Standard Motor Products Inc (SMP) 2009 Q2 法說會逐字稿

Good day and welcome to today's teleconference. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our Q&A session. Please note today's call may be recorded.

And it is my pleasure to turn today's conference over to Jim Burke. Please go ahead, sir.

Okay. Thank you, Sarah. Good morning and welcome to Standard Motor Products second quarter 2009 conference call. In attendance from the company are Larry Sills, Chief Executive Officer, and myself, Jim Burke, Chief Financial Officer.

As a preliminary note, I would like to point out that some of the material we will be discussing today may include forward-looking statements regarding our business and expected financial results. When we use words like anticipate, believe, estimate or expect, these are generally forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they are based on information currently available to us and certain assumptions made by us and we cannot assure you that they will prove correct. You should also read our filings with the Securities and Exchange Commission for a discussion of the risks and uncertainties that could cause our actual results to differ from our forward-looking statements.

I will begin with a review of the financial results and then turn it over to Larry for a Q&A period. But before I go into the financial results, I want to address the additional press release we issued regarding our S-3 shelf registration. If everything remains on schedule, we plan to file our 10-Q and S-3 by tomorrow or, at latest, Friday.

As you can see from our financials, we have been very successful deleveraging our balance sheet. Going forward, it is our intent to have the shelf registration in place to take advantage of financing opportunities to continue to bring down our debt and to fund the future growth of our company.

Now I'll go to the quarterly financial results. Overall, we are quite pleased with our financial performance for the second quarter in the first half of 2009. However, the real moves happened on July 15th, when we paid off the remaining 32 million bonds we had outstanding. I will review this further when I address our balance sheet.

Looking at our P&L, our net sales in the second quarter were down 8.3%, or roughly $18 million. The key reasons for the shortfall were highlighted in our last two investor calls. To repeat, it was tied first to the loss of a major portion of Carquest business to a competitor, a divestiture of our Blue Streak electronics business, a reduction in our OE/OES channel sales, and, lastly, the impact of currency exchange on our European and Canadian sales.

Looking at gross margins, our gross margin percentage improvement helped offset a portion of the sales decline. Overall, consolidated gross margin percent improved 0.9 points, benefiting from the significant improvement in engine management, which improved from 21.7% to 25.5%, or 3.8 points. Again, this reflects the cost savings achieved from exiting our Puerto Rico and Long Island City manufacturing facilities and establishing our low-cost Mexican operation.

Our other two operating segments experienced gross margin percentage reductions. Temp control in the quarter was 17.5 (technical difficulty) This reduction reflects the absorption of unfavorable variances due to inventory reduction efforts, and we expect margins in Temp Control to improve in the third and fourth quarters from these levels.

Our European segment also experienced the decline in margins from 24.3% to 23.4%. Europe has our highest mix of OE/OES sales and the volume reduction negatively impacted production volumes and overhead absorption.

Overall, we are pleased with the inter-management recovery and also the outlook for Temp margin improvements in the second half.

Our reduction in SG&A expenses were significant, benefiting from 2008 voluntary retirement program, our post-retirement plan amendment, and a 2009 salary freeze. We reduced expenses $5.7 million in the quarter and gained 1.1 points as a percentage of net sales.

Despite the sales shortfall in the quarter and year-to-date, we were able to increase operating income. Excluding restructuring and integration expenses, operating income improved $3.5 million in the quarter and $1 million year-to-date. I'll point out other income in the quarter included a gain of $2.3 million from a preferred stock investment that we had, and the prior year-to-date number also included $20 million from the sale of our Long Island City building.

Interest expense was reduced in 2009 from our significant debt reduction, primarily from working capital improvements. Partially offsetting this savings were higher accounts receivable draft fees which were included in our SG&A expenses.

In summary, from a P&L perspective, excluding nonoperational gains and losses, we are very pleased delivering diluted earnings per share of $0.27 in the quarter verse breakeven last year and $0.35 in the first half verse $0.16 last year.

Looking at the balance sheet, again we are pleased with our deleveraging efforts and our ability to redeem our outstanding bonds that matured on July 15th. Working capital improvements were the primary driver. Accounts receivable was reduced $110 million from June '08 to June '09. Inventories over the same period were reduced $46 million and total debt was reduced 50%, or roughly $138 million from $274 million in June of '08 to $136 million in June of '09.

During this period, we also amended our bank revolver, reducing the commitment from $275 million to $200 million, saving amendment fees and unused fees. In addition, we were also able to expend the maturity date of our revolver facility one year to March 2013.

Currently under our $200 million revolver, we are borrowing roughly $110 million, and, as we speak, we have excess availability of $80 million.

From our cash flow statement, our CapEx spending in the quarter was $2.6 million, year-to-date $3.9 million, depreciation and amortization in the quarter was $3.6 million, and $7.3 million year-to-date.

With that, I'll turn it over to Larry.

Good morning, everybody. I believe that Jim's comments plus the second quarter release covered all the key points. I'll just review a few headlines quickly and then we'll open for questions.

First, sales, Engine Management, we are running behind the previous year. Jim mentioned the reasons. On the other side, we get reports of sales out the door from our major accounts and those have been running consistently positive all year long, which tells us that the after-market business, as opposed to the OE business is essentially healthy and we anticipate that that strength will continue.

Temp had a very good second quarter. They were ahead of last year, primarily from two new accounts, Auto Zone and CSK. And this came in the face of what was -- I just saw that -- one of the coldest Junes and Julies in the northeast in memory. Now, balancing that, it was quite warm in Texas. But I think the weather up here was probably a negative and considering we are still ahead, that's pretty good news.

Gross margin continues to improve, as Jim said, and this is basically because we're doing better and better in Mexico. We are getting more efficient and we anticipate adding production hours in the future.

SG&A, we're very proud of that. As Jim said, we reduced $6 million in the second quarter, $13 million year-to-date. This is nothing but grinding it out line-by-line, item-by-item savings. And, of course, it was helped by the reducing salary headcount by over 100, so that's 10%, mostly through an early retirement program.

And, of course, the biggest success is redeeming the bonds and reducing the debt, and I won't keep going over that. But, obviously, we're very proud of it and I want to publicly acknowledge all the hard work that our people did to make this happen. It was really a fine accomplishment.

All right. Those are the highlights of the second quarter. And overall we are quite pleased with it. And with this, let's open for questions.

(Operator instructions.)

We will go first to the site of Tony Cristello with BB&C Capital Markets. Your line is open. Please go ahead.

Good morning, gentlemen. This is actually Allen Hatzimanolis in for Tony.

Hi. Good morning, Allen.

Morning.

Morning. First question. Should we expect to see any portion of the new federal [mobile] business reflected in Q3 results, or is that really just coming through in Q4 and beyond?

A very small amount in the third quarter. We're looking at it really the end of August, so we won't see much in the third quarter. But we should see it a full -- for the fourth quarter.

Okay. And the margins on this business should be fairly comparable to the rest of the Engine Management segment?

That's reasonable.

Okay. Looking to Temp Control in the quarter, obviously very strong results. How much of a contribution was there from the addition of the two new retail accounts?

I would say that's the bulk of it. That's the bulk of it.

I mean, was -- could we ballpark it in maybe the $5 to $7 million range in the --

I'd rather not go into more detail than that. But I would say the bulk of the increase was the two new accounts.

Okay. Maybe one other way to look at it, should we look at this quarter and the contribution as being fairly good from a run rate basis or is there some initial boost from product line changeovers or restocks?

Are you talking about Temp?

Yes, in Temp Control.

Well, remember it's hugely seasonal. So it's -- the whole business is the second and third quarter. So you can't take the second quarter and multiply it by four. So it's a very, very seasonal business, which we -- usually the sales start falling off the latter part of August.

Was the contribution from the two new accounts in the quarter, was that pretty representative of what you would see just from that new business on a run rate basis? Or was it -- could it have been higher from product line changeovers or restocks?

Are you asking --

I'm having a hard time understanding your question.

-- the margin contribution, Allen?

No, no. Just on the incremental sales in the quarter, the benefit that you saw from the two new accounts, I was wondering if this was pretty consistent from a contribution standpoint [from what you would expect] moving forward?

If you're saying was there a big pipeline in the second quarter --

Yes.

Ah, okay. There was not a big pipeline in the second quarter.

Okay.

Because we did not do any stock lifts or anything like that. So they had inventory.

Okay. Great.

So for the most part, I can't say completely because there was some, as I think back. There was some. But I'd say the bulk of it was not pipeline. Although, some was now that I'm thinking of it.

Okay, that's helpful. And then looking to gross margins for the balance of the year in Temperature Control, you discussed last quarter looking to see expansion from the 19.3% in 2008, moving to 2009. Does this continue to seem reasonable? And have you seen any benefits a day from price increases?

Well, on the margins, what we had is because they were a significant contributor to our inventory reductions and we absolved the unfavorable variances as we shift a significant amount of inventory in the second quarter. So we can look at our cost structure there and see that the margins will be improving for the third and fourth quarter. And the second half of that question, if we're saying on Temperature Control, the pricing is really implemented in the first quarter, early in the first quarter, for what the pricing -- so there's really no change other than normal mix that happens throughout the year.

However, I would add that this was the first year when we got any price increases, it was not a lot, it was a couple points. But that's compared to the prior years where we had major drops in pricing.

So when we look out --

So that all happened already.

So when we look out into the third quarter and the fourth quarter, further improvement in Temperature Control gross margin should be more a function then of working through the inventories and being at a more maybe normalized production rate? Is that fair?

Yes.

Remember the fourth quarter is going to be -- it's always very light in Temp.

Okay. And maybe one last question. When will you anniversary the loss of the Carquest business in Engine Management? And will the year-over-year comparison improve, let's say in the fourth quarter of '09, or will it be more of a Q1 2010 event?

I think you'll see it more beginning 2010. It ended the very tail end of 2008. So the positive comparisons will begin next year.

Okay. Great. Well, I really appreciate it. Thank you.

All right.

Thank you, Al.

Thank you. (Operator instructions) We will go next to the site of Brian Sponheimer with Gabelli. Your line is open. Please go ahead.

Hi. Good morning, Larry and Jim. How are you?

Morning.

Morning.

Are you getting the sense that inventory levels --

I can't hear you very well. Can you talk a little louder?

I'll speak up here. Are you getting the sense that inventory levels at your customers are not where they need to be and that this is more of a normalized buying pattern?

Again, if you could --

I just I can't --

Are you on a cell phone or something?

Yes. He's asking about the customer inventory levels and is he -- has it now reached a level where it's a normalized buying pattern.

Yes, we think that's the case. They had really dropped their inventories end of last year, early this year. It was a catch-up, probably, in the first and second quarter where they rebuilt it back to normal levels. And we get these reports, and I'd say, yes, at this point in time their inventories are roughly where they should be.

Okay. Can you update us on any incremental benefits you saw from dealer closings in the quarter?

I'm sorry, I really can't hear what you're -- your question. Did you hear the question?

Can you repeat it again?

Can you hear me better now?

Yes. Yes. Yes.

Okay. Can you update us on any incremental benefits you saw in the quarter from dealer closings?

Dealerships.

The dealerships is, yes, it's way too soon for that to take effect. But I'll say it now. I was going to say it later. The anticipation, the expectation is that over the next few years the dealer population is going to decrease by over 20%. Chrysler has shut theirs so far. The GM dealers haven't been shut yet. So really it's a few hundred that are gone.

You're not going to see an overnight change for something like this. This is a long-term shift. But it is a positive shift toward the aftermarket, because these car dealers are our biggest competitor both for not just standards, but the independent aftermarket for both the repair of cars and the sale of parts. So there will be a long-term improvement, but you're not going to see anything overnight.

Right. And as we're trying to understand your competition here, which you were able to finally implement some price increases in the first quarter. Has anything changed where you may be able to implement the price increases for next year, or Q1 2010, basically due to --

You're talking about Engine Management?

That's right.

Well, okay. Well, you said it. I was going to say it. But, yes, we're not anticipating -- we got -- whatever we got, we got already this year. It was a reasonably health year. We're not anticipating any further increases in '09, and we are just beginning to look at 2010. So it's too soon to answer that question. But we do expect to have prices, price increases, in 2010, but that exercise is just beginning.

All right. Thank you.

Okay.

(Operator instructions) We'll move next to the site of Walter Schenker with Titan Capital. Your line is open. Please go ahead.

Hey, Walter.

Gentlemen. Good morning.

Good morning, Walter.

Good morning.

Couple questions. First on Temp. Given that you did no dating in the first quarter, it seemed to me it would be possibly more appropriate to look at six months to compare this year to last year, which shows us down about 5%. This is largely a function of temperatures you look at in the north as opposed to the heat in the south?

Well, I'm going to make a guess that it was more changes of inventory levels. I think the customers entered this year with pretty good inventories and that was the main reason that we didn't have much preseason. But that sale is gone forever.

What I'm seeing now is with the -- and here the temperature in the southwest has helped us. I think everybody right now is running a little low. I don't have those statistics in front of me. But I think everybody's inventory's running a little low. I don't think we'll see big stock replenishment this year, as we're into August already. But hopefully that will help us going into the following year.

And also might have some impact on the fourth quarter on returns?

Yes, it might, that's correct.

Second question. You have done an exceptionally good job reducing working capital. I'm not sure you answered it. I was listening. How sustainable are these working capital levels? Or to what extent, without a gun to your head -- I'm not saying there was really a gun to your head -- without a gun to your head will these numbers start working back up?

The short answer is, our expectation is we'll hold these numbers.

Okay.

I'm not looking for a lot further improvement. But we do believe we can hold these numbers.

If that is the case, okay, then going back to the first comment by Jim, the balance sheet is much less levered than it's been historically, which is not a great standard. It's not the gold standard anyway, where the balance sheet used to be a year or two ago. As you look at the balance sheet and your current debt to equity, you are comfortable with the current levels of debt equity or would like to have less debt and more equity or vice versa?

Walter, as we look at the balance sheet as a snapshot now, we're pleased with where we were able to take the debt levels down and what we're doing is looking at the capital structure, not today, but saying, okay, as we look out going forward, and that's the intent of the recommendations why to file the shelf registration, so that if we can see, which we anticipate, opportunities with the breakup of the tier one suppliers, our plan is to be able to pick up tooling and opportunities there, we don't go and lever up the company to be able to capitalize on those immediately, we would have a potential war chest. But again, it really depends on the capital markets and our intent. We were north of six times debt to EBITDA previously. We don't want to be there. We're back, much more comfortable where we are now.

Although, the debt to EBITDA also is benefits for more EBITDA.

Absolutely, and we think that both will be improving for this year.

Okay. Let me just make a comment and a public record as opposed to a private record, which is, we have talked about the opportunities in the OES side at great length for many years. I understand why we may be closer to something finally happening, but we still may be -- it's amazing to me it hasn't happened yet, and, therefore, won't -- anything that's gone this long, it may still be a while. I mean, it seems to me if an opportunity presents itself, that would be a better time to try and finance that opportunity by going to your shareholders and the market and saying, we have an opportunity to do this, and we would like some assistance in doing that, as opposed to having a war chest, which we may still be talking about as we have been on the OES side for some number of years, unless things are imminent and you just can't talk about them.

Well, and basically in agreement, what we're really looking at is the maturity levels on our debt also, A, from our revolver, and, B, from roughly $17 million that would be coming due within two years. So anything that we do from a capital raise side would be to expend the maturity on the debt levels or be able to build up equity. So we have nothing set yet. But again, we're also looking at the maturity levels that we have.

And lastly, now that the balance sheet is better and you're earning money, which is always nice, could you give us some sense as to how the Board is looking at or Larry's looking at or management's looking at returning a level of income to the shareholders of Standard Motor through a dividend?

Yes. Glad you asked that one.

I'm sure you can't wait to --

We eliminated the dividend this year because of the need to repay the bonds. That's what we told the world. And the need, obviously, that's now behind us. It is unlikely that we will reinstate that in the year 2009.

We will consider again, in 2010, based on two elements, first is earnings. We have a written policy, which says that our dividend payout goal is one-third of earnings per share, so that's one element that we will look at. The second element we will look at is a positive cash flow. Obviously, we have to have a positive cash flow.

So those are the two things we will look at in the year 2010. And based on what we see, the Board will make a decision at that point based on these two criteria.

Okay. Thanks a lot.

Thank you, Walter.

Thank you. And it appears that we have no further questions in the queue at this time.

Okay. Very good. All right. I would like to thank everyone for participating in our investor conference call today. Thank you. Good-bye.

This does conclude today's teleconference. Thank you for your participation. You may disconnect any time and have a wonderful day.