Standard Motor Products Inc (SMP) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's program.

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.

(Operator Instructions) Please note today's call is being recorded.

It is now my pleasure to turn the conference over to Jim Burke.

Please go ahead, sir.

Okay.

Thank you.

Good morning and welcome to Standard Motor Products' third-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.

Before I review our financial highlights, I want to note our second announcement this morning about our planned public equity offering.

Due to restrictions of the securities laws, we will not be discussing our equity offering on this call, nor will we be able to take questions on that topic during a question-and-answer session.

We appreciate your interest in Standard Motor Products very much, and we appreciate your understanding about the restrictions that we face in this regard.

After I review our financial highlights I will turn the call over to Larry Sills, followed by a Q&A period.

Looking at our P&L, our consolidated net sales were up $2.6 million or 1.3% for the quarter.

This was very positive because we have been facing headwinds all year from the loss of a major account in Engine Management; the divestiture of our Blue Streak Electronics business; and a reduction in our OE sales.

Benefiting the third-quarter '09 revenues were Engine Management sales to O'Reilly for CSK store conversions; Temp Control sales up 10.8% from the new business awarded in 2009; and to a smaller extent, starting September 1, the launch of new wire sales from our recent acquisition from Federal-Mogul.

Our European sales were off $3.6 million in the quarter and $12 million year-to-date due to the reduction in OE sales and negative currency impacts.

I will limit my review of Europe, as Larry will address our discussions with local managers to acquire the European distribution business.

Looking at our gross margins, our consolidated gross margin percent edged up for the quarter and year-to-date compared to 2008.

This was significant, considering the lower production volumes from lower sales year-to-date and our inventory reduction efforts.

Engine Management gross margin improved 0.3 points in the quarter and 1.1 points year-to-date.

Margins and Engine Management are benefiting from our transition last year from high-cost manufacturing locations in Puerto Rico and Long Island City to Reynosa, Mexico, and also from our efforts to source materials from low-cost countries.

Temp Control gross margins improved 2.2 points the quarter and now are up 0.1 points year-to-date.

Temp Control margins were negatively impacted in the first half with inventory reduction efforts, and we are pleased with the 2.2 points improvement in the quarter.

Temp Control's Reynosa manufacturing plant is performing very well, currently producing about 70% to 75% of our remanufactured compressor volume.

Looking forward, we expect our transition schedule to produce about 90% of our remanufactured volume in 2010, reducing our production costs further.

Our reductions in SG&A expenses have been excellent.

For the quarter, expenses were down $4.3 million and we gained 2.4 points leverage.

On a year-to-date basis we reduced expenses $17.9 million or 1.3 points on a lower sales base.

The reductions in 2009 benefited from the 2008 early retirement program and other headcount reductions, a postretirement plan amendment, and 2009 salary freeze.

Operating income improved very nicely in the quarter and year-to-date.

Excluding restructuring and integration expenses, operating income was up $5.4 million in the quarter and $6.4 million year-to-date.

I will point out on Other Income, for the nine months 2008 it included a $20 million gain from the sale of our Long Island City building.

Also in '08 the third quarter included a $1.6 million gain from the buyback of our convertible debentures.

Excluding the prior-year debenture gain, Other Income was favorable $1.1 million in the quarter.

Interest expense was lower by $866,000 for the quarter and $3.8 million year-to-date.

These savings are reflective of the $119 million debt reduction achieved over the last 12 months.

Partially offsetting the interest expense savings are accounts receivable draft fees, an increase of $578,000 for the quarter and $1.3 million year-to-date.

These expenses are included in our SG&A costs.

In summary, from a P&L perspective, excluding non-operational gains and losses we are very pleased, delivering diluted earnings per share of $0.35 in the quarter compared to $0.13 adjusted last year and $0.70 year-to-date versus $0.19 last year.

Looking at the balance sheet, again we are very pleased with our reductions in working capital.

Accounts receivable was reduced roughly $68 million from September '08 levels.

Inventories were reduced $40 million since September '08.

And total debt at September '09 is now $111 million, which reflects a reduction of $119 million from $230 million level in September '08.

In the third quarter, we also met our obligations, retiring our outstanding convertible bonds which matured on July 15.

Currently, under our $200 million revolver -- which we extended the maturity to March 2013 -- we are borrowing roughly $80 million and have excess availability under that line of another $80 million.

From our cash flow statement, cash flow generated from operations increased $28 million in the quarter and reflects $97 million increase for the nine months '09.

Lastly, our CapEx spending for the quarter was $1.6 million, $5.5 million year-to-date.

And depreciation and amortization was $3.6 million in the quarter and $10.9 million year-to-date.

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

Good morning.

I believe we've now covered the numbers both through the third-quarter release and through Jim's comments.

I'm just going to cover a few highlights and then we'll open for questions.

In a word, we are very pleased with the third quarter.

Sales -- remember, 93% of our sales are to the aftermarket, and the aftermarket is doing quite well.

In addition, as Jim mentioned, we picked up new temp business from AutoZone and CSK.

We had some pipeline business in Engine Management for CSK as O'Reilly is upgrading the stores.

And we got our first month of sales with the NAPA Belden wire business; but it is only one month's worth in there.

And again we have an annual forecast of $20 million to $25 million for this business.

That's the aftermarket.

The OE as we all know is far more difficult, and it's -- our sales here are substantially down, as everyone else's sales are substantially down.

However, OE represents only 7% of our business.

We are not forecasting any quick turnaround here.

But the sum of the two -- the aftermarket and the OE, we are ahead of the third quarter of 2008, and we are very pleased with that.

The P&L.

The gross margin continues to improve, and one of the key drivers here is the growth of the Mexican operation.

As you recall, we have incurred over the years substantial costs in closing down primarily Long Island City and Puerto Rico and starting up in Reynosa.

But these costs are now behind us.

We have three plants in Reynosa -- one for Engine Management, one for wire and cable, one for Temperature Control.

We have over 850 people in these three locations.

It is far and away our largest manufacturing location.

I happened to be there last week.

I visited all three plants.

And I was very impressed with their growth and improvement, and we are forecasting substantial growth in these operations in 2010.

SG&A.

We say it, it keeps coming down.

It's terrific.

$18 million year-to-date.

Key element was the 10% reduction in salaried headcount, about 100 people, mostly achieved through an early retirement program.

The balance sheet is a terrific story.

Our total debt is down over 50%.

In dollars, it's over $100 million.

We redeemed the bonds in July, and obviously pleased with our results.

A word about Europe.

As you see, we announced that we are in negotiation with our UK management team to sell them the distribution part of this business.

A little background.

While we have made some nice operational improvements here over the years, we just came to the conclusion that it was unlikely that it would ever become large enough to have an impact on our total Company.

That is why we have decided to do what we are doing.

Now, the factory in Poland we believe is a totally different story.

It's a low-cost operation.

We have, most important, availability of highly skilled people.

We feel this place can become a major supplier both to Europe and to our operation in the United States.

So we are keeping this factory; and more than that, we plan to build on it and make it bigger.

So that's our story.

We are pleased with the third quarter and where we are as a Company.

I think the hard work over the last several years is paying off, and we are optimistic about the future.

Before we open for questions, Jim Burke is going to make a statement, and then we will open for questions.

Okay.

Thank you, Larry.

I'd just like to remind everyone we will not be discussing our equity offering during the Q&A session; and I want to thank you in advance for your consideration.

With that, we will open it for questions.

(Operator Instructions) Walter Schenker, Titan Capital.

Looking forward to meeting you guys next week at the Gabelli Conference [gig, Mario].

Good.

Anyhow, could you just address -- you have raised prices over the last couple of years a fair amount -- even though you won't disclose the actual amount.

How do we get -- we have moved to Mexico; we have not gotten the full benefit.

How do we get the next step up in margins to get to the long-term target we have?

Since it's unlikely we are going to have dramatic increases in unit volume.

Correct.

You want to --?

Jim will answer that.

Okay.

We really have drived in the margins.

One component you mentioned, Walter was price.

But the other two, which are in our control also, are the shift with production hours to low-cost countries -- so that's a big driver for us.

And the other one, which is material cost, which is a very high component, is where we're outsourcing materials to low-cost countries.

Historically we've been able to achieve the outsourcing of product to more than offset inflationary impacts on other commodity increases.

So really those are the two primary drivers for the gross margin.

Okay, I'm going to sort of do it again.

I heard what you said.

Can we get where we would like to be without further significant price increases?

I'll put it that way.

Well, yes.

The pricing is a competitive environment.

The other two are totally within our control, and we can move the needle.

We have -- Larry commented how much -- how well Mexico is doing and the expansion that we're having further.

I had commented at Temp Control we will have 90% of our production down there, and the other plants are doing very well.

The wire business that we acquired is going into existing facilities and expanding our business in Mexico.

So we think we'll have significant benefits from the expansion of Mexico.

Okay.

Just second question, in respect to -- I'm still trying to make sure I understand.

When we talk about OE, that's OES?

No, we make a distinction there, Walter.

OE by our definition is selling to the production line.

It actually goes on what they call on the platform.

OES is sales of replacement parts through the dealerships.

Two different businesses.

Right.

Have you seen much impact on your OES business yet from the restructuring that's going on, on the US dealer force?

And that's my last question, so the operator can move on after the response.

No, I can't measure it at this point.

I think that's going to be more of a longer-term trend.

Thank you.

Okay, Walter.

Thank you.

(Operator Instructions) Robert Smith, Center for Performance Investing.

Morning.

Hello, Bob.

Congratulations on a good quarter.

Thank you.

Is there anything that would prevent you from reinstituting the dividend this year?

I got that.

Okay.

That's a good question.

I'll just give you a little background.

For years and years we've always paid a dividend.

We suspended the dividend in 2009 because of the economic situation.

It is our intention to resume paying dividends in the future; and we have a target payout of one-third of earnings per share.

But most likely we will start at a lower figure and build up to this number gradually.

That is our intention at this moment.

I would like to interject and maybe suggest that you reconsider this.

Because as you said, Larry, you've paid dividends for many years.

And one of the yardsticks of investors look at companies is the years of consecutive dividend payments.

To have this interruption of one year, I think might be very detrimental to how Standard is viewed in the marketplace.

If you could possibly pay some kind of even a nominal dividend in the year 2009 to prevent this break in the record over many years, I think it would be something that you would seriously consider and would benefit the Company.

Okay, Bob.

Thank you for the suggestion.

And good luck.

Thank you.

(Operator Instructions) It appears that we have no further questions at this time.

Okay.

With that, I would like to thank everyone for joining our conference call this morning.

Thank you.

This concludes today's teleconference.

You may disconnect at any time.

Thank you and have a great day.