Standard Motor Products Inc (SMP) 2009 Q4 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. (Operator Instructions) It is my pleasure to turn today's conference over to Jim Burke. Please go ahead, sir.

Okay. Thank you. Good morning and welcome to Standard Motor Products' fourth 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 the forward-looking statements. I will review the financial highlights and then turn it over to Larry, followed by Q&A.

Our fourth quarter 2009 results continued the favorable trend from earlier in the year. Overall during the fourth quarter, we experienced favorable sales, up 7.6%, generated earnings in the fourth quarter which is normally a weak period due to the seasonal nature of our Temp Control line, continued debt reduction, successful equity raise of $27.5 million and finally the divestiture of our European distribution. I will drill down on some of these key highlights in the quarter and the full year.

Our net sales, as I stated was up $11.3 million or 7.6%. Our Engine Management segment led the way with a $10.2 million increase or 9.2% increase. Temp sales were also favorable. And Europe was down due to the divestiture at the end of November. Gross margins for the quarter were up 1.2 points, and for the full year, 0.3 of a point. Engine Management was up 2.3 points in the quarter, and 1.4 points for the full year. Temp Control was up 1.8 points in the quarter, and up 0.4 for the full year. However, our overall margin was dragged down in the quarter by our European divestiture, with Europe margins falling 9.8 points in the quarter, and 4.1 points for the year. The key take-away on gross margins are that both Engine Management and temp margins should continue their favorable trend into 2010, based on planned price increases at cost efficiencies, and again, Europe will be gone.

Our SG&A expenses were reduced $1.7 million in the quarter, across all of our segments. With the addition of $11.3 million in sales in the quarter, we experienced a favorable 2.9 point reduction in SG&A expenses as a percent of net sales. On a full year basis, we were also able to gain leverage on SG&A expenses coming in at 19.9%, as opposed to 21.4% last year. Overall, we were able to reduce full year SG&A expenses by almost $20 million, with the 10% head count reduction, the largest contributor. Operating income excluding special items improved nicely for the quarter and full year.

Fourth quarter 2009 improved $6.3 million from roughly a $3 million loss in 2008 to a $3 million profit in 2009. 2009 full year improved $12.6 million from a profit of $18 million in 2008 to almost $31 million in 2009. Our restructuring and integration expenses were also curtailed in 2009. Fourth quarter expenses were reduced to $1.7 million from $10.7 million last year. And the full year expenses reduced to $7.4 million versus almost $17 million last year.

The largest driver in 2008 was related to the severance for our voluntary head count reduction, and costs associated with Puerto Rico and Long Island City moves. 2009 expenses also relate to our efforts to move production to low cost countries.

Other Income in the quarter includes a charge of $6.6 million non-cash for the European divestiture. In summary, excluding non-operational gains and losses, our P&L results were very favorable, with diluted earnings per share of $0.70 for the year, compared to a loss of $0.11 last year.

Even more impressive than our P&L results was the deleveraging we were able to achieve on our balance sheet. Accounts receivable were reduced $50 million, despite an $11 million increase in sales in the fourth quarter. Our AR factoring program with many large customers helped reduce our accounts receivable. Inventories were reduced $33 million, and total debt was reduced $118 million from $194 million to $76 million at December 2009.

Also benefiting the debt reduction was our successful equity raise of 3.450 million shares, yielding a net $27.5 million cash benefit after fees and expenses. Our leverage ratio of total debt to adjusted EBITDA over the last 12 months has decreased from 6.2 times to 1.7 times. At December 2009, our borrowings under our $200 million revolver was $58.4 million, and we had excess availability of $83 million.

From our cash flow statement, cash generated from operations for the year was $102 million, compared to $47 million last year. CapEx spending for the year was $7.2 million, and depreciation and amortization was $14.4 million for the year. Free cash flow was $95.1 million. We are very pleased to deliver these results for 2009 and expect to build on this momentum as we enter 2010. Thank you for your attention. I will now turn it over to Larry Sills.

Good morning, everybody. I think the numbers basically speak for themselves. As we stated in the release, we're pleased with the fourth quarter. We're pleased with the year. Earnings came up. We paid off the bonds. We reduced debt by $118 million. We improved our debt to EBITDA ratio from 6.2 to 1.7 and that was a key number we focused on. We reduced SG&A. We continued to move product to low cost countries in Mexico and Poland. We sold 3.5 million shares and we reinstated the dividend.

Overall, I think our people did an outstanding job. Those of you who know us, know we don't provide any kind of forecast. And we don't expect to. However, I can say this. It's still very early in the year. It's really only two months. But from what we see, the after market appears to be holding up nicely and I think you see that from the other public companies. And after many months, we started to see a pick-up in OE and OES business. It's still well below 2008, but it is above 2009 and the trend is in the right direction.

So, to conclude, we're happy with 2009. We look forward to 2010. And now we are happy to take all your questions. Thank you.

Absolutely. (Operator Instructions) We'll go first to the site of Tony Cristello with BB&T Capital Markets. Your line is open. Please go ahead.

Thanks. Good morning, gentlemen.

Hello, Tony.

One question I had, Larry, you talked about the first couple months off to a good start. Is that across both engine and Temperature Control? Are you just seeing trends in general which have been consistent with the after market being strong in both segments?

Well, you really can't say anything about temp at this point because it's not in the season. So anything that's happening is really what's happening in anticipation of the season. So discounting that, I would say that we're seeing it on a fairly broad-based measure.

Okay. And is there, when you look at how you're running now in Reynosa, can you give us sort of a good update on anything left to do there? How's the utilization running there? With the business wins that you have now, how comfortable are you that as we progress through 2010, we're going to be, from a standpoint of profitability and efficiencies, where you want to be?

If I think I understand your question, we still have a few more, but much smaller, product groups that will be heading down this year. So we're not finished yet.

And I think that is true in all three of the plants that we have. So there will be some further movement down there. And again, as we have been there longer and our people are more experienced, we are continuing to see production efficiencies. So we're quite pleased.

And when you look at the business as a whole, the recession and the tough macros, certainly been challenging for everyone. Has the visibility into your business and your customer's business changed over the last 12 to 18 months? Are you not able to really see what they're looking at or how they're managing their business as far out as you once were able to do?

I'm not sure exactly what you mean by visibility. We do get information as to their sales and we do get information as to their inventories for the big guys, anyways.

I guess, are they managing their inventories in a tighter window than they have in the past. So that are they buying for one or two quarters out? Are they managing with you for the next six to 12 months? I mean, do you know how, when you're looking down the road, what's your confidence in their demand today versus the purchasing patterns that they may have had 12 to 18 months ago?

What we are seeing and have seen is that, and the trend is continuing. Their sales out the door are running at a higher rate than their purchases from us. So if that answers your question. So we see them as continuing to manage their inventory quite well.

Okay. Okay. That's very helpful. And in terms of, one last question, just in terms of the balance of the year, how should we think about the business in terms of building the Temp Control? I know seasonally you often issue different price ranges or price scales in this time of year. And then the second thing is when you look at the Engine Management side of the business, it seems like you had some recent business wins. As we look into 2010, is there still the opportunity to continue to pick up either new business wins or are you seeing sort of the pipeline there for you from a growth standpoint outside of what you would do organically?

Okay, you asked a bunch of questions all together. From the last one, we're always looking for new business and there is new business to be gotten but nothing is imminent and nothing to report. Okay? Were you asking me about pricing? Is that what you were asking.

That's correct.

Walter is the one who asked that question.

You can save it for him, if you want.

I'll save that question for Walter. Did I answer you fully? I'm not really sure.

Yes. No, that's fine. Thanks, Larry.

Okay. Thank you.

And we'll move next to the site of Patrick Archambault with Goldman Sachs. Your line is open. Please go ahead.

Hi. Can you hear me okay?

Yes. Good morning, Patrick.

Hi, good morning. I'll also leave the pricing question for Walter. I wanted to ask more about, you've heard a couple of companies talk about a mix rotation that's been sort of unfavorable over the last couple of quarters. As customers have been sort of rotating to the good and better rather than the better, best categories. And a number of companies have seen revenue take a bit of a hit on that in the fourth quarter. Given how strong your overall results were on the top line, could you just tell us, is that something that is relevant to your business or something that you've been seeing? Just wanted to get a little bit more color on that.

Yes, that is a trend throughout the industry and that is a trend that we have been experiencing. I'm saying for the last five years. It's continuing. We do have lines of product, essentially a good, better, best. And especially in more difficult economic times, you are seeing it migrate to the lower. I think we are pretty much there already and all those future changes are built into our numbers. But yes, that is a trend. It's a trend throughout the industry. But it's a trend we're dealing with.

Okay. And I think just going back to, I wanted to understand a little bit more. On Temperature Control, your margins were I think it was like 25.3. That seems to, I remember you guys having said that your targets were kind of in the 25.5% to 25% range for that segment. And it looks like you're already there. And just given some of the other comments you made, should we extrapolate that then maybe the target might actually be moved up. That you're likely to do better in that segment over time than you originally thought?

Patrick, the margins when you look at our Temperature Control, it was an anomaly in the beginning, first half of the year, when we had margins in the mid-teens, high teens. And that was specifically related to the inventory reductions that we were implementing to address our bonds that were maturing in July. The more normalized pattern is in the low 20%s, looking historically, and that's where we've been for our Temperature Control program. In the fourth quarter, while sales are low and it's really a function of how well we did with accruing for returns, so we could get an adjustment there. So I think looking at the Temperature Control line, you still need to think it's not at that fourth quarter run rate of 25%. It's in the low to 20s, I would say.

Okay. Great. That's helpful. And then one last one, just on SG&A. Obviously, that was a very good number for you this quarter. How should we think about incremental SG&A opportunities? Clearly, you've got some, I believe some pension costs coming back, so that's a little bit of a headwind. But overall is there further efficiencies in the offing? Or have you kind of done as good as you can on that line item?

We've taken dramatic reductions this year and we also had a price freeze that was in place at the end of '08 for '09. So we did reinstitute our salary increase for the employees. So we'll have a change there.

The pension costs you were referring to and for the rest of the audience, that was related to post-retirement medical expenses, where we had a curtailment in the plan that had about $24 million benefit. So, that doesn't roll back in until about 2012, I think is the year. So that benefit on an annual basis we'll continue to receive. But we're keeping a very tight reins on SG&A expenses. There will be some inflationary pressures there and we will be addressing areas that we cut back. Maybe investment in some catalog areas where we were able to curtail that. But we intend to try and hold the line and the leverage that we've achieved there.

Okay. Terrific. Thank you very much.

You're welcome.

(Operator Instructions) We will go next to the site of Jacob Strumwalther with AYM Capital. Your line is open. Please go ahead.

Hi, guys. Can you talk about what's your normalized EBITDA?

Well, we've put in the press release, I think, while we don't offer guidance, I think you could look at that as a normalized EBITDA, where the calculation came out to $46 million for 2009.

Okay. And is it, just looking off of 2009's Investor Day presentation, you guys kind of talked about how post-integration, I think in like the 2005 to 2007 time, you would have had like a $50 million to $55 million EBITDA. Is that accurate? Am I thinking about looking at that right?

I don't recall the presentation, but we're at $46 million for this year. We do identify the expenses, the significant ones were some that we break out and isolate which was the restructuring for our plant moves to normalize it and carving out some gains that we had in there. So we're at $46 million and we have all the intent to build on that going into next year.

$46 million kind of in today's environment but in a better environment that number post restructuring and integrations could be, I guess you could walk that number higher?

Well, yes, absolutely.

Okay. And do you think that the, so I guess you said you didn't remember, is it fair to say that maybe that number, I know you don't want to give guidance so I'm trying to ask the question in a way that's not a guidance number but I'm just trying to understand peak versus normalized to say peak is something in the $60 million range. Is that a fair way of looking at it?

That's going too far out, asking for ranges or guidance that's on there. I think on an annual basis, our Temp Control is seasonal, but if you look at the improvements which we believe we have pricing opportunities for 2010, we have cost efficiencies and as we, again, 2009 was a significant inventory reduction year. So we look to have some working capital improvements going forward but production levels will improve and cost efficiencies will improve. So we look to build on this EBITDA level, adjusted EBITDA of $46 million.

Okay. Great. Thank you, guys.

You're welcome.

(Operator Instructions) We'll go next to the site of Walter Schenker with Titan Capital Management.

A big build-up. Everyone is expecting something. Jim alluded to or specifically stated that one of the factors in the fourth quarter was accruals versus actual inventory returns. Obviously, there was some, at least on Temp you had somewhat over-accrued. On Engine Management, the same thing, or not?

No. As a matter of fact, Walter, for the fourth quarter of 2008, we had a larger benefit on returns. It was more normalized, our results, for 2009, the fourth quarter. We did have a little bit better of a reduction in returns, but in '08 it was a bigger reduction. So I think the results were more normalized. And Engine Management, there was no big recovery there. So I think what you saw for results that we were able to generate earnings while slightly above break even was good results and it wasn't related to any over-accruals or accounting.

Okay. Since you, Jim, made reference to an opportunity in Temps for pricing, that obviously leads into a pricing question. It's March. Can you give us some sense, Larry, as to what your expectation for pricing this year is, prefaced with comments that Genuine has repeatedly made about pricing pressure in the industry?

Okay. The Temp increases are in place. Because it's a seasonal thing. It's a slight increase over prior years. Now, that may not sound great but if you go back a few years, we were cutting prices because of the need to compete with stuff coming in from China. But that has stabilized and we have in place a slight price increase for four seasons.

Engine Management, the prices are in the process of being implemented. I would say 95% of it will be implemented in the second quarter. And I would say they are at least as good as in prior years.

Okay. So, you, to rephrase that, but since you said it, you will be implementing noticeable price increases this year in Engine Management?

Noticeable is not the word I used.

Okay. Comparable to --

What I used was at least as good as in prior years.

Okay. The other side of that is that while there is some pressure, Jim alluded to, on SG&A, not adding people but just inflationary pressures in that, your outlook for the year on raw material costs, which obviously have some fluctuation, you don't control it, is roughly what?

Again, what we would target is that the procurement savings that we would be able to get from going to low cost countries will neutralize any commodity price increases that we get on materials. So, we would look to even beat any low single digit increases.

Okay. So pricing versus cost should expand margins?

Yes.

Okay.

Thank you. Okay. Very good, Walter.

It appears that there are no further questions. But first I would like to give one last reminder. (Operator Instructions) And it appears that we still have no further questions in the queue.

Okay. With that, then, I'd like to thank everyone for joining our conference call today. Thank you. Good-bye.

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