Standard Motor Products Inc (SMP) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Standard Motor Products first-quarter earnings conference call. At this time, all participants are in a listen-only mode. It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead, sir.

Thank you. Good morning, and welcome to Standard Motor Products' first-quarter 2010 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 highlights and then turn it over to Larry, followed by a Q&A period.

The first-quarter 2010 kicked off on a strong note, with good top-line sales and even stronger EPS results. Our net sales for the quarter were $179.4 million, up $7.1 million or 4.1%. However, excluding $6.7 million European distribution sales that were divested last year, our net sales actually gained $13.9 million or up 8.4%.

Engine Management was the driver in the quarter, with net sales up $12.8 million or 10.3% across all channels. Temp sales were flat for the quarter, which primarily reflects customers' preseason orders. As you know, Temp sales are predominately AC-related, with the bulk of the revenues occurring in the second and third quarters.

Consolidated gross margin improved $2.9 million to 24.4%, or 7/10 of a point. By segment, Engine Management gross margin was up $2.6 million to 24.2% in the quarter. The 24.2% in Q1 is up sequentially from Q4 2009 at 24.1%, but off 4/10 of a point from Q1 2009. Two reasons for the slippage from last year are, first, a rebound in the first quarter 2010 of our OES sales mix; and second, our 2010 price increases did not benefit Q1, as they are being implemented throughout the second quarter 2010.

An additional benefit in gross margins going forward will be the favorable manufacturing variances we are currently generating, as production levels have increased to match sales volumes. These favorable variances are capitalized into inventory and will be released to the P&L as the inventory turns.

Temp controlled gross margin improved $2 million or 5.1 points. The 2009 margin was negatively impacted by unfavorable variances incurred at the end of 2008, while our current margin improvement is reflective of benefits from the transfer of production to our low-cost Mexico operations. Similar to Engine Management, Temp manufacturing variances are running favorable, and we anticipate further margin improvements from Temperature Control as we progress into 2010.

SG&A expenses increased marginally with the increased volume. Overall, SG&A expenses increased $600,000. However, excluding Europe, they increased $2.2 million. Of the $2.2 million, $800,000 reflected an increase in AR draft fees from the acceleration of accounts receivable collections. The net result was a gain of 5/10 of a point for SG&A expenses to 20.4% of net sales from 20.9%.

Operating profit before restructuring and integration expenses improved $2.3 million or 1.2 points. Our restructuring and integration expenses of $753,000 in Q1 2010 were reduced $400,000 against $1.2 million last year. As we announced in the earnings release, we anticipate increased spending over the balance of the year for two facility consolidations of approximately $4 million. Excluding nonoperational gains and losses in the quarter, we delivered diluted earnings per share of $0.14 versus $0.07 last year.

Looking at the balance sheet, our working capital increased slightly as we move into our peak season. Accounts receivable increased $17.6 million versus December 2009 level, which basically matches the $19.2 million sequential sales increase in the first quarter 2010 versus the fourth quarter 2009. Looking back to March 2009 levels, accounts receivable are down $39 million.

Inventory increased $10.3 million against December 2009, and it is down $2.2 million against March 2009 levels. Our inventories normally increase as we build inventory in anticipation of the summer Temperature Control season.

The Accounts Payable increase of $15.4 million since December offset much of the increase in accounts receivable and inventory.

Total debt increased to $93.5 million, up $17 million from December. However, benefiting from our significant reductions over the last 12 months, aided by our equity raise in November 2009, total debt has been reduced by roughly 50%, or $90 million, from March 2009 levels. We also currently have in excess of $100 million borrowing availability under our revolver.

Lastly, from our cash flow statement, our CapEx spending in the quarter was $3.1 million and our depreciation and amortization for the same period was $3.3 million.

With that, I will turn it over to Larry.

Good morning, everybody. I think the numbers essentially speak for themselves, so what I would like to do is just take a minute to step back and put the numbers into perspective.

Over the last several years, we have taken aggressive steps to reduce costs, to reduce debt, increase cash flow. On the cost side, we closed down seven Dana locations after that merger. We have shifted manufacturing to low-cost areas. We now have over 50% of our production hours in Mexico. In Poland, our goal is to increase that still further. We've shifted purchasing to low-cost areas. We've reduced overhead costs. Last year, we reduced salaried personnel by about 10%.

On the balance sheet, we've reduced inventory, we've reduced receivables, and, as you know, we redeemed the $90 million bond issue.

Now, these activities are continuing. As Jim said, we have just announced two additional plant consolidations that will occur this year. We are also in the process of opening up our own purchasing office in Hong Kong, with the goal of increasing purchases in China and the Far East. So cost reduction is still a very high priority. But as of today, because of these latter accomplishments, our cost structure is better than it has been in quite a while.

Now, you lay on top of that the fact that sales are up, that the industry is having a good year and that we are sharing in that good year, and, as we wrote in the release, that the sales growth is continuing through April, so you lay on the sales increase on top of a reduced cost structure. And as a result, we are quite optimistic looking ahead.

Okay, that is a quick summary of the first quarter. We open for questions.

(Operator Instructions) Tony Cristello, BB&T Capital Markets.

Good morning, gentlemen. This is actually Allen Hatzimanolis in for Tony. First question -- last quarter, you had indicated that sales through customer registers, I believe, were outpacing replacement orders as inventories were drawn down. Is this is a trend that you are continuing to see play out, or has that abated a bit?

Well, I would say that in the first quarter, we do measure -- we don't get all our customers, we get the big ones. I would say that their purchases from us essentially mirrored their sales out the door in percentages, for the first quarter. So that would indicate sort of stable inventories.

Okay. And then I guess switching to Engine Management and the gross margin for that segment, you highlighted the impact -- or are you alluded to a greater OE/OES mix.

I guess first question, could you help us understand a bit better what the impact of that greater mix was in the first quarter and maybe just what the OE/OES mix was this quarter versus last year?

And then the second part of that question is as it pertains to the price increases to be implemented in the second quarter, how many months of the second quarter would you anticipate having the benefit of those price increases?

(Multiple speakers) I'll take the first one. Again, within the Engine Management, Allen, it was 4/10 of a point slippage. And with 40,000 SKUs, we have a significant amount of mix in there. We don't go through and break out the amount of the OES sales. It did increase; as we've stated in the past, with OE/OES, that has a lower margin, but lower SG&A expenses. So the incremental dollars are positive.

So that just is a mix shift slightly that is in there. But again, the differential was marginal to begin with.

Your second part, I think it was the timing of the increases throughout the quarter. Did I understand that?

Yes, in the second quarter with the Engine Management price increases, for instance, will those have gone into effect already in April, and so you will get the majority of that benefit, or is there more carryover into Q3?

It's going to be some of both. It is really throughout the quarter, and I really -- it is hard to be more precise than that. But if you want to count it as a midpoint, if you are trying to do forecasting, take the midpoint, something like that. It is throughout the quarter.

Okay. And then I guess my last question. Larry, in your closing commentary, you seemed very optimistic with what you were seeing overall in the industry and I guess trends to continue for this year. Do you believe that the strength you are seeing from your customers and what that should imply for your results will allow you to capture more of some of the operational savings and benefits that you've implemented this year than maybe might otherwise have been captured in the years to come?

It is hard for me to exactly grasp your question. I would say -- what I have said was if you bring the cost down and your sales come up better, that is going to give you some nice incremental profits. I don't know how I can be more precise than that, because that is what we are anticipating. Does that answer your question, or --?

Yes. No, no, that does. I was just wondering if you look back maybe six months ago and some of internally targets you had set for what you would be able to accomplish in 2010, 2011, longer-term, if you thought that maybe that window of time had perhaps shortened, just given what has been somewhat of an uptick in industry trends over the past few months.

I would say we are running roughly along with what we have been expecting.

Okay, great. Thank you very much.

[Adi Oberoi], Goldman Sachs.

I have -- first of all, I just wanted to ask like what is your general take on the inventory levels at the distributor levels? Because as we see the miles driven pick up and as we see the deferred maintenance coming back, do you think the warehouses and your retailers would have to restock, and probably that would lead to their inventory levels going up from here? Or what is your general sense on that?

What I answered the last person was that in the first quarter, just looking at what they sold versus what they bought, one would appear that they are inventories remained stable.

Will there be some inventory growth in the months ahead? Really, that is hard for me to answer, because they are very conscious of inventories. So I'm going to guess if there is some inventory buildup, it won't be dramatic, but that is just speculation.

Thanks for that. And the second question is generally on the margins on the Engine Management side. Like, the margins were down sequentially -- I'm sorry -- down year on year. Can you give some color on what were the key reasons behind that?

Again, it is -- within the first quarter, we anticipate, with the price increases, that we didn't see any benefit on that at all for 2010. And overall, we have stated goals that we believe we can improve the Engine Management margins on a longer-term to 27% to 28%, and I believe in 2010, we will be moving closer to that target and up on 2009 levels.

But, if I am understanding correctly, if your prices did not increase in the first quarter, then technically your margins should at least remain flat year-on-year, right? Because if you're selling the same thing at the same price -- did the mix deteriorate in that case?

Well, to understand our business model, we are always adding newer SKUs, later model, and we have some falloff of older ignition products with higher margin replaced by new ones. We also have cost increases that are going in throughout the year that will impact the margins.

And a key driver are our cost reductions, which are in place, and then obviously price increases. And we believe with the combination of the price increases that will kick in for 2010, that overall, our Engine Management margin will be up year-over-year.

Got it, great. Thanks a lot, guys.

Brian Sponheimer, Gabelli & Company.

A couple questions on capacity. With 50% coming from Poland and Mexico, where is Mexican capacity right now, and at what sales level do you think you can get to before you have to think about any sort of incremental capital expenditures there?

We are not at capacity because we are always ability to --if you add people and add equipment. So I can't say we can grow without any additional capacity.

For the most part, we are not operating three shifts, for the most part. There is a couple of our operations that are three shifts; the vast majority are one and two shifts. So I would say we have ample room for increased manufacturing in both Mexico and Poland. I won't say with no capital increases, but with moderate capital increases. Does that answer your question?

That's helpful, certainly. And just maybe qualitatively on the OE/OES business, has it been more with the domestics that you've been picking up, GM, Chrysler, etc., where you think you are starting to get more of this business, particularly on Engine Management?

Well, we typically do more with the domestics. But through some of our more recent acquisitions, we have actually picked up some import cars from Japanese manufacturers. So we see that as future. But the bulk of our OES business today is with domestic.

Okay, and then just one last one, if I may. The rise or potential rise of the Chinese currency, any responses from your competition regarding that or has there been any shift maybe towards Standard Motor [cores] out of your Mexico facility, given the equal -- or potential for equal prices there?

We haven't seen much cost inflation out of China. We all read the same thing, so we assume that if the currency rises and if inflation proceeds in China, which is a pretty decent bet that will happen, but at this time, we haven't seen too much.

Okay, great. Thank you.

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

I think you said that inventory levels were pretty in-line for Temperature Control.

For our customers, you're saying?

Yes.

Yes, okay.

So at least here in the New York area, we've had kind of unseasonably warm weather recently. It might be a predictable hot summer. But where geographically are you? Is the Southeast corridor the principal swing factor for you?

For the market, probably the Southeast, but probably our biggest single market is Texas (multiple speakers) place.

How about closer to home here? What do you do here in the Northeast?

The Northeast is problematic, because even if it is a few hot days, it is still a very short season. So we really rise and fall -- our air conditioning will rise and fall with Texas and the Southeast, and primarily Texas. That is the heart of our business.

Okay. And is there much room for facilities -- further facilities management? I noticed you did a couple recently. Is there anything left in that respect, about consolidation or whatever -- movement?

We are always looking, Bob, and we evaluate all of our locations and make sure we are being as rational and economical as we possibly can be. So these two are what we are going to be doing this year, but nothing else is planned at this time.

Okay. And how about what is out there in OES, as far as what might be occurring in the foreseeable future?

We have a host of potentials. We review a prospect list every two months. We obviously don't close all the prospects. But the potential is very, very broad. And we continue to believe this is a good growth area for us.

What would you list as the factors that determine bringing some of these home?

Well, the two factors are, one, they are typically looking to exit it. So these would be OE suppliers or maybe the OE people themselves who no longer want to produce this product because it is not on the car anymore. So that is what makes it available. And we are in a position, because we have so many different manufacturing capabilities -- we can do metal, we can do plastic, we can do electronics, etc. -- that we are a viable candidate for a lot of different things.

That's clear. Thanks a lot, and good luck.

Okay. Thank you.

(Operator Instructions) I am showing at this time we have no questions in queue.

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

This concludes today's teleconference. You may disconnect at any time. Thank you, and have a great day.