Standard Motor Products Inc (SMP) 2010 Q3 法說會逐字稿

Hello, and welcome to the Standard Motor Products third quarter earnings call. At this time, all participants are in a listen-only mode. Later there will be an opportunity to ask questions. You can enter the question queue at any time by pressing the star and then one on your touch tone phone. Please note that this call is being recorded. It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead.

Thank you. Good morning and welcome to Standard Motor Products third 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 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 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 Q&A.

I am very pleased to report another strong quarter with top line revenue gains and continued earnings momentum. With most of our heavy lifting complete from past restructuring efforts, we reached an inflection point in the second quarter of 2009. Since then we have produced improvements in gross margins, EBITDA, and earnings per share quarter-over-quarter against the prior years. I will review the highlights from our most recent third quarter. Our consolidated net sales in the third quarter were at $227.5 million, up $22 million, or 10.7%. Excluding $7.2 million in sales from the divestiture of our European segment last year net sales were up $29.2 million, or 14.2%. Looking at it by segment engine management net sales were up $16.6 million for the quarter, or 12.1%, and with the warmer temperatures this summer, our temp control net sales were up $12.3 million, or 20.6%.

Consolidated gross margin dollars improved $10.2 million to 26.4%, which was up 2.2 points. By segment engine management gross margin was up $7 million to 25.9% for the quarter, up 2 points. With the 2010 pricing fully implemented and favorable manufacturing efficiencies, our 2010 margins have improved sequentially throughout the year. In Q1 it was 24.2, improved to 24.5 in Q2, and up to 25.9 in the recent Q3 quarter. Temp control gross margin improved $4.1 million to 23.9%, up 2 points. Our temp control gross margin percent is benefiting from the favorable efficiencies in our Mexico manufacturing facility, and increased production due to the stronger demand from the hot summer season.

Consolidated SG&A expenses increased $5.2 million primarily related to the sales increase in the quarter. As a percentage of sales, SG&A expenses were 18.5% in Q3 2010 versus 17.9% last year, and for the nine months a slight reduction at 18.9% in 2010 versus 19.1% last year. Our AR draft fees accounted for a large portion of the increase. They were up $900,000 in the quarter, and up $2.8 million year-to-date. Consolidated operating profit before restructuring and integration expenses improved $5 million, to $18 million or 7.9% of net sales. This reflects a 38.3% improvement over Q3 last year from a 10.7% increase in revenues.

Our year-to-date operating profit of $41.8 million again excluding restructuring and integration expenses are up almost 52% from a 10.9% increase in revenues. Restructuring and integration expenses were $1.4 million in Q3, down $1.9 million from last year. In 2010 we were primarily incurring costs associated with the closure of our Hong Kong manufacturing facility, and our Hayden facility in California. In the quarter, Other Income includes roughly $1.5 million gain from our sale of our Reno distribution facility which we exited in 2008. This gain has been excluded when we report our operational results. Income tax expense in the quarter and year-to-date includes a benefit of $1.1 million from previous tax reserves primarily related to foreign transfer pricing. As a result of the expiration of the statue of limitations for 2006 and prior tax years. Similar to the Reno sale gain, we have excluded this benefit when we report our operational results. Our diluted earnings per share excluding non-operational gains and losses were $0.43 in the quarter versus $0.35 last year, and for the nine months $0.96 versus $0.70 last year, on a base of roughly 4 million more shares.

Looking at the balance sheet, our Accounts Receivable increased $46.4 million versus December 2009 levels. This is due to our strong sales and seasonal nature of our temp business. AR levels are essentially flat with September 2009 levels. Inventory increased roughly $32 million since December 2009. This increase was in response to the very strong demand both in engine management and our temp business. We anticipate inventories decreasing slightly by year-end with further planned reductions in 2011. Accounts Payable increased $31.3 million in 2010, in response to the increased inventory levels and production demands. As mentioned earlier, we sold our Reno facility generating $1.7 million in net cash proceeds.

Our total debt at September 2010 was $74.3 million, down slightly from $76.4 million level at December 2009, and we currently have in excess of $100 million borrowing availability under our revolver. From our cash flow statement, CapEx spending in the quarter was $3.3 million and $9.1 million for the nine months, and our depreciation and amortization was a comparable $3.3 million in the quarter, and $10 million for the nine months. With that, I will turn it over to Larry Sills.

Good morning. Jim has covered the numbers, and I think for the most part they speak for themselves. I will just give a few brief comments, and then we will open for questions. As I have said before, we have spent the last several years working diligently to reduce our cost base. We have moved manufacturing and purchasing to low cost areas. We have reduced overhead. We have reduced debt.

Now you lay on top of this lower cost base a strong sales year, and obviously the results will be quite good. Word on the sales. The aftermarket is doing quite well this year, as those of you who follow the industry have seen from all of the public companies, both manufacturers and distributors. The reason for the increase has been quite well documented. I will review them briefly . The car population continues to age as new car sales are down. The average age of the cars on the road is now greater than 10 years, which I have rated the highest it has been in almost 50 years.

Obviously older cars equal more repairs. The car dealers are closing down, several thousand so far. The car dealers are the industry's biggest competitor, both for the repair and the sale of parts. So that is a positive thing for our industry. Number three, we believe there has been some pent-up demand. This is hard to quantify, but believe there has been some pent-up demand from people who just didn't spend any money at all in 2009, and that repair work slapped over into 2010. This is hard to quantify, but I think a certain amount of that is going on.

Number four this was quite a hot summer in most of the country, which helped our air conditioning business, but it also helps the general repair business, because heat plays havoc on car engines. So we had everything going right this year, and so for all of those reasons, the industry had quite a good year. Meanwhile, we continue to work on our cost base. As Jim mentioned, we have consolidated two plants into existing locations. The tasks are essentially complete now. We moved our Hayden fan clutch operation from California to our existing factory in Grapevine.

We moved our Hong Kong electronics into our Orlando electronics facility. One-time costs for these two moves roughly $4 million, and annual savings for the two moves combined estimated at roughly $4 million a year. Number two, our factories in Mexico and Poland continue to grow, and continue to improve in efficiency. We now have over 1,300 employees in these two areas. Number three, we just opened a purchasing office in Hong Kong, I happened to be there last week. The purpose for this is to streamline and expedite our purchasing in the Far East, to work on our strategic goals of purchasing from low cost countries.

So to summarize, we have worked over the last few years to reduce costs. We continue to work to reduce costs, and from all indications, the aftermarket will remain healthy, and so for all these reasons we are optimistic. With that, let's open for questions.

(Operator Instructions). We will allow just a moment for questions to queue. And we will take our first question from Robert Smith with the Center for Performance Investing. Please go ahead. Your line is open.

Congratulations on the strong quarter.

Thank you, Bob.

It is really pleasant to see those numbers. Considering the improved financial condition of the Company, and the announcement of the dividend, do you guys have an idea as to a payout ratio, what you want as far as the dividend?

As you recall our stated goal for dividend payout is one-third, our goal is one-third of earnings per share. We are below that right now with these latest numbers. We will be reviewing this with our Board over the next few months, and as we look at our 2010 numbers and our 2011 forecast, we will be making a decision some time in the next few months.

Thanks. Good luck.

You too.

(Operator Instructions). And it looks like we have a follow-up now with Mr. Robert Smith again. Please go ahead. Your line is open.

Where is everyone?

I will tell you where they are, Bob. There is an, Mario Gabelli runs an annual--. We are in Las Vegas now. And I am guessing all of the people who normally ask questions are at this meeting right now.

Oh, in Las Vegas, yes. Got you, okay. What am I doing in New York? Maybe you can just give me a little more color on the competitive environment. You mentioned certain of the pieces that are making you look better. How about the possibility of the continuation of those trends?

Well, the competition remains strong. We are in a very competitive industry. On our engine management side, we compete with the OEs vigorously. We compete with some other companies that do what we do as full service suppliers. We also compete with people who import products mostly from the Far East. I would say there has not been any major change in that one way or the other. So the growth in sales that most of us have seen is not so much taking or losing market share, but the fact that the whole industry level has risen this year.

Looking out to the next year, so to speak, what are the OES' promise?

OES is what you are asking?

Yes.

At this point we have many prospects.

Well, what can bring some of those home?

Well, really what we are learning is these companies we deal with, they are larger. They are very engineering and quality-oriented. They don't move as quickly as some of our aftermarket companies. So they take their time. They study and they analyze and they test. Sometimes they will put things on live tests for six months. It is a slow process. But it is a good process. It is fair. As I said, we have got a lot of prospects out there.

And how much are the incremental temp business is due to the weather factor?

I can't quantify it precisely, but I would say it plays a very nice role.

We did pick up some in new business from a competitor last year, so a little bit. Probably 80% of it is from the temperature from the season. A little of that is market share gain that we got at the beginning of the year.

Can you tell me something about the commodity cost factors to you? With the prices of materials going up?

Yes. To some degree to say we are fortunate, we experience the same commodity price changes, up or down like everybody else. But because of the breadth of our 30,000 SKUs primarily within engine management, many of those products we purchase outright, we tend to find sources for those, either in the Far East, or we bring them in-house for manufacture. So we have the ability to offset a large part of any commodity increases with the resourcing of products to low cost countries.

And how do you find the acceptance of modest to moderate price increases in the channels?

Well, we had a pretty decent year for pricing this year. We achieved our historical average which is roughly inflation, maybe a little more than inflation. It has been okay. But you do have the competitive pressures, and primarily coming from China. So you have to watch out for that.

And is employee count essentially, have you reached the objectives you set out?

Are you talking about the layoffs?

Yes.

Yes. We did it, and we really kept it down, which is very good.

Can you tell me anything about the current quarter as to how things have been going?

Again for the fourth quarter sales overall, many of our distributors are optimistic looking forward. We don't put forecasts out.

No, I understand.

But we continue to be optimistic on sales. Again, the fourth quarter is our lowest quarter for the year. And the primary driver is really customer returns. At this point we need to be adequately accrued for customer returns. And we will see as we close out the full year.

Okay. Once again, congratulations and best of luck.

Thank you. Very good. Anybody else?

We will take our next question from [Steve Rude with USIP]. Please go ahead, your line is open.

Hi, sorry to disappoint, but many of my questions were answered by the other gentleman's questions. I am all set. Thanks.

Thank you.

And next we have Shaun Nicholson with Kennedy Capital. Please go ahead. Your line is open.

Good morning, guys.

Good morning.

Great quarter. Just one question on inventory at your customers. What are they telling you, as far as maybe expectations for early next year? Are they managing it any different than they have been this year, going into next year?

I think on the inventory levels, our inventory increased. I think we have seen some slight increase at some of our customers. We don't get all, obviously all of the reporting, but we get the majors. We get a look at their inventory levels. It did increase a little bit, again in response to the strong sales and the demand. But I also think some of the major retailers as they continue to expand their inventories as they go after the commercial end of the business. But I think overall in the industry, supply chain improvements, everybody is working to better improve their inventory levels. So I don't see anything dramatic as you look into next year.

Great. And just on new products, where, are you guys doing anything in particular that will be launching next year that may benefit sales?

No, I would say that we do have many, many new products, but not of a quantitative nature. Because each year we add many part numbers just to keep up with the latest car models. But there is nothing dramatic.

Great, thanks.

And our next question comes from Efraim Levy with S&P. Please go ahead. Your line is open.

Good morning. As far as the long-term debt that is payable, are you planning to roll that over, or are you going to pay it off?

We have a small piece that is left there related to the exchange bonds that we offered, which are, I think the number is $12.3 million comes due in April 2011, so at a very high interest rate, and that will be a savings. We will cover that under our revolver in April of next year.

And as far as the tax rate --

The other piece we have on there is our revolver which is a maturity to March of 2013.

And as far as the tax rate you are looking for?

We explained the anomaly in the quarter. Again tax rate I would be thinking in the about 41% range.

And as far as looking to 2011 with some of the optimism that you have expressed, do you think you will get a little more of a sales kick than you historically have for the engine business?

Off of this year going forward?

Yes.

Well, I think this year we were very fortunate. Many of us as Larry spoke to, pent-up demand and all of the other demographic factors that are in there, I think many of our customers, they are optimistic. Hopefully it holds. We will ride along with them and continue to introduce our new products. But again on top of this base would be amazing. So I would be very pleased in the mid-single digits.

And finally as far as restructuring, that should essentially be going away, or there is a little bit of a carry over?

This year was the amount we said, one-time cost $4 million. There is always a little bit with the timing of it that may carry over. But we do not have anything identified specifically for the following year. So again, that number should be coming down significantly.

Thank you very much.

You are welcome.

And our next question we have again another follow-up from Mr. Robert Smith. Please go ahead. Your line is open.

Could you just briefly comment on managing currencies going forward?

Again, our locations that we are involved in. We are in Mexico. We are in Poland. We have an impact with the Euro. Again commodities, most of our purchasing are in US dollars, even for our overseas sourcing. We have a natural hedge that is on the other, with the Canadian dollar. We have a bit little in there. But it hasn't been a significant impact either from the sales or the cost side of our business.

And you don't expect it to be?

No.

Right. Thanks.

Okay.

And it appears we have no more questions in queue at this time.

Very good.

Thank you everybody.

Thank you. Good bye.