Standard Motor Products Inc (SMP) 2010 Q4 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note the 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' fourth-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 as 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 review the financial highlights and then turn it over to Larry, followed by Q&A.

To begin, I'm pleased to report a strong finish to 2010 with continued momentum from increased sales, gross margins and operating margins, and earnings per share. Our consolidated net sales against last year in the fourth quarter were $173 million, favorable $12.8 million or 8%. Excluding our European divestiture last year, sales would have been up $18.3 million or 11.9%.

For the full year, sales were $810.9 million, favorable $75.5 million or 10.3%. Again, excluding the European sales, results were favorable $102.2 million or 14.4%. The growth was reflected in double-digit improvements in both of our two segments. Engine Management, for the full year, our sales increase was $70.9 million or 14%. At the Temperature Control, full-year sales increased $25.4 million or 12.9%. Mirroring the overall industry, each segment had strong sales increases in both traditional and retail market channels.

Consolidated gross margin dollars for the full year improved $30.4 million to 25.6%, which is an increase of 1.5 points. By segment, in the full year, Engine Management gross margin was up $21.3 million to 25% or up 0.7 points. The margin improvement benefited from our sales growth, which drives increased production levels and improved overhead absorption.

Similarly, our Temperature Control segment benefited from favorable overhead absorption with full-year margin dollars improving $12.6 million to 23.1%. Overall gross margins in both segments have benefited from our restructuring efforts over the last few years, with increased global sourcing and increasing our mix of production hours from low-cost Mexican and Poland operations.

In the fourth quarter, consolidated gross margins improved 1.1 points from 25.1% to 26.2%. Consolidated SG&A expenses increased in the quarter and year to date, driven by the robust sales growth. In the fourth quarter, SG&A was up $1.9 million as a percentage of sales in the quarter, SG&A expenses were down 0.6 points to 22.5%. For the 12 months 2010, SG&A expenses were up $12.8 million and as a percent of sales, SG&A expenses were down 0.2 points to 19.7%.

Isolating the AR draft fees, we were able to achieve 0.6 of a point improvement in SG&A expenses for the full year. Restructuring and integration expenses were less than $100,000 in the quarter versus $1.7 million last year and were reduced for the full year to $3.5 million versus $7.4 million last year. In 2010, our restructuring costs were related to the consolidation of our Hong Kong manufacturing facility and our Hayden, California location into other existing SMP facilities.

You will notice that we split out other income expense into two lines on our P&L to separate and record gains and losses on long-lived assets and operating income. This is a technical FASB requirement. However, as we have done in the past on our reconciliation of GAAP and non-GAAP items, we isolate and exclude the gains on losses to report operational results.

Excluding restructuring and integration expenses and the gains on losses on those long-lived assets, our consolidated operating income in the fourth quarter more than doubled from $3.1 million to $6.4 million or a 1.8 point improvement. For the full year, consolidated operating income improved from $30.6 million to $48.2 million or a 1.7 point improvement.

Other nonoperational adjustments we excluded from our results in 2009 was a $2.3 million gain from the sale of a preferred stock investment and a $1.1 million discrete tax benefit reported in 2010. Excluding this tax benefit, we would have a normalized tax rate of approximately 41% as opposed to the 38.4% reported this year. Again, we do not recognize these one-off benefits when we report operational results.

The net effect of our operational results, for the quarter, we improved from $0.02 last year to $0.11 this year and on a year-to-date basis from $0.70 to $1.07. The year-to-date diluted earnings per share improvement is also on a base of roughly 3.2 million more shares outstanding.

Looking at the balance sheet, accounts receivable decreased roughly $20 million as we were able to accelerate the collections through customer factoring programs. Inventory increased roughly $41 million as we had to react to the very strong sales demand in 2010. That said, we are not happy with this increase and believe we have opportunities in 2011 to improve our inventory turns and generate cash flow.

Despite the net increase in our working capital, we were able to further reduce our debt levels in 2010 from $76.4 million to $65.6 million while at the same time reinstating dividend payments of $4.5 million this year.

Lastly, as we previously announced back in January, we increased our quarterly dividend from $0.05 to $0.07, which was paid March 1 this week.

From the cash flow statement, our CapEx spending in the quarter was $1.7 million and the full year $10.8 million, and our depreciation and amortization in the quarter was $3.6 million and $13.6 million for the full year.

In closing, I must point out a percentage correction on the segment revenues and operational page that we released. For the fourth quarter 2010, operating profit percent for Engine Management should read 6.6%. This correction was reflected in our 8-K that we filed earlier today. Thank you and I will now turn it over to Larry Sills.

Good morning. The results essentially speak for themselves, so I will be brief and then we will have questions. Obviously, we are pleased with the results for the fourth quarter and for the year. Now much of the improvement resulted from the growth of the entire industry and the reasons for this have been well documented. We have the aging car population where the average age is now over 10 years. We have the closing down of car dealers according to a recent Wall Street Journal article. It had been close to 4000 closings in the last several years. This amounts to about 17% to 18% of the total and these car dealers are our industry's biggest competitor. Third, this last summer was one of the hottest in many years and this obviously helped our Temperature Control business.

But that is sort of the outside world. We've also done a lot to help ourselves. First, we've grown marketshare over the last few years. We had the Dana acquisition, which made a large increase in our Engine Management business. We gained new accounts in Temperature Control. We acquired and then increased the Federal Mogul wire business. Last year, we successfully introduced an imports parts line branded Intermotor to tap this rapidly growing market.

So as a result of these changes, we were in an excellent position to benefit from the overall industry growth. Plus, as we've said before, we have taken many steps over the past few years to reduce costs. We have moved manufacturing to low-cost areas. Our hours in low-cost areas now represent over 50% of our total production hours. We continue to consolidate and combine existing locations. In the year 2010, we moved our fan clutch business, which was in Corona, California, to our existing Grapevine location in Texas. We also closed down the electronics, which is a small operation in Hong Kong, and merged that with our existing electronics facility in Orlando, Florida.

Third, we reduced salaried headcount roughly 10% and we have been able to keep it down despite the growth in sales. And fourth, we have substantially reduced debt over the years close to $200 million over the last three years results. In December 2010, our debt to EBITDA ratio stood at roughly one to one.

So put these all together, you had the growth of the market. We had increased marketshare and we had cost reduction, which led to excellent results and we look forward to 2011. Thank you and we will open it now for questions.

(Operator Instructions) Aditya Oberoi, Goldman Sachs.

Thanks a lot. Congratulations on a great quarter. I just had a question on your SG&A. Your SG&A came in significantly better and going forward, how should we be thinking about your SG&A? I know you guys have commented that some of the costs will creep back, but how -- to what extent of the cost creep back we should be factoring in our models going forward?

Again, we are always prudent in watching and monitoring the SG&A. You saw the absolute dollars increase, but there was -- with the significant sales, we were able to gain leverage on it. I don't even have a good handle at the moment to share with you as a variable and fixed that's in there, but, again, we're going to be very prudent on watching these costs. You've got to be careful when you look at the seasonal nature of the business that we have on the SG&A so that, in the second and third quarters when sales are greatest, we will have distribution costs and other sales and support costs in there.

And obviously, in the fourth quarter, you can see that we are at versus the year at 20%. Again, this is our lowest sales quarter. So again, as a percent of sales, it will increase.

Thank you. I can understand the absolute dollar amount might keep on going up from here, but as a percentage of sales, is it fair to assume that it will remain in the top 20% kind of range going forward or do you think it'll creep up back to that 20% to 21% kind of range?

I don't put out formal guidance on it and the best -- we are faced with the inflation costs that are in there and then part of it is sales-driven and we are very prudent on taking costs out.

Okay, that's helpful. Thanks. On the Temperature Control side, your margins typically fourth quarter show a pretty decent margin and in fact, it's one of the strongest quarters, but if I look at the past couple of years, but this quarter, the Temperature Control margins kind of lagged a little bit. Was there anything specific that went in there or can you shed some light on that please?

Sure, again, it's an anomaly either way it moves on it. It's our lowest sales quarter for the year and what we are trying to do is accrue for anticipated customer returns for the season. In 2009, we had more of a favorable adjustment that would have rolled back in than we had in 2010. Again, the returns were in line. I think the margin percent for Temperature Control was 22.5% in the fourth quarter and 23% for the full year. So I guess we were more accurate throughout the year for what we were accruing for.

Also, in the fourth quarter, and it impacts the first quarter to some degree, we're cutting back on production and as you amortize those variances, those variances will really roll into the first quarter also. So it's just the timing of events and production there.

Got it. This is more of a strategic question for both Jim and Larry. Now most of the dealers -- publicly the dealers have kind of talked about focusing a lot on their parts and service business where they are trying to attract the customer and by giving some incentives on the customer base side. Can you just throw some light, how does it impact your business per se and if you guys are doing something to counter that?

Okay, good morning. This is not a new thing. They're always promoting that and they make more money in this than they do selling cars, typically. So they always are aggressively here. What has helped the aftermarket is the fact that there are fewer of them and geography is an important part of sales in our industry because people need to get their car fixed quickly. They need to get the parts quickly. If that car dealer closes down and you have to go 15 miles away to get one, that is a major factor in the market.

Now the remaining dealers are doing very well and I think you've seen that. So the surviving car dealers are thriving because they have less competition. But in total, the car dealers as a group are -- because that's a smaller group, that's helped the aftermarket. So I think the individual car dealers are aggressive, but the overall trend since there are fewer of them has been helpful to our industry.

Aditya Oberoi That's a fair point. I am just trying to understand if like the fewer car dealers and specifically like all the bigger ones have kind of started focusing a lot on this business and are kind of getting overly aggressive on pricing. Some of them have put in a separate management team to focus on growing this customer pay business. So how does this kind of change the dynamics in the income?

Again, the biggest factor is not how hard they push, but if a person is not there anymore, there's a hole in the market and that hole has been more filled by the aftermarket.

Great. One last one, if I may. Can you just remind us how should we be thinking about the key parameters that would drive further margin expansion as we head into 2011?

Well, the two primary drivers that we look for there are global sourcing and the move of low-cost hours now. We've moved a significant amount of our hours. We will continue to find other opportunities, so I think, at this point, global sourcing is probably the biggest driver that's in there. Again, growing our top line, too, will get us better absorption. But I think we will see benefits going forward. We have had continued over the last couple of years margin expansion in both lines.

While I will say it is still a competitive marketplace, we are trying to increase Engine Management margins. We've said in the past to 27%, 28%. We're up to 25%. We said Temperature Control previously to about the 23%. We are at that today. However there is always a good deal of price pressure and we will look to maintain and hopefully if it's possible enhance it. But Temperature Control, we are at 23%, where we stated our goal to be.

That's great. Thanks a lot, guys.

Arthur Winston, Pilot Advisors.

Good morning. I was wondering if you could elaborate on your buildup of inventories. How much of it is from the higher cost of copper or something like that? How much of it is new parts, if anything? How much of it just got out of control? What's going on there?

The one on the commodities, and again, I will kind make this into a dual question, we wind up dealing with all the commodity price increases. That's negligible on the increase that's in there. That said, we get commodity price increases and we react to that and price for it specifically.

The increase in inventory is really to be able to react to the demand that comes within the -- we were up $100 million in sales and that's not even the demand. The demand was even greater. That's what we could fill and ship, so we had to react. We brought the inventory in and as I pointed out earlier in my talk, we think there's opportunities here to now react to it and get better inventory turns and generate cash in 2011 from it.

Do you figure that by the end of the year the inventories will be less or more than they are now?

If I had to say that the volumes are constant where we are now, we will be able to bring the inventories down. And we will react to volumes, what happens. I will appreciate another record double-digit sales growth and then I will explain my inventory again. But we will be able to bring them down if sales levels are at this level.

Okay, my last question is the interest expense is $1.4 million in this quarter, but I guess there's seasonal buildup of the receivables and inventory later on. But I wonder if you think that it would be smart to multiply $1.4 million by 4 so that the interest expense this year would approximate $5.6 million.

No, you can't do that. It's twofold. One, you could look at the modeling of our working capital by quarter, so we do have demands that increase in the second, third quarter in there, but we have an offsetting benefit that will be coming due next month, in April. We have $12 million of convertible bonds that will be maturing, redeeming at 15% and we will be able to turn those over. So that will be a benefit bringing our interest expense down, but you can't just take the fourth quarter that's in there. Again, we are very pleased with the debt reduction in total, which is at $66 million.

Just one last question. If you are doing so much in Poland and Mexico, what do your tax rates look like?

Well, the tax rates that are -- we are not selling in those specific countries over there, so we are lower in our costs. We're bringing it in here. It's our lower cost. I now we're affected by the local tax rates that are in. So again, you're at federal of 35% and then state rates.

Thank you very much.

Brian Sponheimer, Gabelli & Co.

Good morning, guys. I hopped on a little bit late here. I saw that there was a fairly big pickup in the Temp Control SG&A. Did you discuss that before or can you explain that?

No, well, again, if I look -- I am looking at here -- I just want to quickly take a look at something. Yes, we are up $5 million in sales that's in there. As a percent, because it's our lowest quarter of the year, you will get a percentage increase in there as opposed to looking at it on an annual basis. And for Temperature Control it's really best -- you really can't try to even analyze one single quarter. You have to look at it on an annualized basis.

And if we do that, we can say SG&A was 16.5% versus 15.8% last year. Again, in 2009, we reacted dramatically to redeem our convertible bonds that were outstanding and cut all of our programs and everything. So we did have an increase with our customer programs and incentives that we had in 2010 versus 2009. It's not good to try to isolate a single quarter, Brian.

Okay, I was just curious because I saw that the operating income had a sequential downtick from 8.9% to 70 bps and it wasn't as dramatic last year and just wondered if there was anything this year that was different than last year, but that helps.

Looking at acquisitions as -- you brought in the Federal Mogul line. That appears to be doing well for you. Where do you think on the OES side the productlines are going to come in 2011 and 2012?

You are asking specifically about OES?

I know that that is where you have articulated that you want to grow.

Well, I can't be specific, but the theory that we are working with is to seek out OE suppliers in lines that are identical to ours or similar to ours and we have found that many people, OE vendors, even whether they are part of a car company or independents who sell to the car companies, once the part is no longer on the platform, they have the responsibility to supply that, what they call the long gray tail for years. That's a business that they don't like very much.

And our task, we have been somewhat successful, but we hope to be more successful in the future, is to persuade those vendors to let us be their aftermarket people to supply the OES volume in the future by taking their equipment and doing it on our equipment, their equipment, etc. That is the avenue that we see for growth. We've had a few successes and we look for more.

Would it be an accurate statement, then, to say that given the number of model changeovers and new platforms that particularly the domestic OEMs have come out with over the last couple of years, that that is potentially a nice benefit for you where you can tick up that long tail?

Yes, that's our goal. Dealing with these companies is a long, arduous process, but we are working on it.

And the cold winter obviously helping. Most of those repairs from a cold winter would take place the following quarter or should we have seen the benefit during the fourth quarter here?

Are you talking about the winter just past?

Yes.

Actually, if anything, in the short term, it's been a downer. And I think you've seen it from some of the public companies what they've stated. Especially those in the northeast, they lost a lot of days through ice and snow. Stores were closed. People stayed home, etc., and that did have a short-term negative effect. It is short-term though and it can help in the long term because, yes, bad weather does ultimately erode the engines, and that's good for the industry. Potholes are good for the industry. All the salt on the road is good for the industry. You didn't see this in the first quarter, but it can help in the end. I am talking here now about our industry, no about us specifically.

Right, right. Okay, well, nice job and congratulations on a good quarter.

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

Good morning. Congratulations on the good quarter. Wanted to get my arms around the question of commodity costs. Do you have an internal index that you run about commodity costs?

We don't keep a specific internal index. We monitor the existing commodity prices and address that with our pricing as we do to the customer. Where it's really the focus that we have seen is within copper pricing and that affects our wire and cable productline. It's been up dramatically over the past year and we are reacting to that with our price changes that we are coordinating as we speak now.

So you can react that quickly?

Again, we work with our customers. We don't deal in surcharges or monthly on that, but overall it's addressed when we have price increases. It may be on an annual or not necessarily semiannual basis, but we will have -- they will be implemented when we introduce price changes.

Okay, how are inventories in Temp at the dealer level now?

We think they are in pretty good shape. There was some buildup last year, I think, but they came out of the year in reasonable shape.

Okay, and the shrink in car dealerships with the recovering economy and new car sales, has that kind of played out now or fairly much?

Are you asking if there will be more closings? Is that your question?

Yes.

Again, we are not on the in on that, but from what I read, there may be some more, but the major closings have occurred.

Thanks much. Good luck going forward.

Peter Boardman, Tradewinds.

I've got a couple questions. First of all, I noticed that you, on your statement, you have a balance sheet and P&L. You haven't come up with a cash flow statement yet, have you?

We will be filing our 10-K as early as next week, but I have -- do you have a specific question on the cash flow statement? I'm just sort of wondering, in just looking at the cash flow generation, how did you get to the point that was lower? Was it just mainly earnings?

Excuse me, I'm sorry, you faded out.

I'm sorry. I was just sort of wondering how did you come to seeing your debt decline by about $10 million. Was it through working capital management or the fact that you had higher earnings? What did you do with your cash? Those are the main questions.

Well, the primary driver in there was the earnings. We had, if you looked at the impact to the receivables, the overall working capital wound up getting close between, with a slight increase that was in there, inventories went up $40 million, receivables down $20 million. I think payables may have been down about $4 million or $5 million that was in there. So it was really -- the driver was the earnings that we had within the period. We also in this year we also paid dividends that we had reinstituted in 2010 and we are still pleased to be able to pay down the debt.

How much of a dividend did you pay for the full year?

$4.5 million.

$4.5 million, okay. And then I was just looking at the -- although your equity increased, your book value per share actually decreased a little bit, and I assume -- is that because of the convertible bond being converted to more share -- the share count increase?

Yes, I'm sorry, you keep fading out, but if I understood the question on the book value per share, we had a significant increase in number of shares outstanding.

Okay, and that's because of the convertible bond or is that because --?

No, that was a follow-on offering that we had.

Okay, and then just a little piece of the information about the industry, so with higher oil prices, obviously we've had new car sales being quite strong and it doesn't look like people -- consumer sentiment is that bad for new car sales, but for maintenance and fixing, temperature controls and so forth, historically when oil prices get to these levels, do people start cutting back on the maintenance aspect?

No, I don't think you can make that relation. You can say -- and this is based on history -- that when oil -- when gasoline prices go over $4 a gallon, at least that was the case a few years ago, people reduce their driving somewhat, but not huge, 1% or 2%. And for the kind of businesses we are in, it doesn't affect it that much.

Yes, new car sales are going to be up. However, it's an oversimplification because people have been saying, oh, we had a good year this year because new car sales were down. Therefore, if new car sales go up, we are going to have a bad year. The new car sales -- the spread between good and bad is a few million per year, and that's a drop in the bucket compared to the entire vehicle population, which is over $250 million.

The issue is not how many new car sales are sold that year. The issue is what is the average age of the fleet that's out there? And that age of fleet continues to rise. That's the biggest factor. Whether they sell 12 million or 15 million cars this particular year is not that critical.

Then just finally, could you just -- I know you are trying to shift more of your costs to lower-cost countries, but could you just take us -- how much do you think, let's say in '11 or '12, how much more cost-cutting benefit do you think you could see, assuming revenues stay unchanged?

We continue to look for improvements. We continue to look to move product. We continue to look to manufacture products that we currently purchase. There's a good saving there. We continue to look for sourcing material in lower-cost places. There's lots to be done yet.

What you have already currently underway in terms of expanding your business in Mexico, your production base in Mexico and other low-cost countries, what you have currently projects on the table, how much more incremental cost cutting do you think you could achieve?

Again, we have had significant cost-cutting over the last number of years. It's a competitive environment, which also impacts pricing in the marketplace. I think we don't put guidance out, but what you can look to was long term and we went back to when we acquired the Dana business, the Engine Management part of it. We said that we want to be able to work towards bringing the Engine Management business to a 27%, 28% gross margin. We said Temperature Control at the time I think we had said 23%, maybe 24%.

Temp is there. Again, that's a competitive market. It depends on volumes for the year. So there is still opportunity for us and we work on it. We have pricing. We have ability to look to low-cost sources, so we continue to have opportunities.

Okay. All right. Thank you very much.

It appears we have no further questions at this time.

Okay, I want to thank everybody for joining our conference call today. Goodbye.

This concludes today's conference. You may now disconnect your lines and have a wonderful day.