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Standard Motor Products, Inc. (NYSE:SMP)

Q3 2010 Earnings Call

November 2, 2010; 11:00 am ET

Executives

Lawrence Sills - Chief Executive Officer

James Burke - Chief Financial Officer

Analysts

Robert Smith - Center For Performance Investing

Steve Rudd - USIP

Sean Nicholson - Kennedy Capital

Efraim Levy - S&P

Operator

Hello and welcome to the Standard Motor Products’ third quarter earnings call. At this time all participants are in a listen-only mode. (Operator Instructions) 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.

Jim Burke

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 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’ll begin with a review of the financial results and then turn it over to Larry followed by Q-&-A.

I’m very please 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 $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%.

Our 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 cost 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 the 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 Statute 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 account receivable increased $46.4 million versus December ‘09 levels. This is due to our strong sales and seasonal nature of our Temp business. AR levels are essentially flat with September ’09 levels.

Inventory increased roughly $32 million since December ’09. This increase was in response to a 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 10 was $74.3 million, down slightly from $76.4 million level at December ’09, 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 amortization was a comparable $3.3 million in the quarter and $10 million for the nine months.

With that, I’ll turn it over to Larry Sills.

Larry Sills

Good morning. Jim has covered the numbers and I think for the most part they speak for themselves. I’ll just give a few brief comments and then we’ll open for questions.

As I’ve said before, we have spent the last several years working diligently to reduce our cost base. We’ve moved manufacturing and purchasing to low-cost areas. We’ve reduced overheads. We’ve reduced debt. Now, you lay on top of this lower cost base of strong sales year and obviously the results will be quite good.

A word on the sales. The aftermarket is doing quite well this year as those of you who followed the industry have seen from all the public companies, both manufacturers and distributors. The reason for the increase have been quite well documented, I’ll 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’ve read is the highest it’s 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 with the repair and the sale of parts, so that’s a positive thing for our industry. Number three, we believe there’s been some pent-up demand that is hard to quantify, but believe there’s been some pent-up demand from people who just didn’t spend any money at all in 2009 and that repair work slopped over into 2010. Again this is hard to quantify, but I think the certain amount of that is going on.

Number four, this was quite a hot summer in most of the countries, 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 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 since the task are essentially complete now. We moved to our Hayden, fan clutch operation from California into 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, 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 of this is to streamline and expedite our purchasing from the Far East to work on our strategic goals of purchasing from low cost countries.

So to summarize, we’ve worked over the last few years to reduce cost. We continue to work to reduce cost. And from all the indications, the aftermarket will remain healthy and so for all these reasons, we are optimistic.

With that, let’s open for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question from Robert Smith with the Center For Performance Investing. Please go ahead. Your line is open.

Robert Smith - Center For Performance Investing

Congratulations on a strong quarter.

Larry Sills

Thank you Bob

Robert Smith - Center for Performance Investing

It’s very pleasant to see those numbers. Considering the improves the financial condition of the company and the announcement of the dividend do you guys have an ideas to payout the ratio what you want sort of doing them.

Larry Sills

Okay, as you recall our stated goal for a dividend payout is one third of earnings per share. We’re below that right now with these latest numbers. We’ll be reviewing this with our board over the next few months and as we look at our 2010 numbers and our 2011 forecast and we’ll be making a decision sometime the next few months.

Robert Smith - Center for Performance Investing

Thanks, good luck.

Larry Sills

Thank you.

Operator

(Operator instruction) And looks like we have a follow up now with Mr. Robert Smith again. Please go ahead, your like is open.

Robert Smith - Center for Performance Investing

Where is everyone?

Larry Sills

I’ll tell you where they are Bob there is a Mario Gabelli runs and actually about a year we are at Las Vegas now and I’m guessing all the people who normally ask questions are in this meeting right now.

Robert Smith - Center for Performance Investing

Okay. What am I doing in New York? Yeah, so maybe you could just give me a little more color on the competitive environment. You mentioned certain of the pieces that are making you look better and how about the possibility of the continuation of those trends?

Larry Sills

Well the competition remains strong. We’re in a very competitive industry in 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’d say there has not been any major change in that one-way or the other. So the growth in sales that most of us is seeing is not so much taking or loosing market share but the fact that the whole industry level has risen this year.

Robert Smith - Center for Performance Investing

Well looking out to the next year so to speak, what are the OES promise?

Larry Sills

OES is what you’re asking?

Robert Smith - Center for Performance Investing

Yeah

Larry Sills

Well at this point, we have many prospects.

Robert Smith - Center for Performance Investing

Well what can bring some of those home I mean.

Larry Sills

Well it’s really they, what we are learning is that, these companies that we deal with, they are larger, they are very engineering and quality oriented and they don’t move as quickly as some of our aftermarket companies, so they take their time and they study and they analyze and they test, and some times they’ll put things on live test for six months. So it’s a slow process, but it’s a good process, it’s fair and as I say, we’ve got a lot of prospects out there.

Robert Smith -- Center for Performance Investing

And how much of the incremental Temp business is due to the weather factor?

Larry Sills

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

Jim Burke

Does it we did pick up some new business from our competitor last year.

Larry Sills

A year ago.

Jim Burke

So a little bit, probably 80% of it is from the temperature, from the seas and the little bits that market share gain we got at the beginning of the year.

Robert Smith - Center for Performance Investing

And can you tell me something about the commodity cost factors to you I mean with the prices and materials going up?

Jim Burke

Yeah. To some degree to say we’re fortunate, we experience the same commodity price changes, up or down as everybody else, but because of the breadth of our 30,000 SKUs, primarily within Engine Management, many of those products we purchased 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.

Robert Smith - Center for Performance Investing

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

Larry Sills

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

Robert Smith - Center for Performance Investing

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

Larry Sills

You’re talking about the layoffs?

Robert Smith - Center for Performance Investing

Yes.

Larry Sills

Yes, yes we did and we’ve really kept it down, which is very good.

Robert Smith - Center for Performance Investing

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

Jim Burke

Again, for the fourth quarter, sales overall, many of our distributors are optimistic looking forward yet, so we don’t put forecasts out.

Robert Smith - Center for Performance Investing

But I understand.

Jim Burke

I would say that 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 and at this point we deem to be adequately accrued for customer returns and we’ll see as we close out the full year.

Robert Smith - Center for Performance Investing

Okay. Well, once again, congratulations and good.

Jim Burke

Alright, thank you.

Robert Smith - Center for Performance Investing

Best of luck.

Larry Sills

Very good. Anybody else?

Operator

And we’ll take our next question from Steve Rudd from USIP. Please go ahead, your line is open.

Steve Rudd - USIP

Hi, sorry to disappoint, but actually my questions were answered by the other gentleman’s questions, so I’m all set, thanks.

Larry Sills

Yeah, thank you.

Operator

And next we have Sean Nicholson with Kennedy Capital. Please go ahead, your line is open.

Sean Nicholson - Kennedy Capital

Good morning guys.

Larry Sills

Good morning.

Sean Nicholson - Kennedy Capital

Third quarter, just one question on inventory at your customers, what are they telling you as far as maybe expectations for early next year or how are they are they managing it, any different than they have been this year going into next year?

Jim Burke

I think on the inventory levels, our inventory increased. Again, I think we’ve seen some slight increase at some of our customers. We don’t get obviously all the reporting, but we get the majors that we had a look at their inventory levels. It did increase a little bit, again in response to strong sales and the demand, but also I 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.

Sean Nicholson - Kennedy Capital

Okay, great. And just on new products, where are we, are you guys doing anything in particular that will be launched in next year that may benefit the sales?

Larry Sills

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

Sean Nicholson - Kennedy Capital

Great, thanks.

Operator

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

Efraim Levy - S&P

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

Jim Burke

We have a small piece that’s left there related to the exchange bonds that we offered, which are, I think the number is 12.3 million comes due in April ‘11, it’s at a very high interest rate and that will be a savings, we will cover that under our revolver in April of next year.

Efraim Levy - S&P

Okay, and as far as the tax rate that you’re looking for?

Jim Burke

And the other piece that we have on there is our revolver, which has a maturity after March ‘13.

Efraim Levy - S&P

Alright. Okay, and as far as the tax rate that you’re looking for?

Jim Burke

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

Efraim Levy - S&P

And as far as looking to ‘11 with some of the optimism that you’ve expressed, do you think you’ll get a little bit more of a sales kick than you historically have for the Engine business?

Jim Burke

What for this year, going forward?

Efraim Levy - S&P

Yeah.

Jim Burke

Well, I think this year we were very fortunate, many of it as Larry spoke to pent-up demand and all 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 new products. But again, this on top of this base would be amazing, so I would be very pleased in the mid single digits.

Efraim Levy - S&P

Okay. And finally, as far as restructuring, that should essentially be going away or there’s a little bit of a carryover?

Jim Burke

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

Efraim Levy - S&P

Thank you very much.

Jim Burke

Welcome.

Operator

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

Robert Smith - Center for Performance Investing

Can you just briefly comment on managing currencies going forward?

Jim Burke

Again, our locations that we’re involved in we are in Mexico, we are in Poland, we have an impact with the Euro. Again, the commodities, most of our purchasing are in U.S. dollars for even our overseas sourcing. And we have a natural hedge that’s on the other with Canadian Dollar, we have a little bit in there, but it hasn’t been a significant impact, either from the sales or the cost side of our business.

Robert Smith - Center for Performance Investing

And you don’t expect it to be?

Jim Burke

No.

Robert Smith - Center for Performance Investing

Alright, thanks.

Jim Burke

Okay.

Operator

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

Jim Burke

Alright, very good.

Larry Sills

Alright, thank you everybody.

Jim Burke

Thank you, goodbye.

Operator

Today’s call has concluded. We thank you for your participation and we hope you have a nice day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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