Larry Sills - CEO Eric Sills - Future CEO Jim Burke - CFO.

Scott Stember - C.L. King Tony Cristello - BB&T Capital Markets Brian Sponheimer - Gabelli Brad Jordan - Jefferies Walter Schenker - MAZ Partners.

Good day ladies and gentlemen and welcome to today's program. Today's program maybe recorded. At this time, all line are in a listen-only mode. However later in the program you will have the opportunity to register to ask your question. [Operator Instructions] It is now my pleasure to turn today's program over to Larry Sills. Please go ahead sir..

Good morning everybody and thank you for attending. I am Larry Sills, currently the CEO for another month. At the end of March, Eric Sills will become the CEO as I become Executive Chairmen, and this is a move that’s been long being contemplated and plan that we are confident it will go off extremely smoothly. Also with me is Jim Burke, our CFO.

As we said in the release, we are disappointed in our results in the fourth quarter and for the year and obviously the market is disappointed as well. However, as we have said we believe that most of the issues are onetime and behind us. And with the steps we are taking, we are quite optimistic about 2016 and the future.

So to start going over these things let me first bring on Jim Burke, who will review the number and then Eric will talk about this major plant rationalization move that we announced yesterday -- two days ago. And then we will open for questions. So with that I turn it over to Jim..

Okay thank you Larry. And just 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 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. As Larry said overall, we are disappointed with our results in Q4 and for the full year 2015.

There were a number of specific events which I will address and try to highlight our core operations. Consolidated net sales in Q4 ’15 were 205 million, down 13.1 million or 6% and full year sales were 972 million, down 8.4 million or 0.9%.

We previously highlighted that Q4 ’15 sales were up against Q4 ’14 sales that included customer pipeline orders that would be difficult to match. Our year-to-date sales results were down roughly 8 million which reflects the negative impact of foreign exchange rates in 2015, excluding exchange rates we were essentially flat in sales.

By segment, engine management net sales in Q4 ’15 were 167.6 million, down 8.3 million or 4.7%, and full year was 698 million, down 11.2 million or 1.6%. The engine management sales reduction in the quarter reflects pipeline orders as mentioned earlier in Q4 ’14, that were not repeated in this past quarter.

And year-to-date engine management sales were negatively impacted earlier in the year when we initiated a diesel return for inspection and to a lesser extent unfavorable foreign exchange rates. On a positive note, our major customer sales for our engine management line reported their sales out the door of approximately 3%.

Temperature control net sales in Q4 ’15 were 36 million, down 3.7 million or 9.3%, and year-to-date were 264.5 million up 5.4 million or 2.1%. The Temp Control year-to-date sales included 4.7 million incremental sales in the first half from our Annex acquisition that was completed at the end of April 2014.

Our major customers experience roughly 10% temp sales increases as they were able to reduce elevated inventories after two cool summers in 2014 and 2013. There should be a benefit for us during the 2016 summer season.

Consolidated gross margin dollars in Q4 were down 4.3 million at 30.6%, down 0.2 points and year-to-date dollars were down 8.6 million at 28.9%, down 0.6 points. By segment engine management gross margin in Q4 ’15 was 31.5%, down 3/10 of a point and for the full-year 30.4% down 0.6 points.

In the first half 2015, we implemented a plan to upgrade and enhance our rebuilt diesel injector program. We incurred 5.7 billion cost for the year for returns from the field for inspection, outside purchases at a premium and product cost quality enhancements. The bulk of these costs were incurred in the first half.

Engine management gross margins improved sequentially throughout the year once these diesel costs were behind us. Looking at the engine management by quarter Q1 margin was 29.2, improved to 29.5%, Q3 31.3%, and Q4 at 31.5%. We're very pleased with the recovery in gross margins and the re-launch of our quality rebuilt diesel injector program.

Temp gross margin in Q4 ’15 was 20.9% up 2.3 points and for the full-year was 21.9%, up 0.3 points. We are pleased with the gross margin improvements of 2015 over 2014 despite the unfavorable manufacturing variances from 2014 that were carried forward into 2015.

We will be a much better position entering 2016 without the carry forward of 1.8 million unfavorable variances that we absorbed in 2015. Eric will also discuss further actions we announce this week to reduce our cost structure and Temp Control. Consolidated SG&A expenses excluding a customer bankruptcy charge which I’ll discuss after.

In Q4 '15 we’re 49.9 million up 1.7 million at 24.4% of net sales versus 22.1% for the quarter last year. And full year '15 SG&A expenses were 202.8 million up 9.2 million at 20.9% of net sales versus 19.7% for the full year '14. 2015 incurred a number of specific advance that negatively impacted our results.

Three items we previously discussed Engine Management diesel enhancements 5.7 million, Temp Control unfavorable manufacturing variances carried over from '14 of 1.8 million and post retirement medical non-cash amortization of 2.4 million total of 9.9 million, these charges will not be repeated in 2016.

In addition, in Q4 '15 we recorded a 3.5 million net bad debt expense in our SG&A expenses, when one of our larger WD customer filed for bankruptcy. Overall our 2015's spend level in SG&A was below our 51 million to 52 million per quarter SG&A guidance at the beginning of the year.

Consolidated operating income before restructuring and integration expenses, the litigation charge from 2014 and the bankruptcy charge in 2015 another income net otherwise non-GAAP operating income in Q4 '15 was 12.9 million, 6.3% of net sales versus 18.8 million at 8.6% for the quarter in 2014.

The shortfall in Q4 non-GAAP operating income was primarily related to the 13.1 million sales shortfall as pipeline orders were not repeated in Q4 '15. Full year 2015, non-GAAP operating income was 78.2 million, 8% of net sales versus 96.1 million, 9.8% for all of to 2014.

The full year shortfall again was impacted by the three specific advance at roughly 10 million that will be behind us as we enter 2016. Other non-operating income expense net improved 500,000 in the quarter at 1.7 million for the full year 2015.

The primary positive contributors in the quarter and full year were improvements in our joints ventures and foreign exchange impacts.

An unfavorable non-cash charge in the quarter and full year was the write-off of deferred financing fees as we previously announced we entered into a new 250 million revolving credit facility with a new five year term which will material in October 2020 at more favorable terms.

The net effect of our operating results is reported on our non-GAAP reconciliation was dilute earnings per share in the quarter of $0.35 versus $0.49 in the quarter for '14 and full year '15 diluted EPS of $2.13 versus $2.52 in 2014.

While our final 2015 results were below 2014, we feel confident entering 2016 at the three specific charges at $10 million are behind us, the customer bankruptcy charge was anomaly and our announced restructuring initiatives will make us a stronger company in the future.

Looking at the balance sheet, accounts receivable decrease roughly 3 million for year, while inventories increase roughly 8 million from December 14. Total debt was reduce 9.3 million in 2015 to 47.5 million.

our cash flow from operations was 65 million in 2015 and our cash allocations in 2015 were used primarily to fund capital expenditures of 18 million, dividends of 14 million, share repurchases of 20 million and debt pay down of 9 million, totaling 61 million. Leaving still yet a net gain in cash of 5 million to 19 million.

Looking forward in 2016, we look for sales increases in the low single-digit, gross margin improvement for engine management with incremental increases, Temp Control gross margin improvements approaching 23% to 24%.

SG&A spend levels in the 52 million to 54 million range per quarter, increased dividends as we previously announced from $0.15 to $0.17 per quarter and a restructuring plan to strengthen our cost competitiveness. Thank you for your attention, I'll now turn the call over Eric Sills.

Good morning everybody, so I thought I would spend a minute talking about our recently announced plans to relocate some of our manufacturing. There are two main pieces to this. Firstly, we announced that we will be closing our Grapevine, Texas locations and relocating production to two existing SMP plans.

All the temperature control related products will move to Reynosa, Mexico where we have a highly skilled long-standing temperature control operation and we will be moving our diesel injection products recently installed there from our 2014 acquisition of Pensacola Fuel Injections, we’ll be relocating this to our Greenville, South Carolina plant which is our center of excellence for gas injection products and therefore a very logical fit.

And various stuff functions will be relocating from Grapevine to our Louisville, Texas facility close by. Secondly, we announced that we will be moving all of our ignition coils from Greenville, South Carolina to our plan in Bialystok, Poland. Poland is already making the majority of our coils so this is a relatively simple and straightforward move.

As mentioned Greenville will be receiving the diesel products from Grapevine, so from a staffing standpoint they will remain almost whole, and all of these moves are expected to be completed by the end of 2017.

From a financial perspective, we expect to incur one-time cost of about $9 million which will be partially offset by the expected gain on the sale of the Grapevine property which was recently appraised at about $5 million.

This 9 million in one-time costs split out roughly as follows, it's about 2.5 million in capital, about 5 million in restructuring costs both employee related as well as transportation and rigging expenses and then it's about 1.5 million in softer costs such as temporary inefficiencies, training and so on and will be expensed during the ordinary course of business.

In terms of associated cost reductions, once complete we anticipate annualized pretax savings of $6 million to $7 million. Closing plant is the toughest thing we do as it affects people's lives. I was personally in Grapevines to make the announcement.

Grapevine has been a great plant for us with great people and our decision is nothing to do with their performance.

We'll bend over backwards to make it is painless as possible for them, helping them with the transition in every way we can including severance packages, medical continuation, assistance relocating to other SMP locations and in finding jobs locally.

We've have a great deal of experience with plant moves and as we're moving all production to existing well-established SMP locations, we expect absolutely no business disruption. So with that, I'll turn it back to Larry..

Okay, that's our brief summary, again just to recapitulate we're disappointed with our results, but optimistic about the future. Industry demographics remained quiet favorable, our position in the industry is extremely strong.

And as others have said many of the onetime costs are behind us and now we have announced this initiative for substantial cost improvement in the future. With all that, we look forward to 2016 and beyond, and we are happy to open now for questions..

[Operator Instructions] We will go first to Scott Stember with C.L. King. Your line is open..

Could you maybe quantify what the magnitude of the pipeline fill was last year in the fourth quarter? And was that pipeline filled for both Engine Management and Temperature Control?.

Yes, it was primarily and it was triply an engine that was in there -- that was there. And we haven't disclosed, it makes up the majority of the shortfall that’s in there for the quarter..

Okay and you talked about the sell through rates for your I guess for your product from a major customers, were you referring to the quarter up 3% and 10% respectively or for the full year?.

For the full year. And again we are pointing out Scott is that the distributors, if you look at them so their sales are better indication of what's going on. But for manufacture is we are selling through in inventory movements, we are tracking and we always -- caution always to look on a full year basis..

Again just to clarify. Sales out in Engine Management and we get this information from top accounts. Sales out in Engine Management plus 3%, sales out in Temp Control 10%.

Can we get a -- is the way to get little bit more granularity just about the quarter maybe just was there any deceleration in the quarter or was that rate pretty steady throughout the course of the year?.

I think it was pretty steady. Our information lags a little bit too, so we don’t get up to the date. Yes, [multiple speakers] it’s the same, it held in the fourth quarter, both lines. It held in the fourth quarter..

And just going, I guess to the bankruptcy there was -- its sounds like a largest distributor on the west coast that we have heard in -- would you expect again a seamless transition to your product being just sold through to a different distributor out there? And was there any disruption from that in the quarter to your business at all?.

No, and it's hard to measure. Some of the other local distributors picked up volume that was all there and we’re hopeful that whoever acquires it that we feel our product categories to be covered in there..

There is several bidders and we are quite comfortable that we will not lose any volume over this..

Got it. And just to reiterate, just looking forward, I know you talk about the low single digit growth on the topline, obviously it's depends on what Temperature Control does.

But just from what you are seeing from your customers right now, are we -- I mean is that factoring any other potential -- the back half of last year we saw some rationalization by customers, has that ended? And are we in pretty good shape entering the first half for the year, I guess is what I am trying to get that?.

Okay, now I understand your question. Yes, but when you using rationalization when -- as two acquisitions of the properly the customers have been combine in distribution centers jobs or et cetera, et cetera. Yes that was a factor in 2015, I can’t say it's a 100% over but I would say the majority of it is over..

And just last question, was that a material impact in the quarter? Or the shortfall is really just strictly the tough comparisons I guess?.

Yes, I think as Jim said the majority of it was the shortfall in the dating orders..

Okay thank you so much that’s all I have for now. I’ll jump back into the queue..

And we will go next to Tony Cristello with BB&T Capital Markets. Your line is open..

I guess I want to just touch on a little bit more in terms of this quarter and sort of what happened because I get the sense that you are disappointed as well in sort of what the operating results were. But you also knew going into the quarter there were going to be some headwinds on a year-over-year comparative basis.

So I want to understand is your business model such that there is no other adjustments you can make to offset what you saw coming into the quarter to make it a little less of a disappointment at $0.35 versus what you could have done.

I am just trying to understand the flexibility you have in your model today?.

Okay Tony, this is Jim Burke. So even on the cost to sales on our SG&A, really the cost within a quarter are in place since your infrastructure that you have in there, so reaching. Some of the things that we're doing within the quarter are monitoring and accruing for returns, customer rebates in that.

Within SG&A 75% to 80% are fairly fixed cost that we have in there, the opportunity there is we can grow, we can gain leverage on those expenses. But within a short period, there is very little that you can react to be able to change in EPS number there within a quarter.

We knew the sales, we announced that in the third quarter conference call, reminded the inventor community that we were up against those pipeline orders last year and we did not expect to match the sales..

But it seems like this quarter, even under that context this quarter came in probably worse than you would have expected.

And was there a reason why -- we knew that the pipeline headwinds were going to be there, but was there a something else that happened that you couldn't adjust that maybe a little bit more of difficult quarter that you would have expected?.

No, while sales drive so much of it that's there, again the margin on engine management was very healthy, improved over the third quarter, you have period one, you have lesser sales. So we had a 31.5% margin in engine management.

Temperature control, the margin there came in at 20.9% and again that's because it's a short sales period and we're adjusting for returns, so probably the prior year's quarter I probably had a little more favorable adjustment on what we had anticipated for returns in the quarter. But that top number really drives the results that are in there..

Okay and if I look on I guess your business model, is you visibility into customer replenishment better today or worse today on a historical basis meaning are your customers lead time shorter now due to efficiencies across supply chain, give you less time to overall react to things?.

Well, I think we have better visibility now that we ever had. We speak with them constantly. We have a group of people here who talk to their counterparts, they’re our bigger customers. And so we have a pretty good feel of what they're going to do next.

Every once in a while we get surprised, but for the most part we have pretty good visibility of what's out there..

Okay and then just last question, if you think about your business in the baseline and maybe industry is quite strong, you talk about sales out the door and in those type of things, I mean, is 2015 the right base line run rate now for your business, I mean is it a situation where you look back at 2013 or ’14 and say, hey, we cannot only get to those numbers in the future but we should be able to surpass them or are we just kind of going to look at a modest growth rate year low single digits and sort of reset based on 2015?.

I think for a sales model, low single digit is a reasonable number and frankly that what you're hearing from our customers as well on average, some better some better worse, that's where they average out that what's the industry is doing.

If you say is 2015 a base, I am not sure what that means, but we look at each year and we make excellent moves in cost reduction and manufacturing products we used to buy. We have many ways which we help ourselves so that we can do better than a 3% in profit with the 3% sales increases..

And Temp Control category is going fluctuate no matter what, and I guess what I just ask one thing, do you think, it sounded like that last couple of years you had to work off and you customers have worked off in inventory, do you think inventory in general across the supply chain is positioned acutely today or do you still think there is overstock as everyone sort of raising that continue to have the highest bill rates relative to their peers?.

I can say that and in Temp I think it's much better than it's being in last two years because they had large sales years because it was cold and the inventories increase and that’s back to a normal situation and what we are actually seeing the benefit of that right now in preseason orders which you coming in pretty good.

Engine I think it is pretty stable with the one exception as someone mentioned before with acquisitions you are sometime combining facilities and that has a short term effect. But that’s a short term effect. Overall I think our customers watch inventories very well. And I would say inventory are in pretty good shape..

Great thank you for your time there..

And we will go next to Brian Sponheimer with Gabelli. Your line is open..

Larry, I think I speak for the rest of our organization and saying congratulation and best wishes for the future. We certainly hoping that we’ll see in Los Vegas again this year..

You certainly shall..

I guess taking a longer term look at where you kind of see the next couple of years from an M&A pipeline perspective Eric.

You made a few acquisition over the last few years, what -- I guess what's in the kitty right now, is the pipeline robust or you guys more or less looking to handle these internal restructuring first before you in line anything else?.

So we are always looking at nice acquisition targets and see a no from our balance sheet, it's very healthy and we have the financial, wherewithal to do it.

But we are going to continue to be selective and only seek targets that fit our strategy and as a reminder of what that’s strategy is, we really only looks for targets that are very complementary and synergistic to our core business and so they tend to be one of two types either a bolt on target that dovetails directly to what we are already doing or going and acquire a supplier of ours which as the strategic benefit of allowing us to become a more basic manufacture, getting into something newer technology that perhaps here to fully we are only buying.

So we’re going to continue to look but we’re going to be selective in finding those targets that fit that profile. There are still ones out there and so we are on always looking..

Okay so these plant movements certainly don’t restrict you from anything incremental over the next couple of years?.

That’s correct..

Okay thank you very much..

Thank you for the question..

And we will go next to Brad Jordan with Jefferies. Your line is open..

Is there anything that you are sort of in the pricing outlook that’s catalyst to this plant restructuring, I mean are you seeing any progressing coming or why? Seems liked you’ve moved some of your diesel production to Grapevine and now you are shutting Grapevinea and moving it again?.

Well, the why now is, we are also looking to do this. We’ve gone through some major wins over the last five or six years. So that’s independent of the pricing situation. We are always looking to improve ourselves. So this became a plan and we think it's a very, very fine plan.

Is this related to the pricing, not directly but officiating that we are in a competitive environment and much of the competition is coming from China which is based on price. And we need to be in the good position to complete there. And these moves puts us in the position to complete there..

Okay..

So it’s into it, actually related, but that’s not why we did it, we’d had done it anyway..

Alright. And then a question on growth to get back to that low single digit Engine Management growth, I mean you’re adding categories like diesel and in theory maybe tax mark begins to contribute someday, and some general parts installation.

Is low single really -- is that a base case number where some of the new product line introduction or higher value part, going to give you some upside of that.

Or you really thinking 3% is as good as it gets?.

Brad its Eric. We are -- yes we are pushing some of the newer technology in some of our newer categories but you will also have to do mind that with our breath of an offering as always those categories that are in decline.

Some of the older technology and so some of this growth that we're seeing in areas such as diesel and Tech smart, it is replacements volume for some of technologies that are following, Our industry has a benefit of having very well life cycles but we do still have technologies that are decades old and in declined.

We hope that our product expansion can exceed that which is rolling off and -- but we're somewhat conservative in forecasting that going forward..

[Operator Instructions] We will go next to Walter Schenker with MAZ Partners. Your line is open..

Just to reiterate a question for the slightly different vent and then second question, the first is on the returns which are averaged over historical period, maybe this is for Jim, that number especially given this year where sell through was lower and therefore I assume return to a somewhat lighter, that number is gradually coming down as you accrue it during the year?.

No and again looking at it Walter, our customer sales were doing good and the returns are triggered by their sales in the activity that's out there. So we're going to get the volume of returns coming off of their inventory movements.

So in essence even while its inverse relationship our sales were down slightly but our returns could be higher and that's what we're experiencing. We did experience higher returns in the period..

And that's brought the year somewhat above what you had planned and accrued or is still basically in line?.

Well, it was in line, we're probably within the quarter I had to more of a charge than what I would have expected and it's more related within the alleged warrantee that gets in there because of the technical of our products that are in there..

Okay and second, a philosophical question which we've made many times, but this maybe last chance to ask while Larry’s still there, this is an industry where your biggest customers especially [Indiscernible] really and even on their calls are now thrilled with pricing declines, just so they should be accounting in the business when your assets as inventories, we prefer pricing going up slightly, you are by far the largest player in both of you major categories air conditioning and engine management and Chinese competitors are always going to be somewhat lower than you are otherwise why would you bother since we can all agree you breadth of products and your quality is at least going to be better than theirs and your breadth of product line is better, what can't you still push pricing up 2% to 3% a year? Why can't you do that as the industry leader, if you're the industry leader and you're not going to do, it clearly isn't going to happen and yes the increment the Chinese suppliers are always going to be nibbling or biting at you, but why should they determine pricing and not you? I won't be able to ask this anymore Larry to you..

Yes, you will. We are in a very competitive world and yes we’re the leader. But we're pleased to be the leader and again one reason we stay the leader is we stay close and we do not match there is a lot of low prices out there and lot of our people are bringing in short lines from China and offering it at 20% below us.

We don't go to 20%, we have to watch it. And on the other end, we have so many products, our basic understanding with our customers is that we will not -- we will keep them competitive with OE and that limits us on that side. So you say we're the industry leaders but we really cannot go above OE.

So you got those two things, you got OE on one end, you got cheap stuff coming in on the other. We balance that as best we can. We raise where we can, we reduce where we can and we do a pretty good job of balancing and as you see our gross margin continues to increase and we hold on to the business. So I think we do a reasonably good job of balancing..

Can therefore generally speaking not every product line, your pricing is very close to the OE level?.

Yes, that’s fair to say. We are certainly not above it. In certain cases we may be below it because of other reasons, but we are never about it, we cannot about it. If we put our customers in a difficult position, if they can compete with OE. So that’s why we have to use that as our benchmark..

Okay thanks a lot..

Thank you and I hope this is not the last time you ask the question..

And we will go next to Scott Stember with C.L. King. Your line is open..

It's a quick follow up question just trying to frame out the cadence of terms to control business throughout year, last couple of quarters, the second and third quarter we saw a nice rebound and then fourth quarter we saw a pretty short fall off and now it sounds from your comments that things have bounced back in the first quarter.

So was this more of a -- inventory just cut down by some of your customers saying we just don’t want to carry a lot of inventory heading into the cold or winter months or just was this just a blip?.

It's a very, very seasonal business obviously. The sales -- the customer sales are in the second and third quarter. There is almost no business in the fourth quarter and 1 million or 2 million up or down in the quarter is just in my mind unpredictable noise, I don’t know why that is. The first quarter tends to be a function of how the prior year went.

So if the prior year was good and peoples inventories are low or reasonable, you’re going to see some very nice or just in the first quarter. Again its preseason, it doesn’t mean anything for the future, but it's really be flexible to prior year it was.

So that in 2015 we had quite low orders in the first quarter for two reasons, one that people had inventory and people also tend to forecast based on the prior year and prior year wasn’t very good. So you have low initial orders, this year the reverse was true. They are looking at a good season as a benchmark and their inventories are low.

So that’s what predates the first quarter create the first quarter. The second and third quarter are function of how hard it is and the fourth quarter is just I don’t know whatever balancing has taken place before the quarter is not meaningful in this business..

Got you..

Is that answer your question?.

That’s perfect. Thank you very much..

[Operator Instruction] And there are no further questions at this time..

Okay. With that I would like to thank everybody for participating in our call today. Good bye..

And thank you for joining us today ladies and gentlemen. That’s does conclude today's program. We appreciate everyone's participation and you may disconnect at any time..