Standard Motor Products Inc (SMP) 2002 Q1 法說會逐字稿

Good morning and welcome to Standard Motor Product's first quarter 2002 conference call. In attendance from the company are Larry Sills, CEO, and myself, Jim Burke, CFO. As a preliminary note, I'd 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 or 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, also we cannot assure you they will be correct. You should not rely on anything in these forward-looking statements as a promise or representation as to our future results. You should also read our filings with the SEC.

Now Larry will discuss highlights of the recent quarter and we will open the conference to questions.

Good morning everybody. Usually I am able to start by saying that our earning announcement and the numbers speak for themselves. I'm afraid that's not the case this time. Between the write-off of goodwill and the reclassification of certain expenses the analysis is a bit more complicated than is usually the case. So if you have any questions about that Jim Burke should be able to answer them. What I'd like to do now in a bit more detail what I believe are the four key points about the quarter. First is to explain the swing from a small profit last year to a loss this year. Second, the decrease in sales. Third, the improvement in gross margins. And fourth, cash flow and inventory reduction. So let's start.

First to profit. What you have is basically a $4 million swing pretax from about a million in 2001, a million profit, to a $3 million loss in the first quarter 2002. About half of that is from the activity in a single account and the result was not at all unexpected. The account was O'Reilly and if you recall they had left us, and then come back to us, they came back to us last year. We had a large opening order in the first quarter of 2001, about $8.5 million, and as you recall, the way we do our stock

accounting is that we spread it over 12 months. And some of that hit this year. So what you had was in the first quarter of 2001 this $8.5 million order. What you had in the first quarter of 2002 was no opening order and about $1.5 million left over from the stock

expense which is now finished. So this one thing accounts for about half the swing and it is fully behind us now.

OK. Sales. We had a drop both in engine management and in temp control. The one in temp control was more significant. First just to get engine management out of the way. We were slightly behind through March but we are seeing a very strong April between our regular business being good, and if you recall we had two new accounts, discount order parts on ignition and Napa second line wire. The opening orders for those new accounts are being shipped in April. So between all that, by the end of April we'll be in good shape on engine management. Just to remind you we'll be closing the purchase of the fuel injection facility in South Carolina, which we bought from Johnson Controls, but will close in mid-May, which makes us basic in a key product group, it gives us lower cost, and gives us a bit of business we didn't have before. So that's engine management.

Temps. We were behind and three basic elements in that. First, the O'Reilly again, that's about $8.5 million. Second, we did lose some business in Auto Zone, some of it. In a few of their distribution centers they opted to switch to a bunch of smaller vendors who offered far lower prices and they are going to try to essentially create their own line. As a full service supplier we chose not to compete on price. You will recall that O'Reilly tried the same thing two years ago and it did not work well for them at all. They came back and we'll see what happens with Auto Zone. But that accounts for a lot of the dorp in the first quarter. And finally a few of our traditional accounts had pre-season orders below the prior year. That was mostly as they continue to work off inventory from the previous three cool summers.

However, the good news is that we do track the sales and inventory of our top accounts in this line and what we've seen is that they are all ahead of the prior year in their sales. Not necessarily in their purchases from us but in their sales out the door and that should flow to us soon. And second, you are all aware of the big spike in hot weather last week. That gave us a nice extra boost in sales early in the year that we normally don't get. So we think four seasons will be fine for the balance of the year.

OK, that's the sales. Gross margin, as we noted in the release we're up about 1.3 points, that's excluding the change in the accounting, accounting the old way. Two reasons for that. Where the price increases which are kicking in during the first quarter and the increases in production. In our last conference call we estimated about a 1.5 to two point improvement for 2002 for the full year and we are very comfortable with that estimate.

Finally on cash flow we continue to work on it. Our total debt at the end of March was $43 million less than the prior year. That's a very healthy number for us, were please with that. The biggest factor in that was inventory, which was $34 million below the prior year. So we're still working in cash flow and we continue to see improvement.

So that's the highlights. The second quarter so far as I say looks quite promising. We have the new business in engine management, we've got some hot weather for four seasons, the margins continue to improve and the cash flow is good, and so despite the loss of the first we are optimistic for the year. And that's our story. With that we open to questions. Thank you.

We'll go to Derek Winger with Jeffries.

Yes good morning. Three questions if I can. What was depreciation and amortization for the quarter if you could break those two components out, and what do you expect them to be for the year? Secondly, capital expenditure for the quarter and you had alluded to $14 million as to plans for the full year, I just wanted you to comment on that again. Thirdly, can you quantify the pickup in orders and how would it look on a let's say a four-month basis. The sales versus plan.

We just lost our speaking side we'll get those reconnected in a second and get back to your questions.

I'm sorry we had such a hard question they cut us off. On the depreciation amortization for the first quarter the number was $3.9 million, again on the understanding the goodwill is no longer amortized. It's a reduction from the prior year's first three months. For capital expenditures were $2.3 million for the quarter and we continue to watch cash flow prudently and our previous guidance of $14-$15 million, we're holding that number and our goals is to beat it. Your last question I believe was related to sales orders and what we have disclosed was that we are going to have an uptick in volume as we start to shift this volume but we don't issue numbers on a monthly basis.

I guess in your estimate would this pickup offset the weakness we see so far or we'll still running slightly below plan.

I'll say that it'll offset engine management but we'll still be behind at the end of April in temp. The big issue in temp is always how hot it gets and we really had no summer at all last year. So we're not up against tremendously strong months. But we'll have to wait and see.

Do you have any ideas about the aging of the American fleet on America's roads?

Yes there's a lot of data on that. The key is not the total age of the cars but the universe of cars over five years of age because that's really our market. So that universe is growing. I don't have the numbers in front of me but that universe is growing.

Thank you very much.

We'll go to Walter Shenker with Titan.

It's just a technical question and I think I know the answer, when you take a goodwill charge like that, that does not affect the EVA analysis you do for bonus compensation?

No, we exclude that.

OK, so whatever you would have had to earn in EVA you still have to earn.

Yes, exactly.

OK, and again, since it's been a while, roughly what level of earnings, again this is not a forecast, would you have to achieve to get positive EVA? Hello?

I'm sorry we've lost the speaker again. OK, will you ask your question again?

The question was, and again, in no way meaning for you to make a forecast because you are not, what kind of earnings do you have to achieve in order to get positive EVA? Asking for a ballpark figure, not looking for a tight number?

We lost them again.

Again, not meaning a forecast, what level of income do you have to achieve to get a positive EVA and EVA bonuses?

Positive EVA and EVA bonuses are two different things, because EVA bonuses is based on improvement, year-over- year, so all you have to do, I don't have the numbers in front of me, you have to do better than the prior year. You can still have a minus EVA and still have improvement. EVA is based on improvement not on absolute numbers.

OK, so if you sink low enough, any recovery starts to generate bonuses.

That's one way to look at it.

I guess it's factually accurate.

Walter let me add on that. There is also banking system we have where the payout is limited to a certain percent of the bonuses so that tends to smooth out a down year and up years.

OK. Receivables are roughly where they were a year about on March 31, a couple of million dollars, despite the lower sales numbers. Are you running some sort of dating or is that bringing in new accounts, or ... ?

March 2001 will be the last time we address this. Accounts receivable securitization program we had we eliminated with the new facility we put in place at the end of April 01 so you'd have to add $25 million back to the prior year's accounts receivable.

I apologize. I guess I should remember that.

That's the last time you'll have to remember that, Walter. From now on it'll be apples to apples.

When you were discussing Auto Zone you were indicating it was not a junior person such as Visteon who took the business but it was smaller people

That's correct

Given the important of rebuilt cores in compressors and the breadth of the line, they can get a full line of product from smaller local people, they are not taking any of your product at those stores?

Basically what Auto Zone has, is they have eight distribution centers. The prior year they were mixing products at eight of those distribution centers and we actually did lose some volume to Visteon in those distribution centers. What they've done this year was give us five of them but 100% of the five of them, and taking these three others and trying to put together this mish-mosh of smaller vendors. And I'm almost sure that none of them are Visteons.

So they are not cherry picking across the board some of your line?

We think its not going to work. I thought I would just say a word on that. We feel we are far and away the best suppliers in the temp business. We have the most capacity with the coverage, the sales support, the training, and the quality and all these things, and the fact we put everything together in one catalog, one numbering system, and so on. That's what the vast majority of our customers want. They don't have the wherewithal or the desire to put together all this at lower prices. As you recall that O'Reilly tried that two years ago, they came back. Auto Zone is trying it. We chose obviously if we come down in price we could have kept it. We chose not to do that. We think our strategy is correct and we think our strategy is correct for the vast majority of accounts out there. We'll probably lose a little bit, but we never expect to have 100% of the market. That's what's going on at Auto Zone. Does that answer your question Walter?

Yes it does. Not that my opinion means anything but I salute you for doing this because if you can't get reasonable pricing you cant get reasonable returns and holding the price line has got to be the right idea if you have the market position you do.

We agree Walter thank you.

We'll see how it turns out. It's easy as you know for us to have opinions but were not running the business. You made reference to the hot weather in the northeast and that already had some positive impact on your business. You say that because you saw some sell-though in your accounts or because people called you up?

What you saw was a huge increase in emergency orders. Basic inventory. All of a sudden the phones didn't stop ringing. We have a good customer here in Queens. He called me last week yelling and screaming that I was late in our shipment, he was getting orders out the door, he didn't have product, so on and so on. He was yelling "where's my order, where's my order?" And I said, you know what, I haven't had a call like that for three years. I was very happy.

We'll go to David Zeno with Gabelli.

Good morning guys. Again I know your not getting into guidance in any way, shape or form, but give us the best case, looking back to 99 and 2000, or at least 99, the first three quarters, how good can you get the business back to? The temperature control business I guess it hasn't changed much given the volatility. Give us the good news, the bull case, what do you think you can return this business to in light of what's happened the last couple of quarters?

We cant and shouldn't give that kind of guidance, but look at the hot weather. The last hot summer was 1998. It was the hottest summer in history, it was tremendously hot, followed by three of the coolest summers in history. I think those numbers are out there. We show them. You can make your own estimates of that. I can't predict a hot summer and we hope the law of averages will say we hope there can't be a fourth very cool summer. I think that would give you a range of what four seasons can be. Just by looking at those extremes. I think you've seen the extremes, extreme high and extreme low.

Do you think it could be higher the next time around given the steps you've taken with returns, the prices increases ...

Again not to put numbers, again, but our returns are lower, we are in much better control than they were, and we continue to work on margin improvement. But that 98 year if I recall had two weeks in a row in Texas that was over 100, people were dying in the streets. We don't want to see that. So the sales were just enormous that year. That should give you a range of what four seasons could be, and again its so depends on the heat.

A technical question. What was the weighted average price increase in the quarter?

I don't know if we have it by the quarter. We're estimating three for the year and it wasn't all in the first quarter because some of them came in February, March, something like that. I don't have a weighted number for the quarter. So the price increases we anticipated are still there.

Thanks you very much

We have Tom Spiro from Spiro Capital.

Good morning. I just wondered if you could comment on any increases in any of the costs that you face. I was thinking of steel and insurance, S2, or perhaps there is something else out there you'd like to comment on.

I'll talk about everything but the insurance. I'll let Jim do the insurance. No we're not looking at any increases at all in purchase products, either raw material like steel. Of course we haven't had increases from the tariff, but were not big users of steel. No frankly we anticipate a very slight, but a slight, decline, I'll let Jim talk about insurance.

Within the insurance market, the markets have hardened and increases across the board have been going up anywhere from 20 to 50%. Not all of our policies mature on the same month in the year. We are seeing increases and overall it's going to have an immaterial impact on the total results of the company.

A follow up with Derek Winger with Jeffries.

Yes am I to assume that the revolver is about $130 drawn and what does that look like at this point?

Yes that's very accurate. Good for you. We're in that range and in the second quarter with our peak demands, the seasonal nature we increase for that throughout the year and we should be below all levels for the prior year as the benefits from our inventory reduction program are felt. We have stated earlier that our debt levels are down $43 million against the year, against the prior year.

Great. Thank you very much.

OK Mr. Burke no further questions for you.

OK I want to thank everybody for joining the conference call. Bye.