Standard Motor Products Inc (SMP) 2002 Q3 法說會逐字稿

Good day. At this time I will turn the call over to the moderator, Mr. Jim Burke. Go ahead please.

Thank you. Good morning and welcome to Standard Motor Products third quarter 2002 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. While 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 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 Securities and Exchange Commission. Now Larry will discuss the highlights from the recent quarter and then we will open the conference call to questions.

Good morning everybody. First I would like to review the quarterly operation results, which were excellent. A quick summary, I am sure you have all seen the numbers, but a quick summary, sales were up nicely, overall plus 16.5% and when we break it down by line, Temperature Control was up over 21% for the quarter. It was the first warm summer in four years and we saw the result. Engine management was also up nicely, about 12%, with our average customer showing some steady growth and as a result of some new accounts. Our gross margin showed improvement, they were up 1.5 points for the quarter and up nearly 2 points year-to-date, as we promised would happen as we returned to more normal production levels. And our inventory reduction and cash flow results were quite positive. Well those are the headlines, a few details.

Temperature Control. In sales, if you recall, we got off to a very slow start. We had lost a hunk of AutoZone's business, roughly a third of it and we were showing a negative difference in sales because of the prior year's opening order pipeline to [O'Riley]. Those two things put us deep in the hole in the first quarter, but we have been slowly and steadily catching up and again the third quarter was excellent. More importantly, we see these positive trends continuing, for our top five accounts, we monthly, every month, look at their sales at the door and their inventory levels. What we see through September is that, for all five of them, their unit sales were up, and for four out of five of them, their inventories were down, and this bodes well as we head into 2003. This we consider very positive results. That's Temperature Control. Now staying on Temperature Control, we continue to make progress on warranty returns. If you recall, in 1999, that was a big number, we have been making steady progress since that time as we have done a much better job of controlling them. We had new, tighter policies in place, we had better installer training, it's come down every single year since then and 2002 is showing a nice improvement over 2001. Okay, that's the temp story. We can come back and answer more questions if you like.

In Engine Management ther' a few things worth mentioning. We told you earlier we had two new accounts this year. We changed over Discount Auto Parts, once they were acquired by [Advance], and we were successful in getting the second wire line in at NAPA, both of these are doing nicely and are achieving our original estimates.

Our recent acquisition, which I think we told you about last quarter, we acquired a Fuel Injection Manufacturing facility in Greenville, South Carolina. This is also achieving and actually surpassing a little bit, our initial expectations. This is a product line with good growth potential, and we have an excellent plant to work with.

Our gross margins, as we said, we are very pleased with the improvement as we are up almost 2 points year-to-date. Engine Management is now up to a healthy 30%, that's a good number.

Temp is improving, but it still has room to grow to get up to where the Engine Management number is. We have plans to move in that direction in 2003. We are consolidating a few operations. We will be manufacturing certain products that formerly we purchased, which have nice cost savings involved with them, and we are looking to reduce certain component costs by outsourcing a few of these components to the Far East. Again, our goal is to move this number closer to the Engine Management number, and we are working in that direction.

In terms of inventory, since January 2001, about 21 months ago, we have reduced our inventory by over $70mln, roughly a third, with no great degradation at all in shipping. We consider that a fine operational accomplishment, and what that has led to is continuing debt reduction, year-over-year, September-over-September. Our total debt is down $35mln from $243mln to $208mln, and that's reflected in lower interest. Our interest for nine months is down $3mln from $13.9mln to $10.9mln. So, from an operational point of view, and we will go back and answer questions as you wish, basically all good news, and we are very pleased with the results.

Okay, let's talk a little about asbestos. But before going into detail, I would like to put it in perspective. As at this time, our total backlog is about 600 cases, and the incoming new ones at the rate of 40 to 50 a month, or 500 to 600 a year. Now, compare that to other companies that you read about or follow who have backlogs of 10,000 cases, 100,000 cases, 300,000 cases. We are a small fraction of that, so let's keep that in perspective as we discuss this.

Alright, here's the background and the history. This comes from the [Ice Break] business which we acquired from Parker Hannifin in 1986 and we sold in March of 1998, nearly five years ago. Where asbestos came in was that a certain number of pads, disc pads and brake shoes have asbestos lining, not all of them, but some of them. For the most part, we did not manufacture these, we bought them, we purchased the asbestos from other vendors, and what we did is essentially is attach them to a shoe or a pad and sell it. And that's where the asbestos got into the deal.

Now, as far as our purchase agreement, we agreed to assume liability claims filed after September 2001 or roughly a year ago. And once we got roughly a year of history under our belt, we thought it would be prudent to quantify the potential future costs for the benefit of our lenders, for our stockholders and for ourselves. So an actuarial firm, one of the leaders in the field, was engaged to do an estimate for us and this firm forecast potential claims of liability on a year-by-year basis going out nearly 50 years into the future. And here's what they found. The estimated that our annual payout repeat next year at $1.7mln and then begin to fall off each year until it was under $1mln by the year 2015 and then go down from there. Over 50 years, when you add up each of their individual estimates, it came to a gross non-discounted total of $27mln. That's over the 50-year period and we, as a result, are taking a third quarter charge of $22.6mln pre-tax to create that reserve.

Okay that's the background. Let's talk about our [current experience]. As I said we are very, very small compared to the others. Our backlog is about 600 cases, incoming cases of 40 or 50 a month or 500 to 600 a year. A typical case [I would deduce] has 100 to 150 defendants, the vast majority are non-automotive, they are construction workers, shipyard workers, etc. Again, the vast majority have no physical symptoms and, as a result, many have settled for zero and the rest have settled for small dollars. In addition, keep in mind that [Ice] was always a small player in the brake business, which as you recall is why we got out of it, and the brand has been eliminated for almost five years now. So, we conclude from all this and from the actuarial study that what we have is a small, easily-manageable situation which we believe will peak next year at less than $2mln, and then diminish in the years ahead. And that's the asbestos story and again we will be happy to answer your questions.

So to summarize, we had an excellent third quarter from an operational point of view. Our core businesses, our on-going businesses, are doing very, very well. We now taking a one-time charge for asbestos, which on an annual is a small and manageable number. Okay, that's the summary of the third quarter. We are now happy to take all your questions. Thank you.

At this time, if you would like to ask a question, please press the '1' on your touchtone phone. You may withdraw your question at any time by pressing the # key. Once again if you would like to ask a question, please press the '1' on your touchtone phone. To withdraw your question, please press the # key. We will take our first question from the line of Walter Schanker, from Titan Capital Management, go ahead please.

Hi guys. I have a question. The fact that operator when we logged in said that it was going to be delayed because we were adding more people to the call. Are there actually more people on this call, or is just the five or six of us who are usually on the call?

Until the listing afterwards Walter, we don't know yet.

Okay I thought it was funny we were late because we were adding more people. Three different unrelated questions, all of which should go fairly quickly. The first of which, could you just address what is happening relative to adding or losing customers? And then the second one is about asbestos, and one is an overview question?

Well each year we add and lose. It tends to balance. Last year we lost a hunk of AutoZone and we gained [Napa] and some [Advance]. At this point in time, we are looking to gain some business and there is a chance that we will lose some business. Again, nothing dramatic and I think they will balance, but nothing to announce at this point, but there is always some, you know gain some, lose some all the time.

And as best as you can determine, AutoZone in a warm summer did okay, away from you? The service level on the business you lost from AutoZone in a warm summer, their service level as best you can determine I realize you weren't servicing them, were things okay ...?

Well I'm dealing with rumors, we kept hearing rumors that they weren't service well. But we didn't, it's third-party talking and I can't put too much verasity in it. We'll see, we're talking to them about possibly getting back. I don't know until we have spoken to them.

Okay, second question on asbestos, when you get a claim from a ship worker or some other unrelated area, why would you settle that? I realize you want to get rid of them, but it would seem to me once you create the precedent and I am not a lawyer, once you start creating precedents of people who clearly have no nexus to you guys directly ... Yeah, there are hundreds of thousands of people out there who their class action lawyers are shuffling around from defendant to defendant. Why wouldn't one just try and settle with anybody who has something relating to some direct nexus to you guys?

Walter, those are typically settled for zero.

Okay. So when you pay somebody, there at least is a faint chance that they had some relationship tied to your business?

And that would be somewhat sick. So, yeah, a goodly number are settled for zero.

Okay, third question, which is my usual question. We had a pretty good summer, from a temperature standpoint. The ignition business continues, Engine Management business continues, to do well and is a very nice 'my turn' duopoly. What does it take to have Standard Motor Products, my usual quarterly question, generate an adequate return on capital?

Right, last time you had a better way of sayingit. You remember what you said last time?

Yes.

The teenage ... You wanted a teenage return on investment?

Yes.

We are working in that direction, Walter, and I am not free to divulge some of the things we are doing, but we are working in that direction, and it's certainly our goal.

And it's a goal which you would hope to achieve within the next couple of years?

Yes.

Okay, I'll see you guys in a couple of weeks.

I'll see you out there, Walter. Thank you very much.

Once again, if you would like to ask a question please press the '1' on your touchtone phone. We will take our next question from the site of Chris Cooke with [...]. Go ahead, please.

Hi guys. What was the depreciation, amortization in the quarter, and CAPEX in the quarter? Or what do you think CAPEX will be for the year?

Okay, well I have the nine-month numbers. The D&A for the nine months was $11.7mln, and CAPEX for the nine months was $5.8mln. We continue to hold the line pretty tightly on CAPEX, so we will be well under. We are in the neighborhood heading towards $8mln or $9mln for CAPEX.

And then your initiatives for raising margins next year. Is that going to take a lot of capital?

There will be one for that. I mentioned we are going to making product importees that we have formerly purchased, but yes that will require some capital effort, but nothing dramatic.

They'll be within our range of capital spending for the last couple of years. It's just going to be an allocation of funds.

Okay and then what are your guys' expectations for SG&A in the fourth quarter?

Well, it's not our policy to put out estimates or forecasts out there, just for yourself and for the group, just realize that the seasonal nature of our business, so sales in Temperature Control will always be down as we are in the first quarter. So, you have to be careful if look at it as SG&A as a percentage sales.

Right, but should the SG&A line remain steady over ? Should the SG&A line remain steady quarter-over-quarter? There are quite a few variable costs in there. Are there not?

Well there's distribution that's in there. Again in our SG&A were are inclusive of sales marketing, distribution and G&A. So, there is some variable sales and marketing and distribution costs.

Okay.

But it's a smaller portion of the overall variable [...].

Got you, okay thanks.

We will take our next question from the site of Tom Spiro with Spiro Capital. Go ahead please.

Tom Spiro, Spiro Capital, good morning.

Hi Tom.

Hi Tom.

Anything on the cost side of the equation we should be thinking about, whether it's insurance or raw materials, labor?

Well on the insurance, I think we have been seeing that impact for part of the year this year and you know the market has hardened across the entire insurance industry, so I think for whatever a half a year, we have seen the impact of that. But overall, insurance is not a significant cost within our total cost structure.

Material cost, we keep looking for improvements and we did improve it somewhat this year and our guys have that permanent goal of knocking down one or two points off material costs and they have done the last several years, we keep trying, we keep working in that direction. And labor, no big deal, we have a few unit contracts which are minimal and are salaried, non-union wage increases roughly in line with inflation.

Thanks very much and good luck.

Thank you Tom.

Once again if you would like to ask a question please press the '1' on your touchtone phone. We will take our next question from the site of Peter Zaglio with Gabelli. Go ahead please.

Good morning gentlemen. I am filling in, we've got the AAA league today. Quick question, marketable securities, I haven't seen those in a long, long time. Can I infer from that, that that's money you are not going to need near-term?

That's a good question, and I haven't spoken to you in a long time. That relates back to, oh it's about six or seven years ago when we had monies in Puerto Rico, related to a tollgate tax issue, we invested them down there for I think it was a seven-year period and they are going to mature now. And the purpose of that was to reduce tollgate taxes, so next year in I think it's May and July, those will mature and we will be able to repatriate those funds. They move from long-term other assets to current, that's all.

Got you, so I can't infer from that that the balance sheet has improved enough that you don't need a certain amount of cash anymore?

Well we'll have that cash next year, which will be good.

No, no I understand. Net pricing on both sides? Temperature Control and Engine Management?

Are you asking for 2002 or 2003?

Let's do both.

Probably the same answer. I think [...] but I think this year our rated average was in the 2% to 3% range and we haven't finished our budgeting yet for next year, but early indications are we will be looking at the same 2% to 3% overall for next year as well.

That's both lines Larry?

That's the weighted of the two lines yes and then each line is sub-divided in different markets and different [...] and so on but I think if you put the whole thing together, it'll be 2% to 3% and not much difference line for line, brand to brand, etc.

Okay, good, thank you very much.

It appears we have no further questions. At this time I will turn the meeting over to the moderator, Mr. Jim Burke.

Okay I want to thank everyone for joining the conference call this morning. Thank you. Goodbye.

Goodbye, thank you.

This concludes today's conference, you may disconnect at any time and thank you for participating.