Standard Motor Products Inc (SMP) 2002 Q4 法說會逐字稿

Good day. You are in listen-only mode. I would like to turn the program over to your host, Mr. Jim Burke.

Okay thank you. Good morning and welcome to Standard Motor Products fourth 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 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 the expectations reflected in forward-looking statements are reasonable, they are based upon information currently available to us and certain assumptions made by us and we cannot assure to you they will prove correct. You should 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.

At this point, I would like to walk the group through financial results for 2002. Looking at net sales for the recent quarter, sales have increased $11.4m or approximately 12%. On a full year basis, net sales increased $6.8m, slightly favorable. On a segment basis, Engine Management net sales were $303m, up $17.5m or 6%. The benefit of added volume was from Discount Auto, which was acquired by Advance Auto Parts and additional wire business from two major accounts. Our Temp Control business had net sales of roughly $257m, down 14.5m or 5%. This was related to the impact of lost AutoZone business in early 2002, which we discussed previously.

Also, the O'Riley(ph) pipeline order of approximately $8m in 2001, that would not be repeated. Offsetting these two events were favorable volume in the Temp Control product line from our traditional W-Ds. Looking at gross margins, early in 2002, we forecasted margins would improve approximately 1.5 points to 2 point says. We finished the year up almost 3 points. As production levels were in line with sales, and continued cost reductions. By segment, engine management was 30.4% up 4 points. This show how sensitive margins are to increased volumes and this is a high margin business.

Temp Control was 21.7%, up 3.7 points. However, offsetting these two results was our poor performance in Europe, which we will discuss later. On a consolidated basis, gross margins were 26.3% overall, up 2.8 points. Benefiting gross margins was the reduction in our customer warrantee returns in both Engine Management and Temp Control of approximately 1% savings.

Looking at our operating income at $25m, this included a one-time charge for Goodwill and also facility closure costs, excluding these one-time items, operating income would have been approximately $30m. Dropping down to interest expense, $3.2m was the reduction in interest expense, due to the favorable cash flow and $29m reduction in debt, followed by $22m reduction in debt from the prior year.

Addressing income taxes. The 2002 effective tax rate was skewed due to the $3.3m goodwill impairment and Europe losses without any tax benefit. However, on the tax losses for the European losses, these will be carried forward. On the change in accounting principal, in the first quarter we reported a cumulative effect change net of taxes of $16m, approximately half of this charge was for Europe, which included a 25% tax benefit.

At year-end it was discovered since the European acquisition was a stock deal as opposed to an asset deal, the goodwill charge was not eligible for tax deduction, hence we had to reverse the $2.4m benefit recorded and note that this was a non-cash charge.

In addition, due to disappointing results from European operations in 2002, we had to record an additional $3.3m goodwill impairment, again, a non-cash charge in fourth quarter of 2002. The required accounting treatment was to classify this charge as part of operations as compared to the initial accounting change below continuing operations.

Looking now at Europe. In summary, Standard Motor Products entered Europe in 1996. The results from '96, through 2000, were basically break-even. In 2001, we incurred pre-tax loss of approximately $2.8m, primarily from a shift in traditional business to lower margin co-manufacturer business.

Also sales decreased from $40m to $33m in that period. Looking into 2002, we incurred a loss of $8m, which excludes the $3m charge in the fourth quarter. This loss was the result of lower sales base and reduced margins as the mix shifted away from traditional high-margin business to co-manufactured business.

Also, one-time items from the integration costs from recent small acquisitions. The key looking forward is we have installed a new management team, developed an action plan to outsource manufactured product to Asia for older traditional ignition lines and plans to merge additional facilities, reducing expenses and overhead. The 2002 loss is expected to be reduced in 2003.

However, the full impact will not be felt until 2004 from the planned savings. Looking at the combined tax rate, while Europe's 2002 results skewed our effective tax rate, we are estimating a more normalized tax rate in 2003 of approximately 33% to 35%.

Now, shifting to the cash flow statement, I would like to point out D&A or depreciation and amortization was $16.1m year-to-date, cash flow from operations was $61.6m, capital expenditures $7.6m. For free cash flow it was $54m. We also had during the year, acquisitions of $19.5m, finishing up with debt reduction of $29m. To recap the results, net sales were up 12% in the most recent quarter, gross margins improved almost 3 points, any expense was reduced $3m, operating income excluding goodwill and facility closure costs was approximately $30m. And looking forward normalized effective tax rate would be in the range of 33% to 35%. Our free cash flow generator was $54m.

We were able to pay down our debt of $29m. With that, I would like to turn over to Larry to highlight the most recent quarter and year to date results.

Okay. Good morning. Let me start by saying overall, we are very pleased with how we did in 2002. Again, our U.S.A. divisions did terrifically well. As Jim said, we reduced debt by $29m last year, coming to $22m the year before that.

This is over $50m in two years. And we are pleased with that and we are pleased that the improvement in gross margin of almost 3 points again reinforcing what we said especially in our Engine Management Division how margins are sensitive to increased productions so as we increase production back to normal levels our gross margin went up substantially.

As for Europe I want you to know that I am personally disappointed and we have already taken strong steps to do much better this year. We have a new strong team in place we have aggressive cost reduction plans in place and I am confident we spend a fair amount of time on this, that 2003 will show us substantial improvement over 2002 with future improvements in 2004.

Okay that’s last year. Okay. That is last year. 2003 is off to a good start. It is only two months, but off to a good start. Engine Management sales are holding up nicely. I think the cold weather in much of the country has helped. The pre-season orders is anything you get in four seasons is pre-season orders.

Pre-season orders are coming in quite a bit higher than last year and what we saw last year was customers on the whole reducing their inventories. So, that is helping us in the first part of this year so the pre-season orders are coming in better. Europe is also ahead of its sales budget. This is based on two months, but two months so far is pretty good.

Finally, let me update you on the acquisition. As we said last time the bank money is in place. We are working our way through the regulatory process and we have begun contacting customers and have been doing a lot of that personally, both ours and Dana's. The initial response has been quite favorable. We still expect to close sometime during the second quarter of this year. Okay. That's a summary of where we are and what we see in the immediate future. So, we are open for questions.

If you would like to ask a question at this time, press * 1 on your touchtone telephone. To withdraw yourself, press pound. Once again to ask a question press * 1 now. And we will take our first question from David Siino, Cabelli and Company.

Jim, do you have segment profit numbers?

Segment profit, what, operating profit?

Yeah, you said Europe $8m loss overhead. What was Engine Management and Temp?

Okay. Engine Management $41.8m, Temp $10.1m.

Okay. The balance I guess overhead?

Yes, for the other corporate expenses.

Okay. And the accruals were down in the year-over-year, implying that the steps you took beginning in 2000 are taking shape and that should be less of a problem going forward?

Accruals on what, David?

On balance sheet for returns?

Yes, very favorable results from returns, both in Engine Management and Temp Control, which continues what would be at least a three-year trend.

Okay. And what are you looking at in terms of pricing for 2003?

The Temp Control, we had seen pretty decent price increases. They have already taken effect, so, they should be fine for the year. Engine Management, we have not moved this year, to date.

Okay. And I guess, Larry, two conceptual questions then I will let someone else get on. Pay on Scan, if you can comment where the industry is on that and what customers are telling you outside of the AutoZone?

It is a highly controversial subject, as you can imagine. We are -- when I talk to customers about the deal, we spend half our time talking about Pay on Scan. It is a hot button. I am not aware of major manufacturers going along with it at this time. What was the other one?

Europe, you haven't made money there and you are not going to this year. Why do you want to be there?

Uh, well, all I will say is we are looking hard at it. I believe we will do much better this year, I am fully confident about that. You are right. It is a difficult situation, difficult market. We will be looking at all possible alternatives.

Thank you.

Our next question comes from Derrick Winger of Jeffrey’s Inc.--

I just want to verify for the fourth quarter the D&A was $4.39m and capital expenditure was $1.79m if I have done my math correctly. And with the guidance for that in ’03 both capital expenditure and D&A?

Okay, Derrick I don’t have the year to date number and I’m sure your math is going to be correct form our third quarter Q, and I don’t have the fourth quarter’s with me and capital expenditures for going forward I would say again everything is excluding the acquisition obviously we have a very favorable year at 7.6 I’d say it was slightly above that, not significant, there’s nothing significant in the [inaudible] that can increase that.

Less than 9-10?

Well we’ve gotten very significant in that area there are less then 10.

Okay, lastly the $54m of free cash flow you generated, I missed that. Debt repaid was $29m, what was the balance?

Acquisitions during the year were $19.5m.

Right and the balance was cash or dividends.

All other items. We will our cash flow statement will go out after, and yes we had dividends in there.

Right okay. Thank you.

If you would like to ask a question, press * 1 on your touchtone telephone. We will take the next question from Greg Faje of Morgan Stanley. Go ahead.

Good morning, everyone, in terms of Europe, are your guys outsourcing manufacture in there, do you anticipate additional charges going forward? '03?

Yes, we will incur certain costs in 2003. I don't have the total quantified yet, but in the magnitude of let's say less than $3m.

In terms of cash cost or all lines?

As far as cash cost, probably less than $2m.

Then, in terms of sequential inventory increase in the fourth, is that related to the pick-up in Temp Control pre-season orders?

No, it was mostly in Engine Management as we were building for Advanced, a retail customer. Putting a large order to be delivered early this year. So, we had to get the inventory last year and that was roughly $3m to $3.5m increase. It was a big order. That order has now been shipped so our inventory is back down. That accounted for most of the increase in the fourth quarter.

For the Discount business that you guys have?

It was for both, Discount and for pipeline of various new items they put in. It was a bunch of stuff.

Okay.

One note on the balance sheet that reflects about $2.5m of inventory reduction, but $5.5m from acquisition. So on inventory reduction basis, there was a reduction.

If you would like to ask a question, press * 1. Next question from David Siino of Cabelly.

Larry, any progress on winning back any of the Temp business at AutoZone and any blocks of new business we could see this year?

No, we are in negotiations with AutoZone now. It is a difficult account. Nothing -- we picked up a few WD’s, but I would say nothing substantial to talk about. So, again, business is pretty good even on our current basis.

Okay. Thank you.

Please press * 1 if you have a question. There are no more questions. Back over to you.

With that, I would like to thank everyone for joining in the conference call. Thank you very much.

This concludes our conference call for today. You may now disconnect your lines. Thank you for participating.

The call terminated at 1121.