Standard Motor Products Inc (SMP) 2003 Q1 法說會逐字稿

Good day. I would like to turn it over to your host Mr. Jim Burke. Go ahead please.

Okay, thank you. Good morning and welcome to Standard Motor Products First Quarter 2003 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. With that, I will run through the financial highlights and then we will open it up for Q&A.

The year started off on a high note with strong sales, good gross margins, and $2.2m improvement in operating income. Looking at the business by segment to net sales, engine management net sales improvement was $10.8m, up 15.9%. Temp, however, was down $3.6m. This shortfall was related to the decision by AutoZone to move the balance of their Temp volume to other suppliers. Our other segment Europe, was up $2.4m and on a consolidated basis we are up $9.4m or 7.4%. Reviewing gross margins, engine management was at 29.2% for the quarter, temp 17.6%, and Europe 18.6%. On a consolidated blended rate, we were at 25.4%. Our plan, recall, is to the double engine management segment which has the 29% plus gross margins. SG&A expenses were up slightly with volume and were at 23.7% of net sales versus 24.6% in the first quarter of 2002.

Operating income from continuing operations these are actual numbers, Engine Management was $9.7m, up $2.5m, Temp reflected a loss of $2.2m in the quarter, which is basically flat with last year on reduced sales. Europe was a loss of $500,000. On a consolidated basis actual operating income was $2.3m, up $2.2m on strong engine management sales and improved margins. Again, we plan to nearly double the engine management business with the Dana acquisition. Other income expense was $300,000 expense and reflects an unfavorable swing in the quarter from the prior year of $900,000. This variance consists primarily of foreign currency exchange and the losses within joint ventures. Interest expense decreased $400,000 as we reduced debt approximately $12m as compared to the first quarter of 2002.

Summarizing the P&L, diluted earnings per share from continuing operations improved from a loss of 16 cents to a loss of 5 cents in the quarter. Some numbers from the cash flow statement usually requested; the D&A, depreciation and amortization was $4m for the quarter same as last year; and capital expenditures were $1.7m versus $2.5m for the prior year. In summary, we had a very successful quarter and per the release we plan to close the Dana acquisition in the second quarter of 2003.

At this point we will open it up for Q&A.

At this time, if you would like to register your side for a question please press the "star" then the "1" on your touchtone phone; to withdraw at anytime press the "pound" key. Once again if you would like to register yourself for a question, please press the "star" then the "1" on your touchtone phone. We will first go to the [site] of David SiinoDavid Siino from Gabelli & Co., Inc.

Hi, good morning.

Good morning David.

The loss in Europe, is that more or less than you expect this to be?

That's basically in line and what we had said at the year-end conference call was that we are taking steps and we feel very positive with the steps and the actions that have been taken so far this year.

So it's basically $2m loss for the year can we annualized the 500K?

Well David, we don’t put out a forecast on that but we are looking for year-over-year improvements.

Okay and the AutoZone business, the 100% of the business is what 30m annually?

Let me -- I will answer it. Good morning David.

Good morning.

Well our loss we are still not sure how much of it we will ultimately loose but we are estimating it could be as high as in the $20-25m range. As you all know they have been very, very aggressive in seeking price reductions and heavily extended terms. And after lengthy negotiations, we just thought it wasn't prudent to meet all their demands and that’s what happened. We feel confident that we have picked up some other new business and we have some fairly significant cost reductions, we have closed some facilities, we have reduced some head count, we are making some products that we used to purchase, and when you add all that up the effect of it will be, as we said in the release, the effect will be minimum.

And the $20-25m, that’s the incremental piece or that’s the total size of the AutoZone?

That’s what we think we will loose this year, we have lost a comparable amount last year. Altogether they were in the 40-50 range-- pretty substantial. So, we lost about half last year and about half this year. We will see and we will get them back, but if we felt that it was not prudent to meet their demands.

And the accrual -- lower accrual for customer returns that reflects the lower sales level at Temp, is that the rate we'll look at it?

That’s the lowest sales level on Temp and again we accrue it. So, the returns as they come in during the year reflects current returns coming and the lower volume.

Okay and last question, can you just give us an update on the status of the financing for the Dana deal [that the equity offering]--, where are you in that process?

Okay, at this point now we have our bank financing in line. Again we had just recently in February, renewed our revolver for a new five year revolver with an $80m traunch. The other step that took place during this period of time, we cleared HSR approval and during the second quarter now we will be preparing to launch a follow-on offering to raise equity.

Okay thank you.

You are welcome.

Our next question comes from the site of Greg Faje from Morgan Stanley.

Good morning.

Good morning.

Can you talk about what sort of drove the year over year increase in engine management, was it weather related or were there other factors that sort of drove that increase?

We are frankly pleasantly surprised, I can't point to a single thing. Our engine management is not a weather-related business. So, it's nothing to do with the weather. We look at our top accounts and astonishingly, they are all up. And I have been seeing that for a number of years and I can only hypothesize, so if you will accept my hypotheses, we -- I would imagine two things; one as we have said the demographics are in our favor. The 5-10 year old car group, which is the heart of our market, is growing and in the prior years it had been shrinking. And, I think, the perhaps the biggest factor is that over the last 5-10 years, there has been enormous amount of consolidation, as distributors have closed their doors or sold out or whatever they did. And vast amounts of inventory have had to be absorbed, with the result that, I think, our sales to distributors was almost every year less than the -- well you are seeing ultimately going on the car as the amount of inventory out there was shrinking. I believe that has pretty much come to a close. So, I don’t have any hard facts for either of these two things but that’s my estimate and we are very pleasantly surprised and hopefully we will continue.

So you feel a lot of that was – well, at least some of it was attributable to the fact that they were just rebuilding off low inventory stocks?

Yes, that right. So, here a distributor bought out [this other guy], alright, so now we had two inventories. We had to work them down to get back to a normal inventory and that process has been going on for years and we think that that process is coming to an end, but again that’s my hypothesis. Well I think that's what we are seeing.

Okay and then could you just sort of give an update on the status of the price increase, you guys put in place for Temp control this year, I think last quarter, you guys indicated it was about 2-3%?

Yes, I don't have that in front of me; we just reviewed it yesterday actually and we got essentially everything we said we would; it is all in place.

Okay and then one last one; on the AutoZone's business, who won the business that got away from you guys -- was it the smaller guys competing more in price or was it a larger player--

No. It was -- they gave it out to a bunch of smaller people and that remains to be seen whether that will be a good strategy on their part are not. So, they just took it and gave it to 3 or 4 smaller vendors who were willing to meet their demands. It remains to be seen whether these people will be able to meet, what they need to do the rest of the year. If you recall, the same thing happened to [O’Reilly] three years ago and they went to a couple of smaller people and of course O’Reilly couldn't live with what they had and then came back to us. One of the people that AutoZone has gone to is one of the ones that O’Reilly could not live with. So, we will see. We are assuming worst case that we don't get any of it back.

Okay. The problem with O’Reilly was that the small guys couldn’t [do] the [inaudible] [rates], correct?

Correct, that was the biggest issue is[inaudible] rates, and I think that will be the biggest issue here as well. As they go to these smaller vendor that -- if it’s a good hot summer which we all hope for, [we think we will have trouble meeting the demand].

Thank you.

Okay.

Our next question comes from the side of Derrick Winger (ph.) from Jefferies and Company.

Yes Hi, if you could give capital expenditure guidance for the year and then also I believe you said your depreciation and amortization was $4m; what was it in the fourth quarter?

In the fourth quarter of last year, I don't have it in front me, but it should have been approximately that same number.

Okay.

And you’re asking capital expenditures for the year?

Right.

Again that number would probably be in the $10m range.

Okay and when do you anticipate doing this equity offering?

In the second quarter; this quarter.

And what month are you generally planning the acquisition for?

Again, we are working on it now-- well April is out, we are looking at either the end of May or June.

But, you have to have this equity offering done first?

Yes

Okay. Thank you very much. Good quarter.

Thank you.

We'll next go to the side of Chris Cook (ph.) from Dozourf (ph.).

Yes, with respect to the Dana acquisition and the Dana business, has anything changed as far as the purchase price. I assume that they had a decent quarter as well, the product that you are buying?

Yes, we are getting results there, but what the -- the conditions are that we are acquiring is the net book value of the business. So, you know, the closing of the contingent upon the final balance sheet, the only item there may be increased receivables offset by lower inventories, but there should be no surprises on the balance sheet or the dollar value-- what we are acquiring.

Okay, I assume that the CAPEX number that you gave at $10m is that inclusive of the Dana acquisition.?

No.

Okay, so what would you expect including the Dana acquisition?

Well again I'm looking at possibly over the first 12 months of the year related to Dana that there may be $5m incremental on the high side for CAPEX, but that will be on a 12 month basis, so.

Okay. And then any big working capital needs at the Dana business that we should know about?

No, we'll be acquiring the net balance sheet with the receivables and the payables in place.

Okay and you wouldn’t expect that will be a big cash source or cash use going forward?

No again in the registration statement you’ll look, at they were incurring losses and so there will be a slight drain initially, and during the first 12-months there maybe as we address inventories, there may be a slight increase in inventories but nothing to significant magnitudes.

Right, and you are still not giving guidance to what alternate profitability you expect to get out of Dana or are you?

[Inaudible].

What we are doing is wait till we complete the-- or go on the road show, and we will be addressing those questions at that point.

Terrific, okay thanks guys.

You are welcome.

Come to our road show.

Our next question comes from the site of Tom Spiro (ph.) from Spiro Capital (ph.).

Tom Spiro of Spiro Capital, good morning.

Good morning, Tom.

I wondered how the Dana business is fairing during this period of uncertainty; are employees there are paying attention to they’re they work are they sending resumes out, what’s going on?

I don’t know what they’re all doing. From a customer point of view, they are fine. What to me is the most important thing; we have personally visited all of their top accounts and we are getting a very fine response, so we are very comfortable about holding the top line. I think that’s the most important. As for whether employees -- they also had I haven’t seen the numbers -- [-10] -- they had a pretty good first quarter, so that’s good. The employees, yes, I am sure there are some that are leaving; I wouldn’t be surprised. If I was working there I’d be out looking also. We will wait and see, actually it is-- in our minds [it’s]fairly positive; good for them and as you know we are going to be substantially reducing headcount and this just simplifies it and makes it less expensive to do it. So anybody finds job in next two months, then God bless them.

Thanks a lot.

Okay.

We will go next to the Robert J Smith from Center For Performance (ph.).

It’s Robert J Smith from Center For Performance Investment, good morning.

Good morning Bob.

Could you say something a little about SARS and the industry; might this present some kind of competitive advantage to you?

I don’t think there is any effect. We have a plant in Hong Kong and we have a plant in Tornado (ph.). So for our own employees, we’re a little concerned. I can happily say that at this point we have no illnesses in either place that to me is the most important. I would say that from a business point of view, there is-- sales or anything like that; there is zero impact and we just hope and pray that our employees are fine.

How about the competition?

Pardon me.

How about the competition?

What do you mean?

Your competitors?

You mean -- I know…

Having a plant sited in these areas or in the far east?

I don’t believe it has any great impact frankly.

Okay and can you just say something about your view of long-term as far as the electric cars and alternative fuels and how you look at that -- I mean I know that’s very long-term--?

It’s very long-term. A few years ago everyone was saying electric cars are going to takeover and as you know they pooped out, all right, the electric car is dead. People are talking about hybrids, people are talking about as an interim step and then the ultimate, the fuel cell. I honestly don’t think any of those cars will be in mass production for 10 years and since our -- we’re in the aftermarket I don’t think it will have any effect on us for 15 years. So sure it’s going to come but its way down the road and will give us plenty of time to make sure that we have the product, -- they will need our kind of products.

Okay, thanks and good luck.

Thank you Bob.

Once again if you would like to register your site for a question please press the “star” then “1” on your touch tone phone. We will next go the side of David Sena (ph.) from Gibbelo & Company (ph.).

Hey Larry; just a couple of follow-ups.

Yes.

Could you comment on sales to independent jobbers versus some of the national chains; [if one is weaker than the other--]

Yes, I would say this year, because [you may] want to look at it this point is the engine management because we are still not in the season yet in Temp, okay and so, you can't really measure time. But in engine management, I was very pleased to see that the independent sector which is not the retailers and not NAPA and not CARQUEST but the independent is doing very, very nicely. And this is where I believe those two elements that I mentioned before come into play. The five to ten year] [old age group] growing and this is the group that went through so much consolidation, and that again it just my hypothesis but the fact is that, that group is doing very nicely in the first.

Okay and in light of the discussion surrounding [UIS], potentially being acquired, can you just discuss your competitive position versus them and what that means in terms of the dynamics?

Well we complete with one piece of it, which is Wells. And Wells is I am not sure because it was a private company, but we are guessing that they are between a 100-150m in sales. I don't really know for sure. But we are guessing it is something like that. Their primary account is AutoZone. Their second account is Canadian Tire, and they are a good competitor. I won't say they are not. Will this have any effect on us? I don't believe so.

[They have] a new owner now and all I can think of is that the new owner may be very anxious to improve their short-term profits and maybe that will make them a less of tough competitor. I don't know, but we don't see them any way being stronger and a tougher competitor as a result of this.

Where are they in the market versus your product or? Do they have a premium and a second line product [inaudible]--

A bulk of their business is retail. And the bulk of their retail as well -- is AutoZone. So that product goes out at a lower price than the product that we sell to the distributors. The first [find] quality distributors. I'd say it matches a second line price, and we have a second line price which matches them, and so we are fully competitive at that level, and if you think of it that they are our five big retailers, and they have AutoZone. We have Advance, and Dana has the other three. Actually, we will have four out of five. They will have the biggest, but we will have four out five at that point.

Right. And how -- I guess last question on that, how price sensitive is the business, I mean you said the new owner might take different steps, is there any worry that might they might try and take business from your own price or that’s--?

If I was the new owner, I would be going the other way. I will be trying -- that is not a wise strategy. You never make money doing that, if you drop the price to get new business all you do is drop the price for everybody and nobody makes more money -- hopefully these people are smarter than that. I will think maybe their short-term goal would be to raise price, but I have no idea. They will do what they do. I don’t see that frankly.

Okay, thanks Larry.

Okay.

It appears we have no further questions at this time.

Okay, with that I want to thank everyone for joining our conference call. Bye.