Standard Motor Products Inc (SMP) 2003 Q2 法說會逐字稿

All sites in a listen-only mode. I'd like to turn the conference over to your moderator today, Mr. Jim Burke. Go ahead, please.

Thank you. Good morning. Welcome to Standard Motor Products 2003 second quarter 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. We'll 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. I will review the financial highlights from the recent quarter, and then Larry Sills will discuss the recent [Dana Engine management acquisition.]

Looking at net sales by segment, Engine Management second quarter sales were down for the quarter. However, first half net sales are up slightly. Temp Control's second quarter net sales are down $9.9 million, and first half net sales are down $13.4 million. Temp volume is off primarily for two factors. The previously announced lost AutoZone business and the cool wet weather conditions this spring. Looking at Europe, second quarter net sales were up approximately $2 million, and first half net sales are up approximately $3 million.

Gross margins improved nicely in the quarter and the first half. Consolidated gross margins were up 0.4 points in the second quarter and 0.6 points for the first half. Most of the improvement was in Temp Control, primarily due to closed facilities at the end of last year, head count reductions and pricing in the range of 2% to 3%. SG&A expenses were favorable against the prior year for the quarter and year-to-date, as we continue to work on cost controls. Operating profit, while down for the quarter on lower sales, we remain ahead for the year because of the improvements in gross margins and SG&A savings.

In summary, the year-to-date improvement in operating profit was reduced by an $800,000 unfavorable exchange loss, approximately $900,000 unfavorable income taxes, offset by approximately $1 million improvement in interest expense. Looking at our balance sheet, it reflects the acquired assets and liabilities of the Dana Engine Management acquisition effective June 30th, '03. The acquisition we acquired the net assets totaling $121 million. To fund the acquisition, we successfully raised equity of approximately $60 million in gross proceeds. We secured approximately $30 million in seller financing, and increased our revolver $80 million to $305 million. The net result is no short-term liquidity concerns with approximately $100 million in excess borrowing availability and no meaningful debt maturity before 2008. Finally, from a cash flow perspective, depreciation and amortization for the quarter was $4 million, $8 million year-to-date and capital expenditures for the quarter was $1.9 million and $3.6 million year-to-date. At this time I'll turn it over to Larry as we look to the future and address the Dana acquisition.

Okay. Good morning. Thus far I'm happy to report that the Dana integration process is moving quite well. On July 8th we visited their nine facilities and announced to the people that we would be closing seven of them over the next 18 months. We're starting to move now. We're starting to make our moves. Over the next 90 days we will have our first round of lay offs of salaried overhead personnel and it's going to be roughly 100 people. And we have begun shifting manufacturing volume to SMP facilities in preparation of the actual plant moves.

And these are going to occur over the next 90 days. We remain comfortable with our estimates, and it will be a maximum of 18 months to complete the integration, that the one-time costs of integration will be in the $30 million to $35 million range, and at the annual savings will be in the $55 million range. We're very comfortable with all of these estimates. From a customer point of view, again, we have visited all the customers. So far so good. We are working with all of them. And we foresee no issues at this time. To conclude, although it's only been a few weeks. We've only owned the company since June 30th. It's only been a few weeks but we're very optimistic and at this point in our planning everything is on target. And we will continue to keep you informed, of course. So with that, I would like to open it for questions about the numbers, about the Dana integration or about anything you would like to ask. So fire away.

Yes we have one question from Greg Faje from Morgan Stanley. If anybody has any questions press the star and the 1 on your touch tone phone.

Good morning.

Good morning Greg.

Just a quick question on the Engine Management of $7 million dollars we had other suppliers cite lower volumes and trade volume lines. What was the key driver in the decline in revenues year over year?

I think you have to look at the six months. There's always a lot of noise in the first three -- in any short period. I think we had people possibly increasing inventory slightly in the first three months and they reduced it back in the second three months. So I think more significant to look at the total and the total is we're slightly ahead. We don't see any trends.

This quarter then was then probably say more a volume issue than inventory.

I would say so we haven't seen any decline anywhere. If you look at the six months we're slightly ahead and we think that's the more meaningful number.

Okay. Can you talk about the status of the European operations in terms of the profitability? Is that improving there?

Yes, the profitability is improving. We have restructuring plans going on this year. And we expect year-over-year, because in the second half of the year where significant losses were incurred in Europe. So year-over-year will be favorable. We'll still be in a loss position. At the end of the year. We're looking to the following year for more meaningful returns.

Okay. And one quick housekeeping question. What was the roll of FX on both sales and operating income in the quarter?

Repeat the question, Greg.

What was the impact of FX on sales and operating income in the quarter?

Oh, foreign exchange?

Yeah.

It was -- for the quarter it was 800,000 that we had, that we noted there. And you're saying what are sales?

On sales.

I don't have that for the impact. It was primarily related to the strengthening of the Canadian dollar.

Okay. Thank you.

You're welcome

Our next question comes from the cite of Chris Cook of Dozourf (ph). Go ahead, please.

Real quick. I had forgotten. What guidance if any have you given for sales and EBITDA prior to integration for the Dana Engine Management acquisition?

Chris, in the company's policy in the past had not been to give guidance. I'm pleased we have now two investment banks following us. So if you could look at the, look to Goldman Sachs and Morgan Stanley.

So you give guidance to them?

No, they do their estimates. We look at them. And those incorporate the Dana acquisition, but overall, if you're looking at the company for 2003 --

I'm not asking you to give guidance I'm saying prior to any integration savings, what was the Dana Engine Management business doing as far as sales and EBITDA?

Oh.

And I would have to point to the S-3. On an operating profit or for the second half of this year, we have seen the Dana Engine Management with minimal losses on an operating profit basis. And they had improved significantly from the past 24 months. So if you look at the losses incurred for that and the increased interest expense, you would be able to estimate our numbers.

Okay. Thanks.

You're welcome

Our next question comes from the site of David Sino from Gabelli & Company.

Do you have the segment profit numbers?

Operating profit?

Yeah.

Okay. Engine Management, I'll provide six-month numbers, David.

Sure.

Six-month numbers. Engine Management, 19.3 million. Temperature Control, 2.0. Europe -- Europe, 800,000 loss.

And the rest is just overhead?

Yes. Unallocated in Canada and that.

Right. And what did the balance sheet look like ex-Dana just in terms of inventory receivables, accruals and returns?

We'll have all that detail in the Q. But just to point out, there were no significant swings. I didn't want to run down through the entire balance sheet on there. But basically if you compared us to June of '02, we were basically in line with the prior year relating to receivables and inventories.

And last one. In July have you seen the AC business pick up any?

Somewhat. Yeah, somewhat. The first few weeks in July were quite warm. And we did see it pick up some. It has been warm the last two weeks. But it did pick up some in the beginning.

Okay. Thanks.

You're welcome, David

Our next question comes from the site of Ted Rick of Jaffrey’s & Company go ahead.

Do you have the CAPEX projection for the second .

.

Overall, for the full year, at this point, I would estimate we're in the -- we'll be approximately $10 million, I think. Again, it's going to be, that probably should be a conservative number as we're looking at it.

Okay. Thanks.

You're welcome

Our next question comes from the site of Chris Hussey (ph) of Goldman Sachs. Go ahead.

This is Chris Hussey. You talked about expanding the Greenville, South Carolina plant. Was this anticipated expansion maybe just go through that a little bit.

Oh, yeah. Greenville is going to be a major place for us. And it was anticipated. So we're moving their fuel injection operation there, and we will be moving their coil operation from Connecticut to there. And we have the room -- the building had a good amount of excess capacity when we took it. So that's going to be a major place for us. We feel it's a very good facility upon which to build.

And this, the investment there is part of the 30 to $35 million cost that you guys --

Yeah it's all included.

Chris, that goes back to when we acquired the fuel inject tore business from Johnson Controls. They moved a portion of their business back to Europe, and we had a sizable facility there, which real rough numbers now, maybe we were utilizing 25 percent of it. And it was more beneficial to keep the facility than to move that product line. We owned the building and we were very fortunate to have that capacity to move the Dana Engine Management product lines into it. It will be a high tech facility for us.

The only real cost there is just moving the equipment.

Terrific. I think I missed hearing one question, but I apologize if it was asked. But can you quantify what the weather impact was on your Temperature Control business? I know it's kind of tough to do. But do you have a sense --

It's hard to quantify. But we've said that the difference between hot years and cold years can be as much as 20 percent. That's again there's so many variables it's hard to pick one. But that would seem to be a somewhat reasonable number. It's been a pretty cold spring.

It's been a cold year here in New York. I just want to make sure elsewhere in the world, who knows.

Well, I have -- this is interesting. This is in the Times weather page about a week ago, and it indicated the number of 90 degree days, which is a good measurement. In the eastern part of the United States compared to the average and compared to a year ago, the most glaring example is Atlanta. The average is 19 days over 90 degrees. This is from January 1st to July 17th. The average is 19. Last year it was 14. This year it was 1. St. Louis, the average is 18, last year it was 29. This year it's 13. It's hotter in Texas than it was a year ago. But for the eastern part of the United States it's been dramatically cooler.

And when we think about the Engine Management business going forward, inasmuch as you guys are focused on a six-month number, should we sort of think about that as being kind of an annualized number for you guys for the second half of the year as well? You feel competent you can get that kind of revenue?

To be essentially even with last year.

Well, yeah, I mean [inaudible], but, yeah, in as much as --

Again there's always a lot of ups and downs going on. There's some pluses and minuses. And I'm not sure what we have forecasted. But I don't see any major differences from last year.

Finding any significant wins you'd like to share with us, anything that came out pretty, on the OEM side or anything?

We had one good win. As we talk to people on our road show, we emphasize the fact that we had a large area of opportunity in the OES business, because we did so little in it. We did just get a $10 million annual sales agreement with Johnson Controls, the people we bought the inject tore fuel from. And we will be supplying them with fuel injectors they will be distributing around the world. So that was a nice increase. We got that about a month ago.

And is that incremental 1$0 million or --

Yeah. It's mostly -- it's not all incremental. It's probably 70% incremental.

Terrific. Thanks a lot.

Okay

Our next question comes from the site of Dan Herbert from Essex Investments go ahead.

Going back to the integration, how long will you be manufacturing in some of these facilities where the workers know that there's going to be laid off and how are you managing the whole process in terms of insuring the quality of the product that's still being produced while they're aware that their jobs are going to go away?

That's a very good question. We've announced, so everybody knows, and frankly they appreciated our forthrightness. They obviously didn't like the answer, but they appreciated the forthrightness of it. And I have to say that thus far the response has been a pleasant surprise. So that -- people are cooperative and they're working and I'm very pleased to see that. What we've done to try to make the situation as good as possible is, first of all, we have, we've told people that we're going to be adding jobs in many places. We're going to be adding roughly 600 jobs to other locations. And we have told everyone that they get first crack at these jobs. So that's one thing. And secondly we will have -- we have state bonuses in there for the key people to stay until the end. And third we have assigned one or two of our key people to be physically present at those locations during this period to make sure everything stays fine. So, again, so we're doing everything we can and so far we're, frankly, very pleased with the results.

Okay.

Our next question comes from the site of Frank Brushetti, an private investor. Go ahead, please.

Good morning. I was just curious, if I'm not mistaken I was reading through your reports and one of your acquisitions, my question is about asbestos, okay. And you bought something at one asbestos claim and then I think by the next quarter you had 2500 asbestos claims. I know there's a bill in congress. I just want to know, am I reading something into this that doesn't belong there? Or is this an iceberg?

Good question. First of all, of those-I guess the number is now 2500. 1600 of them are a one-shot event which we think will be relatively trivial. It's 1600 that came out of the state of Mississippi on January 3rd, as they instituted tort reform and every lawyer there cleaned his desks. We've had all those cases transferred to federal court and we've been assured that the results would be insignificant if anything. So take 1600 off your total.

They're coming in around 80 a month. We're averaging somewhere -- it's kind of early to say because we've settled so few at this point. But we're guessing somewhere between three to 4,000 per each. Hopefully that number will come down in the future. We've had an actuarial study last September. The basis of that actuarial study we took a $25 million reserve, which is basically still there. And, yes, we're very much hoping that we'll get some relief from congress. But even if we don't, we think we have a manageable situation.

Okay. Sounds that way to me also, but I do know that asbestos has put a lot of good guys out of business, because everybody underestimated the effect.

Correct. But to put it into perspective. The people that are put out of business were people who were really basic producers of asbestos who asbestos was a major part of their business. For us, it was only from the brake business. It's still very problematic, if anybody ever got sick from a brake. Our typical case is a construction worker or a, somebody, a shipyard worker or something like that. Because he's having trouble suing those people, they look at other products that would have contained it. So the guy says yeah I fixed two or three brakes in my lifetime and he sues 100 brake companies without any idea what they were. Those are the ones that we're typically getting and for the most part they're being settled as for as I say relatively small amounts. We don't like it but it's a manageable thing.

Understood. Thank you very much.

Okay.

Good luck. Keep up the good work. Thank you our next question comes from the site of Matthew Jones, Catalyst. Go ahead, please.

Next on the line is Matthew Jones from Catalyst.

My question has to do with revenue retention within the integration process. Have you spoken to any of your customer base any further on having to figure out whether you can retain the number that you've give us in the past in terms of their revenue?

Yes, we've talked to all of them, constantly. Both to Dana customers and the Standard customers. We're in constant contact, me personally, constant contact. As I say, everything so far is fine. We're working with them and everything is fine so far.

Okay. Good. Thanks

Once again, if there are any questions, please press the star and 1 on your touch tone phone. To withdraw, press the pound key. At this time, Mr. Burke, we have no further questions.

Okay. With that, then, I want to thank everyone for participating in our conference call. Thank you

This concludes today's program. You may hang up your lines at this time.

(Call concluded at 11.28 a.m.)