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Remy International Inc. (NASDAQ:REMY)

Q4 2013 Earnings Conference Call

February 13, 2014 09:00 AM ET

Executives

Monica Bolt – Vice President-Finance

John J. Pittas – President and Chief Executive Officer

Fred S. Knechtel – Senior Vice President, Treasurer and Chief Financial Officer

Analysts

Alan W. Weber – Robotti & Co. Advisors LLC

Sarkis Sherbetchyan – B. Riley & Co. LLC

Chuck Walter – Hoak

Faz Habib – DA Capital

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Remy International Fourth Quarter and Full Year Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time (Operator Instructions) As a reminder this conference is being recorded.

I would now like to turn the conference to our host Monica Bolt, VP and Finance. Please go ahead.

Monica Bolt

Good morning, and thank you for participating on our fourth quarter and full year 2013 earnings call. My name is Monica Bolt, Vice President of Finance. Joining us are President and Chief Executive Officer Jay Pittas, and our Chief Financial Officer, Fred Knechtel.

Yesterday, we released our fourth quarter and full year 2013 financial results. Jay and Fred will review both periods. A copy of our release, accompanying financial statement and presentation slides are available at our website under the caption Investors at remyinc.com. Log-in instructions for the webcast were included with the invitation to today's call.

The company's Safe Harbor statement is included in the earnings press release as well as shown on slide two of today's presentation. Please consider my reference to this statement as notification of the applicability of the Safe Harbor provision to today's call.

Now, we will hear from our President and Chief Executive Officer, Jay Pittas.

Jay Pittas

Thank you Monica. Good morning everyone, and thank you for joining us. 2013 was a successful year for Remy. We focused on winning new business, driving sustainable operational improvements and aggressively controlling spending while investing for growth in China and our Light Duty aftermarket. I am happy to report we made significant progress on all fronts.

For the fourth quarter, we reported net sales of $292 million, up 9% compared to $268 million last year. Our long-term goal is to have a well balanced portfolio of business. We strive for balance between OE and aftermarket and also between North America and the rest of the world. This quarter, 50% of sales were from the aftermarket and 36% were from outside North America. Sales in China were up 62% in the quarter over 2012.

Net income for the quarter was $17 million consistent with 2012. Fred will discuss our fourth quarter and calendar year financial results in more detail. 2013 was a very strong year for securing new business. Our success in the first three quarters continued with new business awards in the fourth quarter.

In the aftermarket, European net sales continue to expand in the quarter with a 12% increase of our fourth quarter of 2012. In the heavy-duty aftermarket our North American truck manufacturer added Remy value line offering to supplement our premium portfolio.

In our original equipment business, we signed a five-year long-term agreement for standard position with Daimler Trucks, North America. China first tractor group or YTO awarded heavy-duty alternator and starter business for their export and premium tractor applications.

We also continue to be successful in winning new business with three different comments-related joint ventures in China and Korea. Chongqing Yuan, or CQYA, a Chinese passenger vehicle manufacturer awarded as alternator and starter business and Hyundai awarded as a new engine program.

I will now turn the call over to Fred to review our fourth quarter and full year financial results.

Fred S. Knechtel

For the fourth quarter, net sales were $292 million, up 9% when compared to $268 million last year, and up 11% versus the prior quarter. Aftermarket net sales were $146 million, up 9% as compared to $134 million last year.

Original equipment sales were $146 million, up 9% compared to $134 million the prior year. The increase reflects additional light duty sales to Hyundai, Shanghai GM, Wuling, Dongfeng Peugeot, Citroen and Dongfeng Nissan, and a 26% increase in heavy duty sales to Caterpillar, Daimler, and Cummins.

Global light vehicle production was up 4% in the quarter and Remy’s global light duty unit volume was flat. Hyundai’s production was down 3% globally however, our unit sales to Hyundai were up 20% as we continue to increase our share within Hyundai. General Motors production decreased 3% while Remy unit decreased 12% reflecting the reduction of planned and previously announced roll-off of GM platforms with Remy content.

Fourth quarter global commercial vehicle production was up 2% versus last year, while Remy’s unit sales were up 30% for the quarter reflecting increased production at Caterpillar, Daimler, Packard and Cummins.

Adjusted EBITDA was $39 million compared to $40 million last year as a result of higher sales offset by investments to grow the business. The main drivers were $1 million higher from increased volume and favorable mix, partially offset by price reductions, $3 million lower due to increased investments for growth in China and improved coverage in and our Light Duty Aftermarket and $1 million higher due to global cost reductions from productivity, supply chain efficiency and discretionary spending.

Net income for the quarter were $17 million, the same as the fourth quarter of last year. Cash flow from operations was $45 million as compared to $27 million in 2012. For the full year, net sales were 1.2 – $1.12 billion down 1% when compared to $1.13 billion in 2012. Our sales were off marginally from last year with new OE programs and increased aftermarket sales offset by Light Duty OE sales and the continued softness of the North American commercial vehicle market.

Aftermarket net sales were $557 million, which was up 4% compared to $536 million last year. The increase was driven by expansion in our Light Duty Aftermarket and OE service sales. Original equipment sales were $562 million down 6% compared to $598 million in 2012. Light Duty original equipment sales were down as expected. Increased sales to Hyundai and growth in China, partially offset the decrease in sales to GM. Remy hybrid sales were $17 million compared to $36 million in 2012.

Global light vehicle production was up 3% in 2013 and Remy’s global Light Duty unit volume was down 4%. Hyundai’s production was up 3% globally and our unit sales to Hyundai were up 19% as we continue to win new business. GM production was flat on a global basis while Remy unit sales decreased 14% reflecting the reduction of platforms with Remy content.

Global commercial vehicle production was up 3% in 2013 while Remy’s unit sales were up 6% for the year driven primarily by market share growth in the off-highway segment. We continue to leverage our strong heavy duty original equipment position in the aftermarket.

Adjusted EBITDA for the full year was $136 million compared to $154 million in 2012 with favorable volume mix and productivity improvements only partially offsetting our growth investments, price concessions and restructuring. The main drivers were $8 million lower, which reflects the market base price concessions only partially offset by higher volume. $16 million lower due to increased investments for China and improved coverage for our Light Duty Aftermarket, which was partially offset by a $11 million in productivity improvements and cost initiatives. The year-over-year change in amortization and restructuring was lower by $4 million.

Interest expense was $20 million compared to $28 million in 2012 due to the refinancing of our term loan in the first quarter. Net income for the year was $40 million as compared to $141 million last year which included the reversal of $89 million valuation allowance on a deferred tax asset balance. Capital expenditures for 2013 were $22 million compared to $24 million last year. Cash flow from operations were $60 million as compared to $66 million in 2012.

Total cash and cash equivalents were $115 million as compared to $112 million last year. This cash increase is after investments in working capital, the acquisition of minority interest in the China joint venture and planned investments in China and Light Duty Aftermarket. We had $181 million of net debt outstanding consistent with last year. We expect to file our 2013 Annual Report on Form 10-K on February 28.

I will now turn the call back over to Jay.

Jay Pittas

In 2013, we continue to drive shareholder value with aftermarket investments, expanding China production capability and improved operating efficiencies. Specifically, we made investments in the aftermarket to improve the stealth and availability of our late model portfolio coverage and introduced over 400 new aftermarket part members. We added inventory and capacity to ensure best-in-class customer availability.

These actions supported growth with retailers but we also converted customers in the independent aftermarket as we continue to grow sales with key volume groups in North America and Europe. During the year, we launched new products across the globe and secured new light duty and heavy duty OE business with key customers including Shanghai GM, Yunnei Power, Hyundai, Dongfeng Peugeot Citroen and Cummins.

Finally, GM Motors had extended range electric vehicle manufacturer continues to place orders for hybrid starters. Our global OE backlog in the fourth quarter increased by $34 million increasing our anticipated 2017 annual revenue to nearly $716 million this represents a 28% increase in OE sales over 2013 results. Our investments in China are already paying dividends. We purchased the remaining 49% share of our joint venture and added to new plant Yuhong to our manufacturing footprint. We commissioned the China Engineering Center to better support our customers in the Asian market.

The Yuhong facility is now up and fully operational serving OE customers in China and exporting products worldwide. With production up and running, sales in China were up 62% of the fourth quarter over 2012.

Finally, we continue to drive for sustainable improvements to our manufacturing operations and supply chain, well aggressively controlling discretionary spending and implementing selective restructuring we needed. For example, we closed our Mezokovesd plant in Hungary this year consolidating manufacturing operations for OE and the aftermarket in Miskolc and other Remy facilities. For 2014 we’re well positioned with improved product coverage, new OE customer programs and improved economic forecast for OE production and aftermarket demand.

We have taken steps and will continue to take the necessary steps to minimize the impact of price pressures, characteristic of the auto industry. We are excited about our recently announced acquisition of USA Industries. One of our key growth strategy is to leverage our distribution channels with an enhanced portfolio and expand beyond our core rotating electric products.

This acquisition accomplishes both as USA has an outstanding reputation with strong product distribution and a diverse product line that includes constant-velocity axles, calipers and rotating electrics. The USA team brings additional expertise in manufacturing, providing cost synergies with our current operations.

We look forward to 2014 as the Remy team remains focused on driving superior long-term value for shareholders. With healthy cash flows to support business investments, pay dividends and fully fund potential M&A activities, I believe we are well positioned with our expanded portfolio and quality products to grow our business.

Operator we’ll now take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will now go to the lines. Our first question comes from Alan Weber from Robotti & Company. Alan please go ahead.

Alan W. Weber – Robotti & Co. Advisors LLC

Good morning.

John J. Pittas

Good morning.

Alan W. Weber – Robotti & Co. Advisors LLC

Can you talk about the 2014, can you talk about the amount of revenue you expect from new business compared to 2013 revenue that have been rolled out, you mentioned $700 million, I wasn’t clear what that really was?

John J. Pittas

I’ll first clarify that and then try to answer the first part of the question. When we talk about backlog as you recall and we said this before, most of our OE programs that are awarded are awarded anywhere from two to three years prior to start of production.

So we look to see what our three year out revenue looks like in the OE business and that’s the measure of the impact of our new orders that we received in any given year. So that’s the reason why we talk about 2017 today in 2014.

So we booked business awards through the year, I mentioned many of the companies that we received awards and those will generate revenue after their start of production some years out in the future and so are roughly $500 million worth of OE business in 2013 will expand to $700 million worth of business in 2017 when those award start production.

Alan W. Weber – Robotti & Co. Advisors LLC

And then offsetting that is the amount of business in 2014 that kind of rose off, so it’s kind of getting more like a net number?

John J. Pittas

That is a net number that I’ve given you and so that’s why we talk about backlog as the net effect of new business awards coming on and impacted or created by the programs that will not be there by time or whatever.

Alan W. Weber – Robotti & Co. Advisors LLC

Okay and then can you talk a little bit about the seasonality, because if you look at the fourth quarter, this year compared to last year, this year in the fourth quarter you had the highest revenue for the year. Last year’s fourth quarter actually was the lowest revenue for the year and just trying to understand better how much of it is seasonality compared to how much really is just you winning more business than what’s kind of rolling off for this quarter?

John J. Pittas

Yes, first of all there is a basic seasonality in the overall business. Our second quarter tends to be our highest quarter, first and four tend to come in behind that and third quarter being our weakest one. Basically just to the seasonality of both the OE business and the buying patterns in the aftermarket.

Last year’s fourth quarter was very low, much [indiscernible] driven mostly by the downturn in the heavy duty in commercial vehicles. It was much weaker last year, patent covers were much weaker in the fourth quarter last year as well as most of the truck manufactures and frankly that continued through most of 2013.

As we talk in our result as we spoke to them we talked about increases in the commercial vehicle segment driving a lot of the uptick and that’s because we saw the truck business, the commercial truck business in the North America kicked backed in, come in strong actually in the later parts of the fourth quarter as well as patent covers.

Alan W. Weber – Robotti & Co. Advisors LLC

Okay. My final question is, the acquisition of USA Industries, can you talk about what it cause, what do you expect the revenues are and who actually are there, what are their end markets?

John J. Pittas

USA was probably the fourth biggest player in the light of the aftermarket in North America. So predominantly through the buying groups and WDs rather than through retailers sold mostly rotating electric products, but had a fast growing multi line of stable products as I mentioned around constant-velocity axles around great calipers other products and that’s the diversification opportunity we had. They had approximately $35 million worth of sales in 2013 and we expect to see that to grow nicely driven mostly but the multi-line products are going forward.

Alan W. Weber – Robotti & Co. Advisors LLC

And just as a quick follow up; how does that, that wholesale business through the buying groups, their business, how did they compared with your business is in terms of revenue aside?

John J. Pittas

They are obviously much smaller than us in the late through the aftermarket in the triple size however in the buying groups in the independent aftermarket for light duty they were only a little bit smaller than us.

Alan W. Weber – Robotti & Co. Advisors LLC

And this becomes a pretty big acquisitions for you on that on that end market.

John J. Pittas

Yes, it actually help us in the independent aftermarket for exactly the reasons that you described and it even more importantly gives us that diversified product offering that we can sell in though our existing channels and many of our existing customers are eager to look at those products from us as we go forward.

Alan W. Weber – Robotti & Co. Advisors LLC

Great, thank you very much.

John J. Pittas

Thank you.

Operator

(Operator Instructions) our next question comes from Sarkis Sherbetchyan from B. Riley & Co. Sarkis, please go ahead.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Good morning, thank you for taking my questions.

John J. Pittas

Good morning.

Sarkis Sherbetchyan – B. Riley & Co. LLC

So just kind of thinking back of the USA acquisition, what is the impact of profitability form the acquisition excluding may be the acquisition and integration cost and will it be calling out those expenses on a go forward basis?

Fred S. Knechtel

Well, first, we’ll not be separating those expenses. We report Remy as one consolidated entity and we don’t break it up by business. So we expect the profitability going forward to be equivalent profitability rates that we see is a whole for Remy. As Jay said that there is a lot of expansion opportunities that we think we can leverage that with certainly be accretive going forward and also discussed that there are certain operational efficiencies with the way they produce and reproduce that can continue to grow value for us in the future as well.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Okay, that’s helpful. And then if we kind of look at the acquired product categories outside of rotating electrical, what is your annual revenue run rate currently and where would you expect that exiting 2014?

Fred S. Knechtel

First of all, we had zero sales in axles and multi-line products in North America. We do so some of those products in Europe, part of our European business is active. And that's been a lot of the growth that we’ve seen in Europe has been with the same product lines. I can’t tell you the spilt between Virgin electrics and multi-line products in Europe. But if could say, it’s a good contributor to our business there which is why we wanted to expand that category for us in North America.

We expect that to grow, we think we can double the business if they were doing not a part – quarter of their business came from multi-line products in 2013, and we think we can do a good job of growing that significantly in 2014.

We think the growth income not only from additional demand, that USA was seeing in the market but also many of our customers that expressed the interest of buying those types of product from us and expanding their purchases from us with our expanded portfolio.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Okay, thank you for that and maybe can you remind us what is the North American OE commercial vehicle market as a percent of your total sales, and are you starting to see some firming production schedules here in the front half of 2014.

John J. Pittas

I don’t know that if I – I can’t tell how much was North America specifically. We talked about our OE business being roughly half our business, and we reported those numbers for you. And Fred, reported those directly in that $550 million give or take a little bit. And we have seen firming schedules across the Board and did in 2013. However, as we spoke we had some large platforms that we came off at GM that declined while we were seeing strength elsewhere. But we see production schedules in North America and China remaining relatively strong, Europe remaining relatively flat and the only place that we see downward pressures on OE productions is in Brazil.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Okay, that’s helpful. And then you did mention some of the power trained platforms that you are kind of rolling off or changing over. Can you help us maybe understand the impact of blocking the GMT-900 flow-off and maybe if you can point to how much revenue you lost from that in 2013 and maybe with that excepted incremental losses, here in the 2014 period from the SUV side. So I guess we are just trying to make sure we have the magnitude in timing of this planned end of life captured?

John J. Pittas

Yes, I think the easiest way to describe it, we will decline by roughly half, our GM volume that we had in 2011 – in 2014. So that total impact of all the programs is approximately $125 million. In 2014, we’ll see about $45 million headwind with the additional time out of those programs, and we see that to be in the last year of the trough that we talked about for some time. I can’t speak specifically the GMT-900 without looking up to numbers, but that’s the overall magnitude to GM. I believe the impact in 2013 from 2012 was in the $19 million, $18 million range I think in that kind of range. That is by rate.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Okay that’s very helpful thank you for that. And then I guess my last question here, found the announcement of FNF’s tracking stock. Do you have any updated views about their involvement in Remy and more specially either you are understanding that they’ve concluded their process for evaluating how to unlock the value in their Remy stake?

John J. Pittas

Well, of all, I think that’s, really more of a question for Fidelity in their earnings call here later today than Remy. They stated their intension to provide greater transparency to the Fidelity investors. And that was the reason for taking the non-strategic components that included Remy as well as many other investments that have – they were in the Fidelity portfolio to be put in that separate tracking entity and I think that’s more to unlock the value to the shareholders of the Fidelity shares than it was to unlock their investment in Remy’s stock.

They did complete their work with JPMorgan, looking at their auctions and this tracking auctions was the one that they have selected. I can’t speak to their intentions of what they’re going to do with their share or what they will do in their future I think that’s a question for them.

We run as a completely independent entity with our own capital structure and debt capacity and independent about the net. And shouldn’t and – aren’t effected in anyway by that by that move by Fidelity. It really doesn’t change the way we operate this business is usual for us. So I think that’s the questions that are answered by them, but in all of it I have seen no indication from them that there is any urgency for them to change their ownership share or their holding within Remy. They’re barely going to take their non-strategic entities and put them in a separate entity for the entity for effective to unlock value for the Fidelity shareholders in their base business.

John J. Pittas

Thank you very much John.

Operator

Our next question comes from Chuck Walter from Hoak. Chuck, please go ahead.

Chuck Walter – Hoak

Hey guys, thanks for taking the call. Real quick, Fred, if you would just detail the balance sheet items to the extent you can, I think in previous press release as you gave net debt figures, I am sorry if I missed it on this call already. I had missed or I lost track?

Fred S. Knechtel

Yes. So, we didn’t release a balance sheet, we will release the balance sheet on the 27th. So…

Chuck Walter – Hoak

Right, but last year in the annual press release, you gave a net debt calculation?

Fred S. Knechtel

Yes. Okay, so net debt was a $185 million. So, let me just read through it for you. The total cash and cash equivalents were $115 million this year compared to a $112 million last year. And then at the end of the year we had a $185 million of net debt outstanding. And we made quite a few working capital investments. We purchased some minority interests in our China joint venture and we also had investments in China and might do the aftermarket in spite of all those investments. We still maintain solid net debt and cash balance at the end of the year.

Chuck Walter – Hoak

Thank you.

Fred S. Knechtel

Yes.

Operator

(Operator Instructions) Our net question comes from Faz Habib from DA Capital. Please go ahead.

Faz Habib – DA Capital

Hi, good morning guys.

John J. Pittas

Good morning.

Fred S. Knechtel

How are you?

Faz Habib – DA Capital

Good, good. Thanks for taking my question. In the fourth quarter the price mix was favorable. So I am just wondering has the pricing sort of situation at pricing pressure improved a little bit from an industry standpoint, I know there was at least 1 competitor that was not pricing very rationally in the past?

John J. Pittas

Okay, but we continue to see pricing pressures throughout, is just the nature of our business and in some years it’s going to be more and in some years it’s going to be less. So within that price volume mix that we talked about in the fourth quarter, a majority of that – well let’s say $4 million was price year-over-year and so it equates to about 1.3% year-over-year and that’s consistent with what we have seen in the past.

Faz Habib – DA Capital

Okay all right, so the benefit was really, an increase in the mix of commercial is that, is that fair to assume?

John J. Pittas

Yes, we got a very strong commercial mix and aftermarket mix and that drove about $5 million of that volume price mix which was offset by about $4 million in total price.

Faz Habib – DA Capital

Got it and then second question is about the USA acquisition. Have you talked about what the price state was for that acquisition?

John J. Pittas

We have not disclosed that just yet, but we did stand $40 million for the assets of USA Industries and that’s the combination of the purchase price and also we purchased some excess some inventory that we believe that we would work off in the future.

Faz Habib – DA Capital

Got it, okay. Thank you.

Operator

Mr. Pittas, at this time we have no other questions queued up.

John J. Pittas

I’d like to thank everybody for their continued interest in Remy. And I look forward to sharing our progress in the next call in May. Thank you very much for joining us today.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconferencing Services. You may now disconnect.

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