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Echlin Inc.
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Echlin Investor Presentation - March 31, 1998
Certain statements included herein are "forward-looking" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Act"), and are made
in good faith by Echlin pursuant to the Act's "safe harbor" provisions. Such
forward-looking statements are not guarantees of future performance, and may
involve known and unknown risks, uncertainties and other factors that could
cause actual results to differ materially from those expressed or implied. Risks
and uncertainties include, without limitation, global and regional economic
conditions, business conditions in the overall automotive industry, and the cost
and timing of the company's repositioning plan implementation. They also include
other factors discussed herein and those detailed from time to time in the
company's filings with the Securities and Exchange Commission.
Agenda
- ------
Discuss Echlin's significantly increased earnings power Review demonstrated
momentum from Phase I repositioning plan Review significant potential
of Phase II initiatives
Considerations concerning SPX proposal
Business fit issues
Timing issues and future opportunities
Echlin's Turnaround Has Just Begun
- ----------------------------------
Management change only twelve months ago
Inherited a set of businesses not reflective of modern management techniques
Major restructuring actions are moving at a rapid pace
Reorganized,simplified and focused corporate structure
EVA focused management
14 targeted plant closings/consolidations
1,700 headcount reductions
Businesses representing $500 million in revenue sold
Today's meeting is to inform the market that Phase I of our restructuring is
ahead of schedule and Phase II is underway
Our earnings power is substantially above Street estimates
Echlin Has Significantly Higher Earnings Potential
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Fiscal Year Earnings Per Share
- ----------- ------------------
1995 $2.60
1996 $2.30
1997 $1.88
1998 $2.40-$2.50
1999 $3.65-$3.80
2000 $4.40-$4.55
The Market Had Just Started to Reflect the Changes at Echlin Before SPX's
Proposal
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[Chart describing Echlin's daily stock price from 2/13/97 through 2/13/98]
1. Review of Second Quarter and Future Earnings Potential
Confirmation of Phase I: Echlin Surpassed Estimates for the Second Consecutive
Quarter
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EPS FY - S/Share
1Q1998
Estimated $0.47
Actual $0.52
2Q1998
Estimated $0.41
Actual $0.43/$0.42
NB: Second Quarter reflects $1million or $0.01 of extraordinary expense related
to SPX proposal.
Second Quarter Review
- ---------------------
Change
($ in millions) 1997 1998 1998 vs. 1997
- --------------- ---- ---- -------------
Revenues $842.2 $835.7 (0.8%)
Gross Margin % 23.4% 24.4% +100 bp
EBITDA $74.2 $78.8 +6.2%
% Margin 8.8% 9.4% +85 bp
Net Income $23.6 $26.9 +14.2%
Confirmation of Phase I: Organizational Restructuring and EVA Implementation
- ----------------------------------------------------------------------------
Reorganized from 66 business units to 4 business groups
EVA used for a strict evaluation of each business unit to identify "fix" or
"sell" candidates
As a result, 7 businesses have been sold ($500 million revenue, 2% return on
sales)
EVA principles implemented to assess capital investments-two strategic
acquisitions accomplished in last 12 months
EVA based compensation program will be rolled out to all executive and
operations managers by September 1998
Facility Rationalization
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4 completed
8 in progress
2 yet to come
Headcount reduction When complete 1,200
Additional programs 500
Total reduction 1,700
$30 million annualized pre-tax savings when complete ($0.30 per share)
Echlin Now is Positioned For Phase II of Shareholder Value Creation
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Phase 1 Phase 2
EVA Worldwide Sourcing
Divestitures [arrow] Shareholder [arrow] Initiative
Cost Value Distribution Realignment
Reductions EVA
Top Line Strategic Acquisitions
Growth Operational Optimization
Where is the Big Opportunity at Echlin?
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66 Business Units [arrow] New Management [arrow] 4 Business Groups
Old structure was a function of previous management style
Consolidation conceived of and implemented by current team
Reduces duplicate functions
Allows coordinated approach to drive improved profitability
Sourcing
Distribution
Operations
Global Sourcing
- -------------
Objective is to reduce supply base by 40% by 2000 - from 10,000 suppliers to
6,000
Major purchases include:
Aluminum Bearings
Steel Packaging
Rubber MRO
Target of annualized 5.0% cost reduction on $2.0 billion of material and
equipment purchases over a two-year period
Reduction Per Share Benefit
--------- -----------------
Fiscal 1999 2.5% - 3.0% $0.50 - $0.60
Fiscal 2000 2.0% - 2.5% $0.40 - $0.50
Total $0.90 - $1.10
Distribution Realignment
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Distribution Points
Current Target
44 5
Costs reduced by $30 million annually upon completion
Potential Echlin inventory reduction of approximately $90 million
Two year payback on initial investment
Operational Optimization
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Shares services initiatives
BaaN software implementation
IMPACT manufacturing program
Effects of EVA-based compensation program
1998 Earnings Power is Higher than Expectations
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Upside we see in 3Q and 4Q
Gross margins up 180-220 bp above year ago level
Operating expenses 40-60 bp lower
Improved cash flow
1998 EPS Range $2.40-$2.50
Sources of Fiscal Year 1999 Potential
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Incremental 1999 Pre-Tax
Impact
(Millions, except EPS)
Phase I:
Operations and Financial Improvements $25 - $30
Repositioning Benefits 10
Phase II:
Global Sourcing and Distribution Realignment 55 - 60
Operational Improvements 25 - 30
Subtotal Pre-Tax Impact $115 - $130
Total Expected EPS Range $3.65 - $3.80
Sources of Fiscal Year 2000 Potential
Incremental 2000 Pre-Tax
Impact
(Millions, except EPS)
Phase II:
Incremental Global Sourcing $40 - $50
Distribution Realignment 10 - 15
Operational Improvements 10- 15
Subtotal Pre-Tax Impact $60 - $80
Total Expected EPS Range $4.40 - $4.55
Earnings Potential
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($ in millions,
fiscal year) 1998 1999 2000
------------ ---- ---- ----
Revenues $3,500 $3,575 $3,850
% Growth (1.7%) 2.1% 7.7%
Gross Margin % 25.2% 27.9% 28.4%
EBITDA(1) $380 $500 $575
% Margin 10.8% 14.0% 14.9%
EPS Range $2.40-$2.50 $3.65-$3.80 $4.40-$4.55
(1) Corresponding to midpoint of indicated EPS range.
Additional Opportunities: Strategic Acquisitions
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Enhance shareholder value
Complementary in technology
Complementary in markets served
Expansion of geographic markets
Market leader (#1 or #2) in product lines
Strong management team in place
Above average organic growth potential
2. The SPX Proposal
Some Issues Under Review as we Consider the SPX Proposal
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Business fit of combined company will determine valuation of stock portion
Distribution concept
Negative customer reaction
Lack of synergies
Equity market valuation of combined company
SPX understanding of industry
Distribution Systems are Fundamentally Different
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[Chart comparing Echlin and SPX distribution systems]
Limited Customer Overlap
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Echlin SPX(a) Estimated
Overlap
OE Manufacturers X X 8%
OE Dealers X 0
Aftermarket
Aftermarket Repair Shops X 0
Warehouse Distributors X 0
Retailers X 0
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Total Overlap 8%
(a) Assumes sales for Service Solution business is divided between dealers
and repair shops for comparative purposes.
Customer Reaction: The Impact is Already Reverberating
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"... we have been greatly concerned about this move on SPX's part since the
beginning and we are very much in opposition to it." -Larry Price, CEO, Genuine
Parts Company
"I was deeply concerned about how this would affect one of my most important
suppliers... I do not believe it to be in the best interest of the customers."
- -Wilson McMillion, Owner, Parts Plus
"I am not impressed by Mr. Blystone's background, track record, nor
understanding of the aftermarket." -Keith Thompson, CEO, Republic Automotive
Parts
"We do not see any benefits or synergies to this combination for Echlin's
customers and, therefore, do not believe it is good for your shareholders." -Art
Fisher, CEO, Federated Auto Parts Distributors
"As a customer, I am totally opposed to this takeover." -Rollance E. Olson,
Chairman, Parts Depot
You Have Noticed the Lack of Business Fit and Synergies
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Date Firm Comments
2/18/98 Lehman Brothers "There are no synergies; SPX plan is to simply
manage the business better."
2/19/98 DLJ Securities "SPX does not have significant business with
Echlin's main customers."
2/20/98 Morgan Stanley "There appears to be little operational synergies
& that would aid in achieving these cost savings."
2/18/98
"Echlin's manufacturing facilities in
general are product focused, and therefore
many not permit faster rationalization
without spending a lot of money. This runs
counter to SPX's claims that management is
overspending."
3/18/98 Merrill Lynch "... we believe synergisms are largely absent."
Other "New Distribution Concepts" ...
- -------------------------------------
[Chart describing Federal-Mogul - Daily stock price: 1/4/93 through 3/11/94]
... Have Cost Shareholders Money
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[Chart describing Federal-Mogul - Daily stock price: 1/4/93 through 12/27/96]
Other "New Distribution Concepts" ...
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[Chart describing APS Holding Corp. - Daily stock price: 1/11/96 through
9/27/96]
... Have Cost Shareholders Money
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[Chart describing APS Holding Corp. - Daily stock price: 1/11/96 through
3/25/98]
Possible Reasons SPX Needs an Acquisition
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A study of U.S. Automotive Diagnostic Equipment Market Raises Concerns over
Strength of Business
"In the last couple of years, SPX has lost market share in almost every product
segment. The main reasons for this is their distribution system."
"SPX has not had a very strong following with independent installers."
"SPX has increased its sales per employee tremendously over last couple of
years. However, it is expected that some of the gains have come at the expense
of cuts in R&D. Competitors expect that this may hurt SPX's prospects in the
long run."
"OBD III, IV and V represent real threats to diagnostic equipment
manufacturers."
Source: Frost & Sullivan Report commissioned by Echlin on February 25, 1998
SPX Issues Under Review - A Summary
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New distribution concept presumes customer acceptance
Substantial potential for customer defection
Almost $100 million of synergies are required to get neutral EPS(1)
Pro forma P/E may reflect auto parts industry multiple
2 years of automotive experience
Proposed Board is aligned with SPX
(1) According to SPX S-4
SPX's Claims About Echlin Do Not Hold Up to Scrutiny
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Productivity
Capital Spending
Underperforming Assets
EVA Implementation
Pace of Management Actions
Claim: Echlin Productivity is Low
Reality: Outstanding Capital Productivity
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Three-Year Average Return on Assets(a)
Echlin 11.3%
Delco Remy 10.8%
Dana 9.6%
Arvin 8.7%
Lucas Varity 8.2%
Standard Motor 7.3%
Federal Mogul 5.4%
(a) Average of EBIT/Assets for latest three fiscal years.
Claim: Echlin Overspending on Capex
Reality: Capex/Sales in Line With Others
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Capex/Sales 1995 1996 1997 Avg. '95-'97
- ----------- ---- ---- ---- ------------
Aftermarket Companies:
Dana ............................... 5.4% 4.6% 3.9% 4.6%
Arvin .............................. 5.1 3.6 4.3 4.3
Delco Remy ......................... 2.0 5.1 4.6 3.9
Echlin ............................. 3.8 3.3 4.2 3.8
Federal-Mogul ...................... 3.9 2.7 2.8 3.1
Standard Motor Products ............ 2.5 3.0 2.5 2.7
SPX ................................ 2.8 1.8 2.5 2.4
Claim: Need to Divest Underperforming Assets
Reality: New Management Has Moved Quickly to Sell Underperforming Assets
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Sold:
Sensor Engineering
BWD Puerto Rico
Preferred Plastic
Australia Distribution
ACE Electric
WAWD
Midland-Grau
Divested businesses representing revenues of $500 million with an average margin
of 2%.
Claim: Echlin Moving Too Slowly on EVA
- --------------------------------------
Reality: "Echlin is making significant progress with EVA - implementation is
among the fastest we've seen for a company of their size and complexity." - Joel
Stern
Claim: Management Does Not Move Quickly
Reality: We Are Moving With Speed
- ---------------------------------------
Reorganized, simplified and focused corporate structure
Rapid implementation of EVA principles
Implemented restructuring program to reduce costs
Divesting underperforming and non-core assets
Acquired complementary businesses
Quickly exceeded analyst's earnings expectations
3. Conclusions
Echlin's Board of Directors: Track Record of Independence
- ---------------------------------------------------------
Always has been shareholder focused
Track record of acting independently
Has made difficult decisions without external pressure
Well aware of responsibilities and is well advised
"I've been following Echlin for 20 years and I've known [Chairman and Chief
Executive Larry McCurdy] for 20 years...he's a shareholder-sensitive guy."
- -Mario Gabelli
The Echlin Opportunity
- ----------------------
Restructuring well under way
Benefits just becoming apparent
No need for major strategic or operational assumptions to produce revised EPS
Repositioning actions have history of success in industry and have created value
in the market
25 years of automotive experience and credibility
Track record of Board independence
Key Message
- -----------
We have implemented the turnaround and SPX has timed a proposal to reap the
rewards
Echlin's shareholders are just starting to see the EPS impact
Return on investments are just beginning to become apparent externally
Echlin wanted to share its view of future because current numbers underestimate
EPS potential
Apparent to the board and management
Not readily apparent to the investor community
Certain statements included herein are "forward-looking" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Act"), and are made
in good faith by Echlin pursuant to the Act's "safe harbor" provisions. Such
forward-looking statements are not guarantees of future performance, and may
involve known and unknown risks, uncertainties and other factors that could
cause actual results to differ materially from those expressed or implied. Risks
and uncertainties include, without limitation, global and regional economic
conditions, business conditions in the overall automotive industry, and the cost
and timing of the company's repositioning plan implementation. They also include
other factors discussed herein and those detailed from time to time in the
company's filings with the Securities and Exchange Commission.