Good day, everyone, and welcome to today's Standard Motor Products Second Quarter Earnings Call. It is now my pleasure to turn the call over to Larry Sills. Please go ahead.

Thank you for joining us for our second quarter conference call. I'm joined today by Eric Sills, President and CEO; Jim Burke, Chief Operating Officer; Nathan Iles, Chief Financial Officer; and myself, Larry Sills, Executive Chairman. We will begin with Eric, who will discuss the key highlights of the quarter, followed by Jim providing more details on our operations, and then Nathan will present a detailed review of the financials. We will conclude with a Q&A session. I will now hand it over to Nathan for the forward-looking statement. Thank you for your attendance.

Okay. Thank you, Larry. Before we begin this morning, I'd like to remind you 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. I'll now turn the call over to Eric.

Well, thank you, Nathan, and good morning, everybody, and we appreciate you joining us this morning for our second quarter earnings call. I'd like to start today's call with an enormous thank you to all of our employees. Needless to say, this has been a very difficult time, and our people truly rose to the occasion. Throughout the period, our employees remain committed to helping us navigate unique circumstances and did so with skill, compassion and dedication. I'm especially proud of all of our frontline employees, those in our factories and our distribution centers, who continued to show up day after day. We could not have done it without you. From the beginning, our industry was deemed essential. We, therefore, continued to operate throughout the crisis. As such, we needed to assure that we had as safe a work environment as possible. Countless measures are in place, which Jim will discuss in his remarks, and thus far, they have proven very effective. Turning to business. When we last spoke to you on our first quarter earnings call, we were wrapping up April, the worst month our company has seen in decades. The country was under near complete lockdown, and we reported that our April incoming orders were down 30% to 40%. We also told you that there were signs of improvement, especially with our customers' POS, which is always a leading indicator for us. We are pleased to say that business did, in fact, begin to bounce back. May saw a week-over-week improvement, and by June, sales had returned to normal levels. So while the quarter, as a whole, was well below 2019, the trend was quite favorable, and we entered Q3 with a very healthy order book. Customer POS was even more favorable. We reported that, throughout April, our customers' POS was tracking substantially better than their orders to us, as they reduced their inventory. We also stated that after bottoming out, their POS had begun to rebound. This trend continued. Within both engine management and temperature control, customer POS was favorable to last year for the entire quarter and showed sequential improvement month-over-month. On our last call, we told you that while we entered the pandemic with a very healthy balance sheet, we were taking prudent measures to reduce costs and conserve cash. We also told you that we strongly believe that this will be a temporary situation, that while the business world was surely entering a very difficult time, the auto care industry tends to be more resilient. As a nation, we relied very heavily on our hundreds of millions of vehicles, and that they would eventually return to the roads and nondiscretionary repairs would resume. Therefore, we announced that we would only cut back on items that would have no long-term impact on our strategy or our growth plans. The largest among these core cutbacks were a temporary suspension of our dividend and stock buyback programs, and a reduction in compensation for senior executives and our Board of Directors. But again, we did not cut items that would hurt us in the long run. We chose not to lay off any of our salaried staff. We are very pleased that we made that decision. For example, while our 200-plus salespeople were unable to call on customers, we kept them productive. We turned our award-winning training department on them, bombarding them with literally over 100 webinars. Now that they're back on the road, they are equipped with the most extensive knowledge base imaginable. We also chose not to reduce spending on capital projects for new equipment and tooling. Our engineers all remained highly engaged throughout, and our pipeline of projects has continued. Finally, I would like to wrap things up by talking a bit about the future. In the near term, we entered the third quarter in good shape. Business has picked up substantially, and it has been a hot summer, which is always a good thing for our temperature control business. The longer-term also remains quite bright. Market demographics continue to show favorable tailwinds. We are staffed with the best talent in the industry, and our relationships with our customers are very strong. But while business has gotten back on track, the nation is far from out of the crisis, COVID cases remain high as does unemployment. Therefore, we take nothing for granted. We will continue to operate our business with the same care and prudence as we have for the last 100 years. And as such, we know that we will emerge from this crisis a stronger company than we were when we entered it. And with that, I will turn it over to Jim Burke.

Okay. Thank you, Eric. I will provide a general overview of operations, addressing employee and facility health and safety, our supply chain update and our efforts on cost reductions and cash conservation. First, from the onset of this pandemic, our first priority was, and remains, the health and safety of our 4,500-plus employees across 19 facilities. We have implemented very stringent protocols at our facilities, including temperature checks before entry, stepped up daily cleaning and weekly deep cleaning, mandatory use of PPE, facility modifications for protective barriers, staggered work shifts for social distancing, and office and staff functions moved to remote work from home. In addition, most importantly, we were totally transparent with our employees, with electronic alerts to communicate any positive cases and contact tracing. We held regular scheduled town hall video meetings to keep our employees fully informed. As an essential business, our frontline heroes, in manufacturing and distribution, work through these very challenging times. We thank these employees for their dedication to SMP and our customers for keeping essential vehicles rolling. Next, I will review our supply chain and challenges from initial 30% to 40% volume reductions in April to a significant rebound in customer POS levels in May and June. Overall, from a materials perspective, we are in reasonable shape, as our vendors have been very helpful in meeting our needs. However, business rebounded so quickly that we are working as fast as we can to build and distribute our products in a timely fashion to match our customer demands. We are adding labor with new hires and temporary agency staff, in addition to working overtime and weekends to keep up. Looking at our Temperature Control business, it is no surprise that throughout the U.S., we are experiencing a hot summer. This year, preseason ordering was very light, following a mild 2019 summer season. Volume has picked up in June. And based on current ordering patterns, we should have a solid third quarter in our Temperature Control business. Lastly, I will touch on our efforts to reduce spending in light of the lost volumes in the first half of this year. Eric already discussed reductions in Director compensation and Executive pay. But in addition, we thoroughly reviewed all discretionary expenses to eliminate or defer spending in 2020 during this pandemic. Cost reductions were implemented throughout the organization related to T&E, show expense, advertising, professional fees, salary, new hires, excluding engineering to support our make first body strategy. In addition, provisions for incentive pay were significantly reduced based on the pandemic's impact on our first half results. We plan to maintain these reductions through the balance of the year. We will also assess lessons learned during these difficult times and look for longer-term savings as we learn to do business in this new environment. Partially offsetting some of these savings are incremental COVID expenses to keep our employees and facilities safe. In closing, I want to thank again all our employees, especially our frontline heroes, for everyone's cooperation and efforts during these unprecedented times. We entered this pandemic with a healthy balance sheet and a well-seasoned management team. We are pleased with our performance to date, and assure you our team remains laser-focused to ultimately exit this pandemic healthy, with a bright future towards our long-term outlook. Thank you for your attention. I'll now turn the call over to Nathan.

All right. Thank you, Jim. Looking at the P&L, consolidated net sales in Q2 2020 were $247.9 million down $57.2 million or 18.8% versus Q2 last year. Our first half consolidated net sales were $502.2 million, down $86.7 million or 14.7%. As a reminder, we acquired the Pollak business from Stoneridge on April 1, 2019, and our sales in the first 6 months include incremental sales from Pollak of $9.5 million. By segment, engine management net sales in Q2, excluding wire and cable sales, were $142.8 million, down $39 million or 21.5%. For the 6 months, engine management sales, without wire and incremental Pollak sales, were down $60 million or 16.8%. The lower sales for the quarter and first 6 months were primarily due to the general economic slowdown due to the COVID-19 pandemic, with the greatest impact seen in the months of April and May, before a rebound of sales levels in line with 2019 during the month of June, as Eric noted earlier. Wire and cable net sales in Q2 were $34.7 million, down $5.8 million or 16.1%, and for the first half were $67 million, down $6.4 million or 8.7%. Temperature Control net sales in Q2 2020 were $72.4 million, down $12 million or 14.2%. And for the first half, sales were $123.8 million, down $29.5 million or 19.2%. Net sales in the quarter were primarily impacted by the pandemic, and followed the same pattern across the month of the engine management segment. While sales for the first 6 months were mainly impacted by very high preseason orders in 2019 that did not recur in 2020. As we've said before, the timing of preseason orders can vary from year to year, and typically are not indicative of how the year will turn out for the temp control segment. Our consolidated gross margin in Q2 2020 was 26% versus 29.1% last year, down 3.1 points. And for the first half, it was 26.8% versus 28.3% last year, down 1.5 points. By segment, engine management gross margin in the second quarter was 26.7%, down 2.6 points from Q2 last year. And for the first 6 months of 2020, it was down 1.1 points to 27.5%. Temperature control gross margin in Q2 2020 was 22.8%, down 3.9 points from 26.7% last year. And for the first 6 months, it was down 2.2 points to 23.1%. Margins at both divisions were impacted by lower sales volumes and unfavorable cost absorption due to lower production volumes. Consolidated SG&A expenses in Q2 were $48.3 million, down $12.2 million from Q2 '19 and came in at 19.5% of sales versus 19.8% last year. For the first half, SG&A spending was $104.2 million, down $16.3 million at 20.7% of net sales versus '20 impact of cost reduction plans put in place as a response to the economic slowdown caused by the pandemic. Our consolidated operating income, before restructuring and integration expenses and other income net in Q2 2020, was $16 million or 6.5% of net sales, down 2.8 points from Q2 2019. And for the first 6 months, it was 6.1% of net sales, down 1.8 points from last year. As we note on our GAAP to non-GAAP reconciliation of operating income, our performance resulted in second quarter 2020 diluted earnings per share of $0.52 versus $0.92 last year. And for the first half, diluted earnings per share of $0.95 versus $1.49 in 2019. The decrease in our operating profit for the quarter and first 6 months was due to lower sales in both the engine management and temp control segments, partly offset by lower SG&A expenses across the company. Looking now at the balance sheet. Accounts receivable at the end of the quarter were $184.5 million, up $49 million from December '19 and up $5.1 million from June 2019. The increase in our accounts receivable reflects the timing of sales during the quarter and, in particular, the very strong sales we experienced in the month of June. Inventory levels finished the quarter at $353.3 million, down $14.9 million from December 2019 and down $21.9 million from June 2019. The decrease from both year-end and June last year primarily reflects the sharp recovery in sales we experienced in June after having lower production levels in April in response to lower customer orders. Our cash flow statement reflects a $900,000 use of cash in operations in the first 6 months of 2020 as compared to a $19.5 million use of cash last year. The lower level of cash used during the first 6 months of 2020 was driven mainly by an increase in cash generated from working capital, helped by lower inventory balances resulting from the timing of changes in production and sales during the quarter. During the first 6 months, we continued to invest in our business and used $9 million of cash for capital expenditures, which was higher than the $7.6 million used in the first 6 months of 2019. Financing activities included $5.6 million of dividends paid and $8.7 million of repurchases of our common stock, both of which occurred during the first quarter of 2020. Financing activities also included $34.3 million of increased borrowings used to fund our operating requirements as well as our other investing and financing activities. Lastly, I want to talk a little further about our borrowing activities. At the beginning of the second quarter, we took several precautionary measures to increase our cash position and make sure we had ample liquidity. As part of these measures, we made a drawdown of $75 million from our revolving credit facility with the support of our banks and lending partners. As we began to see an improvement in our business during the second quarter, the higher sales and improvement in cash flow led us to repay the $75 million drawdown. To remind everyone, our credit agreement is an asset-based revolver, and we have the ability to borrow and repay as business conditions may warrant. As such, we continue to have ample liquidity, and we finished the second quarter with $22 million of cash on hand and $146 million available under our revolving credit facility. Finally, while we made the repayment on our revolver, we still remain cautious about the months ahead, as Eric and Jim mentioned. And our other cash conservation measures remain in place. Thank you for your attention. And I will now turn it over to the moderator to open up the call for your questions.

Our first question comes from Daniel Imbro from Stephens Inc.

Congrats on the quarter. Then, I want to start on the expense side, really impressive cost control, SG&A down 20%. I think in the past, you guys have said it's about 80% fixed, so really impressive controls there. Can you help us parse out, you mentioned the lower rates helping the finance costs of the receivables program. Is there any way to help parse out how much of an impact that was in the quarter versus how much of the 30 bps of leverage was driven by some of the cost removal? And then as you look to the back half, how each of those factors continued into 3Q and 4Q?

Yes. So Daniel, as you said, we've mentioned in the past, our SG&A costs are in that 75% to 80% range fixed, and the other variable, the factoring receivable costs, are, obviously, part of that variable bucket. I'd say, without getting into too much detail about rates and other things, the bigger impact on the factoring cost is really the sales levels in the dip there in the quarter. If you look at sort of that 75%, 80% fixed number that we've thrown out before, any other difference in savings that you see in the P&L is really the result of this cost reduction efforts that Jim mentioned as well as the lower sort of compensation incentives we're going to have this year just due to the results that we're experiencing.

Got it. That's helpful. Eric, you mentioned earlier that the supply chain is in a good state while trying to meet demand. Can you provide an update on your various manufacturing facilities? I know parts of Europe are performing better, so I'd like to hear about Poland's progress and any capacity constraints you might be facing.

Okay. This is Jim Burke. Speaking generally about all our facilities and specifically about Poland, the situation has changed significantly since March and April. Back then, we were trying to gauge order volumes and determine how long the demand fluctuations would last while aligning production with sales. Today, we are focused on meeting demand. As Eric mentioned, demand has steadily increased month-over-month throughout the second quarter. All our facilities are currently operating at full capacity. While we do face some minor disruptions due to COVID contact tracing, all our facilities are adjusted to meet demand. Poland, in particular, is performing very well, and we are pleased with the operations there. Fortunately, we have seen a decrease in COVID-related cases in that area. The business in Poland is thriving, both in the aftermarket for the U.S. and globally for original equipment and original equipment suppliers.

And last one for me, if I could squeeze it in. Nathan, you touched on the balance sheet, you guys paid down that debt, that should give you flexibility. How are you thinking about cash deployment here? And are you seeing any additional M&A opportunities out there in the market, as maybe some of your smaller competitors are struggling?

Yes. I think I'll hand that one over to Jim, Daniel, as he covers most of our M&A efforts.

Right. And again, okay, Stephen. Yes. So we paid down the debt, and we have the flexibility to draw on that. As Nathan explained earlier, that's there. From an M&A standpoint, we have a formal team that's in place, evaluating opportunities on a regular basis. So during the pandemic, while things seemed to have tightened a little bit in there between available opportunities, we still stay abreast. Many of them we wind up developing over time with relationships that are there. So I would say that we're pleased with Pollak fully integrated. We continue to look and evaluate opportunities going forward. And as something, if anything, we'll announce. But at this point now, we're still dealing with the COVID incidents and that. So nothing imminent, I would say.

And our next question comes from Scott Stember from CL King.

Congrats on a very good quarter. Eric, I think if I heard you correct, you said that in June, orders as well as POS retail, was running up. Could you kind of dimensionalize that? How that was running on an exit run rate? Just to give us an idea of what we could be looking for in the third quarter.

Sure. Let me clarify the two metrics you mentioned: customer sell-through and orders from us. We finished the quarter with orders from customers returning to what I described in my prepared statement as normal levels. This is what we observed at the end of the quarter regarding their purchases. However, there are promising signs of strong orders heading into the third quarter. When it comes to sell-throughs, their point of sale numbers exceeded last year's figures across all three divisions. It’s important to note that we don’t receive data from all customers, just enough to believe it reflects the broader trend, but this percentage should not be taken as definitive for all. In the engine management segment, we saw a decline in April, followed by an increase in June, bringing us to roughly flat year-to-date. Interestingly, in the wire and cable division, it slightly outperformed engine, and we are observing similar trends at the point of sale. Additionally, there seems to be a shift toward DIY projects mentioned by major retailers, which tend to focus on older technologies and product categories suitable for do-it-yourself tasks. Wire and cable, typically a category that sees declines of 7% to 8%, has been performing well. We consider this a temporary situation, but it’s an intriguing trend related to older technologies. Regarding Temperature Control, we need to consider the seasonal nature of the category. April and May are generally not significant, with June being crucial. This June was particularly hot, leading to a significant uptick in sales that we expect will carry into the third quarter.

And just to make sure when you're talking double digits for June in Engine Management and Temperature Control, we're talking POS?

POS. That is correct.

Okay. Understood. Moving on to the gross margins, you mentioned that this is a favorable challenge as business is growing very rapidly. However, it seems you've had to take some additional steps to meet this demand. How does this affect your gross margin targets? Last quarter, you provided us with updated gross margin targets. Could you share those again and explain how the recent changes in business operations might impact them?

Scott, this is Jim Burke. I'll address the facilities issue. Business has indeed picked up, and our manufacturing facilities are operating at full capacity. We are looking to hire more employees and also plan to increase our temporary staffing where possible. We are very pleased with our margins in the Temperature Control segment, especially in the second quarter, where Engine Management reached 26.7%. Our goal is to return to over 30% in that area next year. We anticipate a progressive improvement in our numbers as operations continue to ramp up and we expect a rise in volume. Temperature Control has also performed well, even though we noted a decline to 22.8%. With strong demand, we anticipate improved absorption and expect to get back into the 25% to 26% range. The situation regarding the pandemic still remains uncertain, but we are confident in achieving over 30% in Engine Management and 25% to 26% in Temperature Control, with aspirations to surpass those targets.

Got it. And if I could just ask one last question. You talked about some of the cost cuts in the quarter in management compensation. Is there a timeline of when that will come back online? Or at this point, are you guys planning for that to be gone for the remainder of the year?

I appreciate that, Jim. Regarding the discretionary cost controls that Jim mentioned, we will maintain our efforts to tighten expenses throughout the year. As we've said before, we won't undertake any actions that could harm the business; however, we will remain cautious with our cost management. Concerning executive and director compensation, as previously announced, this will also remain in place for the rest of the year. Regarding the significant issues I mentioned, including the temporary suspension of the dividend and the pause on stock buybacks, we do not have a fixed timeline for these. We will continue to assess and discuss with our Board regularly, but there is no specific timeframe for resuming those programs.

And our next question comes from Bret Jordan from Jefferies.

On the comment about wire being more of a DIY category. I guess, do you have a feeling sort of anecdotally, what percentage of your mix goes to DIFM versus DIY in this quarter?

It's a great question, Brett, and I wish I had a ready answer for you. We lose some visibility once our customers purchase it as to who their end consumer is. We think that there has been somewhat of a modest shift. It's going to be certainly more so in categories wherever do-it-yourself or has the capability. But we do think just some of those indicators, some of the older technologies that suggest that there's been somewhat of a temporary shift. And I think you're certainly hearing the large retailers saying the same things in their calls.

Right. Okay. And then, I guess, on the payable programs, did you see anything in the quarter, obviously, during the shock as far as either availability of factoring programs or the rates charged for factoring programs? And I guess, how is that available today as you see your order books pick back up?

Yes, Brett, this is Nathan. We didn't really see any changes in the supply chain financing program to factoring programs that you mentioned. The banks and the customers both continued to support those programs, so really nothing to report on that front.

Okay. One last question. With regard to the heavy-duty businesses you've expanded into through the acquisition, how did the demand for passenger vehicle parts compare to heavy-duty parts in the quarter?

Yes, that has become a recent focus for us. The biggest impact came from Pollak, which added 40 million in additional volume for us. You need to separate it into two parts: the original equipment (OE) segment of heavy-duty versus the aftermarket segment. The OE segment experienced a similar trend to the general OE market, with production cuts that are now starting to recover, although it faced challenges similar to those encountered by many OE and Tier 1 companies. It is definitely on the upswing. The aftermarket section also mirrored trends seen in general repair aftermarket, with a significant decline in April followed by a fairly quick recovery. Overall, it follows a trajectory similar to our core business.

And our next question comes from Robert Smith from the Center for Performance Investing.

Congratulations on the quarter, and I commend you for all you've done on behalf of your workforce. Most of my questions have been answered. I just have a couple more. Are there any initiatives that you've been considering or launching in the area of electric vehicles?

It's a great question, Robert. A relatively recent announcement towards the end of last year was that we entered into a joint venture with a company called CYJ in China, which manufactures electric compressors for electric vehicles. They are a small, young company but have great technology and excellent potential. One of the main things they were lacking was the horsepower that a company like Standard could provide. This was our most significant entry into the electric vehicle space. Additionally, even within our aftermarket programs here in the U.S., as we look at the new products we're introducing to the market, while they may not be specifically for the powertrain of electric vehicles, they include products related to vehicle active safety devices and other electronic controls. We recognize that there will eventually be a shift towards electric vehicles, and we are positioning ourselves to take advantage of that.

So is that an initial effort going to be the bedrock of where you're going? Or are you going to explore other opportunities as well?

We'll certainly continue to explore. And as it relates to replacement parts, we need to keep an eye on what parts of the system are failing that would fall within our logical product categories. And because the vehicle population here in the U.S. is so small and relatively young, we're still keeping an eye on what those categories will be. In the other area that we've been emphasizing for the last several years, it's not electric vehicles, but it is alternative energy is our compressed natural gas injection program coming out of our Greenville, South Carolina plant, which continues to really get some pretty good traction, especially in Asia, heavy-duty. And so again, while a lot of our business is related to the conventional combustion engine, we are looking to see how we can evolve with automotive technology.

Yes, that's encouraging. Do you have any comments about China, as such, with everything that's been going on between the United States and China back and forth?

Also a great question, and I can always count on you to ask good strategic questions, Robert. We're certainly, obviously, paying close attention to some of the new kind of geopolitical tensions between the U.S. and China. And so we need to make sure that we stay abreast, should anything happen. Right now, we're pretty committed to our footprint over there, both for what it brings back at low-cost products here for the North American aftermarket, but also heavily for the strategic intent of having a footprint there to sell into the fast-growing Chinese market. So while we're paying close attention to those tensions, at this point, we believe that we're comfortable with our strategy. We'll keep an eye on it, but we do think that the two countries are so linked that unwinding it, should that ever happen, will be a very long, slow process.

And finally, I just had a general suggestion that you really reconsider the question about the suspension of the dividend. And my strong recommendation is that you reinstitute the dividend as soon as you possibly can. And if business continues to recover during the remainder of the year, towards the end of the year, you consider paying an extra dividend to bring the rates for the year up to what it would have been. That's my suggestion.

Okay. Well, we hear you.

Robert, this is Jim Burke. Thank you for the suggestion. We are continuing to monitor the full year and our outlook. This will always be reviewed with our full Board. We stated that the suspension would be temporary, and we will keep monitoring it as we move through the rest of the year.

And it does appear that there are no further questions over the phone at this time.

Okay. With that, we want to thank everybody for joining our conference call today. Enjoy the balance of the summer. Thank you.

Thank you very much, everybody.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.