Good morning, everyone. Welcome to today's Standard Motor Products First Quarter 2024 Earnings Conference Call. Today's call is being recorded. Now I'd like to turn the call over to Mr. Tony Cristello, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Bo, and good morning, everyone. Thank you for joining us on Standard Motor Products First Quarter 2024 Earnings Conference Call. With me today are Larry Sills, Chairman Emeritus; Eric Sills, Chairman and Chief Executive Officer; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer. On our call today, Eric will give an overview of our performance in the quarter, and Nathan will then discuss our financial results. Eric will then provide some concluding remarks and open up the call for Q&A. Before we begin this morning, I'd like to remind you that some of the material that we'll 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 Sills, our CEO.

Thank you, Tony, and good morning, everyone, and welcome to our first quarter earnings call. Let me open by thanking all of our employees around the world for their tireless efforts as we enter our 105th year. So it's fair to say that our first quarter results were mixed. We're pleased with our top-line performance where we set a record for first quarter sales. However, as expected, our profitability continued to lag, demonstrating some of the challenges in keeping up with inflationary pressures. Let me get into the details best explained at the segment level, starting with Vehicle Control. After a soft fourth quarter, we are pleased to see a nice rebound in sales. We were up about 0.5 points over 2023, which was a challenging comparison as Q1 of 2023 was very strong, up more than 4% over the previous year. After a soft end to last year, we are pleased to see a return to more normal demand. Customer POS was soft in the quarter, though again, it's being compared to a very strong sell-through last year. Turning to Temperature Control. As you well know, the first quarter is not indicative of how the year will turn out. This is the time of year that we ship customers their preseason orders and as those can ship in late Q1 or early Q2, it can affect the numbers. Ultimately, this division will depend on the total season and its dynamics: when it gets hot, how hot it is, and where and for how long it stays that way. So let's see how the year behaves. On to Engineered Solutions. The year is off to a strong start for sales, up 4.5%, hitting a single quarter record. As discussed, this segment is highly fragmented, with multiple end markets, multiple geographies and a highly diverse customer base with no account greater than 10% of sales. As such, you can see some volatility quarter-to-quarter in terms of customer and market channel mix. Overall, we're very pleased with how we're doing. As we've been saying over the last few years, we've been gaining real traction as we get known as a capable supplier of a broad array of products and technologies. We've been awarded new business and are continuously managing a very healthy pipeline of opportunities. It's important to note that we need to keep the funnel of these opportunities full as items go through their lifecycle much faster than the aftermarket. But I believe we are demonstrating our ability to do that and grow this new segment. I'd like to spend a minute talking about our progress on a new state-of-the-art distribution center in Shawnee, Kansas. We've been discussing this for the last few quarters, but I'll remind you of what we are building and why. About a year ago, we decided to expand our distribution capacity as we've been operating out of our existing footprint for many years while our volume and SKU count have grown. We leased a brand new 575,000 square foot facility, about 5 miles from our existing Edwardsville, Kansas location, giving us about 200,000 additional square feet. In time, this will replace our Edwardsville location as we move that operation in. Additionally, we plan to distribute the A and B movers currently handled out of our Virginia and Texas distribution centers, which will allow us to provide better service to our customers in the West and North. It will also provide risk mitigation for us as we will move from single point to multipoint distribution. We're pleased to announce that we have started shipping Vehicle Control products to certain customers in April, and it's going very well. We've begun with manual operations while we build out our automation, which will take place over the balance of the year. We then plan to move in stages over the course of 2025, and when complete, we will likely be able to sell our Edwardsville facility in 2026. In the near term, we are incurring additional expenses, and Nathan will provide details, but once complete, we will exit many of the duplicate costs and will be well positioned for the future. Lastly, let me discuss some of the issues we've been experiencing on the cost side that are causing continued pressure on profitability. I'll keep it at a high level, and Nathan will provide more details. Overall, as expected, our profitability is down from last year, though for different reasons in the aftermarket versus Engineered Solutions. In the aftermarket, we are pleased that we've been able to maintain our gross margins. The pressures have affected SG&A where we continue to experience elevated expenses tied to our receivables factoring programs, as well as certain other areas. In Engineered Solutions, while operating expenses have remained stable, the downward pressure has been on our gross margins, which then dropped through to the bottom line. We have been experiencing product cost inflation, partly for material costs, but more so related to significant wage increases in Mexico and Europe, where a great deal of our Engineered Solutions volume is produced. We've also seen a modest mix shift over the last two quarters, which can fluctuate based on normal ebbs and flows of demand, and this too is impacting our margins. Also, to reiterate, we are experiencing a planned and temporary increase in spending on our new distribution center. Both here and in the aftermarket, we continue to work aggressively at cost reduction and pricing with teams in place looking at all of the levers, and believe we will see incremental relief in the quarters to come. So with that, I'll turn it over to Nathan, who will dive deeper.

All right. Thank you, Eric. As was noted earlier, the first quarter of the year largely turned out as expected as sales, operating profit, and earnings per share were in line with the expectations we laid out in our last call. As we go through the numbers, I'll first provide some color on the results by segment and at the consolidated level, then cover some key balance sheet and cash flow metrics, and finally provide a brief update on our financial outlook for the full year 2024. First, looking at our Vehicle Control segment. You can see on the slide that net sales of $185.5 million in Q1 were up 0.5%, with the increase driven by solid demand for our products across all categories. Vehicle Control's adjusted EBITDA was 10.4% of net sales for the quarter, which was down from last year. Looking at the drivers of EBITDA for the quarter, the gross margin rate for Vehicle Control in Q1 was flat with last year as cost savings and pricing offset inflation and cost of goods sold. However, SG&A expenses increased in the quarter mainly due to inflationary increases, which I'll touch on later. And factoring expenses increased $0.9 million as a result of higher interest rates, and those increases resulted in lower adjusted EBITDA in the quarter. Turning to Temperature Control, net sales in the quarter for that segment of $71.6 million were down 1.1% as we saw a slight variation in preseason ordering patterns versus last year. But keep in mind that the first quarter is not indicative of the full year in this seasonal business. Temperature Control's adjusted EBITDA in Q1 of 4.7% was 0.1 points better than last year. The improvement was driven by a higher gross margin rate that was bolstered by savings initiatives, which were partly offset by inflation and SG&A costs. Sales for the Engineered Solutions segment in the quarter were up 4.5%, as we were pleased to see our sales continue to increase as a result of strong demand and new business wins with both existing and new customers. Adjusted EBITDA for Engineered Solutions in the quarter was down from last year, primarily due to cost inflation, the drivers of which Eric noted earlier, and an unfavorable customer sales mix in the quarter, which resulted in lower gross margins for the segment. We also saw some inflation in SG&A costs in this segment just as we observed in the aftermarket segments. Turning to our consolidated numbers, the change in our net sales and margins versus Q1 last year was the result of the changes in our segments as highlighted. Regarding consolidated SG&A, expenses were up versus last year and were 19.5% of net sales in the quarter. I noted our costs were elevated across our segment results, and let me provide a little more color on the drivers at the consolidated level. You can see on the slide that costs were up $4.2 million, and this included $1.1 million of start-up costs related to our new distribution center. Excluding these costs, expenses increased $3.1 million or about 5%. The increase included elevated distribution expenses across various costs, including higher lease expenses in certain locations. As we look to offset some of the inflation headwinds on operating expenses, we will be reviewing levers to reduce our costs going forward. One final note on our consolidated results: you can see the cost of customer factoring programs increased by $0.9 million in Q1. But I would point out that we can see the cost of those programs leveling out now that interest rates have been more steady, albeit at a much higher level than several years ago. Turning now to the balance sheet: accounts receivable were $203.9 million at the end of the quarter, and inventory levels finished Q1 at $520.7 million, with both balances in line with March last year. Increases in receivable and inventory from December 2023 related to the seasonal increases in sales and preparation for the Temperature Control selling season. Our cash flow statement reflects cash used in operations for the first quarter of $45.7 million as compared to cash used of $20.4 million last year. Cash used in operations last year was aided by a reduction in inventory balances that did not recur this year after we brought inventory back down to normal levels through 2023. Our investing activities show an increase in capital expenditures this year of $5.7 million, which includes $2.6 million of investment related to our new distribution center. Financing activities show borrowings on our revolving credit agreement of $58.7 million in the first quarter, which were used to fund operations, capital expenditures, and pay $6.4 million of dividends. We also began repurchasing shares under an existing $30 million authorization from our Board and repurchased $2.6 million of shares during the quarter. We continue to purchase shares in the second quarter. As we noted in our release this morning, we purchased an additional $3.5 million through April 29 for a total of $6.1 million repurchased so far this year. Our net debt of $187.7 million at the end of Q1 was much lower than last year, and we finished the quarter with a leverage ratio of 1.6x, which is lower than last year's ratio. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2024. Regarding our top-line sales, we are maintaining the expectations we outlined previously and expect full year 2024 sales to show flat to low single-digit percentage growth. We're also maintaining our expectations for adjusted EBITDA, which we expect to be in a range of 9% to 9.5%, essentially flat for 2023. This estimate continues to include factoring expenses of $45 million to $48 million, largely flat with 2023, as we remain in a high and uncertain interest rate environment, the U.S. dollar that remains at a multiyear low against key currencies in Mexico and Poland, and some additional costs related to the expansion of distribution capabilities in our new warehouse in Kansas, which we estimate will have incremental costs of $5 million to $6 million in 2024. In connection with our adjusted EBITDA outlook, we expect our interest expense on outstanding debt to average about $3 million to $4 million each quarter, and we expect our income tax rate to be 25%. Borrowings are expected to remain roughly flat from December 2023 to December 2024 as cash flows normalize, and we look to invest approximately $25 million in our new distribution center while returning cash to shareholders via dividends and share repurchases. Regarding operating expenses for the full year, please keep in mind our operating expenses are incurred ratably across the year and do not necessarily vary with top-line sales, as the majority of these costs are fixed in nature. As such, we anticipate total operating expenses, inclusive of factoring, to range from $76 million to $82 million for each of the last three quarters of 2024. To quickly wrap up, we were pleased to see our sales increase in Q1 despite slightly slower preseason orders in Temperature Control and to turn in results in line with our forecast, while also increasing shareholder returns through share repurchases in the quarter.

Thank you, Nathan. In closing, I'd like to spend a minute on how we are thinking about the future. The aftermarket continues to be a strong and stable market. All signs suggest that after a few years of unusual demand behavior coming out of the pandemic, it has returned to its historical long-term trend of low single-digit growth. This makes sense when you consider the basic dynamics of the addressable market, where changes happen slowly but in the right direction. The car park slowly gets larger and older, miles driven have returned to stable levels. People are keeping their cars longer, especially in light of the high cost of new vehicles. When you put these together, they add up to slow growth. We recognize that the record inflation over these last few years has posed challenges to consumers. While this could dampen discretionary purchases, much of what we sell is nondiscretionary in nature. Engineered Solutions is more difficult to summarize as it is so diverse in end market, customer, product, and geography. But as we've been saying, we believe our sales trajectory will be less determined by ebbs and flows in these markets, as it will by gaining and launching new business wins and building on those wins. It's obviously not lost on us that we have work to do to return to our historic margins, and we are focusing diligently on this. So overall, when you put it all together, the long view remains quite positive. That concludes our prepared remarks. At this point, I will turn it back over to the moderator, and we'll open it up for questions.

We'll go first this morning to Scott Stember of ROTH MKM.

Eric, you talked about how, I guess, the weakness that we saw in Q4 sort of reversed and that things are back to normal yet. On the other hand, you talked about POS being a little soft. Is that more just a function of tough year-over-year comparisons? Or is there something else going on?

I think that's a fair statement, Scott, that it is more about the fact that the first quarter of 2023 was really quite strong. If you think about POS trends coming through the fourth quarter of last year and into this year, last year, we saw a sequential erosion of that POS month-over-month. That continued a bit into January of this year, and now we've started to see a bit of a rebound. So if you look at the whole quarter this year, POS was a bit soft. But I think that it also reflects more of that return to where we'd expect it to be.

So when you say soft, are we talking flat or down slightly for the whole quarter?

It moderated throughout the quarter. Overall, it was roughly flat. There were some periods and some customers that were a little bit up or down from that. But overall, that's what we saw.

Got it. And then on the engine solutions side, it looks like most of the growth came from the other segment. Is that UTV mostly, or is there something else in there? And what's driving that?

We don't go into the specifics of what's behind it. That 'all other' category has many different end markets, from motorsports to lawn and garden, hydraulic, and stationary engines. There are lots of different pieces in there. As we always say, there's going to be some movement quarter-to-quarter based on the build schedules of the customers within these. So I wouldn't read too much into the fact that any subsegment goes up or down in a quarter.

Got it. And my last question is just on the margin side. You talked about, I guess, labor, wages and things like that. How are you addressing that? And what is a good margin? I guess, where do we look for the margin to eventually land in a more normalized environment for this segment?

And Scott, just to be clear, this is on the Engineered Solutions segment you're asking about?

Yes. Yes.

Yes. So Scott, looking at the gross margin, in the past few years it has fluctuated between 18% and 20%. As we work to counteract cost pressures and reduce expenses in this area, we aim to return to that range. Additionally, regarding the adjusted EBITDA, we anticipate that segment will also continue to align with the aftermarket once the challenges ease.

We go now to Bret Jordan at Jefferies.

Could you talk about Temperature Control inventory at the customer level? And in Q1, how are we year-over-year?

Sure. And I think you can't just look at it after Q1, but as they're building up their entirety of their preseason orders, which did continue into the beginning of Q2. Basically, they're in good shape for the season, maybe slightly above where they were going into last selling season, but they're healthy and where they would want them to be. Ultimately, it's about what happens with the weather. So we hope that begins over the next few weeks and lasts for a long time.

All right. And you talked about new customers. Was that primarily the Engineered Solutions or did you pick up new customers in the aftermarket as well?

That's correct, Bret. We're referring specifically to Engineered Solutions. Not so much new customers as new awards with existing customers, although there is a little bit of that as well. One thing to kind of characterize what happens in that industry is that it's a lot of base hits; it's not like you're landing a new platform with a light vehicle manufacturer and all of a sudden, it’s a multi-million dollar award. It’s a lot of base hits, and we have been getting those.

Okay. And then final question, I guess, on pricing outlook. We've seen most of the inflation pass-through, or is there still something to come to offset the continued high rates?

Yes. Look, it's a competitive market, as you well know. Pricing is not easy to come by. We continue to work with all of our customers where we can to share with them what we're experiencing with cost inflation. So nothing specific to report. We continue to work on it, but it is getting tougher.

We'll go next to Carolina Jolly at Gabelli.

So just a quick question. In terms of industry commentary, it seemed like there was a weak start to the spring selling season in some areas of the industry. Given your inventory and category mix, do you have exposure to that underlying trend?

I'm not sure I completely understand your question. Are you asking whether we're tracking with the overall numbers of the large public companies as they report?

It seemed that there was more of a DIY mix.

Yes, most of our products are not meant for do-it-yourself installation. While some more experienced mechanics can handle certain tasks, the majority of our offerings require professional installation. This distinction relates less to whether the customer is DIY or DIFM and more to whether the purchase is discretionary or nondiscretionary. Most of what we sell falls into the nondiscretionary category. Although some consumers facing economic challenges might delay purchases, essential items like power products are typically urgent needs, and if a vehicle requires them, customers will buy them.

And gentlemen, it seems there are no further questions today. Mr. Cristello, I'll now turn it back to you for any closing comments.

Okay. Thank you. Again, we want to thank everyone for participating in our conference call today. We understand there was a lot of information presented, and we'll be happy to answer any follow-up questions you may have. Our contact information is available on our press release or Investor Relations website. We hope you have a great day. Thank you.

Thank you.

Thank you, gentlemen. Ladies and gentlemen, that will conclude the Standard Motor Products first quarter earnings conference call. Again, thanks so much for joining us. We wish you all a great day. Goodbye.