Larry Sills - Executive Chairman Eric Sills - President & CEO Jim Burke - CFO.

Scott Stember - C.L. King Robert Smith - The Center for Performance Investing.

Good day everyone and welcome to today's Standard Motor Products First quarter Earnings Release conference call. At this time, all line participants are in a listen-only mode. Later you will have the opportunity to ask questions during the Question-and-Answer Session. [Operator Instructions] Please note, this call maybe recorded.

It is now my pleasure to turn the program over to Mr. Larry Sills, Executive Chairman of Standard Motor Products Incorporated. Please go ahead sir..

Good morning everybody and welcome to our first quarter conference call, and thank you all for attending. Here from the company is Eric Sills, President and CEO; Jim Burke, our Chief Financial Officer; and myself Larry Sills, Executive Chairman.

Our plan for the morning is that, first, Jim will review the numbers and then Eric will review a few highlights from the quarter. And then I'll close it and then we'll open for questions. So without further ado, Mr. Burke..

Thank you, Larry. As a preliminary note, I would like to point out that some of the material we will be discussing today may include forward-looking statements regarding our business and expected financial results. 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. Looking at the P&L, consolidated net sales in Q1 '16 were $238.9 million, up $11.3 million or 5%.

Overall, on a consolidated basis sales and gross margin percentages were up for both engine management and temperature control. By segment, engine management net sales in Q1 '16 were $180.7 million, up $3.6 million or 2%. This was within our expectations for low single-digit growth.

Temp control net sales in Q1 '16 were $56.8 million, up $8 million or 16.5%. The strong temp control sales growth in Q1 is timing-related to receiving and shipping early pre-season orders. We always caution not to read too much into a single quarter sales results for either engine management or temperature control.

The temp control sales in Q2 and Q3 will define how good 2016 we enjoy. Consolidated gross margin dollars in Q1 were $9.1 million and favorable 2.5 points were off $9.1 million favorable 2.5 points. By segment, engine management gross margin was 31.7%, up 2.5 points versus Q1 '15.

Our engine management margin percentage rebounded nicely from last year when we incurred costs to enhance our remanufactured diesel fuel injector line. We are pleased with the results of our diesel enhancement program and other initiatives to expand our in-house manufacturing which drives our margin improvements.

Temp control gross margin was 24.8%, up 4.6 points versus Q1 '15. Similar to engine management, temp control margins were negatively impacted by one-time items last year related to higher than normal unfavorable manufacturing variances carried over into the first half 2015 from 2014. We anticipate that our temp control margin in the.

23% range for Q2 '16 based on amortization of manufacturing variances as inventory returns, this compares to 19.4% gross margin in Q2 '15 while we were still absorbing the higher unfavorable variances from '14. The second half of 2016 temp control margins will be dependent upon production levels driven by the summer selling season.

We continue to target temp control margins in the 23% to 24% range. Total SG&A expenses were $53 million in Q1 and 22.2% of net sales versus 21.6% last year. This spending level is within the $52 million to $54 million quarterly level we forecasted for 2016 in our last quarterly earnings call.

Consolidated operating income before restructuring and integration expenses and other income net in Q1 '16 was $20 million, 8.4% of net sales versus $14.7 million, 6.5% of net sales last year. The net effect of our operational results as reported on our non-GAAP reconciliation was Q1 diluted earnings per share of $0.55 versus $0.40 last year.

Looking at the balance sheet; accounts receivable increased roughly $19 million from December '15 level reflecting higher sales in Q1 '16 compared to the fourth quarter last year. Inventories increased roughly $15 million against December '15 as we move into the peak Q2 and Q3 summer season.

Accounts payable also increased roughly $14 million from December, partially offsetting the working capital build in AR and inventories. Total debt at $49 million was up slightly, $2 million from December '15 to support our working capital needs as during the summer season.

Our cash flow statement reflects a $1 million use of cash in operations as compared to a $14 million use of cash in the first quarter of '15 last year.

The $13 million improvement from operations is primarily due to stronger earnings, lower level of accounts receivable increase, and increase in accounts payable, partially offset by a higher increase in inventories.

In summary, we are very pleased with our Q1 '16 results that reiterate our expectations in 2016 for sales increases in the low single digits gross margin improvements, SG&A spend levels, $52 million to $54 million range per quarter overall resulting in operational performance improvements. Thank you for your attention.

I'll now turn the call over to Eric Sills..

Good morning, everybody. It's a pleasure to be with you today.

Jim has going over our Q1 numbers and obviously, we're pleased with the results, especially the profit improvement and these improvement -- it's a combination of these non-recurring items that we've been talking about that are now in our rearview mirror but it is also related to just our ongoing initiatives to improve our business.

So I thought I'd spend a few minutes hitting some of the highlights of what those initiatives are to just give you a little bit of the flavor. And they fall into two different categories; some on the cost improvement side and some on the gross side, so I'll start with cost improvement.

And I just want to highlight two main areas here that we are working on. The first has to do with our ongoing pursuit of being a more basic manufacture, tooling more products earlier in the life cycle so that more of what we sell is manufactured by us.

This is nothing new to us, we've always been committed to being a basic manufacturer but over the last few years we've really stepped up our efforts in this area, we've been growing our engineering departments at our nine different design centers, and over the last couple of years we've increased our staffing in these areas by about 20%.

And so we're pleased with the results and it certainly helps us with our cost structure but it also helps us with our quality control and our ability to service our customers for better control of the supply chain. And quite frankly, we believe it provides us with a competitive advantage.

We believe that our customers want to be doing business with the manufacturer and not just a reseller of product so this is an area that we continue to be committed to doing and we're seeing the results of it. The other area of cost improvement is our ongoing drive to be a low cost manufacturer.

In our February call, we announced -- our Q4 '15 call we announced the closure of our Grapevine Texas facility. To remind you what we're doing there, we are closing this factory, relocating manufacturing to both Mexico and to Greenville, South Carolina.

At the same time we're moving a large product line out of South Carolina to our low cost plant in Poland. This is a project that will take us approximately two years, so we'll be complete by the end of 2017.

And all said and done, it's going to generate ongoing annual pre-tax savings of about $6 million to $7 million with one-time cost to get us there. Without $9 million these one-time costs will be offset somewhat by the sale of our Grapevine property which will happen at the end of this and that's been appraised at approximately $5 million.

This is -- we're still in the early stages of this, we haven't begun moving anything yet but we are on-schedule, we are on plan, and we think this will be very good for us going forward. Moving over to growth, I thought I'd hit on just a couple as initiatives that we were working on beyond just growing with the natural growth of the industry.

What are we doing to expand beyond that? We're always looking to find complementary product lions that we believe makes sense as enhancements to our core engine management business.

And just to give you a flavor of a few of these; none of them is that large by themselves but they are growing very nicely and we think they make very nice compliments as we continue to look to evolve our offering. Starting with our TechSmart product line, this is our line for a unique problem solver type parts.

We only launched this back in 2011 so we're five years in, and it is doing very well year-over-year, high double-digit growth. Rental [ph] embraced by a large portion of our customer base so we're very pleased with how TechSmart is doing.

Diesel; I guess we've said a number of times, we'll finally stop saying that the pain of fixing the line is behind us, we are now into the growth mode and it too is doing very nicely, we believe it is being well received by the customer, we are broadening, expanding the line and diesel is -- we're very pleased with how it's doing, and we think it has great potential going forward.

Another one which is really just announced, we have just announced the launch of line of new master airflow sensors, so it's too early to really tell, we've really only just begun but we believe we have a very compelling story here, it's being -- it's garnering a lot of customer interest and when small we think we have a nice program here.

And just lastly, I thought I'd spend a second on our alternative energy program. We recently had an announcement that we were launching a website about it.

Just to clarify what we are doing, the website is new, the business we've been in for a few years, the centerpiece of it is compressed natural gas fuel injectors which we sell largely to Asian heavy duty market, this is the market that's really embraced this technology.

So it's a small business but we think it's a very nice niche business for us, one that really capitalizes on our core competency of fuel delivery. So it's just a nice complement to what we do. That's just a flavor of some of the different product offerings that we are always launching to broaden our overall program, and we're pleased with all of them.

So in summary, we have a lot going on but I think we have a great team here at SMP to drive it through. And so we're really very excited about the future. And with that I will pass it back to Larry..

Okay. Well that ends this portion of the call. Before we open for questions, I just want to take this time to express our appreciation for all the folks at our company who are -- making Standard a successful organization and publicly, thank all of you. So with that, let's open for questions..

[Operator Instructions] And we'll take our first question from Scott Stember from C.L. King. Please go ahead..

Good morning guys. Just a question on temperature control, I know that in the fourth quarter we had some inventory rights arising by your customers then in the first quarter it seems that that reversed itself.

And with this kind of sales that we saw in for the channel in the first quarter what kind of -- just generally speaking and also factoring in the cost cutting when they were say you have in place to right-size the business what kind of sell-through rates do you need to see if you can qualify it in order for this business to have a decent year no matter what the weather is?.

We've said a lot of things in the past about temp. And we have one overall guiding rule, since the season is unknown, we don't know it could be higher than that, some will be hot and some won't. In the long run it balances out.

We try to send ourselves a cost-based situation such that if it's a cool season, we do pretty good and if it's a hot season, we do very well.

And that's our overall strategy here I can't tell you if it could be hot or not at this point but I can tell you that if it's a cool season we'll have decent numbers, if its hot season, we'll have excellent numbers.

Did that answer your question?.

Yes, it does, but I was just also trying to dial into -- I know that over the last year to two years just given some of the weakness in the segment that you have streamlined and right-sized the business, can you maybe just talk about how you stand now from a cost perspective versus where you were let's say two to three years ago before we had the last cool summer or the last warm period? Just to where do you stand and how much better prepared are you for even just an average -- just the lower than average selling season?.

Right. The guidance that we've previously stated at the 23% to 24% range we were looking at that as an average season that we're looking at. But since -- that we've put that guidance out, we announced this major restructuring and moving out of Grapewine.

So we look to improve upon that as we go but again, that will be not completed until the end of 2017..

However, over the last several years we have done a great deal to lower our costs. The majority of our manufacturing is already in Mexico.

This is really the final piece getting out of Texas and a couple of years ago as you recall, we also entered a joint venture in China called GrowYang [ph] for less technical parts of the line accumulators, filter driers, hose assemblies, and so on. So our cost structure on that portion of temp control is also improved.

So we think that from a product cost standpoint, we're in good shape. As Jim mentioned, once we complete the closure of Grapevine -- at that point essentially all of our manufacturing for temperature control is going to be in low cost areas and that allows us to be able to flex well with the season..

Perfect. And just last question, on the $9 million of costs -- of economic cost related to the move or these maneuvers that you've taken place over the next couple of years, I think on the last call you talked about some of it being cash flow versus actual expense.

Could you maybe just clarify that one more time so we know exactly how much to look for to be hitting the P&L and also the timing of when that could hit?.

The $9 million of it is going -- I think to be basically all cash flow. The bulk of it – I don't have the numbers in front of me again, the bulk of it will be identified in our restructuring. Again what we classify and put in that area would be closure costs for severance, for move of -- inventory move of appointment that's in there.

There will be some redundant cost during this period of time which will be over the 2016-2017 period that will roll-through, all of it rolls through our P&L but we won't be able to capture that because we don't attempt to try to identify what we're establishing the new area what we have for redundant costs that are in there only very concrete and specific severance and freight costs and move costs that's in there.

But all of the $9 million is basically going from memory now, cash flow also..

Some is expense, some is capital..

Yes..

In the back half of the year, I imagine that's when this will start to accelerate.

Any related redundancies and cash flow?.

The redundancies will be a little -- it will have in '16, its smaller in '17, that's in there and I'm trying to remember now in capital, we're probably in that $2 million, maybe $2.5 million of that piece there..

Got it. That's all I have, thanks for taking my questions..

Thank you..

And we'll take our next question from Brad Jordan with Jefferies. Please go ahead..

Good morning, gentlemen. It's David Kelly [ph] in for Brad at this point. Thanks for taking my questions, a couple ones and first on the interim management. I know a couple retailers pointed out a sequential slowdown, and just general demand as the first quarter progressed.

I was wondering if that was something you saw? And in the engine management, maybe if you could provide some color on cadence in that segment throughout the Q, that would be great..

We didn't necessarily assume that same type of slowdown towards the end of the quarter. And as I think, our -- the timing of what they are ordering from us is offset from what they're selling out the door, so typically there is a little bit of a lag.

But we have -- we did not see that slowdown and they are also talking about their overall hundreds and hundreds of lives, not ours, in particular so, we did not see that..

Okay, great, good to know.

And then and then a quick follow-up on temperature control, how are customer stocking levels as we head into this prime selling season? If we were to observe say an above average war May or June, are we looking at a substantial restocking effort at the customer level or is there sufficient inventory out there to absorb let's say it's some potential rising demand here?.

Their inventory is holding relatively flat. As I said their pre-season orders came in a little bit earlier this year and that differs year to year. So we think that they are in good shape for the selling season but we work closely with them looking at their sales out and collaborating with them on those pipeline orders.

We think that they are in good shape for the season..

Okay, great, thank you. And then one more for me and I'll jump back in the queue here.

You mentioned the investment and engineering staff, and some of the reverse growth there -- how much of that is related to TechSmart? And maybe if you could provide some color on that business in particular and your expectation going forward and maybe the market potential for TechSmart several years down the road?.

Our engineering is not as across all of our product lines and some of it is TechSmart and some of it is other aspects of our business, we've been investing in all those areas. What do we see for TechSmart going forward; we have a reasonably tight definition of what we wanted it to be which is we don't want it to be every oddball part out there.

It will stay reasonably close to engine management but it will be the semi-peripheral products where we believe that there is no need to have full coverage on it because it only fails in these particular applications or we have the ability to address a specific OE deficiency with some type of a problem solver.

So it's a complement to our engine management business, kind of sits on the periphery of it and we -- again, we're seeing very nice growth on it but it's an addendum to our core business..

All right, great, thank you. I appreciate the color and I'll pass it along. Thanks..

Thank you..

And we'll take our next question Carolina Jolie [ph]. Please go ahead..

Good morning.

So just excluding some of the one-time expense, expenses such as startup cost for the fuel injectors and the carry forward -- the negative manufacturing variances, can you give us a rough idea of the gross margin experience throughout the quarter? And any specific factors that you might look at which will get you to the higher end of the 23% to 24% target?.

It was really -- it was the prior year that we had the unfavorable or one-time items that rolled in, so really 2016 is -- per say return to normal. So we're pleased with the margin percent in both, engine management and temperature control; temperature control was very strong.

What I pointed out was in Q2 because of just the flow of variances, it really drags about anywhere from three to six months. So we're -- if lower production in the fourth quarter rolls through in Q2, so we said be in the 23% range but you could look to 2016 as normalized production, normalized gross margins..

Okay, great, thanks.

And then also just an answer to your previous question, you mentioned a lag -- the retailers orders, can you quantify how long that lag is?.

I'd rather say roughly 30 to 60, it depends on how volatile the demand changes is at the retailer but you figure that their re-order cycle is -- by the time they react 30 days behind what they are seeing out of their charts..

Great, thanks a lot..

I'd just say to that, it would not be a direct correlation between the retailer same-store sales, what they are reporting on a month-to-month because within the supply chain you'll still get movement in inventories at the distributor level where they're building for certain seasons..

And we'll take our next question from Steve McManish [ph] from Sidoti & Company. Please go ahead..

Hey guys, thanks for taking my questions. So first one, looking at the diesel rebuild which I guess had about $6 million impact in 2015. How heavily weighted with that to the first quarter and maybe even the second quarter of last year -- just looking forward..

It was the impact of -- well, for everybody else on the call, we called out there was about overall about $10 million last year with the bulk of it being in the first half. And without specific numbers it was weighed a little bit more towards the first quarter than the second quarter that was there..

Okay, great, that helps a lot.

I don't think you guys mentioned a constant currency figures, was there any impact there in the quarter?.

No, last year we were impacted in the sales, primarily there, so within the first quarter as we measured it to the prior year's quarter was negligible. So no real currency impact to disclose..

Okay, great. And then can we get an update on the TPMS program, the kind of growth you guys are seeing in there, any color there would be great..

Our TPMS business continues to be robust, we're pleased with it.

It's -- I think what we're seeing to a degree and is that the battery -- I think the whole industry thought that the battery life was going to be in that five-year range and it's proven to be a little bit longer than that, 7/8/9 years but we are now starting to come into that sweet spot of you call that this hit new car production that started in 2008, so we're now in the eight year of it.

And -- so we continue to have good customer acceptance of our product here. It is a competitive field, there are a lot of good competitors there to share the space but we're pleased with it. Also as you recall, we are a minority owner of our supplier in Taiwan, Orange Electronic, and they are doing extremely well overseas with their program in Asia.

So not only are we happy with what we're seeing here, in our domestic market our partners doing very well as well..

Okay, great. Thanks a lot guys, appreciate it..

Thank you..

[Operator Instructions] And we'll take our next question from Robert Smith from the Center for Performance Investing. Please go ahead..

Good morning and thanks for the encouraging outlook.

The TechSmart, so you said your five years into the line and with high double-digit growth, can you give me an idea as to volume that you're doing now?.

We really don't break out product line specific information. It is doing well, the growth has been very positive..

And alternative energy -- you said that -- it's principally Asian but there is a growing effort here in this country in compressed natural gas and liquid natural gas vehicle, so do you see an opportunity here as well?.

We absolutely do, it's -- kind of caught hold quicker over in Asia. The big one – the biggest challenges is about refueling. And there is more refueling stations in China than there are in the U.S. and so that slowed adoption here for over the road CNG applications. The low price of oil has I think further delayed real commitment here in the U.S.

to convert to CNG systems. But without a doubt the whole world is looking at alternative energies, not just from a fuel efficiency standpoint but from an environmental standpoint. We think we have a good program, we have a good partner, who is system integrator putting our injectors in with their overall fuel delivery system.

They have a solid market share and so we're going to -- we think the U.S. certainly has good potential..

It would be a turnaround move for further production to Mexico and Poland; do you have any concerns about growing sentiment here about bringing off-shore production back to the space?.

I'll answer the political question. I frankly think that everyone is talking about it but there frankly isn't that much that can be done. We're all in a competitive environment, and we will do the best we can and whenever we do move something which we hate doing -- as we talked about the last call.

We do everything we can to make the transition easier for our employees, so that's all we can say..

And just finally, there has been quite of a bit of publicity, recently on robots.

So you're doing much in the area of robots?.

You're referring to autonomous vehicles?.

No, manufacturing..

Within our manufacturing, we have different levels of automation depending on what the particular product cause for; some of our more sophisticated products require automation for quality control and process capability.

So we will -- I mean if you walk through any of our plans you're going to see some of the highest tech stuff, you're also going to see things that are more manual and more flexible for our slow moving items. So we have a wide array..

Thanks so much. Good luck..

Thank you..

[Operator Instructions] And it appears we have no additional questions at this time..

Okay. So we have no further questions, I'd like to thank everybody for joining our call today. Good bye..

This does conclude today's conference. You may disconnect at any time and have a wonderful day..