Good day, and welcome to the Standard Motor Products Third Quarter Earnings Release. [Operator Instructions] It is now my pleasure to turn the program over to Mr. Larry Sills, Executive Chairman. Please go ahead, sir..

Thank you, Erika. Good morning, everyone. Welcome to Standard Motor Products third quarter conference call, and we thank you for attending. Here for the company, we have Eric Sills, President and CEO; Jim Burke, Chief Operating Officer; third, we welcome Nathan Iles, our new CFO; and then finally myself, Larry Sills, Executive Chairman.

Our agenda will be, Jim will begin by reviewing the numbers, Eric will highlight a few key areas and then we'll open for questions, and we thank you again for attending. I turn it over to Jim Burke..

Okay. Thank you, Larry. Before I begin, I'd like to ask Nathan, just to comment on his first 30 days or so with SMP..

All right. Thank you, Jim. Good morning, everyone. It's very nice to be here and to have joined the team at Standard, and I thought it would be good to particularly highlight what I've been doing since I joined the company.

Over the last month-and-a-half, I've had the opportunity to spend a couple of weeks time with the leadership of the organization, and very thoughtful conversations about the business, initially with the Board and Executive Team in annual strategic planning sessions, and second review sessions with the management teams of our various divisions and administrative functions across the organization.

Additionally, I am spending time getting to know our finance and accounting teams located in both in New York and around the world on a more in-depth level, in transitioning with Jim, as he continues to move into his new position. Let me finish by giving you my first impressions of the business.

As you know, I spent a good number of years in the automotive aftermarket and worked specifically with some of Standard product categories while at UCI International. My impression then was that the company was a strong competitor with strategic long-term focus and great longevity.

After having been here just a short while, I can say that I am more than pleased with what I've seen and those sentiments remain intact, and I intend to help the company remain strong for another 100 years. Thanks for your time today in allowing me this brief introduction, and I look forward to getting to know each of you better in the future.

I'll now turn it back over to Jim to go over the quarter results..

Okay, very good. Thank you, Nathan.

I'm going to begin with the preliminary statement, forward-looking statement here, and then anticipate this will be my last, then we'll turn it over to Nathan for year-end when we close out our year, but 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. All right, to begin, looking at the P&L, consolidated net sales in Q3 were $307.7 million, up $11.1 million or 3.7%.

As previously disclosed, we acquired the Pollak business from Stoneridge on April 1st of this year. Incremental sales from the Pollak acquisition were $9.3 million in the quarter and $20 million year-to-date from April through September.

Our consolidated net sales excluding the Pollak acquisition in Q3 were $298.4 million, up $1.8 million or 0.6%, and for the nine months were $876.6 million, up $31.6 million or 3.7%.

Looking at it by segment, Engine Management net sales, excluding Pollak and Wire and Cable sales, in Q3 were $171.5 million, up $12.4 million or 7.8%, and for the nine months were $518.7 million, up $36.1 million or 7.5%.

Our Wire and Cable net sales in the third quarter were $35.1 million, down $3.3 million or 8.6%, and for the nine months were $108.5 million, down $9.4 million or 7.9%.

We continue to forecast long-term trends for Engine Management excluding acquisitions and Wire and Cable of low single digits, and our Wire and Cable business, which is in secular decline, down 6% to 8% per year.

Temperature Control net sales in Q3 were $88.3 million, down $7.8 million or 8.1%, and for the nine months were $241.6 million, up $5 million or 2.1%. We anticipated Q3 Temp sales to be down following the very strong first-half pre-season ordering by our customers.

2018 was one of the hottest summers on record, and we are pleased to have slightly exceeded last year's sales for nine months, with sales volume up 2.1%. Consolidated gross margin in Q3 was 29.9% versus 29.4%, up 0.5 points, and for the nine months was 28.9% versus 28.5%, up 0.4 points.

By segment, Engine Management gross margin in the third quarter was 30.7% versus 28.9%, up 1.8 points, and for the nine months was 29.3% versus 28.6%, up 0.7 points.

Gross margin improvement in Engine Management was driven by significant improvements from our Wire and Cable operations, as the General Cable wire business is fully integrated, continuous cost reduction efforts from in-house manufacturing and low-cost sourcing, and pricing efforts, including pass-through of tariff costs, which have a slight dampening impact on margin percentages.

Temperature Control gross margins in the third quarter were 26% versus 27.6%, down 1.6 points, and for nine months, 2019 was 25.5% versus 25.8%, down 0.3 points. The lower Temperature Control gross margins in the quarter and year-to-date are primarily the result of the dampening effect of tariffs passed through to customers at our cost.

As I stated in our last earnings call, we were lower in Temperature Control production levels in the second-half 2019, which would impact gross margins. Q4 sales levels are the lowest than any quarter during the year, and hence small dollar differences can have an impact on margin percentages.

I anticipate the fourth quarter Temp margins in the low 20% range with full-year margins still into 25% to 26%. Consolidated SG&A expenses in Q3 were $59.9 million, down $0.2 million at 19.5% of net sales versus 20.3% last year, and for the nine months were $180.5 million, up $4.9 million at 20.1% of net sales versus 20.8% last year.

Savings were achieved in the quarter and year-to-date from reduced Temperature Control distribution expenses. If you recall, we launched the new automated distribution system last year at our Lewisville, Texas distribution center and incurred additional expenses and inefficiencies during the launch.

Our Temperature Control team did an excellent job refining the distribution system, eliminating inefficiencies and more important turning around customer orders on time during the peak summer season. Partially offsetting these savings were incremental SG&A expenses related to our Pollak acquisition and other variable expenses on higher sales volumes.

Consolidated operating income before restructuring and integration expenses and other income net in Q3 was 10.4% of net sales, up 1.2 points over Q3 '18, and for the nine months was 8.8% of net sales, up 1 point over nine months '18.

The net effect of our operational performance as reported on our non-GAAP reconciliation was Q3 '19 diluted earnings per share of $1.02 versus $0.83 last year, and for the nine months diluted earnings per share of $2.51 versus $2.03 for nine months '18.

Looking at the balance sheet; accounts receivable increased $11.4 million since December '18, and up $5.7 million since September '18. This increase reflects our seasonal Temperature Control business and the impact of our Pollak acquisition. Inventory levels increased earlier in the year for our seasonal needs and from our Pollak acquisition.

In the third quarter, we were able to reduce inventories $35 million to $340.2 million, and for the year, inventory levels are now down $9.6 million. Total debt at September 30, '19 was $83.6 million reflecting an increase of $34.3 million from December '18 levels.

Our cash flow statement reflects $43 million cash generated from operations, $5 million cash received from the sale of our Grapevine, Texas facility last year, and $35 million incremental borrowings, totaling $83 million, which was used to fund $12 million for capital expenditures, $44 million for the Pollak acquisition and our CYJ joint venture investment, $15 million for dividends paid, and $11 million for share repurchases.

In summary, we are very pleased with our strong third quarter and nine months results, reflecting higher sales volumes, higher gross and operating margins, significant performance improvements from our wire manufacturing consolidation and our Temperature Control automated distribution system, and anticipated benefits from our Pollak acquisition to be realized in 2020; and longer term, our CYJ joint venture investment for electric AC compressors for electric vehicles.

In closing, I want to thank all of our dedicated employees for the 2019 significant improvements achieved. Thank you for your attention. I will turn the call over to Eric..

Well, thank you, Jim, and good morning everybody. I'd like to open by adding my welcome to Nathan Iles, our new CFO. As you heard Nathan comes to us with a wealth of experience, including strong background in the industry, and we're excited to have him here.

And it will have also now allow Jim Burke to focus on his new assignment as Chief Operating Officer. I think we look many -- look forward to many more years of his contributions. And so Jim went through the numbers, so I'll only add some color, talk about a few new strategic pieces and then open it up to questions.

Overall, as you've heard, we are very pleased with the quarter. Both divisions performed quite well posting strong sales and profits, and we've been enjoying positive momentum all year long, and this has continued through the third quarter. I'll review each division separately, starting with Engine Management.

Overall, our divisional sales remained strong for the quarter setting, what I believe, is an all-time record. Our Wire and Cable business continues to track downwards reflecting ongoing decline of the product category. However, excluding wire, the rest of the Engine Management business was up almost 14% in the quarter, a gain of almost $22 million.

There are few components here; first and largest is the contribution from our recent acquisition of the Pollak business, at nearly $10 million in sales in the quarter, it contributed almost half the entire gain. I'll speak more about the acquisition a bit later in my remarks, but we are quite pleased so far.

Excluding Pollak, our non-wire Engine Management business was up slightly less than 8% for the quarter. This strong performance is a combination of a few elements. First, we enjoyed above average pipelines from some of our aftermarket customers.

As frequently discussed, these tend to come in lumpy often in different quarters and can cause a bit of noise in year-over-year revenue comparisons. Secondly, as previously stated, we have been passing through tariffs and have also achieved some nominal price increases.

Beyond that ongoing aftermarket demand is keeping pace with our expected low single-digit growth. Now, while all this is good news, we do wish to express some caution heading into the fourth quarter. Our customer sell-through has been tracking slightly lower than their purchases.

And as we always state this tends to even out over time, in the early fourth quarter we have seen some softness. Moving to Temperature Control, sales were down around 8% from last year. However, this was expected and discussed on our last earnings call, there are a couple of key elements to this.

First, our customers ordered much heavier in the pre-season this year than they did in 2018, preparing themselves for the summer. This pulled forward the pattern of their purchases from the prior year. If you recall, we were up 9% for the first-half. Secondly in 2018, the heat began early toward the end of the second quarter.

This caused an order backlog coming into July artificially bolstering Q3 of 2018, and as such, Q3 of '18, we are up 18% over '17 making for difficult comps. Now I realize that this makes for a confusing story, but all that being said, while we've had different dynamics quarter-to-quarter, overall, we are up 2% year-to-date.

Next I'd like to give an update on the Pollak business acquired from Stoneridge in April. To remind you of what it is, this is a $40 million plus business selling various switches, sensors and connectors, largely for commercial vehicle applications. About 75% of it is for OE.

The remaining 25% is aftermarket, sold into the heavy-duty aftermarket channel as opposed to through our typical distributors. The products were manufactured in two Stoneridge plants, the majority in Canton, Massachusetts, and the balance in Juarez Mexico.

As Stoneridge retained the plants, they continue to manufacture the products for us until the production lines or relocated to existing SMP facilities. The majority will go into our Engine Management plant in Mexico. And as you can imagine, once we relocate it from Massachusetts, we will be able to enjoy significant cost savings.

We're about halfway through the line moves, which will take the balance of the year to complete.

We expect to realize full synergies some time in 2020, when the receiving locations are fully up to speed, but we believe that the more important benefit will be in the ability to grow the business by taking advantage of the full resources of SMP as well as our breadth of products to expand the offering.

So while the business is still quite new to us, and we have a great deal to do, we are very excited about the potential. Lastly, I'd like to discuss a recent investment we made in the new technology company. On August 1, we acquired a minority share of a small compressor manufacturer in China.

The company called CYJ for short, manufacturer's compressors for electric vehicles. Their customers are mostly Chinese electric car and bus manufacturers, which is an exciting growth area.

In addition then to gaining access to the large new vehicle market in China, we will also use this plant to make compressors for the electric vehicles on US roads, including all of the hybrids. CYJ is quite young and quite small, but we are very excited to have entered into this at the ground level.

We believe that with their technical skills and customer relationships, coupled with our stability and resources, we can really grow this business, and additionally, if fits very well with our other two Temp Control joint ventures in China with complementary products and many other synergies.

So, in closing, when you add it all together, we're quite pleased with the quarter and the year overall. Sales, margins and earnings are up. We've recovered from all of our short-term cost challenges, which although they were painful while they were occurring, they were all designed to make us a better company.

We continue to be strategically acquisitive with two deals done this year. We have an excellent new business with Pollak, allowing us to diversify our portfolio in adjacent spaces with clear synergies and now we have a strategic partnership with a company making parts for electric vehicles.

And so we feel very good about our future, as we continue to celebrate our 100th year. So that concludes my prepared remarks. At this point, I will turn it back over to the moderator, and we'll open it up for questions..

Thank you. [Operator Instructions] We'll go first to the line of Scott Stember from CL King. Please go ahead..

Good morning, and thanks for taking my questions..

Good morning, Scott..

Earlier this week, one of your competitors talked about some softness in the WD, your Warehouse and Distribution side of the business.

Can you maybe talk about whether you've seen that and maybe just talk about the demand trends from your large retail customers versus the WD's?.

Well, Scott, we don't break down the details between the different customers within the aftermarket. We're just seeing, in general, all year long that they have been purchasing slightly better than their sales at their doors, different customers are having slightly different experiences, but in aggregate, that's the pattern that we're seeing..

Got it. And Jim, did you give the gross margin targets for Engine Management in the fourth quarter and the full-year.

What the longer term targets are, again, if you could just confirm that?.

Yes. Sure. And again we're standing by what we had forecasted for 2019. At Engine Management, gross margins to be in the 29% to 30% range and then going into 2020 looking for 30% plus. And for Temperature Control, we were in the 25% to 26% range for 2019.

I did call out that as it's been a very low sales quarter and targeting low 20% margins for the fourth quarter, but still coming in between 25% and 26% for the year. Going forward for Temperature Control, we're moving it up then to be 26% plus in 2020..

Got it. And Eric, going back to Pollak, you talked about that being halfway through right now, but as far as the amount of heavy lifting that has to be done, it seems like it really has not had much of any impact on or negatively on the results like Wire and Cable did.

Should we look for anything in the next few quarters or are we thinking that it's going to be pretty benign as far as any negative impact goes?.

We expect this one to be frankly an easier integration than the Wire and Cable one mostly due to scale.

If you recall the Wire and Cable integration, we doubled the plant, and we required as not just to double it in terms of head count, but we needed to do a significant facility expansion, which created a lot of additional complexity and a significant lengthening of the overall project.

This one is frankly much simpler, it's a much smaller increase for this plant, which by the way, I should note, it's not the same plant that the wire business went into, as I believe have several different operations and we know. So this is going into one that's been very stable for several years.

It's a much smaller headcount increase and we had ample space within the building. So we expect this one to go much smoother and that's certainly the experience we've had so far in the first-half or so of the year..

All right. And just last from me on tariffs.

I think, maybe a couple of quarters ago, you gave, what the impact was on margins, can you maybe just -- for maybe the first nine months, just let us know what the impact has been on Temperature Control and Engine Management?.

Yes. Scott, and I didn't roll up the numbers again on that. It's a dampening effect. I think we called out originally that Engine Management would be in the 0.5% range. That was there.

And with Temperature Control, I think I had said that it was going to be about 0.7%, 0.8%, and probably with -- if there is a higher concentration on tariffs in the year, it's probably slightly higher than that for Temperature Control..

Got it. That's all I have. Thanks..

All right. Thank you, Scott..

Thank you. [Operator Instructions] We'll go next to Bret Jordan from Jefferies. Please go ahead..

Hey, Good morning, guys..

Good morning. Bret..

Hey, Bret..

Hey, Jim. I assume your new job is going to be turning around the Wire and Cable trends..

I accomplished that already now. So really have -- get something else going….

No. I think Bret wants you to go and sell it..

Yes.

In the Wire and Cable business, is that -- as it declines in volume, does it become a drag on margin or is it really sort of flexible fixed overhead in that segment?.

Well, it would be two-fold that's there. One, always on what are all the variables for margin. So pricing is always one point that's in there when we look to pass on any cost increases that we incurred there.

And again reminding everybody, we were able to double our volume in here to be able to improve the margins when we put the two businesses together and we have contiguous programs for cost reduction efforts that are in there. So with the doubling the scale we still feel that we're able to hold margins in this business. So it's a very healthy business..

Okay. And then, Eric, on the CYJ investment, could you give us some more color, I guess, maybe the category size of the EV hybrid compressors and maybe timing of what you could bring to the U.S. market sort of how we expect that to show up in your U.S.

results?.

It's very early days, Bret. We've really just begun this and as mentioned, it's a very small business from a technology and capability standpoint, they are quite strong. But in terms of their actual out the door production it's still small. To date, we do have a certain amount of coverage for the hybrid vehicles on US roads.

We just have not had an effective source of supply. This allows us to get there, there is development work that we need to do to be able to make that part specific for all the pre-assess etcetera, on our roads, but this now gives us a great jumping-off point to do it.

In terms of the Chinese vehicle, electric vehicle market or what they call the new energy vehicles, NEV's there, it's the fastest growing portion of that marketplace. There are certainly several competitors over there, pursuing the same market that we are, but we believe that there is a lot of business to go around.

They already had a lot of good customer contacts as mentioned in my remarks, both in the passenger vehicles as well as in the bus market. And we believed that, that we then with what we bring to the party, it strengthens our ability to go after these customers to say we have real horsepower to pursue it. So, very early days.

We're excited, but I wouldn't expect it to show any substantial impact on our financials for a little while..

Okay, great. If I can work in one last quick one.

On Temperature Control, did you comment about how you saw the inventory at the retail level? Now, I mean, obviously we had a mild second quarter, some warm up in the third quarter, but how we stand in year-over-year retail inventory?.

It's a -- we do look at that as you know, and compared to where we were this time last year, it's about equal, some are little bit higher, some are a little bit lower, but overall it's about equal..

Great. Thank you..

Thank you, Jordan..

[Operator Instructions] We'll go to Robert Smith with Center for Performance. Please go ahead..

Hello. Good morning..

Good morning, Robert..

Yes, I just want to re-circle back to the Chinese investment, quite interested in that thus for its potential.

So what is -- first what is the minority interest?.

It is Jim Burke. Our share ownership is approximately 29%..

And do you have the ability to increase that?.

Again, we just entered it, we're pleased. One of the part of the partners is in one of our other joint ventures, and each party would always have a right to able to assume the others, but there is no requirement in there that we -- that they have to turn it over to us..

Could you give us some color as to the product line and the genesis of the company, I mean, how long is, that they've been around?.

The company is very new, it's 2016 it was founded, and it was founded, a combination of people who had the technical ability to design and manufacture, but another one of the partners is a manufacturer of new energy vehicles, which is a nice tie-in.

So the products, it's entirely about electric compressors for electric vehicles, the majority of compressors for traditional internal combustion engine vehicles, it's belt driven running on the same belt system as the Engine.

Since there is no belt system in electric vehicles, it needs its own electric motor and so that's what's different about this technology. And so that was the capability that they brought..

So I understand that and you're not going to see anything really near term, but you must have sat down and essentially pushed the fence on as far as the -- and what you might see in a period of, say, five years or so? And how substantial a market could this be?.

It could be -- that the market itself, the overall market is going to be enormous.

So the real question is what do we believe our share can be? There is a lot of competitors in the space, including some of the big multinationals, the way we are currently thinking about it is to pursue the local Chinese vehicle market as opposed to the big joint venture players over there such as the Volkswagens and General Motors in China, where there is a lot of the smaller Chinese niche guys, who are looking for a local content and local partners.

And within that space there are a lot of vehicle manufacturers and we are developing relationships with these guys..

It sounds good. So I mean, it's a potentially important step. Congratulations and good luck..

Thank you, Robert. We're excited about it..

Thank you. [Operator Instructions] And gentlemen, it looks like we have no further questions at this time..

Okay. If there are no further questions, this concludes our third quarter conference call, and again, we thank you all for attending..

Okay. Thank you..

Okay. Fine. Bye..

We like to thank everybody for their participation. Please feel free to disconnect your line at any time, and have a wonderful day..