Good day, everyone, and welcome to the Standard Motor Products Second Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please note that today’s call will be recorded.

[Operator Instructions] It is now my pleasure to turn the conference over to Tony Cristello, Vice President of Investor Relations. Please go ahead..

Thanks, Savannah, and good morning, everyone. Thank you for joining us on Standard Motor Products second 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 the call up 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. 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 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..

first, growth through cross-selling. We are in many similar product categories but with differing strengths as we leverage that, we can expand our offerings on both sides of the ocean. Second, we anticipate cost reduction synergies as we combine our purchasing power, seek best cost, pursue in-sourcing, freight consolidation and so on.

And third, we believe that by joining forces, we could become a stronger company and therefore, a better supplier to our customers. We can accelerate product launches, tackle new technologies faster and pursue numerous other means the collaboration. Some more to come on Nissens, but needless to say, we’re excited.

With that, I’ll turn it over to Nathan to review the numbers with some additional color..

All right. Thank you, Eric. As we go through the numbers, I’ll first give 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 of 2024.

First, looking at our Vehicle Control segment, you can see on the slide that net sales of $188.7 million in Q2 were up 2.7% and for the first six months are now up 1.6%, with the increase driven by solid demand for our products and new business wins.

Vehicle Controls adjusted EBITDA of 10.4% for both the second quarter and first six months is down from last year, driven by a lower gross margin rate and higher operating expenses.

While this segment’s gross margin dollars were flat to last year due to higher sales, the margin rate was lower as a result of the increases in costs that Eric noted before.

SG&A expenses increased mainly due to inflationary increases, which I’ll touch more on later and factoring expenses also increased due to higher sales and timing of cash collections. Turning to Temperature Control.

Net sales in the quarter for that segment of $124.5 million were up 28.2% as we saw a very strong start to the summer selling season, and this start helped our sales grow 15.7% for the first six months of the year.

Temperature Control’s adjusted EBITDA increased in Q2 to 12.6%, and for the first six months increased to 9.7% as higher sales volumes led to higher gross margin rates and improved leverage of operating expenses for both the quarter and year-to-date periods.

Temp Control adjusted EBITDA also benefited from improved performance in our joint ventures in China versus last year. Looking now at Engineered Solutions. Sales in that segment in the quarter were up 6.1% and for the first six months were up 5.3%.

We were pleased to see our sales continue to increase in this segment as new business wins with both existing and new customers support very good growth here. Adjusted EBITDA for Engineered Solutions in the quarter of 13.1% was up slightly from last year.

The improvement was the result of good leverage of operating expenses that were lower as a percentage of sales, and this segment also benefited from improved performance in our joint ventures in China versus Q2 last year.

Engineered Solutions adjusted EBITDA for the first six months is down from last year, driven by lower gross margin due to cost pressures, but also the unfavorable sales mix we experienced in the first quarter and partly offset by better performance from Chinese joint ventures. Turning to our consolidated numbers.

The change in our net sales and gross margin for the quarter and first six months versus last year was the result of the changes in our segments, as I just highlighted. Regarding consolidated SG&A, excluding factoring, which is shown separately on the page, expenses were up for both the quarter and first six months versus last year.

As a percentage of net sales, SG&A was flat with last year at 17.5% in the quarter, given strong sales volume, but was up at 18.4% for the first six months. Start-up costs related to our new distribution center were $1.3 million in the quarter and $2.3 million year-to-date.

And without these costs, SG&A would have been 17.1% in the quarter and 18.1% for the first six months.

I noted last quarter that increases in SG&A costs were driven by general inflation, but also elevated distribution expenses across a number of inputs, including higher lease expense and that we’ll be looking at ways to reduce our costs going forward.

To that point, we executed a retirement program during the second quarter, which we anticipate will save us an estimated $10 million in compensation costs. We incurred a charge of $2.6 million related to this program in Q2 and expect to incur an additional charge of $3.1 million in the second half of the year as people retire.

We’ll also continue to review other levers to pull to reduce our costs overall. Turning now to the balance sheet. Accounts receivable were $239.3 million at the end of the quarter, higher than last year due to higher sales.

Inventory levels finished Q2 at $508.2 million up slightly versus June last year, but basically flat with year-end as higher sales have kept inventory levels lower, even though we’re in peak season for the Temp Control business.

Our cash flow statement reflects cash used in operations for the first six months of $10.1 million as compared to cash generated of $39.4 million last year. Cash used in operations last year was aided by a reduction in inventory balances that did not recur this year after bringing inventory back down to normal levels over the course of 2023.

Investing activities show an increase in capital expenditures this year of $13.4 million, which includes $10.4 million of investment related to our new distribution center.

Financing activities show borrowings on a revolving credit agreement of $52 million in the first six months, which were used to fund operations, capital expenditures and paid $12.7 million of dividends.

We also repurchased shares under an existing $30 million authorization from our Board, repurchasing $10.4 million of shares during the first six months. While we have $19.6 million of authorization remaining, we have paused repurchases in anticipation of closing on the acquisition of Nissens later this year.

Our net debt of $182 million at the end of Q2 was lower than last year, and we finished the quarter with a leverage ratio of 1.5 times EBITDA.

As we noted in July, we do expect our leverage ratio to increase to a little less than 3.5 times on a pro forma basis once the acquisition of Nissens is closed, and then we use cash flows to work our debt balance down to lower levels over time. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2024.

As I do, please note that our outlook does not include any impact from Nissens acquisition as exact timing of closing is not yet known. Regarding our top line sales, given the sales growth we saw during the second quarter, we now expect to see low to mid-single-digit percentage growth in sales for the full year.

We’re maintaining our expectations for adjusted EBITDA, which we expect to be in a range of 9% to 9.5% and essentially flat with 2023. This estimate includes cost pressures, which continue to be a headwind for our Vehicle Control and Engineered Solutions segments, a U.S.

dollar that remains at a multiyear low against the Mexican peso and factoring expenses of $48 million to $50 million as sales are expected to be higher than last year. We also have some costs related to our new distribution center in Cheney, Kansas, which in total will be $7 million to $8 million in 2024.

As a reminder, we incurred about $2 million of costs for this warehouse last year, which means we have incremental costs in 2024 of $5 million to $6 million, of which we estimate $3 million to $4 million of start-up related and will not recur.

In connection with our adjusted EBITDA outlook, we expect our interest expense on outstanding debt to be on average about $2 million to $3 million each quarter, and we expect our income tax rate to be 25%.

Regarding operating expenses in this outlook, keep in mind our operating expenses are incurred more ratably across the year but do have some variability with sales and as such, will fluctuate with seasonality in the business.

Given this dynamic, we anticipate total operating expenses, inclusive of factoring, will range from $84 million down to $76 million as we go through the last two quarters of 2024. To quickly wrap up, we are very pleased with our sales growth in both the quarter and first half of the year, which helped us turn in better results than expected.

As I noted, we’re still seeing higher cost swinging on certain areas of the business, and we’ll be reviewing ways to reduce these costs going forward. Thank you for your attention. I’ll turn the call back to Eric for some final comments..

Thank you, Nathan. And just in closing, I’d like to spend a minute on how we’re thinking about the future. We obviously recognize that they were in uncertain times impacted by various macroeconomic factors. We’ve always felt that our industries are structurally sound and highly resilient and in the long run, they do very well.

As we look at the North American aftermarket, I believe we can feel confident that it can withstand short-term shocks, and we feel very good about our position in the market with key large nondiscretionary product categories and strong customer relationships.

Our Engineered Solutions business is obviously in a different stage of its maturity, but we’re delighted with what we’ve seen. It’s doing what we hoped by creating a cohesive business unit with a coherent strategy, we have achieved critical mass to become a real supplier on the global stage.

And soon, with Nissens acting as a third leg of our stool and all it can do for us as we integrate it, we’re very bullish about the future. So that concludes our prepared remarks. At this point, we will turn it back to the moderator, and we’ll open it up for your questions..

Thank you. [Operator Instructions] And we will take our first question from Scott Stember with ROTH MKM. Please go ahead..

Good morning guys. Thanks for taking my questions..

Good morning, Scott..

In the Vehicle Control segment, nice rebound from the flattish results for the first quarter. Some of your customers have reported, I guess, sluggish demand overly, I guess, in some of the hard parts areas.

And I’m just trying to get a sense of what you guys saw at POS retail and how that’s affecting orders as we stand right now from your customers?.

Thank you, Scott. And I think I can agree with what you’re hearing more from them, but is that they’re seeing softness more in front room and DIY type product, but also to a degree more or less by the different distributors in some of the backroom product as well.

What we’ve seen over the course of the quarter, is that our POS, their sales out has been roughly flat to perhaps slightly down, but we think that that’s just kind of the normal ebbs and flows in any given period. And so roughly tracks with what they’re purchasing from us..

Okay.

So really no change from that low single-digit thought process going forward?.

Correct..

All right. And on the rate front, it seems increasingly likely or at least what the market is telling us is that we’ll probably see a couple of rate cuts.

Can you maybe just remind us, I guess, net of any potential price givebacks, how that could benefit you and how fast that would happen on the factoring side?.

Yes. So Scott, just to put a little bit of a marker on it. If you think about our factoring programs, there’s about $800 million of sales on those programs. Every 25 basis point move is essentially worth about $2 million for us on those programs. So that’s a way to think about increases or cuts as they happen.

I would just say that if you think about the rate that we follow for that, it’s a 360-day SOFR rate. And given that, that rate has been baking in some cuts in the back half of the year, all year since we came into the year in January.

And so this recent Fed announcement essentially being in line with that doesn’t change our outlook a whole lot at this point..

Got it. That’s all I have for now. I’ll jump back in the queue. Thanks..

Thank you, Scott..

Our next question comes from Bret Jordan with Jefferies. Please go ahead..

Hey, good morning guys..

Good morning, Bret..

Talk about what you’re seeing in inventory at your customers in Temperature Control.

We stay hot through August into the fall? Or is there likely another round of ordering or are they reasonably stocked?.

Well, our inventory visibility is a little bit delayed. So we really see it more through June and what happened in the last several weeks were not as attuned to. What we saw through the quarter was that, that their shelves stayed pretty flat, which means that we were able to keep up with their demand and keep their shelves where they wanted them.

As we think about what their sell-through was in July versus their purchases, we anticipate that, that’s continued to track and the heat is now continuing really throughout much of the country. So we’re pretty pleased with that.

And what that tends to show, but time will tell is that prolonged heat tends to have the replenishment orders continuing throughout the season as opposed to in a different cadence to a summer where they may start to taper off their replenishment orders, we’re not anticipating this at this time.

But it’s still early days, and we’ll see what happens throughout the balance of the summer..

Okay. And then I guess what’s your outlook on pricing? You talked about inputs – input costs being up, obviously factoring.

If you think about how receptive are your primary customers to price increases for the balance of the year, like what do you see as inflation from the price side?.

As we’ve always said, we do our best to cover inflation through a combination of pricing and cost reduction. It is a competitive market. I think that the receptivity is challenging. But beyond that, I really can’t get into any specific customer discussions. There’s a lot that goes into it, and we do our best..

Okay. And then I guess one last question. You commented about new business wins in Vehicle Control.

Is that bringing business back that might have gone to direct import programs? Or is that business taken from sort of more normal peers like Wells?.

I’m not going to get into the specifics of it, Bret. But that – just in general, there’s always certain nominal wins and losses. We tend to win more than we lose. And so that’s really what we see here. But in terms of who we’ve got it from, I can’t get into that..

Thanks..

Thank you..

[Operator Instructions] Our next question will come from Carolina Jolly with Gabelli. Please go ahead..

Hi, thanks for taking my question. Just a quick note on overall inventories.

I know Bret asked about Temp Control, but just overall, the inventory in the market, how do you feel about that?.

Good morning, Carolina and so on the Vehicle Control side, again, very similar. We’re seeing that inventory is stable month-over-month. So there’s no specific inventory strategy shift for any of our customers. They have what they want to have and are operating accordingly..

Got it. And then also, you’ve discussed leases, some of the pressure from leases.

I know you talked about kind of if the interest rate lowers the impact from the factoring, would there be any benefit on that lease expense?.

Yes. So Carolina, we renew leases over time just as they come to – so I don’t think lower rates will have any impact on what we’ve already renewed over the last couple of years. But certainly, going forward, that should be some sort of a benefit as we look at the renewals..

Thank you..

Thank you..

And with no further questions, I’d like to turn it back to our presenters for any additional or closing remarks..

Okay. Well, we want to thank everyone for participating in our 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. Hope you have a great day. Thank you..

And this will conclude today’s conference. Thank you for your participation, and you may now disconnect..