Standard Motor Products, Inc. ($SMP)

Hello, and welcome, everyone, joining today's Standard Motor Products First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this call is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to Tony Cristello, Vice President of Investor Relations. Please go ahead.

Okay. Thanks, Aaron, and good morning, everyone. Thank you for joining us on Standard Motor Products First Quarter 2026 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. 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.

Well, thank you, Tony, and good morning, everyone, and welcome to our first quarter earnings call. Overall, we are quite pleased with our performance with all of our segments off to a solid start. Our top line grew by over 9%, reflecting a continuation of the demand trends we have been enjoying for the last several quarters. I'll walk through each operating segment, providing highlights and discuss how we are positioned for the future. Vehicle Control had a terrific quarter with sales up more than 11%. A large portion of this was attributable to certain customers expanding their assortment with pipeline orders. And while this is somewhat of a onetime event, we tend to see an ongoing lift by having better in-market inventory. Beyond that, we continue to see general strength of the business as demonstrated by customer POS in the mid-single digits where it has been for the last many quarters. This reflects the nondiscretionary nature of our products and the brand equity we have with the professional repair shops. Lastly, for vehicle control, if you recall, the last 2 quarters saw a steep decline in the wire set subcategory, which we explained was related to customers rightsizing their shelves for this mature product. As expected, this has now returned to its normal single-digit secular decline. Turning to Temperature Control. Here, too, we had a solid quarter, up slightly from last year's extremely strong first quarter where sales were up 24%. As is typical in this segment, the beginning of the year is marked largely by preseason orders, which can break across the first and second quarters. Last year was heavily in Q1, while this year is more spread out. And as we enter the second quarter, we have preseason orders left to ship. Further, we have been pleased to see that POS was up substantially, though this is in the lower sales. And importantly, this segment is always impacted by the strength of the selling season, but we're certainly off to a good start. Lastly, both of our North American aftermarket segments saw a nominal lift from tariff pass-through pricing, which took effect in the second half of last year. Next, I'll speak about Nissens Automotive, our European aftermarket business. Sales were up more than 12%, though much of this was driven by stronger currency translation than a year ago. In local currency, sales were up 2.7% going against a tough comparison. Last year, we had an unusually robust first half due to customer order patterns, while this year has returned to a more normal cadence. We continue to enjoy solid performance in Europe, partly due to the nondiscretionary nature of our products, but also attributable to Nissens' brand recognition helping us gain penetration. Nissens has now been part of the SMP family for a bit over a year, and we are delighted with its performance, both in and of itself and as a complement to our other businesses and the synergies it creates. Our preliminary focus was on savings, which we expect to roll in over the course of this year. We're also focused on cross-selling, expanding our offering on both sides of the ocean. Toward the end of last year, we launched 2 new categories in Europe, ignition coils and air conditioning hoses. These are important categories for us here in the U.S., both of which leverage our manufacturing capabilities. And while it is still early, we are starting to gain some shelf space. We continue to work towards ongoing portfolio expansion opportunities, leveraging each other's strengths. Lastly, I'll speak to our non-aftermarket segment, Engineered Solutions. We enjoyed strong first quarter sales, up more than 12% over last year when the business was rather soft. As we've discussed, this business will be subject to more volatility than the aftermarket as it will rise and fall with demand for new vehicles and equipment and the sales rebound that began in mid-2025 has continued with strength at certain customers within our commercial vehicle and powersports end markets. Finally, let me speak briefly about the current tariff landscape and its impact on our business. Most of the significant changes happened in 2025, and this year has been more stable. That said, there have been changes related to the elimination of the reciprocal tariffs, the addition of new Section 122 tariffs and changes to the steel and aluminum derivatives tariffs. When combined, these essentially offset each other, and we continue to operate a successful pass-through playbook to accommodate any impact. So when you put all these moving pieces together, we're very pleased with our performance thus far and with our ability to execute on our initiatives during complex times. So let me hand this over to Nathan, who will provide the details.

Good morning, everyone. Thank you, Eric. As we go through the numbers, I'll first give some color on the results for the quarter by segment and the consolidated level, and then I'll cover some balance sheet and cash flow metrics and finish with an update on our financial outlook for the full year of 2026. First, looking at our Vehicle Control segment. You can see on the slide that net sales of $213.8 million in Q1, were up 11.2% as we saw a significant amount of orders to broaden our customers' product assortments come through during the quarter as well as the impact of slightly higher pricing from pass-through of tariffs. Vehicle Controls adjusted EBITDA of 11.4% in the quarter was just slightly lower than last year as higher sales volume and better operating expenses as a percent of net sales was offset by some gross margin rate compression from passing through tariffs at cost. Turning to Temperature Control. Net sales in the quarter for that segment of $89.5 million were up 0.7% for the reasons Eric noted before. Temperature Control's adjusted EBITDA increased in Q1 to 13.4% as good sales volumes led to a higher gross margin rate and operating expenses improved as well. Looking next at Nissens, sales grew by $8.2 million or 12.4%, mostly reflecting the impact of currency conversion, but also continued sales growth in local currency, even though we were up against a difficult comparison, where last year had very robust orders in the first half. Adjusted EBITDA for Nissens of 12.5% of net sales in Q1 was lower than last year, mainly as a result of some currency transaction losses, which occurred in the quarter versus small gains in the prior year. The currency losses stem from sourcing activities in China, where the currency strengthened sharply in Q1, but is returning to a more stable level. Also keep in mind that Nissens business is seasonal given their offering of temp control products, and so the first quarter profit is generally lower than other quarters. Sales for our Engineered Solutions segment in the quarter were up 12.6%, and we were pleased to see growth across most markets. Our adjusted EBITDA for Engineered Solutions in the quarter of 6.9% was down from last year as gross margin was lower due to inflationary headwinds and amortization of manufacturing variances from late last year as well as some mix, partly offset by improved operating expense leverage on higher sales. To wrap up our results discussion and put it all together across the 4 segments for Q1, consolidated sales increased 9.1%, while adjusted EBITDA was 9.9% of net sales and almost $2 million better than last year. Further, non-GAAP diluted earnings per share were $0.82 in the quarter. Turning now to cash flows. Cash used in operations for the quarter of $41.9 million was $18.3 million better than last year as we were well prepared with inventory coming into the year to meet higher sales levels in Q1. Investing activities showed capital expenditures of $6.7 million, which is lower than last year as capital spending related to our new DC is mostly completed. Financing activities showed payments of $7.3 million of dividends as well as $44 million in borrowings on our credit agreement. Our net debt stood at $599.4 million, flat with Q1 last year. We finished the quarter with a leverage ratio of 3x EBITDA given seasonality in our business and believe we are on track to get to our target of 2x EBITDA by the end of 2026. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2026, which is really unchanged from before. Before I do, let me note that our outlook does not take into account ongoing changes in U.S. tariffs on imported goods. We follow changes closely, but things change continuously. Whatever the impact is on our business, we will continue to offset our cost of the dollar-for-dollar pass-through in pricing. For 2026 full year, we expect sales growth to be in the low to mid-single-digit percentage range, driven by continued momentum in North America and Europe and more stable market conditions in our Engineered Solutions segment. Our outlook for adjusted EBITDA margin is a range of 11% to 12% of net sales and reflects margin benefits to sales growth, but also some continued margin compression from passing through tariffs to costs. In connection with our adjusted EBITDA outlook, we continue to expect interest expense on outstanding debt to be about $30 million for the full year. Our income tax rate to be 27.5% to 28% and depreciation and amortization expense to increase to $45 million to $50 million as we'll have a full year of depreciation on distribution center investments and also continue to invest generally in our business. To wrap up, we're very pleased with how our year has started with strong sales growth and good profitability. We thank all of our associates across the company for helping us turn in these results. Thank you for your time. I'll now turn the call back to Eric for some final comments.

Thanks, Nathan. In closing, let me just spend a moment discussing how we're viewing things for the balance of the year and beyond. Even in the face of a challenging environment, we've enjoyed several consecutive quarters of solid performance and believe that this momentum will continue. We are operating in strong and stable markets and believe we are outperforming due to a combination of structural advantages, customer relationships and execution. We've made great strides in diversifying our business with new product categories, geographies and end markets, all with the focus of seeking complementary benefits. We're certainly in the midst of complicated times. It remains unknown what impact the conflict in the Middle East will have, either on costs or potentially on supply chain disruption as well as an ever-changing tariff landscape, but we have a strong track record of navigating these challenges with robust and resilient supply chains and a favorable manufacturing footprint. Within our legacy business, the North American aftermarket, we believe we excel. The industry itself continues to demonstrate its stability and resilience in the face of turbulent times. And within it, we believe we tend to outperform with a business model that targets repair professionals with quality products and brands they trust. Nissens is a fantastic new leg to our stool and is exceeding our expectations. They are a great company in their own right. And as part of SMP, they provide great business diversity while being similar enough to generate meaningful synergies, both to the top and bottom line. Our Engineered Solutions business continues its rebound and is a strong complement to our core business, and so we remain very bullish about the future. That concludes our prepared remarks. At this point, we will turn it back to the moderator and then open it up for questions.

[Operator Instructions] And we can take our first question from Scott Stember with ROTH Capital.

Speaking to Vehicle Control, you talked about some outsized sell-in, I guess, to a couple or 2 or 3 customers in the quarter to broaden their -- I guess, their portfolio of SKUs. Do you think that this is more something related to just industry-wide? Or how much of this is because of the innovation and new products that Standard has come out with in the last 6 to 12 months?

It's much -- it's a good question, Scott. And this is really just a typical process that we go through with our customers to take a look at their inventory position and as has been a trend over these last few years, making sure that they have the smartest inventory forward deployed. So this didn't have to do necessarily with new products or innovation. This was just saying where do we see opportunities. It's very much of a collaborative event that we have with customers, where do we see opportunities to strengthen your position to help you gain share at the consumer or at the independent repair shop. So this quarter was heavier than we've seen, and that's why we've called it out, but this is just the ongoing line review process that we have.

Got it. And then next on Nissens. Could you talk about what the sell or what POS was in the quarter?

It's also a great question. And we have a little bit less visibility to POS in the European market as we do here in the U.S. because it is so much more of a fragmented marketplace. But what we see there is general ongoing trends that match pretty closely with our sell-in. So there's -- it's pretty normalized there, in the low to mid-single digits.

And then as far as the synergies, I know the first year was focused more on the cost. But this year, you talked about some of the wins that you've had cross-pollination. Are any of those synergies in your guidance in a meaningful way? Or should we look at that as more upside?

Referring to the growth side, and Nathan can speak to the cost reduction side. But on the growth side, these -- when you launch a new product, you don't expect substantial near-term gains. So I wouldn't consider it accommodated in the overall top line. It's really more getting ourselves positioned for future years and additional line expansion. But on the cost side, and I don't know, Steve or Nathan, you can answer.

Yes. So Scott, on the cost side, we gave the range of $8 million to $12 million of cost reductions and really put a time frame on that of achieving it by the end of this year into 2026 from a run rate perspective. So like we said before, we think we're still pretty well on track. To the extent some of those roll through the P&L this year, they are in our guidance, but we'll see a good benefit of that going into 2027 as well as we achieve the run rate later this year.

And just one last one, if I could sneak it in on Temperature Control. It sounds like POS is stronger than expected. Do you think that this is -- I know that March was one of the warmest Marchs on record. So do you think it's a combination of weather? Or is it share gains given your favorable positioning on tariffs or where you get your product from?

I think it's both just on good market demand, but I absolutely also believe that it's market share gain and whether it has to do with -- and there's a number of factors there. It's the success we're having with our brands. It's the success our customers are having in the marketplace, gaining additional share. So I believe it's a combination of the two. That said, again, Scott, I want to reemphasize that I wouldn't speak to 2026 by how the market did in March. It's just too soon to tell.

[Operator Instructions] And there are no additional questions at this time. I'd like to turn the program back over to Tony Cristello for any closing remarks.

Okay. We want to thank everyone for participating in our conference call today. We understand there is a lot of information presented, and we will 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. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.