Q1 2024 Standard Motor Products Inc Earnings Call

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Unknown Executive: Please stand by; we're about to begin. Good morning, everyone.

Operator: Please standby we're about to begin.

Operator: Welcome to today's Standard Motor Products First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. You may withdraw yourself from the queue by pressing star 2. Also, today's call is being recorded, and I will be standing by if anyone should need any assistance. Now, I'd like to turn the call over to Mr. Tony Cristello, Vice President of Investor Relations. Please go ahead.

Speaker Change: Good morning, everyone. Welcome to today's standard motor products first quarter 2024 earnings conference call.

Operator: At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing star one on your telephone keypad, you may withdraw yourself from the queue by pressing star two.

Speaker Change: Also today's call is being recorded and I will be standing by if anyone should need any assistance now I'd like to turn the call over to Mr. Tony Costello, Vice President of Investor Relations. Please go ahead Sir.

Anthony Francis Cristello: 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.

Anthony Francis Cristello: 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 sales Chairman Emeritus, Eric sales, Chairman and Chief Executive Officer, Jim Burke, Chief operating Officer, and Nathan Iles, Chief Financial Officer.

Anthony Francis Cristello: 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.

Anthony Francis Cristello: 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.

Speaker Change: 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.

Speaker Change: When we use words like anticipate believe estimate or expect these are generally forward looking statements.

Speaker Change: 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 security and Exchange Commission for a discussion of the risks and uncertainties.

Anthony Francis Cristello: 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.

Speaker Change: That could cause our actual results to differ from our forward looking statements I will now turn the call over to Eric Sills, our CEO.

Eric Philip Sills: Thank you, Tony. And good morning, everyone.

Eric Philip Sills: 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 150 year.

Eric Philip Sills: 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 hundred and fifth year. 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.

Eric Philip Sills: So it's fair to say that our first quarter results were mixed we are 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.

Eric Philip Sills: Let me get into the details best explained at the segment level, starting with vehicle control.

Eric Philip Sills: After a soft fourth quarter, we were pleased to see a nice rebound in sales. We were up about a half point over 2023, which was a challenging comp 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 South through West.

Eric Philip Sills: After a soft fourth quarter, we are pleased to see a nice rebound in sales we were up about a half point over 2023, which was a challenging comp as Q1 of 2023 was very strong at more than 4% over the previous year.

Eric Philip Sills: After a soft into last year, we are pleased to see a return to more normal demand.

Eric Philip Sills: Our customer Pos was soft in the quarter, though again, it's being compared to a very strong sell through last year.

Eric Philip Sills: 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 pre-season orders, and those can ship in late Q1 or early Q2, and whiplash numbers around. Ultimately, this division will depend on the total season and its dynamics, when it gets hot, how hot it is, and where and how long it stays that way.

Eric Philip Sills: 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 that preseason orders and as those can ship in late Q1, or early Q2, and whiplash numbers around called.

Eric Philip Sills: Ultimately this division will depend on the total season and its dynamics when it gets hot how hard it is and where and how long it stays that way so let's see how the year behaves.

Eric Philip Sills: So let's see how the year behaves. On to Engineered Solutions. The year is off to a strong start for sales, up four and a half percent, hitting a single quarter record.

Eric Philip Sills: Onto engineered solutions.

Eric Philip Sills: Year is off to a strong start to sales up four 5% hitting a single quarter record.

Eric Philip Sills: As discussed, the 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 technology.

Eric Philip Sills: As discussed this segment is highly fragmented multiple end markets multiple geographies in a highly diverse customer base with no account greater than 10% of sales.

Eric Philip Sills: As such you can see some volatility quarter to quarter in terms of customer and market channel mix.

Eric Philip Sills: 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.

Eric Philip Sills: As such, we've been awarded new business and are continuously managing a very healthy pipeline of opportunity. It's important to note that we need to keep the funnel of these opportunities full as items go through their life cycle 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.

Eric Philip Sills: As such we've been being awarded new business and are continuously managing a very healthy pipeline of opportunities.

Eric Philip Sills: It is important to note that we need to keep the funnel these opportunities Paul as items go through their lifecycle much faster than the aftermarket, but I leave but I believe we are demonstrating our ability to do that and grow this new segment.

Eric Philip Sills: All right I'd like to spend a minute talking about our progress on our 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.

Eric Philip Sills: 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 came to the decision to expand our distribution capacity, as we've been operating out of our existing footprint for many years, while our volume and skew count have grown. We leased a brand new 575,000 square foot facility about five miles from our existing Edwardsville, Kansas location, giving us about 200,000 additional square feet.

Eric Philip Sills: In time, this will replace our Edwardsville location as we move that operation in. But additionally, we plan to distribute the A and B movers currently single-pointed out of our Virginia and Texas DCs, 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 move from single-point to multi-point 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.

Eric Philip Sills: About a year ago, we came to the decision to expand our distribution capacity as we have been operating out of our existing footprint for many years, while our volume and SKU count has grown.

Eric Philip Sills: We leased a brand new 575000 square foot facility about five miles from our existing Edwardsville, Kansas location, giving us about 200000 additional square feet.

Eric Philip Sills: In time this will replace our edwardsville location as we move that operation, but Additionally, we plan to distribute the a and B movers currently single pointed out of our Virginia, and Texas D. CS, which will allow us to provide better service to our customers in the west and North and it will also provide risk mitigation for us.

Eric Philip Sills: As we all move from single point to Multipoint distribution.

Eric Philip Sills: We're pleased to announce that we have started shipping vehicle control products to certain customers in April and it's going very well.

Eric Philip Sills: 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 phases over the course of 2025. And when complete, we will be able to sell our Edwardsville facility, likely in 2026.

Eric Philip Sills: We've begun with manual operations, while we build out our automation, which will take place over the balance of the year.

Eric Philip Sills: We then plan to move in phases over the course of 2025 and when complete we will be able to sell our edwardsville facility likely in 2026.

Eric Philip Sills: 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.

Eric Philip Sills: In the near term, we are incurring additional expense and Nathan will provide details, but once complete we will exit many of the duplicate costs and will be well positioned for the future.

Eric Philip Sills: Lastly, let me discuss some of the issues we've been experiencing on the cost side that are causing continues continued pressure on profitability.

Eric Philip Sills: I'll keep it at a high level and Nathan will provide more details.

Eric Philip Sills: Overall, as expected, our profitability is down from last year, though for different reasons in the aftermarket. However, in the aftermarket, we are pleased that we've been able to maintain our gross margin. The pressures have been on SG&A, where we continue to experience elevated expenses tied to our receivables factoring programs, as well as certain other areas. For 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.

Eric Philip Sills: Overall as expected our profitability is down from last year, though for different reasons in the aftermarket for engineered solutions.

Eric Philip Sills: In the aftermarket we are pleased that we've been able to maintain our gross margins. The pressures have been on SG&A, where we continue to experience elevated expenses tied to our receivables factoring programs as well as certain other areas.

Eric Philip Sills: In engineered solutions, while operating expenses remained stable the downward pressure has been on our gross margins, which then dropped through to the bottom line.

Eric Philip Sills: We've been experiencing product cost inflation, partly due to 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 mixed shift over the last two quarters, which can fluctuate based on normal ebbs and flows of demand. And this too is impacting our market. Also, to reiterate, we are experiencing a planned and temporary increase in spending on our new distribution. 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 in deeper.

Eric Philip Sills: 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.

Nathan: We've also seen a modest mix shift over the last few quarters, which can fluctuate based on normal ebbs and flows of demand and this too is impacting our margins.

Nathan: Also to reiterate we are experiencing a planned and temporary increase in spending on our new distribution center.

Eric Philip Sills: 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 in deeper.

Nathan: Alright, Thank you Eric.

Nathan R. Iles: As 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 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.

Nathan: As was noted earlier in 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.

Nathan R. Iles: 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 2024.

Nathan R. Iles: 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, and 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 the cost of goods sold.

Nathan R. Iles: First looking at our vehicle controls segment, you can see on the slide that net sales of $185 5 million in Q1 were up <unk>, 5% with the increase driven by solid demand for our products across all categories.

Nathan R. Iles: Buccal controls adjusted EBITDA was 10, 4% of net sales for the quarter and down from last year looking at the drivers of EBITDA for the quarter gross margin rate for vehicle control in Q1 was flat with last year as cost savings and pricing offset inflation in cost of goods sold.

Nathan R. Iles: However, SG&A expenses increased in the quarter, mainly due to inflationary increases I'll touch more on later, and factory 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 pre-season ordering patterns versus last year. But keep in mind that the first quarter is not indicative of the full year in the seasonal business.

Nathan R. Iles: However, SG&A expenses increased in the quarter, mainly due to inflationary increases I'll touch more on later and factory expenses increased <unk> 9 million as a result of higher interest rates and those increases resulted in lower adjusted EBITDA in the quarter.

Nathan R. Iles: Turning to temperature control net sales in the quarter for that segment of $71 6 million were down one 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 a seasonal business.

Nathan R. Iles: Temperature controls 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 helped by savings initiatives, partly offset by inflation and SG&A costs. Sales for the Engineer 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.

Nathan R. Iles: <unk> controls adjusted EBITDA in Q1 of four 7% was 0.1 points better than last year the.

Nathan R. Iles: The improvement was driven by a higher gross margin rate. It was helped by savings initiatives, partly offset by inflation and SG&A costs.

Nathan R. Iles: Sales for engineered solutions segment in the quarter were up four 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.

Nathan R. Iles: Adjusted EBITDA for engineered solutions in the quarter was down from last year, primarily due to cost inflation, the drivers of which Eric noted before, an unfavorable customer sales mix in the quarter, which resulted in a lower gross margin for the segment. We also saw some inflation in SG&A costs in this segment, just as we saw in the aftermarket segment. Turning to our consolidated numbers, the change in our net sales and margin versus Q1 last year was the result of the changes in our segments, as highlighted.

Nathan R. Iles: Adjusted EBITDA for engineered solutions in the quarter was down from last year, primarily due to cost inflation, the drivers of which Eric noted before and unfavorable customer sales mix in the quarter, which resulted in lower gross margin for the segment.

Nathan R. Iles: We also saw some inflation and SG&A costs in this segment just as we saw on the aftermarket segments.

Nathan R. Iles: Turning to our consolidated numbers the change in our net sales and margin versus Q1 last year was the result of the changes in our segments as highlighted rigs.

Nathan R. Iles: 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 up in our segment results, so let me give 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 startup 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 a number of costs, including higher lease expenses in certain locations.

Nathan R. Iles: Regarding consolidated SG&A expenses were up versus last year and were 19, 5% of net sales in the quarter.

Nathan R. Iles: I noted our costs were up in our segment results. So let me give a little more color on the drivers of the consolidated level.

Nathan R. Iles: You can see on the slide that costs were up $4 2 million and this included $1 1 million of startup costs related to our new distribution Center <unk>.

Nathan R. Iles: Excluding these costs expenses increased $3 1 million or about 5%.

Nathan R. Iles: The increase included elevated distribution expenses across a number of costs, including higher lease expense in certain locations as we look to offset some of the inflation headwinds on operating expenses will be reviewing levers to reduce our costs going forward.

Nathan R. Iles: As we look to offset some of the inflation headwinds on operating expenses, we'll be reviewing levers to reduce our costs going forward. As a 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.

Nathan R. Iles: One final note on our consolidated results you can see the cost of customer factoring programs increased by <unk> 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.

Nathan R. Iles: 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 inventory from December 2023 relate to seasonal increases in sales and preparation for temp control selling. 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.

Nathan R. Iles: Turning now to the balance sheet accounts receivable were $203 9 million at the end of the quarter and inventory levels finished Q1 at $527 million with both balances in line with March last year.

Nathan R. Iles: Increases in receivable and inventory from December 2023 relate to the seasonal increases in sales and preparation for temp control selling season.

Nathan R. Iles: 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.

Nathan R. Iles: 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 the course of 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 a revolving credit agreement of $58.7 million in the first quarter, which were used to fund operations, capital expenditures, and pay $6.4 million in dividends.

Nathan R. Iles: 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 the course of 2023.

Nathan R. Iles: Our investing activities show an increase in capital expenditures. This year of $5 7 million, which includes $2 6 billion of investment related to our new distribution center.

Nathan R. Iles: Financing activity 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.

Nathan R. Iles: 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 and, as we noted in our release this morning, 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 1.6 times, which was lower than last year's ratio.

Nathan R. Iles: We also began repurchasing shares under an existing $30 million authorization from our board and repurchased $2 6 million of shares during the quarter.

Nathan R. Iles: We continue to purchase shares in the second quarter and as we noted in our release. This morning purchased an additional $3 5 million through April 29 for a total of $6 1 million repurchased so far this year.

Nathan R. Iles: 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 one six times and lower than last year's ratio.

Nathan R. Iles: 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 laid out before 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 nine to nine and a half percent and essentially flat in 2023.

Speaker Change: Before I finish I wanted to give an update on our sales and profit expectations for the full year 2024.

Nathan R. Iles: Regarding our top line sales, we are maintaining the expectations, we laid out before and expect full year 2024 sales will show flat to low single digit percentage growth.

Nathan R. Iles: We're also maintaining our expectations for adjusted EBITDA, which we expect to be in a range of nine to nine 5% essentially flat 2020 through.

Nathan R. Iles: This estimate continues to include factoring expenses of $45 to $48 million, largely flat with 2023, as we remain in a high and uncertain interest rate environment, a U.S. dollar that remains at a multi-year 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 is $5 to $6 million in incremental costs in 2024. In connection with our Just Even Outlook, we expect your interest expense and outstanding debt to be on average about three to four million each quarter, and we expect your income tax rate to be 25%. Borrowings are expected to remain roughly flat from December 2023 to December 2024.

Nathan R. Iles: This estimate continues to include factoring expenses of $45 million to $48 million largely flat with 2023 as we remain in the high and uncertain interest rate environment our.

Nathan R. Iles: Our U S dollar that remains at a multiyear low against key currencies in Mexico and Poland.

Nathan R. Iles: And some additional costs related to the expansion of distribution capabilities and our new warehouse in Kansas, which we estimate is $5 million to $6 million incremental cost in 2024.

Nathan R. Iles: In connection with our adjusted EBITDA outlook, we expect our interest expense on outstanding debt to be on average about three to 4 million each quarter and we expect our income tax rate to be 25%.

Nathan R. Iles: Borrowings are expected to remain roughly flat from December 2023 to December 2024 is cash flow has normalized and we look to invest approximately $25 million and our new DC and return cash to shareholders via dividends and share repurchases.

Eric Philip Sills: As cash flows normalize, and we look to invest approximately $25 million in our new DC and return cash to shareholders via dividends and share repurchase. Regarding operating expenses for the full year, keep in mind our operating expenses are incurred regularly 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, will range from $76 to $82 million for each of the last three quarters of 2024.

Eric Philip Sills: Regarding operating expenses for the full year keep in mind, our operating expenses are incurred ratably across the year and do not necessarily very with topline sales as the majority of these costs are fixed in nature.

Eric Philip Sills: Such we anticipate total operating expenses inclusive of factoring will range from $76 million to $82 million for each of the last three quarters of 2024.

Eric Philip Sills: To quickly wrap up, we were pleased to see our sales increase in Q1 despite slightly slower pre-season orders and temp control and to turn in results in line with the forecast, while also increasing shareholder returns through share repurchases in the quarter. Thank you for your attention. I'll turn the call back to Eric for some final comments.

Eric Philip Sills: To quickly wrap up we were pleased to see our sales increase in Q1, despite slightly slower pre season orders and temp control and to turn in results in line with our forecast while also increasing shareholder returns through share repurchases in the quarter. Thank.

Eric Philip Sills: Thank you for your attention I'll turn the call back to Eric for some final comments.

Eric Philip Sills: Well, 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, which makes sense when you consider the basic dynamics of the addressable market, where things change very slowly but in the right direction.

Eric: Thank you Nathan in closing I'd like to spend a minute on how we're thinking about the future.

Eric Philip Sills: 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, which makes sense. When you consider the basic dynamics of the addressable market, where things change very slowly but in the right direction.

Eric Philip Sills: The car park slowly gets larger and older, miles driven is returned to stable levels, and people are keeping their cars longer, especially in light of the high cost of new vehicles. And when you put these together, they add up to slow growth.

Eric Philip Sills: The car park slowly gets larger and older miles driven has returned to stable levels people are keeping their cars longer, especially in light of the high cost of new vehicles and when you put these together they add up to slow growth.

Eric Philip Sills: We recognize that record inflation over these last few years has caused challenges for consumers, and while this could dampen discretionary purchases, much of what we sell is non-discretionary 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 be by gaining and launching new business wins and building on these wins.

Eric Philip Sills: Recognize that the record inflation over these last few years have caused challenges to consumers and while this could dampen discretionary purchases much of what we sell is non discretionary in nature.

Eric Philip Sills: Engineered solutions is more difficult to summarize is it is so diverse and 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 be by gaining in launching new business wins and building on these wins.

Eric Philip Sills: 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. At this point, I will turn it back over to the moderator, and we'll open it up for questions. Thank you.

Eric Philip Sills: 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 altogether the long view remains quite positive.

Eric Philip Sills: So 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.

Operator: Thank you, Mr. Sills. Ladies and gentlemen, at this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question, and we'll pause for just one moment to allow questions to queue. We'll go first this morning to Scott Stember of Roth MKM.

Speaker Change: Thank you Mr sales, ladies and gentlemen at this time, if you would like to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question and we'll pause for just one moment to allow questions to queue.

Operator: Okay.

Scott Lewis Stember: We will go first this morning to Scott's Denver of Roth and Cam.

Scott Lewis Stember: Good morning, guys, and thanks for taking my question. Morning, Scott. Morning, 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?

Scott Lewis Stember: Good morning, guys and thanks for taking my questions.

Speaker Change: Good morning, Scott.

Scott Lewis Stember: Eric you talked about how I guess, the the weakness that we saw in Q4 saw sort of reversing 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.

Scott Lewis Stember: Tough year over year comparisons.

Scott Lewis Stember: Or is there something else going on.

Eric Philip Sills: I think that's a fair statement, Scott, that it's more about the fact that the first quarter of 2023 was really quite strong. But if you think about the 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. And that continued a bit into January of this year, and now we have 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 does reflect more of that return to where we'd expect it to be.

Speaker Change: 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.

Eric Philip Sills: If you are.

Eric Philip Sills: Think about the Pos trends come in through the fourth quarter of last year and into this year, Yeah last year, we saw a sequential.

Eric Philip Sills: Erosion of that Pos month over month and that continued a bit into January of this year and now we started to see a bit of a rebound. So if you look at the whole quarter. This year Pos was a bit soft.

Eric Philip Sills: But I think that it also does reflect more of that returned to.

Eric Philip Sills: Where we'd expect it to be.

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

Scott: So when you say soft or we're talking flat or down slightly for the whole quarter.

Eric Philip Sills: It moderated throughout the quarter, and 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 was.

Speaker Change: It moderated throughout the quarter and overall it was roughly in that flat there were some periods with some customers that were a little bit up or down from that but overall, it's that that's what we saw.

Speaker Change: Got it.

Scott Lewis Stember: And then on the engine solution 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?

Eric Philip Sills: And then on the engine solution side it looks like the most of the growth came from the other segment is that UTV.

Scott Lewis Stember: Mostly or is there something else in there and what's driving that.

Eric Philip Sills: Well, we don't, we don't go into the specifics of what's behind it, what's behind it, that all other, there's, there's many different end markets in there, from motorsports to lawn and garden, hydraulic, stationary engines, there's a lot of different pieces in there. And, and as I always say, there's going to be some movement quarter to quarter based on the build schedules of So I wouldn't read too much into the fact that any sub segment goes up or down in a quarter.

Speaker Change: Well, we don't we don't go into the specifics of what behind whats behind it that all other theres theres many different end markets in there from motor sports to lawn and garden the hydraulic stationary engines.

Eric Philip Sills: There's a lot of different pieces in there and.

Eric Philip Sills: And 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 in to the fact that any sub segment goes up or down in a quarter.

Scott Lewis Stember: Got it. 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 should we look for the margin to eventually land in a more normalized environment for this segment? Thank you.

Speaker Change: Got it and then my last question is just on the margin side you talked about.

Scott Lewis Stember: I guess labor wages and things like that.

Scott Lewis Stember: How are you addressing that.

Scott Lewis Stember: And what is a good margin.

Scott Lewis Stember: I guess, what we look for the margin to eventually land in a more normalized environment for this segment. Thank you.

Speaker Change: And Scott just to be clear. This is on the engineered solutions segment Youre asking about yeah. Yeah. Thanks, Yeah, great. So so I think Scott the gross margin that we'd be looking at and I guess to give a little bit of history. Before I started if you go back several years gross margins have kind of a range between 18 and 20%.

Eric Philip Sills: And Scott, just to be clear, this is the engineered solutions segment you're asking about.

Scott Lewis Stember: Yeah, yeah, thanks. Yeah, yeah. Right. So, I think Scott

Eric Philip Sills: Right. So I think, Scott, the gross margin that we'd be looking at, and I guess to give a little bit of history before I start, if you go back several years, the gross margins have kind of ranged between 18% and 20% over time. And so as we look at offsetting cost headwinds and cost reductions in this area, we'd look to be getting back into that range. You know, I think on the very bottom line of just the EBITDA, and where we tend to talk about that number recently, we'd expect that segment to also continue to be in line with the aftermarket once the headwinds are offset.

Eric Philip Sills: Over time, and so as we look at offsetting cost headwinds and cost reductions in this area.

Eric Philip Sills: Look to be getting back into that range.

Eric Philip Sills: I think on the very bottom line adjusted EBITDA, and where we tend to talk about that number recently, we would expect that segment to also continue to be in line with the aftermarket once the other headwinds are offset.

Scott: Got it.

Scott Lewis Stember: All right, that's all I have. Thank you.

Speaker Change: Alright, Thats all I have thank you.

Speaker Change: Thank you.

Bret David Jordan: Thank you. We got now to Bret Jordan at Jefferies.

Speaker Change: Thank you, we got to know to Bret Jordan at Jefferies.

Bret David Jordan: Hey, good morning, guys.

Bret David Jordan: Hi, I'm Bret. Could you talk about temperature control inventory at the customer level and in Q1, how we are year over year?

Bret David Jordan: Morning, Brett.

Bret David Jordan: Could you talk about temperature control inventory at the customer level and in Q1, and how we are year over year.

Eric Philip Sills: Sure, you know, 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, and what I would say is that basically, they're in good shape for the season, maybe slightly above where they were going into the last selling season, but they're healthy and and where they would want them to be, so now, ultimately, it's about what And so really, we're hoping that this begins over the next few weeks and lasts for a long time.

Bret David Jordan: Sure.

Eric Philip Sills: And I think you can't just look at it after Q1, but as as they're building up their entirety of their preseason orders, which did continue into the beginning of Q2 and what I would say is that basically they are in good shape for the season, maybe slightly above where they were going into last.

Eric Philip Sills: Selling season, but they are healthy and where they would want them to be so now ultimately it's about what happens.

Eric Philip Sills: With the weather.

Eric Philip Sills: And so really what we're hoping that that begins over the next few weeks and lasts for.

Eric Philip Sills: A long time.

Bret David Jordan: And you talked about new customers. Was that primarily engineered solutions, or did you pick up new customers in the aftermarket as well?

Speaker Change: Okay, and you talked about new customers was that primarily the engineered solutions are to get to pick up new customers in the aftermarket as well.

Eric Philip Sills: That's correct, Bret. We're referring specifically to within Engineered Solutions and not so much to 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-multi-million dollar award. It's a lot of base hits, and we have been getting them. Okay, and then the final question, I guess.

Speaker Change: That's correct, Brett we're referring specifically to two within engineered solutions and not so much new customers as new awards with existing customers or the other is a little bit of that as well one thing just to kind of characterize what happens in that industry is that a lot of base hits, it's not like you're landing a new.

Eric Philip Sills: Platform with a light vehicle manufacturer and all of a sudden it's a multi multimillion dollar award it's a lot of base hits.

Eric Philip Sills: And we have been.

Eric Philip Sills: But we havent getting us.

Bret David Jordan: Okay, and then the final question, I guess on the pricing outlook: have we seen most of the inflation pass through, or is there still some to come to offset the continued high rates?

Speaker Change: Okay, and then final question I guess on pricing outlook, we've seen most of the inflation pass through or is there still some to come to offset the continued high rates.

Eric Philip Sills: Yeah, so look, it's a competitive market, as you well know. And so pricing is not easy to come by. We continue to work with all of our customers where we can to be able to share with them what we're experiencing with Cost Inflation. And so nothing specific to report; we continue to work on it. But it is getting tough.

Bret David Jordan: Yeah, So look it's a competitive market.

Eric Philip Sills: As you well know and.

Eric Philip Sills: So pricing is not easy to come by we continue to work with all of our customers, where we can to be able to share with them, what we're experiencing with cost inflation.

Eric Philip Sills: So nothing specific to report we continue to work on it but it is getting tougher.

Speaker Change: Great. Thank you.

Operator: Thank you. Just a reminder, ladies and gentlemen, please press star one for any questions this morning. We go next to Carolina Jolly at Gabelli.

Speaker Change: Thank you.

Speaker Change: Just a reminder, ladies and gentlemen, please press star one for any questions. This morning, We'll go next now to Carolina Jolly Gabelli.

Carolina Jolly: Hi, thanks for taking my question. Morning, Carolina. Morning. So just a quick question. In terms of kind of industry commentary, it sounded like in some areas in the industry, there was kind of a weak start to the spring selling season. Would you, given your kind of inventory and category mix, have exposure to that underlying trend?

Carolina Jolly: Hi, Thanks for taking my question.

Carolina Jolly: Morning, Caroline Good morning, So just a quick question in terms of kind of industry commentary it sounded like in some areas in the industry. There is kind of a weak start to the spring selling season.

Carolina Jolly: Given.

Carolina Jolly: You're kind of inventory category mix have exposure to that underlying trend.

Carolina Jolly: Ah.

Carolina Jolly: 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?

Speaker Change: I'm not sure I completely understand your question are you asking whether we're tracking with the overall numbers of the.

Carolina Jolly: The large public companies as they report.

Carolina Jolly: Just in terms of, it did sound like there was more of a DIY element. Oh, I see what you're saying. I see what you're saying.

Carolina Jolly: Just in terms of it did sound like there is more of a DIY.

Eric Philip Sills: I see what you're saying. I understand what you're saying.

Carolina Jolly: Oh I see what yourself also.

Eric Philip Sills: Yes.

Eric Philip Sills: We are.

Eric Philip Sills: Most of our products are not DIY, there's certainly a bit of work there.

Eric Philip Sills: That certain shade tree mechanics are able to do but the majority of our products are professionally installed and.

Eric Philip Sills: Yeah, we, most of our products are not DIY. There's certainly a bit of work there that certain shade tree mechanics are able to do, but the majority of our products are professionally installed. And so I think it has less to do really with the DIY customer versus the DIFM customer. It has more to do with discretionary versus nondiscretionary type purchases. And the majority of what we're selling is nondiscretionary. And so while I think you have some economically challenged consumers who are perhaps deferring things that they don't need, typically, our types of products are break, fix, and if the car is not working, they have to buy it.

Eric Philip Sills: So I think it has less to do really with the DIY customer versus the D. I F. M customer it has more to do with discretionary versus non discretionary type purchases and the majority of what we're selling is non discretionary and so while I think you have.

Eric Philip Sills: Some.

Eric Philip Sills: Economically challenged consumers, who are perhaps deferring things that they don't need.

Eric Philip Sills: Typically our types of products a break fix and if the car is not work in a day.

Eric Philip Sills: They have to buy it.

Speaker Change: Great. Thank you.

Eric Philip Sills: Okay.

Operator: Thank you. And just a final reminder, please, ladies and gentlemen, if you have any further questions today, please raise your hand star one at this time. And gentlemen, it appears we have no further questions today. Mr. Cristello, I'd like to hand things back to you, sir, for any closing comments.

Speaker Change: Thank you and just a final reminder, please ladies and gentlemen, any further questions today star one at this time.

Cristello: And gentlemen, it appears we have no further questions today, Mr. Krista, Hello, I'd like to hand things back to user for any closing comments.

Anthony Francis Cristello: 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.

Cristello: Okay. Thank you again, we want to thank everyone for participating in our conference call. Today, we understand there was a lot of information present, it 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.

Speaker Change: Thank you Matthew Hello, ladies.

Operator: Thank you. Thank you, gentlemen. Ladies and gentlemen, that will conclude Standard Motor Products.

Speaker Change: 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.

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