Good day, and welcome to the Standard Motor Products Fourth Quarter Earnings Release. [Operator Instructions]. Please note, today's call may be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Larry Sills, Executive Chairman. Please go ahead, sir.

Okay. Thank you, and good morning, everyone, and welcome to Standard Motor Products Fourth Quarter Conference Call. And we thank you all for taking the time to attend. Here for the company is Eric Sills, President and CEO; Jim Burke, Executive Vice President and Chief Financial Officer; and myself, Larry Sills, Executive Chairman. Agenda for today, Jim will review our financial results both for the fourth quarter and for the year as a whole, and then Eric will review some of the key events and developments, and then we'll open it for questions. So with that, thank you for attending, and let's get started.

Okay, thank you, Larry. As a preliminary note, I would like to point out that some of the material we will be discussing today may include forward-looking statements regarding our business and expected financial results. When we use words like anticipate, believe, estimate or expect, these are generally forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they are based on information currently available to us and certain assumptions made by us, and we cannot assure you that they will prove correct. You should also read our filings with the Securities and Exchange Commission for a discussion of the risks and uncertainties that could cause our actual results to differ from our forward-looking statements. All right. To begin, overall, 2017 was a transition year with various facility moves, some completed and 2 still underway, establishment of a new JV in China and the recording of the impact of the Tax Cuts and Jobs Act tax law changes. Eric and I will discuss these points further in our prepared comments. Consolidated net sales in Q4 '17 were $240 million, up $10.2 million or 4.4%. And full year 2017 net sales were $1,116,100,000, up $57.7 million or 5.4%. Excluding the General Cable incremental sales from our acquisition at the end of May 2016 of $38.4 million, our full year 2017 net sales increased $19.3 million or 1.8%. Engine Management net sales in Q4 '17 were $198 million, up $12.8 million or 6.9%, and for the full year were $829.4 million, up $63.9 million or 8.3%. Excluding the General Cable incremental wire sales, Engine Management full year net sales were up $25.5 million or 3.3%, which is within our expectation of low to mid-single-digit growth. Temperature Control net sales in Q4 '17 were $40.3 million, down $2.4…

Well, thank you, Jim, and good morning, everybody. So overall, we are basically pleased with the quarter and for the year as a whole, though there were certain challenges, however, which will continue to create some headwinds in the near term. With that said, once we get past these temporary issues, we're confident that we'll be stronger than ever. Each of our two divisions had different dynamics so it's best to review them separately. Let's start with Engine Management. Sales in the quarter were quite strong, up 6.9%. But as we've said many times, there will tend to be variations quarter-to-quarter depending on our customer's ordering patterns, and therefore, it's much better to look at it over a longer period. So our full year was up 3.3% once you adjust for the full year of General Cable not present the prior year. And this 3.3% is in line with the low single-digit growth we have seen as the division's organic trend. From a gross margin standpoint, we did have another difficult quarter in Engine Management as we continue to incur costs from the various plant moves. We've made great progress with the physical aspects of the moves, but there's more to be done before we see the financial benefits. The biggest is in the integration of General Cable. To remind you, we acquired this in May of 2016 and are very pleased with the business so far. We spent the first year consolidating distribution and certain back office and sales functions, all of which are working quite well. But the heavy lifting of the consolidation didn't really begin until 2017 as we began combining the two manufacturing operations by relocating all of their production from Nogales, Mexico to our plant in Reynosa. This has been a major undertaking requiring the…

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

Eric, can you maybe talk about what the sell-through for Engine Management was in the quarter and maybe for the full year? And I know that you need to look at things for the full year, but just trying to get a sense of how your customers were thinking. Notably later in the quarter, particularly as some of the colder weather came in, it maybe sparked some additional demand.

In the fourth quarter, our customer sell-through was basically flat, slightly down to flat. But again, anything can happen in a quarter. Their purchases from us for the entire year was slightly higher than their sell-through. This was really intentional on their part. We had several of our customers intentionally broaden their inventory assortment, still a little bit of an arms race out there as all of our major accounts are trying to have the best inventory forward deployed. So we saw a broadening of their inventory to help them position themselves for the future. So it's kind of a long-winded answer. Their sell-through was a little bit less than their purchases, but we hope that, that is positioning them for future sales growth.

Okay. And just as far as like later in the quarter, just with the weather coming back, I know that your product isn't particularly, at least in Engine Management, weather-sensitive. But what are you seeing in the attitudes later in the quarter? Anything different heading into the new year?

Really, towards the end of the year, it was pretty consistent throughout the quarter, roughly flat to slightly down. Really, there's typically a bit of a lag between what our customers sell and what they purchase from us. So the cold December should parlay itself, perhaps, into some restocking in this quarter. But it's really too soon to see the impact of that.

Got it. And you talked about the margins being a little bit lower for some of these newer products, like the CNG product in Engine Management and a few other items, at least on the gross side. But you said the SG&A is lower. Is this a wash? Or is it still net-net negative or net-net [indiscernible]?

I just want to make sure we don't combine 2 things. Part of what I was saying is that the OE business is typically lower gross margin, lower SG&A. And so that's kind of an ongoing, kind of different market profile. And I would say that that's pretty consistent. On the aftermarket side, this is where we have newer product categories that are starting to take off. And these are areas where they start out with lower margins as we work things through our product development cycle. So we're always confident we're able to correct the costs going forward. But that's more of a temporary margin initiative.

Okay. And just a last question and then I'll jump back in the queue. Maybe just talk about the CNG opportunity. I know last quarter, you had said that there was some building momentum there, notably obviously, in the Far East. Can you maybe talk about how that's changed in your outlook for '18 for that?

Sure, Scott. It's -- yes, it really -- this is a program that we've had for several years, but it took a little while for the market to adopt it over there. This really started to pick up in the second half of last year and it's continuing into this year. It's very difficult to predict what it's going to look like going forward. The order book -- we have -- we sell to a system integrator, who then sells to the actual vehicle manufacturers, so we're relying on them for future outlook. A lot depends on what happens in China with regulations over there, but we're pretty bullish on this program.

And we'll go next to the line of Christopher Van Horn with B. Riley FBR.

This is Dan Drawbaugh on the line for Chris. Just to start on the new Chinese joint venture, I was curious if you can lay out for us how the impact on margin is going to look over the near term, over the medium term. What should we be looking for in terms of cadence of how that rolls in? And maybe if you could help us with the magnitude of that impact.

Right. Well, first on -- and this is Jim Burke. On the results of the JV, we'll record that down in the non-operating income that's there. It will have a -- as a source of supply to us, it will have a benefit where we control the costs and drive improvements in there. And we recognize that benefit in our gross margins. But again, it's a competitive environment that's there. We look to offset and make continuous improvements in there, but I don't think you would look to see something substantial change in our gross margins. If you look back, our gross margins over the last couple of years, we improved from the low 20s, 21%, 22% upward to what we said was 25%, 26%, and stated that 2018, expecting an average season, we look to be in the 26% range.

And then I think you recently announced an expansion in your ADAS component offering. I was curious to know how large you see that market getting sort of over the medium term, where you play right now and what drove that expansion in your offering.

Well, as we look at our overall Engine Management offering, we believe we need to be much more than things that touch the engine, and so we see a lot of opportunities in safety-related systems and other sensor-driven systems within the vehicle. So yes, you're correct, we did recently announce the launch of several different ADAS-type products, blind spot detection, lane departure systems and so on. Still very much early days on these. They're on late-model vehicles, and so the replacement rates really -- the replacements have not really begun. So this is positioning ourselves more for the future. It's hard to tell what kind of failure rates these items are going to have, so we'll just have to wait and see. But we think these products fall within kind of our bailiwick, what our customers would expect us to carry. So we wanted to get out there and be first-to-market and have a good successful program.

And we'll go next to the line of Matthew Paige from Gabelli.

Just to talk about Temperature Control quickly, is there a replacement cycle for those products that could lead to higher demand even without warmer temperatures, like a failure kind of cycle?

Well, yes. These parts can fail even if it doesn't get hot. And there's, of course, certain parts of the country that are always hot, so it's not binary. It's just that warm weather tends to see higher utilization of the systems and also less of a tolerance for the driver to deal with an air conditioner that's not performing well. So I don't know if that answers your question. These compressors, a lot of them, are running on serpentine belt systems that the vehicle is turning and so too is the compressor. And so if it seizes up, it needs to be replaced. So you are seeing some technology shifts that will allow these things to get worked even if the air conditioning is not on. But it is still going to be something that has a significant weather overlay in the demand.

Okay. And then kind of along those lines, are there different products on newer vehicles? So as later-model vehicles move into their replacement sweet spot, is there going to be a demand for a different kind of Temperature Control product that your customers may not have already stocked?

It's really -- you're having minor modifications to different types of compressors, but it's really a fairly stable technology. It doesn't have the same level of innovation as you'd have on the Engine Management side.

[Operator Instructions]. And we'll go to Bret Jordan from Jefferies.

This is Mark Jordan on for Bret. Thinking about the remaining plant moves and associated costs, what should we expect for Engine Management margins going forward? I think it sounds like Q3 is more the inflection point, but I think you also said the majority of the Reynosa move is expected to be done in early Q2. So could we see some benefit there in Q2 or is it all in Q3?

This is Jim Burke. So again, we really flattened out our margins in Engine Management in that 28%, 29% range and project it to get back up into the 31%, 32%. But we feel we purposely have slowed it down to be able to make sure we maintain our fill levels with the customers. So we're projecting that the moves will be completed in the second half of 2018 as opposed to completed by the end of Q2. And at that point, we still need to be able to get the efficiencies back up to where we believe they should be. So to be cautious, I would be targeting the margin improvement for late 2018, that's in there, and getting the full benefits of it then starting in 2019.

Okay, great. Very helpful there. And then switching gears over to the Temperature Control segment, I know there's some expected sales pressure in the first half of '18. I think the press release this morning used the term significantly lower preseason orders from customers. Would you be able to quantify the expected sales pressure there? I think the biggest hurdle there is in Q1.

Yes. Again, Jim Burke. The orders that we have really within -- and again, we always purposely say you can't look quarter-to-quarter that's there. But even preseason orders can show up between the last 2 weeks of March versus flipping over into April, and we don't know how it plays out. What we do know is that we expect, and what we've seen so far that preseason ordering will be much lighter than it was because they have the inventories. But it's too early to even attempt to say what the full impact of it will be.

And we'll go next to the line of Robert Smith with the Center for Performance Investing.

With respect to Foshan and the opportunity to develop the Temperature Control business in China, could you give me some kind of yardsticks. What is the opportunity? How large of a market is this in China?

Well, seeing as we're starting from 0, there's only upside. Just kidding. The -- where we are seeing our near-term opportunities in the China market is selling OEM as opposed to the aftermarket. The aftermarket may also be a potential, but the vehicle park is so much younger there that really the market growth has to do with new car sales. FGD had begun to get some contracts with vehicle manufacturers in the region, and so they've begun to sell compressors into that market. We hope to be able to capitalize on what they've already established, potentially also getting some of the product categories coming out of our other joint venture there, because they are complementary, related categories, and continue to pursue that local market. We think it could be a very big market, but I just don't want to set expectations too high because it is so new and it is competitive and it is an area that we're just learning.

And from the point of view of the industry, the auto industry for many years was kind of a staid place to be. And now, there's so much excitement about what the future might hold and is unfolding and so many things happening. Where do you guys see the company as far as further OE opportunities?

Our OE business has really improved over the last many years partly in terms of sales growth but more in terms of the attractiveness of what we're pursuing, where we've really tried to get much more focused in areas where we think we have a competitive advantage, so that we're not just playing on price and finding ourselves in commoditized categories. And so the areas that we've been focusing on, one, has to do with fuel injection because it happens to be an area where there are very few players and getting into alternative fuels seems to be a nice niche, especially overseas, where they are adopting it much faster than they are here in the U.S. We're going to continue to pursue that. Out of our Poland operation, we've been in Poland now since 2006. We took it from being a 50-person plant to being a 700-person plant. And while a lot of what they do ends up in our aftermarket boxes here in the U.S., a good chunk of what they do is also in OE as they enjoy 2 benefits that really help you with OE. It's a very good cost structure but it's also very technically capable. They have over 50 engineers there. It's very easy to hire capable, skilled engineers there. So products coming out of Poland is another area where we see growth opportunities. This tends to be Engine Management sensors, Temperature Control sensors, exhaust gas temperature sensors and the like, so. And then, the last area where we've seen some nice OE potential is on the Temperature Control side, really coming out of our past few acquisitions, this FGD one. And also what came with the Gwo Yng deal back in 2014 was a company called Annex Manufacturing, which was a U.S.-based company that really sold to heavy-duty -- it was mostly the sales arm for Gwo Yng and some other suppliers in Asia, but it was pursuing heavy-duty OE Temperature Control products. So we think that there is nice upside to OE. I don't expect it to ever be the majority of our business. But we do invest in it and we improve it, and so we see some nice potential there.

[Operator Instructions]. And it does not appear we have any further questions at this time, gentlemen.

Okay. That concludes our fourth quarter conference call, and thank you all for attending. Thank you.

Thank you.

Bye.