Good day and welcome to the Standard Motor Products Fourth Quarter Earnings Release Conference Call. [Operator Instructions] Please note today’s call is being recorded. It is now my pleasure to turn the conference over to Larry Sills, Executive Chairman. Please go ahead.

Okay. Thank you and good morning everyone. Welcome to Standard Motor Products fourth quarter conference call and we thank you all for attending. Here for the company are Eric Sills, President and CEO; Jim Burke who I am happy to announce is now Chief Operating Officer and we all congratulate him on his promotion and myself, Larry Sills, Executive Chairman. Our agenda will be as we typically do, Jim Burke will review the numbers, then Eric will go into a few subjects in greater detail, and then we will open for questions. So with that in mind, let us begin. Mr. Burke?

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. Okay. So look at the P&L, consolidated net sales in the fourth quarter were $247 million, up $7 million or 2.9% and for the full year were $1.921 billion, down $24.1 million or 2.2%. By segment, Engine Management net sales, excluding wire and cable, in Q4 ‘18 were $165.6 million, up $7.1 million or up 4.5% and for the full year 2018 was $648.3 million, down $9 million or 1.4%. Wire and cable net sales in the fourth quarter were $37.4 million, down $2.1 million or 5.4% and for the full year were $155.2 million, down $16.9 million or 9.8%. Lastly, Temperature Control net sales in Q4 were $41.8 million, up $1.5 million or 3.7% and for the full year were $278.5 million compared to $279.1 million in 2017, essentially flat. Consolidated gross margin in the fourth quarter 2018 was 29%, up 0.1 points versus Q4 ‘17 and for the full year 2018 was 28.6%, down 0.7 points versus 2017. By segment, Engine Management gross margin in Q4 ‘18 was 28.8%, up 0.4 points versus Q4 ‘17 and for the…

Well, thank you and good morning, everybody. First off, I would like to open by offering my congratulations to Jim Burke on his promotion to Chief Operating Officer. Jim’s been an invaluable asset to SMP for decades. And while he rose through the financial ranks, he always played a significant role in all aspects of our business. As such, he is uniquely qualified for this appointment, and I’m very excited to work with him in his expanded role for many years to come. Secondly, I would like to take a moment to recognize that SMP has now achieved a significant milestone. 2019 marks our 100th year. We attribute this longevity to a stability of focus and culture, our participation in a terrific industry and to the thousands of employees, past and present, who have devoted their time and energy to making us who we are. Okay. On to the quarter’s performance, Jim went through the numbers, so I will only add some color on a few of the pieces. Overall, we’re satisfied with our performance. After a challenging first half, some of the positive trends we saw in the third quarter have continued. And as a result, while the year remains unfavorable to 2017, we are pleased with the momentum. I will review the business by operating division starting with Engine Management. The division’s sales were up 2.5% for the quarter. Now our wire and cable product line was down 5.4%, but as we have previously discussed, this category is an older technology and we can expect this type of gradual decline. Meanwhile, the balance of the Engine Management business increased 4.5% over last year, which is on the higher end of our stated expectations of low single-digit growth. Our full year sales in the non-wire portion of Engine Management…

Thank you. [Operator Instructions] We will take our first question from Scott Stember from CL King & Associates.

Good morning, guys.

Good morning, Scott.

A question on the outlook for the gross margin in Engine Management, I appreciate the – I understand the dynamics behind the tariff impact of 40 basis points. So I guess, 29% to 30% versus the 29.4% – I am sorry, the 28.6% this last year. So I am just trying to figure out, I know there is – you are not 100% done with seeing some of the benefits from the Mexico consolidation, but I was under the impression that we will probably see a little bit more of a net benefit from that even with the tariffs in 2019. Maybe just talk about the timing of that and maybe just size that up? Thanks.

Okay, again good morning, Scott. As we are trying to provide guidance as we improve in there, Eric correctly stated the inflection point, we are seeing improvements but this is still built in for continuous improvement as we go throughout 2019 with the margin. So we’re stating in there we will be in the 29% to 30% range. We don’t quantify each of the individual pieces that we have there. We did – I also pointed out that the first quarter will be lower than that as we amortize cost with returns and other expenses in Q1, but then we feel we finished the year at 29% to 30%. Again, it’s a competitive marketplace. We have product mix that goes on, some of the mix of OE, OES business. Eric talked about CNG comes with lower margins, but lower SG&A expenses that are there. Our longer term is 30% to 31% that’s on there and we are always looking for continuous improvement.

Got it. That was very helpful. And as far as pricing in general, obviously, you are able to get pricing for tariffs and I know it’s very competitive market, but with regards to freight and labor, can you maybe talk about your ability to get pricing with your customers?

Sure. This is Eric. And you are right, this is a difficult and competitive industry, so pricing is never easy. However, what I would say is really for the first time in several years, we have been essentially flat on pricing for the last several years and I believe we are now entering a period where it’s much better received. For all the reasons that you are referring to, not only are our costs going up but so too are our customers. And so I think it’s a much more favorable environment and we are having some better discussions along those lines.

Got it. And just lastly, just on the industry, obviously I guess the weather from last year certainly helped the industry on the Engine Management side, maybe not for you guys but the industry as a whole. And it seems as if the number of vehicles entering the industry’s sweet spot of 6 plus years should increase as the year progresses heading into next year. So maybe just talk about your expectations for the growth of the industry, would you expect to see even better growth than we saw this last year just because of the factor of the vehicle population or maybe just frame that up first?

Sure. And you are hearing from all of the other publicly traded companies that it is perhaps a slightly better tailwind than in previous years. I would say, in terms of that sweet spot for us as opposed to other product categories where the sweet spot can be really pretty tight, our diversity of products, it’s not like once it hits 6 years old all of a sudden rates jump up. So we don’t have that sort of significant shift based on that sour trough and what the industry is seeing as more things move into the industry sweet spot. That said we do see that our customers’ POS, specifically on our product categories is ticking up a bit. You go back a year it was a couple of percentage points lower. So we think that’s favorable. We think that, that does tend to be a good leading indicator of what they are going to buy from us. So we are cautiously encouraged.

Got it. That’s all I have. Thank you.

Thank you, Scott.

Thank you. [Operator Instructions] We will move next to Bret Jordan with Jefferies. Please go ahead.

Good morning, guys.

Good morning, Bret.

When you think about your low to mid single-digit sales growth target for ‘19 and this is sort of along the line of how much contribution from inflation versus core growth in that expectation?

Again, I think Eric had just pointed out there, the diversity with all our product groups that are in there. Bret, we continue to look to the low to mid-single digits in the organic growth period that’s in there. I think the better indicator pointed out was how well the major distributors are doing with the POS and we should follow and support them. So again, we stay with the mid single-digits, low to mid single-digits that are there.

Okay. So low to mid single organic growth and guys like O’Reilly are talking about 2% of inflation on top of growth, is that more focusing towards mid single-digit and low single-digit?

Yes, would be and add the impact of some tariff noise on there also to get over to high single-digits.

And then, I guess, in past years, we’ve talked about various retail partners that may be stocking or destocking erratically. Are we seeing anything extraordinary going out, out there as far as customers that are buying more or less than usual?

No. We haven’t really seen that recently, I would say as we look at the 2 different divisions separately as they do have different dynamics. On the Engine Management side, as we’ve explained a couple years ago, there was a lot of increased stocking going on. Since then, it’s essentially stabilized, a little bit of flexing here and there but we haven’t seen any of our major accounts doing major stock-ups or destocking outside of the normal pipeline planogram update type of changes. Temperature Control, what we have seen, which is to be expected, is they entered this season a bit lighter on inventory than they entered last season, really just because of the previous summer’s dynamics. And so, we are, therefore, seeing a better preseason dynamic than we did last year. We encouraged with actually with some of our accounts to help smooth out that volume dip and better prepare it for the season. And so, we are seeing that type of activity now in the first and second quarter.

Okay. And I guess, you talked about that strong Temperature Control preseason orders. Are those orders that would ship in the first quarter or the second quarter as far as the top line impact?

It’s going to be both. It’s really hard to predict if it ships in March, it ships in April, it can swing it quarter-to-quarter. So, I think it’s better to look at it at the half.

I’ll just add to that a little bit, Bret, that because the first half of ‘18 was so soft, again, we’ve had this up seesaw effect going year-to-year that’s in there. So even though it’ll be even those are across Q1 and Q2, I expect that it will be a stronger Q1 ‘19 versus ‘18 from preseason order impact.

Okay. And then the impact we saw on the Temperature Control category, obviously, margins around distribution impact in ‘18. That’s cleaned up, so we should, with the volume, see the benefit in ‘19?

Yes. Jim Burke again. Again, we had again, the purpose we get automation in there, low unemployment, and you can imagine the amount, of seasonal workers that we have to put in there. So, we wound up struggling through last year’s and incurred significant cost. We feel we’re in a much better position starting off this year, smoothing out the preseason orders. We’ll get a large portion of that savings back, but this will continue to be a continuous improvement project that we work on.

Okay great thank you.

Thank you, Bret.

Thank you. We’ll take our next question from Robert Smith with Center for Performance Investment. Please go ahead.

Good morning. Thanks for the dividend increases as always. Two questions. One, looking at gross margins on a longer-term good planning assumption, do you see any possibilities of moving the needle more than traditionally in areas of automation or supply chain management or distribution? Or how do you look at longer term?

Robert, this is Jim Burke. We’re continuously looking at opportunities there, a number of the initiatives that we’ve won between low-cost sourcing, manufacturing to low cost areas, supply chain improvements throughout value engineering. But again, we’re in a very competitive marketplace, so as we automate, as we make all of these improvements that are there, we look to continue to be a long-term supplier, a full-line supplier, but there’s no needle mover that’s going to move it 5 points or anything like that. So, I would say consolidated, we’re in that 30% range that are in there. We think, year-over-year, our initiatives will build to have incremental improvements each year on a longer term. But there’ll be no there’s no sudden cliff change that is significantly one way or the other.

Okay. And is there any more color that you could give us about China that might have developed in the last several months?

Sure. So really, the three main things we have going on in the region, we have our two joint ventures there. The first one, [indiscernible] which is or both of our joint ventures are on the air conditioning side. [indiscernible] was back a few years already. They are more recently making inroads into the Chinese OEM market, so it’s still very small. The other joint venture, the more recent one, FGD, the compressor manufacturer, when we first entered that JV, they already had a bit of a footprint there that we were building on and actually using the 2 joint ventures to partner into that space. So, while it’s still very small in sales, we’re seeing nice year-over-year percentage growth. It’s obviously a very fast-growing market. You got 25 million vehicles-plus going into the market each year. And so, while there are a lot of players there for sure, we’re starting to make a bit of a name for ourselves and so, we see tremendous upside potential. Again, it’s still very early. This will typically be in the OE space. The aftermarket in China, it’s still very new and fragmented. The average vehicle there is only about 4.5 years old, so any aftermarket that is happening there is really more on things like fluids and brakes and things that are early vehicle age-type products. But the OE market there is a nice avenue for us. The other one which I mentioned in my prepared remarks, is the compressed natural gas injectors where, in China, there’s a lot more adopters of this alternative energy than here in the U.S., largely due to government regulations presented. And so, we developed this product several years ago, adoption was slow but in the last couple of years, it’s really hockey sticked up, and 2019 is starting really quite strong in that. We sell indirectly into China. We sell to a system integrator who builds an entire fuel delivery system but then it all goes to OE heavy-duty other vehicles in China. So, you add all the little things together, while still relatively the small, the future is pretty bright.

And so, 2019, how do you see the landscape for possible acquisitions or joint venturing?

Well, we’ve always been reasonably active in M&As, sticking with our basic approach, which is looking for targets that both strengthen our core business but also do help us get into something new. As Jim mentioned in his remarks, our balance sheet is in great shape to be able to do these types of deals. We’re always looking and there continue to be opportunities.

Is that improving or the opportunity is getting more apparent or no?

This is Jim Burke. There’s always a list of things that are for sale out there but again, we try to stay focused in our key categories where we can bring value and improvements that are in there. So, I’d say that the pipeline or deals and things that we look at is fairly stable, constant.

Okay thanks very much good luck going forward.

Thank you.

Thank you. [Operator Instructions] We will move next to Christopher Van Horn with B. Riley FBR. Please go ahead.

This is Dan Drawbaugh on the line for Chris thanks for taking the questions most of it’s been addressed already. Just wanted to close out with a couple more here. I think last quarter, you had mentioned that you guys were a bit differentiated in your sourcing from some of your ignition coil competition in that a lot of it’s coming out of Poland where some of your competitors may be sourcing from China. Can you maybe elaborate on any potential share gain opportunity there could be there, if any of that has begun to materialize or how you might go about that?

Sure, Dan. First of all, it’s not just on coils, it’s that is one example. As a general statement, our footprint is less in China than potentially some of our competitors, whether it’s out of Poland or whether it’s out of our Mexico operation. In the long run, we do believe that this is a competitive advantage. In terms of any specific gains or losses, we don’t get into that type of discussion.

Okay, fair enough. And then I also wanted to I know this was asked earlier. I know you guys have talked about the fourth quarter gross margin in Temperature Control, but I wanted to make sure that I understand sort of the cadence through the balance of 2019 here. I mean, what should we be thinking about as far as the year-over-year performance for that gross margin for Temperature gross margin in kind of the first half? Because I know that the first quarter was a bit light last year relative to the kind of the middle of the year. And I think historically, the first half has been a bit lighter. So, kind of how should we think about that cadence for 2019?

Well, first, I want to again, caution everybody looking at any individual quarter. So, our strongest quarters are obviously Q2 and Q3. And what we do throughout the year, is because we’re having to anticipate all of the returns and other allowances in that, so we’ll have some true-ups at year-end that are there. Overall, we said 25% to 26%. I think the first quarter will be more normalized and we’ll experience in there. And again, I think you have to really look at the full year rather than the because Eric even pointed out a big swing can happen, that the sales go out in the month of March so they flip over into April and what is the absorption that we’re having on fixed cost in that there. But I would say look towards the full year at 25% to 26%.

Okay great. Thanks for the color. I will jump back in queue.

Thank you, Dan.

[Operator Instructions] We’ll move next to Kyle Kavanaugh with Palisade Capital. Please go ahead.

Yes, hi good morning and thanks. I was wondering if you could kind of walk through the tariff impacts and if that could you explain a little more how you expect it to do? Is it from [indiscernible] cost of the tariffs and how much it can impact the tariff on cost of goods sold?

I’ll address what our process has been with our customers and Jim can help with any of the numbers associated with it. So, we have successfully worked out a process with all of our customers where it’s a direct pass-through. So that will it won’t have any impact on us from a dollar standpoint. You’re going to see a little bit of a hit on margin percentage because we’re basically passing it on that cost. But we do have a program now with all of our customers where they’ve accepted it. And going forward, if there is any changes to the tariff landscape, we have a process in place to continue to roll with it. So, we feel like we have it well under control.

And then how it’s like on both Temperature Control and Engine Management, how much of the cost is being affected by the tariffs?

Yes. Kyle, this is Jim Burke. Yes, we haven’t quantified what the absolute dollars are but it’s basically the we’re looking for the same number that we’re going to that would increase the selling prices through for what we’re going to have in the cost of sales. That’s why we have a little bit of a margin percentage erosion, but the gross profit dollars will be the same. And again, it’s in flux also between what’s happening and with tariff percentages and everything else that we watch and wait to hear and learn.

And basically, at the quarter, it’s just the steel input, right, into the products?

No. Actually, the steel and aluminum tariffs, the 232 code, 232 tariffs have negligible impact on us. It’s the China tariff that is called Section 301 tariffs where there were 3 different rifts. As you recall, the first 2 rifts went in over last summer. They combined to $50 billion of U.S. purchases and the tariff percentage was 25%. The third rift went in later, that is the tariffs on those are 10%. Those are the ones, as you may recall, if they don’t work out some kind of arrangement do go there in the 25% in March. We have products on all 3 of these rifts, and so we’re passing along that tariff expense on all affected products.

Okay. And then just one more question on Reynosa, I don’t know if I missed it but the startup expenses that affected this quarter, are they continuing into the first quarter?

Yes. Again, this is Jim Burke. And Kyle, the Reynosa cost really impacted us really across from 2018 this full integration. Just to put it in perspective again, this was closing down a facility in Nogales with 400 to 500 people and bringing them all and consolidating, actually even building and leasing out a new building attached to our existing one. So, the costs we incurred were throughout 2018 and to a lesser extent now, so that we did recognize and see improvements as we move forward through 2018. We feel now that it’s stabilized. The key there was the significant turnover and low unemployment that we would have there. But now we feel the labor force is more sustainable. They still have turnover but we’ve been through a much lower degree, and the efficiencies and productivity improvement. So again, we’re optimistic looking into 2019 from where we were, costs we incurred throughout 2018.

Okay right thank you.

Thank you, Kyle.

[Operator Instructions] We’ll take our next question from [indiscernible] with EBMR Holdings.

I’m sorry, I joined the call late that’s so I apologize if this question has been asked. I’m wondering what’s going in terms of a stock buyback. I know the stock’s down, let’s call it 12% today?

Yes, hi Nick. Okay, we currently have an authorization of $20 million. We had an earlier one in 2018. We added on $20 million. We’re very we have acquired roughly $9.3 million against that, roughly half. So, we have, again, roughly $10.7 million open into 2019. And we will continue to evaluate it as we move forward and [indiscernible].

And you’re inclined to continue your activity at the previous pace?

We have a number of when we look at our use of cash, we invest in the business with capital expenditures first for our core business that we’re looking at. Obviously, pay down debt, but we’re in very good shape in that fashion also. We look for opportunities on acquisitions. And dependent upon that, then we’ll do the share buybacks, so that our share buyback program really is to mirror roughly equity awards that we have to our employees. So again, we’ll evaluate this on an annual basis with our board.

And I guess my final question since I missed the first part of the call. Has there been any change to the overall ‘19 guidance?

I’m sorry. Could you repeat the question?

Has there been any change?

Yes, well, we don’t put out formal guidance, Nick, on down to an earnings per share number. But what we do is because we have 2 primary segments there, Engine Management, Temperature Control, on the Engine Management business, we said that we would be within the 29% to 30% range in 2019 and more forward-looking, going increasing to the 30% to 31%. And in Temperature Control, we be in the 25% to 26% range and then drop it down to SG&A expenses because the bulk of those expenses are quasi-fixed that’s there and it’s not true 100% variable to sales by quarter. We say that we’ll be in a spend level in the $59 million to $62 million range for 2019 on SG&A spend.

Okay, alright. Thanks very much. I appreciate that.

Thank you.

And we will take a follow-up from Bret Jordan with Jefferies.

Good morning again. Just a quick follow-up on the Temperature Control margin, I think you’re sort of bucketing 370 basis points of year-over-year decline between labor and efficiency and production scheduling and sort of shifting things around in Mexico. Could you sort of talk about the largest couple of factors there?

Are you talking about going forward?

No, no, I am really sort of just looking at what we are bouncing back from or sort of really what was not recurring that might be impacting now.

And I think Jim kind of mentioned this, but we caution against looking at any individual quarter but especially the fourth quarter within Temperature Control, because it is a very light sales quarter and being at the end of the year, it’s also where we true up a lot of returns and so on. So you can have those types of swings but it’s I don’t know 13%, 14% of our year’s sales happened in that quarter for the division. So I wouldn’t look at that as in and of itself.

Right. And I think the $40 million in sales that are there were off 4 points and its $1.5 million that are in there. It’s really a true-up between everything that we are doing for customer returns, but I think your original question on there for manufacturing variances, we are very pleased with the performance in our Temperature Control group in Reynosa, Mexico and look for continued savings going into 2019 that’s there. So, it’s really more a function of how well do we estimate where we are on returns and what inventory levels and what we will have for truing up the year end numbers. Again, it’s seasonality, it’s volatile between the high sales Q2, Q3 and the lowest in Q4.

Okay, thank you.

You’re welcome.

Thank you. And it looks like we have no further questions at this time.

Okay. Thank you everyone. That concludes our presentation and thank you for the questions and for your attendance and thank you very much.

Bye-bye.

And this does conclude today’s program. You may now disconnect and have a wonderful day.