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

Okay. Thank you, and good morning, everyone. And welcome to Standard Motor Products First Quarter Conference Call, and we thank you all for attending. Here for the company are Eric Sills, our President and CEO; Jim Burke, Chief Operating Officer; and myself, Larry Sills, Executive Chairman. Our agenda for today, Jim will review the first quarter results, Eric will then highlight and go into detail on a few key topics, and then we'll open for questions. So with that, Jim, let's go.

Okay. Thank you, Larry. Good morning. 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. Beginning with our P&L. Consolidated net sales in the first quarter '19 were $283.8 million, up $21.9 million or 8.4%. By segment, Engine Management net sales, excluding wire and cable, in the first quarter '19 were $176.1 million, up $15 million or 9.3%, driving the high single-digit sales increase where customer pipeline orders not present in Q1 '18, tariff pricing to pass-through incurred costs and higher OES channel sales. We caution looking at single quarter results and excluding acquisitions continue to forecast Engine Management organic growth, excluding wire in the low- to mid-single digits. Wire and cable net sales in the first quarter '19 were $37.1 million, down $1.3 million or 3.3%. As previously stated, wire and cable will continue in general decline and anticipate 6% to 7% annual decreases. Temperature Control net sales in Q1 '19 were $68.9 million, up $8.7 million or 14.4%. As discussed in our fourth quarter 2018 earnings call, we anticipated strong 2019 preseason orders. Again, we caution against looking at single quarterly results as the temp season will ultimately depend on how…

Well, thank you, Jim, and good morning, everybody, and welcome to our call. We appreciate you taking the time. I'd like to open by recognizing that 1.5 weeks ago, SMP achieved a major milestone. April 19 marked the 100th anniversary of our founding. We attribute this longevity to many things, but foremost among them is to the thousands of employees past and present who have devoted their time and energy into making us who we are and we thank them for it. And on to the quarter's performance and Jim went through the numbers, so I'll only add a bit of color on a few pieces and then provide an update on our recent acquisition. Overall, we're pleased with the quarter. Some of the positive momentum that we saw in the second half of last year continued as we saw gains in both divisions and a nice improvement in our earnings. I'll start with Engine Management. The division sales were up nearly 7% for the quarter and excluding wire and cable, were up more than 9% and several elements were behind this. First, as previously discussed, we have begun passing along tariffs to our customers. Second, as is often the case, we experienced some pipeline orders from certain customers as they updated their assortments. This type of sales activity is quite common, but was largely absent last year. Thirdly, we enjoyed a nice uptick in OE sales, especially with our compressed natural gas injectors being sold into heavy-duty systems in Asia. This is proven to be a nice business for us, but can be somewhat erratic in demand. And finally, we believe that the base business was healthy. Customer sell-through, which tends to be a good indicator of things to come, started the quarter sluggish but improved month-over-month throughout. And…

[Operator Instructions]. We'll take our first question from Scott Stember with CL King.

Just honing in on the margins here a little bit, I know you've said that returns and you definitely telegraphed that heading into the quarter, but returns had an impact on the Engine Management gross margin. Is it fair to assume that the delta between the 28% and your goals or the run rate of 29-plus percent was related to returns in the quarter?

That's a major piece of it, Scott. That's there. And also as we kick off in the beginning of the year, we always have a pipeline of improvements that we're working on, moving product to low-cost areas and achieving make first buy and low-cost sourcing. So returns would be the largest component of it just because of the timing of it and other savings that we have for the balance of the year.

And on Temperature Control, could you tell us what the tariff impact was to gross margin?

We predicted that again, within the first quarter, it's a smaller piece that isolated it. We said that we are in the 0.7% to 0.8% range on an annual basis.

Got it. And just moving over to Pollak real quick and then I'll get back to the queue. Maybe just talk about your expectations for the growth of that profile here, our understanding that it's, I guess - sounds like it's a low-single digit grower. How do you expect that to fit into your model? And how - maybe just talk about the margin profile and how we expect that to fold into the expectations of the 29% to 30% you have for Engine Management?

In terms of the growth profile, it's actually what we acquired is a bit more mature. And so if we were to just leave it as is, it would be not slow growth, but would be more flat to potentially a little bit down as some of the OE contracts start to near end of life. But it's very stable product. Most of it's going into - when I say commercial vehicles, some of it is over-the-road, heavy-duty type vehicles, but it is also going into industrial, marine, material handling-type equipment, which technology is really, it's very stable and the vehicle stay on the road for a very long time. So there is not a need for continuous pipeline of new technologies coming in. All that being said, we did not acquire this to just leave it alone. We acquired it because we see that there are good opportunities to capitalize on their footprint, but also by putting behind it the breadth of our coverage. We have a lot of similar products that they did not have in the line, but work well into that space and to be able to capitalize on their brand in the aftermarket space and the customer relationships in the OE space. Our objective - it's hard to put a number on this because we're really just getting started, but our objective is to grow and build on this business.

[Operator Instructions]. Meanwhile, we'll move to Bret Jordan with Jefferies.

On the top line in Engine Management, a little over 9% ex wire, could you sort of give us a break out of what the tariff and the pipeline still contributed to that number?

Yes, Bret. This is Jim Burke. Okay. on the tariffs, we don't break out the exact amount of the tariffs that's in there. It's - to ourselves, it's a lesser degree again as we're focused in North American manufacturing and then being with Mexico to U.S. and then our Polish operation there. So we don't identify specifically that amount. The impact on the margin percent we broke out, which was 0.3%.

If you look at the components, Bret, of that 9% growth, the pipeline would be the biggest portion of it.

Okay. All right. And then on Pollak, I guess, as it's stand-alone, it's not growth, but you're talking about adjacencies and being able to grow it. What - is there any kind of a technology exchange where you can take their product and expand your own Engine Management censor business? And I guess as you shifted to Reynosa, how do you see their returns improving on the $45 million in revenue it's doing now?

From a technology standpoint, it is largely older technology. So I don't see it helping us with technology, I see us helping it. Again, it's got plenty of runway left because a lot of the applications they just don't change, they're not especially and you start looking at industrial-type applications, they're not necessarily chasing new technology, which typically comes at an increased cost. They're looking at tried and true robust types of switching and sensing. But we believe that you put this into our breadth of coverage. We will have the ability to entertain replacement technologies with the customer base. And I would say, I don't believe I mentioned this in my response to Scott that the majority of the customer - certainly the majority of where the volume is, are customers that we already do business with. So we're familiar to them and have a dialogue and a relationship, and so this now positions us with them to be able to say, "Okay, this is what Pollak was providing for you." We want to be there as we start talking about newer technologies.

Okay. And then, I guess, as far as improving the return, I guess, sort of you pay close to onetime sales for flat top line. Is there a fair amount of margin potential in this as you shift its production?

Yes, Bret, this is Jim Burke. Again, yes, we feel there is a benefit on there significantly. We're going to move into our low-cost areas that are there. So we think this is a very good opportunity for SMP: a, to grow the top line; and b, for the margins that we're going to pull from this business.

[Operator Instructions]. And we do have a follow-up from Scott with CL King.

Yes, I appreciate what you were saying about how this acquisition will definitely have far less integration issues than General Cable there, but could you just maybe walk us through the timing of when you expect to be self-sufficient and actually producing the products yourself? And will there be any in-between inefficiencies that we have to think about as, I mean, obviously as you're moving all the tooling and machinery down from Canton down to Reynosa? I imagine there's going to be some inefficiencies and some redundancies. But just trying to get a sense of what we could expect and what we should be modeling at least at some point this year.

Sure. I'll provide very broad brush strokes, Scott, but the ink is still wet on this deal. We're just now developing our move plans in conjunction with the Stoneridge folks. So we do not yet have the detailed time line in preparation for moves. We have bridge builds to make. We have discussions with customers regarding approval processes and so on. And so it's really premature to start painting too clear picture of time lines, but you're right, there will be prior to being it full efficiency, we'll step backwards a little bit as we incur some of the duplication costs, inefficiencies, training, travel, rigging expense, et cetera, which is going to take us really over the course of the next 12 months, I would say.

Okay. Just one final question, I'm not sure if I heard the answer to it, but on a stand-alone basis, how does the margin stand up of the Engine Management segment for Standard versus Pollak?

Yes, this is Jim Burke, Scott. Once we have it fully integrated, we believe that the margins will be moving, again, 75% of this, so we believe that will be moving close to the top line gross margins. But on the operating profit, it comes with very little SG&A excluding the amortization that we'll have once we finally do the full valuation between intangibles and goodwill. Cash, SG&A will be much lower. So the operating margins on this business will be very good.

[Operator Instructions]. We'll move to Robert Smith with Center for Performance Investing.

So first, are there other Pollaks out there and could you just tell us what the possibilities are in moving into - more into OE emphasis?

Bob, and yes, there are. This is a space that we have been gabbling in. We've got - going back a few years when we acquired Annex Manufacturing on the Temperature Control side of our business, that was more in this commercial vehicle space and then some of our own organic growth. We have been growing quietly this portion of our business. We see it as an attractive area. It's first of all because we're starting from a relatively low base, there's a lot of growth potential, but it's a nice stable market with reasonable margin potential and an area where we think we have some confidence. So we will continue to look to build not just on our existing business, but sure or absolutely as we look at potential M&A pipeline. This is a category amongst all the others that we've historically been looking at that's on our list.

Okay. And as far as the labor category in general and supply training costs in Reynosa, in particular, with the Pollak integration.

Well, it's - the labor market down there continues to be somewhat tight as it is really everywhere at this point. But as I've stated in my opening remarks, it's important to note that the headcount related to this business is really pretty reasonable. It represents as a percentage, not a huge amount of growth over what we already have in that plant as opposed to the General Cable deal, where we're trying to double a plant. This is adding a fraction of what's already in the building. So we don't see it as an insurmountable issue at all.

Okay. And raw material costs your ability to pass on costs and what's happening in the transportation seems, so to speak, with costs?

Yes. Robert, this is Jim Burke. Yes, we're incurring those same similar costs as our POs that are there where we feel very comfortable with the pricing environment that we have the ability to pass those costs on through the channel.

And you mentioned the new technologies in the Poland operations. Could you give us a little more color on that?

Sure. It's a plant that has a large engineering group. It's our single biggest engineering group. We have over 50 great engineers in the building, and they have been working beyond just more traditional technologies. They've been doing well into some advanced emission sensing products more on the OE side in that area. Exhaust - high-temperature exhaust gas temp sensing getting into some other technologies for the aftermarket such as variable valve timing and a little bit on the safety and ADAS side with parking sensors. So they have been able to really tackle just about anything we've thrown at them and with the types of new technologies coming on the market, we see them as our center of excellence to be able to bring this type of product in-house.

Yes, that sounds promising. So I assume that you're going to expand that operation?

That is our plan. We've been doing that since we acquired it in 2006 and there were only 50 people in the entire building. We now have over 700 in the building. And as I mentioned over 50 technical people, there's engineering universities in the city that we operate in. And so it's readily available to us and yes, absolutely, we plan to continue to grow that operation. So really, it's a great combination, I should say, not just from a technical standpoint in the ability to hire engineers, but also from a cost of manufacturing standpoint, we're being in the eastern part of Poland, our cost structure there is comparable if not better than being in Mexico. So it really creates a terrific combination of technical skills and low-cost manufacturing and we plan to build on it.

That's it for me, and congratulations and all the best on the second hundred.

Thank you, Bob.

And it appears we have no further questions at this time.

Okay. Thank you all. But before we close, I just want to take this opportunity to thank and congratulate our employees around the world for achieving this 100 year in business milestone. It's really a singular achievement, and we thank them and congratulate them. And with that, this concludes our first quarter conference call. Thank you all for attending.

All right. Thank you, and goodbye.

Thank you. This does conclude today's conference. You may disconnect, and have a great day.