Good day, everyone, and welcome to the Standard Motor Products First Quarter Earnings 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. [Operator Instructions]. Please note today’s call is being recorded. And it is my pleasure to turn the conference over to Executive Chairman, Larry Sills. Please go ahead.

Good morning, everybody, and welcome to Standard Motor Products’ first quarter conference call, which will include an update on the COVID pandemic and our actions regarding that. We thank you for attending. Here representing the company are Eric Sills, Chief Executive Officer; Jim Burke, Chief Operating Officer; Nathan Iles, Chief Financial Officer; and myself, Larry Sills, Executive Chairman. As befits the current situation, we are all operating remotely. So let’s hope everything works smoothly. Agenda for today; Nathan will begin with the forward-looking statement. Eric will then discuss the COVID pandemic and how it’s affecting us and what we’re doing about it. Jim will give an update on the operations. Nathan will then review the first quarter results and Eric will summarize. And finally, we'll open for Q&A. So with that, let’s get started, and I’ll turn it over to Nathan. Thank you.

Thank you, Larry. Before we begin this morning, I’d like to remind everyone 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. I’ll now turn the call over to Eric.

Thank you, Nathan, and good morning, everybody, and I appreciate you taking the time to join us today. So our call this morning will not follow the usual flow. It’s important that we spend more time talking to the impact that the coronavirus crisis is having and the measures we are taking to manage our way through it. We’ll then turn to a discussion of the first quarter results. Again, I wish to emphasize that we have entered the situation extremely healthy. We have a very strong balance sheet with low debt and ample liquidity. We have a 100-year history of stability based on a foundation of conservative cash management and this will serve us well as we navigate through the current situation. As you know, the auto care industry is deemed essential, first by federal guidelines and then echoed throughout the various states and municipalities, and we are essential. The foundation of our country’s infrastructure is transportation, both of people and of goods. And although mobility may be reduced in a crisis such as this, it is no less essential. First responders rely on their vehicles to provide their invaluable services, medical professionals to get to their jobs and it is how deliveries are made in an environment where so many are confined to their homes. This requires the entire supply chain to operate effectively, from the repair shops to the part stores and distributors up to the manufacturers who supply them with their critical parts needs. Therefore, in order to perform at our usual high level, our primary concern is for the safety and welfare of our employees. Jim Burke will speak of the specific actions we’ve taken, but we are pleased to see that they have proven effective. We have very few employees who have tested positive…

Okay. Thank you, Eric. I plan to provide some highlights on employee and facility safety, our global supply chain and production planning in light of lower customer orders. To put this in perspective, SMP has 19 locations and approximately 4,500 employees. On behalf of the entire management team, I want to thank our wonderful employees who have been conscientious and cooperative during these difficult times. While managing through this pandemic, which is temporary, we are fortunate to have a seasoned management team and long-tenured workforce. Our SMP culture reflects a reciprocal relationship with the company caring for its employees and our employees contributing to the health of our company. We are also managing through this process with a very healthy and unleveraged balance sheet, a reflection of our key strategic values. First, to ensure employee and facility safety, we implemented the following protocols. Employee daily temperature checks before entering our facilities, social distancing, cleaning and hygiene expansion efforts throughout the day, deep cleaning and disinfection measures on weekends and for any incident reported, mandatory use of protective masks and gloves, staggered and flexible shift changes to reduce density, and remote working efforts for administrative functions in addition to engineering, purchasing, demand planning and our sales force. To date, across all our facilities, we have only had six positive reported cases. And thankfully, all are recovering and out of danger. Next, turning to our global supply chain, we have not had any significant disruptions. Our initial concerns were with our three JVs in China following the outbreak in Wuhan. I’m pleased to report our JVs and other Asian suppliers fully recovered while we maintained high fill rates with our customers. Our supply chain management team did an excellent job working with our suppliers to plan and prioritize our needs during this…

Thank you, Jim. Before I go through the numbers, I would also like to thank the entire SMP family for their hard work and dedication. Our employees are the source of our strength and stability, and we greatly appreciate their contributions in the midst of this extremely difficult environment. Looking now to the P&L. Consolidated net sales in Q1 of 2020 were 254.3 million, down 29.5 million or 10.4% versus Q1 last year. As discussed in prior quarters, we acquired the Pollak business from Stoneridge on April 1 of 2019. Incremental sales from the Pollak acquisition were 9.5 million in Q1 of 2020, and excluding these sales from our consolidated sales, our net sales were 244.8 million, down $38.9 million or 13.7%. Looking at it by segment now. Engine Management net sales in Q1, excluding Pollak and wire and cable sales, were 155.1 million, down 21 million or 11.9%. As you may remember from our calls last year, Engine Management sales in Q1 of 2019 were 9.3% higher mainly as a result of large pipeline orders and customer orders which were higher than the POS sales that customers experienced. As expected, in Q1 of 2020, these pipeline orders did not recur and we saw customer orders come back in line with their sales. And while these two items were the primary contributors to our lower sales level, we were further impacted by the COVID-19 pandemic in the last two weeks of March. Temperature Control net sales in Q1 of 2020 were 51.4 million, down 17.5 million or 25.4%. Net sales in this segment last year were impacted by very high preseason orders as customer inventory levels heading into 2019 were lower than usual. Coming into 2020, customer inventories were at more normal levels, and therefore, we expected lower sales, as…

Thank you, Nathan. And so to summarize before opening it up to questions, here are the key takeaways we want to leave you with. First, we entered the situation very healthy, able to withstand an extended period of difficulty. Second, out of prudence, we are making short-term surgical moves to cut cost and conserve cash, all without harming our long-term strategic goals. And finally, all this is built on the fact that our basic industry fundamentals remain intact, making this a temporary situation. In time, the market will bounce back and we will be there to service it as strong as ever as we have for the last 100 years. And with that, I will turn it over to the moderator, and we will open it up for your questions.

[Operator Instructions]. We’ll go first today to Scott Stember [C.L. King]. Please go ahead. Your line is open.

Good morning and thanks for taking my questions, guys.

Good morning.

Good morning, Scott.

Can you just tell us on the Engine Management segment before I guess the impact of COVID started hitting, what was your sell-through rates at POS looking like again in Engine Management?

Good morning, Scott. This is Eric. In the first couple of months, we’re hovering at slightly positive. It was very low single digits. And then what we saw in the first half of March, we began to see a bit of a recovery, and I think you’re seeing something similar to what the public distributors are saying. And then for the last two weeks, it fell off a cliff. So again, started out pretty slow, started to pick up in the beginning of March and then it dropped off.

Great. Thanks. And just following up on your comments about I guess recent days I guess you were talking about or is it the last week, you were talking about POS seemingly picking up again. Are we talking about POS being up year-over-year or just being less down than the 20% to 25%?

What we saw and it’s been for the last two weeks – and I need to preface this by saying we’re basing this on some of our larger customers which tends to be directional, but it’s not based on the entirety of our customer or aftermarket customer base. But what we saw really is about three weeks of it really being down in the 20s. And then for the past two weeks, it moved at least 10 points each week over the last two. I’m talking about Engine Management, which is really the driver at this point. Wire and cable saw some similar trends, although actually outperformed a little bit. And Temperature Control, I think April it’s still semi irrelevant what’s happening in the marketplace until the summer begins.

So when you say it moved 10 points, you’re talking about 10 points and then an incremental 10 points insinuating that we’re flattish right now?

Last week was flattish.

Okay, great. All right. And I know you guys obviously are doing a lot of things to curb expenses and so forth. But just remind us of your ability or your inherent model before the moves that you’re making, your ability to flex up and flex down with sales and your fixed cost. And maybe just talk about how much of your costs are fixed versus variable?

Hi, Scott. This is Jim Burke. Again, within cost of sales, as a general rule, what I usually look at there is tend to say that the material costs many times will make up 65%, 70%; that’s truly variable while the balance is half, 50-50 between variable and fixed costs. Within our SG&A, as a general rule, I would say the majority of it, were probably in the 75% to 80% quasi fixed area that’s there. And the truly variable items, as that’s where we classify our distribution expenses, so we have some picking and packing labor, we have freight out and we have where we record our draft fees. Those items would be the variable items in the SG&A area.

Got it. And just last question on your revolver. Can you just tell us what the covenants are, if any? And just talk about the liquidity one more time.

Yes. So Scott, we have ample liquidity. It’s our credit facility. I think you can classify it as a typical asset-backed facility. With regard to any covenants that are out there, it’s a springing covenant based on certain levers in the facility. We’re nowhere close to being near any covenants like that.

Got it. All right, that’s all I have. Thanks, guys.

Thank you, Scott.

Thanks.

We’ll take our next question from Daniel Imbro [Stephens Inc]. Please go ahead.

Hi. Good morning, guys. Thanks for taking my questions.

Good morning.

Wanted to start on the April commentary you just kind of touched on. Some of these things are improving, but curious. Can you give us a sense of where inventory levels are? Just trying to think through if sales do stay pressured for longer, how much longer your sales can maybe underperform POS before customers have to start repurchasing again?

This is Eric, Daniel, and it’s a great question. Our visibility into our customers’ inventories is a few weeks dated. So we’re really looking a few weeks back and therefore, we have to back into the numbers by looking at POS versus purchases. So we do believe they are bringing it down to where they want and some of the early indications that we’re getting from the accounts is that now they’re going to begin getting back to ordering more what they’re selling. But again, that’s very early indications.

That’s helpful. Thank you. And then a follow up on that. Are you noticing any noticeable sales discrepancies by channel or are you seeing the smaller customers dial back purchases to manage cash more than your large customers or any noticeable change in the marketplace that you’re seeing from a customer level?

We don’t get into the details of the different segments with the different customers. You’re seeing a little bit of variability, account by account, which is partly going to be based on geography as well as their own internal strategies. We don’t get into the specifics of different accounts, but you’re going to see a little bit of variation customer to customer.

Got it. And then Nathan, maybe moving to some of the financials. On the Engine Management side, really impressed by the operating margin leverage despite the sales decline. Can you provide some more color on kind of what drove the strength, both gross margin and SG&A? And then how sustainable you think some of those factors are as we hopefully see sales recover in the coming quarters?

Yes. Well, I think just with regard to the gross margins, as I noted in my comments, the strength is really just from continuous cost reduction efforts. We have these programs going on year-after-year, and that helps us improve our margins in normal times. Like I said, we will see sales decline. You’ve heard the numbers that Eric and Jim talked about as far as what we think we see in sales declines, and so that will drag the margins down in the near term. If you go back to SG&A, Jim kind of threw out there the fixed cost numbers, if you will, distribution costs and receivable factoring costs will flex down, but 75%, 80% of that cost is fixed.

Got it. And then last one for me. Jim, I think you mentioned you’re temporarily closing the manufacturing facilities to match your costs. As you think about the recovery, how difficult is it to reopen those facilities? In past cycles, when you’ve had to close them down and reopen them, are there typically incremental inefficiencies that come up or do you expect that to be a pretty smooth shutdown and reopening process?

All right. Okay. Hi, Daniel. Generally very smooth. We would have a skeleton crew that comes in before the re-launching of the full day that’s coming in. So that goes very smooth there. One of the things I just want to follow-up on the margins and refresh everybody that’s on the call, there’s a lag between our production variances and how it rolls through to the P&L. So our margins held up pretty well in the first quarter. But really towards the end of the second quarter and as we’re reducing production levels and what we went through on the variable and fixed costs, we’ll start to see those impacts in Q2 and Q3 as we go forward there. And then as you’re asking, when we recover, there’ll be a lag for that coming through to the margin. So kind of think of it as like a rolling quarter, like three months to that to roll through.

Very helpful. Best of luck, guys.

Thank you.

Thank you.

[Operator Instructions]. We’ll go next to Bret Jordan [Jefferies]. Please go ahead.

Hi. Good morning, guys.

Good morning.

Good morning, Bret.

Can we talk a little bit about supply chain outside of China? I guess there’s been some I guess difference in how Mexico is treating manufacturing as an essential or non-essential business. And I guess could you give us an update there? And is that situation relatively stable now as far as Mexico shutting or not shutting production?

Right. Hi, Bret. It’s Jim Burke. And a very good question. And we monitor it every day. We’ve been defined as an essential business, but there appears to be a disparity between the federal level and the state level, and it’s a fluid situation. We believe we have good defenses there. But back over the holidays, we thought it was prudent to close down. I mentioned we had four facilities that closed for two weeks, balancing our manufacturing requirements. During that situation, we closed our Mexico plants for two weeks that are there. We feel we have the adequate documentation in there as an essential business. Some other manufacturers been closed, but they reopened. And it’s a tentative situation. But at this point, we continue to remain open. And what I would say is our inventory levels, and we’ve looked at this. With our inventory levels, we feel even if there was a short-term disruption again, we think we’d be able to maintain the pretty strong fill rates during that period and then hopefully be able to return and reopen strong.

Okay, great. Thanks. And I guess a question as far as your – the retailers’ inventory intentions. I think you were talking about them working balances down. Obviously, we haven’t seen any shock like this ever before. Do you see them meaningfully changing their inventory balances and how they’re managing their working capital and running at leaner levels going forward, or do you think this is going to remain a relatively inventory-intensive retail industry?

This is Eric, Bret. I think it’s going to continue to be inventory intensive. I believe that the accounts and each one of them is making their own decisions, obviously. But I think that they are – would have reduced some of their inventory, not so much reduced it, but reduced their purchases because their own inventories were going up as their sales dropped. And then they needed to bring it back down to where they wanted it. I still see this, especially even in our categories, to be lines that need inventory debt deployed, and so we’re not expecting any substantial changes there.

Great. Thank you.

Thank you, sir.

[Operator Instructions]. It appears we have no further questions. I’ll return the floor to our presenters for any final comments.

Well, I believe that concludes our first quarter presentation. Thank you all very much for attending.

Thank you.

Okay. Thank you.

Thank you.

And this will conclude today’s program. Thanks for your participation. You may now disconnect. Have a great day.