Ladies and gentlemen, good day, and thank you all for joining us for this Standard Motor Products' First Quarter Earnings Call [Operator Instructions]. Please note, today's session is being recorded. It is now my pleasure to turn today's program over to Mr. Larry Sills. Please go ahead, sir.

Good morning, everyone, and welcome to Standard Motor Products' First Quarter Earnings Call. My name is Larry Sills, I'm Chairman of the Board. With me this morning are Eric Sills, President and CEO; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer. Today, our agenda will be, Eric will go over some of the first quarter highlights and Jim will discuss operations. And finally, Nathan will go into more detail on the numbers. Then we'll open it to Q&A. So let's go. And I'll start by turning it over to Nathan for the forward-looking statement. Thank you.

All right. Thank you, Larry, and good morning, everyone. 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. 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.

Well, thank you, Nathan, and good morning, everybody. Welcome to our first quarter earnings call. So as always, I would like to open today by thanking all of our employees for continuing to go above and beyond. The last year has been a roller coaster and while the challenges were undoubtedly significant, I believe we navigated it quite well. And there's no doubt in my mind that we would not have managed it as successfully if it were not for the dedication and skills of all of our people around the world, I couldn't be more proud of how they guided us through. The first quarter hit many high notes. Our sales were very strong, up almost 9% as we saw the ongoing market strength continue from the second half of last year. Furthermore, we posted the highest earnings we've ever had in the first quarter, more than doubling last year's profitability due to a combination of sales leverage and cost control. It's important to note that the first quarter of 2020 was only modestly impacted by COVID for us with a minor downturn in the last two weeks of March. So while comparisons going forward will be muddy, the first quarter is a bit cleaner. Sales in our Engine Management division were up more than 5%. As previously discussed, we lost a large account and had a sizable reduction in sales to them in the quarter as they transition the business but this loss was more than made up for by strong demand from our other customers. Often the first quarter is marked with some large pipeline orders, but that was not the case this year. Rather, we believe that our customers' strong purchases from us were the direct result of surging sell-through rather than inventory building. Their POS…

Okay. Thank you, Eric, and good morning. I'll provide some color around our operations. To begin, as you have seen in our release, our first quarter gross margins in both segments reflected some of our best results in the last 10 years. At a very high level, this is primarily the benefit of increased production to meet our strong customer demand and the associated efficiency gains generated in our factories. I'm very pleased with how our manufacturing and supply chain teams adapted to meet this higher demand. Our supply chain team also addressed headwinds. First, from a material source of supply, we face semiconductor chip and resin supply delays. Our teams worked with our suppliers increasing lead times and working around allocation limitations. Fortunately, we were able to mitigate much of these supply issues with existing safety stocks, and where necessary, alternate vendors. On the material inflation front, we experienced price increases on semiconductor chips, resins and other general commodities, such as copper and aluminum. But no single commodity has a significant impact on our overall cost structure. Lastly, Asia Source product faced the same global inflation pressures but also the compounded effect from higher container cost and vessel fees. Fortunately, our global manufacturing footprint has been a benefit as compared to our peers sourcing 100% from Asia. Recall, our low-cost manufacturing facilities are in Mexico and Poland, with other highly skilled and less labor-intensive operations in the US and Canada. We believe our NAPA footprint provides advantages for lower cost, improved supply chain logistics and tariff cost avoidance. To offset these inflationary pressures, we looked internally at our margin enhancement efforts. First, to expand in-house manufacturing versus buy initiatives. In this effort, we are targeting to tool products earlier in the product life cycle to better control our costs,…

All right. Thank you, Jim. Now turning to the numbers. I'll walk through the operating results for the first quarter and also cover some key balance sheet and cash flow metrics. Looking first at the P&L. Consolidated net sales in the first quarter were $276.6 million, up $22.3 million or 8.7% versus Q1 last year, with increases coming from both of our segments. Looking at it by segment, Engine Management net sales in Q1, excluding wire and cable sales, were $173.7 million, up $9.1 million versus the same quarter last year. This 5.6% increase is partly reflective of the softness we experienced in Q1 last year, but also reflects continued growth in sales of ongoing customers, as Eric noted before. Wire and cable net sales in Q1 were $38.4 million, up $1.8 million or 4.7%. Sales continue to be positively impacted by strong DIY sales as consumers work on their own vehicles but were helped too by strong sales to OE customers as business ramped up in that channel as well. While the sales in the wire and cable business continue to be steady, the product category remains in secular decline, and we believe sales will ultimately resume a trend line -- of declines in the range of 6% to 8% on an annual basis. Temperature Control net sales in Q1 2021 were $62.5 million, up 21.4% versus the first quarter last year, an increase primarily as a result of stronger preseason ordering by our customers. As we always point out, the first quarter is not indicative of how the year will turn out for the segment as the year ultimately depends on summer weather. Turning to gross margins. Our consolidated gross margin in the first quarter was 30.3% versus 27.7% last year, up 2.6 points, with both of our…

[Operator Instructions] We'll hear first from the line of Daniel Imbro at Stephens, Inc.

Eric, I wanted to follow-up on how you guys are successfully offsetting this customer loss. I guess, first, you noted in the release and you talked about some of your existing customers have helped take that share. In the past, you've talked about how you've been able to help that, talking technician, doing the technician teaching. Can you maybe just update us on how that's going? What kind of reception you're getting from technicians and maybe why brand loyalty does matter and it's helping you gain this share back?

Sure, Daniel, and that's a great question. And we've always had programs with our customers to go arm and arm to those installers to try to build that loyalty back upstream through our brands. This year, we doubled down on some of those initiatives. I'm not going to go into the specific tactics that we've used, but really to get programs to show that in market, there are multiple sources of supply and that our brands are still very much available within the market and to help them find them and to help them make that decision. So we don't have any exact data on market share gains or anything like that. But anecdotally, we find that it seems to be working quite well. The feedback we get from our channel partners is that they feel that it's been successful. So we're pleased with the results. But again, it's very difficult to measure market share downstream. But anecdotally, we feel very good about it.

And then on the inflationary topic, Nathan, you mentioned it's going to be a headwind to margins, just on the cost side. But how are conversations going with your customers? I think typically, you guys are able to pass-through broad-based cost pressures. Do you think that will be the same this year? Or maybe you can pass that through in the top line? And any way to help quantify kind of how you're thinking about that as we move through the year?

Well, to summarize your question, you're asking about our ability to price for inflation. And if I'm understanding what you're saying. And this is Eric. And look, we're in a competitive space, always have been, but we do believe that we are in an inflationary period right now and not just for our product types, but just in general, the market is seeing commodity inflation, cost inflation, whether it's wages, materials, freight, transportation, et cetera. So we work with our customers with the hopes of being able to pass some of that through. But also, as Jim Burke mentioned, we also look to work on that inflation with our other cost reduction initiatives. And combined, we come out, hopefully, okay.

And then last one for me, and I'll hop back in the queue. Just on a topical issue. With the proposals coming out of Washington around green energy and public transportation, do you guys see opportunities to leverage your JVs over in China. Thinking specifically, you guys have that EV bus joint venture over there. So curious if there any opportunity to maybe leverage that knowledge and bring that over here to the US?

Well, there are certainly opportunities. Right now, our joint ventures in China and specifically, the one you're referring to where we're doing electric vehicle compressors, our joint venture with a company called CYJ. The majority of what we're working on is to stay within the country for both pass car and heavy duty, but there are also absolutely opportunities elsewhere in the globe, we're still a very small company over there. But we see that there's opportunities. Really, in general, as you're referring to emphasis on green energy, emphasis on infrastructure spending and so on, that we think that we're well positioned to hopefully take advantage of some of that. That's a very interesting question.

And our next question today is going to come from Matt Brooklier.

I was wondering if you could talk to the large customer that was lost in the quarter. Are you able to put a number to how much that impacted revenue in the first quarter and how we should think about it going forward through the rest of the year?

Well, as previously announced, this account, and this was only in the Engine Management segment, represented approximately $140 million in annualized revenue. And as again previously stated, we only saw a partial first quarter as they transition the business. So it was roughly a 50% reduction of what they typically would have bought in the period, and it has gone essentially gone from here on out from the second quarter forward.

And then do you have any direct recourse with this customer pulling this business from you? I know you talked about, right? You're going out, you're being proactive, you're getting new customers. But is there any recourse with this customer in terms of getting something back for what they pulled?

I'm not exactly sure I understand what you're referring to as recourse. This is still a customer of ours within our Temperature Control segment, and they chose to make a decision. We honor that decision, and we move forward. But maybe if you clarify what you mean by recourse, I can give a clearer answer.

No. I mean, I just -- if there was investment around equipment to source products to this particular customer? Or is there any way to recoup portion of that investment?

I see what you're saying. No, there was nothing dedicated to this account. It was just additional volume for the same or similar products that we sell to others in the channel. So there was no obsolescence associated with it or anything like that, if that's what you're asking about, Matt.

Next, we'll hear from the line of Scott Stember C.L. King.

Can you talk about the cadence of sales in the quarter? And also it doesn't sound like you got hit nearly as bad as some of your competitors from a supply chain standpoint. Do you or customers, you believe, have an adequate amount of inventory as we are in the early stages of Q2?

Well, in terms of the cadence of sales through the quarter, it was pretty strong throughout. And as we look at their POS, for the most part, within really all 3 areas: Engine, Temp and Wire, the first couple of months, January, February, were in the low double digits and then March really accelerated. And I think you're hearing some of that from their public comments as well, whether it was related to stimulus checks kicking in or whatever it is. But we really saw an uptick in March and that has continued. Inventory in the channel, Engine Management is basically normal, it's where we would expect it to be. And has been pretty consistent over the last several months. Temperature control is an interesting story from what we have visibility of. They are roughly at the same levels that they were, I'm talking about quarter end. So end of March to end of March last year. And as you know, and as we've stated, last year, their preseason orders were light. So you would have expected their inventory would be higher now. It's not, which is further evidence that they're really selling it through rather than stocking up. And we also think that, that bodes well. I think that answers most of your questions, Scott. I think you were asking some about supply chain, if you want more on that. I'm sure Jim can speak to it.

Maybe, Jim, just give us an update there. It sounds like it's not as bad as some competitors are talking about given your footprint?

And Scott, I think we may have benefited a little bit there with the inventory levels that we may have had in place and safety stocks. And again, part of this goes back to our efforts from over a year ago where right before COVID hit, we bring product in before Chinese New Year. So we had healthy inventory levels. And the teams have just done a phenomenal job working with our suppliers, finding alternate vendors, and we've had hiccups, and we've had some challenges, but we seem to have worked through many of them.

And then just last question on Temperature Control. You mentioned, Eric, that, I guess, pull-through at retail has been pretty strong. And obviously, the weather hasn't turned that warm yet. So is there anything going on that you're aware of from a trend perspective throughout the country that would drive that?

It's a very interesting question. You're right. It's not that there have been heat waves or anything. So how much of it potentially is pent-up demand for cars getting back on the road. I'm guessing that, that is somewhat of an influence. And so it's positive, but it's hard to put your finger on what's driving it. It could well be a combination of that pent-up demand and people having some excess savings from the past year that they're now investing back in their vehicles, and you're seeing that in a lot of categories and perhaps air conditioning is benefiting from that as well.

[Operator Instructions] We'll hear next from Bret Jordan.

I guess, on the heavy-duty side, you were talking about in the prepared remarks. When you think about that business, is the visibility attached to the OE side greater than what you might see in the aftermarket? And how do you think about the growth rate in that segment going forward now that you sort of seem to be broadening your exposure?

It's a very interesting question. In terms of more visibility, yes, because as opposed to just receiving replenishment orders and shipping, and we're able to work with longer horizons with them. And it is encouraging what we are seeing. I think that those sectors are also roughly in the long run, that similar low to mid single digit growth. But right now, they are seeing a very nice comeback and a lot of these categories that I'm referring to, Bret, are really very much related to some of the other growth areas that we're seeing in our economy right now, whether it's construction getting back and some of the other areas that we're now selling parts into. So we're encouraged by it. But what we're, I think in many ways, more encouraged by is the receptiveness that we're getting from these accounts as they're really learning who we are and seeing the breadth of our capabilities and the breadth of our product offering. So for example, we acquire a company like Pollak and these accounts only know what that narrow portfolio is that they had previous visibility to. Now we're able to show, hey, we're also in the air conditioning business, we're also in a lot of these other electronic components, and it starts to open doors. So nothing happens quickly, as you know, as you go through negotiations, validation and so on. But we're very encouraged by what we're seeing in this space and the receptiveness from the accounts.

And then I guess on the inflation side, do you have a feeling, I guess, sort of back of the envelope, which you think the inflation rate might be this year when you sort of compound the materials and labor and freight and everything, you might see sort of from a percentage increase in your catalog?

Well, Bret, this is Nathan. I think maybe what Jim alluded to earlier, we're seeing some of the same impacts that other companies in the market are seeing. And so when you see headlines out there, inflation is in the low single-digit range. And that's, again, the headline is 1% to 3%. I think we're seeing the same things in that area. So not any different than what you hear about already.

And gentlemen, there are no further questions in the queue at this time. I am pleased to turn the session back to Mr. Larry Sills for any additional or closing remarks.

No big closing remarks, but we thank you all for attending this call. Thank you very much.

Thank you, everybody.

Thank you. Bye now.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.