Good day, everyone, and welcome to the Standard Motor Products Fourth Quarter 2022 Earnings Call Webcast. [Operator Instructions] Please note today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Tony Cristello, Vice President of Investor Relations. Please go ahead.

Thank you, Corliss. Good morning, everyone, and thank you for joining us on Standard Motor Products fourth quarter 2022 earnings conference call. I'm Tony Cristello, Vice President of Investor Relations. And with me today are Larry Sills, Chairman of the Board; Eric Sills, President and CEO; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer. In conjunction with our reported financial results, we published a separate press release earlier this morning announcing the creation of a new segment, Engineered Solutions and the remaining of our existing segments. In addition to the press release, we posted a supplementary slide presentation to the IR website, providing more information on these changes. On our call today, Eric will provide an overview of our performance in the quarter, and Nathan will then discuss our financial results. Eric will then give an overview in greater detail on our newly cast segments and the underlying strategy before some concluding remarks and opening the call up for Q&A. 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 Sills, our CEO.

Thank you, Tony, and good morning, and welcome to our fourth quarter earnings call. I'd like to begin, as I always do, by recognizing all of the SMP employees globally. These last few years have been a wild ride, and our people have helped us navigate it all outperforming many of our peers and emerging a stronger company forward for it. So thank you, everybody. As Tony mentioned, first, we'll review the business with some insights into the future, but I'm also very excited to discuss the resegmentation of our business, which I'll cover later on the call. Overall, we are pleased with our top line performance. For the full year, we were up 5.6% over 2021 with both divisions showing gains. Our sales in the fourth quarter did fall back slightly, down 0.5 point, which is best explained by segments, so let's get right into that, starting with Engine Management. For the full year, Engine Management sales were up 4%, but were down a bit over 1% in the quarter. This was largely due to going up against a difficult comparison as 2021 was very strong, but was also due in part to some customer ordering patterns, which can flex slightly quarter-to-quarter. However, as you look at customers' POS, their sell-through throughout the quarter continued to be strong, which, excluding our Wire business, showed nice gains over the prior year. Not only does this demonstrate the ongoing health of the marketplace and the continued success of our programs with our customers, but also tends to be a leading indicator of future orders to us. Temperature Control continued to be strong, surpassing last year's sales by 5.2% in the quarter. It's important to note that Q4 is a light quarter for this seasonal category, yet it did reflect the ongoing…

All right. Thank you, Eric. As we go through the numbers, I'll first give some color on sales and margins for each division, then look at the consolidated results, cover some key balance sheet and cash flow metrics and finally provide our expectations for the full year of 2023. First, looking at Engine Management. You can see on this slide that Q4 net sales of $242.4 million were down slightly versus the same quarter last year, but this year up against a difficult comparison in Q4 '21, where sales were up almost 6%. For the full year, sales of engine of $975.2 million were up 4% with the increase driven primarily by sales from acquisitions made last year, higher pricing and continued strong demand. Looking at the margin for Engine, the fourth quarter gross margin rate was 28.5%, up 0.9 [ph] points from last year as a combination of our cost savings efforts and pricing actions taken in the second half of the year overcame some of the inflationary pressures we've been experiencing. However, Engine's gross margin for the full year was down mainly due to the higher costs we experienced across all inputs during the year as a result of persistent inflation. Temperature Control net sales in Q4 2022 were up $3.1 million or 5.2% for the full year were up $33.9 million or 9.7%, with the increases mainly reflecting a very strong summer season and higher pricing, both of which helped the division to outpace a record year last year. The gross margin rate for Temperature Control in the quarter was 26.2%, a decrease of 1.4 points from last year, while the gross margin rate for the full year of 26.8% was down 0.5 points from last year. The decrease in margin for the quarter was mainly due…

Thank you, Nathan. As you saw in conjunction with our financial results, we published a press release earlier this morning announcing the creation of a new segment Engineered Solutions. This new segment will focus on products for both on-highway and off-highway vehicle and equipment manufacturers. We discussed this growth area with you for the past many quarters, so it is not so much that it is a new business, but rather a recognition that we have achieved a level of success that warrants creating a new operating segment. This new segment will be carved from the existing two segments, leaving them focused on aftermarket sales. Concurrently, we decided to rename our Engine Management segment to Vehicle Control, which better reflects the current and evolving portfolio of products. More on that in a minute. To better understand the moving pieces, we posted a supplementary slide presentation to the Investor Relations website that walks through some of the rationale. We also have a totally revamped investor presentation posted on our website that lays out the two markets with much greater clarity than before, and we encourage you to review it. Going forward, we will now have three operating segments, Engineered Solutions, Vehicle Control and Temperature Control. There are several reasons for doing this. The first is clarity. Recent growth has made Engineered Solutions a substantial business with critical mass and we believe all stakeholders will benefit from the added visibility of carved-out segment design. Secondly, while complementary, the aftermarket and engineered solutions have distinctly different operating models with different value propositions. And importantly, due to their different value propositions, they have different margin profiles. Both have strong and comparable EBITDA, but how you get there is quite different. The aftermarket has stronger gross margins, but due to the value-added services, there are…

Absolutely. At this time, we will open the floor for questions. [Operator Instructions] We will take our first question from Daniel Imbro. Your line is open.

Alan on for Daniel. Thanks for taking our question.

Hi, good morning.

Good morning. I wanted to ask about pricing initiative expectations for 2023. Do you expect incremental price increases will need to be taken this year to inflate margins? And then if so, could you describe what you're assuming on cadence and magnitude relative to last year?

Sure. So really, as we've been saying for the last many quarters, we continue to pursue price increases to keep up with cost increases, although really requiring a combination of pricing as well as our own internal cost reduction initiatives. This has been ongoing really through the last many quarters. And as we look into 2023, we will continue to be mindful of where the costs are headed, and we'll be working with our customers to adjust accordingly. I believe, as Nathan mentioned, we've seen somewhat of a flattening of a lot of our material cost inflation, albeit at a high level, but we're continuing to watch closely what happens with interest rates. So I realize that's not a specific answer other than we will continue to track. We need to be in reaction mode to it, difficult to get ahead of it. As such, that tends to mean that there is a lag between when we see the cost and when we're able to get the pricing. But we continue to believe the market is receptive to adjusting according to what's going on in the world.

That's helpful. Thank you. As a follow-up, could you maybe provide some thoughts on your joint venture operations and your outlook for growth this could provide for 2023 results?

Sure. Well, I'll speak to the - to how the JVs are doing. But as it relates to outlook for growth, and Nathan can speak more clearly to it, but most of our - with the exception of one, our JVs do not get consolidated to our overall revenue. They just show under other operating profit. But we continue to be pretty bullish on what we're seeing with the JVs. They are performing well for the two separate purposes that they are designed to provide, one being to provide high-quality, low-cost products to come back here to North America to support the aftermarket, but also to sell into third-party market specifically for engineered solutions globally. And really for all of them, we're seeing very nice progress. The one that I do tend to call out because I think it's seeing the best growth trajectory is called CYJ. This is the joint venture that manufactures electric compressors for electric vehicles, where much of that business stays into the electric vehicle market in Asia, but is now starting to gain nice traction in Europe and North America as well. I really think we have something there from a technology standpoint and are starting to get the attention of customers who are looking for suppliers of this newer electrification technology. So we're still pretty bullish on really all of our JVs.

That's super helpful. Thank you, guys. That's all for me.

Thank you.

Our next question comes from Scott Stember. Your line is open.

Good morning, guys. And thanks for taking my questions.

Thanks, Scott.

I think you guys alluded to it a little bit, but maybe you could give a little more granular detail of the guidance of low singles for '23 by the three new reporting segments. Engineered Solutions sounds like that will probably lead the way. Maybe just give a little me detail on that?

Well, we are providing it as one single corporate growth number and not looking to break it out into the different segments, partly because it's early in the year, and there's a lot of moving pieces, as mentioned in my prepared remarks and as you're alluding to, we believe that Engineered Solutions and long-term growth potential that can exceed that of the aftermarket simply because we're dealing with a business that is much more diverse globally, so a lot more end markets to find growth in, and we're starting with a relatively small base. So it's really more about new business wins than just growing with the market. But that could take time, Scott. And it can be lumpy as wins come on as from things fall of. And so we're not giving specific guidance by segment, but we're comfortable that all combined, we're going to be in that low single-digit range that we're speaking to.

Got it. And then on Temperature Control, you guys called out some gains in winter-related products. First time, I guess, I'm really hearing some talk about that. Maybe just go into a little more detail there and how big of this segment is winter-related products?

So it's still a relatively small part of what Temperature Control is – Temp Control. It's largely about air conditioning and therefore, in summer seasons. There are winter categories related to the heaters of course, being one of the larger blower motor. And so we are - I can't get into details of the specific customer wins, but we've been having some nice growth in that area. Again, not enough to dramatically move the needle. It's still largely a summer business.

Got it. And then last question before I jump back in the queue, talking about some of the price increases that have gone through to cover notably the factoring costs. I think you said an additional $45 million to $50 million this year coming up. Maybe talk about your expectations to fully cover these costs? And what can be covered? How much of that $45 million to $50 million will be offset by cost cuts or efficiency improvements?

Well, Nathan can get in some details in a minute, but a lot of that is really run rate differences versus previous year. And so some of it has already been accommodated and discussions with customers are always ongoing. So now a lot really depends on the further movement from the Fed and the fact that has. But a lot of these increases have already taken place.

Right. And Scott, I would just point out the range of $45 million to $50 million wasn't additional. That's what we think the cost will be in 2023, given where the Fed is right now on interest rates.

Okay. And what was the number for '22, so we could just get an incremental?

Yes. The number for 2022 was about $32 million.

That makes sense. That helps. All right. Thank you, guys.

Hey, Scott.

Our next question comes from Bret Jordan. Your line is open.

Hey. Good morning, guys.

Morning, Bret.

Ask again on the growth outlook. Could you tell us how you see the same SKU price inflation contributing to that growth guide for '23?

There's a lot of moving pieces in there, pricing unit volume, some flexing of customer order patterns, a lot of different pieces. But as you can imagine, pricing has had probably more of an outsized influence in the past year than in previous years. But you have a lot of pieces in that number.

Okay. But I guess since we are comparing against the high pricing environment in the last year or two, do you see price being positive in '23? Or are we more on units now rather than ticket?

It's a blend of the two, but pricing will continue to be an input.

Okay. And then on Temperature Control, I guess, could you give us some color as how retail inventories look at this point of the year going into spring?

Sure. So as we look at the inventories of our major customers where we have that visibility, year-end 2022, they were a bit higher than the previous year. 2021, they really ended pretty low. So they're a bit healthier coming into this year. That said, as we look at the pre-season orders that we have in-house and are continuing to discuss with our accounts, the pre-season orders remain healthy - comparable to the previous few years. But as you know, very well, Bret, you've been following us for a long time. All this is just in preparation for what really happens, which is in the summer. And so we'll see how the summer turns out. We're going up against two very hot years in a row. But that's really where we're going to see how the year pans out.

Okay. And then one last question. On the Auto Plus bankruptcy, and the charge, could you remind us sort of how that shakes out. I mean, years ago when Metro went bankrupt, did you wind up recovering a portion of that write-off? And sort of what's the sort of timing and expectation there?

Yes, Bret. So I guess with regard to the charge that we took and noted this morning in the release, that was our best estimate of what may be recoverable. As you know, bankruptcy is still very early days credit committee just formed last week, and so we're still watching closely, but I don't have any real updates from where we are now.

Okay, great. Thank you.

Thank you.

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

Okay. Thank you. We want to thank everyone for participating in our call today. We understand there was a lot of information presented, and we'll be happy to answer any follow-up questions you may have. Our contact information is available on our press release or our Investor Relations website. And we hope you have a great day. Thank you.

Thank you, ladies and gentlemen. This concludes today's program. You may now disconnect.