Standard Motor Products, Inc. (SMP) Q3 2026 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Standard Motor Products Third Quarter 2026 Earnings Call. [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, Chloe, and good morning, everyone. Thank you for joining us on Standard Motor Products Third Quarter 2026 Earnings Conference Call. With us today are Larry Sills, Chairman Emeritus; Eric Sills, Chairman and Chief Executive Officer; Nathan Iles, Chief Financial Officer; and Jim Burke, Director. On our call today, Eric will give an overview of our performance in the quarter, and Nathan will then discuss our financial results. Eric will then provide some concluding remarks and open 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.

Well, thank you, Tony, and good morning, everyone, and welcome to our third quarter earnings call. So overall, we are quite pleased with our performance in the quarter. Our top line grew by 2.8% when adjusting for the accounting treatment of tariff refunds, which Nathan will explain further in his remarks. And year-to-date, we are now up 6%. We also generated a record setting $67 million in adjusted EBITDA in the quarter, along with strong operating cash flows, which has allowed us to surpass our year-end leverage target achieving a 1.8x leverage ratio. I'll walk through each operating segment and its performance in the quarter. And please note that all future mentions of sales through my remarks are also adjusted for the tariff refund treatment. Starting with Vehicle Control. Sales were strong, up 6% and are up a bit over 5% on the year. Customers have been making strategic inventory investments as they pursue commercial market share. This is a product category that is heavily DIFM, and as such, distributors have been focused on having the best in-market availability for the repair shops. And we believe that the strategy is working as their POS has remained in positive territory all year in a challenging environment. Our other North American aftermarket segment, Temperature Control was down about 4% against a record-setting third quarter last year. As we always explain, customers' purchases can move around quarter-to-quarter in this highly seasonal category. This year was very front-loaded. We are up 10% at midyear as customers placed very large preseason orders and in the third quarter, they were able to sell more from their own shelves. So if you look at it on a year-to-date basis, we are up a bit over 4% and their POS is also up mid-single digits. It's also important to note that this is coming off 2 previous years of double-digit growth. Now let me speak about Nissens, our European aftermarket business. Sales were quite strong in the quarter, up 7.6% with most of the growth in air conditioning products. After a late start to the season, Europe set temperature records across much of the continent. We are now up nearly 8% on the year. And while some of the lift in the first half was due to favorable currency conversion, we have now lapped. Nissens continues to outperform in a challenging market with nondiscretionary categories and a very strong program that has helped us grow our share. Now let me speak to our non-aftermarket segment Engineered Solutions. The strong demand experienced in the first half continued with third quarter sales up nearly 5%, bringing year-to-date growth to over 11%. As a reminder, 2025 was a tale of 2 halves. A soft first half followed by a sequential rebound. And while that rebound has continued, the comparisons can get tougher from here. But I'd like to now share some of the other exciting things going on around the company. Few months ago, we entered into a joint venture agreement with our long-standing partner, Techstrong, where we acquired 50% of their sensor manufacturing operation in Thailand to support our Vehicle Control segment. We see this as an excellent strategic investment hitting on several key pillars. It reinforces our commitment to being a basic manufacturer of key products. It provides additional control of our supply chain and it launches a low-cost manufacturing operation on which to build while de-risking us from China. We are well underway and are planning to move more production into this business and see it as an excellent new asset in our global manufacturing footprint. Within Temperature Control, we are excited to have just announced a full-line premium A/C condenser program to the market. This is a category that Nissens has been very strong in, and we are able to leverage their product knowledge and supply base to accelerate a launch here in North America. We are featuring this next week at the big trade show in Las Vegas and are expecting some nice buzz. For Nissens, as previously discussed, we launched 2 new categories in Europe in the beginning of the year, both of which are leveraging synergies with our North American business. We launched Ignition Coils, which is one of the biggest categories within Vehicle Control. And here, our primary manufacturing location for these is in Poland, and we believe that the Europe-for-Europe story is resonating with customers. We also launched A/C Hoses, a key part of the air conditioning system that was a gap in the Nissens range and one where we were a basic manufacturer in one of our Chinese joint ventures. Both of these new categories are now starting to gain some shelf space, though it will take a while to see this reflected in our numbers. We also just announced the third new category in Nissens, Air Door Actuators, another strong product group in the North American Temp Control offering. So as you can see, we are now getting into the fast lane with the cross-selling synergies that the Nissens acquisition has brought us. Lastly, I would like to discuss recent leadership changes previously announced. Nathan Iles has elected to take on a new CFO role at an unrelated company. Today is actually his last day with us. Nathan joined us in 2019 and over his 7 years of service, he was an excellent leader and contributor and helped make us the company we are today. And while we are sad to see him go, we wish him all the best in his next chapter. We're extremely grateful and fortunate that Jim Burke has agreed to return as interim CFO while we conduct our search for a permanent replacement. Jim has been with us for well over 40 years and only just stepped down as Chief Operating Officer a few short months ago. Prior to being COO, Jim served as our CFO for 20 years before handing it off to Nathan. So needless to say, Jim knows the company and the role better than anyone, and we expect a completely seamless transition. So with that, let me hand this over to Nathan for the financial details.

All right. Thank you, Eric. Good morning, everyone. As we go through the numbers, I'll first give some color on the results for the quarter by segment and at the consolidated level, and then I'll cover some balance sheet and cash flow metrics and finish with an update on our financial outlook for the full year of 2026. Before I talk about our third quarter results, I would like to note that we received additional refunds in Q3 for amounts previously paid under the IEEPA tariff regime. As per our normal practice of treating tariffs as a pass-through cost, accounting for these tariff refunds impacted both our sales and cost of goods sold during the quarter. I'll be discussing our results on a non-GAAP basis and excluding the impact of accounting for tariff refunds. First, looking at our Vehicle Control segment. You can see on this slide that net sales of $209.5 million in Q3 were up 6%. While the segment had an easier compare to last year's third quarter, it also benefited from solid product demand across all categories, reflecting our customers' continued positive momentum in their sales. Vehicle Control's adjusted EBITDA of 13.6% in the third quarter was higher than last year, and the improvement was primarily the result of higher gross margin on higher sales and favorable mix, but also improved operating expenses as a percentage of sales as we saw optimization efforts begin to take effect in our new warehouse in Shawnee, Kansas. These favorable items offset ongoing headwinds from inflationary pressures across our many various cost inputs. Turning to Temperature Control. Net sales in the quarter for that segment of $138.7 million were down 4.1% for the reasons Eric noted before. Temperature Control's adjusted EBITDA was lower than last year, coming in at 14.9% of net sales. The decline was primarily related to lower production volumes across our facilities as the high season wound down as well as cost pressure from the Mexican peso that has been stronger than in the past for much of this year. While our Q3 EBITDA margin was lower than last year, it's important to note that adjusted EBITDA is right in line with last year, the first 9 months. Looking at Nissens. Sales grew by $6.5 million or 7.6%, reflecting strong sales growth from a particularly hot summer across most of Europe, partly offset by a modest headwind from a weakening euro versus the U.S. dollar. Adjusted EBITDA for Nissens of 18.2% of net sales in Q3 was higher than last year mainly as a result of improvements in both the gross margin rate and SG&A as a percent of sales due to higher sales in the quarter. Sales for our Engineered Solutions segment in the quarter were up 4.9% and we were pleased to see growth across most markets. We expected sales increases in this segment to be in the low to mid-single-digit range beginning this quarter as we lapped the impact of cyclicality in the segment. Year-to-date, sales are up 11.1% for Engineered Solutions. Adjusted EBITDA for Engineered Solutions in the quarter of 9.6% was down from last year and gross margin was lower due to inflationary headwinds, but partly offset by improved operating expense leverage on higher sales. To wrap it all up, put it all together across the 4 segments. For Q3, consolidated net sales increased 2.8%, while adjusted EBITDA was 13% of net sales and $4.9 million better than last year. Further, non-GAAP diluted earnings per share were up 13.2% to $1.54 in the quarter. Looking now at cash flows. Cash generated from operations for the first 9 months of $207.2 million were $121.5 million better than last year, driven by a significant reduction in inventory levels as well as timing of tariff refunds received. We were pleased to see the continued improvement in inventory levels after coming into the year with some higher inventory balances to support our sales growth. Investing activities show capital expenditures of $23.5 million, which is lower than last year as capital spending related to our new DC is complete. Financing activities showed payments of $22 million of dividends as well as $125.1 million in repayments on our credit agreement. Our net debt stood at $381.9 million, down significantly from last year. We finished the quarter with a leverage ratio of 1.8x EBITDA surpassing our previously stated target of 2x 1 quarter ahead of schedule. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2026, which is unchanged from before. We expect sales growth to be in the low to mid-single-digit percentage range, driven by continued momentum in North America and Europe and more stable market conditions in our Engineered Solutions segment. Our outlook for adjusted EBITDA margin is a range of 11% to 12% net sales and reflects margin benefit of sales growth, but also some continued margin compression from passing through tariffs at cost and elevated distribution costs as we ramp up our new warehouse. As we noted in our release this morning, our outlook does not include the impact of ongoing changes in the tariff environment, inflationary impacts from geopolitical conditions or future changes in interest rates on our customer supply chain financing programs. In connection with our adjusted EBITDA outlook, we expect interest expense, income taxes and depreciation and amortization to be in the ranges shown on the slide. To wrap up, we're pleased with how our year is turning out so far with both strong sales growth and good profitability. We thank everyone at SMP for helping us turn in these results. I'll turn the call back to Eric for some final comments on the quarter.

Thank you, Nathan. In closing, let me spend a moment discussing on how we're viewing things for the balance of the year and beyond. Even in this challenging environment, we've enjoyed several consecutive quarters of solid performance. We've made great strides in diversifying our business with new product categories, geographies and end markets, all with the focus on seeking complementary benefits. Meanwhile, we've never taken our foot off the gas in servicing our legacy business, the North American aftermarket, where we believe we excel and which still represents 2/3 of what we do. The industry itself continues to demonstrate its stability and resilience in the face of turbulent times and within it, we believe we tend to outperform. We have great categories. Nondiscretionary and broad in nature and heavily oriented to DIFM where the aftermarket is expected to grow and our value proposition to our customers a comprehensive vehicle coverage targeting repair professionals with quality products and brands they trust creates a stickiness up and down the supply chain. Nissens is a fantastic new leg to our stool and is exceeding our expectations. They are a great company in their own right. And as part of SMP, they provide business diversity while being similar enough to generate meaningful synergies, both to the top and bottom line and on both sides of the ocean. Our Engineered Solutions business continues its rebound and is a strong complement to our core business, running through shared plants with common product categories, instilling quality rigor in our operations and providing us with an OE pedigree. And our commitment to manufacturing with a footprint that is largely de-risked from China allows us to navigate supply chain challenges and presents a competitive advantage. So we remain very bullish about the future. Before we open it for questions, I do want to hand it back to Nathan for some final thoughts.

All right. Thank you, Eric. I just wanted to make a few closing comments. As I said earlier -- as we said earlier today, today is my last day with SMP before taking a different CFO role. I'd like to say thank you to a number of people. First, to Eric and the entire Board for giving me the opportunity to work at SMP these last 7 years. It's been wonderful. Second, to our finance team here, which works tirelessly to support the business, it's been a privilege to work with you. And finally, to all my colleagues and friends across SMP, you embraced on both the way in and way out, I mean more than you can know. Your caring for and commitment to the company is really incredible. Jim, I'll hand it over to you for some final comments.

Okay. Thank you, Nathan. To start, I want to add and thank Nathan for the past 7 years for his leadership in the CFO role. He has helped build and develop a very competent finance team that will continue to execute in his absence. As Eric noted in the past 7 years, I had held the COO role, and I've been integrally involved in the operations, strategy and financial review of the company. With that background, I look forward to assisting on our executive search for a new CFO. And again, wish Nathan all the best. With that, we'll open it up for Q&A.

[Operator Instructions] And our first question comes from Scott Stember with ROTH Capital.

And Nathan, it was great working with you. I wish you all the best of luck in your new chapter. And -- that's really it. So on the business, just wanted to dig into Nissens a bit. It was nice to see that it looks like sell-through was up back up to traditional rates in that high single digits. I know that Temperature Control drove the business. So maybe talk about some of the other categories and also maybe just layer that in and what you're seeing in the market so we can gauge how share gains are?

Sure. So yes, much of the -- thank you for the nice comments about Nathan. As you look at the 3 subcategories that we break out, the growth was largely in the air conditioning products, and it was really due to just an extremely hot summer across most of the continent and we saw that lift. The other categories continue to do well. You saw that in cooling products. It was up slightly. The third category, which is the smallest, the engine efficiency categories was down a bit. That was mostly just timing of some customer orders period to period. And if you look at the full year to date, we are seeing some nice double-digit growth in the category. So that was really more of a quarter-to-quarter timing issue. But all 3 of the segments are really very healthy and doing well.

Got it. And how should we look at some of these newer products that you have put into the market over the last couple of quarters. It sounds like it's being very well received, but how should we expect that to be seen in your numbers as we exit this year and head into next?

It will take a while before we see any real impact that they have. It takes a little while to get the customers to add it to their shelves and then to start to see that replenishment. We're getting very favorable response. I would put it ahead of schedule and ahead of our expectations, but across a $300-plus million business, it will take a little while for you to start to see the impact. But we'll certainly keep you posted on it. On the new category here in North America, condensers within our Temperature Control division, and this is brand new, we're really just announcing it next week in Vegas, and so more to come. But we see this as a category that, frankly, is overdue for us. It's a key part of the air conditioning system that's been a gap. We always knew that this was a category that Nissens could help jump start for us. So we're excited that we are there bursting it, but it will take a little while before we see anything really show in our numbers.

And just one quick last one before I jump back into the queue, the guidance. A little bit of a caveat due to some of the recent inflationary pressures that we've seen. But you also talked about how you expect to go into your usual playbook to offset that. How are the initial conversations going? And just wanted to get your sense of how seamless that would be?

If I understand the question, you're asking about inflation and our ability to navigate it. Is that what you're asking, Scott?

Yes, exactly. Particularly given all the stacking of costs that we've seen over the last couple of years, how are you seeing that going forward?

Yes. Scott, it's Nathan. I'll take that one. So we are seeing inflationary pressures and really kind of in line with what you've heard others talk about. But we have the typical playbook that we run. We've talked about before, we have cost savings programs, whether it's make versus buy or sourcing plant efficiency projects that really help us offset inflationary headwinds year in and year out. And then we also expect to share some of the inflation just in terms of pricing with customers. So we continue to do that. We've been successful doing that and see the same way.

So the usual playbook? Got it.

Yes.

[Operator Instructions] We'll move next to Bret Jordan with Jefferies.

Great working with you. And Jim, good to have you back. Get some fresh batteries in the calculator. As you look at Temperature Control, and I think one of the large retailers yesterday was talking about temperature control being a strong category this summer. Do you see sort of share gain? It would seem like your customers might be outperforming some of the other players in the industry do you think sort of if you look at the growth of Temperature Control as an entire category, do you think you're gaining market within that?

I do believe that we have seen some market share gains, mostly on the coattails of our good customers as they grow, we've been able to grow with them. But it also has to do with how we've evolved our program to be able to increase ticket size with the launch and really good market adoption of air conditioning kits so that you're selling all the related components along with it. And so the overall market, I think, has been favorable these last couple of years as it gets longer and as the season tends to start earlier and end later. But without a doubt, I also believe we're gaining some share, some on what we're doing, some on the backs of our good customers.

And then I guess a couple of sort of market size questions as you bring coils into the Nissens catalog and you bring condensers into the legacy Standard Temperature Control catalog. And sort of how do you see these addressable markets, like if they gain traction, what would be the contribution to growth sort of on an incremental SKU category?

It's a difficult thing to predict, and we certainly don't want to get ahead of ourselves, making any public statements. Historically, our new product introductions have been more new technologies, late-model coverage and bringing it to market to be first to shelf. This is really a bit new for us in bringing categories that are already out there and needing to displace the incumbents. So we need to come in with a story that resonates and addresses any market concerns that customers have with their existing suppliers. We believe that across all of our launches, we have a strong story to tell. So if you think about -- and condensers, it's a natural fit to a program where they are very satisfied with the supplier for the balance of that program and allows them to have some one-stop shopping, including the inclusion of condensers in a kit, in an AC kit and I spoke a little bit about what we've done in Europe. On the Nissens side, coils, we have a compelling story, where much of the aftermarket in Europe is Chinese coil programs. We're bringing in something that's manufactured within the European Union, and we think that, that is very well received. So we have to have a strong story to displace others on the shelf. We believe that we have that story. We're very careful on selecting categories where we do believe we have something to talk about.

[Operator Instructions] We'll take a follow-up from Scott Stember with ROTH Capital.

Yes, looking at Temperature Control, how are inventories looking as we head into the slower season?

On our customer shelves?

Yes.

Or our shelves? Customer shelves...

No. No. On the customer shelves, yes.

Customer shelves. So our visibility is a little bit dated, so we don't know what's happened over the last several weeks. What we see is that they are in good shape. Perhaps we won't see quite as much of a preseason order coming into next year due to those positions. But it's really where you would want them to be. And the season continued, really, October was warm in a lot of parts of the country, and so we would expect that inventory to continue to come down.

Got you. And then the new DC in Kansas, just checking how the cutover is going? And when will we be fully cutover?

Scott, it's Nathan. So the cutover has gone well. We did have a little bit of headwinds in terms of costs in the middle of the year, first of the year. But like I mentioned, we started to see that optimized in the third quarter. In terms of getting out of the warehouse that we were in, in Kansas down the road, we're essentially out of that. And so now it's about optimizing, but then also bringing more products in from other locations as we get into 2027. So we'd expect to just continue to ramp that up as we go through the next 4 or 5 quarters.

And it does appear that there are no further questions at this time. I would now like to hand back to Tony Cristello for any additional or closing remarks.

Okay. Thanks, Chloe, and we want to thank everyone for participating in our conference 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 Investor Relations website. We hope you have a great day. Thank you.

Thank you. This does conclude today's meeting. We appreciate your time and participation. You may now disconnect.