Standard Motor Products 2026 Q3 Earnings Call

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. 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 1.8 times leverage ratio. I will 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 this 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 were up 10% at mid-year as customers placed very large pre-season orders, and in the third quarter, they were able to sell more from their own shelves.

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 is also important to note that this is coming off two 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 it. Nissens continues to outperform in a challenging market with non-discretionary 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 two 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 would like to now share some of the other exciting things going on around the company. A few months ago, we entered into a joint venture agreement with our longstanding 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 in our 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 two 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. 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 a third new category in Nissens, air door actuators, another strong product group in the North American Temp Control offering. 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 seven years of service, he was an excellent leader and contributor, and helped make us the company we are today. While we are sad to see him go, we wish him all the best in his next chapter.

We are 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. Needless to say, Jim knows the company and the role better than anyone, and we expect a completely seamless transition. 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 will first give some color on the results for the quarter by segment and at the consolidated level. Then I will 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 will 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.