Standard Motor Products 2026 Q2 Earnings Call

Please go ahead. Thank you and good morning everyone.

Thank you for joining us on Standard Motor Products second quarter 2026 earnings conference call. With me today are Eric Sills, Chairman and Chief Executive Officer, and Nathan Iles, Chief Financial Officer. On our call today, Eric will give an overview our performance in the quarter. 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 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. 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 everyone. Welcome to our second quarter earnings call. Overall, we were quite pleased with our performance in the quarter as our top line grew by nearly 7% when adjusting for the accounting treatment of tariff refunds received in the period, which Nathan will explain further in his remarks. Year to date, we are now up nearly 8%. We also generated a record-setting $63.5 million in an adjusted EBITDA in the quarter, along with strong operating cash flows. I will walk through each operating segment separately, please note that all future mentions of sales through my remarks are also adjusted for the tariff refunds. Vehicle Control sales were down slightly in the quarter. Much of this was related to customer order patterns, which can vary quarter to quarter based on timing of pipeline orders and other dynamics.

Importantly, customer POS was up in the quarter, demonstrating that this was more related to typical flexing of their purchasing patterns. Additionally, when looking at the product categories within the segment, our wire set business was off significantly, making up most of the quarter's shortfall. As we have previously explained, this is a category in secular decline, dropping by mid-single digits each year, our customers have therefore been adjusting their stocking positions accordingly and thus slowed purchases in the quarter. Year to date, the segment remains up nearly 5% as pipeline orders generated a very strong first quarter. Our other North American aftermarket segment, Temperature Control, had a very strong quarter with adjusted sales up nearly 16%. As discussed on our first quarter call, the first half of the year is significantly impacted by the timing of preseason orders, 2026 was shifted more into the second quarter.

This more than offset the slower start to the selling season as May and parts of June were unseasonably cool and wet across much of the country. Excuse me. Year to date, we remain up nearly 10%. As we have always said about this seasonal category, individual quarters are less important than the full year, while more favorable weather pattern has kicked in across much of the country, we are going up against very strong comps as we are up almost 15% in last year's third quarter. Next, I will speak about Nissens Automotive, our European aftermarket business. Sales in the quarter were up nearly 5%, which was roughly split between actual growth in local currency and the impact of stronger currency conversion.

In looking at the product categories, we are very pleased with the sizable growth in engine efficiency products driven by items such as turbos and other engine management parts, where we are clearly gaining shelf space. The soft spot was within air conditioning, which was impacted by a late start to the European summer, similar to the U.S. Europe has since set all records for heat, we feel good about a recovery for our AC products. Lastly, as previously discussed, we recently launched two new categories in Europe, leveraging the synergies with our legacy business, while it is early days without much impact yet on our numbers, we are pleased with our momentum. Next, let me speak to our non-aftermarket segment, Engineered Solutions. The strong demand experienced in the first quarter continued with second quarter sales up nearly 17%, bringing year to date growth to nearly 15%.

As a reminder, 2025 was a tale of two halves. A soft first half followed by a rebound. While that rebound has continued, the second half of this year is going against more challenging comps. Finally, as announced a few weeks ago, we are pleased to have entered into a joint venture agreement with our longstanding partner, Techstrong, where we acquired 50% of their Thailand operation focused on sensor manufacturing 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 that de-risks us from China. Before handing it over to Nathan to provide details, I would like to mention recent leadership changes previously announced.

After well over 40 years of dedicated service, James Burke has elected to step down as Chief Operating Officer. Over these years, the contributions that Jim has made are far too numerous to count, and I consider him a major part of our company's success. Jim is staying on as executive advisor and remains a member of our board. I look forward to continuing to work closely with him. At the same time, we announced that Sunil Bhandari has joined us as Chief Operations Officer, with responsibility for all of our operations globally, including manufacturing, distribution, engineering, procurement, and supply chain. Sunil brings with him 25 years of global business and operations leadership, including the last 14 years at Eaton Corporation, and a strong record of driving operational execution. I look forward to seeing all that Sunil can do for us.

Now let me hand this over to Nathan.

All right. Thank you, Eric, and 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 second quarter results, I would like to note that we received refunds in Q2 for amounts previously paid under the IEPA tariff regime. As per our normal practice of treating tariffs as a pass-through cost, accounting for these tariffs 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 results, you can see on the slide that net sales of $198.6 million in Q2 were down 1.6% as we saw a continued secular decline in our wire set category during the quarter, as Eric said. Sales in our engine management product categories continued to be up both the quarter and year so far, leading year-to-date sales to be up 4.7% for the segment despite impacts from wire sales. Vehicle Control adjusted EBITDA of 8.6% in the second quarter was lower than last year. While we've seen some improvement in our gross margin rate, our operating expenses as a percent of sales increased as a result of some elevated distribution costs related to ramping up our new warehouse in Shawnee, Kansas, some higher freight expense, and general inflation and SG&A costs.