Good day, everyone, and welcome to today's Standard Motor Products Second Quarter Earnings Call. [Operator Instructions]. And it is now my pleasure to turn the call over to Larry Sills. Please go ahead.

Thank you, and welcome, everyone, to our second quarter conference call, and thank you so much for attending. With me today, I have Eric Sills, President and CEO; Jim Burke, Chief Operating Officer; Nathan Iles, Chief Financial Officer; and myself, Larry Sills, Executive Chairman. The agenda for today, we'll start with Eric, who will review the key highlights of the quarter, then Jim will go into further detail on our operations, and then Nathan will give a more detailed review of the numbers, and then we'll move over to Q&A. So -- but let us begin. I'll just give it to Nathan for the forward-looking statement, and then we'll go from there. Thank you, and welcome.

Okay. Thank you, Larry. Before we begin this morning, I'd like to remind you that some of the material we will 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, and we appreciate you joining us this morning for our second quarter earnings call. I'd like to start today's call with an enormous thank you to all of our employees. Needless to say, this has been a very difficult time, and our people truly rose to the occasion. Throughout the period, our employees remain committed to helping us navigate unique circumstances and did so with skill, compassion and dedication. I'm especially proud of all of our frontline employees, those in our factories and our distribution centers, who continued to show up day after day. We could not have done it without you. From the beginning, our industry was deemed essential. We, therefore, continued to operate throughout the crisis. As such, we needed to assure that we had a safer work environment as possible. Countless measures are in place, which Jim will discuss in his remarks, and thus far, they have proven very effective. Turning to business. When we last spoke to you on our first quarter earnings call, we were wrapping up April, the worst month our company has seen in decades. The country was a near complete lockdown, and we reported that our April incoming orders were down 30% to 40%. We also told you that there were signs of improvement, especially with our customers' POS, which is always a leading indicator for us. We are pleased to say that business did, in fact, begin to bounce back. May saw a week-over-week improvement, and by June, sales have returned to normal levels. So while the quarter, as a whole, was well below 2019, the trend was quite favorable, and we entered Q3 with a very healthy order book. Customer POS was even more favorable. We reported that, throughout April, our customers'…

Okay. Thank you, Eric. I will provide a general overview of operations, addressing employee and facility, health and safety, our supply chain update and our efforts on cost reductions and cash conservation. First, from the onset of this pandemic, our first priority was, and remains, the health and safety of our 4,500-plus employees across 19 facilities. We have implemented very stringent protocols at our facilities, including temperature checks before entry, stepped up daily cleaning and weekly deep cleaning, mandatory use of PPE, facility modifications for protective barriers, staggered work shifts for social distancing and office and staff functions move to remote work from home. In addition, most importantly, we were totally transparent with our employees, with electronic alerts to communicate any positive cases and contact tracing. We held regular scheduled town hall video meetings to keep our employees fully informed. As an essential business, our frontline heroes, in manufacturing and distribution, work through these very challenging times. We thank these employees for their dedication to SMP and our customers to keep essential vehicles rolling. Next, I will review our supply chain and challenges from initial 30% to 40% volume reductions in April to a significant rebound in customer POS levels in May and June. Overall, from a materials perspective, we are in reasonable shape, as our vendors have been very helpful meeting our needs. However, business rebounded so quickly that we are working as fast as we can to build and distribute our products on a timely fashion to match our customer demands. We are adding labor with new hires and temporary agency staff, in addition to working overtime and weekends to keep up. Looking at our Temperature Control business, it is no surprise throughout the U.S. that we are experiencing a hot summer. This year, preseason ordering was very…

All right. Thank you, Jim. Looking at the P&L, consolidated net sales in Q2 2020 were $247.9 million down $57.2 million or 18.8% versus Q2 last year. Our first half consolidated net sales were $502.2 million, down $86.7 million or 14.7%. As a reminder, we acquired the Pollak business from Stoneridge on April 1, 2019, and our sales in the first 6 months include incremental sales from Pollak of $9.5 million. By segment, engine management net sales in Q2, excluding wire and cable sales, were $142.8 million, down $39 million or 21.5%. For the 6 months, engine management sales, without wire and incremental Pollak sales, were down $60 million or 16.8%. The lower sales for the quarter and first 6 months were primarily due to the general economic slowdown due to the COVID-19 pandemic, with the greatest impact seen in the months of April and May, before a rebound of sales levels in line with 2019 during the month of June, as Eric noted earlier. Wire and cable net sales in Q2 were $34.7 million, down $5.8 million or 16.1%, and for the first half were $67 million, down $6.4 million or 8.7%. Temperature Control net sales in Q2 2020 were $72.4 million, down $12 million or 14.2%. And for the first half, sales were $123.8 million, down $29.5 million or 19.2%. Net sales in the quarter were primarily impacted by the pandemic, and followed the same pattern across the month of the engine management segment. While sales for the first 6 months were mainly impacted by very high preseason orders in 2019 that did not recur in 2020. As we've said before, the timing of preseason orders can vary from year-to-year, and typically are not indicative of how the year will turn out for the temp control segment. Our…

[Operator Instructions]. And our first question comes from Daniel Imbro from Stephens Inc.

Congrats on the quarter. Then, I want to start on the expense side, really impressive cost control, SG&A down 20%. I think in the past, you guys have said it's about 80% fixed, so really impressive controls there. Can you help us parse out, you mentioned the lower rates helping the finance costs of the receivables program. Is there any way to help parse out how much of an impact that was in the quarter versus how much of the 30 bps of leverage was driven by some of the cost removal? And then as you look to the back half, how each of those factors continued into 3Q and 4Q?

Yes. So Daniel, as you said, we've mentioned in the past, our SG&A costs are in that 75% to 80% range fixed, and the other variable, the factoring receivable costs, are, obviously, part of that variable bucket. I'd say, without getting into too much detail about rates and other things, the bigger impact on the factoring cost is really the sales levels in the dip there in the quarter. If you look at sort of that 75%, 80% fixed number that we've thrown out before, any other difference in savings that you see in the P&L is really the result of this cost reduction efforts that Jim mentioned as well as the lower sort of compensation incentives we're going to have this year just due to the results that we're experiencing.

Got it. That's helpful. And then, Eric, I think you guys mentioned during the comment, supply chain in a good state, obviously, trying to meet demand. Can you update us in this -- in your different manufacturing facilities? Obviously, parts of Europe are doing better, so I would like an update to hear kind of on how Poland is progressing? And where you guys are running into any kind of capacity constraints?

Okay. Stephen, this is Jim Burke. Yes, speaking in general for the -- for all of our facilities and then you specifically carved out Poland. As you can imagine, back in March and April, it's a totally different story from where we are today. At that point, we were trying to understand what was happening with orders, how long it was going to last and looking to match production with sales volume. It's a totally different story now. We are working to meet demand. It's -- as Eric pointed out, throughout the second quarter, demand has picked up sequentially month-to-month. All of our facilities are running full-scale at the moment now. We are experiencing -- you always have some disruptions in there, with some COVID contact tracing in that. But we are -- all of our facilities to match demand. Poland, specifically, is doing quite well. We're very pleased with the operations. Thankfully, we have had reduced incidence of any COVID-like cases there in our area within Poland. And that business there keeps up a bit with both the aftermarket, for the U.S. and globally for OE, OES. So that business is doing quite well.

And last one for me, if I could squeeze it in. Nathan, you touched on the balance sheet, you guys paid down that debt, that should give you flexibility. How are you thinking about cash deployment here? And are you seeing any additional M&A opportunities out there in the market, as maybe some of your smaller competitors are struggling?

Yes. I think I'll hand that one over to Jim, Daniel, as he covers most of our M&A efforts.

Right. And again, okay, Stephen. Yes. So we paid down the debt, and we have the flexibility to draw on that. As Nathan explained earlier, that's there. From an M&A standpoint, we have a formal team that's in place, evaluating opportunities on a regular basis. So during the pandemic, while things seemed to have tightened a little bit in there between available opportunities, we still stay abreast. Many of them we wind up developing over time with relationships that are there. So I would say that we're pleased with Pollak fully integrated. We continue to look and evaluate opportunities going forward. And as something, if anything, we'll announce. But at this point now, we're still dealing with the COVID incidents and that. So nothing imminent, I would say.

And our next question comes from Scott Stember from CL King.

Congrats on a very good quarter. Eric, I think if I heard you correct, you said that in June, orders as well as POS retail, was running up. Could you kind of dimensionalize that? How that was running on an exit run rate? Just to give us an idea of what we could be looking for in the third quarter.

Sure. Let me separate the two different metrics, if I understood your question, customer sell-through versus what they're ordering from us? So we exited the quarter in terms of what they're ordering from us, and roughly flat to, I think, the term I used in my prepared statement was normal -- back-to-normal type levels. And so that is what we saw coming out of the quarter with what they're purchasing from us. But again, some very good indications of strong orders coming into the third quarter. In terms of their sell-throughs, their POS, they were really exceeding previous year's POS in all 3 areas to give you a little bit of a breakdown between the 3 divisions. And also, it's always important to couch this in that we don't get information from all of our customers, we just get it from -- enough to say that we believe it is representative and directional, but you can't necessarily run with that percentage and say that, that's everybody. But what we did see within engine management, as we said, April was down double digits. June was up double digits. And that brings them to basically flat year-to-date. The interesting phenomenon is in wire and cable, and I think you can see this, Nathan was giving you the breakout of our revenues in wire versus engine. Wire actually slightly outperformed engine, and we're seeing that at the POS level as well. And I think we're seeing this as a bit of an influence, but you're hearing some of the big retailers discussing as well, that it's been a bit of a shift towards DIY, which tends to move you to the older technologies and the product categories that do-it-yourself or is able to work with. So we've actually seen wire and cable, which, historically, is down 7%, 8% category, outperforming. We think that's a temporary situation. But that has been an interesting dynamic with the older technologies, which wire is included. Temperature Control, you have to look at this in the seasonal nature of the category. So April and May are still largely irrelevant. It really has to do with June in terms of the quarter, and June was hot. And so their sales up were in -- definitely in double digits, and that trend does continue into the third quarter.

And just to make sure when you're talking double digits for June in Engine Management and Temperature Control, we're talking POS?

POS. That is correct.

Okay. Got it. All right. And moving on to the gross margins. You did mention that, I guess, this is a good problem to have, but business is ramping up very, very fast, and it seems like you're -- I was having a hard time, but you have to go through some extraneous means to keep up with demand. How does this play in your gross margin targets? Last quarter, you gave us and updated gross margin targets. Again, maybe you can give us that and tell us how some of these revamping or restart of business could hit that?

Scott, this is Jim Burke. I'll jump in there as it impacts the facilities there. So business, as we said there, has picked up and our manufacturing facilities are running pretty well full steam. We're actually looking to hire and add heads. And where possible, we're trying to be able to step up with temp agency employees also. Our margins within Temperature Control, and we're -- and I'll say, we're very pleased with the margins, the performance that we had within the second quarter. So we're at Engine Management at 26.7% and staying on Engine Management. Going forward, our target there was to be over -- back to the 30% level, over 30% going into next year. We expect to progressively move forward on these numbers, the 26.7% and improve for the balance of the year as our facilities are running, and we believe volume will be picking up. Temperature Control, we're -- that held up pretty good. We had talked about that dropping down 22.8%, where the facilities are manufacturing is running full steam there. We've had very strong demand. So we should be doing much better in absorption there. So we envision this getting back within that 25% to 26% range. And again, all of 2020 is, where does everything play out yet with this pandemic? Are still long range. What's more important is we think engine management is 30% plus going into '21 and temperature control, the 25%, 26%, and look to move off and beat those numbers.

Got it. And if I could just ask one last question. You talked about some of the cost cuts in the quarter in management compensation. Is there a timeline of when that will come back online? Or at this point, are you guys planning for that to be gone for the remainder of the year?

I'll take that, Jim. We got -- so in terms of the discretionary cost controls that Jim spoke to in his remarks, we're going to continue with that belt-tightening throughout the year. As we continue to say, we're not going to do anything that's going to hurt the business, but we're going to continue to be frugal, I guess, would be the word, on those types of cost control. As it relates to executive comp and Director comp, as announced, that will continue for the balance of the year as well. The other big numbers, which I spoke to, the temporary suspension of the dividend and the cash -- and the stock buyback, these, we don't have a set timeline on. We will continue to evaluate and discuss it with our Board. We look at it on a continuous basis, but we do not have a specific time that we say that we're going to renew those programs.

And our next question comes from Bret Jordan from Jefferies.

On the comment about wire being more of a DIY category. I guess, do you have a feeling sort of anecdotally, what percentage of your mix goes to DIFM versus DIY in this quarter?

It's a great question, Brett, and I wish I had a ready answer for you. We lose some visibility once our customers purchase it as to who their end consumer is. We think that there has been somewhat of a modest shift. It's going to be certainly more so in categories wherever do-it-yourself or has the capability. But we do think just some of those indicators, some of the older technologies that suggest that there's been somewhat of a temporary shift. And I think you're certainly hearing the large retailers saying the same things in their calls.

Right. Okay. And then, I guess, on the payable programs, did you see anything in the quarter, obviously, during the shock as far as either availability of factoring programs or the rates charged for factoring programs? And I guess, how is that available today as you see your order books pick back up?

Yes, Brett, this is Nathan. We didn't really see any changes in the supply chain financing program to factoring programs that you mentioned. The banks and the customers both continued to support those programs, so really nothing to report on that front.

Okay. And then one last question. I guess, with some of the -- the heavy-duty businesses you've seen -- you've expanded into in the acquisition. How was the demand profile passenger vehicle parts versus heavy-duty parts in the quarter?

Yes, that has become somewhat of an emphasis for us recently. The biggest hit, obviously, being Pollak, which brought 40 million of additional volume in that space for us. You have to break it into the two components, the OE portion of heavy-duty versus the aftermarket portion. The OE portion followed a lot of the same trajectory that you're hearing about OE in general, which is that production got cut back. It is now rebounding, but it did suffer the same types of things you're seeing from a lot of the OE and Tier 1 players, but it is definitely bouncing back. And some of the aftermarket had a lot of the same dynamics that we're seeing in the general repair aftermarket, where April was significant retraction and then a relatively rapid rebound. So really, it -- I guess if I could have answered it much quicker to say, if I had a lot of the same trajectory as our core business.

And our next question comes from Robert Smith from the Center for Performance Investing.

Congratulations on the quarter, and I commend you for all you've done on behalf of your workforce. Most of my questions have been answered. I just have a couple more. Are there any initiatives that you've been considering or launching in the area of electric vehicles?

It's a great question, Robert. And -- a relatively recent announcement, towards the end of last year, was that we entered into a joint venture in a company called CYJ in China which, is a manufacturer of electric compressors for electric vehicles, small companies, young company, but with great technology and great promise. And one of the main things that they were lacking was the horsepower that a company like Standard could provide. So that was, I believe, to be our most significant foray into electric vehicle categories. But even within our aftermarket programs here in the U.S., as you look at the new items that we're bringing to market, they may not be for the powertrain of the electric vehicle, but they are supplying products. We're all over that vehicle active safety devices and other electronic controls for the vehicle. So we do see, while there's going to eventually be a shift at some point towards electric vehicles, we're positioning ourselves to take advantage of it.

So is that an initial effort going to be the bedrock of where you're going? Or are you going to explore other opportunities as well?

We'll, certainly, continue to explore. And as it relates to replacement parts, we need to keep an eye on what parts of the system are failing that would fall within our logical product categories. And because the vehicle population here in the U.S. is so small and relatively young, we're still keeping an eye on what those categories will be. In the other area that we've been emphasizing for the last several years, it's not electric vehicles, but it is alternative energy is our compressed natural gas injection program coming out of our Greenville, South Carolina plant, which continues to really get some pretty good traction, especially in Asia, heavy-duty. And so again, while a lot of our business is related to the conventional combustion engine, we are looking to see how we can evolve with automotive technology.

Yes, that's encouraging. Do you have any comments about China, as such, with everything that's been going on between the United States and China back and forth?

Also a great question, and I can always count on you to ask good strategic questions, Robert. We're certainly, obviously, paying close attention to some of the new kind of geopolitical tensions between the U.S. and China. And so we need to make sure that we stay abreast, should anything happen. Right now, we're pretty committed to our footprint over there, both for what it brings back at low-cost products here for the North American aftermarket, but also heavily for the strategic intent of having a footprint there to sell into the fast-growing Chinese market. So while we're paying close attention to those tensions, at this point, we believe that we're comfortable with our strategy. We'll keep an eye on it, but we do think that the two countries are so linked that unwinding it should that ever happen will be a very long, slow process.

And finally, I just had a general suggestion that you really reconsider the question about the suspension of the dividend. And my strong recommendation is that you reinstitute the dividend as soon as you possibly can. And if business continues to recover during the remainder of the year, toward the end of the year, you consider paying an extra dividend to bring the rates for the year up to what it would have been. That's my suggestion.

Okay. Well, we hear you.

Robert, this is Jim Burke, and thank you for the suggestion. And we continue to monitor the full year and the outlook that we have there. And obviously, this will be always reviewed with our full Board and our attempts to -- again, we said it would be temporary, but we will we continue to monitor it as we progress throughout the balance of the year.

Yes, I didn't believe that the balance sheet is strong enough to make that happen.

And it does appear that there are no further questions over the phone at this time.

Okay. With that, we want to thank everybody for joining our conference call today. Enjoy the balance of the summer. Thank you.

Thank you very much, everybody.

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