Standard Motor Products, Inc. Aktie

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. 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 commissioning 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 that 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 as 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 to 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 Nate. 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.

Al 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 compared 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 Controls 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 Shawne, Kansas. These favorable items offset ongoing headwinds from inflationary pressures across our many various cost of goods.

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 Controls 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 S&P 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 S&P, 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. Our commitment to manufacturing with a footprint that is largely derisked 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're embraced on both the way in and way out 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. 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 -- first of all, Scott, 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 birthing it, but it will take a little while before we see anything really show in our numbers.

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 persons that we've seen. But you also talked about how you expect to go into your usual playbook to offset that. How 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. And get some fresh batteries and the calculator. As you look at temperature control, and I think one of the large retailers yesterday was talking about type 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 the last couple of years as it gets longer and as the season tends to start earlier and 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 project, 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 an 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.

Great. we'll see at Apex next week.

[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. No on the customer shelf...

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 cut over?

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.

Got it. That's all I have, and Jim look forward to working with you again.

Yes. Same here. Very good, Scott. Thank you.

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.

Hello, and welcome, everyone, joining today's Standard Motor Products Second Quarter 2026 Earnings Call. [Operator Instructions] Please note this call is being recorded, and we are standing by, should you need any assistance. It is now my pleasure to turn the meeting over to Tony Cristello, Vice President of Investor Relations. Please go ahead.

Well, 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 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 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. 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. And year-to-date, we are now up nearly 8%. We also generated a record-setting $63.5 million in adjusted EBITDA in the quarter, along with strong operating cash flows. I'll walk through each operating segment separately, and 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've previously explained, this is a category in secular decline dropping by mid-single digits each year, and 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 and 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.

Year-to-date, we remain up nearly 10%. But as we've always said about the seasonal category, individual quarters are less important than the full year. And 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'll 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. And 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, 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, and we feel good about a recovery for our AC products.

Lastly, as previously discussed, we recently launched 2 new categories in Europe, leveraging the synergies with our legacy business. And 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 2 halves, a soft first half followed by a rebound. And 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 long-standing 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 the products. It provides additional control of our supply chain and it launches a low-cost manufacturing operation on which to build, that derisks 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, Jim 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 them a major part of our company's success.

Jim is staying on as Executive Adviser and remains a member of our Board, so 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.

So 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 IEEPA 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 continue to be up both the quarter and year so far, beating year-to-date sales to be up 4.7% for the segment despite impacts from wire sales. Vehicle Control's adjusted EBITDA of 8.6% in the second quarter was a little 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.

Next, looking at Temperature Control. Net sales in the quarter for that segment of $152 million were up 15.7% for the reasons Eric noted before. Temperature Control's adjusted EBITDA increased in Q2 to 18.2% as good sales volumes led to a higher gross margin rate and operating expenses improved as well. Turning to Nissens. Sales grew there by $4.4 million or 4.8%, reflecting some impact of currency conversion, but also continued sales growth of 2.3% in local currency, even though we were up against a difficult comparison where last year had very robust orders in the first half of the year. Adjusted EBITDA for Nissens of 19% of net sales in Q2 was higher than last year, mainly as a result of improvements in gross margin rate and SG&A expenses. It's important to note that while we had some currency transaction losses that impacted this segment in the first quarter, we saw those stabilize in Q2, helping the segment return to normal profit level.

Sales for our Engineered Solutions segment in the quarter were up 16.8%, and we were pleased to see growth across most markets. The second quarter marked the last quarter of easier comparisons given market cycles, and we expect the sales growth rate for this segment will slow through the remainder of the year. Adjusted EBITDA for Engineered Solutions in the quarter of 9.7% was down from last year as the gross margin was lower due to inflationary headwinds, but partly offset by improved operating expense leverage on higher sales. To wrap up our results discussion and put it all together across the 4 segments for the quarter, consolidated net sales increased 6.7%, while adjusted EBITDA was 12.1% of net sales and $4.4 million better than last year. Further, non-GAAP diluted earnings per share were up 8.6% to $1.40 in the quarter.

Looking now at cash flows. Cash generated from operations for the first 6 months of $58.3 million were $64.2 million better than last year, driven by a significant reduction in inventory levels in the first half of the year as well as timing of tariff refunds received. We were pleased to see the improvement in inventory after coming into the year with some higher balances to support our sales growth this year. Investing activities show capital expenditures of $14.9 million, which is lower than last year as capital spending related to our new DC is complete. Our financing activities show payments of $14.7 million of dividends as well as $24 million in repayments on our credit agreement. Our net debt stood at $510.2 million, down significantly from Q2 last year. We finished the quarter with a leverage ratio of 2.5x EBITDA and believe we are on track to get to our stated target of 2x by the end of 2026.

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. This range is lower than the growth we saw through the first half of the year. But keep in mind, we've now lapped tariff pricing that went into effect last year. Our Engineered Solutions and Temperature Control segments will face more difficult comparisons in the second half, and we will lose some tailwinds from the foreign currency translation that has helped the Nissens business as the U.S. to euro rate stabilized.

Our outlook for adjusted EBITDA margin is a range of 11% to 12% and reflects margin benefits of sales growth, but also 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 and the slide notes, our outlook does not include the impact of ongoing changes in the tariff environment, inflationary impacts from the conflict in the Middle East or changes in interest rates on our customers' supply chain financing programs. In connection with our adjusted EBITDA outlook, we expect interest expense on outstanding debt to be about $30 million for the full year, our income tax rate to be in the range of 27.5% to 28% and depreciation and amortization to increase to $45 million to $50 million as we'll have a full year of depreciation on distribution center investments and also continue to invest in our business generally.

To wrap up, we're very pleased with how our year has started with strong sales growth and good profitability. We thank everyone in the company for helping us turn in these results. Thank you for your time.

I'll turn the call back to Eric for some final comments.

Thank you, Nathan. In closing, let me spend a moment discussing how we are viewing things for the balance of the year and beyond. Even in the face of a challenging environment, we have enjoyed several consecutive quarters of solid performance. We operate in strong and stable markets and believe we are outperforming due to a combination of structural advantages, customer relationships and execution. We've made great strides in diversifying our business with new product categories, geographies and end markets, all with a focus on seeking complementary benefits. We're certainly in the midst of complicated times. It remains unknown what impact the conflict in the Middle East will have either on cost or potentially on supply chain disruption, but we have a strong track record of navigating these challenges with robust and resilient supply chains and a favorable manufacturing footprint.

Within our legacy business, North American aftermarket, we believe we excel. 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 with a business model that targets repair professionals with quality products and brands they trust. Nissens is a fantastic new leg to our stool and is exceeding our expectations. They're a great company in their own right. And as part of S&P, they provide great business diversity while being similar enough to generate meaningful synergies, both to the top and bottom line. Our Engineered Solutions business continues its rebound and is a strong complement to our core business, and so we remain very bullish about our future. And that concludes our prepared remarks.

We'll now turn it back over to the moderator to open it up for questions.

[Operator Instructions] We'll take our first question from Scott Stember with ROTH Capital.

Congrats, Jim, on the retirement. You will be missed. So just quick questions on the tariffs. Now that you received your IEEPA refund. Those are gone, but we have some replacement with 301s. What does the go-forward net tariff landscape look for you? Is there some improvement? And then the other question is whether it's related to the IEEPA and any lower pricing environment, do you -- how should we look at potential givebacks to customers within guidance and how we should look at that being reflected in the numbers?

Very good. Thank you, Scott, and thank you for the kind remarks about Jim. I'm sure he appreciates it. And I'm sure he'd still love to go have a beer with you at some point. All right. I'll tackle the first part of your question about the ongoing tariff regime. As you mentioned, there's been a lot of change, but it's really been replacement tariffs. So the IEEPAs were declared illegal and were eliminated immediately. They put in place the Section 122 tariffs. Those stayed in place for 150 days, and those were immediately replaced by the Section 301 tariff. There was a couple of other changes in the middle of that treatment of steel and aluminum derivatives and some other noise as well. It all nets to a very nominal reduction in our total tariff exposure.

So as we have been saying really since tariffs became a topic back in 2018, our approach has been to pass these through dollar for dollar and make changes as they occur, albeit with a timing offset of, say, 90 to 120 days. So this has been no different. Again, all those changes that I just described all net to a small reduction and with a timing offset, that's what you see. But it doesn't have a major impact on the top line. Related to the second part of your question about treatment of the refunds, Nathan described the accounting treatment in the period. And in the spirit of that same basic philosophy and transparency and fairness that we've had with customers, we're certainly not going to get into any specific customer discussions that we're having on this call, but we do expect a sharing of these refunds as we did pass them along to begin.

Got it. And then in Temperature Control, obviously, some timing of sell-in is helping, but we can all see the record heat that we're seeing across the country in many parts in July and into August. Can you maybe just share with us at POS, what you saw in the quarter? And if you're seeing any subsequent catch-up in the last like 6 weeks since the quarter ended?

So what we saw within the second quarter on customer POS was pretty soft, especially in the month of May, which was really an unseasonably cool and wet month and really the beginning of June, you saw that as well. So overall, the second quarter, while their purchases from us were up, again, as in my prepared remarks, I said it was largely due to the preseason volume, their sales out in that second quarter were soft. But now it has picked back up, and this is now only directional.

And -- but as the summer has continued and as you are now seeing that heat and we've had our periods here in the Northeast kind of up and down, but much of the country has remained really pretty solidly warm, we are seeing that POS rebound. It's -- we're still at the halfway mark, so we don't want to get ahead of ourselves. It's a long season and it seems over the last few years to be getting longer and longer. So it's too early to really predict how the full year is going to turn out, but it is nice to see it has rebounded.

Got it. And then last question on Nissens. I know that, obviously, the market has been soft there, but you've been outperforming. What are you seeing maybe on a market-by-market basis? Any change to the narrative over the last few quarters?

It's really an ongoing story, which is not altogether dissimilar to what we have here in North America, which is why you hear that the overall market across the continent has had some softness. That's largely been on product categories that are more discretionary than ours. And also similar to what we've seen here, the summer started slowly there, but now it's just crazy hot across Europe and has been really for much of the summer. And obviously, air conditioning is a major category for Nissens.

We are -- we have customers across the entire continent. So while you're going to have some potential ups and downs country by country, region by region, we're pan-European. And so those do tend to just kind of cancel themselves out. So as we go forward for the second half of this year, pretty much, as we said, we continue to see trends continue, and we're pleased.

[Operator Instructions] We'll take our next question from Bret Jordan with Jefferies.

You called out Vehicle Control at customer POS up. Could you sort of give us an order of magnitude? And is that up in units, price? And I guess, both? What's the composition of up?

Yes. Thanks, Bret. And what we did see in the quarter for POS was, as you said, which was just reflecting what I said, was continued to be positive. There was a modest softening, but it was still up in the low single digits in terms of the split between pricing and units, it was certainly more towards the pricing side, but the units stayed strong as well.

Okay. And then when we think about this IEEPA conversation with your customers, is it the kind of thing where if you -- there was going to be sort of a giveback, is it cutting them a check? Or is it sort of giving them lower prices going forward to offset the higher prices they paid around IEEPA? So how do we think about like how that transaction might work?

Well, it's a fair question. I'm not going to get into the details of this, and it's still in discussions with individual customers. And so the mechanics, we're not going to be talking about that.

All right. Do I get a free question then since we didn't do that one?

For you, absolutely. Take 2.

All right. You talked about new categories in Europe that were synergistic. Could we talk maybe about what you're doing in expanding categories in Europe?

Yes. Well, this is one of the things that really drew us to Nissens where we can really cross-pollinate the 2 categories that we launched in the beginning of the year, one was a Vehicle Control category, which is a major one for us here in the U.S., which is ignition coils and very well suited for launching in Europe because we make all of our coils in Europe, in Poland. And so it gives you that local-for-local selling strategy there, which while certainly there's a lot of other coil suppliers there, it gives us a really differentiated program. So that was the first one, and we're starting to see a certain amount of traction.

The other was an air conditioning category that was a part of the AC system that was a gap for them, which was hoses. Here, too, we're a basic manufacturer out of one of our joint ventures in China, which was relatively easy to accelerate a program for them with good market coverage. And so both of these were launched in the beginning of this year, and we're in ramp stage. But I think what it shows is that we're developing a nice business model of identifying areas where we can help each other through an accelerated launch. These are obviously things we could have done organically without our help, but because we bring a source of supply. Hopefully, it's out of our own plants as these last 2 were, it really allows acceleration. We did similar things for them broadening their offering here in North America.

North America is a small part of their business. But not only did it allow broader coverage for things that they didn't have, but we've been able to help open some doors here for them. And so we're definitely seeing the synergies on helping them expand what they do. And now we're looking at the converse, which is what can they do to help us with our legacy business. And we're in the process of putting together a category that you'll -- I'm sure you'll come by our booth in APEX in a couple of months and happy to show you around what we're doing there. So we're just really getting started on the growth synergies between the two companies, but we really see that that's where the complementary businesses help each.

At this time, there are no further questions. I will turn the meeting back over to Tony Cristello.

Thank you, and we want to thank everyone for participating in our conference call today. We understand there's 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. Hope you have a great day. Thank you.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Hello, and welcome, everyone, joining today's Standard Motor Products First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this call is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to Tony Cristello, Vice President of Investor Relations. Please go ahead.

Okay. Thanks, Aaron, and good morning, everyone. Thank you for joining us on Standard Motor Products First Quarter 2026 Earnings Conference Call. With me today are Larry Sills, Chairman Emeritus; Eric Sills, Chairman and Chief Executive Officer; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer. 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 first quarter earnings call. Overall, we are quite pleased with our performance with all of our segments off to a solid start. Our top line grew by over 9%, reflecting a continuation of the demand trends we have been enjoying for the last several quarters. I'll walk through each operating segment, providing highlights and discuss how we are positioned for the future.

Vehicle Control had a terrific quarter with sales up more than 11%. A large portion of this was attributable to certain customers expanding their assortment with pipeline orders. And while this is somewhat of a onetime event, we tend to see an ongoing lift by having better in-market inventory.

Beyond that, we continue to see general strength of the business as demonstrated by customer POS in the mid-single digits where it has been for the last many quarters. This reflects the nondiscretionary nature of our products and the brand equity we have with the professional repair shops. Lastly, for vehicle control, if you recall, the last 2 quarters saw a steep decline in the wire set subcategory, which we explained was related to customers rightsizing their shelves for this mature product. As expected, this has now returned to its normal single-digit secular decline.

Turning to Temperature Control. Here, too, we had a solid quarter, up slightly from last year's extremely strong first quarter where sales were up 24%. As is typical in this segment, the beginning of the year is marked largely by preseason orders, which can break across the first and second quarters. Last year was heavily in Q1, while this year is more spread out. And as we enter the second quarter, we have preseason orders left to ship.

Further, we have been pleased to see that POS was up substantially, though this is in the lower sales. And importantly, this segment is always impacted by the strength of the selling season, but we're certainly off to a good start. Lastly, both of our North American aftermarket segments saw a nominal lift from tariff pass-through pricing, which took effect in the second half of last year.

Next, I'll speak about Nissens Automotive, our European aftermarket business. Sales were up more than 12%, though much of this was driven by stronger currency translation than a year ago. In local currency, sales were up 2.7% going against a tough comparison. Last year, we had an unusually robust first half due to customer order patterns, while this year has returned to a more normal cadence. We continue to enjoy solid performance in Europe, partly due to the nondiscretionary nature of our products, but also attributable to Nissens' brand recognition helping us gain penetration.

Nissens has now been part of the SMP family for a bit over a year, and we are delighted with its performance, both in and of itself and as a complement to our other businesses and the synergies it creates. Our preliminary focus was on savings, which we expect to roll in over the course of this year. We're also focused on cross-selling, expanding our offering on both sides of the ocean.

Toward the end of last year, we launched 2 new categories in Europe, ignition coils and air conditioning hoses. These are important categories for us here in the U.S., both of which leverage our manufacturing capabilities. And while it is still early, we are starting to gain some shelf space. We continue to work towards ongoing portfolio expansion opportunities, leveraging each other's strengths.

Lastly, I'll speak to our non-aftermarket segment, Engineered Solutions. We enjoyed strong first quarter sales, up more than 12% over last year when the business was rather soft. As we've discussed, this business will be subject to more volatility than the aftermarket as it will rise and fall with demand for new vehicles and equipment and the sales rebound that began in mid-2025 has continued with strength at certain customers within our commercial vehicle and powersports end markets.

Finally, let me speak briefly about the current tariff landscape and its impact on our business. Most of the significant changes happened in 2025, and this year has been more stable. That said, there have been changes related to the elimination of the reciprocal tariffs, the addition of new Section 122 tariffs and changes to the steel and aluminum derivatives tariffs.

When combined, these essentially offset each other, and we continue to operate a successful pass-through playbook to accommodate any impact. So when you put all these moving pieces together, we're very pleased with our performance thus far and with our ability to execute on our initiatives during complex times. So let me hand this over to Nathan, who will provide the details.

Good morning, everyone. Thank you, Eric. As we go through the numbers, I'll first give some color on the results for the quarter by segment and 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.

First, looking at our Vehicle Control segment. You can see on the slide that net sales of $213.8 million in Q1, were up 11.2% as we saw a significant amount of orders to broaden our customers' product assortments come through during the quarter as well as the impact of slightly higher pricing from pass-through of tariffs. Vehicle Controls adjusted EBITDA of 11.4% in the quarter was just slightly lower than last year as higher sales volume and better operating expenses as a percent of net sales was offset by some gross margin rate compression from passing through tariffs at cost.

Turning to Temperature Control. Net sales in the quarter for that segment of $89.5 million were up 0.7% for the reasons Eric noted before. Temperature Control's adjusted EBITDA increased in Q1 to 13.4% as good sales volumes led to a higher gross margin rate and operating expenses improved as well. Looking next at Nissens, sales grew by $8.2 million or 12.4%, mostly reflecting the impact of currency conversion, but also continued sales growth in local currency, even though we were up against a difficult comparison, where last year had very robust orders in the first half.

Adjusted EBITDA for Nissens of 12.5% of net sales in Q1 was lower than last year, mainly as a result of some currency transaction losses, which occurred in the quarter versus small gains in the prior year. The currency losses stem from sourcing activities in China, where the currency strengthened sharply in Q1, but is returning to a more stable level. Also keep in mind that Nissens business is seasonal given their offering of temp control products, and so the first quarter profit is generally lower than other quarters.

Sales for our Engineered Solutions segment in the quarter were up 12.6%, and we were pleased to see growth across most markets. Our adjusted EBITDA for Engineered Solutions in the quarter of 6.9% was down from last year as gross margin was lower due to inflationary headwinds and amortization of manufacturing variances from late last year as well as some mix, partly offset by improved operating expense leverage on higher sales.

To wrap up our results discussion and put it all together across the 4 segments for Q1, consolidated sales increased 9.1%, while adjusted EBITDA was 9.9% of net sales and almost $2 million better than last year. Further, non-GAAP diluted earnings per share were $0.82 in the quarter.

Turning now to cash flows. Cash used in operations for the quarter of $41.9 million was $18.3 million better than last year as we were well prepared with inventory coming into the year to meet higher sales levels in Q1. Investing activities showed capital expenditures of $6.7 million, which is lower than last year as capital spending related to our new DC is mostly completed.

Financing activities showed payments of $7.3 million of dividends as well as $44 million in borrowings on our credit agreement. Our net debt stood at $599.4 million, flat with Q1 last year. We finished the quarter with a leverage ratio of 3x EBITDA given seasonality in our business and believe we are on track to get to our target of 2x EBITDA by the end of 2026.

Before I finish, I want to give an update on our sales and profit expectations for the full year of 2026, which is really unchanged from before. Before I do, let me note that our outlook does not take into account ongoing changes in U.S. tariffs on imported goods. We follow changes closely, but things change continuously. Whatever the impact is on our business, we will continue to offset our cost of the dollar-for-dollar pass-through in pricing.

For 2026 full year, 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% of net sales and reflects margin benefits to sales growth, but also some continued margin compression from passing through tariffs to costs.

In connection with our adjusted EBITDA outlook, we continue to expect interest expense on outstanding debt to be about $30 million for the full year. Our income tax rate to be 27.5% to 28% and depreciation and amortization expense to increase to $45 million to $50 million as we'll have a full year of depreciation on distribution center investments and also continue to invest generally in our business.

To wrap up, we're very pleased with how our year has started with strong sales growth and good profitability. We thank all of our associates across the company for helping us turn in these results. Thank you for your time. I'll now turn the call back to Eric for some final comments.

Thanks, Nathan. In closing, let me just spend a moment discussing how we're viewing things for the balance of the year and beyond. Even in the face of a challenging environment, we've enjoyed several consecutive quarters of solid performance and believe that this momentum will continue. We are operating in strong and stable markets and believe we are outperforming due to a combination of structural advantages, customer relationships and execution.

We've made great strides in diversifying our business with new product categories, geographies and end markets, all with the focus of seeking complementary benefits. We're certainly in the midst of complicated times. It remains unknown what impact the conflict in the Middle East will have, either on costs or potentially on supply chain disruption as well as an ever-changing tariff landscape, but we have a strong track record of navigating these challenges with robust and resilient supply chains and a favorable manufacturing footprint.

Within our legacy business, the North American aftermarket, we believe we excel. 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 with a business model that targets repair professionals with quality products and brands they trust.

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 great business diversity while being similar enough to generate meaningful synergies, both to the top and bottom line. Our Engineered Solutions business continues its rebound and is a strong complement to our core business, and so we remain very bullish about the future. That concludes our prepared remarks. At this point, we will turn it back to the moderator and then open it up for questions.

[Operator Instructions] And we can take our first question from Scott Stember with ROTH Capital.

Speaking to Vehicle Control, you talked about some outsized sell-in, I guess, to a couple or 2 or 3 customers in the quarter to broaden their -- I guess, their portfolio of SKUs. Do you think that this is more something related to just industry-wide? Or how much of this is because of the innovation and new products that Standard has come out with in the last 6 to 12 months?

It's much -- it's a good question, Scott. And this is really just a typical process that we go through with our customers to take a look at their inventory position and as has been a trend over these last few years, making sure that they have the smartest inventory forward deployed. So this didn't have to do necessarily with new products or innovation. This was just saying where do we see opportunities.

It's very much of a collaborative event that we have with customers, where do we see opportunities to strengthen your position to help you gain share at the consumer or at the independent repair shop. So this quarter was heavier than we've seen, and that's why we've called it out, but this is just the ongoing line review process that we have.

Got it. And then next on Nissens. Could you talk about what the sell or what POS was in the quarter?

It's also a great question. And we have a little bit less visibility to POS in the European market as we do here in the U.S. because it is so much more of a fragmented marketplace. But what we see there is general ongoing trends that match pretty closely with our sell-in. So there's -- it's pretty normalized there, in the low to mid-single digits.

And then as far as the synergies, I know the first year was focused more on the cost. But this year, you talked about some of the wins that you've had cross-pollination. Are any of those synergies in your guidance in a meaningful way? Or should we look at that as more upside?

Referring to the growth side, and Nathan can speak to the cost reduction side. But on the growth side, these -- when you launch a new product, you don't expect substantial near-term gains. So I wouldn't consider it accommodated in the overall top line. It's really more getting ourselves positioned for future years and additional line expansion. But on the cost side, and I don't know, Steve or Nathan, you can answer.

Yes. So Scott, on the cost side, we gave the range of $8 million to $12 million of cost reductions and really put a time frame on that of achieving it by the end of this year into 2026 from a run rate perspective. So like we said before, we think we're still pretty well on track. To the extent some of those roll through the P&L this year, they are in our guidance, but we'll see a good benefit of that going into 2027 as well as we achieve the run rate later this year.

And just one last one, if I could sneak it in on Temperature Control. It sounds like POS is stronger than expected. Do you think that this is -- I know that March was one of the warmest Marchs on record. So do you think it's a combination of weather? Or is it share gains given your favorable positioning on tariffs or where you get your product from?

I think it's both just on good market demand, but I absolutely also believe that it's market share gain and whether it has to do with -- and there's a number of factors there. It's the success we're having with our brands. It's the success our customers are having in the marketplace, gaining additional share. So I believe it's a combination of the two. That said, again, Scott, I want to reemphasize that I wouldn't speak to 2026 by how the market did in March. It's just too soon to tell.

[Operator Instructions] And there are no additional questions at this time. I'd like to turn the program back over to Tony Cristello for any closing remarks.

Okay. We want to thank everyone for participating in our conference call today. We understand there is a lot of information presented, and we will 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. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good day, everyone, and welcome to the Standard Motor Products Fourth Quarter 2025 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, Cloie, and good morning, everyone, and thank you for joining us on Standard Motor Products Fourth Quarter 2025 Earnings Conference Call. With me today are Larry Sills, Chairman Emeritus; Eric Sills, Chairman and Chief Executive Officer; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer.

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.

Thank you, Tony, and good morning, everyone, and welcome to our fourth quarter earnings call. Overall, we are quite pleased with our results. The strong performance we have been experiencing continued into the fourth quarter, putting a cap on a solid year and with good momentum heading into 2026. Our top line grew by over 12% in the quarter and over 22% for the year, and while much of this was from our Nissens acquisition consummated in late 2024, excluding Nissens, we are up about 4% for both the quarter and the year. The strong sales performance when combined with various internal initiatives generated favorable bottom line numbers, both in terms of earnings growth and EBITDA margin expansion. .

All of our segments performed well. Let me go through them starting with the North American after. Vehicle Control sales were up 3.3% against a very strong quarter the previous year with several contributing factors. First, our products are nondiscretionary and largely DIFM, and so in general, the categories outperformed in uncertain economic times. On top of that, we believe our customers are successful with our well-regarded brands and this is evidenced by their strong sell-through as their POS was up in mid-single digits throughout the year.

As you look at the subcategories, you will note that the wire sets subcategory saw a 27% drop off in the quarter, bringing the entire segment down 2%, representing less than 10% of vehicle control, wire sets are a category and secular decline. As such, certain customers chose to reset their shelves in the second half, rightsizing their inventories for this mature category. It's important to note that their wire sets EOS for this period was only down in the mid-single digits, which is more reflective of ongoing demand.

Lastly, our sales in the segment benefited in the back half of the year as we began to pass through our tariffs at [indiscernible].

Turning to Temperature Control. Robust sales continued, up nearly 6% over a very difficult comp, though the fourth quarter is the smallest in this heat-related business. In a seasonal category like this, the cadence across orders can vary year-to-year. So the key measure is full year sales. And for the full year, the segment was up more than 12%. So what's driving this? As we described on the last call, the air conditioning season seems to be elongating starting earlier and ending later. Customers are recognizing this and getting their inventory in place ahead of the season to be able to take advantage of early demand and we also believe a key driver is the success of our AC KIT program. And air-conditioning repair done right consists of the replacement of several system components. Over the last several years, we have seen increased adoption of our kits, where we have all you need to do the repair included in a packed kit. Not only does this increase the ticket as more of the related parts get included technicians love its simplicity, and it tends to end with a happier end customer as the repairs are more successful. And then lastly, here too, we saw a modest lift due to tariff pricing.

Next, I'll speak about our newest segment, Nissens Automotive, which has been a part of SMP since November of 2024. We have now completed our first full calendar year of ownership, and we are delighted with its performance. both in and of itself and as a complement to our other businesses and the synergies accretive. Sales remained strong, contributing $64 million in the quarter and $305 million in the year posting full year mid-single-digit increases from 2024 in local currency.

While there are reports from others with business in Europe of a general softening of the market, Nissen continues to excel. We attribute this to 3 primary dynamics. First, we participate in many of the same nondiscretionary categories as in the U.S., which tend to remain stable in difficult economic times. Second, we enjoy strong sales in Eastern and Southern Europe, which have been outperforming other parts of the continent. But most importantly, we are gaining share through a combination of new category placement, increased share of wallet with existing customers and enhanced pull-through by the workshops who seek the highly respected Nissen's brand.

We are also deeply engaged in seeing synergies. Our preliminary focus was on savings. seeking best cost on sourced products, in-sourcing as appropriate, leveraging our increased purchasing power on freight and logistics and so on. We are also focused on cross-selling, adding coverage in new categories on both sides of the ocean. And while these initiatives can take time to show in the numbers, they represent exciting opportunities.

Lastly, I'll speak to our non-aftermarket segment, Engineered Solutions. As we have discussed, this business will be subject to more volatility than the aftermarket as it will rise and fall with demand for new vehicles and equipment across our different end markets. Halfway through 2024, business started to drop off, leading to several consecutive quarters of sluggish demand. Happily this trend reversed mid-2025, and we have experienced sequential improvement. Q4 was up about 6% over the previous year, and although the full year was down slightly, the momentum is stable. And while we can expect the segment to be more cyclical than the aftermarket we see it as a strong complement to our core business. It operates out of the same plants producing the same product types. It enhances our quality capabilities and access to new technologies, It provides an OE pedigree to leverage in the aftermarket, and it provides a healthy contribution to our bottom line.

Finally, let me speak briefly about the current tariff landscape and its impact on our business. Over the past several months, we have entered a more stable environment. In the fourth quarter, our tariff-related costs were essentially offset by pricing. Obviously, there have been recent announcements, both by the Supreme Court and the White House that will have an impact. We're digesting the rules as certain tariffs are eliminated and new ones take effect but we have developed processes and methodologies with our customers that allow for this flexing and we plan to continue to operate from the successful playbook. Further, we believe that our diverse global footprint will continue to provide us with a competitive advantage. The new rules allow continued exemption for U.S. MCA compliant goods, which is a significant part of our offering.

It's worth reiterating that as most of our products are nondiscretionary and as product decisions are typically made by professional repair facilities, they are relatively priced in elastic at the end consumer as our sell-through confirms. So when you put all these moving pieces together, we are very pleased with the quarter's financial results and with our ability to execute on our initiatives during complex times.

So let me hand this over to Nathan, who will provide the details.

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 then look at the consolidated results for both the quarter and year. I'll then cover some key cash flow metrics and finish with an update on our financial outlook for the full year of 2026. First, looking at our Vehicle Control segment, you can see on the slide that net sales of $193.7 million in Q4 were 3.3% while being up against a difficult comparison from a year ago when the segment grew 4.9%. While we continue to see a decline in sales of wire, as Eric noted, we were pleased to see the engine and electrical and safety categories grow a combined 6.3% versus Q4 last year.

Vehicle Controls adjusted EBITDA in the fourth quarter was even with last year at 11.1%. Adjusted EBITDA margin was flat as higher sales volume was offset by some gross margin rate compression from passing through tariffs at cost as well as some higher distribution expenses as we transition into our new warehouse.

Turning to Temperature Control. Net sales in the quarter for that segment of $61.5 million were up 5.9% for the reasons Eric said. Temperature Controls adjusted EBITDA increased in Q4 to 13% due to higher sales volumes that led to a higher gross margin rate as well as improved operating expenses as a percent of sales for the quarter. While adjusted EBITDA was very good in the fourth quarter, it's a low point in the year for sales volume, and so would also highlight full year adjusted EBITDA came in at 15.7% for this segment.

Next, let me touch on Nissen. This fourth quarter was the first time we have year-over-year results as we acquired the business on November 1, 2024. Nissen sales grew by $28.4 million or 79% mostly reflecting an additional month of business in 2025 versus 2024, but also continued strength in the segment. Adjusted EBITDA for Nissens increased to 10.1% of net sales in Q4, again, partly reflecting an additional month of results in 2025. Keep in mind the Nissens business is seasonal, given their offering of temp control products, -- and so the fourth quarter profit is generally lower than other quarters and the full year adjusted EBITDA margin of 15.9% was in line with expectations.

As this was our first full year of ownership of Nissens, this was the first year we needed to assess the internal control environment of this formerly private business according to Sarbanes-Oxley requirements. As noted in our 10-K filed earlier today, we disclosed that we identified a material weakness in internal controls over financial reporting at our Nissen segment related to its general information technology controls. As we're expeditiously taking action for media controls by both adding a technical solution and enhancing other compensating controls, it's very important to note this weakness did not result in errors in our financial statements. as we do a thorough review of all our numbers and received a clean opinion with PMG.

Turning to Engineered Solutions. Sales in that segment in the quarter were up 6.3% and we were pleased to see growth return to the segment as we lap market softness that began in the second half of last year. Adjusted EBITDA for Engineered Solutions in the quarter was of 9.6% was up from last year as higher sales led to better gross margin and operating expense leverage. While we did incur some onetime costs related to winding down certain customer programs in the quarter, and these were adjusted for non-GAAP reporting, we were pleased to see both the top and bottom line increase in this segment.

To wrap up our results discussion and put it all together across the 4 segments for Q4, let me just say we had a great quarter and year. Consolidated sales increased 12.2% and adjusted EBITDA increased to 9.7% of net sales in the quarter. Further, non-GAAP diluted earnings per share were up 19.1% as a result of higher sales and strength of operating performance. For the full year of 2025, our sales increased 22.4% over last year and 4% excluding Nissens, helped by strong sales in both our North America and aftermarket segments. Our adjusted EBITDA was up 160 basis points, and our non-GAAP diluted earnings per share increased 26.8%. We were pleased to see our top line coming right in line with our expectations while our bottom line came in above the range previously provided.

Turning now to cash flows. Cash generated from operations for the full year of $57.4 million, was down $19.3 million from last year. Our cash flow was lower in 2025, mainly due to an increase in inventory during Q4 as our business continues to grow, and we prepared for the upcoming selling season. Note that part of the increase in inventory is also due to higher tariff costs incurred during the year.

Investing activities show capital expenditures of $38.7 million, which includes $10.4 million of investment related to our new distribution center. CapEx is slightly lower than last year's capital spending related to the DC is nearing completion. Financing activities show payments of $27.3 million of dividends as well as $27.7 million in borrowings on our credit agreement. Note that we repaid $51.4 million on our credit agreement from Q2 through Q4 and with that, our net debt stood at $546.7 million. We finished the quarter with a leverage ratio of 2.7x EBITDA and believe we are on track to get to our target of 2x by the end of 2026.

before I finish, I want to give an update on our sales and profit expectations for the full year of 2026. Before I do, let me note that our 2026 outlook does not take into account recent changes in U.S. tariffs on imported goods. We follow changes closely, but things change continuously, creating uncertainty in the market. Whatever the impact is on our business, we will continue to offset our cost with the dollar for dollar pass-through and pricing. We expect sales growth in 2026 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 in a range of 11% to 12% of net sales and reflects margin benefits of sales growth, but also some continued margin compression from passing through tariffs at costs. In connection with our adjusted EBITDA outlook, we expect interest expense on outstanding debt to be about $30 million for the full year, our income tax rate to be 27.5% to 28% and depreciation and amortization to increase to $45 million to $50 million as we'll have a full year of depreciation on distribution center investments and also continue to invest generally in our business.

Regarding operating expenses. Keep in mind, these expenses are incurred more ratably across the year, but do have some variability with sales and as such, will fluctuate seasonality in the business. We anticipate total operating expenses, inclusive of factoring will be approximately $106 million to $114 million each quarter in 2026.

Finally, as noted, there is a seasonal aspect to our business with regard to temp control products we sell in North America and Europe. Our preseason can span across Q1 and Q2 with some variability between quarters. And given we saw a large amount of growth in Q1 last year in these products, we will be going up against a difficult comparison in Q1 2026. So it's important to look at the first half of the year in total regarding cadence of sales.

To wrap up, we're very pleased with our sales and earnings growth in 2025 and that we can share expectations for further growth in 2026. We continue to execute on many initiatives, including integration of Nissens and expect to realize increasing benefits from that in 2026.

Thank you for your time. I'll turn the call back to Eric for some final comments.

Well, thank you, Nathan. In closing, let me just spend a moment discussing how we're viewing things in 2026 and beyond. Even in the face of a challenging economic environment, we have enjoyed several consecutive quarters of strong performance and believe that this momentum will continue. We operate in strong and stable markets and are outperforming due to a combination of structural advantages, customer relationships and execution. We've made great strides in diversifying our business with new product categories, geographies and end markets, all with the focus on seeking complementary attributes.

Within our legacy business, the North American aftermarket, we believe we excel. The industry itself continues to demonstrate its stability and resilience in the face of turbulent times. Within it, we are in great nondiscretionary product categories that are less impacted by consumer sentiment. We target the repair professionals with quality products and brands they trust, and these are the folks making the purchasing decisions, creating pull-through to our channel partners, and we nurture our customer relationships with a program they value and with the execution they rely on.

Our recent geographic expansion with the acquisition of Nissens is exceeding our expectations. They continue to impress us as terrific operators with strong relationships with their customers. They enjoy many of the same benefits I just described for us here, both in terms of market dynamics and their place in it. And the more we work together, the more we are impressed with their team, with their capabilities and our ability to identify opportunities.

Our Engineered Solutions business is on the rebound and while it can be volatile, it is a strong complement to our core business and generate favorable returns. We continue to gain traction with blue-chip customers around the world leveraging the breadth of our offering and our capabilities. And as we become known doors are opening bots. And while we continue to see supply chain complexity, we feel that we can navigate it better than most. And so we remain very bullish about the future.

And that concludes our prepared remarks. With that, we will open it up for your questions.

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

Congrats on the very impressive results.

Thank you, Scott.

Eric, in vehicle control in the release that says that your sell-through or POS was essentially in line with what, I guess, you had seen through the first 3 quarters. Does that assume that you were up low to mid-single digits at sell-through or POS?

Yes, that's correct. And if I was unclear on that. I apologize. Yes. The POS was pretty consistent really all year long for the big players, which was in the mid-single digits.

Okay. And very strong growth in the business outside of wire. And maybe just talk about some of that I know you guys have been much more focused on increasing your portfolio of products earlier in their life cycle and with more complexity in electronics. Maybe just talk about behind the scenes, how that's coming about.

Yes. Great question. And that's one of the reasons why we do break the subcategories out the way that we do. We have carved out the wire business to show that it does perform differently just where it is in its life cycle to the other areas where we do continue to see growth. Our vehicle control offering is extremely broad, expands many, many categories, whether it's addressing conventional engines or safety-related products or other electrical products around the vehicle. And what we're seeing is a proliferation of not only SKU opportunities but also replacement rates on some of the newer technologies. So it's an evolving category. It's a growing category. In the aftermarket, nothing moves very quickly, as you know. But what we are seeing is that there continues to be really nice opportunities for growth across both conventional technologies and some of the newer ones.

Got it. And then one more before and I'll jump back in the queue on the synergies that you talked about, obviously, lots of synergies, cross-selling, new customers, introducing to each other and I guess, cross-pollination of products. Can you talk about how we're doing and what innings we are in some of these initiatives?

Sure. And I started by asking about the growth opportunities, let me respond to that. What we did over the course of 2025 was to look first at where we saw gaps in the common product categories. So for example, we both sell air conditioning compressors. So where did we find opportunities for us to expand their North American coverage with what we already had and some opportunities where they had some SKUs that made sense for us to add. But the bigger area that we're excited about is identifying entire categories that one was in and the other wasn't. And so we added several of these in 2025. And for the Nissens offering, some in Nissens Europe and some in Nissens North America, really capitalizing on product strength that S&P brought to the table. So with -- for example, within Europe, we launched in December a line of ignition coils to expand their engine efficiency category, ignition coils is a great category here. It's one we are very basic as a manufacturer, and we manufacture them all in Poland, which is a great selling point in Europe for Europe. We expanded some of their air conditioning subcategories that they were not in on both sides of the ocean.

So really 2025 was a year of putting the programs in place. Now it's about getting out there in the market, getting traction and getting some shelf placement with the distributors. So it takes a little while for us to see the value that it brings, but we're excited about the potential. This is really one of the things we came into this acquisition thinking that while we have a lot of common categories to seek synergies. We also have these complementary categories to add and seek growth.

On the cost side of things, and this is the area we've been talking about really all year long, as we've looked at commonizing vendors, beefing up those vendors and figuring out where there are cost type synergies, we came into this saying that we would have a run rate of $8 million to $12 million in savings by the end of 2026. I believe we're very comfortable with that. We believe we're ahead of that. Important to note, this doesn't all hit the Nissens P&L. This gets spread across the entire enterprise because as we see in the savings can -- we each benefit the other and what we bring to the table.

Got it. If I could just squeeze one -- last one in about the timing of the remediation of the internal control issue in Europe.

Yes. And Scott, so like I said, we're working on it right now. with both the technical solution and compensating controls. I believe we're making very good progress, and we'll update you as soon as we can on that front. .

[Operator Instructions] We'll take our next question from Bret Jordan with Jefferies.

You talked about a tough comp in temperature control in the first quarter, but could you maybe give us some color as to where retail inventory in temperature crude oil product stands year-over-year going into what might be the cooling season?

Yes. What we've seen coming into the year is that their inventories are up slightly, but they're really up tracking with how much their sales are up. So I wouldn't say that they're in a different position than previous years in terms of readiness for the season. We are seeing ongoing good preseason order requirements across the customer base. as Nathan pointed out, this can hit in the first quarter and in the second quarter, a lot depends on when we ship it usually ends up being right at that crossover point. Last year, we did a lot of them in the first quarter. That's why you saw last year's Q1 was really very strong. We think it's going to be more normalized this year, and that's why it's important to look at the full year. The preseason should be good this year.

Great. And then on Nissens a couple of the large parts distributors in Europe are talking about private label programs that they're emphasizing. Can you be a private label supplier being this into those and pick up share if they gain share with private label?

Certainly. And we do a little bit of private label there today. We really have been emphasizing our brands. And the majority of our sales there, about 80% or so of our sales in Europe are under the Nissens brand. We have 2 other brands. We have an entry-level brand called AVA and one that's more dedicated to commercial vehicles called highway -- and so each China has its positioning within the space, depending on customer needs, but we do see private labeling as something that is a successful partnership when it works well for both partners. And so if we see opportunities there, we will certainly capitalize on.

Great. And then obviously, you get visibility on tariff outcomes here. Is there any opportunity for tariff rebate collection? Or are you guys just not as exposed to some of that Asian import product?

Well, I think that it's still very unclear. If you're asking about refunds from the [indiscernible] tariffs, I think it's still very unclear how that's going to play out. We're in the same boat as everybody else. If there's an opportunity to recover it, we will certainly avail ourselves of that. But I think that we're -- everything I'm hearing is that we're a long way from figuring out how that's going to get resolved. .

[Operator Instructions] Thank you. At this time, there are no further questions in queue. I would now like to hand it back to the presenters for any additional or closing remarks.

Okay. 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. Hope you have a great day. Thank you. .

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good day, everyone, and welcome to the Standard Motor Products Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, today's call will be recorded. [Operator Instructions]

It is now my pleasure to turn the conference over to Tony Cristello, Vice President of Investor Relations. Please go ahead.

Thank you, Nicky. Good morning, everyone, and thank you for joining us on Standard Motor Products third quarter 2025 earnings conference call. With me today are Larry Sills, Chairman Emeritus, Eric Sills, Chairman and Chief Executive Officer; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer.

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 results as the strong momentum from the first half has largely continued. From a top-line perspective, we posted growth of nearly 25%. And while the majority of this growth was from the addition of our newly acquired Nissens business, the legacy business was up nearly 4%.

Due to the strength of our first 3 quarters, we have decided to increase our top line expectations as well as to tighten our EBITDA guidance to the upper end of our previous range, and Nathan will provide the details.

I'll now review each business separately, starting with the North American aftermarket, which is comprised of 2 operating segments, Vehicle Control and Temperature Control. Vehicle Control sales were down 1.6% against a difficult comparison as last year's third quarter increased 5%.

Looking closer, 2 of the 3 product lines were essentially flat, while all of the back slide was in our wire set business, which is a product category in secular decline. Generally speaking, there will always be some volatility quarter-to-quarter based on customer order patterns, timing of pipelines and so on.

And so we believe a key metric is customer POS as it reflects true market demand for our products. POS for vehicle control continued the positive trend that has shown all year and was up mid-single digits in the quarter for our large accounts. This reflects the nondiscretionary and heavily DIFM nature of our categories and the brand acceptance by the professional shops making the purchasing decisions.

Turning to our Temperature Control division. Robust sales continued up nearly 15% over last year. Year-to-date, the segment is now up more than 13% against 1 of the hottest on record. The air conditioning season seems to be elongating starting earlier and ending later. This year, several of our customers anticipated this and got their preseason orders on their shelves ahead of the season and this began their replenishment cycle sooner and they never lost a beat.

I do also believe that our customers are gaining share as they do well with our recognized brands. And generally speaking, across both of our aftermarket segments, we continue to enjoy strong partnerships with our customers and strong brand penetration with the professional installers.

Next, I'll speak about our newest aftermarket segment, Nissens Automotive, which has been a part of SMP since last November. Sales remained strong in the quarter, contributing nearly $85 million in revenue as they continue to outperform in their markets. We believe their ongoing success is based on many of the same reasons, why we do well here.

First, they share many of the same nondiscretionary categories, which tend to remain stable in difficult economic times, but moreover, their strong brand recognition, well-received go-to-market strategy and consistent execution has allowed them to grow market share and expand into new categories.

On the integration front, we continue to work together in developing meaningful synergies. We began our efforts focused on cost savings and are on track to achieve our previously stated targets and we are now seeking growth opportunities through cross-selling our complementary categories on both sides of the ocean. And while we are just getting started, we see a lot of potential.

Next, I'll address our non-aftermarket segment, Engineered Solutions. After a few quarters of sagging sales, demand has flattened out, and we ended our quarter down a modest 0.3%. We have always known and discussed that this business has grown to more cyclicality than the aftermarket and while we can expect some volatility period to period, we believe that the longer-term trends are favorable as we continue to see a robust pipeline of new business opportunities, and we believe that it provides a nice complement to our aftermarket business, with valuable synergies.

Lastly, let me speak briefly about the current tariff landscape. And while difficult to fully project, we believe that we have entered a more stable environment. In the third quarter, our tariff-related expenses were largely offset by pricing and go forward, we expect this to continue. While we are still awaiting certain trade agreements to be finalized, we believe that our diverse global footprint will continue to provide us with a competitive advantage.

As previously stated, about half of what we sell in the U.S. is produced in North America and is largely tariff free. The balance is roughly split between China and lower tariffed regions such as Europe. We, therefore, believe our exposure is less than many with tariff inflation in the quarter in the low single digits.

It's worth reiterating that as most of our products are nondiscretionary and as product decisions are typically made by professional repair facilities, they are relatively priced inelastic at the end consumer as our sell-through confirms. So when you put all these moving pieces together, we are very pleased with the quarter's financial results and with our ability to execute on our initiatives during complex times.

Let me hand this over to Nathan, who will provide the 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 then look at the consolidated results for both the quarter and year so far. I'll then cover some key cash flow metrics and finish with an update on our financial outlook for the full year of 2025.

First, looking at our Vehicle Control segment, you can see on the slide that net sales of $197.7 million in Q3 were down 1.6%, while being up against a difficult comparison from a year ago, when the segment grew 5.2%. That said, the decline was driven by wire products, which remain in secular decline, and we were pleased to see the engine category, in particular, hold up well against 7.3% growth last year.

While the quarter showed a decline in sales, it's important to note that our sales were up 2.9% for the first 9 months in this segment. Vehicle Controls adjusted EBITDA in the third quarter was lower than last year at 10.3%. Adjusted EBITDA was driven by lower sales volumes and gross margin rate compression from passing through tariffs at cost as well as some higher distribution expenses as we transition into our new warehouse.

While there was some timing that impacted sales and expenses in the quarter, it's important to note that adjusted EBITDA for the first 9 months is 10.9%, and right in line with last year, when allowing for the rate compression impact of tariffs.

Turning to Temperature Control. Net sales in the quarter for that segment of $144.7 million were up 14.8% for the reasons Eric noted before. Temperature Controls adjusted EBITDA increased in Q3 to 19.7% due to higher sales volumes that led to a higher gross margin rate, which more than offset pressure from tariff costs as well as improved operating expenses as a percent of sales for the quarter.

Next, I'll touch on Nissens. In our third full quarter of ownership, Nissens added $84.5 million of net sales and $14.2 million of adjusted EBITDA. The business is performing well and again, was in line with our earlier estimate of mid-teens EBITDA percent coming in at 16.8% for the quarter. Nissens continues to grow its sales across Europe and has also benefited from some favorable currency translation movements.

Sales for our Engineered Solutions segment in the quarter were down 0.3%, but we were pleased to see declines level off as we lap market softness that began in Q3 of last year. Adjusted EBITDA for Engineered Solutions in the quarter of 10.2% was down from last year, but continues to be in a steady and consistent range. This was the result of lower sales volume, unfavorable mix and some impact from tariff costs that lowered the gross margin rate.

To summarize and put it all together across the 4 segments for Q3, consolidated sales increased 24.9% and adjusted EBITDA increased to 12.4% of net sales and non-GAAP diluted earnings per share were up 6.3%, with all metrics being helped by our acquisition of Nissens, among the other things I already noted.

For the first 9 months, our sales have increased 25.5% over last year and 4% excluding Nissens, helped by strong sales in both our North America and aftermarket segments. After 3 strong quarters of performance, our adjusted EBITDA is up 170 basis points, and our non-GAAP diluted earnings per share increased 27.8%.

Turning now to cash flows. Cash generated from operations for the first 9 months of $85.7 million was up $7.5 million from last year. As always, the third quarter is when we generate much of our cash given the seasonality in the business, and it was nice to see higher earnings and good working capital management resulted in an increase despite paying higher cash cost per payers.

Investing activities show capital expenditures of $29.3 million, which includes $9.6 million of investment related to our new distribution center. CapEx was slightly lower than last year as capital spending related to the new DC is nearing completion. Financing activities show payments of $20.4 million of dividends as well as a repayment of debt.

Now we repaid $47 million on our credit agreement during the third quarter. And with that, our net debt stood at $502.3 million. We finished the quarter with a leverage ratio of 2.6x adjusted EBITDA and are on track to get to our target of 2x by the end of 2026. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2025.

As we noted in our release this morning, our updated outlook includes higher tariff costs and offsetting impacts as they stand today. We are raising our sales guidance for the full year to be an increase over last year in the low to mid-20% range, which is above our prior range of low 20% increases. We're also pleased to update our outlook for the adjusted EBITDA margin and tighten it to be in a range of 10.5% to 11% of net sales.

Note this guidance updates. This updated guidance reflects the robust sales performance we've seen for the first 9 months of the year and higher overall margins. To wrap-up, we're very pleased with our sales and earnings growth in the first 9 months of 2025 allowing us to raise our outlook for the full year. We continue to execute on many initiatives, including the integration of Nissens and expect to realize increasing benefits from that initiative in 2026.

Thank you for your time. I'll turn the call back to Eric for some final comments.

Well, thank you, Nathan. And in closing, let me just spend a moment discussing how we're dealing fix. Even in the face of a challenging economic environment, we have enjoyed several consecutive quarters of strong performance. The largest part of our business, the North American aftermarket continues to demonstrate this resilience. It's a highly stable market with solid foundations, the addressable market expands with a growing and aging car park.

Within this attractive space, nondiscretionary product lines tend to do better as motorist are unable to defer repairs, and that's even more pronounced in DIFM categories like ours, and our value proposition continues to resonate. We provide full-line coverage of professional grade products and brands that technicians trust and our relationship with our trading partners is strong.

Our recent geographic expansion with the acquisition of Nissens is exceeding our expectation. They enjoy many of the same benefits I just described for us here, both in terms of market dynamics and their place in it. And the more we work together, the more impressed we are with their team, with their capabilities and with our ability to identify opportunities. And so we remain very bullish about the future.

And that concludes our prepared remarks. With this, we'll turn it over to the moderator and open it up for questions.

[Operator Instructions] We'll take our first question from Scott Stember with ROTH Capital.

Some of your customers have been giving the indication that they're seeing some elasticity issues mainly in the DIY side of the business, I guess, just given the inflation and tariffs and so forth. It doesn't sound at least that you're seeing that at this point? Just wanted to confirm that.

Yes, that's a fair statement, Scott. And as I said in the prepared remarks, we're seeing our sell-through at these customers continuing in a positive range and within Vehicle Control, we are in the mid-single digits in the quarter and Temperature Control was even higher than that. So to your point, where I think we're seeing the impact of tougher economic times is in the product categories that consumers have the ability to defer or forgo altogether.

And our categories for the most part, are not like that, the break fix, the car is down and the repairs required. So it's a fair statement if that is what we're seeing.

Got it. And then moving over to Europe, Nissens sounds like pro forma they had very nice growth in the quarter. It also has been some commentary about some weakness in Europe from some competitors and customers. Just trying to get a sense of the European market and also how well Nissens did in the quarter?

And very similar story over there, which is that its product category by product category and ours being similar to here being nondiscretionary are outperforming in general. And we very much believe that we have been able to gain share over there through a combination of executing on existing product categories, but also to -- as they continue to expand into newer ones and getting penetration in some of the newer categories.

I do think it is perhaps worth pointing out to a degree some differences in regions within Europe, where we tend to have more of our volume focused. I mean, we're paying Europe for sure, but we do have some more of our volume more towards the east and southeast of the continent, where demand has really continued to be quite robust.

Got it. And then last question before I jump back in the queue. The OpEx numbers were a little higher. And I think that the mentioned sounds as if the transition over to Shawnee in Kansas, might have had a little bit to do with that. Just trying to get a sense of what we should be looking at for in SG&A or an OpEx number going forward for the next few quarters?

Yes. Yes. Thanks, Scott. So I think there are 2 ways. 1, looking at the consolidated operating expenses. This is really the kind of the last full quarter, where we're going to have Nissens coming in with really no comparison against last year. So Nissens business added about $24 million of OpEx. And so just as you think about modeling, need to include their expenses going forward.

And then there were some higher expenses in the Vehicle Control segment. I think as you pointed out, some of that, as I mentioned, was just due to transition and timing of transition to the new warehouse in Shawnee, Kansas. Just note that on a 9-month basis, the operating expenditures are a little bit more in line. So that kind of points out the timing aspect of some of those moves.

[Operator Instructions] We will move next with Bret Jordan with Jefferies.

On that growth in Temperature Control, is that market share gain where customers are opting for your North American product over what they might have been buying previously?

We see a bunch of different tailwinds really combining because certainly, having this sort of a sales lift over 2024, which was such a strong year from a temperature standpoint, it was a very -- it was less hot this summer than last summer, we're led to believe that there are several things going on.

1 is, and as I mentioned in the prepared remarks, the season started earlier. It's ending later. And so it's just we're seeing sales penetration lasting that many more months than it used to. But we very much do believe that we're gaining share. And it's partly because we think our customers have been able to maintain in-stocks because of our ability to keep them at that level.

And our brands continue to be well received and requested within the repair base and so we do believe and we see this in some of the industry data that we have been able to gain share.

Okay. And then 1 more question around this elasticity or inelasticity in the segment. Did you see any shift in POS cadence as the quarter progressed? I mean some of your large customers have called out the end of the third quarter being weaker for them. Did you see that in your POS? Or is your category relatively more immune?

Within Temp Control, it was -- no, there's a little bit of movement. I'm just looking at it now, Bret. There's a little bit of movement month-to-month, but nothing substantially whiplashing things around Vehicle Control is actually pretty stable. Temp Control, which is going to have a little bit of a weather-related impact. August was the strongest, but really throughout the entire quarter, it was in the mid to upper single. So nothing dramatic across the quarter.

[Operator Instructions] We do have a follow-up from Scott Stember with ROTH Capital.

Back to Nissens questions about the synergies or cross pollination or top line opportunities. Maybe just give us an update on some of the bigger ones like with NAPA being able to translate some business over there for Nissens? And then are there any other synergies or sales opportunities that have popped up that you didn't realize previously.

Well, first, I will speak to what the opportunity is related to product line expansion. As we've been saying, while we both play in a lot of the same product categories. We do have some that 1 is stronger than the other or perhaps that 1 doesn't have at all and the other does. So those are the areas that we're looking at now is how do we expand each other's product offerings.

Sometimes it's as simple as filling holes. We have compressors that they don't have. They have compressors that we don't have. But the more exciting area is to say here's an entire subcategory that we think we can accelerate the other company launching. That's what we've been working on towards the second half of this year is preparing more specifically in Europe, a couple of product categories to get launched over there.

And so, it will take a little while before you start to see any revenue impact because there's a lot of work that goes into the launch and then it's about getting any customer traction. But we do see some very nice potential similarly here in the U.S., they are in some thermal categories that we think we should be able to do well in, and we're in the process now of building some of those lines out.

In terms of customer penetration, I'm not going to go into any specifics on the cross-selling to each other's customers. But we do enjoy some ability to do that, where we do have customers to introduce each other to and that's really both sides of the ocean. So we feel good about that. We see some of the global distributors interested in having global suppliers, and now we can fulfill that objective of theirs. So again, early days on any of these things, Scott, but we do see that there's some nice potential.

Thank you. And this will conclude our Q&A session. I will now turn the call back to Tony Cristello for closing remarks.

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