Larry Sills - Chief Executive Officer Jim Burke - Chief Financial Officer

Efraim Levy - Standard & Poor’s

Okay, thank you. Good morning and welcome to Standard Motor Products, fourth quarter 2012 conference call.

In attendance from the company are Larry Sills, Chief Executive Officer, and myself Jim Burke, Chief Financial Officer. As a preliminary note, I would like to point out that some of the material we will be discussing today may include forward-looking statements regarding our business and expected financial results.

When we use words like anticipate, believe, estimate or expect, these are generally forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they are based on information currently available to us, and certain assumptions made by us and we cannot assure you that they will prove correct.

You should also read our filings with the Securities and Exchange Commission for a discussion of the risks and uncertainties that could cause our actual results to differ from our forward-looking statements. I will review the financial highlights and then turn it over to Larry followed by Q&A.

We are very pleased with our fourth quarter results and the culmination of an excellent year. Highlights for the quarter and the full year were revenue growth primary from acquisitions, gross margin expansion, solid cash flow generation.

2012 was the fourth consecutive year of continues improvement, excluding special items dating back to 2009, with net sales of roughly $950 million, gross margins 27.4%, EBITDA of $87 million, diluted earnings per share $1.83, cash flow from operations $94 million and reducing our total debt to $41 million. I’ll walk through some of the specifics.

Consolidated net sales in Q4 ’12 with acquisitions were $192.4 million, up $18.2 million or 10.4%, without acquisitions a $184 million up $9.9 million or 5.7%. By segment, Engine Management net sales in Q4 with acquisitions $153.7 up $14.3 million or 10.3%; without acquisitions, $151.5 million up $11.9 million or 8.5%.

Some of the Engine Management’s strong fourth quarter sales reflect customer inventory expansion programs to grow their commercial market channel. Our sales moving forward should mirror our customer sales in the low single digits.

Temperature control net sales in Q4 ’12 with acquisitions were $35.2 million, up $3.5 million or 10.9%; without acquisitions $29.4 million, down $2.4 million or down 7.6%. As our temperature control segment is seasonal, it only makes sense to revenue on an annual basis.

Our temperature control for 2012 excluding acquisitions were down $9.2 million, however excluding the roughly $20 million loss from the single customer direct sources, our total temp control business was up roughly $10 million or roughly 5%. Consolidated gross margin dollars in Q4 improved $9.6 million at 30.1% versus 27.8% last year.

For the full year gross margin dollars were up $30.5 million at 27.4% versus 26.2% last year. By segment, Engine Management gross margin dollars in Q4 were up $10.1 million or 4.1 points to 30.7%.

For the full year gross margin was up $26.8 million or 2.6 points to 28.2%. Engine Management gross margin improvement reflects our efforts to expand low cost manufacturing in Mexico and Poland, low cost sourcing efforts and acquisition integration benefits.

The fourth quarter gross margin percent reflected favorable product mix at favorable variances earned till the third quarter. Our fourth quarter, which reflects lower production level, will amortize higher product costs moving forward.

So entering 2013 we see our normalized Engine Management gross margin rate at 28% to 28.5%. Temperature control gross margin dollars in Q4 were down $600,000 to 19.8%.

The full year gross margin dollars were up $3.7 million to 21.8%, but down 1.7 points. The 2012 temp gross margins were impacted by the loss of the single customer, Direct Sourcing, which caused the reduction in our product volumes and higher product unit costs.

However, looking forward to 2013 we anticipate gross margin recovery, as we realize benefits from integrating CWI production into our low cost Mexico production facility. In summary, we are pleased with our full year consolidated gross margin increase of 1.2 points, led by our engine management, 2.6 point improvement, and temperature control should improve for 2013.

Consolidated SG&A expenses in Q4 increased $3.7 million to 23.5% of net sales versus 23.8% last year. Full year SG&A increased $23.7 million to $19.8 million versus 18.7% for 2011.

Approximately $10 million of the increase reflected non-cash post retirement medical curtailment and amortization, intangibles amortization and a minor re-class from cost of sales. Another $11 million is directly associated with our three acquisitions, BLD, Forecast Trading and Compressor Works.

We anticipate some savings in 2013 as we complete the CWI integration into our temperature control business. Consolidated operating profit before restructuring and integration expenses, prior year post retirement curtailment gain of $3.6 million and other income net, in other words, operational operating profit in Q4 ‘12 was $12.8 million, up $6 million at 6.7% of net sales.

For the full year 2012 operating profit was $72.2 million, up $10.5 million at 7.6% of net sales. This reflects a 0.6-point improvement over 2011.

The net effect of our operating results is reported on our non-GAAP reconciliation with diluted earnings per share in Q4 ’12 of $0.28 versus $0.17 last year and full year at $1.83 versus $1.57 last year. We are very pleased converting our 8.5% net sales increase into a 16.6% increase in diluted earnings per share at $1.83.

Looking at the balance sheet, accounts receivable decreased $5.6 million from December ‘11. Inventories increased $19.4 million from December ’11, and this increase is attributable to our CWI acquisition.

Good will and intangibles increased $14.5 million, again primarily attributable to the CWI acquisition less intangibles amortization. Total debt decreased $32.7 million to $40.6 million.

From our cash flow statement, in 2012 we generated $94 million cash from operations, from which we invested $12 million in capital expenditures, $39 million in the CWI acquisition. In addition our financing activities included $5 million of share repurchases, $8 million in dividends culminating with the $33 million reduction in total debt.

Finally, we are pleased to have announced official returns to our shareholders, with a 2013 share repurchase program increase from $5 million to $6 million and a 22% increase in our dividend rate from $0.09 to $0.11 per quarter. With that, I’ll turn it over to Larry Sills.

Good morning everybody. I believe the numbers speak for themselves.

As Jim has reviewed we had an excellent year in sales, gross margin, cash flow, earnings per share, all headed in the right direction. I believe this is the result of the efforts of our people over the last several years, gaining additional business, increasing manufacturing, controlling expenses, rationalizing production, integrating our acquisitions, everyone performed well.

In addition to the results, we’ve taken steps to improve the company in 2013 and for the years ahead. In the release we mentioned two acquisitions we completed in the last year or so; the Forecast Trading Company and Compressor Works.

We are pleased with our progress in both of these. We maintain the customer base.

We are achieving the planned cost savings. The key employees are staying and we believe they’ll be making important contributions in the years ahead.

We also mentioned two transactions completed early this year. First, we acquired a minority interest in Orange Electric Company, a manufacturer of TPMS sensors located in Taiwan; and second, we acquired the OE business from our former affiliate, SMP Europe.

Neither of these will have a significant effect on 2013 results, but each of these I believe will be significant contributors in the future. Lets go back to the Tire Pressure Monitoring Systems.

This has been mandated on old U.S. car manufacturing for the last five years.

So somewhat less than half the cars on the road today have these. The market is still in its early stages, but everyone believes that it’s going to grow significantly in the years ahead.

A market research firm recently forecasted that there would be a 300% increase in the next five years. We think this is also going to be a competitive market.

There are several players in it already and probably more to come, but we believe we have an excellent product and we have an excellent partner. We’ve been doing business with them for several years and we look forwards to growing this product line with them in the years ahead.

The second event was we had purchased the OE business from SMP Europe. As we have said in the past, increasing OE and OES business is one of our key strategic goals for the future.

In this case the majority of products are coming out of our plant in Poland, which is a low cost operation with high skills and high technology. We believe this will be a good base from which to grow this OE and OES business, which again is one of our future major goals.

So to sum, we are pleased with 2012. We look forward to 2013.

We believe the market will continue to show slow and steady growth, which we are estimating in the low single digits, driven by the continually aging car population. We will also have the benefit of our recent acquisitions and of course, we look to continue to improve in all areas.

With that, lets open for questions.

Hey guys, thanks for taking the call.

Okay, good morning.

The first question would be on SG&A. Jim, we usually think about this as being a relatively fixed portion of your cost structure.

Is there anything with the Compressor Works acquisition that may make this more variable in nature going forward and perhaps now allowing you guys much leverage.

No, when you think of the SG&A it’s a combination. We have distribution in there also.

We have the fixed brick and mortar cost and that there’s a little bit in SG&A that we have that’s variable and may have a little bit of selling expenses and picking and packing labor, but its fairly steady throughout the year. Our lowest point will be in the fourth quarter, but they are relatively steady throughout the year.

Okay, that’s very helpful. And then did you guys see any effect from the delay in tax refunds this year.

Do you think that that had any impact towards the end, the fourth quarter?

Our parts are more failure parts than discretionary repairs, and we can’t see down through the channel significant enough on that, so we can’t point that out.

Okay, great. If I could just sneak one last one in here.

The increase in the share repurchases, the $5 million to $6 million, is the focus there still to kind of offset stock comp dilution.

Yes, exactly.

Okay, thanks very much guys.

Hi Larry, hi Jim. A very good quarter.

Thank you.

As we are looking at your balance sheet, one of the things you’ve done very well is reduce working cap and I’m wondering, how you’re visioning your expectations with our receivables versus your customer base going forward. One of your after market supplier peers is looking to improve their own terms.

Do you see any room for you, particularly in the commercial side?

Brian, again obviously this is all a competitive market place. The major customers are the ones that can avail themselves of programs with the AR factoring.

I don’t see any significant changes there; the benefits for the large distributors and benefits from the manufactories who accelerate the collections on those. So I don’t see any significant changes.

All right. And as far as mix, as we are going into 2013, this will be about the fourth consecutive year of fairly stagnant economy overall.

Do you see any change back towards some of your higher end products as you are going over the next couple of years?

Well, actually what we are seeing is a shift to the economy lines, and we think that’s somewhat a function of the economy, but I think perhaps even more a function of the aging vehicle population. So if you have a 12-year-old car, you are not looking for the fanciest part.

That trend has happened. We expect that it will continue, although not dramatically, but we think we are very well positioned for it with our low cost manufacturing and our two latest acquisitions, Compressor Works and Forecast Trading are strong in that area, so we feel okay.

Just from a quality perspective, is any part of that the fact that your economy products are being made better than they ever were before.

Well, we differentiate the product. We will never degrade the quality, but the product is differentiated.

Okay. All right, very well.

Congratulations on a great quarter.

Thank you.

Hey, good morning.

Hi Bret.

Question on that Orange Electronic deal, just to sort of give us a perspective on the Tire Pressure Management Systems. Is the distribution channel the same or do those products go more through a tire distribution channel than our traditional parts distribution.

That’s a good question. At this point the majority are going through two areas.

One, there is still a lot going back to the car dealerships, because these are new products, new cars. And yes, at this point a heavy percentage is going to the tire shops, which is natural, because it would be replaced with may be when you change your tire, and that is the majority of the business, those two, which is why today we have a relatively small market share.

But we believe as in those things as they are out there longer and they are more and more and more out there and you get a 10 year old, 12 year old car, they tend to migrate back to our channel. So at this point it’s heavily care dealer and tier shop, and it’s going to stay that way for a while.

But in the long run we think it will migrate back to ours.

Okay, and where does Orange stand in market share. So if you look at the market where do they shake out?

Well, at this point the business is concentrated on the OE guys and they are really not an OE player, but I think in the after market we are going to do okay.

All right, and when I think, did you through out a gross margin target for Engine Management 28 to 28.5.

Yes, just wanted to point out that moving forward we think that will be the base that we’ll move off of for the 2012, ending full year number versus the fourth quarter number.

Got something for Temperature Control.

Temperature Control, again I think we are targeting that we can move back towards our stated goal of 23% to 24%. .

Okay. All right, thank you.

You’re welcome.

Hello Walter.

Good morning Larry. How are you?

Very good. Thank you.

Given the aging of the population, I’ve been somewhat surprised in listing to a number of your major customers or at least the major sales channels talking about qualitatively what appears to be increasing competition and talking about competition based on price, given all the dynamics of the after market and the elasticity generally to the price, especially for things like your products. Do you want to comment on, to what extent that’s been reflected back at you.

Is it just trading down to lower price lines, since price competition if you go back far enough really wasn’t the big issue in this industry?

Well, it remains a competitive business and I would say at this point the issue is where competition from other parts of the world is coming in here and people feel they need to react to that. So that’s probably the biggest thing pushing prices coming down.

So it’s a mix. We got up, down, that’s what we have all the time.

And you are not seeing any different response to your ability or you don’t look at any different change in your ability to raise prices as you go into 2013, as you might have three or four years ago.

I think we were in a tough competitive environment four years ago and I’m in a tough competitive environment today, that’s where we are.

Okay. And Jim, in the fourth quarter, I don’t if you’d break it out.

Well, you fished up the year on returns. This year was roughly, and I realize it’s a moving average.

This year was basically somewhat positive from where you’ve been historically over the last couple of years. So there’s going to some slight forward improvement about the same or slightly worse.

I think you’ve got a little bit of mix in our consolidated results. So now that we have the Compressor Works and Temperature Control, you got a little bit higher mix of temperature control, so that may bring our consolidated returns number up, because its more seasonal in nature and more of a return.

But I think on an individual basis, its fairly steady.

And lastly, going back to competition, competition is directly priced or competition, which is always a significant component is also significant returns which have a cost.

It’s both.

Okay, so it continues both, its not more push on terms as opposed to straight pricing.

Right, it’s a combination of both in any of the discussions. It’s a full program, when they are evaluating or working with customers.

Okay, thank you.

All right, you’re welcome.

Yes, thank you for taking my question. Nice quarter gentlemen.

Thank you.

First question is about, you mentioned that the revenue impact, there was a positive revenue impact in the fourth quarter or some pre-ordering for 2013. Any sense of quantifying the magnitude of that?

I don’t think we said that.

What we pointed to was the customers looking to expand their inventories that are in there. Again, I think that is reflected in the Engine Management, where we said the sales increase were in the high single digits and we envisioned we are going to mirror our customers, what they are reporting, that will be in the low single digits going forward.

Perhaps I can clarify a bit, when you said they were increasing inventory, it want debts, it was (inaudible). So they were adding coverage.

It tends to be a one-time event.

Okay.

So you are not taking business away from the next quarter, but its also not repeated.

Okay, thanks, I appreciate that. And on the Orange acquisition, is there nay sense you could give us on quantifying that you have the percent minority interest of they are a total revenue.

Even though it’s a small contribution, I just want to get an idea as to what impact they may have in 2013.

Right, it will be negligible. We are going to have a 25% minority interest in the business and we are already selling the product.

So what we are doing here is being able to benefit in some of the growth within the business that we are taking the 25% interest in.

Okay, and on the forecast trading, in the CWI, these are in the value area product arena. Can you give us a sense for how much growth they’d have organically, after bringing them under the SMP umbrella?

Essentially they are comparing their current revenues in last year versus what they were prior to the acquisition.

Yes, okay. And again as we move forward, these are really becoming just brands within our integrated businesses.

There was basically in line, the performance for CWI and Forecast Trading growing with the market, no significant changes one way or the other.

Okay, you are growing with the value product.

Yes, the segments that we would enjoy across our standard and four seasons perhaps.

Okay, and could you just walk us through the thought process about going back into Europe, after exiting Europe a few years ago. I mean my understanding is that it was more after market that you exited.

Now you are coming back into the Europe scene on an OE basis. Is that the right way of looking at it or perhaps is there something else you could walk us though here.

No, that is a good way of looking at it. What we exited was a distribution business, which frankly it was difficult business for us.

We didn’t understand it as well as we should and we were able to sell it to our managers there, which we thought was good for them and good for us. What staying is something we feel very positive about, which is essentially manufacturing out of our Poland plant, which we think is an excellent operation.

And that gives us an opportunity to compete in the OE and OES business internationally and we feel that’s a business we know quite well and hopefully we are going to grow it. Its not related.

But that’s on having the Poland plant, which you had all along right?

We had it for not that long, a few years and we continue to build on it.

Okay

And the product that we were producing in Poland, we were selling to the former company that we sold and this simplifies the supply chain and eases the coordination directly with the OE and OES. So we are looking for opportunities and advantages here.

So really what we’ll gain here, because we reflected the sales already, we’ll gain the margin that we were selling through to what was our sister division in Europe previously.

Okay, so does that mean – is it appropriate to look at it that this might be step one and what might be several OE acquisitions in Europe or line extensions perhaps.

I think this was a product that we were already manufacturing. We were able to look at this as a margin improvement for a product that we where already manufacturing and we look to grow out a little part of Poland.

We at this point do not have a pipeline or anticipate going out to acquire other OE or OES businesses in Europe. We are just concentrating on our low cost Poland manufacturing business.

Okay thanks, that’s clarifies it, thanks. I appreciate that.

Thank you. Regarding the acquisition pipeline, are there other areas of acquisitions that you are looking to make and what areas would they be.

Well, we have made – so that’s a pretty big number; big and small about five in the last two years; that’s a healthy number for us. They all fitted a similar patter and it’s a pattern that we like.

It’s a pattern that there were immediate cost savings, because we were so similar. Their markets, we where either in or they were close to what we were in and these acquisitions fit that mould.

They are all going to be fine and if we see any more that fit that mould, we continue to look, but within that mould is where we are looking.

And as far as the margins that you are acquiring, how are they compared to the existing margins of the business. I know you are also trying to extend the market; for example, Compressor Works.

Right, on the big ones that we have done, which were Forecast and Compressor Works, the margin again, because they were competing in the after market also are similar to our margins by the different product segments. So Forecast, similar to the Engine Management and the same with Compressor Works.

Okay, thank you.

You’re welcome.

Okay. With that I want to thank everybody for participating today.

Goodbye.