Unum Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 8 speakers on the call.

Operator

Good day, everyone, and welcome to the Standard Motor Products Second Quarter 2023 Earnings Call and Webcast. To enter full screen mode, hover over the slide and click the full screen icon in the center of the viewer. To exit full screen mode, press Escape. After the presentation, we will open the floor for questions. If you require technical assistance during today's event, you can reference the help link at the top of your screen.

Operator

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.

Speaker 1

Thank you, and good morning, everyone, and thank you for joining us On Standard Motor Products' Q2 2023 earnings conference call. I'm Tony Cristello, Vice President of Investor Relations. And with me today are Larry Sills Eric Sills, President and CEO 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, Jim will comment on our new distribution and supply chain efforts, and Nathan will then discuss our financial results with an update on our annual guidance. Eric will provide some concluding remarks and open up the call for Q and A.

Speaker 1

Before we begin this morning, I'd like to remind you that some of the material that we'll be Today may include forward looking statements regarding our business and expected financial results. When we use words like anticipate, 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.

Speaker 2

Well, thank you, Tony, and good morning, everyone, and welcome to our Q2 earnings call. Overall, our revenues were down slightly in the we believe will be overcome in time. First, the quarter was unseasonably cooler wet, especially as compared to 2022, This had an adverse effect in our air conditioning business. And second, one of our largest aftermarket customers declared bankruptcy in January And we essentially sold them nothing throughout the entire first half. This business has now been sold at auction to other existing accounts And we expect to rebound as they replenish the depleted shelves.

Speaker 2

I'll address these issues further in discussing the impacted segments. So let me review each division separately as each has slightly different dynamics. To remind you, we entered the year realigning our reporting segments, Carving out our non aftermarket business into its own segment called Engineered Solutions, leaving the other 2 solely reflective of the aftermarket. I'll first speak to the aftermarket, starting with vehicle control, which as a reminder was previously called engine management. We renamed it vehicle control entering this year to better reflect the breadth of categories within the offering, especially as it relates to powertrain neutral products.

Speaker 2

Vehicle control was down 1.1% in the quarter, but remains up 1.5% year to date. As noted in our release, the sales drop related to the customer bankruptcy was 2.2% and so excluding that we would have been up And thankfully, this is now in our rearview mirror. Furthermore, we are seeing an overall favorability in our large customer sell through And we believe this reflects ongoing health in the marketplace. Turning to Temperature Control, sales were down 8.1% in the quarter, Bringing first half results 5.2% lower than 2022. As you're well aware, this is a highly weather dependent seasonal business.

Speaker 2

2022 is an exceptionally strong early season and the 2nd quarter was up 6.4% over 2021, making for difficult comparisons. By contrast, 2023 saw an unseasonably cool and wet start to the season. That said, weather trends changed dramatically entering July, which has now been declared the hottest single month on record with customer POS up double digits over last year and the heat continues. Next, I'll speak to our Engineered Solutions segment, our non aftermarket business focused on selling to manufacturers of vehicles and equipment across various end markets globally. Sales in Engineered Solutions were up 6.2% in the quarter, reflecting a combination of generally strong demands from key accounts, The impact of a smaller acquisition late last year and the benefit of new business wins.

Speaker 2

We're very pleased with how this business is going. After several years working towards achieving critical mass, we believe we are now well positioned to take advantage of the combined strengths of the different pieces that we have assembled and are now achieving the cross selling opportunities we have anticipated. Turning to profitability. There are a lot of moving pieces and Nathan will get into the details in a few minutes. But from a high level, we are pleased to have been able to retain our margins, Though the sales shortfall in temperature control drops to the bottom line in terms of earnings.

Speaker 2

Inflation persists With costs remaining elevated across materials, labor, rent and so on, and we are now dealing with a relatively new issue of the weakening U. S. Dollar in countries where we have manufacturing, most notably Mexico. And the single biggest cost increase continues to come from interest rates, impacting both our customer factoring programs and our borrowings. But through a combination of initiatives, we have largely been able to cover these cost increases And I'm very proud of all of our people's efforts in this regard.

Speaker 2

So with that, let me turn it over to Jim Burke, who will bring you up to speed on what's going on in our operations.

Speaker 3

Okay. Good morning and thank you, Eric. As we disclosed in our earnings release, we are excited to share our aftermarket distribution network Strategy expansion plans. We signed a new lease in Shawnee, Kansas commencing on July 1, 2023. So why the expansion efforts now and why Shawnee, Kansas?

Speaker 3

We service our U. S. Aftermarket customers, Excluding forecast trading distribution, which is in Fort Lauderdale, Florida, with vehicle control and temperature control products From 3 primary distribution centers located in Dispute Hunter, Virginia Lewisville, Texas and Edwardsville, Kansas. The existing footprint of these three facilities is roughly 1,200,000 square feet. The New Shawnee DC is roughly 575 1,000 Square Feet, which adds an additional 211,000 feet, bringing our new footprint to 1,400,000 Square feet once we exit the Edwardsville facility.

Speaker 3

Currently, we are approaching capacity in our existing footprint, And this addition will expand our throughput turnaround times. Our customers require the right part in the right place at the right time. We will be able to turn around customer orders in 3 days or less and ship thousands of emergency orders daily. This is an investment in our SMP value proposition to be the best full line, full service supplier of premium products. Other benefits include risk avoidance from our current single point distribution model to a modified multi point distribution strategy for high volume fast moving SKUs.

Speaker 3

So why Shawnee, Kansas? We were very fortunate to The new Shawnee DC located less than 5 miles from our existing Edwardsville DC. We will be able to retain our existing well Our planned timeline launch for the new DC will be to install some racking and equipment by the end of the Q1 2024, which will provide relief to our other DCs. This will be on a small scale basis, While the largest scale automation picking lines are being installed during 2024, Beginning at the start of 2025, we will phase in various product categories and brands and anticipate being fully operational by the end of 2020 5. Obviously, this will add some redundant costs during the transition and some incremental costs once complete for the additional capacity.

Speaker 3

We estimate $2,500,000 added cost in 2023, a partial year And $7,000,000 to $8,000,000 added costs in 2024 on an annualized basis. However, we also anticipate some offsetting savings due to current inefficiencies, exiting Edwardsville redundant costs And transportation cost savings. Over time, with added sales growth, we anticipate we can delever some of these net added costs. We will have incremental CapEx spending in 2024 and 2025 to outfit the new DC. Fortunately, we own the existing Edwardsville location and anticipate putting this facility up for sale in late 2025, which should help offset a large portion of the Shawnee investment.

Speaker 3

Overall, we are very excited about bringing this new Shawnee DC on board, adding capacity, minimizing risk, Maintaining well trained existing workforce and most importantly, better servicing our customers. I will also hit on a couple of supply chain topics. Overall, supply chain bottlenecks and delays have subsided With more reliable deliveries and lower transportation costs. While some commodities like copper and aluminum have decreased over the first half twenty twenty two, We have seen increases in copper and steel based products from 'twenty two year end levels. Overall, we are seeing inflationary costs persist, primarily for electronics and labor costs, but at a slower pace than in 2022.

Speaker 3

The more reliable supply chain has allowed us to accelerate our inventory reduction efforts in the first half of twenty twenty three. This has been a tremendous benefit to our cash flow generated this year, but also adds a slight drag on gross margins from under absorbed overhead, which Nathan will highlight shortly. Over the second half of the year, I see a slight build in inventory levels as we level load our manufacturing facilities and begin our seasonal build for temperature control products. I want to thank all of our S and P Employees dedicated to servicing our customers, thank you for your attention, and I will turn the call over to Nathan.

Speaker 4

All right. Thank you, Jim. As Eric noted earlier, our sales were down in the 2nd quarter with lower temp control sales impacting our bottom line. But we did see improvement in our gross margin rates, which at the consolidated level offset factoring costs that continued to increase. We also made great progress reducing inventory levels, as Jim noted.

Speaker 4

As we go through the numbers, I'll give some more color on these items and other key drivers for the quarter year so far, as well as provide an update on our financial outlook for the full year in 2023. First, looking at our Vehicle Control segment, can see on the slide that net sales of $183,800,000 in Q2 were down 1.1% versus the same quarter last year, With the decrease driven by a 2.2% decline from the impact of a bankrupt customer, partly offset by increases with other customers as we continue to see favorable sell through trends. For the 1st 6 months in vehicle control, sales were up 1.5% despite the impact of a bankrupt customer, which was also a 2.2% drag on sales year to date. With the growth for the year so far a result of continued demand for our products and favorable sell through. Vehicle Controls adjusted EBITDA was 12.6 percent of net sales and up 2 points from Q2 last year.

Speaker 4

But it's important to note that we were up against an easy comparison as this segment saw a large impact from cost inflation and factoring expenses in Q2 last year, and this year's quarter showed profits at a more normal level. Vehicle Control's adjusted EBITDA in the quarter was driven by gross margin rate expansion as a result of pricing and savings initiatives, which overcame cost inflation, unfavorable overhead absorption from reducing inventories and a $3,000,000 or 1.7. Increase in the cost of customer factoring programs. Vehicle Controls adjusted EBITDA for the 1st 6 months was 12.1%, basically flat with 12.2% last year, mainly as a result of the margin expansion this segment saw in the 2nd quarter, which offset higher factoring expenses. Turning to Temperature Control.

Speaker 4

Net sales in the quarter for that segment of $97,100,000 were down 8.1% and sales for the 1st 6 months were down 5.2% We saw a slow start to the selling season, as Eric pointed out. Temperature Control's adjusted EBITDA was 7.2% of net sales in the quarter And 6.1% of net sales for the 1st 6 months, with both periods down from last year, mainly due to lower sales and higher factoring expenses. Looking at it more closely, Temp Control's gross margin rate was down 0.5 points in the quarter and 0.4 points for the 1st 6 months With margin rates down slightly, the combination of significantly higher costs from customer factoring programs and lower SG and A leverage led to a reduction in adjusted EBITDA. Sales for our Engineered Solutions segment in the quarter of $72,200,000 were up 6.2% and sales for the first 6 months of $143,300,000 were up 2%. While we said sales could be lumpy for this new segment as it begins to grow, we were pleased to see our sales increase as a result of strong demand and new business wins.

Speaker 4

Adjusted EBITDA for Engineered Solutions in the quarter came in at 13%, an increase of 2.1 points from last year as strong sales growth and good channel and customer mix improved both the gross margin rate and SG and A leverage. For the 1st 6 months, adjusted EBITDA for Engineered Solutions was 12.3% and up 0.5 points from last year, mainly as a result of higher sales and improved SG and A leverage. Turning to our consolidated results. Net sales in the quarter declined 1.8% and for the 1st 6 months We're basically flat with both periods being impacted by a decline of 1.6% related to a customer bankruptcy, which Consolidated gross margin rate improved for both the quarter and 1st 6 months due to our initiatives that overcame other headwinds and resulted in gross margin dollar increases of 5.1% 3.4% for the quarter 1st 6 months respectively. Regarding SG and A expenses, excluding the cost of customer factoring programs, which are shown separately on the page, Expenses were well controlled in the quarter at 17.4 percent of net sales and in line with last year.

Speaker 4

Looking at the bottom line, consolidated operating income of 7.8 And adjusted EBITDA of 10% in the quarter were flat with last year as an improved gross margin rate was offset by $4,800,000 of higher factoring costs. For the 1st 6 months, consolidated operating income and adjusted EBITDA were down as higher factoring costs were only partly offset by improvements in gross margin. As for diluted earnings per share, you can see our performance resulted in earnings of $0.84 for the quarter and $1.44 for the 1st 6 months. Lower EPS was mainly due to lower temp control sales, which dropped through to the bottom line, but also interest expense that was higher by $1,500,000 in the quarter $4,500,000 in the 1st 6 months, mainly due to higher interest rates. Finally, one last point on our results.

Speaker 4

As you know, we report the results of the discontinued operation each quarter, which relates to a business bought in 1986 and subsequently sold in 1998. As noted in our press release this morning, since March of 2019, the company was involved in a legal proceeding in connection with a breach of contract claim for this discontinued operation. In July, the court ruled in favor of the other party, and we were found liable for approximately $11,000,000 in damages. And as such, we incurred a charge for this amount during the quarter. Turning now to the balance sheet.

Speaker 4

The key item here is our inventory level, which finished Q2 of $499,100,000 Down $29,600,000 from December last year and down $52,300,000 from June last year as we continue to focus on reductions in this area. Note that we typically build inventories during the first half of the year in anticipation of the temp control selling season and when viewed against average increases of $15,000,000 in the first half of the year, This reduction in inventory represents a significant improvement in cash flow of almost $45,000,000 in the 1st 6 months of this year. Looking at cash flows, our cash flow statement reflects cash generated from operations in the 1st 6 months of $39,400,000 as compared to cash use of $95,300,000 last year, with the improvement driven by a $118,600,000 improvement in cash flows from inventory in the 1st 6 months. Our financing activity shows significant progress made in paying down our revolving credit facilities by $16,500,000 as a result of improved operating cash flows and $50,000,000 of repayments made in the quarter. We also paid $12,500,000 of dividends during the 1st 6 months.

Speaker 4

Our borrowings of $223,000,000 at the end of Q2 were much lower than last year, and we finished the quarter with a leverage ratio of 1.4, lower than both June December of last year. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2023. Regarding our top line sales, We expect full year 2023 sales growth in percentage terms will be in the low single digits, which includes the first half that was flat to last year and the second half that will see low single digit growth rates Adjusted EBITDA is expected to be approximately 9.5% and lower than our prior estimate of 10% as we noted in our release this morning. Lower estimate is a result of 4 things. First, as I just said, our 2nd quarter sales were softer than expected, leaving us flat to last year through 6 months, And this will hurt our full year sales performance.

Speaker 4

2nd, additional interest rate increases announced by the Federal Reserve in June when output factoring expenses at the top end of our prior range, The expansion of distribution capabilities in a new warehouse in Shawnee, Kansas will result in duplicate overhead and start up costs beginning in the second half of the year. And finally, we've recently seen the U. S. Dollar significantly weaken where the majority of our international operations are located, weakening against both the Mexican peso and Polish zloty, and in turn, increasing our cost of production and inventory in those locations. In connection with adjusted EBITDA, we expect depreciation and amortization expenses and our income tax rate to be in line 2022.

Speaker 4

Further, we expect our interest expense on outstanding debt to be on average about $4,000,000 each quarter given higher interest rates. Looking at operating cash flows in 2023, you can see we're well on track for operating cash flows to return to healthy full year levels consistent with years past. To wrap up, while sales were slower than we like, we were very pleased to report improved gross margin rates for the quarter the year as well as a significant improvement in cash flow I very much appreciate the efforts of all of our team members in improving our business. Thank you for your attention. I'll now turn the call back to Eric for some final comments.

Speaker 2

Thank you, Nathan. To conclude, let me spend a minute talking about current trends and how we're thinking about the future. Our aftermarket business, which makes up 80% of our total sales, The addressable market continues to show far more favorable trends than unfavorable. The car population continues to grow and to age with more vehicles entering the sweet spot in coming years. The combination of difficult economic times, Elevated new vehicle pricing and high interest rates have car owners retaining their existing vehicles, thus requiring necessary repairs in non discretionary categories like ours.

Speaker 2

Our relationship with distributors have never been stronger as they seek capable committed suppliers like us who executed a high level for them. And while external factors like the weather can have short term impacts, the long view is favorable. Our Engineering Solutions business is now in the fast lane. We're getting ourselves known by the blue chip accounts in these various end markets and the doors that are opening to us are very encouraging. We are receiving more quoting opportunities than we could have hoped for and expect to get our fair share.

Speaker 2

We're now back to generating solid cash flow. After a period of intentionally increasing our inventory to accommodate Supply chain instability, we are now successfully working it down, allowing us to pay down debt, return value to shareholders through dividends and reinvest in the company's manufacturing and distribution capabilities to prepare us for the future. And we're tackling it with the strongest team we've ever had. And so I thank all of our employees worldwide. So that concludes our prepared remarks.

Speaker 2

With that, I'll turn it over to the moderator and we'll open it up for questions. Thank

Operator

We'll take our first question from Bret Jordan with Jefferies.

Speaker 5

Hey, good morning, guys.

Speaker 2

Good morning.

Speaker 4

Good morning.

Speaker 5

When you look at the 1.6% impact from that Auto Plus bankruptcy, does that abate in the second half with those assets having been acquired by somebody else. Are they back to being a customer?

Speaker 2

So that's a great question, Brett. And So yes, those all the pieces of the business have now been acquired. And as I said in the prepared remarks, they've been acquired by existing S and P accounts. We believe that in the long run, all that volume should return. But this bankruptcy was really very disruptive, as you can imagine, to the whole marketplace.

Speaker 2

And I think it could take a little while for all the dust to settle. As the new Acquirers assess what they have and look at the inventory that they have acquired and look at it within their own existing inventories. I think there could still be some Period of absorption of that inventory and reconciling what they have. So we think it could take a little while. But first, we're definitely very encouraged that the business is now back in business And by existing accounts that we have good relationships with.

Speaker 2

And so we are expecting to see it bounce back. I also think that there was Certain amount of that business that just over that period was absorbed by other accounts that kind of gets lost in the mix in terms of being able to track it. But in the long run, the end market, the true demand is what it is. We'll get it back as the inventory works

Speaker 5

Okay. And then on the redundant costs from the Shawnee, Kansas DC, I think you called out 7% to 8% in 2024, but there would Some offset, could you give us a feeling for what the net impact might be?

Speaker 3

Brett, this is Jim Burke. The 7% to 8% is on an annualized basis because we'll be staffing up and bringing on different costs that are in there. So I think that'll be on an Annualized basis versus a full year impact. The savings that we have are inefficiencies that are there in our existing facility. We'll exit Kansas fully.

Speaker 3

It'll be in stages, but we'll exit it in 2025. So there'll be savings coming from that and transportation. When all said and done on a run rate basis, We believe that we could be incremental costs from new DC that's there in the $3,000,000 range, net $3,000,000 to $4,000,000 range. But again, that's we're talking by the end of 2025, and we'll be updating our estimates as we proceed through to that period.

Speaker 5

Okay. And then one last question on inventory levels for AC product. You commented on the soft start to the season. Could you talk about what retail inventories look like now On a maybe year over year basis?

Speaker 2

As we look at it for those we have visibility and important to note that we only have that through June, So not sure what happened to their inventories in July and their demand was very strong. Their sell through in July was very strong. But at the end of June, what we saw was That it was essentially flat throughout the course of the entire year, a little bit of noise month to month, But the big players kept their inventory roughly flat throughout. And so now it's just a matter of that sell through Turning itself into replenishment orders to them. But yes, they didn't enter this quarter, Fat.

Speaker 5

Okay, great. Thank you.

Operator

Thank you. We'll take our next question from Daniel Imbro with Stephens.

Speaker 6

Yes. Hey, good morning guys. Thanks for taking my questions.

Speaker 2

Good morning.

Speaker 6

I want to follow-up maybe on Brett's last question just around maybe some more near term trends. We've heard some varying commentary on kind of how 2Q progressed. Can you talk about any notable Trend shifts you saw in your sales results from April through June? And then could we dig into July a little bit more? We've had some pretty big heat waves coming Drew, has that been a tailwind?

Speaker 6

Have trends accelerated here in 3rd quarters? Any color

Speaker 4

on the monthly cadence would be great.

Speaker 2

The monthly cadence Within the Q2 was nothing exceptional. And so anything can happen in a given month. I think when you look at the cadence for our distributors, that's going to be more about true end market demand cadence for us as you're going to have the influence of their Reorder pattern. So we didn't see anything notable in that quarter. Entering July, The books are not closed yet on it, but what we have seen is a nice uptick certainly on the temperature control side On their orders to us as would be expected and you mentioned the heat.

Speaker 2

And but I think it's too early to make any real Strong observations of how that plays out for the balance of the summer.

Speaker 6

Got it. That's helpful. And then maybe shifting to the guidance, Nathan, as we look at the back half, obviously, guide implies Pretty notable ramp in op margin, maybe it's cost alleviate and to Eric's point, top line gets a little bit better. How do you think about the sustainability Of this high singles operating margin or low doubles as we look at 2024, 2025? Obviously, Jim just mentioned there's a few savings coming, but What do you think the right intermediate term margin should be for this?

Speaker 6

Can we get back to 10% next year?

Speaker 4

Yes, Daniel. So as I mentioned in my remarks, we do have some headwinds coming at us in the second half of the year. And at least one of those was related Currency, and as you know, those markets can swing around and you don't know exactly when those will turn. And so, we can't be sure when headwinds We'll abate. That said, we're always working on savings programs, continuous improvement projects.

Speaker 4

And so as we go into 2024 and from there, we'll still look to have those projects in place and improve our margins like we've always said we would by 10 to 20 basis points as those programs come through successfully.

Speaker 6

Got it. And last one for me. Eric, I think you mentioned in your prepared remarks, you're starting to realize the cross selling within Engineered Solutions. Any more color or quantification you can provide on just how you're feeling about or capturing that opportunity?

Speaker 2

Yes. Well, I can't get into specific business wins or specific accounts, but what we have Really started to see over these last few quarters is that, as we talked about in the past, we've assembled A bunch of smaller companies into 1 and each of those had their own customer list, their own product categories, in some cases, even their own geography. And so they were fairly they're good, but they were limited in what they were able to do. Now one entity's Customer list gets opened up to the broader portfolio and it gives our people something to sell. So for example, I'll just give you one example.

Speaker 2

There was a large ConAg accounts that came with an acquisition a couple of years ago that we had never done any business with. Now we're selling them air conditioning Because that was something that we had, that customer needed it. Their previous supplier before we had acquired them obviously couldn't service that type of product. So we see those types of opportunities and we're new in this space. So we're really just getting our name out there.

Speaker 2

And as we have these meetings with these accounts and they're able to see all of our capabilities and they're assessing their supply base, they're asking us to quote On quite a lot of product now, it's a pretty long cycle from being asked to quote to getting the award to actually seeing it start to show up in production and revenue. But Even just over the course of this year, the number of new opportunities that we have on our plate to work on has grown dramatically. So we're pretty excited.

Speaker 6

Great. I appreciate it. Thanks.

Operator

Thank you. We'll take our next question from Scott Stember with ROTH MKM. And Scott, you may be muted. And Scott, your line is open. Please unmute on your end.

Operator

We'll go next to Robert Smith with the Center For Performance Investing.

Speaker 7

Hi, good morning and thanks for taking my questions. I'm quite interested in the Shawnee And I just want to I heard that you said that going forward, say, beginning in 20 26 that the efficiency would be a +3000000 to 4000000. Was that correct?

Speaker 3

Hi, Robert. This is Jim Burke. The net savings of the $7,000,000 to $8,000,000 that we set annualized after we achieve Savings that in there, we believe the ongoing run rate will be in that $3,000,000 to $4,000,000 range. Now those savings will be achieved over the period of time, A small part of it in 'twenty four, more of it in 'twenty five and then fully in 'twenty six as we're fully operational.

Speaker 7

So it seems rather conservative figure $3,000,000 to $4,000,000 from a totally new facility with Automation and Robotics, I mean, am I missing something?

Speaker 3

Well, one of the pieces there, our Edwardsville DC that we have It's fully owned. I believe it's mostly fully depreciated that's on there. We'll have the advantage of when we sell it And taking that capital that's in there to offset future impact. But the new lease on $575,000 you incur The cost there and the property taxes and that, so that's incremental, whereas most of Owned facility wouldn't have had costs that are in there.

Speaker 7

Got it. Is there any prospect of actually buying the facility?

Speaker 3

No, that's not our intent to be in the real estate. We were fortunate from years past that we own the other one there. We'll put that up for sale and that'll be A nice favorable cash flow benefit.

Speaker 7

Right. Are there any such possibilities with the other two facilities, DCs?

Speaker 3

Well, that's where we'll wind up feeling achieving the efficiency savings That were in there, that we'll be able to scale down. Most of that will be where we have ramped up Temporary workforce. So we really won't be even incurring any wind down costs for personnel in those areas there. And we'll staff up. What the one big benefit is in the new Shawnee facility, we bring over our full staff And management team knowing our systems, knowing the product categories, knowing the part numbers and everything, And we'll staff up gradually during that period of time.

Speaker 3

The savings will be achieved. Yes, there'll be some automation there, But a lot of the savings will be in the other 2 distribution centers, which are really at capacity at the moment now.

Speaker 2

And a significant portion, just to add to that, Robert, to give some color, as Jim described it, we're going to be moving Some of the distribution out of the other DCs to go into the Shawnee distribution center. And right now, majority of our vehicle control is Coming out of Virginia, which has to ship all the way across the country to West Coast customers. This will now put that inventory in the middle of the country, which will allow us to service our customers better certainly from a transportation time standpoint, but also from a freight cost, we're going to be halfway there already. So that's where you're going to see some nice benefits as well.

Speaker 7

Now I follow. So later on in the 2020s toward the end of the decade, do you foresee Possibility of doing something with the other 1 or 2 DCs? I mean, expanding those? Well, I

Speaker 3

anticipate with this additional 200 1,000 plus square footage that we added will have sufficient capacity for the future. But I hope we grow Significantly, at this point, we don't have initial plans for the other two locations, but that will be a good problem to be facing a couple of years out.

Speaker 7

As you expand in Engineered Solutions, the possibility of folding some of the distribution into The new Shawnee facility or the your other 2?

Speaker 2

The majority of our engineered solutions Business, Robert, is built to order. So we do not typically warehouse much of it at all. So most of that ships directly from our factories. There's some that we do hold a bit of safety stock for the accounts, but it's not like the aftermarket where you're stocking a significant amount of inventory for Stock orders, it's all built to order for the accounts.

Speaker 7

Got it. Thanks. And give me an idea as to You're very optimistic about Engineered Solutions. And what's on the landscape as far as possible additional acquisitions in the near term?

Speaker 3

Robert, this is Jim Burke again. And I've said as I've said many times, we have a team that covers really the Geographical space as we look worldwide and also functional product category lines. So we're evaluating always opportunities that are there. The last couple of acquisitions we did were in the engineering solutions space. We're optimistic about that category.

Speaker 3

We've seen growth. So we're focused on both our vehicle control, temperature control categories and engineered solutions, but Nothing at this point to announce.

Speaker 1

I need to take your

Speaker 7

comments about Mexico or China?

Speaker 2

Could you be more specific on what your picks were?

Speaker 7

Well, listen, there's a lot of ambiguity going on over that far as the politics and what's happening in both countries, I was wondering what you guys are looking at from your viewpoint.

Speaker 2

Well, we're pretty committed to our footprint in both of those countries. As I think you're aware, we have a lot more in Mexico than we do in We've been building out our manufacturing capabilities in Mexico for going on 30 years, I think. And while Really, the only thing we see adverse going on in Mexico is some of the cost increases, most notably Related to labor costs, right now, we're seeing it in currency, but that's Hard to predict how long a trend that would be. But no, we're very pleased with our footprint in Mexico. We have excellent Management teams there, we are pushing 2,000 people there.

Speaker 2

And one of the nice things we see is some of our big customers are growing their business in The Mexico market allows us to follow them in. So that's the Mexico story. China, we're there as well. We have 4 joint ventures. As you're aware, I believe, 3 of them are on the temperature control side and one came with the acquisition of Trametta to an Power management and power distribution products, they're really there for 2 purposes.

Speaker 2

1 is to continue to bring high quality, low cost product here in North America, but also to sell Engineered Solutions business globally, and they're all doing well. And we're very pleased with how we're doing. We're obviously very aware of geopolitical complexity, and we pay close attention to that. And we look to mitigate some of that risk through vendor diversification, redundancy and so on. But we're pretty committed to what we're doing there, and we've seen very nice results.

Speaker 7

How about your Eastern European operation?

Speaker 2

Eastern European, we have 2 Factoring operations there, our largest and one that's been part of us the longest is in Poland, in Eastern Poland. And it's really just a fantastic plant, 700 people strong and an area where we're seeing Potentially, the biggest opportunities for Engineered Solutions quoting due to the combination of High quality, high technology and low cost. And now more recently, we have a plant outside of Budapest in Hungary That came with the Stabil acquisition, and it's been terrific for us as well. Not only we're seeing a lot of opportunities to sell to third parties, What it brought to us was electronics manufacturing in Europe and now they've become a supplier to our Poland plant. So we're really pleased with how we're building out.

Speaker 2

We've kind of moved from having a manufacturing plant in Poland to have a European wide business, and we're continuing to invest heavily there, and we're just very pleased with what we're seeing.

Speaker 7

Any reverberations from the Ukraine situation?

Speaker 2

No, it's really business as usual. When the war first broke out a year and half ago or so, We quickly mobilized to understand what the potential impact could be on the supply chain. Unfortunate to have found that there was we had no suppliers in the region. We had no customers except one very small one in the region. Here was that it was going to potentially impact our utilities infrastructure there.

Speaker 2

It did not. This is now 1.5 years Ongoing and so it's really proven to be a non event, which is very good.

Speaker 7

Thanks for taking my questions and good luck.

Speaker 2

Thank you, Robert. Thank

Operator

you. We'll go next to Scott Stember with ROTH MKM. Please go ahead.

Speaker 1

Yes. We'll follow-up with Scott if he's not able to ask his question here. Understood. Thank

Operator

And we have no further questions at this time. I'll turn it back to management for any closing remarks.

Speaker 1

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. We hope you have a great day.

Speaker 1

Thank you.

Operator

This does conclude today's Standard Motor Products 2nd quarter 23 Earnings Call and Webcast. You may disconnect your line at this time and have a wonderful day.

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Earnings Conference Call
Unum Group Q2 2023
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