Q2 2021 Standard Motor Products Inc Earnings Call
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Good day, everyone and welcome to today's standard motor products second quarter earnings call.
At this time all participants are in a listen only mode.
Later, you will have an opportunity to ask questions.
A question and answer session.
You make sure to ask a question at any time by pressing the star and 1 on your Touchtone phone US. Please note. This call maybe recorded and I will be standing by if you need any assistance.
And it is now my pleasure to turn today's program over to Larry Sills Chairman.
Hello.
Good morning, everyone and welcome to standard motor products.
Second quarter earnings call.
My name is Larry Sills, Chairman of the board.
With me. This morning, we have Eric Sills, President and CEO.
Jim Burke Chief operating officer.
Nathan Iles, Chief Financial Officer.
And what we'll be doing this morning and.
And is Eric will review highlights of the first quarter.
Jim will talk a little more about operations.
Nathan will take a deeper dive into the numbers and.
And then we'll open it to questions. So with that I will turn it over to Nathan for their forward looking statements.
Okay. Thank you Sir.
And this morning, I would like to remind you that some of the material that 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 expect these are generally forward looking statements. Although we believe that the expectations reflected in these forward looking statements.
And what 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 now turn the call over to Eric.
Okay. Thank you Nathan and good morning, everybody welcome to our second quarter call. Overall, we're very pleased with our performance and the quarter. We set records for sales and profits we were able to consummate a major acquisition with terrific strategic value and we were able to accomplish this while continuing to navigate the complexities of the ongoing pandemic, including the relate.
With supply chain challenges.
We would not been able to dot net.
And we've done this without the tireless efforts of our skilled and dedicated employees, whom we're just so proud of we cannot thank them enough.
We achieved sales of over $340 million on the quarter up 38 per cent from the prior year with both divisions, having all time highs.
Comparisons to 2020 are not particularly relevant as you are well aware that was the trough of the downturn for us however, when comparing to a more normalized 2019 were favorable by 12%.
I believe that this has been somewhat aided by a shift back towards the D. I F. M business a trend we expect will continue.
Coming out of the pandemic DIY sore and his people at a certain amount of disposable money to spend and chose to upgrade their vehicles. We felt that this was not necessarily a durable long term trend what was required was for vehicles to get back on the road. We're now seeing that vehicle miles traveled are nearing normal levels and deferred repairs are occurring and while this is.
Good for the whole industry, we believe it is especially so for us as our product categories and more technical in nature, and therefore lend themselves to professional installation.
Let me now go into a review of our 2 products segments, beginning with engine management.
Our topline sales remained quite strong up 35% versus last year, but also up 7% over 2019.
As discussed on previous calls we enter 2021 with the loss of a major account and therefore, we are pleased to have been able to post positive numbers. Despite this.
As noted in the release there were several contributors first we implemented programs and all of our customers to pursue market share gains at the street level early indications are that these were very successful.
Second we have been aggressively pursuing new business wins with our existing customers and we're very pleased that our results as our new business awards recover over a third of the lost business on an annualized basis.
Some of this rolled and during the second quarter, while much of it and has yet to begin.
Third and we've been busy on the M&A front and I'll speak more on this and a minute and lastly, the general market conditions have been favorable customer P. O S as well into the double digits over both 2020, and 2019 and was consistently strong month over month.
Turning to temperature control I think it is helpful to remind people that this is a highly seasonal and weather dependent business.
The first quarter is always light is almost entirely preseason and can swing year to year, depending on the timing of these orders.
The second quarter tends to have 2 parts April and may tend to be a continuation of pre season and then in June the summer heat begins and the channel starts selling through and reordering.
This year things shifted forward a bit we began seeing very strong P. O S. Early on and the year, which suggested that the purchases intended to load shelves, we're selling through and this trend has continued we saw early heat and many parts of the country and when combined with a return of miles driven and the associated vehicle maintenance, we enjoyed a record setting quarter.
Sales up nearly 50 per cent from last year and up over 25 per cent compared to 2019.
Customer sell through has remained very high with elevated summer heat and much of the country. We believe we are in for a good third quarter.
However, similar to engine management here too we are facing difficult third quarter comparisons to 2020, which was up 25 per cent for 19 and was far and away. The biggest third quarter, we had ever had and temperature control.
Overall gross margins dipped slightly from the first quarter, Jim will go into more depth on the drivers when he discusses our operations, but at a high level margins were aided by strong absorption and our plants due to elevated production levels as we start to rebuild our inventory. However, offsetting this we are also experiencing inflationary.
Headwinds across many of our cost inputs.
Our operating expenses were elevated due to a combination of distribution expenses related to higher sales as well as the cost increases and freight and labor. However, we were able to achieve very good leverage on our costs due to our strong sales performance and Nathan will dig a little deeper on this later on the call.
All of these elements combined for record profits as we posted earnings per share of $1.26, which is more than a 140% greater than 2020, and nearly 40% greater than 2019.
However, looking forward it is important to point out that the cadence of the last 18 months was very unusual and making the future difficult to predict.
From a topline perspective, although we entered the third quarter was indications of strong customer sell through it's hard to predict how long that can last and the past 12 months have seen outsized market expansion, which likely includes a certain amount of pent up demand and at some point it will not be a sustainable rate of growth.
From a gross from a gross margin standpoint, we anticipate certain pressures as the nonrecurring benefits of favorable absorption fade and elevated supply chain costs persist, though we do believe that the market is amenable to a pass through of inflation.
Additionally, we will begin to see a slight mix shift to our OE business, which I'll discuss on a bit and that segment has a different margin profile from the aftermarket lower gross margins, but also lower operating expenses. So it ends up comparable at the bottom line.
When you put all these together and acknowledging the difficulties in forecasting. These unusual times. We believe 2019 may provide a better benchmark for second half performance.
Yes.
And I'd like to and I spent a couple of minutes discussing our progress towards expanding our original equipment business for the last several years, we've been growing our penetration and the OE space and while we do have a certain amount of passenger car O E. Our efforts have been more and niche areas, specifically heavy duty and commercial vehicles, where product life cycles tend to be longer.
Technology tends to be more stable and price pressures tend to be less.
This year, we have made 2 acquisitions in this arena, both previously announced on.
And our first quarter call. We discussed the acquisition of a high Tech emissions sensor product line from Stoneridge, Inc, which we are and the process of integrating into existing SMP locations.
And at the end of May we made a larger acquisition.
We acquired from better a worldwide leader and mechanical and electronic power switching and power management devices generating about $60 million and annual sales.
So on better is headquartered in Milwaukee, Wisconsin is run by a strong and seasoned management team and employees approximately 350 associates globally and 4 locations.
And we wish to publicly welcome all of the Trump better employees to the S&P family.
They sell to a broad group of Blue chip OE customers across multiple commercial vehicle channels, including construction and agricultural medium and heavy truck lawn and garden and power sports.
Some of products standpoint, they offer and expansive portfolio of both well established electromechanical parts as well as a growing assortment of sophisticated electronics devices.
The majority of their offering is considered powertrain neutral, meaning that their parts either service other systems on the vehicle where are equally suited to conventional or electric powertrains and we believe this is extremely beneficial as they are well positioned to capitalize on the eventual shift to electric vehicles, and we believe we will be able to leverage this and our aftermarket.
Okay.
From an operation standpoint from better brings a highly complementary manufacturing footprint to S&P.
There are 2 plants in Wisconsin, and including our high Tech Electronics facility. There is a low cost plant in Tijuana, Mexico, and there is a majority ownership and a joint venture in Wuxi, China geared towards pursuing the fast growing industry industrial market there.
Well oftentimes the synergies of and acquisition come from the cost savings of closing plants and eliminating duplicate costs that is not the strategy here.
And with Trump better the synergies come from the combination of their strength and hours cross selling opportunities through combined product portfolios and customer lists and collaboration between our engineering groups and advanced technologies.
And the early stages, but we are delighted with the potential.
We believe that this acquisition takes us to the next level and this OE space when combined with previous activities, including organic business wins, such as our compressed natural gas injection program and other acquisitions such as the pilot deal in 2019, we have grown this business to an annual run rate of around $250 million.
We now have the critical mass to be a significant supplier and and and are excited to see where we can take it and to reiterate we believe that this channel is highly complementary to our core aftermarket business from the product and technology standpoint, as well as from an engineering and production.
At this point I'll hand, it over to Jim and to review our operations.
Uh huh.
Thank you Eric.
I would also like to reiterate what I stated that we are very pleased with our year to date.
During the challenges facing manufacturers.
So supply chain difficulties have been significant and our supply chain and manufacturing teams continue to battle a host of challenges such as material sources supply Inc.
<unk> semiconductor chips resins, which continue on allocation and limitations.
Standard lead times, which adds to the challenges of forecasting demand and managing inventory levels and transportation of goods only adds to the difficulties once your vendors can provide the components.
Taylor and vessel management has become a critical paths and managing the manufacturing process.
Fortunately, we believe our global footprint and being on a basic manufacturer has helped us with these challenges.
Our low cost operation on Mexico, and domestic manufacturing facilities in North America.
So he's the challenges of sourcing strictly from Asia, our low cost operation and Poland is also easier to schedule containers on vessels as compared to China and in addition, this reduces any negative tariff impacts out of China.
Availability of Labor has also been a struggle at times, but not to the same magnitude of material supply.
With the significant increases and customer demand. The primary challenge has been to secure distribution personnel to get the product out and.
We have managed this labor shortage with the help of our dedicated distribution teams working 6 or 7 days per week and daily overtime.
We also have adjusted wages for existing and new hires as we compete for a limited labor pool.
Despite these challenges our internal teams are focused on meeting our customer demand for availability and timely deliveries. We have received many accolades from our customers for higher fill rates than other vendors and the industry.
Yeah.
On the inflation front, the law of supply and demand tends to set pricing.
Non immune to these pressures and a recurring increases and materials for chips resins and commodities across the board.
Transportation for international for international impact on containers and vessels as well as domestic transportation cost increases and labor supply for wage adjustments and overtime.
We do our best to offset some of these increases with make first by efforts and low cost better sourcing. However, we are also passing on price increases to our customers availability of products and better fill rates and all the vendors helps support the need and acceptance for these price increases and.
Closing and want to thank all the S&P team members, who remain driven to meet our shared goal for customer satisfaction.
Thank you for your attention and I will turn the call over to Nathan for a financial summary.
Alright, thank you.
Turning to the number and I'll walk through.
For the second quarter and for 6 months.
And we'll cover some key balance sheet and cash flow metrics.
Looking first at the P&L consolidated net sales in Q2, 'twenty, $1.342.1 billion up $94 per <unk>.
Okay.
Last year and our consolidated net sales for the first 6 months of 2021 were $618.6 million up $116.4 million or 23, 2%.
Looking at it by segment engine management net sales in Q2 were $233.2 million up $61 million versus the same quarter last year and.
And for the first 6 months were up 71 million to $445.2 million.
These large increases of 34, 7% and 19% for the quarter and first 6 months, respectively, largely reflect the softness we experienced in Q2 last year and the midst of the pandemic.
Given the volatile results and 2020, it's better to compare our results to 2019, where engine is up 7% for the quarter and up 3.2% for the first 6 months. Despite the loss of a large customer these.
These increases are a result of the successful customer initiatives, new business wins and generated robust demand highlighted before and <unk>.
Additionally, you acquired for embedded and sensor businesses provided approximately $9 million of revenue and the second quarter of 2021.
Temperature control net sales in Q2, 'twenty, 1 or $106.5 million up 47, 1% versus the second quarter last year and were at 36, 4% to $168.9 million for the first 6 months and.
And like we said for the engine segment is better to compare our 2021 and results to 2019 and on that basis temp control sales were up 10, 2% for the first 6 months and with the increase is mainly reflecting and earlier than usual start to the summer selling season as Eric alluded to before.
Our consolidated gross margin in Q2, 'twenty, 1 and was 29% versus 26% last year up 3 points.
And for the first 6 months. It was 29, 6% versus 26, 8% last year up 2.8 points with increases for both the quarter and year to date periods coming from both of our segments.
Looking at the segments second quarter gross margin for engine management was 28, 9% up 2.2 points from Q2 last year and for temperature control was 26, 9% and increase of 4.1 points from 22, 8% last year the higher margins in both segments were mainly the result of the higher sales volumes, we experienced and favorable plant absorb.
And from building, our inventory back to sufficient levels and were partly offset by higher costs and labor raw materials and transportation as was expected given the inflation occurring across the spending categories.
For the first 6 months engine management gross margin was up 2.3 points to 29, 8% low temp control was up 3.3 points to 26, 4%.
The increases on our first half margins were also due to higher sales and higher fixed cost absorption given elevated production levels and were again, partly offset by inflationary cost pressures.
Moving now to SG&A expenses, our consolidated SG&A expenses in Q2 increased by $14 million to $62.3 million ending at 18, 2% of sales versus 19, 5% and Q2 last year.
For the first 6 months SG&A spending was $116.8 million up $12.6 million, but ending lower at 18, 9% of net sales versus 27% last year.
Expenses increased for both the quarter and first half mainly due to higher selling and distribution costs due to both higher sales levels and inflation and costs the improvement as a percentage of sales mainly reflects improved expense leverage due to our higher sales volumes and continued focus on cost control around discretionary spending.
Our consolidated operating income before restructuring integration and acquisition expenses and other income net in Q2 was $37.7 million or 11% of net sales up 4.5 points from Q2 last year and for the first 6 months was 10, 8% of net sales up 4.7 points from the first 6 months last year.
As we note on our GAAP to non-GAAP reconciliation of operating income our performance resulted in second quarter 2021 diluted earnings per share of $1.26 versus <unk> 52 last year and for the first 6 months diluted earnings per share of $2.23.
Versus 95 last year, the increase and our operating profit for both the quarter and first half was mainly due to higher sales volumes higher gross margin percent and improved SG&A expense leverage.
Turning now to the balance sheet accounts receivable at the end of the quarter were $211.8 million up $48.8 million from June 2020, and up $13.7 million from December 2020.
The increase over June last year was due to the increase in sales during the quarter, while the smaller increase from December reflects both higher sales and management of our supply chain factoring arrangements.
Inventory levels and finished the quarter at $404.9 million up $51.6 million from June last year and up $59.4 million from December 2020.
The increased inventory levels reflect higher sales levels and the need to carry higher balances to support our customers and as a reminder, our inventories were depleted during 2020 and due to strong sales and the last half of the year and we expect it to build our inventories back this year.
Yeah.
Looking now on cash flows or cash flow statement reflects cash generated from operations and the first 6 months of 2021, $23.2 million as compared to cash use of $9 million last year to $24.1 million improvement was mainly driven by an increase and our operating income and while we saw some large swings in working capital balances the changes were largely offsetting.
The changes in working capital and the first 6 months were mainly driven by sales performance. During the period inventory balance is finished higher as we replenished our shelves and make sure we had sufficient inventory to serve our customers. The cash used for inventory was partly offset by an increase in accounts payable.
Additionally, we use significantly less cash and funding accounts receivable versus last year due to both timing of collections and management of our factoring programs, but this was partly offset by cash used to pay customer rebates that were earned and accrued last year.
Looking at investments, we used $11.7 million of cash for capital expenditures during the first 6 months up from $9 million last year. We also used $109.3 million to fund our acquisitions of the aforementioned from better and sensor businesses.
Financing activities included $11.1 million of dividends paid and another $11.1 million paid for repurchases of our common stock.
Financing activities also included $127.3 million of borrowings on our revolving credit facilities, which were used mainly to fund our acquisitions, but also for investments and capital and returns to shareholders through dividends and share buybacks.
And while after making significant acquisitions and the first 6 months, we still finished the quarter with total debt of less than 1 times EBITDA given our strong operating performance and ended Q2 with total outstanding borrowings of $137 million and had more than sufficient remaining available capacity under our revolving credit facility of $112 million.
In summary, we are very pleased with our operating results for the first half of the year. These results led to strong cash flow generation, which supported 2 great acquisitions and the term veterans that sensor businesses as well as continued returns to shareholders and helped us finish the second quarter with low levels of debt and a substantial amount of liquidity.
We thank all of our dedicated employees for their efforts and achieving the results. These results and what continues to be a unique and challenging time on.
And I will turn the call back over to Eric to wrap up.
Well, thank you Nathan and before opening it up for questions. Let me just close by again, saying that we're delighted with our quarter and with the year to date.
And I'm very proud of how our people perform.
Our financial performance has been strong both in sales and profits we have been active in M&A closing 2 very strategic deals and it does sell on navigating the complexities of the ongoing pandemic, keeping our people safe and managing through supply chain challenges and I absolutely feel we are a stronger organization for.
We're pleased with the overall state of the industry and of our standing within it and we are very excited about the future and.
Now I will turn it back to the moderator and open it up for questions.
At this time, if you would like to ask a question. Please press the star and 1 on your Touchtone phone.
Remove yourself from the queue at any time by pressing the pound.
Once again this is star and 1 to ask a question.
We'll pause for a moment to allow questions to queue.
We'll take our first question from Bret Jordan.
From Jefferies. Your line is open.
Hey, good morning, guys.
Good morning.
Hey, you commented about getting awards for your fill rates, but could you talk about maybe where you are.
And stocks versus target are you within a few percentage points of where you'd like to be our supply chain problems, having any impact on sales.
Yes, good morning, Brett This is Jim Burke.
And from historical levels were down a few points, it's been a struggle, but here on for our customers that is significantly better than may.
And maybe other manufacturers that are out there, but we're only a few points shy, we continue to strive and improving.
Each month and quarter over quarter so.
And we're in reasonably good shape, that's there and I wouldn't say that there is on a loss a significant loss of sales volume, that's there, which we're scrambling and the teams are doing very good we're very proud of what we've been able to achieve over this last year and a half.
Okay. And then you commented that you picked up I guess over a third of that engine management volume that had that had.
It had gone.
But the cadence on that comment you said you picked up some and the second quarter, but may be more coming and the second half could you talk about maybe the magnitude of of what's coming and the second half versus what we've already GAAP.
Sure Brad this is Eric.
And and you're right some of it did roll in drawing.
During the second quarter.
These wins and where it was really several.
Singles and doubles, so and they all phase in over time, but.
If.
Approximately half of it came in over the second quarter and the balance over the rest of the year in phases.
Okay, Great and then 1 last question on the comparison to second quarter of 19 engine management being up 7 does that include the acquired revenues or is that an organic number versus <unk> 19.
Yes, Brett this is Nathan that and that included the acquired revenue approximately $9 million in the quarter. Okay.
Right.
Thank you I actually won and 1 final if I can.
I guess this is more of a big picture, but given the fact that your supply chain as more and North America, Obviously, Mexico and then some eastern Europe are you potentially going to gain share as people try to sort of maybe step back from a <unk>.
Asian supply chain, just given the disruption and the shipping costs that we've seen or is it viewed as sort of transitory to the point people aren't really going to change their supply model as much.
And that's certainly very difficult to predict Brad we certainly had a lot of discussions with customers over our supply chain stability.
And and we tend to get high marks on the fact that we are not beholden to the far east and sub.
And but it's difficult to say how much of that potentially parlays into new business opportunities. We're very pleased that we do have that footprint because I think it helps us certainly at the table, but it's difficult to say what that will actually convert to okay.
Okay, great. Thank you.
Thank you.
Okay.
We'll take our next question from Scott <unk> Denver.
L. King your line is open.
Good morning, guys and thanks for taking my questions.
Hi, Scott.
You guys gave a lot of good detail about.
Your success rate and getting new business to offset.
Loss of business.
And that you referred to as the quarter ended if you put all of the buckets on all of the 4 initiatives in place to offset.
How close were you to.
Achieving all of those lost sales and if not when.
And we expect that to happen and the back half of the year on next year.
Alright. Thank you can you can break out a few of the pieces.
With the information we've given you in terms of the size of the acquisitions and <unk>.
And what day generated and as Nathan just mentioned, we got $9 million in the quarter, but run rates of $75 million.
And.
And then as it relates to new business wins, we've roughly sized it intelligently and you could expect the other 2 pieces on a little harder to.
And separate out which is just general market.
Strength, and how much and add as the whole market growing versus the success of initiatives that we've had with our.
Channel partners to help them grow their share downstream, we do believe that both were contributors.
But how much was just general market strength versus some of the programs that we put in place, it's a little difficult to separate them out.
But we do believe both of them have some some legs and less.
So we're hopeful and that will continue.
Got it.
And just going through the back half of the year I guess, starting with third quarter, you talked about very difficult comparisons, but what youre seeing at Pos.
Are you still running up north of what you did a year ago.
Notably in engine management.
Coming out of the second quarter, yes. It has continued to be strong.
And with all that our numbers are pretty good through June whats happened in July is a little more directional but we do continue to see that strength, but as we have to continue to emphasize its really so hard to determine.
How long how long this kind of dynamic and last is obviously sell unprecedented for our industry.
Okay.
Got it and then last question on the gross margins you usually give us an update on where you see things coming in at the end of the year and Jeremy you talked about some puts and takes where can we expect.
Gross margin in both pieces of the business trends and the back half of the year and for the full year.
Yes, and Hi, Scott This is Nathan.
Like Eric said before it's really hard to predict kind of where we're headed at this point. We think 2019 second half is a good benchmark, but just given where sales have been over the last 18 months.
Fairly unpredictable and unprecedented recently as Eric just said, we have some inflation pressures that while we will certainly work to offset.
With cost savings and price pass throughs, and we think those will persist and we also have the 2 acquisitions were working through and and.
And does it settle down and to see how they're going to impact the business. So.
We produced using 2019 as the guide at this point for the back half.
So.
Are you, saying, we can match that and what we saw on the back half of 2019.
Yeah, I would just say that.
Directionally speaking.
On the back half is the right benchmark and whether its the exact number or not.
Okay.
Okay.
Okay.
And if I could just sneak 1 more and just on Trump better.
And I know you are Eric talked.
<unk> talked about how just in general OE businesses.
Yes operating margin neutral, but there are some moving pieces and there is try and better.
Does that fit into that narrative as well.
In terms of overall bottom line, yes, very much so yes.
Okay.
Alright. Thank you thank.
Thank you Scott.
Well take our next question from Robert Smith from the center for performance and investing.
Your line is open.
Thanks, and good morning, and thanks for taking my questions.
Good morning, Robert first congratulations on the robust quarter.
And I'm just wondering if your.
Your OE target if you on a long term planning and say 3.5 years on what are you targeting and.
Acquisition Wise and are you more on looking at strategic around between opportunistic.
Yeah.
So it's a great question and we don't have a specific target.
And our balance of our business between OE and aftermarket.
We are.
We are pleased with the fact that we have gotten it to where it's Scott.
Critical mass arguably several years ago. It did not and so it was really more of a hobby business and difficult.
Get anybody's attention with it and so now as you know.
On a run rate of $250 million, that's 20% of our business it's meaningful.
Do we think that that 80.20 is a good ongoing ratio do we plan to continue to build it I think that goes to your second question, which is yes. We are opportunistic we don't have a.
Our goal that we are chasing we look at things that make sense that we think that we have.
Either good internal competencies to pursue and to pursue profitably or a good acquisition opportunities that lend themselves to where we're trying to take this business. So at that point. It does it becomes more opportunistic but I also think that we now have momentum on our side.
Which tends to open doors, and so we'll see where that takes us.
Okay.
Yes.
What is your take on the China flagpole with technology and what are you hearing country.
I'm, sorry could you repeat the question Bob.
What's your take on the China flagpole with technology and what are you hearing country.
China Tegra them flat.
And the Chinese.
Chinese move on certain areas of technology, and China Chinese technology.
Well, we look at it within our scope of business and so as we look at what we've been.
<unk> in the China market, which has been entirely through our joints are almost entirely through our joint ventures.
And at which we had the 3 on the air conditioning side, and then try and data came with that very nice complementary piece there as well.
We believe that pet technologies that we are pursuing over there.
And are ones that have and have good market potential and not necessarily high tech categories that the China market is going to try to protect your control at least that's what I'm hearing. So we think that where we are in that space.
This is all upside and we're excited on where it could potentially go.
How would you characterize the current competitive environment and any particular more recent developments.
Okay.
And the North American aftermarket, it's yes on Houston.
Continues to be a very competitive market.
And we have to be out there fighting every day for our space, We do believe.
Our longstanding go to market strategy is being a full line full service provider of professional grade products continues to be very well received continues to be very sticky with our customers again, and we need to perform and at a high level.
So that they general genuinely derive the value out of that out of that approach.
But we think that as long as we do that the competitive landscape is certainly there, but we think we'll win more than we lose.
And any particular.
Recent changes seen little and within the last 18 months.
What's been happening.
With the pandemic affecting competitiveness.
And nothing that we can really tell you.
It's a fragmented industry with a lot of players.
Go back many years and it was us against other full line suppliers now it's a bunch of niche players on specific product categories or on a quality grades.
Or what have you and so.
As it gets fragmented like that.
And the landscape changes.
Slowly because theres so many small pieces to it so no I wouldn't say the recent and anything dramatic and is independent.
Okay and.
And lastly can you just restate your dividend policy for me again.
Yes, Hi, Robert it's Nathan so.
As always we'd like to provide a dividend to our shareholders and we continue to do that.
In recent years, we've increased it slowly and steadily.
Have continuing discussions with our board around what we what we should do and when we should raise it again and we'll continue to have those discussions as we go forward.
But we do value the dividend.
As our sort of basic returned to shareholder method.
You you stated before and certain percentage payout.
Oh, yes, yes, and we have it and I think the target that we talked about before was roughly a third of earnings and <unk>.
Obviously, we have we have that in mind and.
And we'll keep that in front of us.
Okay. Thanks, so much good luck going forward. Thank you Robert.
We will take our next question from Daniel and Browse Stephens Company.
Lievens, Inc. Your line is open.
Good morning, congrats on the quarter and.
And you're on for Daniel.
Hi, good morning.
And I've got 1 quick question and I'm, just kind of curious if you could help me kind of quantify what the inflationary impacts you're seeing today and kind of what youre assuming in the back half are you expecting more and will that kind of start day.
Yes, yes.
So as far as what we're seeing.
I guess through today.
From a numbers perspective, it's low to mid single digit inflation percentages.
It kind of depends on the category as far as exactly what were seeing but that's the range that we're seeing.
And of course kind of stay away from a forecast because it's hard to tell where things are headed just given the fast pace of the environment at this point.
Okay, and how much do you think of that would be more structural going forward versus transitory and I know again, it's tough to forecast, but if you can kind of give me any sense of what youre seeing today.
I think I'll stay away from answering that 1 I think most of the world as having the debate on transitory versus structural at this point, but again, we're looking to pass through prices and offset with cost savings and that's how we're addressing it at this point.
Alright, perfect. Thank you.
Okay.
And once again and if you would like to ask a question. Please press the star and 1 on your Touchtone phone.
And we'll take our next call from.
Carolina Jolly from Gabelli.
Your line is open.
Hi, Thank you for taking my question.
Hello Hello.
Hi.
Wanted to touch and Youre aloud and answered have touched on this but I was hoping.
And quantitatively can add today, but.
That's like when you and.
And that's why.
When you did that 1 customer that down there with the idea that they might go direct.
Can you kind of quantify or just talk about how you're able to.
<unk> provides a better service to the distributor.
Hi, there on your model and then.
And if you if any of your competition that is going to act as kind of losing share at this point by doing that and does the current environment.
Yes.
Difficult to say.
And what our competitors are getting with that but we will reiterate our model of.
Of having more than just the partner box at a price, but all the different services and a lot of that does include having and country distribution.
Which especially in this.
Current environment and supply chain disruption has proven to be such an important.
Part of what we offer that we're able to get products on our customers' shelves very quickly as opposed to needing to bring it in direct if a customer and to try to do that and deal with the kind of shipping delays and everybody seeing China and get product across the ocean. So.
We believe.
We've always believed that our model has been very well received I think in today's.
Environment and supply chain disruptions, even more so and so I don't want to comment on how others are doing with their strategy, but we think we're doing well with us.
Okay, Great and then just 1 more question.
Previously and I don't know if you touched on the call.
There was just and next difference and response to the current environment, where you're seeing some on.
And what would potentially it looked like more do it yourself and market demand and demand from the 12 plus older vehicles.
And are you still seeing that type of mix difference there can you update us on that.
Yeah, I think what we're seeing.
And it's important to note that we only have on a directional insights into the end user.
We do get some and some data from some of our larger trading customers.
So who their end user is whether it's a do it yourself for or the professional installers and what we did see last year was a bit of a shift towards DIY.
And we've now largely seen that shift back.
Where do you see it more and it's not so much who the who is.
Buying a particular part I think you see it a little bit more in on.
Mixed shift of the types of parts. So for example, what we saw last year when there was heavy DIY and and.
And that's what all of the publicly.
Publicly traded distributors, where we're talking about we saw outsized demand for ignition wires, which is a highly DIY category and it's supposed to be a category and secular decline on and it was through the roof that has not now started to normalize a bit and I think that that's a good insight into.
More of a return to a <unk> market.
And the long run is as I said in my and my prepared remarks, it's a very favorable trend for us because that is ultimately the market that we do best in and I think it's ultimately the market the industry is going to grow and so we're starting to see it move back in that direction.
Yes.
Okay.
Okay, great. Thank you and then last question would it be fair to say that.
Right now your.
You are meeting that demand and E our customers and the distributor, but there there might be additional demand on that 1 day I need to stop.
Love to.
Hum.
Revert to their normal stocking levels.
What we're seeing.
Their inventories again. This is directional we don't have everybody's inventory, but that is what we are able to.
C.
And theyre inventories have actually been pretty stable over the quarter and and we're seeing that also and that there.
<unk> is roughly matching their their purchases so they have been pretty stable and their inventory levels.
And so we don't necessarily expect a surge in stocking up nor do we see and a destocking, we kind of think it's where it's supposed to be right.
Great. Thank you Frank.
Thank you.
Once again and if he would like to ask a question. Please press the star and 1 on your Touchtone phone.
Okay.
It appears that we have no further questions.
I will now turn the program back over to Barb.
For any additional or closing remarks.
I think we have no further remarks, thank you very much per attendee.
Thank you. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Okay.
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Yeah.
Okay.
Yeah.
Hum.
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