Q3 2023 Standard Motor Products Inc Earnings Call

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Good day, everyone and welcome to the standard motor products third quarter 2023 earnings call webcast to enter full screen mode hover over the slide and click the full screen icon in the center of the dealer.

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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 Mr. Tony Crystal Lu. Please go ahead Sir.

Thank you Carrie and good morning, everyone and thank you for joining US standard Motor Products' third quarter 2023 earnings Conference call I'm, Tony Chris <unk>, Vice President Investor Relations and with me today are Larry Sills, Chairman Emeritus, Eric <unk>, CEO and Chairman, Jim Burke, Chief operating officer.

And Nathan Iles, Chief Financial Officer on our call today, Eric will give an overview of our performance in the quarter and Nathan will then discuss our financial results with an update on our annual guidance, Eric will provide some concluding remarks and open the call up for Q&A.

Before we begin this morning, I'd like to remind you that some of the material that we'll be discussing today may include forward looking statements regarding our business and expected financial results. When we use words like anticipate believe estimate or expect these are generally forward looking statements. Although we believe that the expectations reflected in these forward looking.

Statements are reasonable they are based on information currently available to us and certain assumptions made by us and we cannot assure you that they will prove correct. You should also read our filings with the Securities and Exchange Commission for a discussion of the risks and uncertainties that could cause our actual results to differ from our forward looking statements.

I'll now turn the call over to Eric Sills, our CEO.

Thank you Tony and good morning, everyone and welcome to our third quarter earnings call.

Overall, we're pleased with our results our sales were up slightly setting a record for a single quarter and we saw a nice increase in earnings even in the face of interest rate headwinds.

<unk> continued to show strong cash flow improvement, allowing us to pay down about a third of our outstanding debt.

Let me address each segment.

I'll first speak to the aftermarket starting with vehicle control.

Eco control was essentially flat year to date and down three 4% in quarter.

This was against a record quarter, a year ago, which posted a nearly 6% growth. So it was a difficult comparison.

Also two other notable drivers.

First as mentioned in the release, we continue to see the impact of the customer bankruptcy announced earlier in the year.

After half year of essentially no revenue.

As we acquire was acquired a few months ago by a handful of existing S&P customers.

We believe that in the long run the business will bounce back to historic levels, but we recognize that this could take a while as they absorb the acquired locations in inventories and therefore, we expect an ongoing drag on the business, which should diminish over time.

Definitely the third quarter of 2022 saw a greater amount of pipeline this year.

These tend to flex quarter to quarter and year to year as customers adjust their planet grants and can therefore create a bit of noise.

Importantly, we always look at customer.

As an indicator of true end user demand and in aggregate. Our large customers remained ahead of last year.

Now, let me turn to temperature control.

Due to a cool spring, we experienced a very slow start to the season, especially when compared to 2022 and entered the third quarter was down five 2%, but as you know we got quite hot across most of the country and remains so throughout the summer.

Sales were up five 3%, allowing us to posted all time record for a quarter and bringing us back to within a point of last year's nine months.

Next I'll speak to our engineered solutions segment, which is our non aftermarket business focused on selling to manufacturers of vehicles and equipment across various end markets globally.

Sales in engineered solutions were up eight 4% in the quarter, reflecting a combination of generally strong demand from key accounts and the benefit of new business wins.

Very pleased with how this business has got with Delta program with a great combination of diverse products and markets and geographies and are gaining traction at the capable supplier to blue chip accounts, and we believe the sky's the limit.

Turning to profitability, we are pleased to see strong gains posting an EPS increase of five 7% versus last year.

Inflation persists with costs remaining elevated across materials labor rent and so on as well as the significant impacts from rising interest rates affecting both our customer factoring programs and our Barclays, but through a combination of initiatives. We have largely been able to cover these costs increase and I'm very proud of all of our People's efforts in this regard.

With that let me turn it over to Nathan Iles, who will dive a bit deeper into the numbers and what's behind them.

Alright. Thank you Eric as noted before our sales were up in the third quarter with increases in both the temp control and engineered solutions segments, which along with other actions helped drive improvement operating profit over last year.

We also continued to make great progress, reducing our inventory.

As we go through the numbers I'll give some more color on these items and other key drivers for the quarter and first nine months as well as provide an update on our financial outlook for the full year of 2023.

First looking at our clinical control segment, you can see on the slide the net sales of $199 million in Q3 were down three 4% versus a difficult comparison last year with the decrease driven by the impact of a bankrupt customer as well as some customer pipeline orders, which did not recur this year for.

For the first nine months of the vehicle control sales were down slightly by <unk>, 3%.

I'm showing the impact of a customer bankruptcy as well as lower Q3 pipeline orders, but excluding these impacts we've seen growth for the year. So far as a result of continued demand for our products and faithful chauffeur.

Vehicle controlled adjusted EBITDA was 11, 4% of net sales for the quarter and 11, 9% for the first nine months.

Periods down from last year.

Looking at the drivers we saw a nice expansion in the gross margin rate for vehicle control one four points in the quarter.

One nine points for the first nine months.

Spansion was the result of pricing and savings initiatives, which overcame cost inflation and the impact of lower production and lowering inventory levels.

However, the improvement in gross margin was more than offset by a combination of higher factory costs and lower operating expense leverage as a result of lower sales.

Our vehicle control adjusted EBITDA was down year over year I would point out that we've made a lot of progress offsetting the headwinds we faced recently as our gross margin improvements outpaced rising costs and factoring programs for both the quarter and year so far.

Turning to temperature control net sales in the quarter for that segment of $123 6 million were up five 3% while sales for the first nine months were down by 1% as we saw strong sales in the quarter, mostly offset what had been a slow start to the tax season.

Temperature control adjusted EBITDA.

11, 9% of net sales in Q3 and slightly ahead of last year and was driven by two things primarily.

First strong sales combined with other initiatives to improve the gross margin rate.

The performance of our equity investments in our joint ventures in China, which falls below the operating profit line, but improved in the quarter the.

The combination of these two things overcame the higher cost of customer factoring programs in the third quarter.

Controls adjusted EBIT for the first nine months of eight 5% of net sales was down from last year.

Slightly higher gross margin rate was more than offset by higher factory costs. So far this year.

Looking at it in more detail the impact of pricing and cost savings actions benefited the gross margin rate.

Offset by lower production related to lowering inventory levels, while gross margin improved by two points. In this segment. This was more than offset by higher interest rates on factoring programs as well as some lower leveraged SG&A costs due to lower sales.

Looking at engineered solutions sales for that segment in the quarter of $71 8 million were up eight 4% and sales for the first nine months of $215 1 billion were up 4%.

We used to see our sales continue to increase as a result of strong demand and new business wins.

Adjusted EBITDA for engineered solutions in the quarter came in at 15, 6% an increase of four six points from last year and for the first nine months adjusted EBITDA for engineered solutions was 13, 4% and up one nine points from last year.

The improvement for both the quarter and the year. So far was the result of strong sales growth good channel and customer mix, which improved the gross margin rate and better SG&A leverage given higher states.

Turning to our consolidated results net sales in the quarter were up one 3% due to higher sales in pest control and engineered solutions and for the first nine months sales were basically flat as growth in engineered solutions was offset by small declines in the aftermarket.

Our consolidated gross margin rate improved for both the quarter and first nine months due to our initiatives and overcame other headlines.

The gross margin dollar increases of seven 5% to four 9% for the quarter first nine months respectively.

Regarding SG&A, excluding the cost of customer factoring programs, which are shown separately on the page.

Fences were well controlled in the quarter at 69% of net sales and in line with last year.

Looking at the bottom line consolidated operating income of nine 1% and adjusted EBITDA of 11, 4% in the quarter were higher than last year as higher sales and improved gross margin rate across all segments offset $4 million higher factory costs. There's also drove an increase in earnings per share to $1 11 in the quarter.

For the first nine months consolidated operating income and adjusted EBITDA were down as higher factory costs were only partly offset by improvements in gross margin and it's also resulted in lower earnings per share for the year So far.

I would also point out that while our operating profit is down four 4 million in the first nine months. This is after absorbing a $14 2 million dollar increase in factoring costs, which highlights the work we've done to offset the headwinds of rising interest rates.

Turning now to the balance sheet and cash flow as the key item here is our inventory level, which finished Q3 to $479 8 million down $48 9 million from December last year and down $54 5 million from September last year as we continue to focus on reduction of his area.

Cash flow statement reflects cash generated from operations in the first nine months was $132 9 million as compared to cash used of $75 5 million last year with the improvement driven by a $129 6 million improvement in cash flow inventory during the first nine months.

Our financing activities show significant progress made in paying down our credit facilities by $92 1 billion as a result of improved operating cash flows, including a $75 6 million.

Dollars' worth of repayments made in the quarter.

We also paid $18 8 million of dividend during the first nine months.

Borrowings of $147 6 million at the end of Q3 were much lower than last year, and we finished the quarter with a leverage ratio of one eight times lower than the September and December last year.

Before I finish I wanted 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 'twenty three sales will show flat to low single digit percentage growth versus last year, given our performance to date and the fact that temp control season is now largely finished.

Adjusted EBITDA is expected to be approximately nine 5% and unchanged from our estimate last quarter.

This estimate includes the full year sales performance as noted factoring expenses of $48 million to $50 million using the current outlook for rates.

The additional costs related to the expansion of distribution facilities.

And our new warehouses Shawnee, Kansas.

And a weaker U S dollar strengthening recently, just still lower against the Mexican peso versus last year.

Connection with adjusted EBITDA, we expect depreciation and amortization expenses.

Our income tax rate to be in line with 2022.

Further we expect our interest expense on outstanding debt to be on average about $4 million each quarter, given higher interest rates.

To wrap up we're pleased with our overall higher sales in the quarter and our temp control and engineered solutions segments.

And our improved gross margin rates across all segments as well as the continued significant improvements in cash flow that we saw and we very much appreciate the efforts of all of our team members in achieving these results.

Thank you for your attention and I'll now turn the call back here to wrap up.

Thank you Nathan.

So just to close let me reiterate how pleased we were with our quarterly results, we posted record sales and showed strong growth in earnings.

North American aftermarket continues to show stability as the basic demographics that are market remain favorable.

The car park is growing and aging miles driven have rebounded and while there can always be some noise quarter to quarter fundamentals remain excellent.

Technology shifts youre surely coming but there is nothing new about that and we feel well positioned to evolve with it.

So we really feel quite good about our future here at.

For engineered solutions, we are obviously in a different stage of our journey, while we are well established in the aftermarket here. We are just getting done but the moves we have made in the past few years in creating a cohesive global business is clearly hitting its stride.

We continue to receive opportunities across a host of products and end markets and are clearly seeing a strengthening customer relationships that will surely open more doors and as I always say, we're tackling with the best team out there that are immensely grateful to all of our talented employees.

And so that concludes our prepared remarks at this point, we'll open it up for questions. So I'll turn it back to you.

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And we'll take our first question from the line of Daniel <unk> with Stephens. Please go ahead.

Hey, good morning, everybody and congrats on the quarter.

Thank you good morning.

Eric maybe I'll start at a higher level in this group I think you've mentioned.

You mentioned the large customers in aggregate are still up.

That kind of implies a positive industry backdrop are you seeing or how are you thinking was there any change in that outlook. Some participants are noting more repair deferrals curious if from your purview, where you see a lot of customers are you seeing anything changing in terms of sales trends our volume trends in the industry.

So that's a fair question and what.

What I would say is that in general.

We are seeing that kind of ongoing low single digit growth within speaking specifically to vehicle control temperature control, obviously has a lot of movement due to that.

But I think we're basically back to that low single digit long term trends that the industry has always seen as it relates to any deferred maintenance and so on you know a lot of our categories are not really maintenance related their heart failure.

And so really it's.

Your car needs our products you tend to not be able to correct for very well. So we don't necessarily see any any impacts from that which could that theoretically because another categories by economic trends.

We're really looking at the addressable market being stable and strong.

Understood Thats, great maybe a couple on the engineered solutions segment results were really strong there impressive profit growth first maybe how are you thinking about the fourth quarter. I know you guys in light vehicle and domestic exposure is there any potential disruption from the ongoing UAW strike embedded in the guide and then Nathan when we <unk>.

At the margin performance was there anything anomalous in there or is it mid teens segment EBITA margin sustainable.

So as it relates to what we're seeing in engineered solutions right now and I think you're specifically asking about any light vehicle impact.

It's a relatively small portion of our overall sales certainly and.

Even with engineered solutions, we service so many other end markets.

We have really seen very nominal impact as a result of the strike and now it appears that.

At least with Ford.

It's resolving itself and so any impact really would've been minor and short term. So we don't really expect any anything out of that.

Okay, Yes.

Good morning, Diego so so on the margin for engineered solutions I just pointed out like we said before that the customer base. In this segment is very diverse.

We do expect to have some changes in margin quarter to quarter, just because of the diverse mix of customers in the business and so.

As I remarked before really a lot of the improvement was driven by an improved customer mix versus last year.

On a long term basis I would just point you to the nine months numbers for this segment, which showed a gross margin of 26% and probably closer to where the business settles out on a long term basis. So I think that we would still.

Leave that engineer.

Engineered solutions versus the aftermarket is comparable on an adjusted EBITDA basis.

Great. That's helpful. And then last one from me Nathan on the guide on the EBITDA margin outlook. Thank you maintained at 95, obviously <unk> was stronger than that so can you maybe help us understand the outlook, maybe what are the headwinds coming in the fourth quarter that we should be aware of as you thought about kind of keeping that guidance.

Yes, yes, so just the headwinds that I pointed out in his remarks around some of the incremental cost around a new warehouse.

As well as the FX that at least for the Mexican peso is still little bit against us in the fourth quarter.

I think to your point, obviously, adjusted EBIT a bit stronger than the guide coming out of Q3, but the other thing that will swing Q4 around a bit as the temp control business in the season as that comes to an end in the fourth quarter is always a lower profit quarter.

So.

What's inside your expectation.

Great I appreciate all the color and best of luck guys.

Thank you.

And we'll take our next question from the line of Bret Jordan with Jefferies. Please go ahead.

Hey, guys. This is Patrick <unk> on for Brett Thanks for taking our questions.

Good morning.

Are you guys thinking all inventory levels as we head into 'twenty four already pretty close back to optimal or maybe some more work to be done there.

Are you referring to.

Inventory on our shelves are our inventory sitting on customer shelves, yes, I suppose both would be helpful.

You bet.

So.

I'll speak to that.

Customer inventories and Jim can speak to.

Hours.

What we're really seeing it.

It's very rational stable inventory on our customers' shelves youre always going to have a little bit of flex in quarter to quarter period to period, but basically it shows that.

There the inventory is really where they want it to do and we work closely with them. So we have pretty good visibility into what their intentions are.

Nothing really to note on customer shelves.

Yeah, Hi, this is Jim Burke.

We're very pleased with the inventory performance that we had in the recent quarter and really year to date. So we took a significant.

Working capital down out of the out of the business at this point going forward.

Start to build inventories in the temperature control. So vehicle control will probably be about neutral, maybe we will get a little bit of a benefit there but from this point forward, we start to build and get ready for next season here, but I'd say it should you should look at relatively reasonable levels no significant changes.

Got it Thats helpful.

And then as you look at cadence throughout the quarter it sounded like momentum picked up towards the end after the colder spring.

Thanks progressed into Q4, and how much more tailwind are you guys expecting from the summer heat.

Well really the summer season at this point is largely over.

Yes.

So I wouldn't read too much into what happens in that.

A few weeks of October.

But yes. It was it was a strong.

Some are really throughout the third quarter.

Which as we said allowed us to recover from the slow start.

Great very helpful. Thanks, guys.

Thank you.

And again, if he would like to ask a question. Please press. The Star then one on your Touchtone keypad.

Our next question comes from the line of Scott timber with Ross MTS MK.

Please go ahead.

Good afternoon, guys and congrats on the quarter.

Thank you Scott.

Yes.

Some industry players have been talking about potential price disinflation.

Are you starting to see any of that I mean, obviously you guys have put through a lot of price increases to cover raws, but.

And.

And factoring costs, but whats your view on the pricing environment right now.

Yes, we're really not seeing it in our categories.

Partly because.

They are not commodity driven and so we've seen that.

Overall costs have not come down.

Our costs have not come down so we're not really seeing much obviously talk to their distributors as to what their pricing strategies are you hearing as you said some different things, but we are really not not seeing anything and we believe in our categories is non discretionary.

Failure parts did not that price sensitive.

Got it.

And back to the UAW strike.

You talked about engineered solutions, but in vehicle control is there any potential.

If you havent seen it already for for benefit in the aftermarket side.

So that's also a great question.

The short answer is no we really have not seen any impact one of the things that we have been reading about is really that they had anticipated this and stocked up third party distribution are ahead of it and they are not at zero. They are as we're reading it I'm not seeing anything that's not public information.

But they have continued I got it.

Partial staff to operate those parts department. So no. It really has not had any impact on our business.

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On a poll channel really.

Got it and then.

The guide for top line, a little bit lower.

Is that really pertaining to vehicle control and the customer loss or is there anything else.

Unknown Executive: Good day everyone, and welcome to the Standard Motor Products 3rd quarter, 2023 earnings call webcasts. 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.

No I think that's really that's really added in the fourth quarter can be somewhat volatile.

As you know as.

And control season is largely over and and there could be adjustments. So we're just taking a slightly conservative view on it and also looking at where we are where we are after nine months. So yeah, that's really what's behind that.

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And then lastly, the bankruptcy I think last quarter, you might've, given what the impact.

Two.

Unknown Executive: If you require your technical assistance during today's event, you can reference the help link at the top of your screen. Please note, today's call will be recorded, and I will be standing by. Should you need any assistance?

The vehicle controlled sales or do you have that for this quarter.

We were able to provide some.

Some rough numbers.

Two the pieces getting acquired because we were able to show a specific zero revenue type situations now that its been acquired by other accounts.

Anthony Cristello: It is now my pleasure to turn the conference over to Mr. Tony Cristello. Please go ahead, sir. Thank you.

Anthony Cristello: Good morning everyone, and thank you for joining us on Standard Motor Products 3rd quarter, 2023 earnings conference call. I'm Tony Cristello, Vice President of Investor Relations. And with me today are Larry Sills, Chairman Emeritus, Eric Sills, CEO and Chairman Jim Burke, Chief Operating Officer, and Nathan Niles, Chief Financial Officer. On our call today, Eric will give an overview of our performance in the quarter, and Nathan will then discuss our financial results with an update on our annual guidance.

And it's.

It's really just kind of get.

Lost in the mix as to what that impact is because it's been distributed across.

Several different customers and all of the different dynamics within their businesses. So.

Yes at this point and really going forward as well unable to really specify what that impact is but we just know that there is some some overall softness as they rationalize with that.

Got it.

That's all from me thanks, guys.

Anthony Cristello: Eric will provide some concluding remarks and open the call up for Q&A. Before we begin this morning, I'd like to remind you that some of the material that we'll be discussing today may include forward looking statements regarding our business and expected financial results. You should also read our spilings with the Securities and Exchange Commission for discussion of the risks and uncertainties that could cause our actual results to differ from our forward looking statements.

Thank you Scott.

And there appears to be no further questions at this time I'll hand, the call back over to the speakers for any closing remarks.

Thank you and we want to thank everyone for participating in our conference call. Today, we understand there is a lot of information presented and we'll be happy to answer any follow up questions. You may have contact information is available on our press release or our corporate web site and we hope you have a great day. Thank you. Thank you everyone.

This concludes today's conference. Thank you for your participation and you may now disconnect.

Okay.

Eric Sills: I'll now turn the call over to Eric Sills, our CEO. Well, thank you, Tony, and good morning, everyone, and welcome to our 3rd quarter earnings call. Overall, we're pleased with our results. Our sales were up slightly setting a record for a single quarter, and we saw a nice increase in earnings even in the face of interest rate headwinds. Additionally, we continued to show strong cash flow improvement, allowing us to pay down about a third of our outstanding debt.

[music].

Eric Sills: Let me address each segment separately. I'll first speak to the aftermarket starting with vehicle control. The vehicle control was essentially flat year to date, and down 3.4% in quarter. This was against a record quarter a year ago, which posted nearly 6% growth, so it was a difficult comparison. There were also two other notable drivers. First, as mentioned in the release, we continue to see the impact of the customer bankruptcy announced earlier in the year.

Eric Sills: After a half year of essentially no revenue, the business we acquired a few months ago by a handful of existing S&P cars. We believe that in the long run the business will bounce back to historic levels, but we recognize that this could take a while as they absorb the acquired locations and inventories and therefore we expect an ongoing drag on the business which should diminish over time. That can lead to the third quarter of 2022, so a greater amount of pipeline owners than this year.

Uh huh.

Uh huh.

Hello.

[music].

Eric Sills: These tend to flex quarter to quarter and year to year as customers adjust their planograms and can therefore create a bit of noise. Importantly, we always look at customer POS as an indicator of true end user demand and in aggregate our large customers remain ahead of last year.

Got it.

No no no.

Uh-huh mhm.

[music].

Eric Sills: Let me turn to temperature control.

Hum.

Eric Sills: Due to a cool spring, we experience the very slow start to the season, especially when compared to 2022 and enter the third quarter down 5.2%. But as you know, it got quite hot across most of the country and remained so throughout the summer. Sales were up 5.3% allowing us to post an all-time record for a quarter and bringing us back to within a point of last year's nine month sales.

Hum.

Okay.

Uh huh.

[music].

Eric Sills: Next, we'll speak to our engineered solutions segment which is our non-aftermarket business focused on selling to manufacturers of vehicles and equipment across various end markets globally. Sales and engineered solutions were up 8.4% in the quarter, reflecting a combination of generally strong demand from key accounts and the benefit of new business winners. We're very pleased with how this business is going. We've built a program with a great combination of diverse products and markets and geographies and our gaming traction at the capable supplier to blue chip accounts, and we believe the sky is the limit.

Eric Sills: Turning to profitability, we are pleased to see strong gains posting an EPS increase of 5.7% versus last year. Inflation persists with costs remaining elevated across materials, labor, rent and so on, as well as the significant impact from rising interest rates affecting both our customer factory programs and our borrowings. But through a combination of initiatives, we have largely been able to cover these costs increase and are very proud of all of our people's efforts in this regard.

Nathan Iles: So with that, let me turn it over to Nathan Isle, who will dive a bit deeper into the numbers and what's behind them. All right, thank you Eric. As known before, our sales were up in its third quarter with increases in both the 10 control and zero solution segments, which along with other actions helped drive improvement operating profit over last year. We also continue to make great progress reducing our inventory levels.

Nathan Iles: As they go through the numbers, I'll give some more color on these items and other key drivers for the quarter in first nine months, as well as provide an update on our financial outlook for the full year 2023. First, looking at our vehicle control segment, you can see on the slide that that sales with 190.9 million in Q3, but now 3.4% versus the difficult comparison last year. With the decrease driven by the impact of the bankbook customer, as well as some customer pipeline orders which did not occur this year.

Nathan Iles: For the first nine month in vehicle control, sales were down slightly by 0.3%. With the decline showing both the impact of the customer bankruptcy, as well as lower Q3 pipeline orders. But excluding these impacts, we've seen growth for the years so far as a result of continued demand for our products and faithful self-groups. Vehicle control, the justice even up was 11.4% of net sales food. Coorder, 11.9% for the first nine months, with both areas down from last year.

Nathan Iles: Looking at the drivers, we saw a nice expansion in the gross margin rate for vehicle control of 1.4 points in the quarter and 1.9 points for the first nine months. This expansion was the result of pricing and saving initiatives which overcame cost, inflation and the impact of lower production from lowering inventory levels. However, the improvement in gross margin was more than offset by a combination of higher factory costs and lower operating expense numbers as a result of lower sales.

Nathan Iles: While vehicle control suggested even a down year over here, it would point out that we've made a lot of progress off setting the headwinds we faced recently as our gross margin improvements outpaced the rising cost of factory programs for both the quarter and the year so far. Turning to temperature control, net sales in the quarter for that segment of 123.5 million or up 5.3% while sales for the first nine months were down by 1%.

Nathan Iles: As we saw strong sales in the quarter, mostly offset would have been a slow start for the selling season. Temperature control suggested EBITDA was 11.9% of net sales in Q3 and slightly ahead of last year and was driven by two things primarily. First, strong sales combined with other initiatives to improve the gross margin rate. And second, the performance of our equity investments in our joint ventures in China, which followed below the operating profit line, but improved in the quarter.

Nathan Iles: The combination of these two things overcame the higher cost of customer backing programs in the third quarter. Some controls adjusted EBITDA for the first nine months of 8.5% of net sales was down from last year, as a slightly higher gross margin rate was more than offset by higher factory costs so far this year. Looking at it in more detail, the impact of pricing and cost savings actions benefited the gross margin rate, so was partly offset by the lower production related to lowering inventory levels.

Nathan Iles: While gross margin improved by 0.2 points in this segment, this was more than offset by higher industries on factory and programs, as well as some lower leverage in SG&A costs due to lower sales. Looking at engineered solutions, sales for that segment in the quarter of 71.89% were up 8.4%, and sales for the first nine months of 211 million were up 4%. And we were pleased to see our sales continue to increase as a result of strong demand in new business wins.

Nathan Iles: Just an EBITDA for engineered solutions in the quarter came in at 15.6%, an increase of 4.6 points from last year, and for the first nine months of just an EBITDA for engineered solutions was 13.4%, and up 1.9 points from last year. The improvement for both the quarter and the year so far was the result of strong sales growth, good channel and customer mix which improved the gross margin rate and better SG&A leverage given higher sales.

Nathan Iles: Turning to our consolidated results, net sales in the quarter were up 1.3% to the higher sales and 10 control engineered solutions. And for the first nine months, sales were basically flat, as growth in engineered solutions was offset by small defines in the aftermarket segments. Our consolidated gross margin rate improved with both the quarter and first nine months due to our initiatives that overcame other headlines. And results in gross margin dollar increases of 7.9% and 4.9% for the quarter and first nine months respectively.

Nathan Iles: Starting SG&A, excluding the cost of customer background programs that were shown separately on the page, expenses were well controlled in the quarter at 16.9% of net sales and in line last year. Looking at the bottom line, consolidated operating income of 9.1% and adjusted EBITDA of 11.4% in the quarter for higher than last year, higher sales and improved gross margin rate across all segments, offset $4 million of higher sales, is also driven increased in earnings per share of $1.11 in the quarter.

Nathan Iles: For the first nine months, consolidated operating income and adjusted the e-wood up or down, is higher factoring costs were only partly offset by improvements in gross margin, and is also resulted in lower dues earnings per share for the years so far. However, I would also point out that while our operating profit is down 4.4 million dollars nine months, this is after absorbing a 14.2 million dollar increase in factoring costs, which I like the work we come to off that rising industry.

Nathan Iles: Turning out of the balance sheet and cash flows, the key item here is our inventory level, which finished 2.3 at 479.8 million, now 48.9 million from December last year, and now 54.5 million from September last year, because we continue to focus on reductions in this area. Our cash flows statement reflects cash generated from operations in the first nine months with 132.9 million, as compared to cash used as 75.5 million last year, with the improvement driven by 129.6 million improvement in cash flows from inventory during the first nine months.

Nathan Iles: Our financing activities shows significant progress made in paying down our credit facilities by 92.1 million, as a result of the proof got pretty cash flows, including a 75.6 million dollars worth of repayments made in the quarter. We also paid 18.8 million dividends during the first nine months. Our borrowings of 147.6 million at the end of 2.3 were much lower than last year, and we finished the quarter with a leverage ratio of 0.8 times lower than those in September and December last year.

Nathan Iles: Before I finish, I want to give an update on our sale and profit expectations for the full year 2023. Regarding our top line sales, we expect a full year 23 sales will show flat to load single digit percentage growth versus last year. Given performance to date, and the fact that 10 control seasons is now large, it's finished. Does the EBITDA is expected to be approximately 9.5 percent, and unchanged from our estimate last quarter?

Nathan Iles: This estimate includes the full year sale performance is noted. Factory expenses of 48 to 50 million dollars using the current outlook for rates. The additional cost related to the expansion of distribution facilities in our new warehouse are Shawnee Candids, and a weaker US dollar that well strengthened recently, just still lower against the Mexican pace over our last year. Next, with the adjusted EBITDA, we expect depreciation and amortization expenses, and our income tax rate to be aligned in 2022.

Nathan Iles: Further, we expect our interest expense on outstanding debt to be on average about $4 million each quarter given higher interest rates. For up up, we're pleased with our overall higher sales in the quarter and our temp control and engineered solution sales, and our improved growth margin rate across all segments as well as the continuous improvement in cash flow that we saw, and we very much appreciate the efforts of all our team members in achieving these results.

Unknown Executive: Thank you for your attention.

Eric Sills: I'll now turn the call back to Eric Drapo. Well, thank you, Nathan.

Eric Sills: So, just to close, let me reiterate how pleased we were with our quarter results. We're supposed to record sales and show strong growth in earnings. North American aftermarket continues to show its stability as the basic demographics of the market remain favorable. The car park is growing in aging, miles driven and rebounded, and a lot that can always be some noise quarter to quarter, the fundamentals remain. Technology shifts are surely coming, but there's nothing to do about that, and we feel well positioned to evolve with it.

Eric Sills: So we really feel quite good about our future here.

Eric Sills: As for engineering solutions, we are obviously in a different stage of our journey. While we are well established in the aftermarket, here we are just getting known. But the moves we have made in the past few years in creating a cohesive global business is clearly hitting its stride. We continue to receive opportunities across a host of products and end markets, and are clearly seeing a strengthening and customer relationships that will surely open more doors. And as I always say, we're tackling with the best team out there, and I'm immensely grateful to all of our talented employees.

Unknown Executive: And so that concludes our prepared remarks, but this one will open it up for questions, so I'll turn it back to you. Thank you. At this time, if you would like to ask a question, please press the star and one on your touchtone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question.

Daniel Imbro: And we'll take our first question from the line of Daniel Imbro with Stevens. Please go ahead. Hey, good morning, guys, buddy, and congrats on quarter. Thank you. Good morning. Maybe I'll start at a higher level. In this group, I think you've mentioned that large customers in aggregate are still up to that kind of implies a positive industry backdrop. Are you seeing or how do you think there's any change in that outlook? Some participants are noting more repair deferrals. Curious it is from your purview where you see a lot of customers, are you seeing anything changing in terms of sales trends or volume trends in the industry?

Eric Sills: So that's a fair question. And what I would say is that in general, we are seeing that kind of ongoing low single-digit growth within speaking specifically to vehicle control, temperature control, obviously, has a lot of movement due to the weather. But I think we're basically back to that low single-digit long-term trends that the industry has always seen as it relates to any deferred maintenance and so on. You know, a lot of our categories are not really maintenance-related, they're hard failure, and so really your car needs our products.

Eric Sills: You tend to not be able to defer it very well. So we don't necessarily see any impacts from that, which could that theoretically be caused another category by economic trends. We're really looking at the addressable markets being stable and strong. Understood. That's great.

Unknown Executive: Maybe a couple on the engineered solutions segment. You know, results are really strong there, impressive profit growth.

Unknown Executive: First, maybe how do you think about the fourth quarter? I know you have some light vehicle and domestic exposure. Is there any potential disruption from the ongoing UAW strike embedded in the guide?

Eric Sills: And then Nathan, when we look at the margin performance, was there anything anomalous in there, or is this mid-teen segment even on margin sustainable? So as it relates to what we're seeing in engineered solutions right now, and I think you're specifically asking about any light vehicle impact, it's a relatively small portion of our overall sales, certainly, and even with engineered solutions, we serve as so many other- Market. We have really seen very nominal impact as a result of this strike and now it appears that at least with Ford it's resolving itself.

Eric Sills: And so any impact really would have been minor and short term. So we don't really expect anything out of that. We expect to have some changes in margin quarter to quarter, just because of the diverse mix of customers and the business. And so as I remarked before, really a lot of the improvement was driven by an improved customer mix versus last year on a long term basis. That would just point you to the nine months numbers for the segment, which there shows the gross margin of 20.6% and probably closer to where the business settled out on a long term basis. So I think that we would still believe that engineer solutions versus the aftermarket is comparable on an adjusted even basis.

Unknown Executive: Great. That's helpful.

Nathan Iles: And the last one for me Nathan on the guide on the even margin outlook. Thank you maintained it at nine and a half. Obviously three key was stronger than that. So he maybe helps us understand the outlook. Maybe what of the headwind coming in the fourth quarter that we should be aware of as you thought about kind of keeping that guy. Yeah, so just the headwinds that are pointed out and remarks around some of the incremental costs around a new warehouse, as well as the effects that at least for the Mexican pace, so it's still a little bit against us in the fourth quarter.

Nathan Iles: You know, I think to your point, obviously just even a bit stronger than the guy come out of Q three, but the other thing that will swing you more around a bit is the temp control business and the season is that comes to an end. The fourth quarter is always a lower profit quarter anyway, so that's that what's inside the expectation.

Unknown Executive: Great. I appreciate all the color and best of luck.

Unknown Executive: Thank you.

Patrick Buckingham: And we'll take our next question from the line of Brett Jordan with Jeffries. Please go ahead. Hey guys, this is Patrick Buckingham for Brett. Thanks for taking our questions. How are you guys thinking of inventory levels as we had in the 24? Are we pretty close back to optimal or maybe some more work to be done there? Are you referring to inventory on our shelves or our inventory sitting on customer shelves?

Patrick Buckingham: Yeah, I suppose both would be helpful. So I'll speak to customer inventory and Jim can speak to hours. What we're really seeing is very rational stable inventory on our customer shelves. You know, you're always going to have a little bit of flexing quarter the quarter period period, but basically it shows that their inventory is really where they want it to be. And we were closely with them, so we have pretty good visibility into what their intentions are. So nothing really to know about customer shelves.

Jim Burke: Hi, this is Jim. We were very pleased with the inventory performance that we had in the recent quarter and really at a date. So we took significant working capital down out of the out of the business. At this point going forward, we start to build inventory in the temperature control. And so vehicle control will probably be about neutral and we'll get a little bit of a benefit there. But from this point forward, we start to build and get ready for next season there. But I'd say it should you should look at relatively reasonable levels, no significant change, as we look at Cadence throughout the quarter, it's under like momentum picked up towards the end after the colder spring.

Unknown Executive: How are things progressed in a Q4 and how much more tailwind are you guys expecting from the summer heat? Well, really the summer season at this point is largely over. So I wouldn't read too much into what happens in the few weeks of October. But yes, it was a strong summer, really throughout the third quarter, which as we said, allowed us to recover from the slow start. Great, very helpful. It's all for us. Thanks, guys. And again, if you would like to ask a question, please press the star M1 on your touchtone keypad.

Scott Stember: Our next question comes from a line of Scott Stember with Roth M.K.M. Please go ahead. Good afternoon, guys, and congrats on the quarter. Thank you. Some industry players have been talking about potential price disinflation. Are you starting to see any of that? I mean, obviously you guys have put through a lot of price increases to cover rods and the factoring costs. But what's your view on the pricing environment right now? Yeah, we're really not seeing it in our categories.

Scott Stember: Partly because they are not commodity driven. And so we've seen that overall costs have not come down. Our costs have not come down. So we're not really seeing much. You obviously talked to the distributors as to what their pricing strategies are. And you're hearing, as you said, some different things. But we are really not seeing anything. And we believe in our categories. It's not discretionary. Our failure parts. If they're not that price sensitive industry. Got it.

Eric Sills: And back to the UAW strike. You talked about the interior solutions. But in vehicle control. Is there any potential? If you haven't seen it already for benefit in the in the aftermarket set? That's also a great question. And the short answer is no. We really have not seen any impact. One of the things that we have been reading about is really that they had anticipated this. And it's stocked up. There's parts distribution ahead of it.

Eric Sills: And they are not at zero. They are as we're reading it. I'm not saying anything that's not public information. That they have continued a kind of partial staff to operate those parts department. So now it really has not had any impact on our whole channel really. Got it.

Eric Sills: And then the guide for for top line a little bit lower. Is that really pertaining to vehicle control and the customer loss or is there anything else? No, I think that's really. That's really it. And the fourth quarter can be somewhat volatile. As you know, as the pen control season is largely over, and there could be a adjustment. So we're just taking a slightly conservative view on it and also looking at where we are after nine months. So yeah, that's really what's behind that.

Eric Sills: And then lastly, the bankruptcy, I think last quarter you might have given with the impact to the vehicle control sales, or do you have that for this quarter? Yeah, it's we were able to provide some rough numbers prior to the pieces getting acquired because we're able to show a specific zero revenue type situation. Now that it's been acquired by other accounts and it's really just kind of gets lost in the mix as to what that impact is.

Eric Sills: Because it's been distributed across several different other customers and all the different dynamics within their businesses. So yeah, we're at this point and really going forward as well, unable to really specify what that impact is, but we just know that there is some some overall softness as they rationalize what they have. Got it.

Scott Stember: That's all from me. Thanks guys. Thank you.

Unknown Executive: And there appears to be no further questions at this time. I'll hand the call back over the speakers for any closing remarks. Thank you. And we want to thank everyone for participating in our conference call today. We understand there's a lot of information presented and we'll be happy to answer any follow-up questions you may have. Contact information is available on our press release or our corporate website and we hope you have a great day. Thank you. Thank you everyone. This concludes today's conference. Thank you for your participation and you may now disconnect. [inaudible]