Q2 2024 Standard Motor Products Inc Earnings Call

Operator: Good day, everyone, and welcome to the Standard Motor Products second quarter 2024 earnings call. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session, and you may register to ask a question at any time by pressing star 1 on your telephone keypad. You may withdraw yourself from the queue by pressing star 2. Please note that 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.

Unknown Executive: Good day, everyone, and welcome to the Standard Motor Products second quarter 2024 earnings call. At this time, all participants are in a less-than-only mode. Later, you have an opportunity to ask questions during the question-and-answer session, and you may register to ask a question at any time by pressing star one on your telephone keypad.

Speaker Change: Good day everyone and welcome to the Standard Motor Products second quarter 2024 earnings call. At this time, all participants are in a listen-only mode.

Speaker Change: Later you will have an opportunity to ask questions during the question and answer session and you may register to ask a question at any time by pressing star 1 on your telephone keypad. You may withdraw yourself from the queue by pressing star 2.

Unknown Executive: You may withdraw yourself from the queue by pressing star two. Please note that today's call will be recorded, and it will be standing rise should you need any assistance.

Speaker Change: Please note that 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 Toni Cristello, Vice President of Investor Relations. Please go ahead.

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

Tony Cristello: Thanks, Savannah, and good morning, everyone. Thank you for joining us on the Standard Motor Products second quarter 2024 earnings conference call. With me today are Larry Sills, Chairman Emeritus, Eric Sills, Chairman and Chief Executive Officer, Jim Burke, Chief Operating Officer, and Nathan Iles, Chief Financial Officer. On our call today, Eric will give an overview of our performance in the quarter, and Nathan will then discuss our financial results. Eric will then provide some concluding remarks and open the call up for Q&A.

Tony Cristello: Thanks, Savannah, and good morning everyone. Thank you for joining us on Standard Motor Products' second quarter 2024 earnings conference call. With me today are Larry Sills, Chairman Emeritus; Eric Sills, Chairman and Chief Executive Officer; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer. On our call today, Eric will give an overview of our performance in the quarter, and Nathan will then discuss our financial results.

Toni Cristello: Thanks Savannah and good morning everyone. Thank you for joining us on Standard Motor Products second quarter 2024 earnings conference call.

Speaker Change: With me today are Larry Sills, Chairman Emeritus, Eric Sills, Chairman and Chief Executive Officer, Jim Burke, Chief Operating Officer, and Nathan Iles, Chief Financial Officer.

Speaker Change: On our call today, Eric will give an overview of our performance in the quarter, and Nathan will then discuss our financial results. Eric will then provide some concluding remarks and open the call up for Q&A.

Tony Cristello: Eric will then provide some concluding remarks and open the call up to Q&A.

Tony Cristello: 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. And 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 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.

Tony Cristello: 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, and 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.

Speaker Change: 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.

Speaker Change: 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 they will prove correct.

Tony Cristello: 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 Change: 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.

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 second quarter earnings calls. Good to be with you today. I'd like to start as I always do by recognizing all the S&P employees around the world that make us who we are. It really could not be more proud of what they're able to accomplish. Overall, we're quite pleased with our quarter. Sales were up 10 percent, which is an all-time record for us, and we saw it in each of our three operating segments, though certainly highlighted in temperature control, which I will get to in a minute.

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

Eric Sills: Well, thank you, Tony. And good morning, everyone. And welcome to our second quarter earnings call. It's good to be with you today.

Eric Sills: Well thank you Tony and good morning everyone and welcome to our second quarter earnings call. It's good to be with you today. I'd like to start as I always do by recognizing all the S&P employees around the world that make us who we are. I really could not be more proud of what they are able to accomplish.

Eric Sills: I'd like to start, as I always do, by recognizing all the S&P employees around the world that make us who we are. I really could not be more proud of what they are able to accomplish. All right, overall, we're quite pleased with our quarter's sales were up 10%, which is an all-time record for us. And we saw it in each of our three operating segments, though certainly highlighted in temperature control, which I will get to in a minute.

Speaker Change: All right, overall, we're quite pleased with our quarter. Sales were up 10%, which is an all-time record for us, and we saw it in each of our three operating segments, though certainly highlighted in temperature control, which I'll get to in a minute. But let me start with vehicle control, the largest of our segments.

Eric Sills: But let me start with vehicle control, the largest of our businesses. In general, we were pleased after a flattish Q1, the second quarter was up 2.7% over last year, showing some nice sequential momentum quarter over quarter, bringing our year-to-date numbers up by 1.6%. We've benefited from some new business not present last year, as well as generally favorable trends as vehicle control products are largely non-discretionary in nature. Moving to temperature control, it was a heck of a quarter as we saw a tremendous surge due to the extended heat across much of the country.

Eric Sills: But let me start with vehicle control, the largest of our segments. In general, we were pleased. After a flat-ish Q1, the second quarter was up 2.7 percent over last year, showing some nice sequential momentum quarter over quarter, bringing our year-to-date numbers to being up by 1.6 percent. We've benefited from some awarded business not present last year, as well as generally favorable trends, as vehicle control products are largely nondiscretionary in nature. Moving to temperature control, it was a heck of a quarter as we saw a tremendous surge due to extended heat across much of the country.

Eric Sills: In general, we were pleased. After a flattish Q1, the second quarter was up 2.7% over last year, showing some nice sequential momentum quarter over quarter, bringing our year-to-date numbers to being up by 1.6%.

Speaker Change: We've benefited from some award of business not present last year, as well as generally favorable trends as vehicle control products are largely non-discretionary in nature.

Speaker Change: Moving to temperature control, it was a heck of a quarter as we saw a tremendous surge due to extended heat across much of the country.

Eric Sills: Sales for the quarter were up 28% against last year, though it's always worthwhile to point out that seasonal cadence can change year to year. Last year started slow with a soft second quarter, but then the third quarter saw a solid improvement. So we are facing a tougher comparison going forward.

Eric Sills: Sales for the quarter were up 28 percent against last year, though it's always worthwhile to point out that seasonal cadence can change year to year. Last year started slow with a soft second quarter, but then the third quarter saw solid improvement, so we are facing a tougher comparison going forward. And at said, year-to-date, we were up nearly 16 percent, and the heat has continued through July, which bodes well for a solid full year for the segment. I'd like to say I'm proud I am of our operations people. They were able to keep up with this elevated demand, taken care of our customers with on time deliveries.

Eric Sills: Sales for the quarter were up 28% against last year, though it's always worthwhile to point out that seasonal cadence can change year-to-year. Last year started slow with a soft second quarter, but then the third quarter saw a solid improvement, so we are facing a tougher comparison going forward.

Eric Sills: That said, year-to-date, we are up nearly 16%, and the heat has continued through July, which bodes well for a solid full year for the segment. I'd like to say how proud I am of our operations people. They were able to keep up with this elevated demand, taking care of our customers with on-time deliveries. I can't thank them enough.

Eric Sills: That said, year-to-date we are up nearly 16% and the heat has continued through July, which bodes well for a solid full year for the segment.

Eric Sills: Can't thank them enough. The different end markets, the general trend has absolutely been favorable as we continue our success landing new business and ramping up production, expanding programs with existing customers and generally getting known in the space as a capable high-quality supplier.

Eric Sills: I'd like to shift now to talking about our non-aftermarket business, our engineered solution set. This relatively new segment continues to perform to our expectations. Sales were up about 6% in the quarter and 5% on the year.

Eric Sills: I'd like to shift now to talking about our non-aftermarket business, our engineered solutions segment.

Speaker Change: This relatively new segment continues to perform to our expectations.

Eric Sills: Sales were up about 6% in the quarter and 5% on the year.

Eric Sills: And as there will always be some lumpiness due to the basic dynamics of the different end markets, the general trend has absolutely been favorable as we continue our success landing new business and ramping up production, expanding programs of existing customers, and generally getting known in the space as a capable, high-quality supplier. We were pleased to see a recovery in earnings during the quarter, though we know we still have work to do.

Eric Sills: And as there will always be some lumpiness due to the basic dynamics of the different end markets, the general trend has absolutely been favorable.

Eric Sills: as we continue our success landing new business and ramping up production, expanding programs of existing customers, and generally getting known in the space as a capable, high-quality supplier.

Eric Sills: I'd like to now spend a few moments on profitability, though Nathan will go into greater detail. We were pleased to see a recovery and earnings in the corner, though we know we still have work to do. We're proud of what we've accomplished in controlling our costs and passing through pricing, but overall we recognize that there is room for improvement. We continue to face pressures and costs of goods, both in elevated material costs and in wages, and customer factoring programs remain a significant headwind. To help combat this, we instituted in the quarter an early retirement program for qualified salary employees in North America.

Speaker Change: I'd like to now spend a few moments on profitability, though Nathan will go into greater detail.

Eric Sills: We are pleased to see a recovery in earnings in the quarter, though we know we still have work to do. We're proud of what we've accomplished in controlling our costs and passing through pricing, but overall we recognize that there is room for improvement.

Eric Sills: We're proud of what we've accomplished in controlling our costs and passing through pricing, but overall, we recognize that there is room for improvement. We continue to face pressures on the cost of goods, both in elevated material costs and in wages, and customer factoring programs remain a significant headwind. To help combat this, we instituted in the quarter an early retirement program for qualified salaried employees in North America.

Eric Sills: To help combat this, we instituted in the quarter an early retirement program for qualified salaried employees in North America.

Eric Sills: We are quite pleased with the level of participation. We thank our new and soon-to-be retirees for their countless contributions to our success and wish them well. The savings associated with this will be approximately $10 million annualized once fully realized, which will happen in phases over the next year.

Eric Sills: We are quite pleased with the level of participation. We thank our new and soon-to-be retirees for their countless contributions to our success and wish them well. This is a leading supplier to the European aftermarket of engine cooling and air conditioning components, along with a growing line of what they call engine efficiency products, which would fall into our vehicle control category. With sales of around $260 million and EBITDA margins in the mid-teens, they represent an immediate significant leap forward for S&P into new markets with highly complementary products.

Eric Sills: Next, I'd like to speak for a moment about our exciting recent announcement. On July 10th, we announced that we had signed a definitive agreement to acquire Nissen's Automotive. I won't repeat all the details. We welcome you to review the transcript of our investor call, although I was presentation material provided, but here in the highlights. Nissen's is a leading supplier to the European aftermarket of engine cooling and air conditioning components, along with a growing line of what they call engine efficiency products, which would fall into our vehicle control category. With sales of around $260 million and EBITDA margins in the mid teens, they represent an immediate significant leap forward for S&P into new markets with highly complimentary products.

Eric Sills: We need a complete customary regulatory approvals, which we expect will take a few months, but once consummated, we are eager to get started on pursuing the numerous benefits we anticipate as we work together with their team. We see these benefits falling into three main areas. First, growth through cross-selling. We are in many similar product categories, but with differing strengths. As we leverage that, we can expand our offerings on both sides of the ocean. Second, we anticipate cost reduction synergies as we combine our purchasing power, seek best cost, pursue in sourcing, freight consolidation, and so on.

Eric Sills: We need to complete customary regulatory approvals, which we expect will take a few months, but once consummated, we are eager to get started on pursuing the numerous benefits we anticipate as we work together with their team. We see these benefits falling into three main areas. First, growth through cross-selling. We are in many similar product categories but with differing strengths. As we leverage that, we can expand our offerings on both sides of the ocean.

Eric Sills: Second, we anticipate cost-reduction synergies as we combine our purchasing power, seek the best cost, pursue insourcing, freight consolidation, and so on. We can accelerate product launches, tackle new technologies faster, and pursue numerous other means of collaboration. Some more to come on NISNs, but needless to say, we're excited. With that, I'll turn it over to Nathan to review the numbers with some additional color.

Eric Sills: Second, we anticipate cost reduction synergies as we combine our purchasing power, seek best cost, pursue insourcing, freight consolidation, and so on.

Eric Sills: And third, we believe that by joining forces, we could become a stronger company and therefore a better supplier to our customers. We can accelerate product launches, tackle new technologies faster, and pursue numerous other means of collaboration. Some more to come on essence, but needless to say, we're excited.

Nathan Iles: With that, I'll turn it over to Nathan to review the numbers with some additional costs. All right, thank you, Eric. As we go through the numbers, I'll first give some color on the results by segment and at the consolidated level, then cover some key balance sheet and cash flow metrics, and finally provide a brief update on our financial outlook for the full year of 2024. Vehicle controls adjusted EBITDA of 10.4% for both the second quarter and first six months is down from last year, driven by a lower gross margin rate and higher operating expenses. While this segment's gross margin dollars were flat to last year due to higher sales, the margin rate was lower as a result of the increases in costs that Eric noted before.

Nathan Iles: All right. Thank you, Eric. As we go through the numbers, I'll first give some color on the results by segment and at the consolidated level, then cover some key balance sheet and cash flow metrics, and finally, provide a brief update on our financial outlook for the full year of 2024. Vehicle Control's adjusted EBITDA of 10.4% for both the second quarter and first six months is down from last year, driven by a lower gross margin rate and higher operating expenses.

Nathan Iles: SGNA expenses increase mainly due to inflationary increases, which I'll touch more on later, and factory expenses also increase due to higher sales and timing of cash collections. Turning to temperature control, net sales in the quarter for that segment of 124.5 million were up 28.2%. As we saw a very strong start to the summer selling season, and this start helped our sales grow 15.7% for the first six months of the year. Temperature controls adjusted EBITDA increased in Q2 to 12.6%, and for the first six months increased to 9.7%. As higher sales volumes led to higher gross margin rates and improved leverage of operating expenses for both the quarter and year-to-date periods.

Nathan Iles: SG&A expenses increased mainly due to inflationary increases, which I'll touch more on later, and factory expenses also increased due to higher sales and timing of cash collections.

Nathan Iles: Turning to temperature control, net sales in the quarter for that segment of 124.5 million were up 28.2% as we saw a very strong start to the summer selling season. And this start helped our sales grow 15.7% for the first six months of the year.

Nathan Iles: Temperature controls adjusted EBITDA increased in Q2 to 12.6% and for the first six months increased to 9.7% as higher sales volumes led to higher gross margin rates and improved leverage of operating expenses for both the quarter and year-to-date periods.

Nathan Iles: Temper control adjusted EBITDA also benefited from improved performance in our joint ventures in China versus last year. Looking now at engineering solutions sales in that segment, in the quarter were up 6.1%, and for the first six months were up 5.3%. We were pleased to see our sales continue to increase in this segment as new business wins with both existing and new customers support very good growth here. Adjusted EBITDA for engineering solutions in the quarter of 13.1% was up slightly from last year. The improvement was a result of good leverage of operating expenses that were lower as a percentage of sales, and this segment also benefited from improved performance in our joint ventures in China versus Q2 last year.

Nathan Iles: Temp Control Adjusted EBITDA also benefited from improved performance in our joint ventures in China versus last year. Adjusted EBITDA for engineering solutions in the quarter of 13.1% was up slightly from last year. The improvement was the result of good leverage of operating expenses that were lower as a percentage of sales, and this segment also benefited from improved performance in our joint ventures in China versus Q2 last year. Engineered solutions adjusted EBITDA for the first six months was down from last year, driven by lower gross margin due to cost pressures, but also the unfavorable sales mix we experienced in the first quarter, and partly offset by better performance from Chinese joint

Nathan Iles: Temp control adjusted EBITDA also benefited from improved performance in our joint ventures in China versus last year.

Nathan Iles: Looking now at Engineering Solutions, sales in that segment in the quarter were up 6.1% and for the first six months were up 5.3%. We were pleased to see our sales continue to increase in this segment as new business wins with both existing and new customers support very good growth here.

Nathan Iles: Adjusted EBITDA for engineering solutions in the quarter of 13.1% was up slightly from last year.

Nathan Iles: The improvement was the result of good leverage of operating expenses that were lower as a percentage of sales, and this segment also benefited from improved performance in our joint ventures in China versus Q2 last year.

Nathan Iles: Engineering solutions adjusted EBITDA for the first six months is down from last year, driven by lower gross margin due to cost pressures, but also the unfavorable sales mix we experienced in the first quarter and partly offset by better performance from Chinese joint ventures. Turning to our consolidated numbers, the change in our net sales and gross margin for the quarter in first six months versus last year was the result of the changes in our segments, as I just highlighted. Regarding consolidated SGNA excluding factoring, which is shown separately on the page, expenses were up for both the quarter and first six months versus last year.

Nathan Iles: Engineered Solutions adjusted EBITDA for the first six months is down from last year, driven by lower gross margin due to cost pressures, but also the unfavorable sales mix we experienced in the first quarter, and partly offset by better performance from Chinese joint ventures.

Nathan Iles: Turning to our consolidated numbers, the change in our net sales and gross margin for the quarter and first six months versus last year was the result of the changes in our segments, as I just highlighted. Regarding consolidated SG&A, excluding factoring, which is shown separately on the page, expenses were up for both the quarter and first six months versus last year. Start-up costs related to our new distribution center were $1.3 million in the quarter and $2.3 million year-to-date, and without these costs, SG&A would have been 17.1% in the quarter and 18.1% for the first six months. We incurred a charge of $2.6 million related to this program in Q2 and expect to incur an additional charge of $3.1 million in the second half of the year as people retire.

Nathan Iles: Regarding consolidated SG&A, excluding factoring, which is shown separately on the page, expenses were up for both the quarter and first six months versus last year.

Nathan Iles: As a percentage of net sales, SGNA was flat with last year at 17.5% in the quarter, given strong sales volume, but was up at 18.4% for the first six months. Startup costs related to our new distribution center were 1.3 million in the quarter, on 2.3 million year to date, and without these costs, SGNA would have been 17.1% in the quarter and 18.1% for the first six months. I noted last quarter that increases in SG&A costs were driven by general inflation, but also elevated distribution expenses across a number of inputs, including higher lease expense, and that would be looking at ways to reduce our costs going forward.

Nathan Iles: As a percentage of net sales, SG&A was flat with last year at 17.5% in the quarter, given strong sales volume, but was up at 18.4% for the first six months.

Nathan Iles: To that point, we executed a retirement program during the second quarter, which we anticipate will save us an estimated 10 million in compensation costs. We incurred a charge of 2.6 million related to this program in Q2 and expect to incur an additional charge of 3.1 million in the second half of the year's people retire. We'll also continue to review other levers to pull to reduce our costs overall. Turning out of the balance sheet, accounts receivable were 239.3 million at the end of the quarter, higher than last year due to higher sales. Basically flat with year end, as higher sales have kept inventory levels lower even though we're in peak season for the temp control business.

Nathan Iles: To that point, we executed a retirement program during the second quarter, which we anticipate will save us an estimated $10 million in compensation costs.

Nathan Iles: We'll also continue to review other levers to pull to reduce our costs overall. Turning now to the balance sheet, accounts receivable were $239.3 million at the end of the quarter, higher than last year due to higher sales. Inventory levels finished Q2 at $508.2 million, up slightly versus June last year, but basically flat with year end, as higher sales have kept inventory levels lower even though we're in peak season for the temp control business.

Nathan Iles: Turning now to the balance sheet, accounts receivable were $239.3 million at the end of the quarter, higher than last year due to higher sales.

Nathan Iles: Inventory levels finished Q2 at 508.2 million, up slightly versus June last year, but basically flat with year-end as higher sales have kept inventory levels lower even though we're in peak season for the temp control business.

Nathan Iles: Our cash flow statement reflects cash use and operations for the first six months of 10.1 million, as compared to cash generated of 39.4 million last year. Cash use and operations last year was aided by a reduction in inventory balances that did not recur this year after bringing inventory back down to normal levels over the course of 2023. Investing activities show an increase in capital expenditures this year of 13.4 million, which includes 10.4 million of investment related to our new distribution center. Financing activities show borrowings on a revolving credit agreement of 52 million in the first six months, which were used to fund operations, capital expenditures, and pay 12.7 million of dividends.

Nathan Iles: Our cash flow statement reflects cash used in operations for the first six months of $10.1 million as compared to cash generated of $39.4 million last year. Cash used in operations last year was aided by a reduction in inventory balances that did not recur this year after bringing inventory back down to normal levels over the course of 2023. Investing activities show an increase in capital expenditures this year of $13.4 million, which includes $10.4 million of investment related to our new distribution center.

Nathan Iles: Our cash flow statement reflects cash used in operations for the first six months of $10.1 million as compared to cash generated of $39.4 million last year.

Nathan Iles: Cash used in operations last year was aided by a reduction in inventory balances that did not recur this year after bringing inventory back down to normal levels over the course of 2023.

Nathan Iles: Investing activities show an increase in capital expenditures this year of $13.4 million, which includes $10.4 million of investment related to our new distribution center.

Nathan Iles: Financing activities show borrowings on a revolving credit agreement of $52 million in the first six months, which were used to fund operations, capital expenditures, and pay $12.7 million of dividends. We also repurchase shares under an existing $30 million authorization from our board, repurchasing $10.4 million of shares during the first six months. While we have $19.6 million of authorization remaining, we have paused repurchases in anticipation of closing on the acquisition of Nissan later this year.

Nathan Iles: We also refer to shares under an existing 30 million authorization from our board, referencing 10.4 million of shares during the first six months. While we have 19.6 million of authorization remaining, we have paused repurchases and anticipation of closing on the acquisition of Missons later this year. Our net debt of 182 million at the end of Q2 was lower than last year, and we finished the quarter with a leverage ratio of 1.5 times EBITDA. As we noted in July, we do expect our leverage ratio to increase to a little less than 3.5 times on a performance basis once the acquisition of Missons is closed.

Nathan Iles: We also repurchased shares under an existing $30 million authorization from our board, repurchasing $10.4 million of shares during the first six months.

Nathan Iles: While we have $19.6 million of authorization remaining, we have paused repurchases in anticipation of closing on the acquisition of Nissan's later this year.

Nathan Iles: Our net debt of $182 million at the end of Q2 was lower than last year, and we finished the quarter with a leverage ratio of 1.5 times EBITDA. As we noted in July, we do expect our leverage ratio to increase to a little less than 3.5 times on a pro forma basis once the acquisition of missions is closed, and then we will use cash flows to work our debt balance down to lower levels over time.

Nathan Iles: And then we use cash flows to work our debt balance down to lower levels over time.

Nathan Iles: Before I finish, I want to give an update on our sales and profit expectations for the full year of 2024. As I do, please note that our outlook does not include any impact from Missons acquisition, as the exact timing of closing is not yet known. Regarding our top line sales, given the sales growth we saw during the second quarter, we now expect to see low to mid single-digit percentage growth in sales for the full year. We're maintaining our expectations for adjusted EBITDA, which we expected to be in a range of 9.9.5% and essentially flat with 2023.

Nathan Iles: Before I finish, I want to give an update on our sales and profit expectations for the full year of 2024. As I do, please note that our outlook does not include any impact from the Nissan acquisition, as the exact timing of closing is not yet known.

Nathan Iles: Before I finish, I want to give an update on our sales and profit expectations for the full year of 2024.

Nathan Iles: As I do, please note that our outlook does not include any impact from the Nissan's acquisition, as exact timing of closing is not yet known.

Nathan Iles: Regarding our top line sales, given the sales growth we saw during the second quarter, we now expect to see low to mid single-digit percentage growth in sales for the full year. We're maintaining our expectations for adjusted EBITDA, which we expect to be in a range of nine to nine and a half percent and essentially flat with 2023. This estimate includes cost pressures, which continue to be a headwind for vehicle control and engineered solution segments. The U.S. dollar remains at a multi-year low against the Mexican peso, and factory expenses of $48 to $50 million as sales are expected to be higher than last year.

Nathan Iles: Regarding our top-line sales, given the sales growth we saw during the second quarter, we now expect to see low to mid single-digit percentage growth in sales for the full year.

Nathan Iles: We're maintaining our expectations for adjusted EBITDA, which we expect to be in a range of 9 to 9.5%, and essentially flat with 2023. This estimate includes cost pressures, which continue to be a headwind for our vehicle control and engineered solutions segments. A U.S. dollar remains at a multi-year low against the Mexican peso.

Nathan Iles: This estimate includes cost pressures, which continue to be a headwind for a view control and engineered solution segments. A U.S. dollar that remains at a multi-year low against the Mexican peso. In fact, our expense is a 48 to 50 million as sales are expected to be higher than last year. We also have some costs related to our new distribution center in Shawnee, Kansas, which in total will be $7 to $8 million in 2024. As a reminder, we incurred about 2 million of costs for this warehouse last year, which means we have incremental costs in 2024 to 5 to 6 million, of which we estimate 3 to 4 million to start up related and will not recur.

Nathan Iles: and factory expenses of $48-$50 million as sales are expected to be higher than last year.

Eric Sills: We also have some costs related to our new distribution center in Shawnee, Kansas, which in total will be seven to eight million dollars in 2024. As a reminder, we incurred about $2 million in costs for this warehouse last year, which means we have incremental costs in 2024 of $5 to $6 million, of which we estimate $3 to $4 million is startup-related and will not recur. In connection with our adjusted EBIT outlook, we expect our interest expense on outstanding debt to be, on average, about $2 to $3 million each quarter, and we expect our income tax rate to be 25%.

Eric Sills: We also have some costs related to our new distribution center in Shawnee, Kansas, which in total will be $7 to $8 million in 2024.

Eric Sills: As a reminder, we incurred about $2 million of costs for this warehouse last year, which means we have incremental costs in 2024 of $5 to $6 million, of which we estimate $3 to $4 million is startup related and will not recur.

Nathan Iles: In connection with our adjusted EBITDA outlook, we expect our interest expense on outstanding debt to be, on average, about 2 to 3 million each quarter, and we expect our income tax rate to be 25%. Regarding operating expenses in this outlook, keep in mind our operating expenses are incurred more radically across the year, but do have some variability with sales and, as such, will fluctuate the seasonality in the business. Given this dynamic, we anticipate total operating expenses, inclusive of factoring, will range from 84 million down to 76 million as we go through the last 2 quarters of 2024.

Eric Sills: In connection with our adjusted EBITDA outlook, we expect our interest expense on outstanding debt to be, on average, about $2 to $3 million each quarter, and we expect our income tax rate to be 25%.

Eric Sills: Regarding operating expenses in this outlook, keep in mind our operating expenses are incurred more readily across the year but do have some variability with sales, and as such, will fluctuate with seasonality in the business. Given this dynamic, we anticipate total operating expenses, inclusive of factoring, will range from $84 million down to $76 million as we go through the last two quarters of 2024. To quickly wrap up, we were very pleased with our sales growth in both the quarter and first half of the year, which helped us turn in better results than expected.

Eric Sills: Regarding operating expenses in this outlook, keep in mind our operating expenses are incurred more readily across the year, but do have some variability with sales, and as such will fluctuate with seasonality in the business.

Eric Sills: Given this dynamic, we anticipate total operating expenses, inclusive of factoring, will range from $84 million down to $76 million as we go through the last two quarters of 2024.

Nathan Iles: To quickly wrap up, we were very pleased with our sales growth in both the quarter and first half of the year, which health has turned in better results than expected. As I noted, we're still seeing higher costs weighing on certain areas of the business, and we'll be reviewing ways to reduce these costs going forward.

Eric Sills: To quickly wrap up, we were very pleased with our sales growth in both the quarter and first half of the year, which helped us turn in better results than expected. As I noted, we're still seeing higher costs waiting on certain areas of the business and we'll be reviewing ways to reduce these costs going forward. Thank you for your attention. I'll turn the call back to Eric for some final comments.

Eric Sills: As I noted, we're still seeing higher costs weighing on certain areas of the business, and we'll be reviewing ways to reduce these costs going forward. Thank you for your attention. I'll turn the call back to Eric for some final comments.

Eric Sills: Thank you for your attention from the call back to Eric for the final comments.

Eric Sills: Thank you, Nathan. And just in closing, I'd like to spend a minute on how we're thinking about the future. We obviously recognize that we're in uncertain times impacted by various macroeconomic factors. But we've always felt that our industries are structurally sound and highly resilient, and in the long run, they do very well. As we look at the North American aftermarket, I believe we can feel confident that it can withstand short-term shocks, and we feel very good about our position in the market with key large non-discretionary product categories and strong customer relationships.

Eric Sills: Thank you, Nathan. And just in closing, I'd like to spend a minute on how we're thinking about the future.

Eric Sills: We've always felt that our industries are structurally sound and highly resilient, and in the long run, they do very well. As we look at the North American aftermarket, I believe we can feel confident that it can withstand short-term shocks, and we feel very good about our position in the market with key large non-discretionary product categories and strong customer relationships. Our engineered solutions business is obviously in a different stage of its maturity, but we're delighted with what we've seen. It's doing what we hoped: by creating a cohesive business unit with a coherent strategy, we have achieved critical mass to become a real supplier on the global stage.

Eric Sills: As we look at the North American aftermarket I believe we can feel confident that it can withstand short-term shocks and we feel very good about our position in the market with key large non-discretionary product categories and strong customer relationships.

Eric Sills: Our engineered solutions business is obviously in a different stage of its maturity, but we're delighted with what we've seen. It's doing what we hoped by creating a cohesive business unit with a coherent strategy. We have achieved critical mass to become a real supplier on the global stage, and soon, with Nissens acting as a third leg of our stool and all it can do for us as we integrate it, we're very bullish about the future. So that concludes our prepared remarks. At this point, we will turn it back to the moderator, and we'll open it up to your questions.

Eric Sills: Our Engineered Solutions business is obviously in a different stage of its maturity, but we're delighted with what we've seen. It's doing what we hoped. By creating a cohesive business unit with a coherent strategy, we have achieved critical mass to become a real supplier on the global stage.

Eric Sills: And soon, with Nissen's acting as a third leg of our stool and all it can do for us as we integrate it, we're very bullish about the future.

Eric Sills: And soon, with Nissens acting as a third leg of our stool and all it can do for us as we integrate it, we're very bullish about the future.

Unknown Executive: So that concludes our prepared remarks. At this point. We will turn it back to the moderator, and we'll open it up for your questions. Thank you.

Eric Sills: So that concludes our prepared remarks. At this point, we will turn it back to the moderator and we'll open it up for your questions.

Operator: Thank you. And at this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue by pressing star two. Once again, that is star one to ask a question, and we will take our first question from Scott Stember on Roth MKM. Please go ahead.

Unknown Executive: And at the time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing Star 2.

Operator: Thank you. And at this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2.

Scott Stember: Once again, that is star 1 to ask a question, and we will take our first question from Scott Sember with Roth MKM. Please go ahead. Good morning, guys. And thanks for taking my questions.

Scott Stember: Once again that is star one to ask a question and we will take our first question from Scott Stamber with Roth MKM. Please go ahead. Good morning guys and thanks for taking my questions.

Scott Stember: Good morning, guys, and thanks for taking my questions. Good morning, Scott.

Eric Sills: Morning, Scott. In the vehicle control segment, nice rebound from the flash results of the first quarter. Some of your customers have reported, I guess, a sluggish demand, notably, I guess, in some of the hard parts areas. And I'm just trying to get a sense of what you guys saw at POS retail and how that's affecting orders as we stand right now from your customers. Well, thank you, Scott. And I think agree what you're hearing more from them, but is that they're seeing softness more in front room and DIY type product, but also to a degree.

Eric Sills: In the vehicle control segment, a nice rebound from the flattish results of the first quarter. You know, some of your customers have reported, I guess, sluggish demand, notably, I guess, in some of the hard parts areas. And I was just trying to get a sense of what you guys saw at POS retail and, you know, how that's affecting orders as we stand right now from your customers.

Speaker Change: Good morning, Scott.

Eric Sills: in the vehicle control segment nice rebound from the flattish results of the first quarter you know some of your customers have reported I guess sluggish demand notably I guess in some of the hard parts areas

Eric Sills: and just trying to get a sense of what you guys saw at POS retail and you know how that's affecting orders as we stand right now from your customers.

Eric Sills: Thank you, Scott, and I think you're hearing more from them, but it is that they're seeing softness more in the front room and DIY type product, but also to a degree more or less by the different distributors in some of the backroom product as well. What we've seen over the course of the quarter is that our POS, their sales out, have been roughly flat to perhaps slightly down, but we think that that's just kind of the normal ebbs and flows in any given period. And so it roughly tracks with what's with what.

Eric Sills: Thank you, Scott, and I think.

Eric Sills: I can agree with what you're hearing more from them, but...

Eric Sills: is that they're they're seeing softness more in front room and DIY type product but also to a degree

Eric Sills: You know, more or less by the different distributors in some of the background product as well. What we've seen over the course of the quarter is that our POS, their sales out, has been roughly flat, perhaps slightly down, but we think that that's just kind of the normal ebbs and flows in any given period. And so roughly tracks with what they're purchasing for us. Okay, really no change from that low single digit. Full process going forward. Correct.

Eric Sills: more or less by the different distributors in some of the backroom product as well. What we've seen over the course of the quarter is that our POS, their sales out, has been roughly flat, perhaps slightly down, but we think that that's just kind of the normal.

Eric Sills: ebbs and flows in any given period and so roughly tracks with what they're purchasing from us.

Eric Sills: Okay, so really no change from that low single-digit, full process going forward. Correct.

Eric Sills: full process going forward.

Eric Sills: All right, and on the right front, it seems increasingly likely, or at least what the market is telling us, is that we'll probably see a couple of rate cuts. Can you just remind us, I guess, net of any potential price givebacks? How that could benefit you and how fast that would happen on the fact. on the other side. Yeah, so Scott, just to put a little bit of a marker on it, if you think about our factoring programs, there's about $800 million of sales on those programs. Every 25 basis point move is essentially worth about $2 million for us on those programs. So that's a way to think about increases or cuts as they happen.

Nathan Iles: All right, and on the rate front, it seems increasingly likely, or at least what the market's telling us is that we'll probably see a couple of rate cuts. Can you maybe just remind us, I guess net of any potential price givebacks? How that could benefit you and how fast that would happen on the factoring side.

Nathan Iles: Correct.

Nathan Iles: All right, and on the rate front, it seems increasingly like, or at least what the market is telling us, is that we'll probably see a couple of rate cuts. Can you maybe just remind us, I guess, net of any potential price givebacks?

Speaker Change: how that could benefit you and how fast that would happen on the factoring side.

Nathan Iles: Yeah, yeah, Scott, just to put a little bit of a marker on it. If you think about our factoring programs, there's about $800 million in sales on those programs. Every 25 basis point moved is essentially worth about $2 million for us on those programs. So that's a way to think about, you know, increases or cuts as they happen. I would just say that if you think about the rate that we follow for that.

Nathan Iles: Yeah, so Scott, just to put a little bit of a marker on it, if you think about our factoring programs, there's about $800 million of sales on those programs.

Nathan Iles: Every 25 basis point moved is essentially worth about $2 million for us on those programs.

Nathan Iles: So that's a way to think about, you know, increases or cuts.

Eric Sills: I would just say that if you think about the rate that we follow for that, it's a 360-day SOFR rate, and given that, that rate has been baking in some cuts in the back half of the year all year since we came into the year in January. And so this recent Fed announcement, essentially being in line with that, doesn't change our outlook a whole lot at this point. Got it.

Nathan Iles: as they happen. I would just say that if you think about the rate that we follow for that, it's a 360-day SOFR rate.

Nathan Iles: So 360-day SOFR rate. And given that that rate has been baking in some cuts in the back half of the year all year since we came into the year in January, and so this recent Fed announcement essentially being in line with that doesn't change our outlook a whole lot at this point.

Nathan Iles: and given that that rate has has been baking in some cuts in the back half of the year all year since we came into the year in January and so this recent Fed announcement essentially being in line with that doesn't change our outlook a whole lot at this point.

Scott Stember: Got it. That's all I have for now. I'll jump back in the queue. Thanks. Thank you, Scott.

Scott Stember: That's all I have for now. I'll jump back into you. Thanks.

Scott Stember: Got it. That's all I have for now. I'll jump back into the queue. Thanks.

Unknown Executive: I'll just go.

Brett Jordan: Our next question comes from Brett Jordan with Jeffries.

Bret Jordan: Our next question comes from Bret Jordan with Jeffreys. Please go ahead.

Bret Jordan: Thank you, Scott.

Eric Sills: Please go ahead. Hey, good morning, guys. Hi, Brett.

Speaker Change: Our next question comes from Brett Jordan with Jeffries.

Bret Jordan: Morning, Bret. Morning. Talk about what you're seeing in inventory at your customers for temperature control. If we stay hot through August into the fall, is there likely another round of ordering, or are they reasonably stocked?

Bret Jordan: Please go ahead.

Eric Sills: Good morning. Talk about what you're seeing and inventory at your customers and temperature control. We stay hot through August into the fall, or is there likely another round of ordering, or are they reasonably stocked? Well, our inventory visibility is a little bit delayed, so we really see it more through June and what happened in the last several weeks. We're not as attuned to what we saw through the quarter was that their shelves stayed pretty flat, which means that we were able to keep up with their demand and keep their shelves where they wanted them. As we think about what their cell through was in July versus their purchases, we anticipate that that's continued to track.

Bret Jordan: Hey, good morning, guys.

Speaker Change: Morning, Brett. Morning. Talk about what you're seeing and inventory at your customers and temperature control. If we stay hot through August into the fall or is there likely another round of ordering or are they reasonably stocked?

Eric Sills: Well, our

Eric Sills: Our inventory visibility is a little bit delayed. So we really see it more through June and what happened in the last several weeks. We're not as attuned to what we saw through the quarter was that their shelves stayed pretty flat, which means that we were able to keep up with their demand and keep their shelves where they wanted them. As we think about what their sell through was in July versus their purchases, we anticipate that that continued to track.

Eric Sills: Well our

Eric Sills: Our inventory visibility is a little bit delayed, so we really see it more through June and what happened in the last several weeks.

Eric Sills: were not as attuned to, what we saw through the quarter was that their shelves stayed pretty flat, which means that we were able to keep up with their demand and keep their shelves where they wanted them.

Eric Sills: As we think about what their sell-through was in July versus their purchases, we anticipate that that's continued to track.

Eric Sills: And the heat is now continuing throughout much of the country, so we're pretty pleased with that. And what that tends to show, but time will tell, is that prolonged heat tends to have replenishment orders continuing throughout the season as opposed to in a different cadence to a summer where they may start to taper off. We're not anticipating this at this time, but it's still early days, and we'll see what happens throughout the balance of the summer.

Eric Sills: And the heat is now continuing really throughout much of the country. So we're pretty pleased with that.

Eric Sills: and the heat is now continuing really throughout much of the country, so we're pretty pleased with that. And what that tends to show, but, you know, time will tell.

Eric Sills: And what that tends to show, but time will tell, is that prolonged heat tends to have the replenishment orders continuing throughout the season as opposed to in a different cadence to a summer where they may start to taper off the replenishment orders. We're not anticipating this at that at this time, but it's still early days, and we'll see what happens throughout the balance of the summer.

Eric Sills: is that prolonged heat.

Eric Sills: tends to have the replenishment orders continuing throughout the season as opposed to in a different cadence to a summer where they may start to taper off the replenishment orders. We're not anticipating this at that at this time but you know it's still early days and we'll see what happens throughout the balance of the summer.

Eric Sills: Okay. And then I guess, what's your outlook on pricing? You talked about inputs, input costs being up, obviously factoring. You know, do you think about, you know, how receptive are your primary customers to price increases for the balance of the year? Like, what do you see as inflation on the price side?

Eric Sills: Okay. And then I guess what's your outlook on pricing? You talked about inputs, input costs being up, obviously factoring. If you think about how receptive are your primary customers to pricing increases for the balance of the year, like what do you see as inflation from the price side? Well, as we've always said, we do our best to cover inflation through a combination of pricing and cost reduction. It is a competitive market. I think that the receptivity is challenging, but beyond that, really can't get into any specific customer discussions. There's a lot that goes into it, and we do our best.

Eric Sills: Well, as we've always said, we do our best to cover inflation through a combination of pricing and cost reduction. It is a competitive market. I think that the receptivity is challenging. But beyond that, I really can't get into any specific customer discussions. There's a lot that goes into it. And we do our best.

Eric Sills: Okay, and then I guess one last question: you commented about new business wins and vehicle control. Is that bringing business back that might have gone to direct import programs, or is that business taken from, you know, sort of more normal peers like Wells Fargo? I'm not going to get into that.

Eric Sills: Okay. And then I guess, look, one last question: you commented about new business wins and vehicle control. Is that bringing business back that might have gone to direct import programs, or is that business taken from, you know, sort of more normal peers like well? I'm not going to get into the specifics of the Bret, but that just in general there's always certain nominal wins and losses we tend to win more than we lose, and so that's really what we see here. But in terms of who we got it from, I can't get into that.

Eric Sills: I'm not going to get into the specifics of it, Bret, but just in general, there are certain nominal wins and losses. We tend to win more than we lose. And so that's really what we see here. But in terms of who we got it from.

Brett Jordan: All right, thanks. Thank you.

Carolina Jolly: And again, if you would like to ask a question, please signal by pressing star one, and our next question will come from Carolina Jolly with Cabelli. Please go ahead. Hi, thanks for taking my question.

Carolina Jolly: And again, if you would like to ask a question, please signal by pressing star 1. And our next question will come from Carolina Jolly with Cabeli. Please go ahead.

Carolina Jolly: Hi, thanks for taking my question. Just a quick note on overall inventories. I know Bret asked about temp control, but just overall inventory in the market, how do you feel about that?

Eric Sills: Just a quick no on overall inventories. I know Bret asked about temp control, but it's overall the inventory in the market. How do you feel about that?

Eric Sills: Good morning, Carolina. And so on the vehicle control side, again, very similar. We're seeing that inventory is stable month over month, so there's no specific inventory strategy shift for any of our customers. They have what they want to have and are operating accordingly.

Eric Sills: Good morning, Carolina. And so on the vehicle control side, again, very similar, we're seeing that inventory is stable month over month. So there's no specific inventory strategy shift for any of our customers; they have what they want to have in our operating according

Eric Sills: Good morning Carolina and so on the vehicle control side again very similar we're seeing that that inventory is stable month over month so there's no

Eric Sills: And then also you discuss leases, some of the pressure from leases. I know you you talked about kind of if the interest rate lowers the impact from the factoring. Would there be any benefit on that lease expense? Yeah, so Carolina, we renew leases over time, just as they come to. So I don't think lower rates will have any impact on what we've already renewed over the last couple of years, but certainly going forward, that should be some sort of a benefit as we look at the renewals. Great. Thank you.

Carolina Jolly: And then also you've discussed leases, some of the pressure from leases. I know you talked about how the interest rate lowers the impact from the factoring. Would there be any benefit to that lease expense? Yes, so Carolina, we...

Carolina Jolly: operating accordingly.

Speaker Change: And then also you discussed leases, some of the pressure from leases. I know you talked about kind of if the interest rate lowers, the impact from the factoring. Would there be any benefit on that lease expense?

Nathan Iles: Yes, so Carolina, we renew leases over time just as they come to, so I don't think lower rates will have any impact on what we've already renewed over the last couple years. But certainly, going forward, that should be some sort of a benefit as we look at the renewals.

Nathan Iles: Yes, so Carolina, we renew leases over time just as they come to, so I don't think lower rates will have any impact on what we've already renewed over the last couple years, but certainly going forward that should be some sort of a benefit as we look at the renewals.

Carolina Jolly: Great, thank you.

Unknown Executive: And with no further questions, I'd like to turn it back to our presenters for any additional or closing remarks. Okay. Well, we want to thank everyone for participating in our 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.

Operator: And, with no further questions, I'd like to turn it back to our presenters for any additional or closing remarks.

Operator: And with no further questions, I'd like to turn it back to our presenters for any additional or closing remarks.

Eric Sills: Okay. Well, we want to thank everyone for participating in our 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 in our press release or Investor Relations website.

Unknown Executive: Hope you have a great day. Thank you.

Unknown Executive: And this will conclude today's conference. Thank you for your participation, and you may now disconnect. Thank you. ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶ ¶

Operator: Hope you have a great day. Thank you. And this will conclude today's conference. Thank you for your participation, and you may now disconnect.

Operator: And this will conclude today's conference. Thank you for your participation, and you may now disconnect.

Operator: [inaudible]

unknown: .......

unknown: [inaudible]