Standard Motor Products, Inc. Q3 FY2022 Earnings Call

Good day, everyone, and welcome to today's Standard Motor Products Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call is 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.

Thank you. Good morning, everyone, and thank you for joining us on Standard Motor Products Third Quarter 2022 Earnings Conference Call. I'm Tony Cristello, Vice President of Investor Relations. And with me today are Larry Sills, Chairman of the Board; Eric Sills, President and CEO; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer. On our call today, Eric will provide an overview of our performance in the quarter followed by Jim, who will give an update on the operations and supply chain. Nathan will discuss our financial results, and Eric will then 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, and welcome to our third quarter earnings call. I'd like to begin by recognizing all of the SMP employees worldwide. We continue to operate in a challenging environment, and our people have helped us successfully navigate it. We just can't thank them enough. Overall, we're pleased with our top line performance, which marked our ninth consecutive quarter of record-breaking sales. We were up 3% over last year's with both divisions showing gains. Moreover, sell-through continued to be strong, demonstrating the ongoing health of the marketplace and the continued success of our programs with our customers. Let me review each segment, beginning with Engine Management. Engine Management sales were up nearly 2% with various moving pieces. After a post-pandemic bump, the Wire and Cable portion of the line has returned to its secular decline down about 5%. But excluding this, the balance of Engine Management was up 3.2%, a combination of pricing actions and generally robust demand. This was also reflected in aftermarket customer POS, which, excluding Wire and Cable, remained positive in the quarter even when compared to outsized growth last year. Temperature Control continues at its solid pace, surpassing last year's sales by 3.3%. However, I think it's more insightful to look at this segment on a year-to-date basis due to how seasonality can shift demand across quarters. And year-to-date, we are ahead by nearly 11%. This strong performance is a combination of a long hot summer even when compared with last year's record heat, compounded by pricing actions taken during the year. As with Engine Management, customer POS was robust throughout, attributable to the warm weather across the country and our ability to retain in-stock positions during a difficult supply chain environment. While top line sales remain favorable, margins have presented a challenge. I'll touch on it, and Jim and Nathan will delve deeper. Along with the rest of the world, all year long, we have been experiencing elevated costs across many inputs. The industry has been largely receptive to passing it through, though there is always a lag in timing. Meanwhile, as discussed on our last call, the rapid increase in interest rates, which affect our receivables factoring programs, is creating a significant headwind. And while we are working diligently to adjust for it, both through cost reduction and pricing initiatives, it's impacting our bottom line, as Nathan will speak to. So let me talk for a bit about what we've been seeing in the market and how we are thinking about the future. I'll start with our aftermarket business, which makes up about 3/4 of our total revenue. The basic overall backdrop continues to show favorable trends. The vehicle fleet is aging. The lack of new vehicle availability is causing motorists to repair and maintain the vehicles they have. Gas prices peaked and have now substantially dropped, and we were pleased to see it had a negligible impact on miles driven. And while we are heading into a potentially recessionary environment, the aftermarket tends to outperform. Furthermore, our product categories tend to fare even better during difficult economic times. First off, they are largely nondiscretionary, meaning the vehicle is not operating properly and repair is necessary. And secondly, our products tend to be professionally installed. And while independent garages surely have product choice, they are less inclined than do-it-yourselfers to trade down to lower-grade products as avoiding vehicle comeback is more important than saving cost, which gets passed on to the car owner anyway. Plus, we believe that our market strategy, which focuses on the do-it-for-me market, continues to be very well received by the customers. Additionally, our lesser reliance on the far east for our supply of goods is a major advantage over some of our competitors. It has allowed us to ship at higher levels than many and has helped our direct customers better service their end customers. So while there will always be challenges, the marketplace and our position within it are very strong. Meanwhile, our specialized non-aftermarket business has remained robust, and we are very excited about where we're headed with the strategy. As we've been discussing on the last several calls, this business focuses on selling custom engineered products into niche on-highway and off-highway end markets such as heavy-duty, construction and agricultural equipment, power sports and others. With our recent history of acquisitions in this space, along with many organic business wins, we now enjoy a run rate of about $300 million in sales. Not only is it diverse in the end markets it serves, it's diverse geographically with strong sales in Europe and Asia as well as North America. A few weeks ago, we finalized another acquisition, Kade Trading, just outside Hamburg, Germany. SMP has a long history with Kade Trading. They have been the European sales arm for our Chinese joint ventures, selling to niche OE customers throughout Europe. Having them be a part of SMP provides a great strategic step forward. They bring the customer relationships, and as we look to integrate the various pieces of this new market strategy, they present excellent cross-selling access. We welcome them to the SMP team.

Thank you, Eric. Good morning. Similar to past quarterly calls, I will provide some insight from an operational perspective. The most prevalent headwind we are facing is from inflationary pressures. Material cost increases have been running in the high single digits in 2022 on top of the similar level increases experienced in 2021. Certain product categories, such as electronic components, have increased on average 25% to 30%, and you're actually fortunate if you can procure your requirements. We have seen moderation on commodity-based metals from earlier peaks in 2022, but current year average costs still exceed 2021 levels. In addition, our material vendors are also experiencing similar labor and overhead increases, inclusive of wages, benefits, utilities and transportation that they are passing on to their customers. On a more positive note, transportation container costs from overseas in Q3 have dropped below $5,000 per container. In addition to the container cost reductions, we are seeing relief at the ports from vessel backlogs. This will allow us to gradually reduce supplier lead times impacting our increased inventory levels. On our prior second quarter earnings call, I stated that our Q2 inventory levels should have peaked, and I anticipated inventory reductions for the balance of the year. During Q3, inventory levels dropped $17 million, and I anticipate further reductions in Q4. From an operational perspective, we are very fortunate to have our significant North American manufacturing footprint. This has allowed us to better control our flow of goods as opposed to other manufacturers that source 100% from overseas. Nathan will review our gross and operating margins in more detail, but I want to elaborate on our internal cost reduction efforts besides just pricing to offset these inflationary pressures. Our purchasing, engineering and manufacturing teams together are focused on low-cost sourcing, redesign efforts for substitute materials, reducing costs through manufacturing cell automation, first buy programs and our ESG efforts, reducing energy usage and waste. These internal cost reduction programs have yielded significant savings, and we are pleased with the sequential margin improvements achieved from the second quarter to the third quarter. However, due to uncertainty, we still are expecting inflation across materials, labor and overhead along with cost increases from higher interest rates. In closing, we believe our core strategy focused on delivering premium products with superior customer service offers our customers a compelling value proposition. I thank our worldwide employees for their efforts, making us on being a premier supplier in our industry. Thank you, and I will turn the call over to Nathan for his financial perspective.

All right. Thank you, Jim. As we go through the numbers, I'll first give some color on sales and margins for each division, then look at the consolidated results, cover some key balance sheet and cash flow metrics, and finally, provide an update on our financial outlook for the full year in 2022. First, looking at Engine Management. You can see on the slide that Q3 net sales of $251.7 million were up $4.6 million or 1.9% versus the same quarter last year. But excluding Wire and Cable sales, which have returned to secular decline, sales were up $6.6 million or 3.2%, with the increase being a result of higher pricing and robust demand, as Eric highlighted. For the first nine months, sales in engine of $732.9 million were up 5.8%. But excluding sales of Wire and Cable, year-to-date sales were up 7.6% with the increase driven by sales from acquisitions made last year, higher pricing and strong demand. Looking at the margin for engine. Third quarter gross margin rate was 26.2%, down 0.9 points from last year mainly due to inflation in our costs, but also due to lower production volumes as inventory levels moderate. Engine's gross margin for the first nine months was 26.5% and was down from last year, mainly as a result of higher material and labor costs from persistent inflation not experienced to the same degree during the first nine months of 2021 and increased transportation expenses resulting from stocking higher levels of inventory. Before I leave the topic of gross margin for Engine Management, I'd like to point out that the margin did improve by 0.4 points from the second quarter. This improvement was a result of additional pricing pass-through to customers and our cost savings initiatives. And going forward, we expect to continue to take both additional pricing and cost savings actions to address inflation as necessary. Turning to Temperature Control. Net sales there in Q3 2022 were up $3.9 million or 3.3%. And for the first nine months, were up $30.7 million or 10.7% with the increases mainly reflecting a very strong summer season and higher pricing, both of which helped the division to outpace a record year last year. The gross margin rate for Temperature Control in the quarter was 28.8%, an increase of 0.4 points from last year, while the gross margin rate for the first nine months of 27% was down 0.2 points from last year. The increase in margin for the quarter was mainly due to another record sales year, while the slight decrease for the first nine months was due to cost inflation and some higher transportation expenses related to stocking higher levels of inventory. Turning to our consolidated results. Our consolidated net sales reflected the growth we saw in each division with the third quarter up 3% versus last year and the first nine months up 7.6% versus last year. Our consolidated gross margin rate was down for the quarter and first nine months for the reasons noted before. But for each of these periods, we were pleased to report higher gross margin dollars on the back of strong sales growth. Additionally, our consolidated gross margin rate did improve from 26.8% in the second quarter to 28% in the third quarter, helped by the strength of the temp control season but also our pricing and cost savings actions. Moving now to SG&A expenses. Our consolidated SG&A expenses increased for both the quarter and first nine months as rapidly rising interest rates continue to drive expenses from customer factoring programs higher. Our consolidated SG&A expenses increased by $6.7 million in the quarter and included $7.6 million of incremental factoring costs. Of note, excluding these incremental factoring costs, our core SG&A expenses were down $0.9 million and as a percentage of sales would have been better than last year. SG&A expenses for the first nine months increased by $21.2 million and included $13.1 million of higher factoring costs and $7.2 million of additional costs from acquisitions. Like I noted for the quarter, excluding incremental factoring costs for the first nine months, our SG&A as a percentage of sales would have been better than last year. As we noted in our release this morning, we expect to implement price increases to address the climbing cost of our customers' factoring programs. With respect to profitability, consolidated operating income, as shown here on the slide, was 8.8% of net sales for the quarter and 8.3% for the first nine months of the year. And earnings per share and EBITDA were lower than last year for the reasons already discussed. Turning now to the balance sheet. Accounts receivable of $230.4 million at the end of the quarter were up $49.8 million from December 2021 with the increase typical of the seasonal nature of the business and mainly a result of higher sales during the quarter. Inventory levels finished Q3 at $534.3 million, up $65.6 million from December 2021, with the increase a result of higher sales levels this year and a strategic investment in inventory, to both make sure we meet our customers' delivery expectations and to buffer against supply chain volatility. As we work through our peak seasonal inventory needs, our inventory was reduced $17.1 million from the June 30 levels. Looking at cash flows. Our cash flow statement reflects cash used in operations in the first nine months of $75.5 million as compared to cash generated of $79.1 million last year, with the biggest driver of cash usage being working capital. Use of cash from working capital mainly stemmed from making strategic investments in inventory as noted, but also the impact of lower accounts payable now that inventories have begun to decline. Regarding investing activities, we continue to invest in our business and used $19.5 million of cash for CapEx during the first nine months, which was flat with last year. Our financing activities included returns to shareholders in the form of $17.6 million of dividends paid and another $29.7 million paid for repurchases of our stock. Financing activities also included $141.5 million of borrowings, which were used to fund our operations, strategic investments and returns to shareholders. While our borrowings are higher this year, we still finished the quarter with low total debt leverage of 1.7x EBITDA. Finally, I want to give an update on our sales and profit expectations for the full year of 2022. Regarding our top line sales, we expect full year '22 sales growth in percentage terms to be in the mid-single digits. This reflects both the sales growth we've seen through three quarters this year, and the fourth quarter, we expect to be roughly flat with last year as it's up against a difficult comparison from a year ago and always hard to predict. With regard to margins and operating profit, you can see from our results that while our gross margin rate is still under inflationary pressures, we did improve from where we were in the second quarter. Additionally, you can see that despite rising customer factoring costs, our SG&A expenses remain well under control. As such, we are maintaining the updated full year expectations we provided in August, which is that for the full year of 2022, we expect consolidated gross margin will be approximately 27% and consolidated operating profit will be in the range of 7% to 8%. To wrap up, we are pleased to report strong sales growth while even up against a record year last year and gross margin improvement sequentially from last quarter. We thank all of our employees for helping us achieve these results and remain confident in our team's ability to navigate the evolving landscape.

Well, thank you, Nathan. In closing, let me reiterate that we're pleased with where we're headed. We surely acknowledge that there are many headwinds, including cost increases, supply chain issues and a potential economic downturn, but we view these as relatively short term in nature. As we look to the longer term, we're very excited about our future. Needless to say, technological shifts are heading our way, but SMP is well positioned to capitalize on them. As we've done for over 100 years, we evolve with automotive technology. As we head towards vehicle electrification, we are pleased that already about half of our sales are in product categories that are not ICE-dependent, that they're either powertrain neutral, meaning that they are not affected by whether it's an internal combustion engine or not, while other products are specifically targeting these new systems. We're particularly excited about our rapid growth in selling electric compressors to EVs, which is now a global business for us. We are also aftermarket leaders in ADAS products, the advanced safety systems on today's vehicles. And while the market for these products remains in their infancy, we are there with programs as they mature and gain demand. Meanwhile, as we all know, the aftermarket enjoys the luxury of time. While there is no doubt an acceleration in technology change in new vehicles, it takes many years before they become a meaningful part of the car park and even longer for them to hit their sweet spot. We continue to invest in our company. We have hundreds of engineers focused on new product development and are bringing new technologies into our plants. We've been focused on strategic acquisitions, strengthening our global footprint and gaining access to complementary markets. And I believe we have the strongest team we've ever had. And so we're in a great place to capitalize on our future. So that concludes our prepared remarks. At this point, I'll turn it over to the operator, and we'll open it up for your questions.

Our first question comes from Daniel Imbro with Stephens Inc.

I want to start on the pricing dynamic. I think you all touched on it during the prepared remarks, but continuing to pass through maybe further inflation here in the fourth quarter, and I know it's early, but can you talk about any cadence you expect over the next 6 to 12 months? Should we expect further price increases to continue into next year? Are you seeing any pushback from your customers, or in turn, their customers? Just trying to think about how you guys think about pricing and further inflation in the backdrop as we move forward from here.

This has been a changing situation over many quarters, and we've been addressing cost increases that initially centered around materials and freight. Currently, the biggest challenge is the rising interest rates and their impact on our factoring programs and overall debt. We're actively working to manage these cost increases, and as we've mentioned, we have a two-pronged strategy. One part focuses on our internal cost reduction efforts because we acknowledge our role in managing these expenses, which involves traditional cost-cutting measures. The other part is addressing pricing. We're making progress, but I can't provide specific timing for further pricing actions. We plan to closely monitor inflation and respond appropriately. Regarding the impact on our customers and their clients, we've observed that our products are mostly resistant to price sensitivity because they are essential and require professional installation. This means that car owners, who need repairs, often don't have much choice in expenditure and typically aren’t fully aware of the costs, as these are nonrecurring expenses for them. Therefore, inflation tends not to markedly affect demand in the end market.

That information is really useful, thank you. I have two questions about the Temperature Control segment. First, what is the current state of industry inventory levels? You mentioned your inventory earlier, Nathan, but how do industry levels look after a strong quarter? Given the warm summer, are we heading into winter with low inventories in preparation for next year? What does this mean for next year's temperature control?

Specific to Temperature Control, what we see is that the customer inventories for those that would have visibility in were relatively consistent throughout the quarter, basically showing that their purchases match their sales. And so as we go towards the fourth quarter and the off-season, their inventories are really in pretty good shape.

Great. And then second one on Temp Control. You mentioned synergies from the Kade acquisition and kind of the opportunity in Europe. Can you just help size up like how big the opportunity is in Europe or maybe you provide more color on the potential synergies you see from that business?

Certainly. As we mentioned in our announcement a few weeks ago regarding the deal, Kade Trading is relatively small, generating about $6 million in revenue. We found that we represented most of what they sold, which consisted of products we manufacture in Asia and that they distribute in the European original equipment market. The opportunity here is another component of our broader non-aftermarket global business, focusing on these niche original equipment channels, including commercial vehicles, which is a significant market for Kade, as well as construction and agricultural sectors. Many of these accounts are global and require local support. Kade has established great relationships in Europe, where we did not have a significant presence for our Temperature Control products. This opens up new doors for us, as these accounts prefer to work directly with manufacturers. Kade has functioned more as a trading company, and this partnership allows us to engage directly with customers as the product manufacturer. While we don't have specific targets to discuss, we view this as an important addition to our overall strategy as we seek to navigate the global niche OE marketplace with our expanded range of products.

We'll take our next question from Scott Stember with MKM Partners.

In the current environment with interest rates, could you discuss your perspective on your debt structure moving forward? Assuming no changes, what is the annualized interest expense we should anticipate for the credit revolver and other components?

Yes. So Scott, it's Nathan. We believe our capital structure is very adequate for where the business is today. We just did a refinancing back in June that gave us a lot of additional capacity, borrowing capacity, really shored up the liquidity position of the Company. So we feel really good about that, and nothing changed on that front. I think with regard to factoring, in particular, we talked about this on the last quarter's call, I think the way to think about it is with sales that are factored roughly $800 million, each 1% moving interest rates obviously is about $8 million. And so if you just look at the interest curves that are out there, that would give you a flavor for where we're at.

And just a pure interest expense number?

Yes. So Scott, I think it's disclosed in the 10-Ks, 10-Qs, but we're on a 30-day SOFR rate. Obviously, our borrowings at the end of the quarter were about $270 million. And so we'll expect to pay down the borrowings as the inventory levels reduce, but that's kind of what we're looking at today for interest rates.

Okay. Looking at the other 25% of the business specialized, could you maybe talk about how you would expect that to perform in the event that we really do go into a recession next year?

Sure, Scott. The way we view it is that we really are selling into multiple end markets with a relatively good balance across them. So we're not beholden to any one particular end market such as, say, power sports. So we believe that any volatility you would see in difficult economic times in these end markets somewhat get dampened by that diversification, and so we'll obviously watch it closely. But we feel reasonably comfortable that we have that hedging across the different markets.

Okay. And just last question, after the Kade acquisition. Just trying to figure out if this is a way to move into heating products? Or is this more just the way to get into AC in Europe?

What we're observing is that both in the non-aftermarket segment and the aftermarket of our business, the focus is on various types of thermal controls. While air conditioning is a component, we are also experiencing significant growth and opportunities in battery cooling and engine cooling technologies. This movement was partly initiated by our joint venture in China, CYJ, which is developing electric compressors, aimed not just at passenger compartment air conditioning but also at battery cooling for heavy-duty vehicles like trucks and buses. This expansion paves the way for these types of programs. I anticipate that we will hear the term thermal management referenced more frequently in this sector, as its relevance extends beyond just air conditioning.

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

In the old days, we used to talk or we used to see Engine Management margins that would bump over 30%, and you used to sort of talk about that having a gradual upward bias. Is that mix structurally different now that those margin levels are off the table? Or is there a potential to get back up to higher margin rates?

Yes. So Bret, what we talked about, I think, earlier this year was with the mix shift to the more specialized initial OE business, we thought the margin range would be 28% to 29% rather than up above there. And so when you think about it from a long-term perspective, we would expect to get back into that range when things normalize, whenever that happens. And then to your point, we always have our continuous improvement programs that help us nudge up a bit each year.

Okay. Because that was my question, I guess, on the non-OE business, how do you see that shaking out from a margin potential standpoint? It's obviously it seems lower gross but maybe comparable EBIT.

Yes, that's right. That's the right way to think about it, lower gross margins but lower operating expenses to service that channel. And so operating profit and EBITDA are really right in line with where the aftermarket has been historically.

Okay. And I guess, did you say what the contribution of units versus price was in the roughly 3% growth in the quarter?

I did not say, and there's a lot of moving pieces in there. And we don't have any specific data, but intuitively, I believe it is more about price than unit volume growth.

Okay. Great. And I guess one question, I guess, sort of following up on the pricing request to offset some of the factoring expenses. Are you seeing inversely any pressure from your customers asking for price concession, given things like shipping costs have come down and some of the material inputs?

We're in a competitive market for sure, Bret, and nothing new about that. And so we have ongoing discussions with all of these accounts. We also believe we have very strong relationships with all of them and a mutual understanding of the benefit of the partnership that we enjoy and how that helps us both downstream in the market. So we work closely with them, and that's all I have to report on that.

Okay. Great. If I could slip one more question in on power sports because a peer is also involved in the space. Is this strategy to distribute parts through your traditional retail partners? Or is this a completely different customer base that you're selling that product into? I guess is it on the OE side? Is there an aftermarket component to that segment?

It's entirely focused on the original equipment side. There is a small amount of service parts available through their dealership network. However, it is not an aftermarket distribution strategy at all. The focus is solely on new vehicle production.

We'll take our next question from Robert Smith with Center for Performance Investing. It's completely on the OE side. There is a little bit of service parts through their dealership network, but no, it's not an aftermarket distribution play at all. It's all about new vehicle production.

Could you give me some color on what's happening currently in China as far as it might affect you in your relationships?

Thank you for the question, Robert. I want to highlight that we have two main purposes for being there. First, we aim to support our North American aftermarket business by providing low-cost, high-quality products. However, this aftermarket business is a relatively small segment of our overall operations. We have a substantial amount of redundancy and diversification in our supply chain, which helps mitigate risks. The second purpose, which I believe is more strategically important, is to serve the Chinese original equipment market and the global market from that location. We are very pleased with the performance of our joint ventures. I want to emphasize the joint venture that produces electric compressors, which has been particularly successful, but all of them are performing well. They are all preparing for new energy vehicle technology in both China and globally. We are closely monitoring the current geopolitical tensions and remain optimistic about our efforts there.

Okay. In the non-aftermarket acquisition landscape, I assume that your acquisitions are quite opportunistic. I’m curious about the future cadence of this. Do you anticipate one or two acquisitions a year, or how do you see this developing further?

Robert, this is Jim Burke. We don't set a target or goal for completing a specific number of acquisitions each year or link it to a particular revenue growth. Our approach is focused and disciplined, ensuring that any acquisitions align with our current product categories and potentially expand into both aftermarket and non-aftermarket channels. Our team continuously evaluates market opportunities as they arise, and we are pleased with what we have achieved so far. We remain optimistic about future opportunities, but we do not have a specific target in mind.

Well, looking at, say, five years, do you have any idea as to what the percentage of category might have in the overall picture? You're at 25% now, I guess.

We don't have any specific expectation. And frankly, we expect to grow both sides of the business, but we do recognize that in our non-aftermarket area, it presents itself with far greater opportunities largely because we're starting from such a low point, but also because it's more global, it's more diverse. There's so many different end markets to target that we really are just very excited about the potential growth opportunities. Similar to Jim's answer on acquisitions, we don't set ourselves with a particular target. We try to do things prudently and opportunistically and chase the right programs. And so we're excited about the progress we're making, and we see that really the sky is the limit on this area of our business.

And looking at this, would you say that most will be accretive as far as looking at a 12-month period?

Yes, Robert. We would expect the acquisitions that we do to be accretive to the bottom line, certainly within the first 12 months, and that's typically what we target.

Yes. How about the labor picture as far as cost, supply availability and retention? What's happening with you guys?

Robert, this is Jim Burke, again. We've been facing pressures on there, everybody with the inflationary pressures that we have. But the shortage of labor especially when we were in season, and I'm speaking specifically more towards the distribution end, that was a challenge, securing warehouse distribution, people and specifically specialized drivers that are there. We've got over the hump with the season being a peak season. And again, we're converting many of our temporary workers that we bring on board to full-time employees and offer and show them the benefits of being a full-time employee with the benefits that SMP offers.

And your retention rates?

Retention rates are a key focus for us. In recent years, turnover was very high due to strong demand, particularly in the warehouse and distribution sectors, which led to the offering of short-term hiring bonuses. We have made efforts to establish a more stable workforce and highlight the advantages of being a long-term employee. As a result, I believe our turnover rate has decreased to a more manageable level.

Let me just add one thing to that. The high turnover that Jim was speaking to within our hourly associates tends to be in the most junior of our employees. We find that once our people spend a couple of years with us, they stay with us for life. And we're very proud of that. We're especially proud of that when you look in our salaried and professional ranks. Our turnover has been extremely low during these last couple of years when you hear about some of the challenges that a lot of other companies have had, notions of The Great Resignation and so on. We believe that our employees truly enjoy working with us, and we have not seen that type of turnover that a lot of other companies have spoken to. We're really very proud of that.

Yes, it sounds good. And just finally, there's been so much written about bringing production back to the United States. Any thoughts on this?

There have been times when we have brought production back. We are also examining automation, particularly in areas where we had previously moved operations offshore or to lower-cost regions that involved more manual processes. We're introducing automation into our production cells, which has been part of our efforts to reduce costs and has proven beneficial. This allows us better control over product quality. We are focused on near-shoring and reshoring opportunities for sourcing and manufacturing. For our joint ventures in China, we have established redundant production facilities to handle that volume, ensuring we are covered and minimizing any risk exposure.

It appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Okay. We want to thank everyone for participating in our conference call today. If you have any further questions, our contact information is available on our press release or Investor Relations website. We hope you have a great day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.