Q2 2023 Standard Motor Products Inc Earnings Call
Participants
Anthony Francis Cristello; VP of IR; Standard Motor Products, Inc.
Eric Philip Sills; CEO, President & Chairman; Standard Motor Products, Inc.
James J. Burke; COO, Member of the Office of Chief Executive & Director; Standard Motor Products, Inc.
Nathan R. Iles; CFO & Member of the Office of Chief Executive; Standard Motor Products, Inc.
Bret David Jordan; MD & Equity Analyst; Jefferies LLC, Research Division
Daniel Robert Imbro; MD & Research Analyst; Stephens Inc., Research Division
Robert Smith
Presentation
Operator
Good day, everyone, and welcome to the Standard Motor Products Second Quarter 2023 Earnings Call and Webcast. (Operator Instructions). Please note today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Tony Cristello, Vice President of Investor Relations. Please go ahead.
Anthony Francis Cristello
Thank you, and good morning, everyone, and thank you for joining us on Standard Motor Products Second Quarter 2023 Earnings Conference Call. I'm Tony Cristello, Vice President of Investor Relations. And with me today are Larry Sills, Eric Sills, President and CEO; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer. On our call today, Eric will give an overview of our performance in the quarter, Jim will comment on our new distribution and supply chain efforts, and Nathan will then discuss our financial results with an update on our annual guidance. Eric will provide some concluding remarks and open up the call for Q&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.
Eric Philip Sills
Well, thank you, Tony, and good morning, everyone, and welcome to our Second Quarter Earnings Call. Overall, our revenues were down slightly in the quarter, while we remain essentially flat year-to-date. Importantly, there were certain short-term factors influencing sales softness in the quarter, which we believe will be overcome in time. First, the quarter was unseasonably cool, especially as compared to 2022, and this had an adverse effect on our air conditioning business. And second, one of our largest aftermarket customers declared bankruptcy in January, and we essentially sold them nothing throughout the entire first half.
This business has now been sold at auction to other existing accounts, and we expect to rebound as they replenish the depleted shelves. I'll address these issues further in discussing the impacted segments.
So let me review each division separately as each has slightly different dynamics. To remind you, we entered the year realigning our reported segments, carving out our non-aftermarket business into its own segment called Engineered Solutions, leaving the other 2 solely reflective of the aftermarket. I'll first speak to the aftermarket, starting with Vehicle Control, which, as a reminder, was previously called Engine Management.
We renamed Vehicle Control entering this year to better reflect the breadth of categories within the offering, especially as it relates to powertrain-neutral products. Vehicle Control was down 1.1% in the quarter but remains up 1.5% year-to-date. As noted in the release, the sales drop related to the customer bankruptcy was 2.2%. And so excluding that, we would have been up. And thankfully, this is now in our rearview mirror.
Furthermore, we are seeing an overall favorability in our large customer sell-through, and we believe this reflects ongoing health in the marketplace.
Turning to Temperature Control. Sales were down 8.1% in the quarter, bringing first half results 5.2% lower than 2022. As you're well aware, this is a highly weather-dependent seasonal business. 2022 is an exceptionally strong early season and the second quarter was up 6.4% over 2021, making for difficult comparisons. By contrast, 2023 saw an unseasonably cool and wet start to the season. That said, weather trends changed dramatically entering July, which has now been declared the hottest single month on record, with customer POS up double digits over last year and the heat continues.
Next, I'll speak to our Engineered Solutions segment, our non-aftermarket business focused on selling to manufacturers of vehicles and equipment across various end markets globally. Sales in Engineered Solutions were up 6.2% in the quarter, reflecting a combination of generally strong demand from key accounts, the impact of a small acquisition late last year and the benefit of new business wins.
We're very pleased with how this business is going. After several years working towards achieving critical mass, we believe we are now well positioned to take advantage of the combined strengths of the different pieces that we have assembled and are now achieving the cross-selling opportunities we have anticipated.
Turning to profitability. There are a lot of moving pieces, and Nathan will get into the details in a few minutes. But from a high level, we are pleased to have been able to retain our margins though the sales shortfall and temperature control drops to the bottom line in terms of earnings.
Inflation persists with costs remaining elevated across materials, labor, rent and so on. And we are now dealing with a relatively new issue of the weakening U.S. dollar in countries where we have manufacturing, most notably Mexico. And the single biggest cost increase continues to come from interest rates, impacting both our customer factoring programs and our borrowings. But through a combination of initiatives, we have largely been able to cover these cost increases, and I'm very proud of all of our people's efforts in this regard.
So with that, let me turn it over to Jim Burke, who will bring you up to speed on what's going on in our operations.
James J. Burke
Good morning, and thank you, Eric. As we disclosed in our earnings release, we are excited to share our aftermarket distribution network strategy expansion plans. We signed a new lease in Shawnee, Kansas commencing on July 1, 2023. So why the expansion efforts now and why Shawnee, Kansas? We service our U.S. aftermarket customers, excluding forecast trading distribution, which is in Fort Lauderdale, Florida, with vehicle control and temperature-controlled products, from 3 primary distribution centers located in Disputanta, Virginia, Lewisville, Texas and Edwardsville, Kansas. The existing footprint of these 3 facilities is roughly 1.2 million square feet.
The new Shawnee DC is roughly 575,000 square feet, which adds an additional 211,000 feet bringing our new footprint to 1.4 million square feet once we exit the Edwardsville facility.
Currently, we are approaching capacity in our existing footprint. And this addition will expand our throughput turnaround times. Our customers require the right part in the right place at the right time. We will be able to turn around customer orders in 3 days or less and ship thousands of emergency orders daily. This is an investment in our S&P value proposition to be the best full-line, full-service supplier of premium products.
Other benefits include risk avoidance from our current single point distribution model to a modified multi-point distribution strategy for high-volume, fast-moving SKUs. So why Shawnee, Kansas. We were very fortunate to find the new Shawnee DC located less than 5 miles from our existing Edwardsville DC. We will be able to retain our existing well-trained associates and management team, which minimizes any risk from a new greenfield start-up.
Our planned time line launch for the new DC will be to install some racking and equipment by the end of the first quarter 2024, which will provide relief to our other DCs. This will be on a small-scale basis, while the larger scale automation picking lines are being installed during 2024.
Beginning at the start of 2025, we will phase in various product categories and brands and anticipate being fully operational by the end of 2025. Obviously, this will add some redundant costs during the transition and some incremental costs once complete for the additional capacity. We estimate 2.5 million added costs in 2023, a partial year and $7 million to $8 million added costs in 2024 on an annualized basis. However, we also anticipate some offsetting savings due to current inefficiencies exiting Edwardsville redundant costs and transportation cost savings. Over time, with added sales growth, we anticipate we can delever some of these net added costs.
We will have incremental CapEx spending in '24 and '25 to outfit the new DC. Fortunately, we own the existing Edwardsville location and anticipate putting this facility up for sale in late 2025, which should help offset a large portion of the Shawnee investment. Overall, we are very excited about bringing this new Shawnee DC on board, adding capacity, minimizing risk, maintaining well-trained existing workforce and most importantly, better servicing our customers. I will also hit on a couple of supply chain topics.
Overall, supply chain bottlenecks and delays have subsided with more reliable deliveries and lower transportation costs. While some commodities like copper and aluminum have decreased over the first half 2022, we have seen increases in copper and steel-based products from '22 year-end levels. Overall, we are seeing inflationary costs persist primarily for electronics and labor costs, but at a slower pace than in 2022.
The more reliable supply chain has allowed us to accelerate our inventory reduction efforts in the first half of '23. This has been a tremendous benefit to our cash flow generated this year, but also adds a slight drag on gross margins from under-absorbed overhead, which Nathan will highlight shortly.
Over the second half of the year, I see a slight build in inventory levels as we level load our manufacturing facilities and begin our seasonal build for temperature control products. I want to thank all of our SMP employees dedicated to servicing our customers.
Thank you for your attention, and I will turn the call over to Nathan.
Nathan R. Iles
All right. Thank you, Jim. As Eric noted earlier, our sales were down in the second quarter with lower temp control sales impacting our bottom line, but we did see improvement in our gross margin rates, which at the consolidated level, offset factoring costs that continue to increase. We also made great progress reducing inventory levels, as Jim noted. As we go through the numbers, I'll give some more color on these items and other key drivers for the quarter and year so far as well as provide an update on our financial outlook for the full year in 2023.
First, looking at our Vehicle Control segment. You can see on the slide that net sales of $183.8 billion in Q2 were down 1.1% versus the same quarter last year with the decrease driven by a 2.2% decline from the impact of a bankrupt customer, partly offset by increases with other customers as we continue to see favorable sell-through trends.
For the first 6 months in Vehicle Control, sales were up 1.5% despite the impact of the bankrupt customer, which was also a 2.2% drag on sales year-to-date, with the growth for the year so far as a result of continued demand for our products and favorable sell-through.
Vehicle Controls adjusted EBITDA was 12.6% of net sales and up 2 points from Q2 last year. But it's important to note that we were up against an easy comparison as this segment saw a large impact from cost inflation and factoring expenses in Q2 last year and this year's quarter showed profits at a more normal level.
Vehicle Controls adjusted EBITDA in the quarter was driven by gross margin rate expansion as a result of pricing and savings initiatives, which overcame cost unfavorable overhead absorption from reducing inventories and a $3 million or 1.7 point increase in the cost of customer factoring programs. Vehicle Controls adjusted EBITDA for the first 6 months was 12.1%, basically flat with 12.2% last year, mainly as a result of the margin expansion this segment saw in the second quarter, which offset higher factoring expenses.
Turning to Temperature Control. Net sales in the quarter for that segment of $97.1 million were down 8.1%, and sales for the first 6 months were down 5.2% as we saw a slow start to the selling season, as Eric pointed out. Temperature Controls adjusted EBITDA was 7.2% of net sales in the quarter and 6.1% of net sales for the first 6 months, with both periods down from last year, mainly due to lower sales and higher factoring expenses.
Looking at it more closely, Temp Control gross margin rate was down 0.5 points in the quarter and 0.4 points for the first 6 months as lower sales and lower production related to inventory reductions more than offset pricing and savings actions for this segment. And with margin rates down slightly, the combination of significantly higher costs from customer factoring programs and lower SG&A leverage led to a reduction in adjusted EBITDA.
Sales for our Engineered Solutions segment in the quarter of $72.2 million were up 6.2% and sales for the first 6 months of $143.3 million were up 2%. While we said sales could be lumpy for this new segment as it begins to grow, we were pleased to see our sales increase as a result of strong demand and new business wins. Adjusted EBITDA for Engineered Solutions in the quarter came in at 13%, an increase of 2.1 points from last year as strong sales growth and good channel and customer mix improved both the gross margin rate and SG&A leverage. For the first 6 months, adjusted EBITDA for Engineered Solutions was 12.3% and up 0.5 points from last year, mainly as a result of higher sales and improved SG&A leverage.
Turning to our consolidated results. Net sales in the quarter declined 1.8%. And for the first 6 months were basically flat with both periods being impacted by a decline of 1.6% related to a customer bankruptcy which when excluded shows growth in sales that essentially offset a slow start to the season in Temp Control. While net sales were lower overall, our consolidated gross margin rate improved for both the quarter and first 6 months due to our initiatives that overcame other headwinds and resulted in gross margin dollar increases of 5.1% and 3.4% for the quarter and first 6 months, respectively.
Regarding SG&A expenses, excluding the cost of customer factoring programs, which are shown separately on the page, expenses were well controlled in the quarter at 17.4% of net sales and in line with last year. Looking at the bottom line, consolidated operating income of 7.8% and adjusted EBITDA of 10% in the quarter were flat with last year as an improved gross margin rate was offset by $4.8 million of higher factoring costs. For the first 6 months, consolidated operating income and adjusted EBITDA were down as higher factoring costs were only partly offset by improvements in gross margin.
As for diluted earnings per share, you can see our performance resulted in earnings of $0.84 for the quarter and $1.44 for the first 6 months. Lower EPS was mainly due to lower temp control sales, which dropped through to the bottom line, but also interest expense that was higher by $1.5 million in the quarter and $4.5 million in the first 6 months, mainly due to higher interest rates.
Finally, one last point on our results. As you know, we report the results of the discontinued operation each quarter, which relates to a business bought in 1986 and subsequently sold in 1998. As noted in our press release this morning, since March of 2019, the company was involved in a legal proceeding in connection with a breach of contract claim for this discontinued operation. In July, the court ruled in favor of the other party and we were found liable for approximately $11 million in damages. And as such, we incurred a charge for this amount during the quarter.
Turning now to the balance sheet. The key item here is our inventory level which finished Q2 of $499.1 million, down $29.6 million from December last year and down $52.3 million from June last year as we continue to focus on reductions in this area. Note that we typically build inventories during the first half of the year in anticipation of the temp control selling season and when viewed against average increases of $15 million in the first half of the year, this reduction in inventory represents a significant improvement in cash flow of almost $45 million in the first 6 months of this year.
And looking at cash flows, our cash flow statement reflects cash generated from operations in the first 6 months of $39.4 million as compared to cash used of $95.3 million last year with the improvement driven by a $118.6 million improvement in cash flows from inventory in the first 6 months.
Our financing activity shows significant progress made in paying down our revolving credit facilities by $16.5 million as a result of improved operating cash flows and $50 million of repayments made in the quarter. We also paid $12.5 million of dividends during the first 6 months. Our borrowings of $223 million at the end of Q2 were much lower than last year, and we finished the quarter with a leverage ratio of 1.4% lower than both June and December last year.
Before I finish, I want to give an update on our sales and profit expectations for the full year of 2023. Regarding our top line sales, we expect full year 2023 sales growth in percentage terms will be in the low single digits, which includes a first half that was flat to last year and the second half that we'll see low single-digit growth rate is typical for the business. Adjusted EBITDA is expected to be approximately 9.5% and lower than our prior estimate of 10% as we noted in our release this morning. The lower estimate is a result of 4 things: First, as I just said, our second quarter sales were softer than expected, leaving us flat to last year through 6 months, and this will hurt our full year sales performance.
Second, additional interest rate increases announced by the Federal Reserve in June when output factoring expenses at the top end of our prior range, and these costs are expected to be $48 million to $50 million using the current outlook for rates. Also, we anticipate the expansion of distribution capabilities in a new warehouse in Shawnee, Kansas will result in duplicate overhead and start-up costs beginning in the second half of the year. And finally, we've recently seen the U.S. dollar significantly weakened where the majority of our international operations are located, weakening against both the Mexican peso and Polish zloty and in turn, increasing our cost of production and inventory in those locations.
In connection with adjusted EBITDA, we expect depreciation and amortization expenses and our income tax rate to be in line with 2022. Further, we expect our interest expense on outstanding debt to be on average about $4 million each quarter given higher interest rates. Looking at operating cash flows in 2023, you can see we're well on track for operating cash flows to return to healthy full year levels consistent with years past.
To wrap up, while sales were slower than we like, we were very pleased to report improved gross margin rates for the quarter and the year as well as a significant improvement in cash flow and very much appreciate the efforts of all of our team members in improving our business. Thank you for your attention.
I'll now turn the call back to Eric for some final comments.
Eric Philip Sills
Well, thank you, Nathan. To conclude, let me spend a minute talking about current trends and how we're thinking about the future. Our aftermarket business, which makes up 80% of our total sales continues to march forward, stable and strong. The addressable market continues to show far more favorable trends than unfavorable. The car population continues to grow and to age with more vehicles entering the sweet spot in coming years. The combination of difficult economic times, elevated new vehicle pricing and high interest rates have car owners retaining their existing vehicles, thus requiring necessary repairs and nondiscretionary categories like ours.
Our relationship with distributors have never been stronger as they seek capable, committed suppliers like us who execute at a high level for them. And while external factors like the weather can have short-term impact, the long view is favorable.
Our Engineering Solutions business is now in the fast lane. We're getting ourselves known by the blue-chip accounts in these various end markets and the doors that are opening to us are very encouraging. We are receiving more quoting opportunities than we could have hoped for and expect to get our fair share. We're now back to generating solid cash flow. After a period of intentionally increasing our inventory to accommodate supply chain instability, we are now successfully working it down, allowing us to pay down debt return value to shareholders through dividends and reinvest in the company's manufacturing and distribution capabilities to prepare us for the future. And we're tackling it with the strongest team we've ever had, and so I thank all of our employees worldwide.
So that concludes our prepared remarks. With that, I'll turn it over to the moderator, and we'll open it up for questions.
Question and Answer Session
Operator
(Operator Instructions) We'll take our first question from Bret Jordan with Jefferies.
Bret David Jordan
When you look at the 1.6% impact from that auto plus bankruptcy, does that abate in the second half where those assets haven't been acquired by somebody else? Are they back to being a customer?
Eric Philip Sills
So that's a great question, Bret. And so yes, those -- all the pieces of the business have now been acquired. And as I said in the prepared remarks, they've been acquired by existing SMP accounts. We believe that in the long run, all that volume should return, but this bankruptcy was really very disruptive, as you can imagine, to the whole marketplace. And I think it could take a little while for all the dust to settle as the new acquirers assess what they have and look at the inventory that they have acquired and look at it within their own existing inventories, I think there could still be some period of absorption of that inventory and reconciling what they have.
So we think it could take a little while. But first, we're definitely very encouraged that the business is now back in business and by existing accounts that we have good relationships with. And so we are expecting to see it bounce back. I also think that there was a certain amount of that business that just over that period was absorbed by other accounts that kind of gets lost in the mix in terms of being able to track it. But in the long run, the end market that true demand is what it is, we'll get it back as the inventory works itself through the system.
Bret David Jordan
And then on the redundant costs from the Shawnee, Kansas DC. I think you called out 7 to 8 in '24, but there would be some offset. Could you give us a feeling for what the net impact might be?
James J. Burke
Bret, this is Jim Burke. The 7 to 8 is on an annualized basis because we'll be staffing up and bringing on different costs that are in there. So I think that will be on an annualized basis versus a full year impact. The savings that we have are inefficiencies that are there in our existing facility will exit Kansas fully, it will be in stages, but we'll exit it in 2025. So there'll be savings come up from that in transportation. When all said and done on a run rate basis, we believe that we could be incremental costs from a new DC that's there in the $3 million range, net $3 million to $4 million range. Again, that's -- we're talking by the end of 2025, and we'll be updating our estimates as we proceed through to that period.
Bret David Jordan
Okay. And then one last question on inventory levels for AC product. You commented on the soft start to the season. Could you talk about what retail inventories look like now on a maybe year-over-year basis?
Eric Philip Sills
As we look at it for those, we have visibility and important to note that we only have that through June. So not sure what happens to their inventories in July, and their demand was very strong. Their sell-through in July was very strong. But at the end of June, what we saw was that it was essentially flat throughout the course of the entire year, a little bit of noise month-to-month, but the big players kept their inventory roughly flat throughout. And so now it's just a matter of that sell-through turning itself into replenishment orders to that. But yes, they didn't enter this quarter...
Operator
We'll take our next question from Daniel Imbro with Stephens.
Daniel Robert Imbro
I want to follow-up maybe on Bret's last question, just around maybe some more near-term trends. We've heard some varying commentary on kind of how 2Q progressed. Can you talk about any notable trend shifts you saw in your sales results from April through June. And then could we dig into July a little bit more. We've had some pretty big heat waves coming through. Has that been a tailwind? Have trends accelerated here in third quarter? Any color on the monthly cadence would be great.
Eric Philip Sills
And the monthly cadence within the second quarter was nothing exceptional. And so anything can happen in a given month. I think when you look at the cadence for our distributors, that's going to be more about true end market demand cadence. For us is you're going to have the influence of their reorder pattern. So we didn't see anything notable in that quarter.
Entering July, books are not closed yet on it, but what we have seen is a nice uptick, certainly on the Temperature Control side on their orders to us as would be expected, and you mentioned the heat. And but I think it's too early to make any real strong observations of how that plays out for the balance of the summer.
Daniel Robert Imbro
Got it. That's helpful. And then maybe shifting to the guidance. Anything as you look at the back half, obviously, guide implies pretty notable ramp in op margin, maybe as cost alleviate. And to Eric's point, top line gets a little bit better. How do you think about the sustainability of this high singles operating margin or low double as we look at '24, '25. Obviously, Jim just mentioned there's a few savings coming, but what do you think the right intermediate term margin should be for this? Are we -- can we get back to 10% next year?
Nathan R. Iles
Yes, Daniel. So as I mentioned in my remarks, we do have some headwinds coming at us in the second half of the year and at least one of those was related to currency. And as you know, those markets can swing around and you don't know exactly when those will turn. And so we can't be sure when headwinds will abate. That said, we're always working on savings programs, continuous improvement projects. And so as we go into 2024 and from there, we'll still look to have those projects in place and improve our margins like we've always said we would by 10 to 20 basis points as those programs come through successfully.
Daniel Robert Imbro
Got it. And last one for me. Eric, I think you mentioned in your prepared remarks, you're starting to realize the cross-selling within Engineered Solutions. Any more color or quantification you can provide on just how you're feeling about or capturing that opportunity?
Eric Philip Sills
Yes. Well, I can't get into specific business wins or specific accounts, but what we have really started to see over these last few quarters is that as we've talked about in the past, we've assembled a bunch of smaller companies into one. And each of those had their own customer with their own product, categories, in some cases, even their own geography. And so they were fairly -- they're good, but they're limited in what they were able to do.
Now 1 entities customer list gets opened up to the broader portfolio and it gives our people something to sell. So for example, just to give you one example. There was a large [Con-Agg] accounts that came with an acquisition a couple of years ago that we had never done any business with. Now we're selling them air conditioning because that was something that we had that customer needed it, that previous supplier before we had acquired them, obviously, couldn't service that type of product.
So we see those types of opportunities. And we're new in this space. So we're really just getting our name out there. And as we have these meetings with these accounts and they're able to see all of our capabilities and they're assessing their supply base, they are asking us to quote on quite a lot of product. Now it's a pretty long cycle from being asked to quote, to getting the award to actually seeing it start to show up in production and revenue. But even just over the course of this year, the number of new opportunities that we have on our plate to work on has grown dramatically. So we're pretty excited.
Operator
We'll take our next question from Scott Stember with ROTH MKM. And Scott, you may be muted. Please unmute on your end.
We'll go next to Robert Smith with the Center for Performance Investing.
Robert Smith
I'm quite interested in the Shawnee move. And I just want to -- I heard that you said that going forward, saying beginning in 2026 that the efficiency would be a plus $3 million to $4 million, was that correct?
James J. Burke
Robert, this is Jim Burke. The net savings of the 7 to 8 that we said annualized after we achieved savings that in there, we believe the ongoing run rate will be in that $3 million to $4 million range. Now those savings will be achieved over the period of time, a small part of it in '24, more of it in '25 and then fully in '26 as we're fully operational.
Robert Smith
So it seems rather a conservative figure, $3 million to $4 million from totally new facility with automation and robotics. I mean, am I missing something?
James J. Burke
Well, one of the pieces there, our Edwardsville DC that we have is fully owned, I believe it's mostly fully depreciated that's on there. We'll have the advantage of when we sell it and taking that capital that's in there to offset future impact. But the new lease on 575,000, you incur the cost there and the property taxes and that. So that's incremental whereas most of on the existing owned facility wouldn't have had costs that are in there.
Robert Smith
Got it. Is there any prospect of actually buying the facility?
James J. Burke
No, that's not our intent to be in the real estate. We are fortunate from years past that we own the other one there. We'll put that up for sale and that will be a nice favorable cash flow benefit.
Robert Smith
Right. Are there any such possibilities with the other 2 facilities, DCs?
James J. Burke
Well, that's where we'll wind up feeling achieving the efficiency savings that were in there, that we'll be able to scale down. Most of that will be where we have ramped up temporary workforce. So we really won't be even incurring any wind down costs for personnel in those areas there. And we'll staff up, what the one big benefit is in the new Shawnee facility, we bring over our full staff and management team knowing our systems, knowing the product categories, knowing the part numbers and everything. And we'll staff up gradually during that period of time.
The savings will be achieved. Yes, there'll be some automation there, but a lot of the savings will be in the other 2 distribution centers, which are really at capacity at the moment now.
Eric Philip Sills
And a significant portion, just to add to that, Robert, to give some color. As Jim described it, we're going to be moving some of the distribution out of the other DCs to go into this, Shawnee distribution center. And right now, a majority of our Vehicle Control is coming out of Virginia which has to ship all the way across the country to West Coast customers. This will now put that inventory in the middle of the country, which will allow us to service our customers better, certainly from a transportation time standpoint, but also from freight cost we're going to be halfway there already. So that's where you're going to see some nice benefits as well.
Robert Smith
I follow up. So later on in the -- toward the end of the decade, do you foresee possibility of doing something with the other 1 or 2 DCs. I mean expanding those -- or new structures?
James J. Burke
I anticipate with this additional 200,000-plus square footage that we add and we'll have sufficient capacity for the future but I hope we grow significantly. At this point, we don't have initial plans for the other 2 locations, but that will be a good problem to be facing a couple of years out.
Robert Smith
As you expand in Engineered Solutions, the possibility of holding some of the distribution into the new Shawnee facility or your other 2?
Eric Philip Sills
The majority of our Engineered Solutions business, Robert, is built to order. So we do not typically warehouse much of it at all. So most of that ships directly from our factories. There's some that we do hold a bit of safety stock for the accounts, but it's not like the aftermarket where you're stocking a significant amount of inventory for stock orders, it's all built to order for these key accounts.
Robert Smith
Got it. And yes, give me an idea as to you're very optimistic about Engineered Solutions. What's on the landscape as far as possible additional acquisitions in the near term?
James J. Burke
Robert, this is Jim Burke again. And I've said -- as I've said many times, we -- we have a team that covers really the geographical space as we look worldwide and also functional product category lines. So we're evaluating always opportunities that are there. The last couple of acquisitions we did were in the engineering solutions space. We're optimistic about that category. We've seen growth, so we're focused on both our Vehicle Control, Temperature Control categories and Engineered Solutions, but nothing at this point to announce.
Robert Smith
Any particular comments about Mexico or China?
Eric Philip Sills
Could you be more specific on what you're...
Robert Smith
There's a lot of ambiguity going on as far as the politics and what's happening in both countries. I was wondering what you guys are looking at from your viewpoint?
Eric Philip Sills
Well, we're pretty committed to our footprint in both of those countries. As I think you're aware, we have a lot more in Mexico than we do in China. We've been building out our manufacturing capabilities in Mexico for going on 30 years, I think. And while really the only thing we see adverse going on in Mexico is some of the cost increases, most notably related to labor costs. Right now, we're seeing it in currency, but that's hard to predict how long a trend that would be.
But now, we're very pleased with our footprint in Mexico. We have excellent management teams there. We have pushing 2,000 people there. And one of the nice things we see is some of our big customers are growing their business in the Mexico market allows us to follow them in. So that's the Mexico story. China, we're there as well. We have 4 joint ventures as you're aware, I believe, 3 of them are on the Temperature Control side and one came with the acquisition of Trombetta to power management, power distribution products. They're really there for 2 purposes.
One is to continue to bring high-quality, low-cost product back here in North America, but also to sell Engineered Solutions business globally, and they're all doing well, and we're very pleased with how we're doing. We're obviously very aware of geopolitical complexity, and we pay close attention to that. And we look to mitigate some of that risk through vendor diversification, redundancy and so on. But we're pretty committed to what we're doing there, and we've seen very nice results.
Robert Smith
Okay. How about your Eastern European operations?
Eric Philip Sills
Eastern European, we have 2 manufacturing operations there, our largest and one that's been part of us, the longest is in Poland -- in Eastern Poland. And it's really just a fantastic plant, 700 people strong and an area where we're seeing potentially the biggest opportunities for Engineered Solutions quoting, due to the combination of high quality, high technology and low cost. And now more recently, we have a plant outside of Budapest in Hungary that came with the Stabil acquisition, and it's been terrific for us as well. Not only we are seeing a lot of opportunities to sell to third parties, what it brought to us was electronics manufacturing in Europe and now they've become a supplier to our Poland plant.
So we're really pleased with how we're building out kind of moved from having manufacturing plant in Poland to have a European-wide business, and we're continuing to invest heavily there, and we're just very pleased with what we see.
Robert Smith
Any reverberations from the Ukraine situation?
Eric Philip Sills
No, it's really business as usual when the war first broke out 1.5 years ago or so we quickly mobilized to understand what the potential impact could be on the supply chain. We're fortunate to count that there was we had no suppliers in the region. We had no customers, except one very small one in the region. Hear was that it was going to potentially impact our utilities infrastructure there, it did not. This is now 1.5 years ongoing. And so it's really proven to be a nonevent, which is very good.
Operator
We'll go next to Scott Stember with ROTH MKM. Scott, we still have you mute.
Anthony Francis Cristello
Yes. We'll follow up with Scott if he's not able to ask his question.
Operator
Understood, thank you. (Operator Instructions) And we have no further questions at this time. I'll turn it back to management for any closing remarks.
Anthony Francis Cristello
Okay. We want to thank everyone for participating in our conference call today. We understand there was a lot of information presented, and we'll be happy to answer any follow-up questions you may have. Our contact information is available on our press release or Investor Relations website. We hope you have a great day. Thank you.
Operator
This does conclude today's Standard Motor Products Second Quarter 2023 Earnings Call and webcast. You may disconnect your line at this time, and have a wonderful day.
