Motorcar Parts of America Inc (MPAA) 2006 Q3 法說會逐字稿

Good afternoon, my name is Evelyn and I will be your conference operator today. At this time I would like to welcome everyone to the Motorcar Parts of America Fiscal Third Quarter 2006 Conference Call.

[OPERATOR INSTRUCTIONS]

Thank you. Mr. Coulson, you may begin your conference.

Well, thank you Evelyn. Good afternoon everybody, welcome to MPA's Third Quarter Fiscal 2006 Conference Call. With us today is MPA's Chairman, CEO Selwyn Joffe and also the company's Chief Financial Officer, Mervyn McCulloch.

But before I turn the call over to them, I would like to remind you that in this call management's remarks contain forward looking statements, which are subject to risks and uncertainties. And management may make additional forward looking statements in response to your questions. Therefore the company claims the protection of the Safe Harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today including risk and uncertainties related to fluctuations in demand for MPA's alternators and starters; the company's ability to maintain and expand its relationship with key customers; the company's ability to effectively grow its presence in the traditional warehouse market; variability in gross margins due to customer pricing pressures; fluctuation in the costs and customer turns of course and other factors; increases in working capital required as a result of increased volume to business and risk related to the company's expansion of its offshore manufacturing operations. Examples of forward looking statements include those statements related to MPA's anticipated or projected revenues, gross margins, expenditures and liquidity needs.

We would like to encourage all of our listeners to review a more detailed discussion of these risks and uncertainties related to the forward looking statements that is contained in the company's filings with the SEC and particular in its forms 10-K. Any projections as to the company's future financial performance represent management's estimates as of today, February 14, 2006. MPA assumes no obligation to update these projections in the future due to changing market conditions or otherwise. With those formalities out of the way, it is now my pleasure to turn the call over to MPA's CEO, Selwyn Joffe.

Good afternoon everyone and once again, thank you for your interest in our company. We are pleased to discuss our financial results and achievements with you today. The call will follow the following format. I will begin with a brief overview of our financial results for the third quarter for fiscal '06, as well as provide an update on our progress since our last conference call. At that point I will turn the call over to our Chief Financial Officer, Mervyn McCulloch. He will provide a more detailed discussion of our financial results and finally, I will discuss our outlook, make some closing remarks and open the call up to any questions that you may have.

So, starting off in the third quarter of 2006, MPA increased its revenues 25.6% to $30.3 million, from $24.2 million in the same quarter of last year. The significant driver behind our revenue growth in the quarter was the continued ramp up of sales under our contract with one of the world's largest automobile manufacturers. Gross profit was $6.9 million or 22.7% of sales, versus $8.2 million or 33.8% for the third quarter of '05.

Our margin declined significantly in the quarter and this was primarily the result of increased marketing allowances of $2.3 million in the third quarter of fiscal 2006. These marketing allowances reduced sales, but do not impact the cost of goods sold associated with those sales. Excluding these allowances, gross margin in the quarter would have been approximately 26.4%.

Cost of goods has also increased as a percentage of sales as the result of the higher overhead cost associated with meeting the demands of a new business. I am pleased to say however, that currently our fully loaded manufacturing costs in our new offshore facility are lower than our costs in the United States.

We are moving beyond the outside consultant -- on the operating side, we are moving beyond on outside consulting fees associated with the SEC investigation and restatement of our financial results. As a result total operating expenses in the quarter declined by 5.9%. Operating income was $3 million compared to $4 million in the third quarter of fiscal '05. We reported net income of $1.2 million or $0.14 per diluted share, compared to $2.2 million or $0.26 per diluted share in the third quarter of last year.

Our push to enhance our presence in the approximately $800 million professional installer market is moving forward., reflecting sales from our contract with our automobile manufacturer customer and our traditional markets sales initiative. The majority of our 25.6% revenue growth is attributable to this customer which is now our second largest. This contract has the potential to generate up to 30% of our volume in annual revenues. So, while we incurred marketing allowances and other short-term expenses to increase production to meet demand on this account, their long-term potential is vital to our strategy to gain share in the professional installer market. As this program grows in scale, we expect it to make a positive contribution to our margins.

Our Quality-Built line of alternators and starters which is targeted to the traditional market as well continues to gain acceptance with professional installers. And we have seen strong organic growth in this business. During this last quarter we have obtained commitments from new customers that should result in increased revenues of approximately $13 million for fiscal year 2007. I will note that none of this gain in revenues is reflected in the numbers yet that you have seen.

In our established do-it-yourself market, MPA continues to build share and distinguish itself from the competition by adding value to our customers. In January of this year, we were honored with a prestigious award for the second consecutive year from our largest customer. The customer cited MPA's extensive knowledge of their products and services as well as our use of the Lean concept and our commitment to go the extra mile for our customer as the primary reason for recognizing MPA with the award. We are very pleased to have received this award and believe that it demonstrates our commitment as a valued added partner for all of our customers.

In recent years our focus on Lean Manufacturing and reducing costs have encouraged MPA to source more of our production in facilities outside of the United States. Not only does this give us the ability to lower per unit costs of our alternators and starters, but it provides us with the flexibility to compete effectively in an industry marked by strong price competition. Our remanufacturing plant in northern Mexico is performing well. The facility which began production in June of '05 is now operating at a lower direct cost per unit than our Torrance facility. For the first nine months of fiscal 2006, production at our facilities in Mexico and Malaysia comprised approximately 25.8% of our total production. And as everybody knows, we plan to increase this going forward.

This quarter MPA continued to move forward with our initiatives and I am pleased with our progress to date. We have had strong revenue growth. We are profitable and generated positive cash flow from operations. As we discussed in our last call, the steps we are taking this year to build our business have required us to incur some additional expenses, including of course, the start up costs at our new facilities, investments in inventory and the granting of marketing allowances that have a negative impact on our short-term results. We believe that these expenses are investments in our future and will allow us to continue to gain market share and enhance our profitability in the long-term.

At this point, we believe that most of these expenses for our current revenue base, other than $2.4 million in additional marketing allowances for one of our newest contracts, will be behind us after the fourth quarter of fiscal 2006. It should be noted however, we continue to be committed to profitably increasing our market share and I remain very confident that MPA is on the right path. With that I will turn the call over to Mervyn McCulloch, our Chief Financial Officer.

Thank you, Selwyn. Net sales for Q3 were $30.3 million, up 25.2% from $24.2 million in the same quarter last year. This $6.1 million increase was due to the increased sales to new and existing customers, particularly under our contract with one of the largest automobile manufacturers, which was awarded in January 2005. This increase was partially offset by the $2.3 million in marketing allowances [belonging] to our customers that Selwyn mentioned earlier.

Gross profit for Q3 was $6.9 million or 22.7% of sales compared to $8.2 million or 33.8% of sales last year. Gross margin in the current quarter was affected by the previously mentioned marketing allowances, which reduced revenues but not reduced cost of goods sold associated with those revenues. Excluding the impact of these allowances, gross margin would have been 26.4%. As Selwyn mentioned, we incurred a higher overhead cost in the quarter due to increased overtime and temporary labor costs, associated with the new business we received. In addition, gross margin in fiscal 2005 was favorably impacted by the recognition of under-return core revenue, which had a greater gross margin percentage than finished goods in that quarter.

General and administrative expenses were $2.9 million, down 10% from $3.2 million in the same quarter last year. This decline was due to $118,000 reduction in outside, professional and consulting fees associated with the SEC's review of our filings and the related restatement of our financial statements. We incurred no consulting fees in the current quarter associated with Sarbanes-Oxley compliance compared to $33,000 in the same quarter of last year. In the future we anticipate additional costs in this area as we move into the next phase of the compliance project. General and administrative expenses in the current quarter were favorably impacted by $121,000 gain associated with a foreign exchange -- with our foreign exchange contract.

Selling and marketing expense was $836,000, up 3.7% from $806,000 in the same quarter last year. This is attributable to the increased cost of supporting the new business we obtained. Research and development expenses were $219,000, up 25.9% from $174,000 in the same quarter last year, reflecting costs associated with the new business we received during the quarter. Operating income was $3 million during the quarter compared to $4 million last year. This is the result of accumulated affect of the items discussed previously.

Interest expense, net of interest income, was $958,000 up from $526,000 in the same quarter last year. This due to borrowings we took on our line of credit, as well as increases in short-term interest rates used to discount accounts receivable and factoring arrangements with our customers. We recognized an income tax expense of $818,000 in the third quarter of fiscal 2006, compared to $1.3 million in the same quarter of last year.

Net income and earnings per share were $1.2 million and $0.14 per diluted share, compared to $2 million and [$0.26] per diluted share in the third quarter of fiscal 2005.

For the first nine months of fiscal 2006, revenues were $81 million up 15.1% for the first nine months of fiscal 2005. Sales and gross margin were negatively impacted by front loaded marketing allowances of $4.1 million. Gross profit was $18.9 million, versus $19.4 million for the first nine months of fiscal 2005. Operating income was $4.7 million, versus $8.7 million in the first nine months of last year. $1.5 million of expenses associated with our accounting restatement and Sarbanes-Oxley compliance and $1.4 million of start up expenses incurred in connection with our new facilities in Mexico and Nashville, reduced our operating income.

Net income was $1.5 million for the nine months ended December 31, 2005 or $0.18 per diluted share, compared to $4.6 million or $0.54 per diluted share in the first nine months of fiscal 2005.

As of December 31, 2005, our balance sheet had cash and short-term investments balance of $1.298 million. We had working capital of $45 million and a current ratio of 2.3 to 1. For the nine months ended December 30, 2005, cash flow used in operations were $7.2 million. This reflects increased inventory of $8.1 million from March 31, 2005 and net payments of $7.6 million under our POS arrangement, partially offset by net increase in accounts payable and accrued liabilities of $6.6 million.

I'm pleased to report that our cash flow and liquidity continue to improve. In the third quarter of fiscal 2006, this quarter we generated $1.7 million in positive cash flow from operations. We had capital expenditures of $3.3 million during the nine months ended December 31, 2005, with $2.4 million associated with our Mexico facility. We anticipate continued use of cash in investing activities through the remainder of the year, which will vary depending on the final build-out schedule for our Mexico facility.

In October 2005, we entered into a capital lease arrangement with our bank for equipment financing of $4.1 million. As of December 31, 2005, we borrowed $1.5 million on our line of credit and reserved $4.4 million for standby letters of credit for worker's compensation insurance, resulting in a $9.1 million available under the line of credit. We believe that our cash flows, line of credit and our capital lease agreement will generate sufficient cash flow for us to meet our liquidity requirements and financial obligations. Now I would like to turn the call back to Selwyn, who will make some closing remarks.

Thanks, Mervyn. MPA continues to execute our strategies and made additional progress during the third quarter as we discussed earlier. We achieved strong revenue growth, we're profitable and generate a positive cash flow. As I stated earlier, our performance in fiscal 2006 reflects a year in which we are making investments in our future that our affecting our short-term results. We believe that our three-pronged approach of growing our revenues through strong relationships with our customers, pursuing new customers in both the retail and traditional markets, while improving our margins by increasing production outside the U.S. and our focus on making sure our balance sheet remains strong, while we pursue these initiatives, is the best way for us to proceed in building shareholder value. I would like to thank everyone for listening to the call and now I would like to open the call to any questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from [Mitch Sachs] of [Grand Slam Assets].

Hey, Selwyn. Very nice quarter.

Thanks, Mitch.

A couple of questions. With respect to balance sheet, I saw the inventory came down from previous quarter. Would you expect that trend to continue or do you expect it to build as you're growing sales?

I think, Mitch, we have been over-inventoried through the last four months of our operations, but as sales continue to grow we believe that this current inventory level is pretty much a normalized inventory level.

Okay. And then could you talk a little bit more about Quality-Built. I know you mentioned, you said you should do about $13 million in fiscal '07. Could you -- ?

Yes, sorry go ahead.

Just talk a little bit more about the initiative and sort of what that means to us.

Yes, I just want to clarify the $13 million I indicated was in additional revenue over and above the base revenue we have, that we signed up just in the last quarter. So, our expectations for Quality-Built which really focuses - it's our own brand that's focused on the traditional installer distribution network. We are experiencing a lot of traction in that marketplace. We are focused in making sure that this is a good growth vehicle for us. And we are expecting great things. I think we have a great product in that area. We're competitively priced. It has been accepted pretty significantly by the market. And I think we have an excellent management team in place to execute the rollout of this product. And our distribution strategies, we think, will give us a competitive advantage over the rest of the marketplace as well.

When Mervyn was talking, he had mentioned the $2.4 million in additional sort of front end load marketing. I didn't catch the time period on that?

That time period will be spread over into our next fiscal as well, I think through the third quarter.

The next three quarters.

The next three quarters.

The first three quarters of 2007.

Yes.

Calendar year 2007?

Fiscal quarters. Yes, the first three fiscal quarters of 2007.

Fiscal quarters, okay. And then sort of finally, as I guess Mexico and Malaysia move up as a percentage, I think you said roughly 25% for the quarter? Is it fair to assume that gross margin will move in a positive direction?

That is absolutely the case. I think I had mentioned that even today on a fully loaded basis, we're experiencing lower costs than we experience in the USA facilities. So, Mexico is going right on plan and in fact slightly ahead of planning in terms of number of units produced. Malaysia continues to operate very efficiently. Our management team in place at all of our facilities continues to be very strong and enthusiastic about the offshoring opportunities and quite frankly, I think it puts us in great stand in terms of our competitive positioning in the marketplace.

Thanks a lot guys, I'll get back in queue.

Thanks, Mitch.

Your next question comes from Ross DeMont of Midwood Capital.

Hi guys, congratulations on all your progress.

Thanks, Ross.

Quick question for you, you mentioned here that the allowances were $2.3 million higher than in the same quarter in the previous year. Were there any allowances in that quarter or was it just zero versus 2.3?

No, I think and Mervyn can correct me if I'm wrong, but approximately $5.5 million -- $5.4 million in total allowances for this quarter and then in last year the total allowances were about $3 million.

Okay, understood -- that makes more sense. And then, the $13 million incremental coming out of the Quality-Built line. That is purely your own distribution, that $13 million incremental has nothing to do with your distribution through your large auto partner?

Yes, it is purely incremental revenue, strictly directly from our us, no customer brand.

Okay, great that's all I had, appreciate it and look forward to seeing you in California next week.

Great, thank you very much.

Your next question comes from [Jim Schulman] of [Costa Brava].

Hey guys, how are you?

Hi Jim, how are you doing?

Good thanks. In regard to the offshore plants, where are you relative to capacity production and breakeven?

I think in terms of let's -- in Malaysia has been up for a while, it continues to have expansion capability and we continue to produce product there, cheaper than we do in the United States, although it is included in our overall mix and has been for some period of time. I think the bigger part of this component is really the progress in Mexico.

Right.

In Mexico, our target rate by the end of this fiscal year would be to be producing about $1.1 million run rate in units. And we expect to more than double that in the following fiscal. So, we believe that by the end of the next fiscal year with a lot of transition going on we would be at the end of the next fiscal year in a position to accommodate 100% of our existing volume requirement out of the offshore facilities. Now, having said that I will tell you that we are aggressively pursuing additional revenues as well.

Got you. So, all right, just as -- I want to double check, so basically, a $1.1 million run rate now, should double by the end of '07 and that will be able to handle all of your production down there?

Between Mexico and Malaysia.

Right, that's fantastic. Thank you.

Selwyn, that run rate that is the end of this fiscal year or current?

The $1.1 million will be at the run rate we are on target -- we actually are there now, pretty much, but our budget was to be there by the end of the fiscal year -- of this fiscal year.

[OPERATOR INSTRUCTIONS] At this time there are no further questions.

All right, I appreciate everyone signing in and thank you for joining the MPA call and --

And the company will be presenting at the Roth Capital Conference, I look forward to seeing those of you who attend at that event.

Which we'll on - we'll presenting on the 21st at 4:00 p.m.

This concludes today's conference call, you may now disconnect.