Motorcar Parts of America Inc (MPAA) 2006 Q4 法說會逐字稿

Good afternoon. My name is Cathy and I will be your conference operator, today. At this time, I would like to welcome everyone to the Motorcar Parts of America fourth quarter fiscal year 2003 conference call - I'm sorry, 2006 conference call. [OPERATOR INSTRUCTIONS] Thank you. [Ms. Burns], you may begin your conference.

Thanks, Cathy. Good afternoon and welcome to Motorcar Parts of America's fourth quarter and fiscal 2006 conference call. With us, today, is MPA's Chairman, President, and CEO, Selwyn Joffe, and CFO, Mervyn McCulloch.

Before I turn the call over to them, please remember 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 that is 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 risks and uncertainties related to fluctuations in demand for MPA's alternators and starters, the Company's ability to maintain and expand its relationships with key customers, the Company's ability to effectively grow its presence in the traditional warehouse market, variability and gross margins due to customer pricing pressures, fluctuations in the costs and customer returns, of course, and other factors, increases in working capital required as a result of increased volume to business, and risks related to the Company's expansion of its offshore manufacturing operations.

Examples of forward-looking statements include statements related to MPA's anticipated or projected revenues, gross margins, expenditures, and liquidity needs. We would like to encourage all our listeners to review a more detailed discussion of the risks and uncertainties related to these forward-looking statements that is contained in the Company's filings with the Securities and Exchange Commission, and in particular, in its Forms 10-K. Any projections as to the Company's future financial performance represent management's estimates as of today, July 13, 2006. MPA assumes no obligation to update these projections in the future due to changing market conditions or otherwise.

And with those formalities out of the way, it's my pleasure to turn the call over to MPA's CEO, Selwyn Joffe.

Good afternoon, everybody. This is Selwyn. I thank you for listening to our conference call, today.

Today's call will follow the following format - I will begin with a brief overview about financial results for fiscal '06, as well as provide an update on our progress since our last conference call. At that point, I'll turn the call over to our CFO, Mervyn McCulloch, and he will provide a more detailed discussion of our financial results. Finally, I will discuss our outlook for fiscal 2007, make some closing remarks, and open the call to any questions that you may have.

Fiscal 2006 can be described as a year in which MPA made investments in our future and executed on a number of strategic initiatives. As the year came to a close, we began to see a return on these investments, and I believe that we will see additional progress in fiscal 2007 and beyond.

Net sales increased 17.5% in fiscal 2006 to $112.1 million. After adjusting for front-loaded marketing allowances associated with new business we received in the year, net sales climbed 23.5%. And after adjusting for startup costs in our new remanufacturing facility in Mexico and our new distribution facility in Nashville, Tennessee, our gross margins improved to 28.1% from 27% in fiscal 2005.

On the same basis, net income increased 19% to $7.6 million, or $0.89 per diluted share. For details on these numbers, please refer to the Form 10-K we filed, today, and the press release which was also distributed, today.

Those of you familiar with our company know that we are taking a three-pronged approach to increasing our market share and growing our business. This involves building solid, long-term relationships with our customers, Number 2 - expanding into the professional installer market, and Number 3 - reducing our production cost by phasing production to our facilities abroad. And I'm pleased to report that in fiscal 2006, we have made significant and steady progress on all three fronts.

In the fourth quarter of fiscal 2006, we were honored to receive a prestigious award from our largest customer for the second consecutive year. This award recognizes customers who have gone the extra mile and the customer-sided MPA's extensive knowledge of their products and services, as well as our use of the lean concept of the primary reasons for recognizing us. And we are extremely privileged to have received these awards from our customers.

Last week, we were pleased to announce an agreement with a new customer, Pep Boys. MPA will be the predominant supplier of its ProStart and ProStart Platinum line of starters and alternators for its nationwide network of stores. This speaks to MPA's reputation for excellence in customer service and our commitment to our quality products. In addition, it demonstrates our ability to gain share in a highly competitive marketplace. We expect this customer to be a significant part of our growth for future years.

Another major accomplishment, this year, was in regard to our move to increase our market share in the professional installer market. In the first quarter of fiscal 2006, we announced our contract with one of the world's largest automobile manufacturers to supply an all-makes, all-models line, targeted at the professional installer market. As part of this agreement, we incurred costs related to a new distribution center in Nashville, Tennessee, which we opened specifically for this program and built significant amount of inventory to support the new business.

[Details] under this contract were the largest contributor to our revenue growth, this year, and this customer is now our second largest. While sales under this program have grown slowly, we are optimistic that sales to this customer will continue to grow.

Our quality-built line of alternators, and starters for the professional installer market, continue to meet our expectation and represented about 3% of our revenues in fiscal 2006. In the third quarter of fiscal 2006, we received commitments from several customers which we expect to generate $10 million in incremental revenue for fiscal 2007.

Our third strategic initiative involves transitioning MPA from its predominantly euro-spaced manufacturing company to one that manufactures the majority of its production needs abroad. In fiscal 2006, we made a great deal of progress in this regard with 32% of total production being manufactured by our foreign subsidiaries.

In June of 2005, we opened a new 186,000 square-foot manufacturing facility in Mexico. Per unit manufacturing costs at the Mexico plant are meeting our expectations and are well below those of our Torrance facility at its most efficient level.

However, our overall manufacturing costs were higher in 2006 because of inefficiencies in the startup of our Mexico facility. These inefficiencies are now behind us. However, when considering that, please consider our U.S. facility is experiencing inefficiencies as we ramp down production. These duplicate manufacturing costs will decline as we transition this additional production to Mexico and wind down operations at the Torrance facility.

We are currently on track to source 95% of our current needs from our foreign operations by the end of fiscal 2007. We also see the potential for additional cost savings in fiscal 2008 from lower distribution costs relating to offshore initiatives. So, margins over the next two years should see improvement as we achieve efficiencies in the production and distribution model.

So, as you can see, MPA has continued to execute in each of our programs in fiscal 2006. The progress we have made is tangible and measurable, and we are excited and encouraged by the progress we have made to date.

With that, I will turn the call over to Mervyn McCulloch, our Chief Financial Officer.

Thank you, Selwyn. I'd like to begin by commenting on the delay in the filing of our 10-K. During the course of the audit of our year-end financials, we discovered certain processing errors in the quarter results for fiscal 2005 and 2006, related mainly to the accounting treatment accords. In our 10-K, which was filed today, we restated the quarterly results for fiscal 2005 and fiscal 2006. However, there was no effect on the financial results for the full 2005 fiscal year. Any errors in our financial reporting are unacceptable to us and we have worked closely with our independent auditing firm to resolve these issues as efficiently as possible.

Turning now to our financial results for the fourth quarter, net sales for the fourth quarter of 2006 were $29.7 million, up 17.5% from $25.3 million in the same quarter, last year. The majority of this increase was related to the sales from our contract with one of the world's largest automobile manufacturers.

Gross profit for Q4 was $8.6 million, or 28.9% of sales, as compared to $8.3 million, or 32.7% of sales for the same quarter, last year. As Selwyn mentioned, earlier, gross profit was affected by the costs associated with transitioning production to our manufacturing facilities outside the U.S.

General and administrative expenses were $3.4 million, up slightly from the same quarter, last year, whereas a percentage of sales down 196 basis points. This is due to a substantial decline in SOX compliance costs and expenses associated with the restatement of our financial results.

Sales and marketing expenses were $1.1 million, up 30.6%, from $819,000 in the same quarter, last year. This increase stems from the additional new business we were awarded and our sales efforts in the professional installer marketplace. As a result of these expenses, overall operating expenses increased 9.2% in Q4 of 2006 compared to Q4 of 2005.

Operating income was $3.7 million during the quarter compared to $3.8 million, last year. Interest expense, net of interest income, was $794,000 compared to $366,000 in Q4 of 2005. This increase is due to a large- to a greater use of our line of credit and increases in interest rates. We recognized an income tax expense of $990,000 in Q4 compared to $1.4 million in the same quarter of last year.

Net income and earnings per share were $1.9 million, and $0.22 per diluted share, respectively, compared to $2 million in net income and earnings of $0.23 per diluted share in Q4 of 2005.

Looking at the fiscal year 2006 results, we see net sales for the fiscal year ended March 31, 2006, which rose to $112.1 million from $95.8 million in fiscal 2005, a 17% increase. The rise in net sales is mainly due to the increase in sales to one of the largest automobile manufacturers.

Net sales reduced by $4.1 million in front-loaded marketing allowances, as Selwyn mentioned, earlier. Sales in fiscal 2005 include the benefit of a $1.7 million one-time refund from a modified customer agreement. Adjusting for these items, net sales were $116.2 million, up 23.5% over 2005 net sales of $94.1 million.

Gross profit for the fiscal year ended March 31, 2006 was $27.9 million compared to $27.1 million for fiscal 2005. The gross margin percentage for fiscal 2006 was $24.9, down from $28.2 in fiscal 2005. Gross profit was adversely impacted by the previously mentioned front-loaded marketing allowances, as well as facility startup costs of $0.7 million for our new production location in Tijuana and our new distribution center in Nashville. Reflecting these items, gross profit was $32.7 million, or 28.1% of revenues, up from a gross profit of $25.4 million, or 20% of revenues, in fiscal 2005.

General and administrative expenses for fiscal 2006 were $14.3 million, up 23% from fiscal 2005. This includes $0.4 million in expenses related to the restatement of our financial results and $0.7 million in administrative startup expenses at the new facilities.

Sales and marketing expenses were $3.5 million for fiscal 2006 as compared to $2.8 million, last year. This increase is primarily due to additional sales and marketing headcount to support a growing customer base and sales volume.

Research and development expenses were $1.2 million in fiscal 2006 compared to $836,000 in fiscal 2005. R&D costs were driven by additional R&D personnel hired to meet additional business needs and our commitment to value-added customer service.

Operating income for fiscal 2006 was $8.8 million compared to $11.8 million, last year. Taking into account the adjustments I mentioned above, operating income was at $15 million, up 25.1% from operating income to $12.5 million, last year.

Interest expense, net of interest income, was $3 million in fiscal 2006 compared to $1.7 million in fiscal 2005. The main driver was the increase in the average outstanding loan balance in our line of credit and increases in interest rates.

Net income and earnings per share for fiscal 2006 were $3.7 million and $0.43 per diluted share, respectively, compared to $6.3 million and $0.73 per diluted share in fiscal 2005. Adjusted net income was $7.6 million, or $0.89 per diluted share, up 18% from adjusted net income of $6.4 million, or $0.74 per diluted share, last year.

As of March 31, 2006, our balance sheet had a cash balance of $400,000 with working capital of $46.6 million and a current ratio of 2.1321. For fiscal 2006, cash flow used in operations was $11 million due to our growing business and new facilities. In addition, cash flow was negatively impacted by the credit due to customer obligation. Capital expenditures total $4.4 million during fiscal 2006, or $3 million associated with our Mexican facility.

In April 2006, we increased our credit facility to $25 million, up from $15 million, and extended the agreement until October 2008. As of March 31, 2006, we had $6.3 million outstanding on our line of credit.

Now, I'd like to turn the call back to Selwyn, who will make some closing remarks.

Thanks, Mervyn. Fiscal 2006 was a productive - very productive and profitable year for MPA. We demonstrated consistent and thoughtful execution of our strategies and began to achieve measurable results. We will continue along the same path as we proceed into fiscal 2007.

We have excellent visibility in regard to revenues and are expecting double-digit growth. As I mentioned, earlier, we will see some transition costs as we move production abroad. At this point, we believe we have moved past many of the initial costs related to our strategic initiatives, but we will see cost inefficiencies reflecting the ramp down of our U.S. facilities.

In closing, we believe that our business is fundamentally strong, we are well positioned to capture additional market share, and are fully equipped, both financially and from a production standpoint, to meet the demands of our existing customers and those of potential new customers.

I'd like to thank you all for your interest in our company. Merv and I are happy to answer any questions that you may have. And at this point in time, I'd like to open up the line for further questions.

[OPERATOR INSTRUCTIONS] Your first question comes from [Mitchell Sachs] with [Grand Slam].

Congratulations on a great fourth quarter.

Thanks, Mitch.

I want to just walk through the adjusted EPS, pro forma EPS numbers. Merv was going pretty fast and I wasn't keeping up. So, let's see if we can walk through this and make sure I got the numbers right.

Okay.

You have an adjustment of roughly $4 million on the revenue line, which brings it up to about $116 million. That's correct?

Correct, yes. It went from $112,103 to $116,197.

Okay, and that's versus what number for the previous year?

So, we have $116,197, this year. The previous year would be $112 - oh, of the previous year would be, excuse me. The previous year, we've actually done an adjustment to the previous year, as well, because we picked up a [windfall] in the previous year. So, in '05, we had revenue of $94 million, 112.

$94 million. Thank you.

Excuse me.

No problem. And then, the cost of goods sold line, you mentioned $700,000 for Nashville and Mexico, correct?

Correct.

So, that brings your gross margin for '06 to what?

$32,708,000 which is 28%.

And what was it the previous year?

27%.

Okay. And then, on the G&A line, you talked about, I think, roughly it was $1.1 million in G&A for restatement and startup?

$1.4 million, $1,380,000, exactly.

Okay.

And so, that would reduce our G&A from $14,337,000 to $12,957,000.

Operating income number is roughly $15 million for fiscal '06?

Correct.

And then, what was the operating income of fiscal '05?

Fiscal '05, pro forma'ed again, taking into account apples to apples, we pro forma'ed that at $11,976,000.

So, that's about a high 20%, 28.5% growth on that?

25% growth.

Okay. Then, what kind of tax rate are you using?

37%.

Okay. That gets me down to the number. You said $0.89 Mervyn?

On a fully diluted basis, it's $0.89. Yes, basically, we've been $0.92 a share.

Super. In terms of looking at this year and the cost of transitioning from Los Angeles to Mexico, is that the number that's going to be somewhere in the neighborhood of a million a month? Or is it more like a half million dollar a month number or less? Is there a way to ballpark that?

I think the logic, in terms of looking at that, is strong. It's difficult for us to identify that, right now, because of the tremendous amount of new business we've just received. So, at this point, I don't know if I can comment accurately on that at this point, Mitch.

Okay. Well, is it more towards the lower number or is more towards the higher number?

It's probably - again, I'm guessing - maybe in the midpoint but I don't want you to rely on that number at all.

Okay.

It's guidance. It's a little early for us to give that guidance.

Okay. And in terms of the realistic putting you guys back on NASDAQ, what are you guys doing with that? How is that going to work? Can you walk us through the process?

Yes, I think at this point, now, we're current with our filings and our intent is to immediately push forward to apply to NASDAQ and we would also be evaluating other accredited exchanges.

Okay. Thanks a lot, guys. Great quarter.

Thank you.

Your next question comes from [Robert Freeman] with Winfield Capital.

Hi, Robert.

How are you doing, guys? Great quarter.

Thank you.

A couple of questions. First of all, are you able to disclose about the size of Pep Boys? As to what you expect the Pep Boys contract to be as a percentage of business?

We have a policy against disclosing numbers, customer numbers, but I will tell you that it's a significant contract, and certainly will be Number 2 or Number 3 in terms of the size of the business we expect from them.

Okay. Secondly, I understood that the GM contract, the GM - excuse me, your other contract - was running a little behind schedule. Is that up to snuff, now, or -

Yes, well, GM continues to ramp up. It's still not where we would like to see it but I think the momentum that we are seeing, currently, is very positive. And I think it's just going to be a consistent, growing customer. I think their efforts that they are putting into the marketplace are very strong and we see results on the supply side from that.

Okay. Thirdly, you guys were projecting a 32% gross profit percentage. Assuming you get fully ramped up and your production is fully in Mexico and offshore, without these credits, I assume that the credits you're giving, that Pep Boys doesn't have a credit. Is that true? That there are no [inaudible - background noise] to Pep Boys?

Again, we don't try to address any specific credits unless they're abnormal. All of our customers receive various types of credits and Pep Boys will receive various types, as well, but in the normal course.

Okay, but as I understood it, the credits to your other customer, to GM, will be used up by 12/31. Is that correct?

We are - have restructured that arrangement where they will earn credits on a pro rata basis over the next few years, the remaining credits.

Okay, and there's about $3 million or $4 million left, as I understand it. Is that correct?

Less than that.

Less than that. Alright. That isn't major.

That's it..

Your gross profit - you guys projected at about 32%. Will you be able to match that or do a little better than that after everything is washed out and after your credits and you're fully out of California?

Let me clarify one thing. I don't recall putting out any projections but I do believe that what you're looking at, today, on our adjusted pro forma gross margin is a base case and that the offshore initiatives will lead to greater margins than that.

Greater margins than 32%?

No, than the 28% that we've shown as our operating metric, right now.

You guys had a conference call, again, a couple of months ago, had projected around 32% gross profit rate. That was on a conference call.

Again, I don't think that's an abnormal - I think that's a realistic number, but I don't want to give you a formal projection.

I understand. I understand. As far as the Mexico plant is going according to projection, now? [inaudible - background noise]

The Mexico plant is ahead, or on, projection. We continue to produce the right quantities of product and the right quality of products. We have an excellent management team in place. We have an excellent workforce in place. The facility seems to be working very, very well and exactly as planned.

Okay. Are you going to have to expand that plant to take care of this Pep Boys and some of the other business?

The contract is that this existing facility has more than enough capacity for us to produce for all the new customers plus additional growth and we may expand the facility on our second phase of moving offshore for our distribution model.

How much room do you have for expansion there?

In that particular building, nothing. But, in adjacent buildings, more than adequate amounts of space. There are many adjacent buildings for us.

Okay, and I assume your real listing is going to take from 60 to 120 days as that is what I was told before. Is that about approximate estimate?

I don't know that. Again, it's subject to what NASDAQ or the appropriate exchanges [inaudible - background noise], but whatever it takes, we're going to push it as fast as we can.

Alright. Have you filed for re-listing yet?

We have filed with one exchange, and we're in the process of filing for another, right now.

Alright. Okay. Thank you, guys, for a great job.

Thank you very much.

Your next question comes from [Chip Meyers] with Fidelity.

Hi, guys. How are you?

Hi, Chip. How you doing?

Good. I would like to get more clarity on the marketing allowances. And I was looking at the 10-K you filed, this morning, and it looks like the total marketing allowance for 2006 was $18.6 million of which in your press release, you said $4.1 million were front-end loaded marketing allowance related. Correct?

Correct.

Now, you also provide two charts under that, that show the commitments for marketing allowances in '07. One for $3.04 million and one for $2.6 million for a total of, call it, $5.6 million in '07. Can you just walk us through what you think the total marketing allowance will be in '07 just to give us a framework by which to understand a comparison versus the year we just ended?

Yes, I just want to, before I hand this over to Mervyn, but just in terms of clarifying - generally, marketing allowances are incurred as a percentage of sales as you go through your normal business cycle. The $4.1 million allowance that we claim as an upfront allowance is an allowance that was in conjunction with long-term contracts. And, so, there were expenses that were incurred before we experienced the revenue benefit from the long-term contracts.

The other marketing allowances, I believe, are period costs that relate directly to our sales obligations. At this point, I'll turn it over to Mervyn, who perhaps can share more detailed light.

I think it's exactly as Selwyn said, that we have marketing allowances which are fixed amounts, long term as such, and we also have allowances which are based upon product sales. From that point of view, we're looking at both a commitment, which is the $3.6 million and other commitments, and also the ongoing, based upon the unit sales, themselves.

Okay. And so, you're saying that if we take out the $4 million that was front-loaded marketing, we'd come out to '06 being about $14.5 million of sort of normal course of business marketing and then divide that by sales to get sort of what an ongoing percentage of sales marketing should be? Does that make sense?

That would be one way of looking at it, yes.

Okay. And so, sort of the true run rate earnings of the company, excluding all of the one-time effects, was that the $0.89 or something that you gave?

Correct.

Okay. So, that's sort of the base that we should work off of, going forward?

Correct.

Okay. And then, you mentioned that you had - I think, if I heard you correctly - that you had signed contracts that will provide you at least $10 million of revenue in '07. Was that correct? And did that include or exclude Pep Boys?

That excluded Pep Boys. That related to a line of products on our own brand name.

Okay. And if you said that Pep Boys should be either your second or third largest customer once it ramps up?

Correct.

Okay. And so, your second and third largest customers, last year, I think, were 9% and 13% of sales. So, we're talking 10% of sales is a reasonable number that they should look like in a year or two?

Yes, we would expect greater than that number, yes.

Okay. Perfect. Thanks a lot, guys.

[OPERATOR INSTRUCTIONS] Your next question comes from Jim Schulman from Costa Reyes [sic].

Hi, guys. How are you?

I'm good, Jim. How you doing? Costa Brava?

Well, close enough. I'll get to the mundane questions with your bank facility. How do you stand with availability on this newly increased line after LCs and borrowings?

In terms of - as of the year-end?

Yes, and then, if you can let us know, in a more currently way - if available?

Yes. I will hand it over, in a moment. Just as a, before I hand it over, just as a precursor, we would - under the scenario of all this incremental business, we may want to increase that facility and we certainly have a very receptive bank to that. So, there's a pretty significant amount of new business, and so, we would be revisiting that.

But, having said that, I'll hand it over to Mervyn to give you the details.

No, that's great, because that was going to be a follow-up question, how you were going to work it all in the line as it stands.

Correct. As of the end of March, we had drawn $6.3 million on our line. That leaves about $4.1 million tied up in LCs, which is about a 10.4 commitment. And the line, at that stage, stood at $15 million. As you'll note in our filings, today, that we indicated in an also separate filing that we increased the line from $15 million to $25 million, April 1, so we've only drawn out $10.1 at the end of March on $15, and we've increased the $15 to $25.

Could you borrow the - in round numbers, the incremental $15 above your $10 million? Or is it subject to a formula as on the assets?

No, basically what they did was they - and we did this press release back in April - what they did was they did a new line at 25 million with new covenance and new ratios so we can borrow up to 25, provided we fall within the covenant numbers at the end of each quarter.

Right. So, it's not a percentage of assets.

No, it's not.

Right. That's what I wanted to clarify. And from a - I was just going to say - from a covenant perspective, you're well within your covenance?

Yes, as you'll see, we make that comment that we are within our covenance at the end of March.

Right. Right. Okay. Very good. And I wanted to ask you one - are you going to be issuing any guidance? Or where are you at in that discussion point?

No. We continue to evaluate it. At this point in time, because of the amount of activity in the company with the guidance of double-digit revenue growth, and as we just talked about, some significant new businesses coming onboard, plus the transition of our business into this offshore production, we are hesitant to provide guidance at this point in time. But we will, as we feel more secure on the numbers, provide guidance. But I can't give you a timeline as to when that will happen.

Okay, great. Well, keep up the wonderful work and talk to you, next time.

Thank you, Jim.

At this time, there are no further questions.

Thank you very much, everybody.