Motorcar Parts of America Inc (MPAA) 2007 Q1 法說會逐字稿

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America First Quarter 2007 Results Conference Call.

[OPERATOR INSTRUCTIONS]

Thank you. [Ms. Burns], you may begin your conference.

Thanks, Jason. Good afternoon, and welcome to Motorcar Parts of America's First Quarter of Fiscal 2007 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 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 in growth margins due to customer pricing pressures, fluctuations in the costs and customer returns of cores and other factors, increases in working capital required as a result of increased volumes of 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, August 14, 2006. MPA assumes no obligation to update these projections in the future, due to changing market conditions, or otherwise.

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

Thanks, [Elaine]. Good afternoon to everybody who's out there. Thank you for listening to our conference call today. We're happy with our results. Today's call will follow the following format. I will begin with an overview of our results for the first quarter of '07, 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. He'll provide a more detailed discussion of our financial results, and finally I will discuss our outlook for the rest of fiscal 2007, make some closing remarks, and open the call up to any questions that you may have.

In our last call, we commented that we were beginning to see a return on the investments that we have made in our business. Today, I am pleased to report that this momentum continued into the first quarter of fiscal 2007. Revenues increased 27.5% and the gross margin expanded by 10 percentage points. Even after taking into account the $1.2 million higher marketing allowances in last year's quarter, when compared to the current year, the current quarter's revenues still increased by 20.7%.

The current quarter's operating income is $2,653,000.00, compared to an operating loss of $1, 803,000.00 for the prior period. After adjusting for expenses relating to the adoption of 123R, in this quarter operating income is $2,768,000.00. For the prior period, adjusting for the differences in marketing allowances of approximately $1.2 million, and the increase in the G&A expenses relating to accounting compliance and costs relating to the opening of the Mexico facility in June of 2005, operating income would have been $454,000.00. On an adjusted comparative basis, operating income is up 8.2 percentage points or an increase of 510%.

Our performance is a result of the great progress we have made with our strategies. We continue to increase our market share and grow our business. The company continues to experience growth with its existing customers, sales from our large [OEM] car manufacturer is continuing to show positive progress. The company is now beginning to ship on its significant new business contracts. The revenue growth that we've described above is not reflected -- the new business that we are about to achieve is not reflected in the first quarter.

Since the first quarter growth of 20% does not reflect this new business, we anticipate that sales growth will continue to be strong for the balance of the year. In addition, we continue to cultivate new business arising from our March 2005 contract with one of the world's largest automobile manufacturers to supply an all makes all models line, targeted at the professional installer market. This program continues to gain momentum, and we expect the contract to continue to grow for the rest of the year. Sales from our Quality Built brand showed very positive momentum. We are actively changing over inventory in a number of new professional installer line contracts, and we expect this momentum to continue.

At MPA we take pride in our ability to work with our customers as a value added partner, and we believe we have been rewarded for this in the quality of business that we have won in the last year. Our most recent business successes are good indications for the future of MPA. In addition to our commitment to our customers and our quality, our low cost structure has been a major contributor to MPA's success in winning new business. One of our major initiatives over the past year has been to move our production offshore.

During the first quarter, our facilities in Singapore, Malaysia, and Mexico accounted for 60% of our total production. By the end of the fiscal 2007, we expect these three facilities to provide 95% of our current production needs. The Mexico plant has been opened for a little over a year now. This facility continues to operate with very efficient cost metrics. We expect these metrics to even further improve as production ramps up. In our last call, I mentioned that the per unit manufacturing costs at our Mexico plants are below those of our Torrance facility at its most efficient level.

We expect the benefits of our offshore production cost metrics will continue to show in our future results. This quarter, the net effect of the two was positive. We achieved 100 basis point margin expansion over adjusted gross margin in the first quarter of fiscal 2006. Our next area of focus will be to improve our logistic cost metrics by maximizing our logistics model. This will be one of our key initiatives for fiscal 2008 and should provide the opportunity for even greater cost savings.

Despite some industry softness, fiscal 2007 is off to a strong start. We made dramatic progress in our overall strategy to increase market share, grow our business, and improved our cost structure. We are encouraged by our progress, and we see the potential for more of the same in the rest of fiscal 2007.

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

Thanks, Selwyn. Net sales in the first quarter of fiscal 2007, 27.2 million up 27.5% from the 21.4 million in the same quarter last year. The majority of this increase was primarily due to increases in sales to our retail customers. Sales in last year's comparable period, were negatively impacted by marketing allowances of 5.7 million, compared to the 4.5 million for the quarter ended June 30, 2006. A major contributor to this differential was the effect of 2.6 million in a front loaded marketing allowance last year.

Gross profit for Q1 was 7 million or 25.9% of sales, as compared to 3.4 million or 15.9% of sales for the same quarter last year. Gross margin in the first quarter of last year also reflects the impact of the 2.6 million in front loaded marketing allowances mentioned above, which is treated as an offset to sales, but does not reduce the cost of goods associated with those sales. On an adjusted basis, gross margin improved by 1 percentage point or 4% from the prior period. As Selwyn discussed earlier, this improvement was primarily due to the high utilization of our remanufacturing facilities outside the U.S.

General and administrative expenses fell 23.4% to 3.1 million in the first quarter of fiscal 2007. As a percentage of sales, general and administrative expenses were 11.3% in the current quarter, compared to 18.8% in the first quarter of fiscal 2006. This was due to a substantial decline in Sarbanes-Oxley compliance costs, and expenses associated with the restatement of our financial results. General and administrative expenses in the first quarter of fiscal 2007 include 115,000.00 in share based compensation expense, related to the adoption of 123R.

Sales and marketing expenses were 905,000.00 up 4.6% from 865,000.00 in the same quarter last year. This increase relates to our increased commitment to support our existing and new customer needs. This is partially offset by 119,000.00 drop in catalog expenses from the first quarter of fiscal 2006. As a result of these results, overall operating expenses declined 15.3% in Q1 2007 to Q1 2006. Operating income was 2.7 million during the quarter, compared to an operating loss of 1.8 million last year.

Interest expense net of interest income was 822,000.00, compared to 548,000.00 in Q1 2006. This increase was due to a greater use of our line of credit, and increases in short term interest rates. Net income was 1.1 million, and net income per share was $0.13 per basic share in the first quarter of fiscal 2007, compared to a net loss and loss per share of 1.4 million and $0.17 per basic share for Q1 last year.

As of June 30, 2006, our balance sheet had a working capital of 46.2 million, and a current ratio of 1.9:1. For the three months ended June 30, 2006, cash flow used in operations was 7.1 million. This primarily reflects a 5.2 million increase in inventory, which is related to the ramping up for our new business contracts, as well as 3.9 million related to the final payment for transition inventory from our POS arrangement.

However, cash flow was positively impacted by a net income of 1.1 million, as well as by net increase in accounts payable and accrued liabilities of 3 million. Over the last 12 months, we have increased our inventory levels to meet additional new demands, as well as servicing our offshore facilities. Additionally, we have spent greater than normal capital expenditures to establish our new Mexico facility, and to increase capacity at our Malaysian facility, as well as paying off our POS obligations.

We had capital expenditures of 1.3 million in the first quarter of fiscal 2007. Of this amount, 794 was for recurring expenditures -- was for expenditure for our Mexico production facility, with the rest for recurring capital expenditures. In August 2006, we increased our credit facility to 35 million, up from 25 million. The new agreement also increased the minimum fixed charge coverage ratio, increased the maximum leverage ratio, and increased the amount of allowable capital expenses.

The increase in the minimum fixed charge coverage ratio is due to a change in the formula, by excluding non-finance capital expenditures. The net effect of this change is inconsequential. As of June 30, 2006, we had 14.9 million outstanding on our line of credit. We believe that our expanded line of credit and our capital lease agreement, will allow us to meet our current liquidity requirements and financial obligations.

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

Thanks, Mervyn. I'm encouraged by our strong results in the first quarter of fiscal 2007. The power of our business model is flowing through to our financial statements, as we leverage improving efficiencies at our Mexico remanufacturing facilities, and the ramp up at our Malaysian facilities.

Despite industry softness, our outlook for fiscal 2007 remains positive. Our visibility in regard to revenues is excellent, and we expect double digit growth for the full year. We should begin to see revenues from our new customer agreements as early as the second quarter of fiscal 2007, which is this quarter. We anticipate the remanufacturing cost per unit will continue to decline over the next several quarters, due to a greater contribution from our remanufacturing operations abroad, although they will still somewhat be mitigated in the near term by inefficiencies as we scale down production in our Torrance facility.

It is important to note that the company is still experiencing a number of inefficiencies relating to our offshore initiatives, which we expect will be minimized over time. In closing, this was a solid quarter for MPA. We delivered solid financial results and gained important new business, we are on track, we are optimistic about our prospects for the rest of the year, and we look forward to updating you on the progress in the next quarter.

I'd like to thank everyone for their interest in our company, and Mervyn and I are happy to answer any questions that you might have at this point.

Operator, we're ready for questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from the line of [Mitchell Saks] with [Grand Slam].

Hi, guys. Congratulations on a very good quarter.

Thanks, Mitch.

A few questions. First one has to do with respect to your talk on the new business. You had mentioned that, I believe, that your Pep Boys relationship just started ramping up this quarter, and then did you also mention that the OEM relationship was ramping this quarter, or did I mishear that?

Yes. That is correct. We have increased the amount of business that we have on the OEM side.

So any growth that you have this quarter, over and above, would be from those two, plus whatever is going on in the industry?

Yes. We would have our base organic growth that we have shown in the first quarter, plus incremental growth from the new business initiatives that we've received.

Good. Can you talk a little bit about what's going on in the industry? You had mentioned there was some softness around the industry. Is that caused by you guys winning business, or is that just the general industry trend?

Well, I think, I keep reading the researchers' reports that are out there. I think clearly the economy is in a state where there are higher gas prices, and I think disposable income at the low income level -- consumer level seems to be under some pressure. And so, I think we do see that in general. The retail market seems to be a little softer than it has been in prior years. I don't have any specifics on that, but it's just from reading the research that's out there.

But, it hasn't really impacted you, has it?

At this point in time, I'm sure it has impacted us, but we've not seen the impact because of the incremental growth that we continue to experience. I think under normal situations, Mitch, we'd be experiencing even greater sales growth.

Okay. Can you talk a little bit about the working capital facility that you put in? I think I heard Mervyn say that you've got relaxed covenants. Is that what I heard?

It wasn't that we got relaxed covenants, it was a change in the formula on one of the covenants that if you read it, it looks like they've increased the minimum, which sounds like a negative, but in effect it was a change in the way it was calculated, which brings us back to the same place that we would have been, had it been unchanged.

Okay. In terms of that facility, you said that's enough to handle the growth you've got, and the inventory build up for the new business that you've been winning.

That is correct.

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

Our next question comes from the line of [Bob Freedman] with [Windfield].

Hey, Bob, we can hardly hear you. Can you get close to the phone?

I'm on speakerphone. Great quarter, guys.

Alright, thank you very much.

[inaudible - microphone inaccessible]

Bob, you're not coming through clearly. Is it possible to pick up the phone? I'm sorry. We can barely hear the question.

[inaudible - microphone inaccessible]

That is correct.

[inaudible - microphone inaccessible]

We're going to need you to repeat the question. I'm sorry. You are so faint, we can't hear what you're saying.

[inaudible - microphone inaccessible]

I think the question is, is what do we expect normalized gross profit to be? I think the prior guidance that we've given in the past remains. We had talked about approaching this range of 28 to 32% in gross margin post all of these changes, and there's no change in that at this point. We continue to be on plan with our cost savings initiatives, we, of course, anticipate sharing some of our savings with our customers, but the operating metric that we've previously discussed remains unchanged.

I'm not sure. I didn't hear the question clearly, so I'm not sure if I've answered your question.

Okay. Our next question comes from the line of Gregg Hillman with First Wilshire Securities.

Good afternoon, gentlemen. Could you talk, Selwyn, about your logistics initiative for fiscal '08, and the savings you expect from that initiative?

Well, I think, Gregg, the first thing to understand is as we go through a transition where we move most of our production offshore, the heart of our logistics model is based out of our Torrance facility, and so the number of units we're handling out of Torrance has gone up. Exponentially, catering for all of the product that comes into Torrance and then is moved out to the offshore facilities, and the raw materials that have got to got with it and then everything comes back here as a finished good.

We intend to streamline the entire logistic processes, and lean them out using the offshore locations as the distribution hubs for our product, and in addition to that, we intend to move core sortation offshore as well. The savings we believe could be significant. At this point in time, I'm not ready to give guidance to the street in terms of what those savings would be, but there are a number of employees that are engaged here at high labor rates as well as a tremendous amount of inefficiency in the number of times we touch our product.

Okay. Selwyn, I didn't hear what you said about the second part. You said the first part, you said you were going to use your offshore facilities as distribution points too, but what was the second thing you said? I didn't quite pick it up?

Yes. We would be moving our core induction system into our Mexico facility. We are just entering into an agreement to expand the amount of space that we'll be taking in Mexico for that.

Right now, the core induction facility is in Torrance or --?

Correct.

Okay. We have another question also.

Yes. Hi. This is Scott Hood.

Hi, Scott.

Can you talk about your registration and -- becoming fully NASDAQ, the usual question?

Yes. I think at this point in time, we have already filed an application with the New York Stock Exchange, ARCA Exchange and we've received some comments back from them, so it is pending. We are hoping that this will be successfully completed in the near future. At that point in time, we'll be looking at moving forward with an application to NASDAQ. We feel like the right progression would be to go to ARCA first and then move on to NASDAQ. I'm hoping to have positive response, but it's not entirely under my control, from ARCA in the near future and then shortly thereafter follow up with a NASDAQ listing.

Just one other. This is Gregg. Another question in terms of other initiatives that would use your facilities for other in aftermarket parts. Are you still looking at other types of products to get involved with?

Yes. I think where we are today is -- our focus has been to gain a predominate share in the marketplace in our rotating electrical category. We continue to see greater and greater success in that area. Once we get our model complete on this initiative, we then would be looking at either expanding the marketplaces that we serve, or to add additional products to put through the existing logistics model that we have. Both of those initiatives have been now stepped up in terms of the attention that we are looking at giving them.

Okay. Are you serving the OEMs internationally, or are you just serving them domestically?

We are serving the OEMs internationally, and I want to couch that, in that's not a very big part of the business. It looks like that's starting to show some nice growth coming into it, but we are with our OEM suppliers starting to reach out to pretty much around the world.

That will, in my opinion, give us a foothold into looking at some of the international marketplaces, although the business model in these international marketplaces are a lot different than it is in the U.S. This is still obviously quite preliminary. The next probably low hanging fruit for us is to get line extensions and try and move them through our existing channels, with the good will that we have with our existing customer base.

Okay. Thank you.

Thanks, Gregg.

Our next question comes from the line of Jim Sholman with Costa Brava.

Hi, guys. Good quarter.

Hi, Jim. Thank you, very much.

Just a follow up on the stock listing. Do you have a time horizon range as to when you think you'd be on the NASDAQ? Is it two months away, or eight months away?

My dream is as quick as possible, Jim. I think, again, it's something that's out of our control. I would hope by the end of the summer we'd have some concrete news on the ARCA Exchange which would mean in the next month, I would hope, but again this is somewhat speculative from my perspective. On my part, they have not given us a timeframe or an indication on their response. We would then immediately, and probably before then, probably immediately move forward with another application to NASDAQ.

Right. Then, relative to you having a full year that didn't have unusual items in it, would it be fair to say that fiscal '08 would probably be your first squeaky clean year where you don't have the legacy costs, you don't have the startup related costs, you don't have the front end loaded allowances, and you'd get a real clean look at your true performance?

Let me break it up a little bit into different categories. I think the big initiative that is currently underway is to get our remanufacturing and manufacturing facilities offshore. I think by the end of this fiscal year, we should be clean relative to those expenses.

Right.

Next phase would be to move our logistics and I think you'll see incremental cost savings in '08 clearly from that initiative. Then we would move our logistics model into a much more streamlined lean offshore model, and I think you'll start seeing that towards the end of '08. Those benefits.

I think the way our philosophy is here is to never stop and to continue to incrementalize savings and take out waste out of the system and grow the business. As much as I want to say that you're going to have a clean year, I think you're going to see much better margins and certainly the effect of the remanufacturing facilities offshore, but you'll still be able to look at margin accretion for the future.

Right. That would suggest on your normalized gross margin they'd probably move towards the higher end of your range and the EBITDA margins probably would move up towards at least the mid teens I would think.

Yes. I think what we're showing now in our business is that the EBITDA margins or the EBITDA growth is not matching the revenue growth yet and we expect that to see a catch up certainly in '08 and on that metric. As we capture market share, there's a lot of, as you know, expenses of incorporating new business. There's a lot of inefficiencies in moving a facility. There's a lot of excess overhead that results in having multiple facilities before we can streamline this existing facility and I think you're going to see most of those savings in '08.

Okay. Alright well thank you. Keep up the good work.

Thank you, very much.

Our next question comes from the line of [Rod Sarney] with McCarthy Group Advisors.

Hi, Rod.

Hi, Selwyn. How are you?

Good so far.

Good quarter. Just to follow up just very briefly. Most of my questions have been answered. Do you have a sense of the extraordinary costs, or the extra costs from running Torrance and Mexico at this point? How much extra cost is in the P&L at this stage?

Not a number I can just whip up off the top of my head, Rod. Let me sort of back peddle a little bit and sort of give you another metric. If you looked at our production net cost per unit in Mexico today, it's less expensive than at our absolute peak of productivity in California. Although if you looked at translating that across the board, we really don't see much difference in our margin from our peaks.

The only thing I would say to you is, that today even though we're producing much more efficiently in Mexico, we probably are just getting at the break even point and the turning point of showing incremental margin. That's a convoluted way of answering it, but I don't want to throw a number out that I haven't thought through very carefully.

Okay. Very good. In terms of operating margins, you talked about gross margins being in the 28 to 30% range or 32% range, are your operating margins -- at one stage you though operating margins could be at close to 15%. Is that still a goal?

Well, I think it's realistic as we get these gross margins up there I think our G&A guidance that we gave back a while is coming into fruition. Once we can eliminate all the extraordinary items we're running at about $1 million a month. I don't see much need to increase that at all. We do believe that we're going to continue to bolster our sales infrastructure, which is a relatively small part of the P&L, but we are intent on making sure that we not only deliver alternators or starters, but that we deliver the finest customer service that's out there. We believe that the majority of the gross margin increase should fall to the bottom line.

Alright. That's all I have. Good quarter. Thanks, Selwyn.

Thank you, Rod.

Our next question is a follow up from Mitchell Saks with Grand Slam.

On the logistics conversation, if we're looking at that for modeling that into fiscal '08, is that a gross margin improvement or is that an operating margin improvement? Would you towards that in the latter half of fiscal '08, or earlier in fiscal '08?

The second to last question first. It definitely affects the gross margins that's in the cost of goods number. We will begin to see a change. Our current budget is to begin changing towards the very end of this fiscal year for a portion of that and then probably to the middle of next year for the distribution side. The core induction we're looking at by fiscal year end, and the logistics distribution model we're looking to put into place during the first six months of the next year. Did that answer your question?

No, it absolutely does.

There's a number of employees, a number of extra touches. I believe there's a lot of opportunity still, over and above our production expenses to enhance margins.

Then you also mentioned that you were going to be expanding the Mexican facility. Can you just talk a little bit about that in terms of cost, from CapExed endpoint, and from an operating expensed endpoint?

Yes. We currently have about 180,000 square feet in Mexico, I believe, Mervyn, is that correct?

Yes. That's correct.

About 180,000 square feet, we have a two building campus, we have reached agreement to take the second building on our campus which is another 120,000 square feet. That will be phased in, in two tranches, one in October and one in January.

The first step in the new facility or the additional space in Mexico would be to move our core sortation system into Mexico. What that will do, it will enable us, first of all, to eliminate dual inventories that we have to keep -- some in Torrance and some in Mexico. It will enable us to cut the number of times we have to touch their core inventory, because what we do now is sort it in the United States and then send it to Mexico, and then they've got to mess with it. That will be the first phase. We anticipate having that done by the end of this fiscal year.

The CapEx that was associated with that building could be in the $3 million range, which would include completely retrofitting a full core sortation system and a new wracking and warehouse distribution system and the full cost of the whole warehouse. The second phase of the distribution won't go into place until the latter six months of the next fiscal year.

How quick of a payback would you expect on something like that?

You're trying to back me into your model, huh? Let me not answer that this call. Maybe in our next public outing I can give some more guidance on that.

Okay. Thanks a lot.

Thanks, Mitch.

[OPERATOR INSTRUCTIONS]

Our next question is a follow up from Rod Sarney with McCarthy Group Advisors.

Hey, Selwyn, going back to a logistics initiative, do you expect to have some one time charges or some extraordinary costs that you're going to have to run through the P&L as you move through this initiative?

I hate to say none, but certainly not the materiality level that we've experienced for the production.

Right.

It's a much more manageable task.

Okay.

I certainly think the training and learning curve for the distribution model is going to be much quicker and much more efficient. It's much less sophistication in training new people for this. One of the things that I'm definitely considering is bringing in the world renowned experts to make sure that we do it right, and so there may be some cost associated with that. I would say in general, you're not going to see the effects that you've seen in these numbers to date.

Yes. Very good. Thank you.

At this time there are no further questions on the phone lines. Are there any closing remarks?

I wanted to thank everybody for their loyal support, and continue to express my optimism at accomplishing the business initiatives that we've embarked on. I thank you all.

That does conclude today's teleconference. You may now disconnect.