Motorcar Parts of America Inc (MPAA) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Motorcar Parts of America Earnings Conference Call hosted today by Elaine Ketchmere with CCG Investor Relations. My name is Phil and I am your conference coordinator today.

Throughout the conference call, all participants will be in a listen-only mode, with a Q&A session following the presentation.

(OPERATOR INSTRUCTIONS)

I would now like to hand over the program to your host for today's call, Elaine Ketchmere with CCG Investor Relations. Please go ahead ma'am.

Thanks, Phil. Good morning and welcome to Motorcar Parts of America's Fourth Quarter and Full Year 2007 Conference Call. With us today are 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 in gross margins due to customer pricing pressures; fluctuations in the cost in 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 net sales, 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 Form 10-K.

Any projections as to the Company's future financial performance represent management's estimates as of today, July 2nd, 2007. 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's my pleasure to turn the call over to MPA's CEO, Selwyn Joffe. Selwyn?

Thanks, Elaine. Good morning everybody and thank you once again for listening to our conference call today. Today's call will follow our usual format.

I will begin with an overview of our accomplishments and results for fiscal '07 and provide an update on our progress since our last conference call. At that point, I will turn the call over to our CFO, Mervyn McCulloch, who will provide a detailed discussion of our fourth quarter and our full year financial results.

And finally, I will discuss our outlook for fiscal 2008, make some closing remarks, and open up the call to any questions you may have.

Firstly, let me say that fiscal 2007 was quite a remarkable year for MPA. I will talk about sales first.

Overall, reported sales for the year are up by 25.8%. Sales for the year adjusted for the POS reversal transaction are up by 17.4%. We had significant sales increases in both the do-it-yourself and the do-it-for-me market.

With respect to the do-it-yourself market, sales from each one of our main retail customers increased. In addition, we began shipping another major retail customer with all makes and models in August.

Furthermore, we won a prestigious service award from our largest customer for our service to them. And in addition, we won a product quality and innovation award from independent market analysts.

With respect to the DIFM or the professional installer market, fiscal 2007 proved to be very successful. In keeping with our strategy to increase market share in the professional installer market, we expanded our relationship with our large OE customer and signed up many new customers with our own Quality Built brand.

Sales for the Company in the professional installer market now represent 21% of total sales. This is up from 17% last year and a nominal share of the year before. This segment of the total market is expected to grow faster than the DIFM market in the future and we are excited about our position there right now.

Secondly, I will address some of the initiatives on the production side for the Company. The Company embarked on an initiative to lower production costs by moving its production offshore.

We opened a new 300,000 square foot facility in Mexico, 180,000 square feet are dedicated to production and finished goods distribution, the other 120,000 square foot is dedicated to core sorting and warehousing.

Over the last year, we have had many costs associated with this move and the ramp up inefficiencies you would expect from a new remanufacturing facility. These costs have impacted our operating results for the past year. However, I believe this move was critical for the long-term success of the Company.

The results for fiscal 2007 were as follows. In the fourth quarter of fiscal 2007, gross profit and gross margin were $3.3 million and 10.6%, as compared to $7.5 million and 26.8% respectively in the fourth quarter of fiscal 2006.

Gross profit in the fourth quarter of fiscal 2007 was negatively impacted by start-up expenses relating to our initiative of moving production offshore and by the write-down of inventory related to a reduction in our standard costs from the end of the third quarter, which reduction was also from the cost savings we are experiencing in Mexico.

In addition, during the quarter ended March 31, 2007, $1.5 million of core revenues was deferred. No core revenues were deferred in prior periods.

I am proud to report that as of today, the Company has established full capability to produce all makes and models in its offshore facilities. In addition, our cost reductions are now starting to show.

For the first quarter of this fiscal, we are starting to see significant reductions in our cost of production and I am happy that these savings are right in line with our expectations. We believe that we will be able to report sequential improved costs and profitabilities over the next few quarters.

Besides the imminent cost savings from offshore initiatives, I must report that both of our newly expanded Malaysia facility and our Mexico facility received the highest TS Quality System certification in record time.

In addition, independent experts who have evaluated our facilities have made statements that we have the state-of-the-art remanufacturing facility in the world. We are very pleased with the quality and efficiency of our new facility despite its infancy.

As we are all aware, the profitability for this year has suffered. The numbers have been negatively affected by a number of initiatives, which are positive in nature and that we believe add to the success of the Company.

Most significantly, these initiatives of a new Mexico facility and its start-up expense -- new Mexico facility, the start-up expenses for new customers, as well as a restructuring of our POS arrangement.

It is our expectation however that going forward that we will experience approximately a 100% cash-on-cash return on the initiatives performed in the past year relative to our new factories, and approximately 40% cash-on-cash on new business start-up expenses.

The Mexico facility also now has a fully operational core sorting system up and running. This system is state-of-the-art for the industry and is currently processing 60% of our cores. This facility is now receiving cores back directly from most of our customers. The facility began operations in late March and will be sorting 100% of our cores by the end of July.

In connection with these Mexico initiatives, we have reduced our workforce in Torrance by approximately 345 people to-date and 200 for fiscal 2007.

Despite these reductions, we will have some duplicative expenses in Torrance which will be removed when cores have been fully transferred and once again, when shipping is fully transferred.

These initiatives are well on their way and are in place to enable the Company to continually increase its EBITDA performance until this transition is complete.

The Company successfully completed a PIPE in May, which enabled us to raise gross proceeds of $40.1 million and the Company has used this cash to normalize any late payables and to fully pay down our line of credit revolver. This leaves us with a financial flexibility to execute our business plan.

MPA is the second largest player in the aftermarket for remanufactured alternators and starters in an industry that is extremely competitive between few competitors, it has high barriers to entry, and a limited number of customers.

Because of this, we believe that strong customer relations of -- relationships are vital to our success, and we have established long-term agreements with each of our major customers.

Many of these agreements have required us to grant marketing allowances and offer other incentives that impact our short-term profitability, cash flow, and working capital.

In fiscal 2007, we granted approximately $3.3 million in front-loaded marketing allowances for new business. We also renegotiated the contract with our largest customer to terminate a pay-on-scan inventory arrangement. The income statement effect of this reversal was an $8.1 million charge.

Despite these adverse near-term effects, we believe each of our long-term relationships serves to strengthen our customer relationships, enhance our customer base, and positions MPA for future growth in net sales and in profitability.

In 2007, we made good progress in transitioning production to our facilities outside the U.S. Our Mexico and Malaysia facilities produced 64% of our total production, up from 32% in 2006, and are on track to produce approximately 95% of our production requirements for this fiscal year.

Progress at our Mexico facility is proving to be successful and our operating cost, as recently as May 2007, are right on target with our expectation. We have seen significant improvement in our per unit manufacturing costs.

In fact, the cost savings we are experiencing in Mexico caused a decline in our standard costs that forced us to record a write-down to our on-hand inventory during the fourth quarter of approximately $800,000.

We are optimistic that we will begin to see the success of our offshore initiative beginning with the first quarter of 2008 financial results.

In fact, after conducting a pro forma analysis of what our results would have been, using the operating costs we experienced as recently as May, our adjusted gross margin would have been approximately 26% in the fourth quarter of fiscal 2007 compared to the reported gross margin of 10.6% in the fourth quarter and compared to an adjusted gross margin of 24% in the fourth quarter of the prior year.

On the same basis, operating income for the fourth quarter fiscal [2000] would be approximately $5.4 million after taking into account the effect of the GAAP to non-GAAP adjustments.

We are very encouraged by these results and expect our operating costs to decline even more as we complete the transition of our remaining remanufacturing operations to Mexico.

Our next step in the transition will be to utilize our offshore locations as a distribution center. We see a lot of potential for cost savings in this area, which should begin flowing through to our financial results in this fiscal year.

Another major undertaking for MPA in fiscal 2007 was becoming compliant with Section 404 Sarbanes-Oxley Act of 2002. We incurred approximately $2.4 million in expenses and dedicated a significant amount of time and energy in this area. I am happy to report that we achieved compliance with Section 404 upon the filing of our 10-K last Friday.

With that, I will turn the call over to Mervyn McCulloch, our CFO.

Thanks, Selwyn.

I would like to begin by stating that our prepared remarks include certain income statement information that is not calculated according to GAAP in order to exclude the impact of items such as core inventory adjustments recorded as a result of the termination of the pay-on-scan inventory arrangement, deferral of core revenues, front-loaded marketing allowances in conjunction with new business, stock adjustments related to update orders shipped in later periods, FAS 123R stock compensation expenses, consulting fees incurred in connection with Sarbanes-Oxley compliance, restatement expenses, cost reductions associated with the recording of the shareholder note receivable, and severance and other costs related to staff reductions at our Torrance facility.

We believe these non-GAAP disclosures are useful in evaluating our operating results. For a reconciliation of the non-GAAP results to the relevant GAAP results, we encourage you to review the financial schedules that accompany the press release dated June 30, 2007.

I will now go over our fourth quarter and year-end results in some detail.

Net sales in the fourth quarter of fiscal 2007 was $31.4 million, up 11.6% from $28.1 million in the same quarter last year. The majority of this increase was due to increased sales to new and existing customers.

Net sales in the current quarter were negatively impacted by a $600,000 in core inventory adjustments, $200,000 in front-loaded marketing allowances, and the deferral of core revenues of $1.6 million.

Adjusting for these items and including a $2.2 million reduction in net sales due to the reversal of stock adjustments recognized previously, non-GAAP net sales were $31.6 million, up 23% from adjusted net sales of $25.7 million in the fourth quarter of 2006.

Gross profit was $3.3 million or 10.6% of sales compared to $7.5 million or 26.8% of sales in the same quarter the prior year.

Gross profit in the fourth quarter of fiscal 2007 reflects the impact of inventory -- core inventory adjustments, front-loaded marketing allowances, deferral of core revenue, as well as a $800,000 write-down of on-hand inventory related to the reduction in standard costs from the end of the third quarter.

Our standard costs are evaluated at least quarterly and have been declining due to lower per unit manufacturing costs at our Mexican facility.

Adjusting for these items, and excluding the write-down of on-hand inventory, non-GAAP gross profit was $3.8 million or 12.1% of net sales compared to a non-GAAP gross profit of $6.1 million or 23.8% of net sales in the same quarter of the prior year.

As Selwyn discussed earlier, the decline in adjusted gross margin was due to the duplicate costs at the Mexico and Torrance facilities along with production start-up costs at our offshore locations.

General and administrative expenses rose 75.9% to $6 million in the fourth quarter of fiscal 2007. As a percentage of sales, general and administrative expenses were 19.2% in the current quarter compared to 12.2% in the fourth quarter of fiscal 2006.

This was primarily caused by consulting fees of $1.4 million associated with Sarbanes-Oxley Section 404 compliance, severance costs of $300,000, and FAS 123R expenses of $300,000.

Sales and marketing expenses were $1.2 million at 9.9% from the $1.1 million in the same quarter last year.

This increase was due to increased staffing in the sales and marketing department, driven by our higher sales volume, larger customer base, and increased sales commission expenses.

Operating loss during the quarter was $4.2 million compared to the operating income of $2.6 million a year ago.

On an adjusted basis, non-GAAP operating loss was $1.7 million compared to a non-GAAP operating income of $1.2 million in the fourth quarter of 2006.

Interest expense, net of interest income, was $1.9 million compared to $800,000 in the fourth quarter of 2006.

This increase was due to a greater use of our line of credit, increase in the amount of receivables that were discounted under our factory agreements, the increase in the average days of which receivables were affected associated with the extended payment terms we have provided certain of our customers, and increases in short-term interest rates.

For the quarter, net loss was $2.6 million or $0.32 per diluted share compared to net income of $1.2 million or $0.14 per diluted share in the fourth quarter of 2006.

Adjusted net loss was $2.2 million or $0.26 per diluted share compared to an adjusted net income of $200,000 or $0.03 per diluted share in the same quarter last year.

For the 2007 fiscal year, net sales were $136.3 million, up 25.8% from $180.4 million in 2006.

Net sales were favorably impacted by $19.8 million in sales from products previously shipped on a point-of-sale basis, which is partially offset by an $8.1 million in core inventory adjustments, the $3.3 million in front-loaded marketing allowances, and $600,000 in expenses related to buyback of core inventory.

In addition, $1.6 million in core net sales was deferred in fiscal 2007.

Adjusting for these items, non-GAAP net sales were $130.1 million, up 17.4% from non-GAAP net sales in fiscal 2006.

Gross profit was $21.3 million or 15.6% of net sales versus $25.4 million or 23.4% of net sales in fiscal 2006.

Gross margin includes the effect of the previously mentioned core inventory adjustments recorded as a result of the POS inventory arrangement, buyback of core inventory, front-loaded marketing allowances, deferral of core revenues, and the inventory write-down in the fourth quarter.

Adjusting for these items and excluding the write-down of on-hand inventory, non-GAAP gross profit was $29.3 million or 22.5% of net sales compared to non-GAAP gross profit of $28.5 million or 25.7% of net sales in fiscal 2006.

General and administrative expenses increased 26.8% to $18.2 million primarily due to consulting fees incurred in connection with the Sarbanes-Oxley Section 404 compliance, FAS 123R stock compensation expense, severance costs, and restatement expenses.

General and administrative expenses were favorably impacted by the recording of a shareholder note receivable that reduced expenses by $700,000.

Sales and marketing expenses increased 16.4% to $4.1 million and research and development expenses increased 18.1% to $1.5 million, due to increased wages to support our new business and the development of new diagnostic equipment at our Mexico and Malaysian facilities.

Operating loss in fiscal 2007 was $2.5 million compared to the operating income of $6.3 million in fiscal 2006.

On an adjusted basis, non-GAAP operating income was $9.2 million compared to non-GAAP operating income of $12.4 million in fiscal 2006.

Net loss was $5 million in fiscal 2007 or $0.59 per diluted share compared to net income of $2.1 million or $0.25 per diluted share in fiscal 2006.

Non-GAAP net income was $2 million or $0.23 per diluted share in fiscal 2007 compared to $5.7 million or $0.67 per diluted share in fiscal 2006.

As of March 31st, 2007, our balance sheet has $349,000 in cash and shareholders equity of $47.8 million. At year-end, we had advances against our line of credit and capital lease obligations of $28 million.

As of March 31st, 2007, we had negative working capital of $27.2 million and in fiscal 2007, we used $9.3 million in cash from operations.

During the fourth quarter of fiscal 2007, we reclassified core inventory and the core portion of finished goods held at our locations and core inventory held at our customers' locations to long-term core inventory.

The classification had no impact on total assets or core inventory value. As Selwyn mentioned, on May 23rd, we closed the private placement of 3.6 million shares of common stock, generating net proceeds of $36.5 million. We used these proceeds to fully pay down our line of credit and reduce our accounts payable.

We believe that we have now sufficient capital to meet our working capital requirements and planned capital expenditures over the next year.

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

Thanks, Mervyn. Despite the complexity of the year, fiscal 2007 was a very important year for MPA.

We achieved another year of strong revenue growth, gained market share in both the do-it-yourself and do-it-for-me markets, and continued to transition our remanufacturing and logistics to our offshore facilities.

We also began winding down operations at our Torrance facility, became compliant with Section 404 of Sarbanes-Oxley, got TS certification for our plants, and arranged for additional capital resources to fund our operations and future growth.

Our outlook for 2008 is for another year of positive growth in net sales, along with a continued reduction in our operating costs as we transition the remaining remanufacturing and continue relocating logistics to our offshore facilities.

Despite the market being soft today, we expect this year's sales to increase by at least 15% for fiscal 2008, after eliminating the effect of the POS reversal transaction.

We expect our operating results to steadily improve each quarter in fiscal 2008, with a significant increase in our operating margins by the end of year.

I am confident that our initiatives will improve our competitive position and allow us to further expand our market share.

For the first quarter of this year, we expect sales to increase by approximately 20% over the first quarter of last year, and gross margins to substantially increase over the fourth quarter of last year.

We have eliminated approximately 150 jobs in the first quarter of this year, and we continue to eliminate costs from redundancy and expect quarterly sequential increases in the profitability over the year.

I would like to thank you all for your interest in MPA and I look forward to reporting on our progress next quarter. Mervyn and I are happy now to answer any questions that you may have.

Thank you. (OPERATOR INSTRUCTIONS)

First question from the line Mitchell Sacks with Grand Slam, please go ahead.

Hi guys. I need a little help sort of working through the numbers again on fiscal '06.

What I would like to do is just for the year as a total, if you could just take me through in pro forma the year of all the one-time stuff, just try and get me to an operating number sort of without the noise of backing out the SOX, backing out the severance and the inefficiencies from doing Mexico, the inventory write-down, all the rest of the stuff, if you could sort of just help me back into an operating income number with -- ex those things, I would appreciate it?

Okay. Hi, Mitch. Okay, let me deal firstly with the things that are just very quantifiable and then I will talk a little bit about things that are less quantifiable, but we can give you some estimates.

Let's start off with the SOX -- the 404 compliance of SOX. I mean the expenses for the year on that were $2.4 million. We expect to have recurring expenses for about $500,000 going forward. So, one-time expenses for SOX in this last year were approximately $1.9 million.

And then, I can easily quantify -- the next thing I can easily quantify would be the upfront marketing fees that we have paid in total for new business that we accomplished in the fiscal '06 year and that -- those fees were $3.4 million for the year.

The other thing that again is very easily quantifiable is the POS reversal and the write-down relative to the buyback of cores relating to the POS reversal, and that was $8.7 million.

And the next thing that again we have identified that is specifically identifiable is the write-down of standards, which is $800,000.

The other thing that's identifiable specifically is the severance payments that we made during the period, which is $260,000, and those are the most definable.

Then we get into -- we have talked about adjusted GAAP, but adjusted GAAP doesn't really paint the picture of the inefficiencies, and so if you look at the inefficiencies in our production costs during the last year that we have eliminated, and then I will talk a little bit about what still has to go, that the inefficiencies in production over the last year were approximately $6.8 million that we actually now have eliminated, but that we incurred during the prior year.

And of that, we have incurred additional expenses in the offshore facilities of $1.4 million. So, you have an additional $5.4 million of inefficiencies that are now eliminated.

We also have G&A -- redundant G&A of $800,000 in our Mexican facility, and the last thing is we have this miscellaneous overhead where we have -- paying rent in both places, facility cost overhead, which estimate approximately $1 million.

Now, those inefficiency numbers are of course our best guess and they are estimates, but not strictly definable.

So, if you look at the sum of all of that, the one-time inefficiencies plus expenses is almost $23 million for the year. So, if I took the operating income number that we reported, which is a negative $2.5 million, and I added back this $22.8 million, we are at -- what is that?

$20.5 million.

$20.5 million and then depreciation and amortization was about $2 million for the year. So, you had about $22.5 million sort of run rate on the trailing 12 months if you eliminate that expense.

And then, I would say, well, the last piece is that that's just the beginning because on a straight dollar amount, we have identified at least another $9 million of expense to come out of the Torrance facility, and that $9 million doesn't directly translate into $9 million because you have to start translating it into per unit cost at production level.

So, that $9 million actually ends up being a bigger number in terms of potential savings for the future.

And that $9 million comes out over how long a period of time, do you think?

Over this next fiscal.

So, you don't get the full benefit --

Over this current fiscal. So, we will be looking at a full benefit run rate as really -- we looked at the full benefit of a completed transition, our fourth quarter run rates will start showing the numbers that we expect on a full transition.

And a full transition will be done when?

By the end of this fiscal year.

So really -- so in fiscal '08, you have got still a little bit of noise in terms of inefficiencies or duplicative costs and then in fiscal '09, the noise completely goes away?

That's correct and we will -- despite that we intend to -- we expect to show profitable quarters and increasing margins in each of our sequential quarters going forward, this fiscal.

Okay. And gross margin, do we have an idea which ever way gross margin is running at now?

Yes, as of the most recent months, in May, our gross margins are running at 26%. And again, we expect to -- there are a lot of things that go into COGS unfortunately in this Company that's offsetting sales, so gross margin is not necessarily a direct relationship to production cost. But, we expect that gross margin to continue to grow through the year.

Okay. A quick accounting question, I see that you were forced to defer $1.6 million of core revenues, and that they moved your cores from short-term to long-term. What is the concept behind that?

Well, that's an interesting question but the concept is that these cores are really on an exchange basis and that the long-term, that you don't realize cash going forward long-term because you are really recycling them.

And so, they -- we have decided to reclassify all the cores and the way we determine what cores are is more than meets the eye, it is the actual cores in our core warehouse. It is also the core component of the finished goods that sit in our warehouse. And then, last but not the least, the cores that are on our customer shelves.

So, it is a very significant amount. I mean it is -- certainly affects the -- superficially affects the look of the balance sheet, but in fact nothing is changed of the business.

So, you basically you just -- you basically are taking cash revenues and you are accruing them on the balance sheet essentially?

What happens is we make a sale and then you get a return and they will offset each other through the balance sheet, that is correct.

So, it sort of understates what you are really doing with the business?

I don't know if it understates that, but I think the one thing that it does change what we -- that is an understatement compared to what we used to do is the recognition of the under-return of core revenue. What we used to do is recognize core revenue in our P&L.

The under-return where people -- where the units have left the system and they no longer can come back, at this point in time, we are booking that as deferred revenue and so it will be specifically identified as a line item.

All the cash is received and the money is made, but it just does not come through the P&L, it is on the balance sheet.

And a question not related to accounting, I had heard that one of your competitors was sold recently. I think it was BBB in a transaction and somebody had told me that it went somewhere around ten times EBITDA, do you have any sort of knowledge or feedback on that?

Well, the only thing again is I haven't seen a definitive press release, but the number I had heard was nine times EBITDA. So, again, I haven't seen a definitive release, but the discussion in the marketplace was it was sold at nine times.

And your other major competitor, Remy, I understand is having some financial difficulty, what's going on there?

Yes, at the last announcement, I did see from Remy, they did make a formal press release that they had entered into some arrangements with the bondholders and look like they are going to be going through a pre-packaged Chapter 11, and we are waiting to see what happens there. But, I know as much as what was publicly released.

Okay, I will jump back in queue. Thanks a lot for the questions.

Thanks, Mitch.

Thank you. Next question from Jim Shulman from Costa Brava. Please go ahead.

Hi Selwyn, how are you?

Hi Jim, how are you doing?

Good, thank you. Can you just walk me through the disbursement of the pipe proceeds? Obviously, you have reduced your line of credit 22.8, where was the rest of it and can you kind of give us the current cash situation?

Yes, we are -- I mean, the proceeds were threefold. Obviously, it was the expenses of closing the transaction was the first use of proceeds.

Right.

Which includes broker commissions and legal fees and accounting fees relating to the transition -- added to the transaction, we then paid down payables probably by around almost $10 million and we fully paid off our line of credit and we sit with positive cash. At the end of the quarter, we will be sitting with positive cash I think of $1 million and no debt.

Okay. So, you got at least $1 million there, I got you. And so, I want to ask you here, okay -- Mitch had asked a couple of questions, there was an announcement with the bank waivers and everything, what covenants are in place on a go forward basis?

I don't have an answer to that here.

If you look at the document we filed, we filed the seventh amendment.

Is it just the two of those covenants?

It is actually eight covenants that are in the seventh amendment and what happened was is that we got waivers on the covenants that we had run into problems with.

Right.

And if you look at the seventh amendment, you can see these being the way -- there was some changes in those covenant calculations and we are still working with the bank on the covenants as we go forward because it is pretty important we now begin to meet covenants as we progress forward.

Right. So, in other words -- so it was a little unclear in the way everything came out there. So, the six were waived, there were the two that were noted and you are still grafting?

We are revisiting it because basically one of the things that has happened if you look at the balance sheet with the reclassification of the cores from short-term to long-term, that obviously puts a strain on your current ratio.

Right, right. That's what I wanted to make sure. So, basically, when you guys get done, you will release the new definitions, but you will make sure there is plenty of wiggle room in those on a go-forward basis?

That is correct. The bank is -- obviously by the time we get to the seventh amendment, we would like to roll it up and start fresh again.

Yes.

So, the next thing coming out I assume will be a new agreement that doesn't have to make you work your way through seven amendments.

Okay. All righty, thank you.

Thanks, Jim.

Thank you. Next question from Ross DeMont from Midwood Capital. Please go ahead.

Hi guys, congratulations on 2007.

Thank you, Ross. How are you doing?

Can you just confirm for me, you mentioned 15% plus growth, is that off the $130.1 million pro forma sales number for '07?

Yes, actually the growth we -- is of the sales number adjusted for the POS reversal.

Okay.

So, I mean we are looking at, I think I have told -- given those guidance before, but we -- a sort of base run rate that we are looking at for this year is around $150 million and that does not include picking up any new business.

We expect to pick up additional business through the year and I mean the only caution I would say is that the last month or two had been a little -- despite our 20% plus gain in revenues, the last month or two in the industry have been a little soft.

But, I will tell you I have heard that every year, I hear that and then all of a sudden, you get the complete reversal.

So, we are waiting to see, we are coming into summer, the weather is getting hot around the country and we expect sales to pick up dramatically now.

Right. And where do you think, I know there is still some extraordinary cost that will run through this fiscal, but where do you think EBITDA margin will kind of shake out here?

Well, I think -- again, I think in the low-to-mid 20s reported for this year is realistic and I think that again our run rate at the end of the year is going to be very much significantly higher than that.

Sorry, was that a dollar amount or percentage number?

Dollars.

Okay. And can you just give me a best-guess CapEx for this fiscal?

Mervyn, do you have that?

Yes, CapEx is really small this year. I think a figure of about $2 million would be the correct number.

CapEx should run roughly in line with D&A?

Yes, CapEx has come down. We have obviously just about completed the building two down in Mexico and so CapEx is a fairly small number compared to what we have been spending up to now.

I think it will be a little bit higher than I think on some of the logistics, the movement of the shipping as well. But --

Probably between $2 million and $3 million.

Okay, great. Thanks, that's all I have.

Thank you. Scott Hood from First Wilshire, please go ahead.

Hey, Scott.

Hi, it's [Dimitri]. How are you?

Good. Hi, Dimitri, how are you?

Doing well. Just a few questions, one is that when we spoke a couple of months ago, you mentioned that you expected transition to the Mexican facility to be completed in October and now you mention that it would be done by the end of fiscal year. I am wondering if things are taken slower than you expected and why?

Yes, now the answer is that I believe the transition to Mexico will be completed by the end of October. The -- and I would say, I mean I think conservatively, by the end of the third quarter, which would be December. But, the question I was asked early is when would we expect to see all the benefits of that transition.

Okay.

And just the getting at everybody with our efficient and whatever we think that will take by the end of the year to start seeing the full effects of efficiency. I would tell you that as of today, nothing has changed in our estimate of what we believe our transition timing is.

We are right on time with cores, production is going very well there, we are receiving cores directly back from customers into Mexico seamlessly, which was a little bit of a fear for us, making sure that that was going smoothly.

We are also shipping tremendous amount of volume of finished goods units to our Torrance facility seamlessly. And so, while the transition is going exactly as we planned, you never get your 100% efficiencies immediately. It takes a little bit of time for the people to operate efficiently.

Sure. And what about -- what progress have you made with some of the new customers like [Benz Auto] and possibly Napa?

Yes, we don't comment on any specific customer initiatives. But, the only thing I can comment is that in general we feel we have additional sales opportunities.

We are cautious to make sure that any new customers we add are profitable, and so I would say that the guidance of 15% sales increase that we just talked about for the next year is a comfortable guidance and anything we do to beat that will be wonderful. But, at this point, there is no specifics.

This is Scott. Could you give us a feeling on the professional installer, the significance of that number, how it's sort of grown over the last few years?

Yes, I think a few things are happening, Scott.

As we launched our QB business and that continues to make inroads in capturing new business in the professional installer market, it's a much slower growth there because you are picking up lots of customers with relatively small amounts of revenue compared to our retailers. But it is going very well. We are adding new customers weekly in that area.

Our relationship in the aftermarket has continued to grow. That program seems to be moving on in quite a successful manner. We are experiencing some good growth rates there and so that in addition is helpful.

And last but not least, I think our retail customers are also focused on expanding their professional installer sales and because we are well positioned in the -- in where we are with our retail customers in terms of our supply contracts, we will be getting lots of benefits just organically from their efforts to penetrate the professional installer market.

So, we are very excited about where we are going there and we think we are very well positioned in the marketplace to take advantage of that area.

Okay. And a quick question on modeling. As you mentioned, you paid down most of your credit facilities, does that mean that your interest expense should decrease significantly as well?

Yes, we have paid down 100% of our line of credit, so our interest expense should come down significantly.

And one last question, how much progress have you made on NASDAQ listing?

I would thank you for asking that question. I meant to mention that. We are aggressively pursuing the listing with NASDAQ at this point in time.

There are a couple of steps that we are taking now to try to ensure success on that relisting and I will give everybody a separate update on NASDAQ, but it is very, very high in our priority list of getting relisted.

Okay, thank you.

Thank you.

Thank you. The line of [Vincent Merloc] from Guggenheim Capital Management. Please go ahead.

Can you repeat the name? Sorry, I think you faded out.

Vincent Merloc.

Hi, this Vincent Merloc from Guggenheim Capital Markets. Good morning.

Good morning, how are you?

Good, thanks. Just two questions and I think they are related. I was hoping you could elaborate on your comment that the market is soft today, maybe you could give some more details on what exactly is soft and what particular areas you see that softness.

And the other question is what specific actions do you plan to take to expand your market share?

Okay. Let me deal with one first. The first is the softness. First of all, the first quarter of our fiscal year is always soft. It is generally a fairly -- one of our weaker quarters.

The only thing I can elaborate is we have a very significant cross-section of the market in terms of who we supply and the vibrancy that we expected in this month, actually in the month of June was not there.

I mean we still accomplished hitting sales targets, but we just didn't see the same vibrancy that we would have expected to see and as I mentioned in my comments and the comment is probably less scientific and more emotional.

We probably are a little ahead of ourselves in terms of expectation for the vibrancy in sales and we are hoping now that the hot weather will now accelerate the sales growth in the marketplace.

I think one of the things that has caused some softness in the marketplace is that some of the old, very old domestic applications for old CS, the charging system alternators, those vehicles which failed very significantly over the last five to ten years are now starting to go off the road and we see a change in terms of where the focus of [failure] is going.

So, I think you are seeing an acceleration of those vehicles being scrapped and that's caused some softness in the -- certainly in domestic sales.

And so, we are waiting to see where the next big defect items are and really I think that talks about softness. I mean I think overall the number of vehicles on the road is growing.

The last statistics I looked, I think there are 270 million vehicles on the road in the U.S. and that 130 million of them ten years and greater, and we expect that every one of these cars is going to still need a replacement alternator.

We don't expect the car to be junk before the alternator fails or the starter for that matter. And so, while there may be a softness in the market, I believe it's mostly a deferral based on better quality product in the marketplace.

And so, you have got some deferred maintenance and I believe we will see, I am not sure exactly when, I think the whole industry is waiting to see when these failures start to kick in.

I forgot the second question, if you can want to repeat that second part of your question? I am sorry, after giving a long diatribe on the first part. I remember now, what are we going to do to try and grow our market share?

Yes.

Well, we are happy with where we are today in terms of our organic growth rates. We feel like we have identified and have probably the strongest customer base that you can get in the industry. There are few others we would like to get.

We are going to very controlled about how we exploit our growth opportunities. We want to make sure that all of our sales are in fact profitable. We are also not in the mode of starting a price war and we want to be very reserved.

Our focus this year is going to be at least on maintaining and servicing our customers that we have today at excellent levels, which we currently do, but even taking that to another level above and to make sure that the quality of our product and our shipments are filled on time and to focus on driving our P&L to where we can get shareholder returns for our shareholders, and hopefully we can have some semblance of normality in the competitive structure and landscape within our industry.

So, that's really where I am. We don't have anything more specific to talk about.

And if I could ask a follow-up then, what do you see as being abnormal about the competitive landscape?

Well, I think we have had a situation that three major players in the marketplace, each one of them has been desperate to try and gain market share.

I think each one of us has been hurt by the aggressiveness of each other's tactics in terms of accomplishing that market share and I think the industry in general as a comment needs to solidify and become more strong in terms of their financial capabilities and their capabilities in terms of being able to stay suppliers in the marketplace. So, I think that the customer base would like that to happen.

This is a very -- this category is an exceptionally large revenue producer for all the major retailers and certainly the professional installer, traditional warehouse distributors. And so, having stability of supply is very important for them in the marketplace.

Pricing for the consumer has been very good over the last few years and I think relative to metal prices going up and electronics going up and labor rates going up and insurance rates going up, I think pricing for the consumer has been very favorable.

So, I think it is now time for the supply side to focus on becoming stronger.

Okay, great. Thanks a lot for the detail. I appreciate it.

Okay, thank you.

Thank you. (OPERATOR INSTRUCTIONS)

Right now, sir, I show no more questions, sir.

Thank you very much. I think we can end the call at this point.

Thank you, sir.

Thank you.

And thank you, ladies and gentlemen, for your participation in today's conference. This concludes the conference call. You may now disconnect. Thank you.