Motorcar Parts of America Inc (MPAA) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the First Quarter Fiscal 2008 Conference Call. My name is Denise and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Elaine Ketchmere with CCG. Please proceed ma'am.

Thank you. Good afternoon, and welcome to Motorcar Parts of America's First Quarter Fiscal 2008 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; fluctuation 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 on its Form 10-K.

Any projections as to that Company's future financial performance represent management's estimates as of today, August 9, 2007.

MPA assumes no obligation to update these projections in the future due to changing market conditions or otherwise.

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

Thanks, Elaine. Good afternoon everybody and once again, thank you very much for taking the time to listen to this conference call today. Today's call will follow our usual format.

I will begin with an overview of our accomplishments and our results for the first quarter of fiscal 2008 and then 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 first quarter financial results. And then, finally, I will discuss our outlook for fiscal 2008, make some closing remarks, and open up the call to any questions you may have.

Well, we got off to a great start in fiscal 2008 with sales growth of 29% and adjusted EBITDA growth of 42% after eliminating the benefit from an indemnification reimbursement that reduced G&A expenses in the first quarter of last year.

In addition, our gross margin improved by 270 basis points to 29% due in part to the success of our offshore initiative. The increase is in excess of what our guidance was. So, we are excited about that.

During the quarter, 83% of our production was produced at our facilities outside the United States and that's up from 60% a year ago.

We are very encouraged by our performance for this quarter and we expect additional improvements as we obtain more efficiencies from these offshore operations.

During the quarter, we realized significant reductions in our production costs at our offshore facilities that were in consistence with what our expectations were.

Production is going very well. The core sorting facility in Mexico is now sorting all customer core returns. And I want to preface that with this by saying that not all cores are going directly to Mexico yet, but those that aren't going directly are being cross-docked in Torrance and redirected to Mexico.

We still have a lot of room for further cost savings, particularly as we complete the remainder of the offshore transition. We are still shipping finished goods from Mexico to Torrance for warehousing and distribution, and the next phase of our offshore initiative is to establish our Mexico distribution capabilities.

We continue to wind down operations at Torrance and as a result incurred $400,000 in severance cost from the work force reductions. We still have significant duplicative expenses in Torrance, which will be eliminated once we complete our offshore transition and while we go through that transition.

Our customer base remains the best in the industry and we will continue to focus on providing excellent service to our customers.

We anticipate continued organic growth and will pursue additional growth opportunities in a controlled manner. Our goal is to make sure any new business we sign on is profitable and provides a return to our shareholders.

We are optimistic about our ability to generate new business and increase our share in both the do-it-yourself markets and the do-it-for-me markets.

Starting with the do-it-yourself market, we have increased sales to our major retail customers. In terms of the do-it-for-me markets, we are pleased to report that sales under our long-term contract with our large OE customer continue to grow.

In addition, we recently negotiated with this customer to ship products directly from our Torrance facilities rather than a dedicated distribution center in Nashville that was originally established specifically for this contract.

As a result, we have substantially pared down the Nashville facility in the second quarter of fiscal 2008, which should save us in excess of $1 million in annual expenses going forward.

We continue to make inroads into the professional installer market and our Quality Built business is capturing new customers on a regular basis. Moreover, we believe our retail customers are also focused on expanding their professional installer sales. We are excited at the growth opportunity we will experience from our customers expanding in the professional installer market.

Given the MPA's strong customer relationships and reputation as a value added supplier to our retail customers, we are well positioned to benefit from their efforts to penetrate this professional installer market.

Cash flows for the quarter are also every encouraging. After eliminating the effect of a catch-up in accounts payable, we have generated approximately $3.8 million in positive cash flow.

In closing, this was very a solid quarter for MPA. We saw strong growth in sales and EBITDA. Our costs are coming in line with the expectations of our new business model. In addition, we significantly enhanced our balance sheet.

We are encouraged by our performance for this quarter and believe we will continue to see sequential improvement in our cost structure throughout the rest of the year. Our offshore initiatives are well on track and we expect to have continued profitability in the sequential quarters.

With that, I will turn the call over to Mervyn McCulloch, our Chief Financial Officer, who will review the numbers in more detail.

Thank you, Selwyn. I will now go over our first quarter results in some detail.

Net sales in the first quarter of fiscal 2008 were $35.4 million, up 29.2% from $27.4 million in the same quarter last year. The majority of this increase was due to increased sales to new and existing customers.

Gross profit was $10.2 million or 28.8% of sales compared to $7.2 million or 26.1% of sales in the same quarter of the prior year.

This improvement in gross margin was due to several factors. We had fewer customer returns, which resulted in higher net sales that had another impact on the cost of goods sold. This is partially offset by higher marketing allowances.

We also experienced lower per unit manufacturing costs due to improvements in manufacturing efficiencies at our Mexican facility.

General and administrative expenses rose to $4.8 million in the first quarter of fiscal 2008.

The increase in general and administrative expenses was primarily caused by a $400,000 increase in consulting fees associated with Sarbanes-Oxley Rule -- Section 404 compliance, a $200,000 increase in FAS 123R expenses, severance costs in the amount of $400,000 related to a headcount reduction at our Torrance facility, and $300,000 increase in audit fees.

We believe the cost for severance will continue for a few quarters as we complete the transition.

The first year SOX expense is now over and we expect to significantly decrease that cost as we move to year two SOX.

The Company has hired an internal auditor, SOX Director, and we believe the year two SOX will be at least $1.5 million than year one SOX. The first quarter of the prior year includes indemnification reimbursement of $700,000.

After taking into account these items, general and administration expenses increased from $2.9 million for the first quarter of the prior year to $3.5 million for the current quarter.

As a percentage of net sales, G&A decreased from 10.5% for the first quarter of the prior year to 9.9% for the current quarter.

Sales and marketing expenses were $900,000, marginally up from the same quarter last year. As a percentage of net sales, sales and marketing expenses decreased from 3.3% in the first quarter of fiscal 2007 to 2.6% for the current quarter.

Research and development expenses declined one third to $300,000. The prior year period includes R&D expenses related to the development of new diagnostic equipment for our Mexican facility.

Operating income during the quarter was $4.2 million at 21.8% from $3.5 million a year ago. Eliminating the effect of the previous year indemnity reimbursement of $700,000, operating income is up 52%.

EBITDA in the first quarter of fiscal 2008 was $4.7 million, up 17.7% from $4 million in the year ago period. Eliminating the effect of the previous year indemnity reimbursement of $700,000, EBITDA is up 42%.

If we add back the increased SOX and audit fee expenses, severance fees, and FAS 123R stock-compensation expense, we estimate EBITDA would have been $6.1 million for the current quarter.

Interest expense, net of interest income was $1.6 million compared to $800,000 in the first quarter of 2007. This was due to an increase in the amounts of receivables discounted under our factoring agreements during the quarter, as well as an increase in the average days over which receivables were affected.

In addition, we had our higher average outstanding loan balance on our line of credit prior to repaying it in full in May 2007.

For the quarter, net income was $1.6 million or $0.16 per diluted share compared to net income of $1.6 million or $0.18 per diluted share in the first quarter of 2007.

Earnings per share reflect approximately 1.6 million in additional weighted average shares outstanding from the prior year period due to our private placement in May 2007.

As of June 30th, 2007, our balance sheet had $2 million in cash, working capital of $11 million, and total assets of $130.9 million.

In May 2007, we used the proceeds from our private placement to repay our credit facility and we had no outstanding debt at quarter end.

During the quarter, we used $11.7 million in cash flow from operations and we paid down outstanding accounts payable by $15.7 million.

Excluding the accounts payable catch-up, cash flow from operations was $3.8 million. Shareholders' equity was $87.1 million at June 30, 2007.

In August, we amended our credit agreement. The amendments were effective June 30 and we are in compliance with all of our bank covenants.

Our balance sheet is much stronger, we believe that our credit facility in operations would generate the cash necessary to support our working capital requirement and planned capital expenditures through fiscal 2008.

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

Thanks, Mervyn. Well, we started 2008 fiscal year with a great quarter. We have had strong growth in our revenue and our EBITDA and our margins have improved, due in most part to cost improvements relating to our offshore initiative. During the quarter, we produced 83% of our production requirements at facilities outside the U.S.

We are able to -- this mostly is a result of scheduling. We are able to produce whatever we need in -- in our offshore facilities, taking into account that we started shipping in our Torrance facility.

We substantially completed the transition of our core induction operations at our facility in Mexico. And as I mentioned earlier that 100% of our customer turns are now being sorted in Mexico, and we are in the final stages of just moving core buys into Mexico. And we have continued to wind down our Torrance operations, substantially on budget with our expectations.

In terms of looking forward, despite some softness in the industry, our outlook for fiscal 2008 is for continued annual double digit percentage revenue growth as we gain additional market share and as our customers continue to grow.

We expect to increase our EBITDA due to steady improvement in our operating results each quarter, and I am confident that our initiatives will improve our profitability substantially in the year ahead.

We are excited at our progress and will continue to relentlessly pursue increasing shareholder value. I will point your attention to a significant, I think, improvement in our financial reporting, the amount of noise in the numbers has come down significantly and the timely filing on an accelerated basis of our financial results. And so, we are excited about that progress as well.

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

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Mitchell Sacks from Grand Slam. Please proceed.

Hey guys, congratulations on a great quarter.

Thanks very much, Mitch.

So, Mervyn, can you just walk me through again how you get from the $4.8 million to the $6.1 million please? I am sorry, I was doing two tings at once, I missed a little bit of that.

Yes, the way we did that is we actually basically -- it all occurs in the G&A area. And this comes from various items in the G&A such as the 123R, which is basically a non-cash transaction.

There is the increase in the SOX expenses, there was the severance we paid at Torrance and the audit fee increased.

To give you a breakdown on those numbers, the numbers are $278,000 for FAS 123R, the SOX increase was $361,000, the severance was $435,000, order fee increased $322,000 -- that adds to $1,396,000 and that is what would get you from one to the other.

Okay. And now going forward, all you have left to move down to Mexico then would be shipping, is that correct?

Well, no, let me just -- well, shipping is a big word because we have -- right now, we have completed moving to Mexico and Malaysia the substantial part of our production.

We have now substantially moved cores, there is still some reduction in headcount that will occur in the cores as we move just our inventory of cores into Mexico. And then, we have raw materials that will be relocated, and then all our packing and shipping.

Can you sort of give me a ballpark on what you're thinking might cost you for the rest of fiscal '08 for moving those things down to Mexico and to Singapore?

I would tell you that when we have looked at the differential in the run rate of EBITDA from today to where we expect to be when this is all completed, we expect to be able to contribute an additional, over and above this $26 million run rate, at least an additional $10 million of EBITDA.

Beautiful. Okay, and then, sort of the most important question, when are you guys going to end up on NASDAQ, are you moving in that direction or what are you --?

Yes, we expect to -- actually, Michael Umansky, our Chief Counsel is also with us -- we expect to file the application next week and we currently have an S1 under review and we will see what the response time this. I am not sure how long it will take to respond to us.

Okay, thanks. I will get back in queue, great quarter guys.

Thank you, Mitch.

And your next question comes from the line of Jim Shulman from Costa Brava. Please proceed.

Hi guys, good quarter.

Thanks, Jim.

Just trying to get a handle on, if you want to talk about it, what kind of revenue run rate you are looking at these days?

Yes, I think the guidance we gave before, Jim, was around $150 million.

Right.

And at this point, we still are comfortable with that. The industry is a little soft right now, but I said that in the beginning of the first quarter and we are just starting to see some hot weather across the country.

So, we are hopeful that we will start seeing an immediate pickup in revenue. Although I will just clarify the point and make the point once again is that we are a non-discretionary item, so these costs are going to fail. It is just a question of when they fail.

Right.

And so, we are hoping that this summer will stimulate the failures as it has in the past, but we have had a -- I don't know, for whatever reason, either higher gas prices or more rain across the country on weekend days, for some reason the industry across the board has been very weak.

Have you given guidance on EBITDA as a percentage of revenue?

No, I think we have just given sort of what I just mentioned is this is sort of target of around mid to high 30s subsequent to move.

Right. The run rate will be $30 million plus.

Yes.

Right, okay. And the status of the S1 review cycle, I know it is in, but what is going on with that?

I'm going to let Michael answer that question.

Jim, it is Michael. It is with the SEC, which filed on -- I think the day was June 27 and the SEC in certain cases does not review S1 and in other cases, it does. We have been advised this one will be reviewed and they have not given us a timetable as to when they will be back with us for comments. But, we have a continuing dialog with them.

I got it.

They have asked us some information. We have supplied it.

I got you.

The SEC's focus right now is, there is a lot of focus at the SEC on core accounting just for the industry in general. And so this is I think -- this is just part of that profile, and we fit in the profile.

Right. All right, well, thank you, great quarter.

Thank you. Appreciate it.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of [Dimitry Kanuskovi] from First Wilshire. Please proceed.

Hi, Sel, congratulations.

Thank you, Dimitry. Appreciate it. From you, that is a big compliment.

Thank you. Just a couple of questions, could you give us some color on where the 29% of growth is coming from?

Well, I mean, it is a number of items. I mean, I think first and most substantially what we have is we have continuing reduction in production costs. So, from that perspective, that is good. We have also been -- we are in a period where there is low returns and stock adjustments this time of the year, so that helps.

And that is essentially it, I mean although we have had some increased marketing allowance expenses against that. So, essentially, it is just a fundamental paring down of all the excess costs in our operations.

Great. And what about -- you mentioned that you could also gain some savings in the future from sort of shifting the production in Mexico to be more labor intensive and less sort of inventory intensive, do you have a better idea of how much savings that may bring?

Yes, I think, when I mentioned that I think we can get to the mid-to-high 30s or the mid-30s plus in EBITDA and the run rate at the end of the year, that reflects all of the savings from the near-term efficiencies of moving into our offshore business model and having the adjustments being made and controlling material costs and things like that.

So, again, it's an overall -- encompasses all of the cost savings initiatives in general. I don't know if I am being vague. I am not trying to be vague, but there is so many little items that contributed to it.

Sure. That makes sense. And what is the normalized SG&A run rate?

That question is an embarrassing question to answer because, at this point, we have been very significantly burdened with the 404 SOX compliance. We have had a lot of tremendous amount of audit fees.

I think the last audit we went through was a very intensive audit. I think you all are noting that we were coming into an S1 statement and that the 10-K was going to be used to be incorporated in the S1 filing.

Sure.

And -- but we have done a few things to, I think, substantially reduce that. I think the auditors are getting very -- much more comfortable with our accounting policies and how that has settled down.

I think we have enhanced our finance department. We have brought in an in-house SOX employee that we think can bring down the cost to compliance on the 404 SOX that we don't have to run to outside consultants as much as we were.

Sure.

And I think, as we settle down more, as our business production settles down more in these offshore facilities, we can start paring down G&A. I mean, I think there is room to save money in G&A. I would say $16 million right now is the G&A number, but we think there is opportunity in that number.

Great.

And that is an annualized number, that $16 million.

Sure. All right, thanks very much and congratulations again.

Thank you very much, appreciate your support.

Absolutely.

And your next question comes from the line of Rob Cerny from McCarthy Group Advisors. Please proceed.

Hi Selwyn.

Hi, Rob, how are you?

Good, how are you? Good quarter.

Thank you.

Looking at past the current year, you are talking about certain run rates of revenue as well as EBITDA, but if we get kind of flesh this all out and we are past that, what kind of growth would you expect MPA to be able to accomplish on the top line, given what you believe would be the growth in the industry, both do it yourself and do it for me?

Can you kind of give me some more color on what you think the industry growth will be and then what you think MPA can do in terms of growth on the top line?

Yes, it's a -- that is a tough simple answer -- tough question to give you a simple answer. I will tell you that the car park, the population of cars continues to grow.

However, the population of cars in the seven year and under age group have far less failures than they have historically, and the population on greater than seven years has greater failure than they had before. As you can imagine, those cars now are now older, so they catch up.

And what we are seeing is, when we look at the graph and we are actually going to be adding this to our investor presentation, this graph on where the population of cars is going, we think that the market is going to be relatively flat in the near-term, and we should see then some accelerated growth in the later term, I mean the mid to near term, near to mid term I guess.

But, so the growth that we will experience is that I believe that we have the best customer base in the industry and those customers we hope will continue to enjoy the organic growth and continue to capture market share of a relatively flat piece, and that we will enjoy growth through them.

And so, if I had to try and summarize this long babble that I am giving you, I am -- I would expect 10% growth rates are aggressive, but accomplishable on an ongoing basis barring any big wins in new business.

Okay. And then, in terms of the EBITDA margin, you are talking about dollars, but is there -- I mean, after you have all of this other stuff pretty well under control, is there continued opportunity to expand the EBITDA margin or the operating margin past this year?

I mean, are economies of scale -- will they begin, will they continue to work or will you kind of just target some kind of EBITDA margin and work towards that?

I think there are a number of variables in that. I think we will continue, the whole concept of lean manufacturing is continuous improvement.

Right.

And so, we will continue to work that. On the other hand, growing against us is -- you have got escalating metal prices, so and you have got transportation costs, which is what the fuel price is depending on what happens to them, those are continuously -- I think uncontrollable expenses, you can continue to eke out efficiencies on uncontrollable, I mean, you know as well as I do.

Yes, okay.

But, I think, from there I think the next step in growth for us is to look at international markets and additional categories.

Okay.

And that's really where we are now doing some evaluation on where the next step is for our growth story.

Great. Thank you gentlemen, again a good quarter.

Thank you, Rob.

And your next question comes from the line of Dwight Mamanteo from Wynnefield. Please proceed sir.

Good afternoon gentlemen, good quarter as well.

Thank you.

A quick question on China and whether or not you are seeing any products coming in from China and whether or not you are experiencing any pricing pressure from them?

Yes, that's a good question in light of what's the whole world is looking to China for product.

There is product coming in from China. I think the Chinese product in our category is a lot more difficult for them to penetrate the market based on a few different variables.

The first is there is a tremendous amount of parts proliferation in our category, there is 2,800 to 3,100 different SKUs, and in order China's -- the expertise or the edge that China has in most of their production is producing new units, and it's very difficult to be -- to tool up economically to produce a full line.

So, really what the Chinese manufacturers have done is focused on the fast moving parts and so, relative to the fast moving parts, that's where we see some competition.

However, they at this point in time have not been competitive and the reason being is that however cheap they get, we get cheaper. We have neutralized by moving offshore, we have neutralized the labor benefit that they have, the cost of labor.

And now, what they are experiencing is much higher material cost because they are producing new and we are able to remanufacture.

So, the cheaper they bring new product in, the cheaper the value of the core becomes, and the cheaper our raw materials become. And so, we believe with our new model that we are -- I wouldn't use the word immune, but we are in, we are definitely are competitive with them in terms of their approach, their potential approach into the marketplace.

Now, having said that, we are also aggressively involved in understanding exactly all the metrics in China. We are very close to manufacturing in China and we continue to exploit relationships in China ourselves.

Okay, great. Thank you.

And your next question comes as a follow up question from the line Dimitry Kanuskovi from First Wilshire. Please proceed.

Yes, just a quick follow up question, what's the progress on the do it for me market, the traditional warehouse distribution?

We continue to pick up small customers. I would say, every week, we have got new customers there.

We are hoping and we will be targeting some of the larger customers now. I think we are now in a position to handle that. And I expect to become far more aggressive in pursuing the traditional business in a big way for the bigger customers.

I think our -- we are a major player in that market today with -- I don't have the percentages in our fingertips, but I think about 30% of our revenue today is already coming out of that market and that mostly is as a result of our arrangement with our OE supplier customer, and with our existing customer base in the retail who are heavily focused on getting into the professional installer market, and we see those retailers making fabulous inroads.

So, besides our own brand in the QB, which we expect to get more aggressive with now, we are also seeing growth in the other two sectors that I just talked about.

Sure. Is there room in there to use some of the marketing expertise that you have that you have applied to your large customers to target the little guys?

Yes, I think there is room.

Nice. Thank you.

We have no further questions in queue. At this time, I would now like to turn the presentation back over to Mr. Selwyn Joffe for closing remarks. Please proceed sir.

Okay. Once again, thank you everybody for spending the time. I look forward to keeping the communication channels open with the public and as always, we are committed to relentlessly building shareholder value. So, thank you very much.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.