Motorcar Parts of America Inc (MPAA) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Motorcar Parts of America fiscal third quarter 2008 conference call. As a reminder, today's call is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Mr. Gary Maier, with Maier and Company.

Thank you, Lisa. Thanks everyone for joining us for the call today.

Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer, and David Lee, the Company's newly appointed Chief Financial Officer, I'd like to remind everyone of the Safe Harbor statement included in today's press release. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements including statements made during the course of today's call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by Motorcar Parts. Actual results may differ from those projected in these forward-looking statements. These forward-looking statements involve significant risks and uncertainties some of which are beyond the control of the Company and subject to change based upon various factors. For a more detailed discussion of some of these ongoing risks and uncertainties of the Company's business I refer you to the various filings with the SEC.

With that said, I would now like to begin the call and turn it over to Selwyn Joffe.

Thank you, and welcome aboard as our new Investor Relations group. Appreciate everyone joining us for our fiscal third quarter conference call. Before I turn the call over to David Lee to discuss our financials for the quarter I would like to take a moment and thank David's predecessor, Mervyn McCulloch, who as noted in last week's press release has assumed a new position as Motorcar Parts, Chief Acquisitions Officer, and Mervyn will be focused strictly on acquisitions. We've relieved him of his operating responsibilities so he cannot be distracted in that effort, and we look forward to his contributions in this new role.

Okay, as highlighted in today's financial release our transition efforts are gaining momentum. Clearly our strategic initiatives, particularly our focus on reducing costs and relocating a majority of the Company's manufacturing operations to Mexico are bearing fruit. Gross profit for the quarter increased 28% with gross margin increasing to 27% compared with 18% a year ago. Gross margin was actually somewhat higher if you take into account how we determine inventory costs and the amount of stock adjustments that were accrued for in this quarter. Due to efficiencies with our new production model we wrote down inventory by $1.1 million which was a direct hit to cost of goods sold. In addition, we had a net charge to our P&L of $925,000 for stock adjustments, and David will explain the effect of this in a few minutes. The closing of our distribution facility in the Nashville region, as noted in the release this morning, will also help reduce expenses moving forward. We estimate annualized future savings of approximately $1.6 million.

Our announcement on Friday regarding an extension of supply agreement with a major automotive retailer for alternators and starters secures an important business relationship for us. As reported, we experienced for the first time a decline in net sales. While I discussed above the effect of stock adjustments on net sales it should be specifically noted that two of our major customers went through inventory realignment where in they cut the number of new store openings and closed a number of stores. We believe that this was a major cause of our revenue declines for the quarter, along with some industry softness.

As I indicated in our news release last week, there were a number of favorable trends within the automobile aftermarket industry that support demand for our products. Today the average age of vehicles is approximately 9.4 years with the economy clearing impacting consumer decisions regarding new car purchases and consumers holding on to vehicles longer. Until a car reaches the four to seven year age group replacement parts are not in great demand; however, once the vehicles enter the eight to 11 year group demand increases sharply by almost double, then almost doubles again once the vehicles are more than 12 years old. It is worth mentioning that today there are approximately 49 million vehicles within the eight to 11 year-old age group. Industry sources project 60 million vehicles will be in the same eight to 11 year group during the next three years. And registered vehicles within the more than 12 year-old category are also expected to climb significantly during this period. This will be compounded by the challenging economic times, forcing people to hold on to their cars longer. So this is obviously for our business future and that of our customers. In some respects, it makes us recession-proof. We do not lose a sale but rather our sale is deferred if a part failure is pushed out.

Let me take a moment to talk further about our strategic focus on reducing costs. As I mentioned the majority of our manufacturing has now been successfully relocated to Mexico from California, with greater utilization of production at our longtime operation in Malaysia. In addition, we have successfully transitioned all of our core sorting and material receiving to our offshore facilities. We are also now packing a substantial majority of our requirements in Mexico. Our shipping transition is also well on its way to completion. This is greatly contributed to gross margin improvements. We expect these gross margin improvements to continue over the near future as we grow into our efficiencies. This clearly is a competitive advantage and greatly enhances our leadership position within a consolidating industry.

David will now discuss our financials and I will then make some closing comments and then we will open up for questions. Over to you, David.

Thank you, Selwyn. I am honored to have been selected as the Company's new Chief Financial Officer and I look forward to meeting you in person at conferences and related events in the future.

As announced this morning, net sales in the third quarter of fiscal 2008 were $28.2 million compared with $33.3 million in the same quarter last year reflecting industry demands and realignment of inventory at two of our customers. Gross profit in the quarter increased 27.9% to $7.5 million or 26.6% of sales from $5. 9 million or 17.6% of sales in the same quarter of fiscal 2007. The increase in the gross margin was due to a lower manufacturing cost resulting from improvements in manufacturing efficiencies at our Mexican facility as Selwyn just noted and decreases in customer marketing allowances compared with three months ended December 31, 0 sucks. The gross profit for the quarter was negatively impacted by the write-down of inventory due to lower production costs of $1.1 million compared with $346,000 for the same quarter in the prior year. Despite the write-down which negatively affected gross margin, it certainly is encouraging that our current production costs are less than the costs we incurred to produce our finished goods inventory. This is the result of the fact that our initiatives offshore are paying off. We look at a trailing 12 month average on our standard cost to value inventory at the lower cost or market. As Selwyn discussed previously, our gross margin was impacted by both the inventory write-down and stock adjustment accruals. Excluding these items gross margin would have been approximately 32% for the quarter.

General and administrative expenses increased 11.3% to $5.5 million from $5.0 million a year ago. This increase was due primarily to the increases in the following expenses-- $122,000 of increased severance and other related expenses; despite the negative impact on our P&L, this shows progress on our offshore initiatives. $116,000 of increased bad debt reserves primarily resulting from the forced closure of one of our smaller customers, $109,000 of increased expenses related to the closure and sublease of our warehouse facility in Nashville, Tennessee, and $147,000 of increased general and administrative expenses at our Mexico facility.

Sales and marketing expenses increased $210,000 to $824,000 from $614,000 in the same quarter of fiscal 2007. Operating income during the third quarter was $842,000, up from an operating loss of $94,000 a year ago. Net of interest income, interest expense for the quarter was $1.3 million, down from $1.9 million the prior year. This was primarily attributable to a decrease in receivables that were discounted under our stacking agreements and a decline in our average outstanding loan balance on our line of credit.

For the third quarter fiscal 2008 net loss was $183,000, or $0.02 per diluted share compared to a net loss of $2.1 million or $0.25 per diluted share in the third quarter of 2007. Total shares outstanding in the fiscal third quarter of 2008 includes approximately $4 million additional shares related to the private placement in May 2007. As of December 31, 2007, our balance sheet had $464,000 in cash, $9.6 million in working capital, and $134.4 million in total assets. At quarter end we had no borrowings on our line of credit, leaving $31 million available after reflecting outstanding letters of credit. During the three months ended December 31, '07 we generated $3.9 million in cash from operations to pay down the $3.9 million loan balance on the line of credit as of September 30, '07. Shareholders equity was $88.1 million at December 31, '07.

In January 2008, we entered into an amendment to the credit agreement with our bank. This amendment extended the expiration date of our credit facility from October 1, 2008 to October 1, 2009. Our strength in balance sheet, credit facility and operation should generate the cash necessary to support our working capital requirements and planned capital expenditures which is in the range of $3 million to $4 million at fiscal 2008.

I will now turn the call back to Selwyn, who will make additional comments before we open the call to questions.

Thanks, David.

So from an operating perspective, we're very excited about our progress. During the quarter approximately 95% of our production was performed at our facilities outside the U.S. and really from an internal perspective we view that as completed transition on the production side. In particular, our remanufacturing facility in Mexico achieved record my production numbers. These efficiencies gave rise to the inventory write-downs that we've discussed. The effect of our Q3 inventory write-down, to put it into perspective, is to reduce finished goods inventory costs by approximately 5% which would result in increased gross margins in the following months of $6 million on the next $150 million in revenue. And this signifies these write-downs while apparently negatively our operating numbers on the current basis will be-- result in positive margins in future quarters.

The work force at our offshore plants is getting even more seasoned, and we expect to see continued enhancements in productivity. Effective April 1st, 2008 we will also be returning approximately 80,000 square feet of 35% of the total space at our Torrance facility, which is expected to save us approximately $500,000 in annual rent expense along with some corresponding incidental costs.

We continue to actively seek new business and growth opportunities but only if it is profitable and provides a fair return to our shareholders. That being said we remain optimistic with our prospects for expanding our presence in both the do-it-yourself and the do-it for-me markets. In the professional installer market we continue to make inroads by leveraging our quality built brand name. As retail customers focus on expanding their professional installer sales we look forward to the growth opportunities we will experience alongside them. Given Motorcar Parts' strong customer relationships and reputation as a value added supplier, we believe we are in excellent position to benefit from our customers' efforts to expand their share of the rotating electrical market and to increase market share from new customer additions in the upcoming year.

Despite some softness in our sales numbers, this was good quarter for Motorcar Parts. As we hope you're aware, we commenced trading on NASDAQ on December 3rd, 2007, particularly important we experienced strong margin growth and maintained the Company's operating performance despite slowness in industry sales, and we expect to see additional improvements in our costs structure for the fourth quarter of this fiscal 2008. Our offshore initiatives are on excellent footing and we expect operating performance to improve over the next quarters. In addition to the successful relocation of our core sorting and packing to Mexico, focusing on completing the transfer of logistics operations to Mexico as well.

In summary let me just say that long term market statistics for industry are favorable although there are some deferred maintenance trends that the aftermarket industry is experiencing. Overall we see an expanding pool of older vehicles on the road today and we should experience growth in our sales as a result. As one of the few leaders in an industry undergoing consolidation, Motorcar Parts is in an ideal position to capture the opportunities available in the market. We have nominal leverage and ah increasingly favorable operating structure which puts us in strong position to continue to see growth strategies to enhance shareholder value.

At this point in time I would like to thank you all for your interest in Motorcar Parts and I'm happy to answer any questions that you may have.

Thank you, sir. (OPERATOR INSTRUCTIONS)

Our first question comes from Michael [Legge] with Grand Slam.

Hey, Selwyn. Question on cash flow EBITDA. You have a lot of one-time charges in inventory write-down, stock adjustment. Could you help me walk through a cash flow EBITDA type number.

Yes. Let me start with the EBITDA computation because I think that's a little more simple for me. Essentially the net effect of the stock adjustment accrual that we took in the third quarter was about $900,000 in negative effect to the gross margin. In addition to that, the effect of the inventory write-down which affected gross margin was approximately $1.1 million. We have also adjusted -- we've added to customs accrual, which the Company has taken the position that it does not owe this amount, but we've added to a customs accrual of $135,000. We've also got a 123R stock option expense for $270,000. We have severance of $122,000. At our NASDAQ application this quarter, which we paid at approximately $100,000. We paid approximately $100,000 for closing, in the last costs, relative to closing our Nashville distribution facility. We incurred about $100,000 in fees to transition our auditors who are now Ernst and Young. For a total of approximately $3 million. If you take the reported EBITDA of $1.4 million, apply adjustments, we're probably at approximately $4 .4 million of adjusted EBITDA. From a cash flow perspective I can turn it over to David but we generated approximately $3 .9 million of cash flow.

Okay. And you said during the call that gross margin normalized would have been 32.4%? Is that correct?

Approximately. Yes.

And you also comment in the release that the sales trends started off strong, or I should say strong start to fourth quarter. Can you comment on that a little further?

We started out, obviously after a soft third quarter, which predominantly a result of realignment of inventory at two of our large customers. We started out strong for January month. We are very optimistic about hitting very significantly good sales number for this quarter. We see a -- definitely see a reinvigoration of demand, and we're hoping that it will continue on for the whole quarter. Still a little early in the quarter to assure you of that but it looks very good right now

These one-time charges that we just talked about, do you expect any of those to continue?

A couple of them will continue, so which makes them not one-time, but we continue to save money in our -- save costs in our efforts in producing offshore. So we use a trailing 12 months to adjust our finished goods inventory standards. We expect to see another write-down probably in a similar range for this quarter, and as I try to make a point is that these are -- first of all, it's a non-cash write-down, but the effect of writing down our finished goods inventory; just in the third quarter we wrote down finished goods inventory by 5% and we expect to write it down another 5%. If you take that 5% and pro forma $150 million in revenue, you end up generating almost $6 million in additional gross profits. So on that $150 million, so any additional write-downs will then result in further increases in gross margin as we go through the next $150 million of revenue, which is what I'm assuming we'll do over the next 12 months.

Great. Thank you.

And our next question comes from Mark Tobin with Roth Capital. Please go ahead.

Hi, Selwyn. On the G&A line, just to get a little more color on what drove the increase from Q2, was there any benefit from the Nashville shut down during Q3 at all?

Not yet. We'll start seeing it now. But I'm going to let David walk you through the detail of the G&A differential.

Sure. Hey, Mark, this is David. As Selwyn had discussed previously in going through some of the adjustments that we made in operating costs, we're looking at the severance of $122,000, we're looking at that time FASB 123R non-cash stock compensation expense of about $270,000, and we talked about the listing fee and entry on to NASDAQ of $100,000, and approximately $100,000 in transitioning auditors. Specifically to your question about the Vern distribution center, going forward, want to expect to see estimated $1.6 million in annual savings.

I think also, Mark, just to add to what David said, we're just coming through the back end of a number of different initiatives that have involved using a lot of outside professional services is and we see that starting to decline as we go forward into our regular operations. As we come through tremendous stabilization, with no challenges on accounting methods, accounting being clean, our new auditors are in place, we had a very clean close for the quarter and so we expect to be able to pare down some of these -- which may not be one-time G&A expenses, but our overall utilization of outside professionals.

The FAS 123R, is that kind of a run rate for the next couple quarters as you go through the process, the 270K?

We've seen that that has been the run rate in the past, and as the Company moves forward, we will continue to do the calculation, but history has told us that $300,000 is about the run rate.

Okay. Okay. And on the gross profit line, you indicated that similar inventory write-down in Q4. As you start to annualize some of these cost savings, is it safe to assume that that number comes down dramatically, as far as the write-down number?

Yes, I mean, I think again, what we're looking at, it's been running at about 5% of finished goods inventory valuation. So, you know, again, to the extent we were able to write it down another 5% tin fourth quarter. Just on these two quarters you should see 10% increase in gross margin points. So it's pretty significant. We average the write-down on a trailing 12-month basis. What I'm trying to do is sort of pro forma where the inventory values are now on future sales trends. If that makes sense to you.

That makes sense. I'll jump back in the queue. Thank you.

Thanks, Mark.

And our next question comes from Jim Shulman with Costa Brava.

Hi,guys. Good quarter. Trying to just get a better handle on, if you can walk through, in whatever detail is appropriate, the transition, if you will, with the stock adjustments in the third quarter to kind of balancing it off in the fourth quarter, how does --

I think that's a good question, Jim. We have a policy where we -- one of our accounting policies where we look forward six months, and we develop a reserve for what we anticipate to be stock adjustments in the future six months. I'm sitting with Kevin Daly, our new Chief Accounting Officer, and I'm going to take a little liberty in trying to explain accounting policy,but he's nodding that I'm doing okay so far.

So far.

So we estimate what those stock adjustments will be for next six months. That doesn't necessarily mean that we receive those stock adjustments in the particular quarter, and in general, the Company does not allow stock adjustments unless we have corresponding stock update orders. And the stock update orders we anticipate to be able to ship, that are in conjunction with this allowance, to ship over the fourth quarter of this fiscal year and the first quarter of next fiscal year. And so it's mostly a timing difference.

Oh, okay. And from a dollar perspective, you end up net ahead, I assume?

You do, yes.

Okay.

That depends. In this particular case we, did and we usually -- it's a negotiation between us and our customers, and in general we always end up ahead.

Great. Thank you.

And our next question comes from Frank Grischna with MicroCapital.

Frank Gristina.

Hi, Frank. How are you?

Good. Good. So can you--a lot of questions have been answered. Can you expand recent contract --I guess extension for $50 million over three years? Can you enlighten to us what it was previously in terms of size of contract and duration? Then also can you share whether or not it's with one of the two customers that's going through realignment of stores?

First of all, let me try and break down the question. We are very -- Frank, I'm not trying to dodge anything, but we're very sensitive to our customers demands to keep their business confidential, so I cannot comment on who it is, but I will comment that the prior year -- the prior contract that we had with this particular customer lasted for 18 months, and it's now being renewed for three-year period. We believe this customer is on solid footing and will be an excellent customer for the next three years. It is a major retailer and one that the fact that we resigned them with favorable contract terms is just a valid endorsement of the performance and the quality and competitive nature of how we have supplied them.

Great. Can you comment whether or not it was, if you were to annualize,18 months versus three years, has the annual value, has it gone up? Has it gone down?

When we computed the estimated value, we assumed the historical value, although we're optimistic that it should grow even beyond this.

Okay. Great. And then on gross margin, so there were a couple of mitigating factors there, and one of which is going to continue, and it sounds like the stock readjustment could continue, but that's really a forward-looking basis, but is it safe to think that gross margin going forward should be above 30%, or will it it take two quarters of 5% write-downs before you can start calculating a 30% gross margin?

No, we believe that going forward the gross margin should be in excess of 30%. Yes, it is safe to assume that. Last question.

On the G&A line, is it safe to think that this is a peak quarterly number? Again, there's the Tennessee expense, and it sounds like there's severance payments, but is $5.5 million the peak quarterly expense? You were saying it should trend down from here as a dollar amount or as a percentage amount?

Hi, this is David. So for the third quarter we did see some costs that were really one-time, not necessarily operating and ongoing. In the fourth quarter what you are going to see is more stocks cost come through as we do our year-end stocks evaluation, stocks cost both internally and using consultants as well as auditors so we will see an increase in G&A because of stocks costs.

So it could be -- you could have a third quarter, or you could have a fourth quarter expense higher than this December quarter due to stocks?

Yes.

Okay. Great. Thank you.

And our next question comes from Rod Cerny with McCarthy Group Advisors

Hello, Selwyn. Hi, Rod. How are you?

Fine. Can you give us a little more color on what Mervyn is going to be doing? You say he's now the Chief Acquisition strategist. Can you give us an idea at all about kinds of things you're thinking about in terms of acquisitions, the size, sectors, and or industries? Can you give us agents more color there?

Sure. Obviously we've announced Mervyn's position as full-time Chief Acquisitions Officer, so that would signify that the company is focused at looking on some add on acquisitions. We feel that now with our cost structure in place that by making certain key acquisitions, both within the category, that we can enhance the value of those acquisitions by rolling them into our existing cost structure. We also believe that we have no leverage whatsoever and that a little leverage on the senior your side is in order, and we believe that that leverage could result in certainly enhanced operating metrics for the Company and ultimately being very accretive to our shareholder, for our shareholders earnings per share and EBITDA per share. I think our initial focus is clearly within the category, and certainly we'll be look for opportunistic opportunities that may or may not be in the category. We are going to be very cautious to try and make sure that these acquisitions are accretive and that they do leverage our operating structure today. We're optimistic there are a number of opportunities out there because of the volatile automotive industry right now and the competitive nature of offshore cost models for -- on companies that have been well he is established as local suppliers. And so while we've spent all this money investing in changing our business model we are now going to try and leverage it at an accelerated pace.

So you have excess capacity in Mexico that you could move on an acquisition fairly rapidly. Two facilities in Mexico and likewise reduce costs significantly. Is that correct?

Correct. We've now got an operating team in Mexico that we believe are capable of ramping up production there. The physical facility is certainly capable of taking significantly more production into that facility. We believe that Malaysia operations now, which have expanded dramatically, can help us enormously with certain part numbers and with certain business opportunities. And so if you look at where we are in the industry today, I think we're the only player in the industry that has no leverage. We're probably amongst, if not one of the lowest cost structures in the industry today, and on our way to completing that, although in our minds, from an operating perspective, we feel it it's fait accompli on the transition at this time. We feel like the new structure in financial management will give us greater control of financial reporting. Having the accounting function separated from the financial operating function and where Kevin and his technical expertise will be able to guide us through making sure that we're compliant in all respects with our financial accounting and timely, and that has increased significantly over the last year, and in addition to that, we have in-house stocks counsel, and we believe that we are working as diligently as possible to mitigate any deficiencies so we can get clean opinions in the stocks arena. And we've spent the last two years restructuring our business to change our business model, and I think that's been a success even though it's caused tremendous noise and maybe consternation for some of the investors and I appreciate everybody's patience, but we're now committed to going to the next level, and the next level is adding growth to a business model that makes sense.

How much leverage are you comfortable with, Selwyn?

That's a tough question to answer. I'm very conservative in terms of the leverage, and especially in light of the market today. I think one of the key positives and competitive attributes that we have as a Company today, is our customers can have faith that there are no financial strains on our business, and we can support them without having to worry too much about liquidity. Certainly our customers are battling to continue to sustain their growth levels and have aggressive growth models in place, and we're a supplier with our current financial position that can support them very efficiently. And so it leaves us una very good position for the future, in terms of our growth.

Thank you. Aim going to change gears real quick, then get out and let somebody else. On the do-it-for me marketplace, it seems to be going a bit slower than what you had hoped for. Can you give us some color on what is happening there in professional market?

Yes. I would say that overall the entry into the professional mark has been successful but in perhaps different ways than originally anticipated. We are today, I would estimate, in excess of 30% of our revenues today are in the professional marketplace, mostly through contract manufacturing for both our customers and a large customer that focuses in the professional market. I think the slowness in our growth has been the launch of our QB brand, and I don't want to call it slow, because it's actually doing very well, but we continue to add customers consistently but we've not landed the big fish in that area. We've landed a it lot of very good small customers. And so we continue to work to try and land some bigger customers in that arena, and our time will come. But I can't tell you when.

Okay. Very good. Thank you very much, Selwyn.

Thank you.

And our next question comes from Ryan Parker with EquityBrief Capital.

Hey, guys.

Hi, Brian.

Hey, earlier you had mentioned that you had visibility at about $150 million in revenues in the coming 12 months. Is that correct?

Correct.

Okay. What kind of EBIT or EBITDA margins could you put on, or what could you guide to on that $150 million?

You know, I think the only guidance that we've thrown out or issued -- I shouldn't use the word thrown out -- is when we said we thought by the end of this fiscal year we should be at a run rate of $35 million of EBITDA . So at this point in time we're sticking with that, and there is no update on that, and we continue to be optimistic that that's the correct guidance.

$35 million EBITDA for the fiscal year ending March '09?

Correct.

Okay. And your tax rate would be, what, 38%? Is that correct?

Currently, yes.

Okay. That's all. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) And our next question comes from Irwin Friedman. Please go ahead.

Hi, Mr. Joffe, good afternoon, and Mr. Lee. I'm Irwin Friedman. Our company is swinging up on all fronts, except a little softness in sales; however our stock is at '04, '05 levels when our company was at nowhere near its positive outlook. The question is, is the Company considering buying back some of its own stock? And if not, why not? What better investment can we make than to purchase our own stock which is at such a low multiple of cash flow?

First of all I agree with you in terms of your statements on valuation. We certainly feel like our stock is undervalued. We are consistently evaluating how to use proceeds and clearly a stock repurchase is one of the evaluations that we look at. I will say that from a banking perspective today we have a limitation in our bank agreement as to what we can spend on stock buy backs, and we're -- the maximum amount as of today would be $1 million . So we would look at what the effect of the use of that $1 million in stock buy backs would do relative to use in other ways, and we continue to evaluate it. So I would not rule it out but I would not say that we're doing it. But we're definitely looking at it very carefully.

So we have a bank limitation.

We have a bank limitation on size, yes.

Thank you.

Thank you. Appreciate the question.

And our next question comes from Steve Emerson with Emerson Investments.

Congrats, on achieving great margins in gross margins and the prospect of great gross margins. I missed your opening comments, but how much of this shortfall in revs are extraordinary items, how much is just continuing issues in the business, and the corollary is, to he achieve the $150 million in revs, what has to happen in terms of industry conditions different, let's say, than the Dec. quarter revenue run?

Steve, thanks. Good to to hear from you, by the way. Those, I think, are the critical questions that I'd -- that I would be focusing on in trying to understand where we're going as a company. Firstly, I will try and deal with -- and if I miss a piece of your question, come back at me, but I think I have them. The first thing I'll try and deal with is what was the significant contribution to the decline third quarter sales. And I think that there has been a softness in the marketplace but the most significant piece in the decline relates to two major customers. Both of these customers have publicly announced realignment of their businesses. Both of them have new management, and both of them, in my opinion, have been very effective reorganization plans, what I think will be very effective reorganization plans for their growth in their business coming up. So I feel disappointed that we had to go through the realignment with them but also thankful that I think they have great plans in place to restimulate their business, and by the way we are already seeing that from these two customers. The softness in the --

How much--

--industry relates to two issues Number one is I think that overall the quality of vehicles has gotten a little better, and if you look at the average age of a vehicles it continues to grow over time so we're at 9.4 years, and the expectation is that's going to grow even further. And the expectation is that for two reasons--number one is that the vehicle quality is better, number two; that we have an economic challenges in the marketplace, I certainly won't call it a recession because I'm not an expert enough to know what that really means but there are economic challenges. And as a result of that people will hold on to their cars longer. So if we now translate there's approximately 230 million vehicles on the road in the United States, of which 130 million of them, I believe, are greater than five years old, and in the category of vehicles that are in the zero to three years is almost no replacement during the warranty period. When you start getting into the four to seven-year-old vehicles, replacement goes to almost 4% per annum. Then you start getting into seven to 11, it goes up 50% of that, then in the 12-plus category it goes up even double of that. If you look at how the cars are aging into these new categories, the category from seven to 11 today has I think approximately 39 million vehicles, and the estimated number of vehicles, not estimate, because this is fact, we look it at Polk registrations, there's 60 million vehicles that are just before this category moving in over the next three years. So that 39 million which has replacement rates of 4% will grow to 60 million in the next three years. On top of that, because of cars is staying on the road longer, the industry analysts are now predicting there will be greater than one replacement in the life of the vehicle, because the whole vehicle is getting to be made of better quality than not just the alternator and starter. So we believe that while we're going through a little bit of softness in deferred maintenance that the both of the old vehicle population along with the percentages of replacement in the old vehicle population years will result in enhanced sales in the years to come. The one negative that looms out there is the potential of high fuel prices and the potential that the consumer will drive less. And obviously if you drive less, failures are driven by miles, and if you drive less, that may affect it negatively a little bit from that perspective. And your guess is as good as main as to what's going to happen to fuel prices and driving trends, but I think certainly having lived outside of the United States is that people drive less for a short period of time, then get back to driving their cars because they make adjustments in their disposable income, and they need to get to where they need to get to and it's more comfortable to drive your own car, et cetera, so I don't believe that that is a long-term issue with us, but that's certainly one to consider.

Just as an aside, you should develop data, since you're oriented towards the imports, which tend to be better fuel economy cars. That whole set of factors may be to your benefit in the future. But the question is, how much of your sales decline was the realignment by those two customers and, in other words, if it was $3 million, you mentioned that you've seen those customers already bounce back. Is that $3 million-ish a quarter, expected, let's say, for the March quarter and on? How much does it hit you?

It's very hard to put an exact quantity on. That I would say that 80 plus percent of the decline is relative to realignment of inventory from those particular customers I see their current demand already jump back up, along with demand from some of the other customers. So I think that it was an aberration to some extent of the quarter for the most part. Certainly the stock adjustments was not an aberration, that piece, but the rest I think was an aberration.

So I maybe a 2% decline or $1 million decline normalize for indis for these realignments, or as you suggested, you just can't quite tell?

I would say that you probably lack at closer to 5% of the decline was attribute to softness.

Well, that's very little then.

Yes, that is a small amount. And one thing I wanted to expand on something you said because you raised something that I think is important for our shareholder base to know. You talked about import card, and there was a previous question about how our efforts were going on in the professional installer market. If you look at the growth in the professional installer market, 65% to 70% of all the growth in the professional installer market is relating to import vehicle applications. And MPA, for the most part, has the highest significantly highest share of import application market share. So as we get further and further into the professional installer market we believe we are perfectly situated for expotential growth relative to domestic growth. So while we supply both import and domestic, MPA is known as the leader in the import applications.

Thank you.

Thanks, Steve.

Our next question comes from Ross DeMont with Midwood Capital.

Hi, guys. Congratulations on continued progress in the margin. Quick question as you look out at the acquisition landscape. What kinds of multiples maybe on a pro forma basis once you rolled another player's volume into your operations, what kind of pro forma multiples would you be looking to buy businesses at?

Well, you know, the purchase price may not end up being the effective price, and the concept is to pay market for what's out there and to leverage that market into our model which would make us -- make it far more accretive. There are various types of -- it's a hard question to answer with you I think what I would say to you is that when we look at that's acquisitions, we would look at very carefully at the accretive nature to the existing base, and without throwing out specific multiples, we want to be accretive. I think we are looking at some strategic, but really the idea is to leverage the operating metric that we have and turn what may be fair market acquisitions for the seller but into accretive acquisitions for us as a buyer..

Understood, and I guess in addition to that I would second the comments of a previous caller. It seems like in addition to acquisitions, if we could get that bank sort of covenant waived, I mean, right now this stock is at sort of three times your -- three times $35 million of EBITDA, so I would think buying back stock would also be a pretty interesting option.

Yes. It's definitely a very enticing to us. There are limitations on the buy back when you get into these buy back programs about percentages of volume and because our liquidity and our stock-- has not been great, the buyback analysis makes it a little less -- I lost my mind. Someone throw me a word. Less attractive, thank you. I'm getting senile. Less attractive. But suddenly we would look at -- the other side of it is, we definitely would like to -- we'll presenting at conferences coming up in the future and hopefully we can get more awareness for our stock out in the marketplace.

Thanks for taking my question.

Thanks, Russ.

(OPERATOR INSTRUCTIONS) We do have a follow-up question from Mark Tobin from Roth Capital.

I'm sorry. My question was answered. Thank you.

Thanks, Mark.

And there are no further questions at this time.

I'd like to thank everybody for their time. I appreciate everyone's patience. I know the stock price is low for everybody, and I appreciate you listening to us. We hope you'll continue to follow the story and we appreciate all your time. Thank you.

And that concludes today's teleconference. Thank you for your participation and have a good day.