Motorcar Parts of America Inc (MPAA) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Motorcar Parts of America fiscal 2008 and fourth quarter year end conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Gary Maier. Please go ahead, sir.

Thank you very much. Thanks everyone for joining us for Motorcar Parts of America's fiscal fourth quarter and year end conference call.

Before we begin and I turn the call over to Selwyn Joffe, Chairman, President, and Chief Executive Officer, and David Lee, the Company's Chief Financial Officer, I would 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 conference 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 of America.

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 are 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 Company's various filings with the Securities and Exchange Commission.

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

Thanks, Gary. Good morning or afternoon, everybody. I you appreciate you joining us today for our fiscal 2008 fourth quarter and year end conference call. As highlighted in today's financial release, we are on our way to accomplishing our goals. We are continuously focused on increasing top line revenue growth, and these efforts have been bearing fruit, as indicated by a solid sales increase for the fourth quarter, with sales climbing more than 14% for the quarter.

In addition to sales growth, we have significantly completed our offshore transition, and are now realizing our anticipated savings from this initiative. Our gross profit reached record levels for both the fourth quarter and the year. Gross margin jumped to 31% for the quarter, from 11% a year earlier. While gross margin for the year climbed to 28%, from 16% in fiscal 2007. David will discuss the contributing factors in more detail in a few minutes.

In addition to the benefits of the relocation of our manufacturing operations offshore, which are now substantially completed, and which should help stabilize future profitability, let me also highlight several other key operating metrics that were noted in today's press release. We recorded a $1.5 million inventory write-down of finished goods on hand, to reflect our current lower production costs. This will have a positive impact on future gross margins as we sell through that inventory.

Fiscal fourth quarter results also include a non-cash accelerated promotion expense of $1.5 million to one of our customers. From a cash perspective, these credits are granted evenly over the year.

I would also like to note that full year results reflect the accrual of customs expense for cause of 1.3 million, of which $80,000 was accrued in the fourth quarter. We are hopeful that this expense will be reversed upon a successful resolution of a pending customs review of our position, regarding the potential exposure related to the emission of certain cost elements in the appraised value of used alternators and starters, which were remanufactured in Malaysia and returned to the United States since June of 2002.

Aside from the points just noted, fiscal 2008 was a significant year for us, in many other respects. We changed our entire operating model to an offshore global one, reducing costs, and expanding the Company's global capabilities. This also included a number of other initiatives, including the completion of a $40 million private placement to strengthen the Company's balance sheet, and facilitate the Company's successful transition to our offshore manufacturing model.

A NASDAQ listing was also an important accomplishment in fiscal 2008. In addition, there were various promotions within the Company's senior operating management team, as well as the finance department, which we announced in the third quarter, as well as enhancements in our internal control and Board enhancements. We added Scott Adelson as Senior Managing Director and Global Co-Head of Corporate Finance for Houlihan Lokey to our Board, and recently announced the appointment of Duane Miller, a former senior GM executive as a Director.

We received a clean opinion on our internal controls over financial reporting, and in addition, the transition to our new audit firm Ernst & Young has gone smoothly. All of these represent important developments in the Company's repositioning for the future with a globally competitive model.

Several other events during the past year worth highlighting. We successfully extended an exclusive three-year extension of a supply contract for new and remanufactured alternators and starters from a major automotive retailer, with estimated aggregate sales of approximately $50 million.

We were also successful in subleasing and closing our distribution facility in the Nashville region, with an estimated reduction of future expenses on an annualized basis of approximately $1.6 million. On May 31st, 2008 we returned to our landlord approximately 80,000 square feet, or 35% of the total space at our Torrance facility. This will save us approximately $500,000 in annual rent expenses, along with the corresponding overhead and incidental costs, all accounting for significant savings opportunity for the future.

On the acquisition front, we completed as you know, an acquisition subsequent to fiscal year-end, of certain assets of a privately held company engaged in the production of remanufactured alternators and starters. This acquisition adds a group of premier customers, and provides a product line expansion with the addition of heavy duty and industrial applications.

We expect to pursue these new business channels as aggressively as possible this year. We believe our strong financial foundation, coupled with a cost effective offshore manufacturing operation, will enable us to capitalize on other accretive opportunities moving forward.

Let me just say a few additional words about sales, while we are talking about sales growth. Sales in fiscal 2007 included net sales of $11.7 million, associated with a discontinuation in August 2006 of the Company's pay on scan arrangement with an automotive retailer. Excluding this $11.7 million of net sales in fiscal 2007, net sales for the fiscal 2008 would have increased by $8.7 million, or 7% on a year-over-year basis.

We continue to believe that certain economic conditions support favorable trends within the automobile aftermarket industry, and support demand for our products. As consumers delay new car purchases and hold onto their vehicles longer, the opportunity for replacement parts will continue to grow.

As I noted in the call last quarter, and in recent conferences, the average age of vehicles today is 9.4 years. Once vehicles reach the 4-to-7 year age group, demand for replacement parts climbs dramatically. What is important to understand is that they double when they enter the 8-to-11 year group, and then almost double again once the vehicles are more than 12 years old. It is also worth mentioning that today there are approximately 49 million vehicles within the 8 to 11 year old age group.

There are 60 million vehicles registered today that will enter the 8-to-11 year group during the next three years, a growth of higher replacement opportunity vehicles of in excess of 22%, and registered vehicles within the more than 12-year-old category are expected to also climb significantly during this period, as people elect to continue to hold onto their vehicles. So this is obviously good for our business future and that of our customers. In some respects it makes us recession resistant.

The ongoing rise in oil prices may cause consumers to cut back on driving, which could result in deferred maintenance and sales fluctuations. However, we still believe in numerous parts of the county, miles driven have not declined. As we have said in the past, the Company does not lose a sale, rather sales are deferred if part failure is pushed out.

Let me take a moment to talk about our strategic initiatives concerning further cost reductions. In addition to the offshore manufacturing and the successful transition of our core sorting and material receiving to non-domestic facilities, we are now packing a substantial majority of our requirements in our offshore locations.

Equally significant, we have commenced shipping, and this is subsequent to year end, directly from Mexico to one of our leading customers. All of these developments will contribute to gross margin enhancements moving forward. This clearly is a competitive advantage, and greatly enhances our leadership position within our consolidating industry.

David will now discuss our financials and we will then open the call to any questions you may have.

Thank you Selwyn. As announced this morning, net sales in the fourth quarter of fiscal 2008 were $35.9 million, compared with $31.4 million in the same quarter last year, representing an increase of 14.3% as Selwyn mentioned earlier. Gross profit in the quarter increased more than three-fold to 11.3 million, or 31.4% of sales, from 3.3 million, or 10.6% of sales in the same quarter of fiscal 2007. The increase in the gross margin was due to the lower manufacturing cost, resulting from improvements in manufacturing efficiencies at our Mexican facility, as Selwyn noted.

The gross profit for the quarter was impacted by the $1.5 million write-down of inventory due to lower production costs. Despite the write-down which negatively affected our 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 a result of the fact that our initiatives offshore are continuing to pay off.

We look at a trailing 12 month average on our standard costs, to value our inventory at the lower of cost or market. Excluding the inventory write-down, gross margin would have been approximately 36% for the quarter.

General and administrative expenses decreased 21.7%, to 4.7 million, from 6 million a year ago. This reduction was due primarily to a decrease in Sarbanes-Oxley compliance costs of $870,000 in the fiscal 2008 fourth quarter, and a $211,000 net realized gain, recorded from the redemption of short term investments, for the payment of deferred compensation liabilities in the fourth quarter of fiscal 2008.

Sales and marketing expenses decreased $270,000, to $906,000, from $1.176 million in the same quarter of fiscal 2007. Operating income during the fiscal fourth quarter was $5.3 million, up from an operating loss of 4.2 million a year ago. The Company considers the impact of non-cash expense items on it's fourth quarter operating results including the inventory write-down of 1.5 million, FASB 123R stock compensation expense of $196,000, and in this quarter our non-cash promotion expense of 1.5 million. In addition, depreciation for the fourth quarter was approximately $650,000.

Net of interest income, interest expense for the quarter was $1 million, down from 1.9 million in the prior year. This was primarily attributable to a decrease in the average outstanding balance on our line of credit, and a decrease in short-term interest rates. For the fourth quarter of fiscal 2008, net income was $2.7 million, or $0.22 per diluted share, compared with a net loss of $2.6 million, or $0.32 per diluted share in the fourth quarter of 2007.

Total shares outstanding in the fiscal fourth quarter of 2008 included approximately 4 million additional shares, related to our private placement in May 2007. At March 31st, 2008, our balance sheet had $1.9 million in cash, $6.9 million in working capital, and $141.4 million total assets. At year end we had no borrowings on our line of credit, leaving 31.9 million available after reflecting outstanding letters of credit. Shareholders' equity was $91.9 million at March 31, 2008.

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

Thanks, David. As I mentioned on last quarter's call, we are actively seeking new business, and are optimistic about our growth opportunities. But we are cautious as we only will take advantage of these opportunities if they are profitable, priced right to reflect increased commodity prices, and provide a fair return to our shareholders.

We continue to remain optimistic about our prospects for expanding the Company's presence in both the do-it-yourself and the do-it-for-me markets. In the professional installer market, we continue to make in-roads by leveraging our quality built brand name. As our retail customers focus on expanding their professional installer sales, we look forward to the greater growth opportunities we expect to experience along side them.

Given Motorcar Parts' strong customer relationships and reputation as a value-added supplier, we believe we are in an 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 summary, long-term market statistics for our industry are favorable, though there continue to be some deferred maintenance trends that the aftermarket industry is experiencing. Overall we see an expanding pool of older vehicles on the road, and we should experience growth in our sales as a result of this.

Despite recent reports that certain retail automotive outlets are experiencing some sales softness for discretionary products in this challenging economy, our products are not discretionary, and sales of our products are somewhat immune to the current economic situation.

We do believe however that lower miles driven, will cause deferral of replacement rates. The industry continues to undergo consolidation, and Motorcar Parts is clearly in an ideal position to capture the opportunities available in the market. We have nominal leverage, and an increasingly favorable operating structure, which places the Company in a strong position to pursue growth strategies that enhance shareholder value.

I appreciate your interest in the Company, and I am happy to answer any questions that you may have.

Thank you. (OPERATOR INSTRUCTIONS). We will pause a brief moment. We will take our first question from Mitchell Sacks with Grand Slam.

Can you hear me now?

Yes, hi, Mitch. You just came through.

Congratulations on a nice quarter.

Thank you.

I wanted to just sort of walk through EBITDA for the fourth quarter and for this last year, this last fiscal year? For the fourth quarter, if I calculate it right, I came to a $9 million number, using your release, is that correct?

Yes, the detail of the way we come to this number, is we have adjusted for both the Pep Boys and the inventory write-down, that is about a little over 3.1 million, and then we have about 200,000 from 123R stock compensation expense, non-cash, and the depreciation of $677,000, so we end up with about 9.2 million in adjusted EBITDA.

9.2. Okay. Can you do the same thing for me for the year, for the fiscal year?

Let me give it to David. You want to do that?

Sure.

Much more of a tongue twister.

For the year, reported operating income is 12.75 million, and depreciation is 2.4 million. So to cost of goods sold, we have our standard inventory write-down of 3.2 million, we have customs accrual of 1.4 million. So the items affecting cost of goods sold total is 4.6 million.

In G&A, we have stock compensation expense of 1.1 million. And we include other costs, such as severance in connection with the offshore transition, that was approximately $800,000. We have also cost for restatements, as well as NASDAQ listing related costs, that amounted to approximately 250,000 combined.

We have Laverne Distribution warehouse closure costs. In the third quarter, we closed our Laverne Tennessee distribution warehouse, that was approximately $110,000. We also experienced costs to change over our auditors, as well as legal fees related to the customs, and finally, we have a cost incurred with the SEC comment letter, those last three items, auditor change, custom related legal fees, as well as the SEC comment letter costs is approximately $260,000.

Okay.

So the total G&A adjustments we are looking at is about 2.5 million. So combined with the cost of goods sold of 4.6 million, and G&A of 2.5, we are looking at operating income of approximately 19.9 million, adding depreciation of approximately 2.4 million, to get to EBITDA of approximately 22.3 million.

In your 10-K, it looks like D&A is about $3 million, are you using a lower number?

In the cash flow statement, you will see that we have two lines that really affect depreciation and amortization.

Okay.

We had --

I see it. Okay.

Yes.

Okay. And then for this year, you have previously talked about doing 35 million in EBITDA for fiscal '09. Is that still in the ball game?

Yes. And I think I just want to clarify that that takes into account, adjusted for the inventory write-downs and other non-cash expenses.

Okay. In terms of revenue growth, you have got a 150 number that you put out in your release. I think you talked about the acquisition as adding roughly 6 million.

Correct.

Basically you are looking for 11 million of organic growth then, roughly? Is that a fair number?

That is a fair number. There may be another acquisition or two, small ones, which would change that number. But we expect to add, separate from the acquisitions, we expect to add new business of around 11 to $12 million.

Okay, and then can you talk a little bit about how commodity prices are impacting your business? I mean, you must consume I am sure some of the metals that go into remanufacturing. Can you talk about that a little bit?

Clearly, we have seen dramatic increases in copper prices, dramatic increases in aluminum and steel, and it is a two-fold discussion really is for those who manufacture new product, mostly the Chinese imports, they are becoming less competitive, because the cost of metal has gone up significantly.

For us in the reman business, predominantly the reman business, certainly as we replace components, our material cost has gone up. I think we are cognizant in making sure that our pricing needs to reflect this. And without greatly enhanced operating structure, we have been able to absorb it fairly efficiently. But that is something we need to keep an eye on.

Is your competition doing anything, in terms of price increases due to commodities?

I think that the general market is looking at price increases, due to commodities. I definitely think that we will see some inflation relative to that in pricing. Our competitors seem to be moving in that direction. You have also got the incremental cost of freight and freight surcharges, which I assume need to be passed onto the consumer at some point.

Just a final question before I step back into the queue. Can you talk a little bit about your quarters. You had some lumpy quarters in fiscal '08. How do I sort of think about it in fiscal '09?

Yes, I think, Mitch, one of the things, I think that is a very good question, especially in light of the fuel prices and the fluctuation, as prices of fuel go up, we see these little spikes in the downturn of miles being driven, and then it comes back up. We expect to see fluctuating quarters. This is not going to be an even year in terms of quarters, and while they are going to be fluctuating, we are confident we can accomplish our year-end number. But I think that the public should be cognizant that this is just not flat, smooth sailing through this economy.

Okay. Thanks a lot, guys. Appreciate it.

Thank you.

We will move next to Steve Emerson with Emerson Investment Group.

I would like to compliment both management and the prior caller.

He did a good job answering questions. Thank you.

The 19 mill for last year EBITDA, can you perhaps just total the extraordinary items on top of that, that won't be expenses this year? For instance, of the million increase in auditor fees, how much lower will that be this year?

Let me try and take a stab at what David outlined for his adjustments in terms of non-recurring, and I will start with the COGS analysis, which he broke down into two components. One was our standard inventory write-down and our customs accrual. We certainly don't believe the customs accrual for 1.4 million will occur, and I am personally optimistic that we should have a favorable outcome to the resolution on customs.

So 1.4, we should use a range of zero to 1.4 for the coming year?

I would think again, in my mind, and this is not resolved yet, but it should be zero.

Okay. Excellent.

On the standard inventory valuation write-down, that is sort of a little bit of a trick question, because we do believe that we will continue to have some declining costs in our production, so we may see another $3 million over the next 12 months in reduced inventory write-down, which would be good news for us, because that means we are furthering our efforts in reducing our costs.

On the 123 stock option compensation, I think that will be recurring, even though it is non-cash. It will be recurring. We will have some severance still. We have still got people that will need to be laid off. So we still do have some severance that we would, but it will not be this significant, I think it will be 25% of this.

Okay.

So from 800,000, down to 200,000.

Excellent.

On restatements of 144,000, we certainly do not expect to have any more restatements, and we already are listed on NASDAQ, so we don't expect to have applications fees for NASDAQ again. We have closed down our distribution warehouse in Tennessee, so we don't expect that to be recurring. Our auditor transition costs, certainly we are very happy with our auditors at this point in time, and do not expect any changes there.

How much do we save of the million dollar increase?

In total, it is actually a million dollar decline going forward in total fees.

Okay.

So we expect to save just of the one-time that we announced, that would be, just give me one second. Of the 1.4 million, I think the one-time amounts would be a million, at least a million of it.

What I am trying to get at is the 19 million EBITDA, plus extraordinaries that are not going to continue, give us what adjusted EBITDA for last year?

I think you could add at least $2.5 million back to that number.

Excellent. Now trying to elaborate on the last questioner's sales issues, what is a reasonable way to look at the market, or per unit? In other words, if we are going to get 11 million of organic growth, how much of that would you guess is price? How much of that is real unit growth? Or are we looking at a real unit decline, if miles driven is going to decline a few percent?

We are expecting to get real unit growth through the acquisition of new customers, both through acquisitions and through just organic new customers coming on-board. And so the pricing is relatively flat. I think we should hopefully see a little pricing accretion through just the fact that most later model applications are higher priced than early model applications. I think the majority of our growth that we have outlined is new unit growth.

Okay. New unit growth, I am trying to figure out a baseline, something equivalent to same store sales. In other words, let's say where you are fully utilized by a customer, and you are their sole source, are sales per customer going down 2%, flat, or going up?

I think sales per customer are in the 2% accretion range.

Okay.

And the rest would be in unit growth.

And that would assume a 3% decline in miles driven?

And that assumes, that is correct.

Something like that?

About that. And the reason I say that is because our customers are not only selling to their existing customer base, but they are growing their reach by reaching into the professional installer market.

Okay.

So we think their market share will go up. Even though purchases in total may not be growing that fast.

Of that growth that you are seeing, how much of it is from the professional market, versus your traditional DIY customer? In other words, we have discussed this on previous calls. That is excellent growth in the face of declining miles. So obviously you are, as you just said, your professional market is growing very rapidly. But maybe you could somehow quantify it, or what percent is professional end market, versus retail? Last year? This year?

I would say the vast majority, I don't have the fine percent. I could get back to you on that. The vast majority of our anticipated growth, whether it be through the retailer or through our traditional sales effort, will be in the professional installer market.

And would you guess that is a quarter of your sales now, or how in your opinion, about how big is it for you?

Let me give it some thought for a second. I would say that 30% of our sales are today professional installer.

And how would that compare to a year ago? How quickly has that been growing?

It is up dramatically. Compared to a few years ago it was zero. That sort of puts it in perspective. I am not sure exactly what it was a year ago, but it continues to grow.

So it is around a 10 point per year increment? Is that 30% of your revs growing at 30%, or 25%, or what?

That percentage of our revenues is growing at, we expect to add, on that 30% we expect to add at least 10 to 15% minimum on that base, and maybe higher.

Well I consider this excellent, and I congratulate you.

Great. I think the other thing to add is that we are now positioned to expand our channels into the heavy duty business, and so that overlaps a little with both the Do-it-yourself and professional installer market, and we intend to pick up some market share in the heavy duty agricultural, industrial segment as well.

Well, I am looking forward to the day when I can call Motorcar Parts of America a low PE ag play.

Good.

Thank you very much.

Thanks, Steve.

(OPERATOR INSTRUCTIONS). And we will move to Irwin Friedman, private investor.

Congratulations to Mr. Joffe and the team. Great job. My questions have been answered.

Oh, okay. Well that was easy, but thank you for the congratulations.

Thank you. We will move on to Richard Hoss with Roth Capital Partners.

Richard Hoss. How you guys doing?

Hi, Richard.

Hi. Couple of questions here. David, if you can remind me, what was last quarter's write-down, and of that, how much of that positively benefited gross margins for this quarter? And am I looking at that correctly?

In the third quarter, the inventory write-down was 1.1 million.

Okay. And would we have seen that positively impact the fourth quarter gross margins?

Yes.

You would see that, but you would see it based on the number of turns. If we are turning our inventory at 4 times, 25% of that cost would be showing up, of that cost reduction would be showing up in the gross margins, I believe.

Yes.

Okay. Okay. So stripping out the effect of that write-down, gross margins were still very, very solid for the quarter?

Yes.

Okay. And then as far as the acquisition, when does that start to contribute?

Now.

Okay.

I mean we have basically gone through the complete transition on the acquisition. There will be some transition costs reflected in this quarter. But it took us basically 30 days to fully integrate the entire acquisition.

Okay. That 6 million annualized run rate should be reflected in the second quarter then, fully reflected in the second quarter?

In the second quarter; correct.

How much are you seeing additional price concessions from retailers? Any pressure there?

Yes, there is continued pressure from the retailers on price concessions, but I think the market is moving in the other direction. I think it is coming to a point in time where the reality of increased costs are being portrayed by the supply chain, not only us but by our competitors, and this is a non-discretionary item, and really the consumer has got to pay for what the item really costs. So while there are pricing pressures, I do believe that we are in the trough of that, and that the industry needs to start seeing some price increases.

Okay. And then as far as the existing capacity of the Mexican facility, I guess based on current conditions, how much additional capacity is there that can be utilized? In other words, what sort of a revenue run rate that you can still integrate in there without having to spend too much?

Well, I would tell you that our biggest challenge today is that we don't have enough volume to run through our plants.

Right.

We certainly believe that we are running, we think the Mexico capacity right now is utilized at maybe 50%.

Okay. Wow.

And in addition to that, we have excess capacity in our Malaysia facilities as well.

Okay.

So you could easily get, say 300 million through your existing facilities? Yes, nothing is easy, but I think we could get that through.

Okay. Okay. And then last question. The G&A level for this quarter, I know there are a lot of one-timers and things go up and down. 4.7, I mean, do we see that as the run rate?

Currently we do. We are always looking at our costs and looking for opportunities for savings, and we do have two locations here in Torrance, as well as Mexico, and looking to maximize the efficiencies.

One other proviso to that is that I believe we will be spending a little more on the sales and marketing effort to launch the heavy duty program. I think it will become accretive almost within a six-month period.

Okay.

But yes, I just wanted to add that on to David's answer.

Okay. I guess looking at it from the full year, similar to what we saw in '08 then, as a whole?

Is that accurate?

Our efforts as we continue throughout the year is looking to reduce costs, absolutely.

Okay. So we will look to come down a little bit?

Yes.

Okay. Perfect. All right. Thank you very much, guys.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS). We will move to Mitchell Sacks with Grand Slam.

Hi guys, I have a follow-up question on the heavy duty. Can you quantify roughly for me how big that market is, what kind of market share you currently have in the market, what do you need to do to capture material share there?

That is a very good question, Mitch. No research group that I have seen has been able to really specifically quantify the size of the market. The estimates that I have seen have been in the $600 million range. We have insignificant market share.

I mean, we just made one small acquisition. We have a very small customer base in that area right now. We feel we have great capability in this area. We feel like we are able to compete effectively on cost at this point in that area, and so where we can get to in the short term, I am not sure. But I think we can make it accretive very quickly.

Is this --

I think there is a lot of revenue opportunity as time goes on in that category.

Does this get produced out of Mexico or Malaysia, or where?

Combined. Everything we do is capable of being produced in either location.

Heavy duty, that would be, you said agriculture and what else?

Heavy duty is a word that is used differently in the industry a lot. When we are talking about heavy duty, we are talking about anything that is heavier than a light truck, and also including industrial, agriculture, and marine applications. So that would be forklifts, boats, International Harvester type equipment for farming, and all of those types of applications.

And the customers for buying, the professional store customers are buying this equipment, is it the same customers you are selling to now for the light applications?

There is an overlap, but there is a separate distribution channel as well.

Okay. So you can only leverage some of your relationships, then?

Yes. But the leverage with the existing relationships is enough to get us going in a nice, positive manner, and then we would expand our channels into the more focused heavy duty distribution channels.

Thanks very much, I appreciate it.

Thank you.

We have a question from Frank Gristina with Micro Capital.

Yes, thank you. Many of the questions have been answered. I did want to clarify, the inventory write-downs have a negative effect on your gross margin, correct?

The inventory write-down negatively impacts the reported margin for the quarter.

Right. So I just want to make sure. So if we were to strip that out, that 1.5 million, your ongoing gross margin was closer to like 36%?

Correct.

Excellent. Congratulations, guys, great quarter.

Thank you very much.

We have no further questions in our queue at this time. I will turn the call back over to you, Mr. Joffe, for any additional or closing remarks.

I wanted to thank everybody. I know people were waiting in anticipation of this quarter. I wanted to thank everybody for signing in to listen to our conference call, and we will be actively communicating with the Street as we continue through the year. And I thank you, all, once again.

This does conclude our conference call for today. We do thank everyone for their participation.