Motorcar Parts of America Inc (MPAA) 2009 Q2 法說會逐字稿

Good morning and welcome to the Motorcar Parts of America fiscal year 2009 Q2 conference. This conference is being recorded.

At this time, I would like to turn the conference over to Mr. Gary Maier with Maier and Company. Please go ahead.

Thank you, Teresa and thanks, everyone for joining us. 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, let me remind everyone of the Safe Harbor Statement included in today's press release. 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 believes concerning future developments and their potential effects on the company. There can be no assurance of future developments affecting the company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in the 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 detail discussions of those ongoing risks and uncertainties of the company's business, I refer you to the various SEC filings. With that said, I would now turn begin the call and turn it over to Selwyn.

Thanks, Gary. I appreciate you joining us today for our fiscal 2009 second quarter conference call. If I sound a little different, I apologize. I have got a touch of laryngitis. As highlighted in today's financial release, we are continuing to build upon the success of our year ned and first quarter fiscal performance. We have record revenues and a substantial increase in profitability. Prospects look good for the second half in terms of consumers returning to more normal driving patterns, and this is supported by declining oil prices, and we have new customers coming on board and acquisition opportunities. We believe as our revenues grow and we can leverage our production facilities, when can generate better cost efficiencies and more profitability. While our sales performance accomplished record results for the quarter, it could have been better and it was not as robust as we would have liked. We are nonetheless very encouraged by overall success in a challenging environment. It is important to remind everyone that our products are not discretionary. When an alternator or starter needs to be replaced, it is not an option. Whether it's a professional doing the repair or a consumer purchasing the part and fixing the vehicle themselves, the part needs to be available, otherwise the vehicle will not work. Statistics in the marketplace continue to show the age of cars increasing and as this car population ages, so do replacement rates for alternators and starters substantially increase. In addition, we are optimistic that our recent initiatives to grow the company's heavy duty business and professional market will generate meaningful contributions in the second half. On the financial front, our gross profit climbed 44% as highlighted in this morning's release with gross margin jumping to 32.7% for the quarter compared to 24.4% a year earlier. And operating income was $5 million for the second quarter compared with $2.4 million for the same quarter prior year. David will discuss the contributing factors in more detail in a few minutes.

As I've mentioned before, current economic conditions support demand for our products. As consumers delay new car purchases and hold on to their vehicles longer, replacement rates will increase. For the benefit of new shareholders, the average age of vehicle today is 9.4 years. Once vehicles reach the four to seven age group, the demand for replacement parts will climb dramatically, doubling when they enter the eight to 11 year group and then almost doubling again when the vehicles are more than 12 years old. Today there are approximately 47 million vehicles within the eight to 11 year old group. There are 49 million vehicles registered that will enter this eight to 11 year group during the next three years. That's a growth of a high replacement opportunity vehicles of 26% and the replacement rate is double. And registered vehicles within the more than 12 year old category are also expected to climb significantly during this period and even their rates even double incrementally. So, this is obviously good for our business future and that of our customers. As you've heard me state before, our business is somewhat recession resistant, particularly as drivers return to the roads and add miles to their vehicles. And if drivers stay home, company does not lose a sale, but rather sales are deferred because the part failure is delayed.

Now let me take a moment to provide an update on our strategic initiatives. Our organic business continues to remain strong. Our relationships with our existing customer base remains strong and the market fundamentals for our product are moving in the right direction as I've just mentioned. Our customers are holding steady with their part sales and are expecting increases due to the current environment. We just returned from the show and a number of CEOs made presentations inferring the same conclusions. In addition, as I referenced above, we are expanding our offerings in the new heavy duty business. Our new production sales in Mexico are substantially completed as we look forward to adding revenue in this category. Our prospects for new business overall look very exciting. We have commenced shipping new customer business with approximately $10 million in annualized revenue, in the first six months of fiscal 2009 and in the past three quarters, we have build up inventory for this new business. In addition, we are planning for the future with initiatives in new technologies such as hybrids, which actually employ an alternator and a starter in one unit.

As I indicated in last quarter's call, we are prudent in pursuing new business opportunities, whether small or large, and cognizant of maintaining pricing and terms that make good business sense. In addition to the offshore manufacturing and the successful transition of our core shorting and material receiving to nondomestic facilities, we are now packing a substantial majority of our requirements in Mexico. Equally significant, we commenced shipping during the first quarter directly from Mexico to many of our leading customers in the United States. All of these developments will contribute to cost savings moving forward. This clearly is a competitive advantage and greatly enhances our leadership position within our consolidating industries. David will now discuss our financials, and then I'll give you a summary and we will open up the call to more questions. Thanks, David.

Thank you, Selwyn. As announced this morning, net income for the fiscal 2009 second quarter climbed sharply to $2.3 million or $0.19 per diluted share compared with $466,000 or $0.04 per diluted share a year earlier. These results including non-cash charge of $560,000 or $0.03 per diluted share recorded in general and administrative expenses to adjust for a significant fluctuation in the value of foreign exchange contracts. Excluding this charge, operating income would have been $5.6 million and net income $2.7 million or $0.22 per diluted share.

Let me take a moment to explain how our foreign exchange contracts work. We enter into four foreign exchange contracts to exchange US dollars for Mexican pesos in the future in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. We do not hold or issue financial instruments for trading purposes. The foreign exchange contracts are designated for forecasted expenditure requirements to fund the overseas operations in Mexico and expire in a year or less. While the contracts are in effect, there are fluctuations in how we value them based on mark-to-market calculations, but the overall impact eventually has a net zero effect.

Net sales in the second quarter of fiscal 2009 were $36.4 million compared with $33.8 million in the same quarter last year. As Selwyn mentioned, gross profit in the quarter increased 44.4% to $11.9 million or 32.7% of sales from $8.2 million or 24.4% of sales in the same quarter of fiscal 2008. The increase in the gross margin was due primarily to lower manufacturing cost, increased operating efficiencies and increase in net sales. General and administrative expenses increased 5.2% to $5 million from $4.7 million a year ago. This increase was due to the currency exchange charge I just discussed. Excluding this foreign exchange charge, general and administrative expenses would have actually declined by 5.5%. Sales and marketing expenses increased $547,000 to $1.3 million from $797,000 in the same quarter of fiscal 2008, due primarily to the addition of sales employees which resulted from our acquisition of AIM, increased trade show and advertising expenses. Research and development expenses increase $306,000 from $581,000 from $275,000 in the same quarter of fiscal 2008 due primarily related to an increase in expenses in connection with our heavy duty after market initiative. Operating income during the fiscal second quarter was $5 million, up from $2.4 million a year ago.

In evaluating operating performance, the company considers the impact of non-cash expense items on our second quarter operations including foreign exchange charge of $560,000, inventory write-downs of $297,000, and FAS 123R stock compensation expense of $157,000. In addition, depreciation and amortization for the quarter was approximately $732,000. Net of interest income interest expense for the quarter was $1.1 million, down from $1.5 million in the prior year. This was attributable to a lower balance of receivables being factored and a decrease in short-term interest rates. As of September 30, 2008, our balance sheet had $129,000 in cash, $161.4 million total assets and $17.6 million in borrowings on our line of credit, leaving $19.4 million available after reflecting outstanding letters of credit. During the first six months of fiscal 2009, short-term borrowings under our line of credit were used to pay down our accounts payable balances, acquire certain assets of AIM and Suncoast and to offset certain customer accounts receivable which are no longer factored. Shareholders equity was $96.9 million at September 30, 2008. I will now turn the call back to Selwyn who will make a few additional comments before we open the call for questions.

Thanks, David. As I mentioned last quarter and earlier in the call, we are actively seeking new business and growth opportunities. Of course, only these opportunities are profitable and priced right to reflect commodity prices and that 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 market and the do it for me markets. In the professional installer market, which is the do it for me market, we continue to make in roads by leveraging our quality built brand name. Our expectations for new customer revenue growth, which are based on current commitments, should increase our annual revenue run rate by approximately $20 million, and that excludes the $10 million of incremental that David referred to while he was presenting. While we have these commitments we are still evaluating the timing on when this new business will begin shipping. In addition, Our AIM and Suncoast acquisitions are proving themselves as we anticipated. As our retail customers focus on expanding the professional installer sales, we look forward to the greater growth opportunities we experience alongside 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. Our net uses of cash from operating activities have declined in the second quarter as compared to the first quarter, and we believe that the working capital ratios will stabilize moving forward. In summary, long term market statistics for our industry are favorable. We are optimistic that lower oil prices will support a return to more normal driving patterns and enhance more demand for our products as vehicles age. We have just returned from the A-PAC show in Las Vegas, which was a tremendous success for us. With strong customer interest in our products as well as numerous opportunities to take advantage of industry consolidation which we evaluate on a case-by-case basis. As I've said before, we have nominal leverage and and an increasingly favorable operating structure which places the company in a strong position to pursue growth strategies that enhance shareholder value. I appreciate all your interest in Motorcar Parts, and I'm happy to answer any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Anthony Cristello, BB&T Capital Markets.

Thanks. Good afternoon, gentlemen.

Hi Tony.

I guess one question, while you look at the gross margin was up nicely year-over-year, it was down sequentially from last quarter. Is there anything there that you can attribute that to, or is that more seasonal in nature?

No. I think, Tony, what we are seeing is when we launched the Mexico initiative, we have target production metrics that we thought we could hit in terms of costs and strategically, the company made the decision to produce at levels that we could evaluate what those production metrics could be at and as a result, we build some excess inventory, but we saw tremendous favorable cost metrics by -- in fact, we think we can hit better cost than we thought we would initially, but we also then pulled back because of the -- our growth in our inventory balances, we pulled back production in the last quarter. And as we pulled back production, the absorption of the indirect overhead and the offshore facilities gets a little bit less efficient and so you see slightly higher costs. But the good news is that we believe that as we go into the second half of this year, we will be required to ramp-up inventory. We have a lot of new customer opportunity, and I believe again our -- and I'm seeing this in reality in our trends, that our existing customers' businesses are picking up, and we think that the production metrics will get more favorable as we go down the road.

Do you think you'll see them return to where they were in the first quarter or be better than they were in the second, but may not, it will take a little while the ramp-up back up to those levels?

We should see them go back to the first quarter levels, and they will get better as we pick up new business.

Okay. One of the questions that I have is, relates -- there's a lot of news about AC Delco. I believe they are a large customer of yours. With GM shopping those assets, does this expose your inventory to any additional risks, should AC Delco's customer begin to pull back demand due to sort of general uncertainty?

We are watching it carefully. Again, generally, we talk don't about specific customers. This is a very unusual circumstance, but as of now, the customer base seems solid. We are watching it carefully. One thing that I will -- I think that is important to be aware of is that that demand has to go somewhere. Those people are selling alternators and starters, and if it's not AC Delco, there is a possibility that the demand could come to us as well. So we have to watch it carefully. I don't know yet what the outcome could be, but that is certainly a factor that we continue to evaluate daily. We have very open communication with AC Delco and as of now, I think things seem relatively stable, but they are unfolding very quickly on a day-to-day basis.

And I guess, in this environment, do you tend to see your customers, and not specific AC Delco, just in general, do you see more of a managing of inventory, leaner levels just as the credit environment has placed further pressure on the ultimate end consumer? Are you seeing some --

When I look at our larger customers, in every one of the cases of our larger customers, they are all looking to expand coverage, have greater inventory levels. We have not seen issues on reductions in inventory. We saw that a year ago, a little bit with some repositioning of a couple of our customers, but as of now, I think the outlook is that they see that there is a possibility for expanding demand and certainly, I think their register sales are showing that, and we are seeing a demand for incremental coverage, not a shrink at all.

Okay. Maybe David, you noted foreign exchange had an impact, I believe of $560,000 this quarter. How should we think about this as an ongoing issue in subsequent quarters?

We are tracking the exchange rate on a daily basis, and it really depends on the rates going forward. We are in close contact with our bank to track as well as look into opportunities for other hedging type vehicles. It really depends on the markets and most lately, it's been fluctuating more than we are used to. So it's hard to tell right now where it's going to end up at the end of the quarter.

Can I add to that as well? Tony, the way these hedges work, is you buy a currency forward, so we know what our fixed rate of cost (inaudible) is going to be for the next nine months. In the interim, when we convert dollars to pesos, we get the current exchange rate and not the rate that we are buying forward. At the end of the contract, even though there will be fluctuations in mark-to-market on a quarterly basis, up and down, at the end of the contract, we have fixed the amount that we are paying for a peso, and it's irrelevant in terms of what the mark-to-market fluctuations are through the period.

So you may have some ultimate true-up at the end when that contract expires?

Right, you may have a gain, you may have a loss. At the end of the day, if the dollar continues to grow in value relative to ringgits and pesos, we essentially will be paying less for our production. So the fundamentals are forgetting about the hedging, because the hedging is in fact what it is. It's a hedge, and there's a net zero differential, but the fundamental metric of the dollar increasing in value, if that continues on, will enable us to produce at far cheaper rates. If the dollar goes the other way, we will long term have higher costs of production, but we continue to hedge them nine months in advance. So when we look at that and we've been evaluating whether we should be owned through -- I forget the technical, Kevin -- 133 whether this should be a FAS B 133 change for us and put this on our balance sheet, but at the end of the day, even fit runs through the balance sheet to the end of the contract, it has to hit the P&L. So we end up in the same place. So fundamentally, when we look at our foreign exchange risk, we leverage the future's market to hedge and to take no currency risk on our metric for at least nine months into the future. So all of this fluctuation quarterly, in my opinion, is obviously -- it's required by GAAP, but at the end of the day, it is a net zero situation.

Okay. One --

Negative.

Okay. When you look, you've given guidance in the past. There was no guidance given in the press release or in the prepared remarks. I'm wondering, have you withdrawn guidance or is there something you can give us in terms of the back half of the year, what you are still looking for?

Well, I can tell you, let me deal with that in two pieces. As far as new customer commitments, they are far excess of what we anticipated, and these are commitments that we have from people -- now of course, until you ship -- you haven't shipped yet, but as far as new customer commitments, they are in excess. The thing that will affect our revenue guidance will be the timing of when these shipments kick in. They involve significant change over and at this point, we are evaluating to see whether the guidance for the second half is still valid, but it's -- we think we are going to be close at this point in time, and on an ongoing forward basis going into the next fiscal year, we think we're going to be way ahead of where we though we would be on revenue.

But right now --

I am not in a position to withdraw guidance. I am not in a position to validate it either. But I think, again, I think we're going to be close, it all depends on when these new programs kick off.

Fair enough. Thank you. I'll let someone else ask some questions.

Thanks.

We'll go next to Mitchell Sacks from Grand Slam.

I've got some of my questions answered. One question I had was on -- you talked about $10 million in revenue through new customers. I couldn't tell if that was through the rest of this year or that was to next year. Then you talked about $20 million in new business commitments going forward. Can you frame that for me a little bit better? I was a little bit confused.

Yes, it is a little bit confusing, I apologize for that. In the first six months, we brought on new customers and acquisition new customers that totaled $10 million. Probably a little greater, but at least $10 million of new annualized revenue that rolled in during the first six month period. Over the next six months or eight months, because we are trying to figure out when these customers will roll out, we have commitments of at least $20 million in new business, and that will roll out over the next six months, and we think that right now, that is a conservative estimate.

Is the $10 million part of the $20 million then?

No, over and above the $10 million.

So it's a total of $30 million in essentially new business?

Correct, on an annualized basis. Obviously, we are not going to have $30 million of increased revenues for the period, but on an annualized run rate, we will have this increased $30 million of business going into our next fiscal year.

And then, in terms of getting back to the question on the peso and how that flows through, so G&A was increased by 564, the peso fluctuation for the period. Assuming that the currencies didn't move again through the rest of the contract, how does that then throw through G&A? Do you get an add back as it goes through, as your costs go down to the local price level? How does that flow through?

With our existing four contracts they were mark-to-market as of September 30. If the exchange rate remained flat, you would have no mark-to-market impact.

In the meantime, your cogs would be getting better because you are buying pesos at a lower rate, but you would be offset by the loss that you have already taken.

Right. So you actually -- so the G&A line is not impacted, but your cost of goods sold line is impacted?

Yes. Because the cost of goods sold line is affected -- correct me if I'm wrong, David, is affected by the actual purchase value of the peso, because whatever we are paying, if there is a demand for hypothetically, a million pesos in Mexico, if we pay cheaper dollars for that, then our COGS are lower. If we pay higher dollars for that, our cogs are higher, but the offset is that we already paid a premium and we've locked in a peso rate. So at the end of the hedge, it should be a net zero.

In terms of the R&D in the sales and marketing line, are those run rates more normal now for the rest of the year, or is there any kind of a one time in there?

No, but I think what you've got is expense without revenue in there. So we expect to see revenues start kicking in from those initiatives in the last six months. I think that the run rates are normal, but you don't see the revenue benefit from the initiatives yet.

Thank you very much. I'll get back in line.

Thank you.

Our next question is from Rick Hoss, Roth Capital Partner.

Good morning, gentlemen. Thanks for taking my questions. Not to beat a dead horse, but this $10 million annualized revenue, did we see a full contribution in the first quarter? Obviously, the second quarter we've seen $10 million divided by 4 gives you 2.5. So we've seen incremental 2.5 in the second quarter. Did we see that in the first quarter?

No, you saw almost nothing in the first quarter and you only saw a portion in the second quarter. So that $10 million will now be -- you will see the full effect of $5 million in the second half of the year.

Okay. Got it, alright.

'Because they've ramped-up through the six month period.

Okay. Now if you were to take out that contribution, would we see revenue flat to down year-over-year for the second half?

Let me talk about that for a second, because I think that is an interesting question. There is a product mix in our industry, there are various family groups of alternators and starters, and this has got nothing to do with the fundamentals of supply and demand. I want to talk a little bit about product mix. In the early year models there was an alternator called the CS alternator. It's a domestic and the failure rates of CS alternators were spectacular, they failed very frequently. Those vehicles on average now are over 15 years old and they are starting to come off the road. If we eliminated the 30% plus decline in the demand for those, we were the largest supplier, by the way, of those, if you eliminated that from our same store growth analyses, you would see that we were actually experiencing very high double digit growth in all of our other product categories. So the fact that we are growing nominally or flat despite experiencing 30% sales decline in the CS alternator category, and by the way, this is happening throughout the whole retail chain and the professional installer chain, CS alternators -- the cars are no longer on the road. They are coming off. So the fact that there is no substantial declines, it shows the incredible increase in all the other categories. So to answer your question, is we do see some softness on the same customer basis that we are going through that. Those CS alternators are going to be gone and the new part numbers that are coming into high failure rates. I don't know if I confused you more than anything on that answer, but does that make sense to you?

It helps.

Our base business is very strong, but the fundamental demand for CS alternators, which was a strong part of our business and strong part of all our customers' business, has gone away. So you can see that we've made it up with incredible growth pretty dramatically.

It helps to make a substandard alternator for a while, but then you have got to pay for it.

What happens is those substandard alternators are now off the road and there are new substandards are coming in. The beauty is for our business is we get to look in hindsight as to what is good and bad.

Right, exactly.

The OE guys, they don't really know until it actually performs.

Right. Secondly, on the -- the AR looked like they bumped up. Is this a one time event, or do we see the accounts receivable maintaining that elevated level?

No. I think what happened is we made reference to -- we have a significant customer lose their factoring, and so we've been carrying their receivable. Those terms are now at fruition, so we should now see constant payments and that's why our working capital ratios will now turn positive.

Okay. So we'll see -- we'll see gain 13ish maintain on the AR line, we will see 13 at level maintained throughout the rest of the year, then.

Yes, we should start seeing cash being generated now.

Okay, yes. Because I think we are slightly below our current ratio of 1.

We should see cash being generated. We've absorbed that growth in the receivable. We have had some, also some suppliers with shortening terms. There's been some pressure on the supply base in terms of being able to hold those terms as well. But we've substantially cycled through a large supplier having to contract terms because of their financial situation and a large customer building receivables because of their loss of factoring. So we have gone through all of that now, and it seems very stable at this point.

Okay. Can you take a guess at what the timing would be when you have more visibility into this large new business opportunity, the $20 million that you spoke of?

It's not one opportunity. Again, I've given you what I think is a conservative estimate of our new business commitments. It's multiple opportunities, one of them we began shipping last week and another we should begin shipping in the next few weeks, and some of them are pretty significant that will take longer periods of time. So I don't -- again, this is the variable as to why we haven't come out and given you more clearance on the guidance, because it's a little bit of an unknown for us as well right now.

Okay. But it's not all or none --

No. This is multiple customers. This is not one. So it's -- we have a tremendous demand across the board from new customers talking to MPA right now. I've never seen it this strong, certainly in my tenure at the company.

Okay, perfect. I appreciate it. Thanks a lot.

Thanks.

We'll go next to Dimitri Cornasofskia, First Wilshire.

Good morning, gentlemen.

Good morning, Dimitri.

Just a question on next year's guidance. At what point do you think you maybe putting that out?

I still have to figure out this year. No. I don't know the answer to that, Dimitri. To be honest with you, again, I think we are giving you some insight into revenue growth right now. I think you can look at next year's annualized run rate to be up by -- on a revenue basis, I think if you read the release, we certainly look like we should be up at least $30 million on annualized revenue for next year based on what we've said.

Got it. And then Sel, could you talk a little bit about the competitive environment, what other players are doing and pricing in the industry?

Well, I think the competitive environment is -- I think it's softened. I think you have just a few major players. I think each one of the players is very cognizant of making sure that they don't give out foolish deals. I think each one of them are concerned with performance and profitability and are cautious in a relatively tight -- not a relatively tight, in a very tight credit market, so I think we have probably amongst the major competitors we have, I think we have far greater sensibilities in terms of maintaining margins and maintaining integrity of our businesses. I still think it's very competitive, but I don't think any one of us are in a position to make moves that involve too much investment spending at this point in time. So I think, while I think that, again, continues to be competitive, I think the pricing pressures are a little less extreme than they have been in our industry. I think it's settling down pretty dramatically.

Any threat that any of them might go out of business or significantly weaken? I remember some of them or one of them was trying to distract --

I really don't want to comment on their situations. I think there's data available that you can read. I'm not sure that I am in a position, certainly to comment on any one of the competitors' financial position.

I got you. And then for the new business that you are getting the $30 million, what kind of customers are these?

It's a mixture of all types. We have in both sectors, both the do it yourself and the professional, so it's across the board. I would say that all of these customers are strong, well known brands that exist in the marketplace, well known companies. It's not marginal business, it's very good business. And they range from smaller customers to larger customers.

Got you. And then in terms of operational improvements, are you pretty much done, or is there more that you can do?

There's always more. I think we are just in the beginning stages. I think the first thing that we need to do is to stabilize volume through our facilities. We have lots of excess capacity, which is fortunate because we are able to take on a lot of new business. If we could maximize our capacity through the plants, there is a lot more savings on a per unit basis. We still have some inefficiencies because we haven't completed all of the shipping direct from Mexico. We expect to see a substantial changes in that over the next quarter in terms of moving the majority of our shipping down there. And we are very much a lean manufacturing company and under the definition of lean is, we pursue continuous improvement. We have a team of people, that's all they do is evaluate continuous improvement. So I think while the margin -- our cost of goods, I think they can continue to get better, and we look at external influences like the cost of metals to see how material costs, but certainly from a labor and operating cost, there's potential.

And Sel, could you talk some more about the heavy duty opportunity and how big that market is and what it means to you?

Yes. Well, it's a tough market to get exact size, because in the case of the light trucks and vehicles, you have pulp registration. We know how many vehicles on the road. There is a lot of data that can specifically identify it. When we talk about heavy duty, we talk about trucks, which we can't identify the size of that, and we talk about industrial equipment and we talk about agricultural equipment. Most of those types of equipment are not registered and so we've done some calculations, and I can't vouch how 100% accurate they are, but we think that that volume in that side of the business is probably at least the same size as it is in the automobiles and light trucks, which is 1.2 billion. We don't expect to get a huge market share up front. We do expect to start picking up new business in that area. I think it will start small, and we'd be excited. Our bench first is to get $10 million in revenue. Quite honestly, we have small goals and then we'll start accelerating from there. We are excited about our manufacturing progress in terms of getting that set up offshore. I think either during this week, we'll start producing our first unit there or perhaps next week, and we are excited about our preliminary sales successes in that market. We do have indications of some new business, and while not a material part of what we are talking about in terms of the new business, it's nice. It's a start, and it's a great extension to what we do in the car and light truck business. I think we can get it to be nice substantial volume as we go down the road, but it's not an immediate -- that's not the immediate euphoria. The immediate euphoria for us as a company is focused on the existing mix that we offer, leveraging up with new business and leveraging our manufacturing capabilities with that new business to result in greater operating metrics and efficiencies.

Sure. What was the run rate for the heavy duty business that you acquired, the revenue run rate?

Very small. Very small. Again, we try not to break it out, but it's small. At this point, just from a competitive perspective, it's not material to the numbers from a competitive perspective. We just want to try to keep that quiet for now.

Thanks very much and I'll jump back in.

I appreciate it.

We'll go next to Bob Sales, LMK Capital Management.

Hi. Just a question about the capital structure. When I look at the business you -- as long as working capital gets to the state, looks like you'll generate something in the order of $10 million a year in free cash flow, and you spent about $7 million in the first half of the year in acquisitions. How do you think about looking for additional acquisitions versus simply buying in your stock with the thought that that's equal to -- in excess of 20% of your market cap, almost, I guess 30%, and that would be a pretty significant impact to the bottom line versus the acquisitions, and I say that within the context of understanding that you have $20 million worth of new business lined up. You have heavy duty, so you have the ability to fill some of your Mexican facilities with that without the additional acquisitions that would cost cash. I would appreciate your thinking on that.

Well, it's a question grapple with consistently -- constantly. Not consistently, but constantly. It's a very good question because the market value of our company today makes it very attractive to buy back stock. And we have to balance that with the opportunity, really, to leverage our market share opportunity. We think that we can probably -- as low as we are valued on certain metrics, that we think we could probably make acquisitions at lower prices, and from a capital availability perspective today, lenders are more apt to allow us to spend on generating incremental EBITDA than to leveraging our share count down. And so from a financing perspective, it's proven to be a lot easier to get capital for acquisitions than to buy back stock. We are right now restricted to a maximum of $1 million for a share buy back, and it's something we discuss whether we should do that. Even if it's $1 million, the price that the stock is today, it's pretty -- we can get quite a lot of shares for $1 million right now. So you ask a good question.

As of right now, we feel like if we can enhance our market share, leverage our production capabilities, it would put us in a very strong to stead to maximize profitability going forward. If we don't see a move in our stock price at that point, then maybe we would refocus and stop buying back stock. But it's something that we grapple with everyday. And certainly, if you do the arithmetic without the external growth analysis and you are able to eliminate the availability of cash, buying back stock would be probably would be the right answer. Unfortunately, we are not able to leverage ourselves to buy back stock in this market that would make a meaningful difference. We have not been able to get a lender to agree to buy back significant portions of stock.

How much is available on your current line of credit?

For stock repurchase?

No. Just total availability.

Approximately $17 plus million.

I would just encourage you to think about whether or not banks are willing to do things with the borrower, thinking about less capacity rather than more, and it just strikes me that there's an opportunity here in terms of shareholder value on the stock repurchases. So I guess enough said on that point, but I do appreciate you listening to the opinion.

And believe me, we are looking at it. Our big limitation is, just to be clear, and I think I mentioned that within our $17.5 million we have a specific restriction on stock buy backs, there's a maximum of $1 million from the bank. So we would have to go and restructure our facility, and it's a tough time right now to get that done.

Yes, agree there. What percent is AC Delco of your revenue today?

I'd love to answer that. I know AC Delco is a hot topic. We generally, first of all, don't even talk about our customers by name. We have been saying AC Delco during this call, and we don't give out percentages by name of any particular customer. It is a good customer of ours, and again, we continue to make sure that we are -- stay ahead of the curve with them, but as of right now, I can't give you any guidance as to what may or may not happen with AC Delco. You are in the loop as much as I think everybody else is, because I think they've been pretty public with what's going on there.

Right. And then the CS alternators, what do you think that comprises in terms of your overall volumes today?

It's dropped now. I would say CS, and I will probably make a mistake because I'm doing this at the top of my head, but it used to be about 30% plus of our business. I think it's well below 10% of our business today.

Okay. Thank you.

One other thing to clarify, I don't know if this is -- is this going through on the call? Are you still there? There is some CS business, even though it's down to 10%, there is some CS, later model CS business that does exist. So just because it's -- it's not gone away a hundred percent, but it's reduced dramatically. I don't know if they heard that or not. Operator?

Yes. We'll go to our next question is Irwin Friedman, private investor. Private investor.

Good afternoon, gentlemen. This is for you, Mr. Joffe, it's a strategic question. In your narrative, you mentioned that the company continues to seek acquisitions, small or large. My question is addressed to the large. The company looks very well positioned with its organic growth in taking customers, and my question would be in order to look at a large acquisition, there aren't that many out there, but looking at a large acquisition, we would have to be quite leveraged to successfully pull that over and how we have open capacity to service new customers, and we seem to be very successful, which I'm very pleased to say, with getting the new customers. And if we have the capacity and we are successful in getting the customers, the question is, why would we seek a large ones in this environment?

The answer is is that we wouldn't unless it was accretive and made sense for us. So I'm just opening up a whole spectrum, I'm not indicating that a large one or a small one is imminent. It's just, we are open to looking at everything. Your comments are 100% accurate. We would not be looking to over leverage the company unless there was substantial accretive value to that. Thank you.

(OPERATOR INSTRUCTIONS) We'll ll go back to Mitchell Sacks, Grand Slam.

I wanted to get back on the question regarding free cash flow. You had talked a little about it earlier this quarter as possibly this quarter being a quarter where you would be able to begin to generate free cash flow. Does that assume that your customers and your vendors keep the same credit terms that they currently have with you?

Correct. That does assume that, yes.

Okay. And does it also assume that you would start to work down some of the inventory that you have built up for some of these new customers?

Yes. It either would be worked down or absorbed in incremental revenue.

Thank you very much.

Your next question is from George Burmann, Gunn Allen Financial.

Good afternoon, gentlemen or good morning on your side of the state.

Good morning.

Nobody has said it, let me say up front, congratulations. I think the quarter overall is very good.

Thank you very much. We appreciate that.

A quick question. The currency situation, in general from what I understand, a stronger US dollar helps your costs tremendously.

It does. That is correct, because we'd be paying less dollars to fund our offshore facilities.

In other words, all your manufacturing costs and input costs are in Mexican pesos or ringgits, and if the dollars, which is appreciated against some currencies of up to 25%, that would tremendously reduce your cost of sales.

Absolutely.

The only reason you have this $0.03 one time non-cash charge is because not knowing, because the world was predicting even weaker dollars, you hedged your forward position to a certain point at specific rates.

That's correct. Once the hedge expires, which we generally hedge out nine months at a time, and we only hedge 75% of our requirement, once those hedges expire, we'll be able to then buy currency at cheaper rates. Absolutely.

If the current worldwide economic situation continues and the dollar is seen as flat quality, you may choose with the current exchange rates not to hedge out into the future or even hedge it, and then if -- should the dollar weaken, you would lock yourself in even lower manufacturing costs.

That is correct.

Thanks very much.

Thank you.

It does appear there are no further questions at this time. So I'll turn the call back to management for any closing or additional remarks.

I wanted to thank everybody for taking the time to follow us. I know times are tough out there. We are, again, happy at our progress, especially considering the market. We feel like we are contra cyclical play right now, and we thank you very much for spending the time with MPAA and we look forward to further announcements going forward. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may disconnect at this time.