Motorcar Parts of America Inc (MPAA) 2009 Q4 法說會逐字稿

Good day and welcome to today's Motorcar Parts of America fiscal 2009 fourth-quarter year-end conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Gary Maier.

Thank you 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.

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 expectations and beliefs concerning future developments and their potential effects on the Company.

There can be no assurance of future developments affecting Motorcar Parts will be those anticipated by the Company. 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 Securities and Exchange Commission.

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

I appreciate you joining us today for our fiscal 2009 fourth-quarter year-end conference call. Let me begin by simply stating, the past year was a challenging period for the Company, specifically the fourth-quarter. As Charles Dickens begins a Tale of Two Cities, stating it was the best of times and the worst of times, the same can be said for Motorcar Parts.

The current economic environment created unusual, and I might add, unexpected circumstances for one of our large customers. We worked with this customer to minimize its order flow until its financial uncertainty was resolved. This required us to defer shipments until after June 1, which enabled us to minimize our accounts receivable risk. The net effect for MPA was a sharp reduction in sales to this customer during the fourth-quarter, which contributed to our slow sales for this quarter.

However, we are now classified as an essential vendor to this customer by the bankruptcy court, and hence we have and continue to expect to be paid on a current basis.

With respect to another customer, we have been adversely affected for a different reason. Despite this customer selling more alternators and starters than in the prior year through their registers, they were able to get more efficient with inventory management. This resulted in the customer being able to support its increased sales volume, while reducing inventory on their shelf. This program appears to have ended successfully.

As of the middle of the first-quarter of fiscal 2010 we believe that orders from this customer have returned to a normal pattern. We estimate that the effect of this was approximately $6 million in reduction in net sales volume for the quarter.

In addition, we accrued $1 million more for stock adjustments than we have in the prior fourth-quarter. This resulted in the Company taking a larger charge against sales. While we have a larger expense in this quarter, our policy is to anticipate returns for the next six months and accrue for them. We do not recognize any revenue from the anticipated stock updates that relate to these adjustments until we ship them.

We expect good update orders, at least equivalent to the reserve, to ship in the latter half of this first-quarter 2010 and the second- and third-quarters of 2010.

While these matters were essentially beyond our control I do not want to make excuses; however, the overall environment moving forward is bright, which is why I say it is potentially the best of times in many respects.

As I have said in past calls, consumers are delaying new car purchases and we provide nondiscretionary automotive aftermarket parts. We have available capacity, a low-cost manufacturing infrastructure, relatively low debt levels at around approximately 1 times EBITDA, and numerous new and existing business growth opportunities.

It is our belief we do not have any liquidity issues with our existing financial arrangements. Cash flow from operations is expected to be positive going forward. We have experienced a drain on cash due to a large customer that lost its factoring in the first-quarter of fiscal 2009. We continue to monitor factoring availability with our customers, and have agreed with our bank to reserve $7.5 million of our line availability to use if factoring is lost for any reason by our largest customer. It is our belief we would not need this portion of the line, but for this circumstance.

We continue to focus on taking advantage of our capacity at our facility in Mexico, which is currently operating at approximately 50% capacity, and being able to increased overhead absorption to gain operating leverage that falls right to the bottom line.

Obviously, events in the fiscal 2009 fourth-quarter did not help in this regard, but we began to experience a pickup in sales momentum in the latter half of the first-quarter. If this activity continues to build, and we gain the expected additional business, both from current and new customers, we will be in an excellent position to deliver solid performance for fiscal 2010.

As noted in today's news release there are currently approximately 240 million vehicles on the road. Of these vehicles, approximately 130 million are at least eight years old, which represents a high demand to aid segments for our products. The number of vehicles in these categories has been increasing in recent years, and is expected to continue to grow over the next few years. Our prospects for new business overall continue to be positive.

As I indicated in our call last quarter, we are now packing and shipping a substantial majority of our product requirements in Mexico. These developments will contribute to further cost savings moving forward.

David will now discuss our financials. I will make some additional comments, and then we will open up the call to questions.

As announced this morning, net sales for the fiscal 2009 fourth-quarter ended March 31, 2009 were $29.9 million compared with $35.9 million for the same period last year. Sales were impacted by the factors at the two customers Selwyn discussed a moment ago.

Gross profit for the fiscal 2009 fourth-quarter was $6 million or 20.2% gross margin, compared with $11.3 million or 31.4% gross margin for the same period a year ago. In addition to the factors previously noted by Selwyn affecting sales, gross margin was impacted by higher stock adjustment accruals, lower scrap metal commodity prices, and lower production levels.

On the positive side we experienced lower direct labor costs per unit. Proceeds from scrap sales are recorded in cost of goods sold, and as a result, our lower metal prices had a less favorable impact on the fourth-quarter compared with the prior year fourth-quarter.

Fourth-quarter scrap sales were approximately $1.2 million less or approximately 4% impact on gross margin than the prior year fourth-quarter. Additionally, as a result of lower metal prices, which resulted in lower material costs mostly for cores, we recorded approximately $700,000 in standard inventory revaluation write-down, which will reduce cost of goods sold going forward. In other words, we periodically review our standard inventory, and in the fourth-quarter reduced material costs to reflect current lower metal prices.

To recap, the reduced metal prices have an immediate impact on scrap revenue. But based on our trailing 12 month average standard costing policy, the reduced material cost will be recognized over the next few quarters.

Fourth-quarter production was approximately 22% less compared to the prior year fourth-quarter, which resulted in lower overhead absorption and decreased profit margins. Additionally, higher stock adjustment accruals are recorded in the fourth-quarter, compared to the prior year fourth-quarter, resulting in lower margins.

As discussed by Selwyn, we record stock adjustment accruals in the period when known, but the corresponding update order from the customer is shipped in future months.

General and administrative expenses increased slightly by 2.8% to $4.8 million from $4.7 million a year ago in the fourth-quarter. Sales and marketing expenses increased $425,000 to $1.3 million from $906,000 in the same quarter of fiscal 2008, due primarily to the addition of sales employees, which resulted from our acquisition of AIM, other increased compensation, commissions and increased advertising expenses.

Research and development expenses increased approximately $20,000 to $435,000 from $415,000 in the same quarter of fiscal 2008 due primarily related to an increase in engineering related costs.

Operating loss for the fiscal 2009 fourth-quarter was $680,000 compared with operating income of $5.3 million a year ago. In evaluating operating performance the Company considers the impact of non-cash expense items on its fourth-quarter operations, including total inventory write-downs of $1 million, FAS 123R stock compensation expense of $64,000, and impairment of goodwill of $100,000, and a non-cash gain of $511,000, reflecting the impact of mark-to-market accounting for foreign exchange currency contracts based on the fluctuation of the Mexican peso.

In addition, depreciation and amortization for the quarter was approximately $766,000. So adjusted for the non-cash items mentioned above and severance costs of approximately $200,000 in the fourth-quarter, EBITDA for the fourth-quarter was approximately $1 million, which reflects the lower level of scrap sale proceeds and lower overhead absorption due to lower production volumes.

Net of interest income, interest expense for the quarter was $1 million, consistent with $1 million in the prior year fourth-quarter.

As a result of the items noted above, the Company reported a net loss for its fiscal 2009 fourth-quarter of $1.2 million or $0.10 per share, compared with a net income of $2.7 million or $0.22 per share for the comparable period a year earlier.

For the 2009 fiscal year net sales were $134.9 million compared to $133.3 million for fiscal 2008. Total sales for fiscal 2009 fiscal year were impacted by the fourth-quarter events explained above. Excluding the two customers noted above, overall net sales to existing customers increased.

Gross profit for fiscal 2009 increased to $39.5 million or 29.3% gross margin from $37.2 million or 27.9% gross margin for the same period a year ago. This increase in our gross profit percentage was primarily due to the lower per unit manufacturing costs resulting from the increased utilization of our Mexico and Malaysia facilities, and the reversal during fiscal 2009 of a $1.3 million accrual related to custom duties claims for which the accrual was recorded during fiscal 2008.

These decreases were partially offset by increases in certain period costs and a reduction in scrap metal prices that resulted in less revenue for scrap metal during fiscal 2009 compared to fiscal 2008.

Additionally, fiscal 2009 production was approximately 11% less compared to the prior year, which resulted in lower overhead absorption and decreased profit margins.

Our general and administrative expenses for fiscal 2009 were $19.5 million, which represents a decrease of $267,000 or 1.4% from G&A expenses for fiscal 2008 of $19.7 million. The decreases in G&A expenses was due primarily to the following -- $712,000 of decreased audit and other professional services fees, $544,000 of decreased stock compensation -- stock-based compensation, and $393,000 of decreased severance and other related expenses.

These decreases in G&A expenses were partially offset by a net increase of $1,346,000 of non-cash expense recorded due to the changes in the value of the foreign exchange peso contracts during fiscal 2009.

Sales and marketing expenses for fiscal 2009 increased $1.8 million or 51.7% to $5.2 million from $3.4 million for fiscal 2008. This increase was primarily due to the following -- $723,000 of increased compensation expense due primarily to the addition of employees, which resulted from our acquisition of AIM; $479,000 of increased trade show and advertising expenses, reflecting the fact that we exhibit our full presentation at the November AAPEX show, whereas in the previous year we had a nominal presence; $211,000 of increased travel related expenses; and $204,000 of increased consulting and severance expenses.

Research and development expenses increased by $726,000 or 57.3% to $2 million in fiscal 2009 from $1.3 million in fiscal 2008. The increase was primarily related to an increase in compensation, consulting fees and travel related expenses in connection with our heavy-duty aftermarket initiative related to alternators and starters.

Impairment of goodwill was $2.2 million for fiscal 2009. We account for goodwill under the guidance set forth in FASB 142, Goodwill and Other Intangible Assets, which specifies that goodwill and indefinite lived intangibles should not be amortized. We evaluate goodwill for impairment on an annual basis, or more frequently if events or circumstances occur that will indicate a reduction in fair value of the Company.

The Company's market capitalization in the third-quarter of fiscal 2009 was impacted by stock market conditions, which represented a possible triggering event for potential goodwill impairment. Accordingly, we performed an interim goodwill impairment test in accordance with FASB 142.

Due to the book value of the Company exceeding the fair value during the third-quarter market -- using the third-quarter market capitalization, the Company determined that goodwill is impaired, resulting in a non-cash charge. After this write-down the Company no longer has any goodwill on its books.

Operating income for the fiscal 2009 was $10.6 million compared with $12.8 million a year ago. Fiscal 2009 reflects the impact of a non-cash goodwill impairment of $2.2 million or $0.11 per share, and a non-cash charge of $1.2 million or 6% -- excuse me, $0.06 per diluted share recorded in general and administrative expenses to adjust for a significant decline in the value of the Mexican peso, which affects foreign exchange contracts as we discussed.

The total of these two non-cash charges for fiscal 2009 is $3.4 million. In evaluating operating performance the Company considers the impact of non-cash expense items for its 2009 operations, including inventory write-downs of $2.9 million, FASB 123R stock compensation expense of $509,000. In addition, depreciation and amortization for fiscal 2009 was approximately $2.9 million.

Adjusted for the non-cash expenses mentioned above, severance costs of approximately $400,000, and excluding the reversal of the $1.3 million customs accrual reversal, EBITDA for fiscal 2009 was approximately $19.5 million, which reflects the lower sales for the fourth-quarter, lower level of scrap sale proceeds, and lower overhead absorption due to lower production volumes.

Our interest expenses, net of interest income, in fiscal 2009 was $4.2 million. This represents a decrease of $1.2 million over interest expense net of interest income of $5.4 million in fiscal 2008. This decrease was primarily attributable to a lower balance of receivables being factored during fiscal 2009 compared to fiscal 2008.

During fiscal 2009 interest expense incurred on a higher average outstanding balances on our line of credit was offset by lower interest rates.

As a result of the items noted above, the Company reported net income for its fiscal 2009 year of $3.9 million or $0.32 per share, which includes a non-cash goodwill impairment charge of $2.2 million or $0.11 per share, and the non-cash charge of $1.2 million or $0.06 per diluted share related to the foreign exchange currency contracts, compared with net income of $4.6 million or $0.39 per share for the comparable period a year ago.

As of March 31, 2009, our balance sheet had $452,000 in cash, $159.6 million in total assets, and $21.6 million in borrowings on our line of credit, leaving $16.1 million of available after reflecting outstanding letters of credit. During the fourth-quarter the Company used $6.4 million in cash flows from operating activities, due primarily to the paydown of accounts payable and accrued liabilities of $4.3 million.

During 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 $93.1 million at March 31, 2009.

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

As I mentioned in previous quarters, we are actively seeking new business and growth opportunities, but only if these opportunities are profitable, 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 and the do-it-for-me markets. In the professional installed market we continue to make good inroads by leveraging our Quality-Built brand name.

Our expectations for new customer revenue growth, which are based on current commitments, should nicely increase our annual revenue run rates.

While we have these commitments, we are still evaluating the timing of when this new business will begin shipping. Small amounts have begun shipping, and we expect this to pick up in the next 60 days.

Overall, however, our new business visibility remains strong. Our customers are experiencing good sell-through through their registers. This will make its way to us. We have commitments for strong new customers as well. While the startup for this new customer business has been slow due to factors that at the new customer, we believe this ramp up is imminent.

Our infrastructure is in place to handle this new business and to return us back to our margins in the low 30% range. This increased demand, as noted earlier, will help with absorb overhead costs, as well as growing our top line.

In addition, other factors that could have strong potential for us in the future are the declining value of the Mexico peso, and hopefully moderate oil prices and an aging fleet on the roads.

In summary, we continue to believe that the long-term market statistics for our industry are favorable. While oil prices and driving patterns are important components to our business, an aging vehicle population is particularly critical. This is why we continue to say we don't lose a sale; it is only delayed.

While economic conditions like we are experiencing today are very challenging, I want to emphasize again that these conditions should be helpful to us. In today's environment where fewer new cars are being sold, we are experiencing an increased population of old motor vehicles reaching high replacement rates for alternators and starters. This should bode well for our business over the long-term and it complements our strategic growth.

Recently we made some strategic changes in our G&A costs related to acquisitions, accounting, logistics and financial personnel, and reduced the annual G&A expense rate -- run rate by over $700,000. We have also eliminated $500,000 from interest expense in COGS. Lastly, we have eliminated $200,000 from sales and marketing, and $100,000 from R&D.

During the fourth-quarter we also initiated some strategic changes to the Company's sales organization to capitalize on opportunities for heavy-duty applications. This initiative added the benefit of initial annualized -- of additional annualized savings of approximately $400,000.

Overall the cost savings initiatives to date have taken expenses down by approximately $2 million annualized. We expect to further reduce costs in the next two quarters as we ship our largest customer directly from Mexico.

In conclusion, while the fourth-quarter was extremely difficult, our outlook is as positive as it has ever been for our Company. I appreciate your interest in Motorcar Parts, and I am happy to answer any questions you may have.

(Operator Instructions). Tony Cristello, BB&T Capital Markets.

One question. Selwyn, you noted a large customer had reduced inventory due to a new focus on inventory management and ultimately greater efficiencies. But then you went on to say the program ended and things went came back to a normalized level.

I'm just curious why if they received efficiencies in that program they would then go back to the old way of demand. Why not keep it at the level that they were getting a benefit from?

Maybe I wasn't as clear as I could be. Essentially this customer was able to reduce the amount of inventory on their shelves -- in their warehouses. So while sales through their register will continue to be very positive, in fact higher than historical levels, they were able to deplete inventory levels that they had on their shelves. Now that these inventory levels are depleted, their weekly sales are now back to historical levels and higher.

So it is not -- they haven't changed their inventory method. The inventory methods were successful in being reduced, but now their sales levels -- they have reduced their inventory and now their sales levels are requiring them to buy more inventory.

So they had a backlog that they had to work through before they were willing to take on any more inventory?

Correct.

When you then look at your revenue, and indirectly your cost of goods, we've got the shipments that were reduced by a customer for financial reasons, which I think you said normalized again on June 1. So that you would have then two months of impact in the quarter we are in. And then going forward, I am assuming revenue would go back to some level that it was either at beginning of this year or year-over-year. Maybe you can give some color on that.

Second, you had some inventory adjustments from this prior customer, so revenue, I guess, we just talked about that, was more of a working through of the backlog rather than any adjustment there. But scrap prices, I am assuming scrap peaked sort of in the late summer. So you've got at least another quarter or two where you will have some impact of scrap flowing through I am assuming year-over-year as your pricing anniversaries that.

Production rates is a function of your revenue, and so with that being down 22% in the fourth-quarter yet 11% year-round, I am assuming your capacity or your utilization rates are at 50% or maybe lower right now, and does that continue until you see some benefit from either increased demand or new customer additions?

Then last, the lower direct labor is a function of what is going on in -- with the peso. At some point though you would -- so you are paying out in pesos, you're getting paid in dollars, so you should be capturing the benefit. And I am assuming you will continue to capture that benefit until that reverses, but at some point that becomes a headwind.

Can you go through those sort of five categories and help me understand how either revenue will look better this year, or cost of goods will look better? Or should I just say, hey, at this point, until all these items fully anniversary and things in the macro get better, gross margin is going to be at 20% and revenue declines are going to be down at a level that are below last year's?

That's a lot.

That's a lot there, but I mean I'm trying to hammer out just where you are in your business today, when I see all these factors being brought up.

Okay. I appreciate the question, because I think it should bring light onto the different areas. Let's start with revenue run rates. We believe that the fourth-quarter was an aberration. We think the aberration in the revenue run rate for the fourth-quarter probably affected us by about $6 million in annualized revenue. And so while we ended at about $135 million of revenue, we believe that our existing run rate with no new business is at $141 million to $142 million of revenue run rate.

Now bringing some light onto that, both of those customers that we talked about are experiencing -- on the one hand, on the customer that we had financial restructuring issues, the program -- people were waiting to eliminate uncertainties, and that program seems to be moving in a very, very powerful direction and very positively.

And I think that customer with its new financial restructuring is putting capital behind this program to ensure its viability and success. So we are optimistic that are not only will that customer revive its basic run rates, but we hope that they will increase their run rates.

With respect to the second customer that went through the inventory efficiency program, all of our -- our customers are the better operators in the industry. They have generally tried to reduce inventory as much as possible. We believe that they -- we see their sales numbers daily. Their sales at the register are up for our products. And we are now seeing the benefit of that, certainly in the last month of this first-quarter come back.

We believe that the base run rate of this $140 million plus is very secure. In addition to that, on the revenue side, we have visibility. We have been awarded new business, which this particular customer has had a problem transitioning for an internal problem. We expect to see that -- we are starting to see it nominally in the first-quarter. We expect to see at step up dramatically in the second and third-quarters. And overall we believe that the annualized additional new business from that particular customer should be close to $10 million on an annualized basis.

In addition to that, we are looking at very positive small gains at a number of different customers. We are also looking at a number of positive gains in different areas with other customers. So we feel very comfortable that we are going to see a double-digit revenue growth for this year.

We don't believe that we are in headwinds. We believe that we have a tailwind right now. We have been through this extraordinary event, but while inventories are suffering with headwinds, we believe we've got a tailwind in this [quarter].

Now let's talk a little bit about costs. Does that deal with your revenue question?

Yes. Yes, that's fine.

Great. Now let me get into costs. I don't know I have them in the exact order that you asked them, but let's just first talk about material costs relating to scrap. And I think that the important thing is to understand firstly our accounting policies and then where we are with respect to that.

When we have scrap sales with high metal costs, we had immediate recognition of income that offset our cost of goods sold numbers. That has been for some distance now. We believe that we have a built-in hedge for metal prices. When metal prices are up, we -- our effective material cost is reduced by selling the scrap rates. When metal prices are low, which they are lower now, we believe that our material cost is -- comes down.

We have had pretty significant write-downs of material cost in the last three quarters. And we believe that our material costs should be -- these write-downs should start to be reflected in our gross margins starting with next quarter. And a little bit to the end of this quarter, but with next quarter we should see reduced material costs starting to hit our income statement. We believe that -- we are comfortable believing that we would be back on track to a low 31% margin as we hit to the back half of the year.

In terms of production rates, what unfortunately happened to us is that we were -- as we were going into the fourth-quarter we had embarked on an inventory reduction initiative. In conjunction with that inventory reduction initiative, we got hit with these two customers' situations, and so the pullback in production was probably a little more extreme than what we would normally do.

Now having said that, we believe production will be increased based on -- we are continuing to increase production as we speak. Production rates are up. We are anticipating having to increase production even further as we take on the new business that is coming in to effect right now.

Our utilization rates, our plant efficiencies are excellent. I could tell you that our facilities, both in Malaysia and Mexico, are running on a parts per man-hour basis as efficient as they have ever run. We are getting far more belligerent in terms of cutting any excess indirect overhead costs. So we believe that the absorption rates will help on that front.

We do have a little bit of a Catch-22 scenario that we can't downsize production as we are getting ready for a bunch of new business kicking in. And so that will affect the first-quarter slightly, but we believe the second, third and fourth-quarter should be extremely strong.

Labor costs with the peso, we are down to a rate, even it stopped today, where the direct labor is excellent. That is not our focus. Today direct labor is a very small component of our cost. The biggest factor for us in our cost today is utilization of overhead in Mexico and material costs, as we experience these lower material costs.

Overall in terms of our outlook, we believe that EBITDA will be up substantially over the last 12 months. We believe sales will be up in double-digit areas. We believe that our margins will get back to where they should be, which is in the low 30% range.

When you look at then the production, because at the end of the day gaining more revenue through those low fixed costs in Mexico and/or Malaysia is really key for you. I am just trying to understand if you had a situation where some of your -- one of your larger customers already had a backlog, is there too much production in the industry itself right now that consolidation is almost a necessity, whereas no one can ever be as profitable or make as much money as they need to be, because of the production that is out there? Is that the end game or is that something that has to happen in order for you to be able to benefit from favorable sales trends?

Because if you look at some of your customers and some of the retailers or distributors out there, we just went through a quarter when they were having same-store sales growth of plus 7 or plus 8, or whatever the number is. That is not transferring over into your business right now.

First of all, just on the last comment, we are seeing that in our non -- in these customers that are not related to these initiatives. So we are seeing some pickups, not necessarily directly corresponding to the same-store sales, but certainly increases.

The answer to your question in terms of production capacity and competitive environment, I think is a good question. I think certainly consolidation for our industry is a positive thing. I think it at some point may be necessary. I believe, however, that relative to the major suppliers in the category that we are in the best position. We believe we are most suited for revenue growth and marketshare penetration -- increased marketshare penetration.

We believe that our cash flows will be positive, and so that the amount of leverage on our Company is extremely manageable. We are optimistic that factoring in the industry is starting, while it has been very choppy, it is starting to open up a little bit.

So we believe that we will generate cash. We will have the resources and the infrastructure to capture marketshare. We will be in a good position, if there is consolidation, to participate in consolidation. And we will be in a good position without consolidation to be the strong player left in the industry.

Rick Hoss, Roth Capital Partners.

A very descriptive set of questions, so I think I have a couple that I could add upon this. Marketshare level, you have historically talked about your share being around 22%. Is it safe to assume that that marketshare level has maintained itself? And if I were to peer into the results of your competitors that you would see some of the same decreases in year-over-year growth rates due to inventory alignments, the issues with GM, etc.?

Let's address GM first. We are the exclusive supplier there, and so we don't believe that that affects our competitors at all. So having said that, we believe that the new GM is far better positioned to be more efficient in the parts business, and so we expect good things from them in the future.

With respect to the other initiatives of the customers, again, we have 50% of the volume in one of those customers. So while it may affect the other competitors, it is probably overall disproportionally on us. We have not lost any customers. While we did go through our supply base being slightly diminished for the fourth-quarter, our customers continue to do well, as Tony mentioned, with their same-store sales growth.

We are starting to see that sales growth starting to hit our revenues now. We have -- we believe our marketshare with the customers we have is extremely secure. We believe that the customers that we have will continue to enhance their marketshare, so we will benefit by their growth. The visibility of new customers that we have will additionally enhance our position and marketshare.

Then as far as the dynamic with the GM business, is it safe to assume that like the other -- your other customer -- the lower inventory level is permanent, and there is not going to be a catch up or -- I guess, to make up for the two months that didn't contribute?

I think it is relatively safe. I think in the event of GM there was some hold back in terms of people wanting to know what the future would bring. So I believe that with respect to GM there should be a little bit of catch-up. With respect to the other customer, I think it is adjustment in inventory levels that are now stable that will not catch up. No, they are able to operate at lower inventory levels.

Then historically, I know it is a different time, but a couple of quarters -- I don't know if it was one or two ago, I can't remember -- you talked about incremental $20 million coming from potential acquisitions or the contribution of the two acquisitions that you completed in the last year. And then you just said a couple of minutes ago it was looking like plus $10 million. In that $20 million, is that the assumption of new acquisitions?

No, the -- let me just back up slightly and try and summarize. I am not sure exactly which quarter you are referring to. But essentially from our base business we have made two acquisitions. We expect business directly from those two acquisitions to grow on about $10 million annualized run rate. We expect that those acquisitions will result in additional new business at an additional close to $10 million from growth of those entities. In addition to that we believe that we should be looking down the barrel of another significant customer enhancement -- a new customer.

Remember, Rick, just to make sure this is clear, that we did experience some of those revenues during the latter half of the previous -- of fiscal 2009.

Right. Okay.

So it is not all -- it is not all incremental. I think the incremental is probably much closer to $20 million over and above what we have -- over and above what we have experienced in the fiscal 2009.

Great. Okay. The last question, can you give me an appreciation for the level of revenue that comes from scrap? I know that that is obviously very different, depending on what the metal prices are. But they compare gross revenue from -- I don't know, last year's fourth-quarter versus this years' fourth-quarter?

Again, I don't have those -- I am not sure exactly quarter by quarter, but the high levels of scrap have been at about $1.5 million a quarter, and low levels have been about $300,000 for the quarter. I think in this last fourth-quarter, David, correct me, about $0.5 million?

$0.5 million.

It was about $500,000 of scrap. I think we expect slightly higher in the first-quarter, but not much.

And that is revenues from scrap?

Revenues strictly from scrap.

And that scrap is probably close to 100% gross margin.

It is, yes.

[Dwight Mementao], [Winfield].

Most of my questions have already been asked and answered. I do have a couple and a follow-up -- a general comment, if I could. The first question is on the cash for clunkers bill. Do you have an opinion on that and a viewpoint in terms of how that is in going to impact your business?

Yes. I think the House has one version of the bill. The Senate is still reviewing that bill. It is an interesting bill. It is designed to stimulate new car sales and more environmentally efficient vehicles. But if you look at the volume of credits that are being offered, certainly in the House bill, it doesn't seem to be high enough where they would be able to incentivize people who have cars that are 8 plus years older to be able to buy a new car. A $3,500 credit on a new car for someone who's trading in a car that is worth $500 or $1,000 or $2,000 in my opinion will not reduce the very old cars. It may have some effect in cars coming off the 3 to 4 or 5 year level. And I think those cars that will probably end up in the secondary market.

While I think it is probably not the greatest thing for the aftermarket, I think for us, in particular, I don't believe it will have a negative effect. I think that the older cars on the road will still be there, Because the incentive is not good enough for that level income earner to be able to get up there.

We think that the bill probably will not affect us directly. It may have some effect on our customers in other categories, but certainly not in our category. We don't believe so.

My other question is, I don't know if you renegotiated your EBITDA covenant on June 8, which is essentially the third month in the quarter. And that your new bogey for that quarter is about $3 million of EBITDA. Is it safe to assume that, given that you have negotiated in the third month of that quarter, that that EBITDA number is pretty much safe, that you will be able to attain it?

I feel comfortable we should be able to attain it, yes. We had -- again, I think just going back to a little bit of the script, we waited until the filing. Generally I would not mention a customer's name, but this is a unique situation. We waited until the filing before we worked with this customer to get product out the door. So that really affected us for two-thirds of the first-quarter. And we experienced about 50% of the quarter ongoing on the inventory initiation -- the inventory reduction initiative. So I can tell you that the first half of the quarter was very tough. I would say that we may have the biggest record sales month in the history of the Company this month.

So we have seen a definite turn in volume and demand for the product. We certainly struggled in the first-half, but we feel comfortable that $3 million is an attainable covenant, yes.

My comment is more, given the fact that you think, like you said, this is your -- this was -- June was your best month and Q4 was an aberration, is it safe then to assume that the directors and management will then increase their stock purchases in the open market, just really more to help align the directors and management with those of the shareholders?

I can't comment on them. I think hopefully you will see by their actions. I just can't comment based on what they're doing. So I think just -- let's watch the news is all I would say. I don't want to put anyone in an awkward position, nor can I speak for them directly.

Right. Okay, thank you. It just add a lot of weight to what you have just said -- you are on the Board. The other comment, if I can, is that given the fact that, again, all bonuses are based on -- are paid based on performance, would it make a lot of sense now, given where you are in the cycle that the management would then take their bonuses in equity instead of cash, again, I assume it's based on performance?

I wish that was possible. Unfortunately, right now our stock option program and all of our equity grants are maximized. We are unable to grant any equity. So we hope at the next shareholder meeting that we will be able to make some progress there. And hopefully during this fiscal year we will see more of that. I certainly intend to buy some shares. So if that helps you.

Great. Thank you. I am looking forward to next quarter's results and the Form 4 filings. Thank you very much.

(Operator Instructions). Alan Weber, Robotti & Company.

First question -- most of them have been answered, but are you seeing any change or increased competition in terms of imports and like that?

Not at all. Not at all.

The next question is if you look at -- you alluded to or made a few comments about the cash flow. But if you look at the last few years, the cash flow has really been very poor.

I am just curious, when I look at the last three years, or let's say over the last year, you consumed about $21 million of cash from operations, plus the acquisition and CapEx. Over the last three years it is close to $50 million on a relatively flat revenue base. I am just curious as we go forward how do you see the cash flow lining up with EBITDA?

That's a very good question. I think over the last three years there has been a number of significant events that have cost us cash. Firstly, we have repurchased from our customers core inventory close to $60 million in core inventory. That is reflected on our balance sheet at -- not at the price we played, but really at the low of cost to market for the value of the core.

In the case -- in both of those cases of repurchasing those cores, that is an asset that will remain in the event that we are terminated by either of the customers that we did this program for, they would have to repay us that $60 million.

The second thing is that we built a factory in Mexico. And between startup cost and CapEx I think that is essentially about a $20 million exercise. So that is behind us at this point in time.

In addition to that, one of our larger customers lost their factoring. And working capital requirement and receivable financing for that customer went up by, David, what, $10 million or --? About $10 million? $6 million. $6 million increase in receivables from that customer.

So those have all played a significant role in eating up our cash. Now going forward we expect -- while markets is still competitive, we are resistant to buying back any inventory and we expect nominal amounts only. We have finished our CapEx and all of our development on the factories. Our maintenance CapEx is estimated to be no more than 3 at the worse case scenario, but probably closer to 2. And we again expect to have most of our profitability result in cash.

We are hoping that debt levels and interest rates remain stable. We believe that from an operating capital perspective that the line of credit is more than adequate, even without utilization of the $7.5 million reserve. And we believe we still have some room to make what I would deem to be key strategic acquisitions on a small scale.

We think that EBITDA cash flow should become much more synonymous with each other as we go forward.

Then my next question -- thank you -- my next question was, you had your annual meeting, I guess it was maybe -- it is kind of -- you do it very late in the fiscal year. I am wondering what was your bonus for the 2009 year?

I don't have a bonus yet. I have not heard yet from the comp committee.

There was nothing accrued in the P&L for you --?

No, there have been bonus accruals. There have been bonus accruals, but there have been no bonuses granted against them yet. They are accrued in bulk as well. So the comp committee is in the process of evaluating the appropriate bonus levels, so I could not give you any insight on that at this point.

[Bob Sales], LMK Capital Management.

A couple of questions. Can you give us some -- given the profitability expectation, can you give us some view as to the tax rate for fiscal year 2010?

For fiscal 2009 our tax rate was approximately 40%. And going forward we would expect to be about 40%.

I guess a follow-up question on the cores. Help me understand in the normal course of business with your customers is it a requirement that every time you sell a core, you take in core that they exchange?

Is it a requirement? In general -- it is not a requirement, because if they don't return a core -- if they have a core that comes back from their customer, we are required to take back a core -- a unit -- a core that represents a unit that we have sold them. So from that perspective it is -- they don't always send back a core. And that way we would capture the incremental cash or the incremental revenue in our balance sheet or our income statement, depending on the arrangement with that particular customer.

But generally when we sell a unit we take one back. Yes. There is about a 98% correlation.

I guess my question is, over as a long-term where is the opportunity to generate cash from your existing core inventory?

Well the inventory -- just to put some metrics to a core, which is -- a different sort of way to look at the business -- is if you invest in a core, we generally expect to get a 40% -- 30% to 40% cash on cash return on an annual basis for every new core we invest in.

Meaning that, if you've got an existing unit that is already in the supply chain, that core just keeps getting reused back and forth. Other than the scrap yield, it is never a one-for-one reusing.

So that core gets reused. Every time you reuse that core and you add material, we would expect to generate a 30% margin on the finished good. And the effective return on the investment in that core should be at least 30% to 40% on an annual cash-on-cash basis.

As we introduce new units, we buy cores, and we expect to get a 40% return on that core that recycles back and forth. The life of a core is generally 12 years. So you generate cash from the core. It is almost like -- it is almost equivalent to a CapEx expenditure that you're getting a return on.

So when we look at our metric internally, when we take on a new customer, we look at what are we going to have to invest in new cores to get this customer going on a one-for-one exchange program.

The problem that we have had in the past is that while we have generated cash from those cores, the customers -- some of the large retail customers have all embarked on this initiative of saying they don't want to carry the cores on their balance sheet, that we need to carry it on ours. So we have reversed out a number of these cash transactions. We are towards the end of that process now.

I don't know if that is clear enough for you, but --.

Just to that latter point, you say you are towards the end of the wave of taking more of those cores on your balance sheet from the client?

Right. Because as -- correct. As we launch a new product now, for those customers that don't carry cores, we don't have a core charge. So that investment remains on our balance sheet. And the same -- we don't have to spend incremental cash to buy it back.

Many customers pay full value for cores and find that the diversion of tracking all of these cores is not worth it. So I would say there are a few that we work on what we call a core bank arrangement, and many that we just charge full price for the core and give them a full credit.

But the actual reversal of the cash flow relative to those cores that have already been sold before these initiatives from these customers to take inventory off the shelf is substantially complete. So the number of -- the dollar amount of the core buybacks that we are doing now are reduced by 90% plus.

Then lastly, when you talk about topline guidance, could you repeat what your conservative expectations are for the year, and off what runrate you are expecting that growth?

I think the runrate we are expecting our growth is off about $140 million in revenue and -- $140 million to $141 million, and I expect to see at least 10% growth.

From the $140 million to $141 million base?

Correct.

Secondly, when you talk about expectations of gross margins in the low 30%s, can you whittle it down to whether -- should we be thinking 30%, 31% or somewhere between 30% and 35% more broadly?

We are talking about the low 30%s. Historically we have been around 31%. I think in the environment that we are in today the low 30%s as a realistic number, the 31% range.

It appears we have no further questions at this time.

Thank you everybody. I appreciate your patience. And hopefully we will look forward to some better times in the future.

That concludes today's conference. Thank you for your participation.