Motorcar Parts of America Inc (MPAA) 2010 Q1 法說會逐字稿

Good day and welcome to the Motorcar Parts of America Fiscal 2010 First Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Gary Maier. Please go ahead.

Thanks for joining us for the call this morning. 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 call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by Motorcar Parts. Actual results may differ from these projected 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 these ongoing risks and uncertainties I refer to various filings with the Securities and Exchange Commission.

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

Thanks, Gary. Good morning, everybody. Thank you for joining us. Appreciate you joining us for our fiscal 2010 first quarter conference call. I will start out talking about sales, and as I mentioned during our year-end call, sales for our fiscal first quarter began to pick up and return to a more normal sales pattern in the last month of the quarter. The sales now continuing to be encouraging. Following from June, sales for July continued to be strong. And if business continues as we expect it to, we will have a very solid revenue number for this quarter. In addition, we are continuously adding new customers to our base business. The overall dynamics of our business continue to support a positive outlook as consumers delay new car purchases which provides tremendous opportunities since we provide non discretionary automotive aftermarket parts. Our focus continues to be on taking advantage of our available production capacity. This situation provides us with significant operating leverage opportunities moving forward, with enhanced profitability as new and existing business growth ramps up. We continue to monitor the "Cash for Clunkers" program and currently believe at these levels there should be little effect to our current business. At this point, we do not see much of an impact on us even though approximately 200,000 vehicles initially have been redeemed with the possibility of 400,000 more to come. This represents a very small fraction of the 240 million vehicle population. Vehicles purchased to replace the clunkers replenish the car population, and as they age will present an opportunity for sales with far greater profitability than the old cars that have been taken off the road.

I'll address gross margins. On the surface, our reported results fro gross margins indicated much greater declines than they are in fact. And the first quarter of the prior year we experienced the pickup in gross margin that is separate from productivity of $3 .4 million, relating to a one-time reversal of a customs accrual, lower scrap metal prices, and an acceleration of promotional allowance in the fourth quarter of fiscal 2008 which otherwise would have been earned by a customer during the first quarter fiscal 2009. These combined effects gross margin by approximately 9.4 percentage points. Last year's margin adjusted for this 9.4% is 25.7%, leaving a differential from operations of 3.8%. This differential resulted from monthly sales volatility, as I have mentioned we had two very tough months for the first two-thirds of this last quarter. As well as operating expenses in connection with the launch of an enhanced product line. Nevertheless, management is encouraged by the progress made to enhance gross margins.

We look at gross margins from operations after eliminating the effect of unusual timing of promotional allowances and non-cash standard reevaluation write-downs of inventory. Under this analysis we were able to increase our gross margin from the fourth quarter fiscal 2009 by approximately 1% despite very uneven monthly volumes and the launch of this enhanced product line. Our gross margins going forward should be positively impacted by increasing sales volume which will drive productivity in our factories. Cash flow from operations is expected to be positive going forward, supported by an improved financial outlook for one of our large customers. A situation that required to us delay product shipments in the first quarter. Also encouraging is an improving factoring environment for another customer which could result in us being able to pay down a significant portion of our debt in the near-term. We also are pleased that we have received a firm commitment for the renewal and increase of our line of credit to $45 million with maturity dates between two and five years. We will announce more detail in the near future.

As I have mentioned in other calls, and company presentations, there are currently approximately 240 million vehicles on the road, of these vehicles approximately 130 million are at least nine years old, which represents the high demand age segments for our product. 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. 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 and I will make some additional comments and we'll then open the call to additional questions.

Thank you, Selwyn. As announced this morning, net sales for fiscal 2010 first quarter ended June 30, 2009, were $32.7 million compared with $32.7 million for the same period last year, reflecting the reduction in sales for the two months -- first two months of the quarter offset by sales to new customers. Sales returned in the last month of first quarter to more normalized levels to two of the largest customers. Gross profit for the fiscal 2010 first quarter was $7.2 million or 21.9% gross margin compared with $11.5 million or 35.1% gross margin for the same period a year ago. The prior year first quarter benefited from the reversal of a $1.3 million accrual or 7% per diluted share related to customs duty claims, higher scrap metal revenues of approximately $900,000 or $0.04 per diluted share, lower packaging of approximately $400,000 or $0.02 per diluted share and other period costs. And the positive impact in the first quarter of the prior fiscal year, fiscal 2009, of an acceleration and promotional allowance in the fourth quarter fiscal 2008 which otherwise would have been earned by a customer during the first quarter of fiscal 2009 of $1.2 million, or $0.06 per diluted share. Monthly sales volatility as well as operating expenses in connection with the launch of an enhanced product line accounted for the remaining declines in the comparable gross margin. General and administrative expenses decreased $1.7 million or 40.2% to $2.5 million for the first quarter from $4.2 million a year ago. This decrease was primarily due to a net gain of $761,000 recorded due to the changes in the fair value of foreign exchange contracts and a decrease of approximately $900,000 in audit, consulting, and other professional fees and other general and administrative expenses.

Sales and marketing expenses increased $260,000 to $1.3 million for the first quarter, from $1 million in the same quarter of fiscal 2009, due primarily to the full quarter's impact in the current year first quarter of the additional sales employees which resulted from our acquisition of AIM in the prior year May 2008. Research and development expenses decreased $128,000, or 27.7% to $334,000 for the first quarter from $462,000 in the same quarter of fiscal 2009, due primarily related to lower compensation and other supplied expenses. Operating income for the fiscal 2010 first quarter was $3.1 million compared with $5.8 million a year ago.

In evaluating operating performance the Company considers the impact of non-cash expense items on its first quarter operations including inventory write-downs of approximately $800,000, FAS 123-R stock compensation expense of $56,000, and the non-cash gain of $964,000 reflecting the impact of mark-to-market accounting for foreign exchange currency contracts based on the fluctuation of the value of the Mexican peso. In addition, depreciation and amortization for the quarter was approximately $773,000, adjusted for the non-cash items mentioned above, and severance costs of approximately $100,000, EBITDA for the first quarter was approximately $3.8 million, which reflects the lower level of scrap sale proceeds and increased material costs. Net of interest income, interest expense for the quarter was $1 million compared to approximately $800,000 in the prior year, primarily due to higher interest rates on factoring accounts receivable. As a result of the items noted above, the Company reported net income for its fiscal 2010 first quarter of $1.2 million or $0.10 per share, compared with $3 million or $0.25 per share for the comparable period a year earlier which reflects the positive impact of the $1.3 million reversal of a customs duty accrual, higher scrap revenues, and no marking allowances recorded for our retail customer which were accelerated in a previous period.

As of June 30, 2009 our balance sheet had $1.1 million in cash, $157.4 million in total assets, and $20.1 million in borrowings on our line of credit leaving $17.4 million available after reflecting outstanding letters of credit. During the first quarter the Company generated $3 million in net cash flows from operating activities primarily due to $2 million reduction of account receivable and $1.2 million net income offset by the pay-down of accounts payable and accrued liabilities. During the first quarter cash generated from operating activities were used to make payments on a line of credit, capital leases, and no payable and fund capital expenditures. Shareholders equity was $94.4 million at June 30, 2009.

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

Thanks, David. As I stated earlier in the call, new business and growth opportunities are gaining momentum, and we are optimistic that we will have several exciting developments to report in the near future, which will further strengthen our position in both the DIY, do it yourself market and the DIFM, the do it for me markets. In the professional installer market we continue to make end roads by leveraging our quality built brand name. Our expectations for new customers revenue growth which are based on current commitments should nicely increase our annual revenue run rate. We have begun shipping some of this new business with the majority still set to begin shipping later in this quarter and in the beginning of next quarter. Small amounts have begun, 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 sales through the register this will make its way to us. We have commitments for strong new business. While the stock for this business has been slow due to factors at the new customer -- new customer, we believe this ramp-up is imminent.

Our infrastructure is in place to handle this new business and to increase our margins. This increased demand as noted earlier help with 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, moderate oil prices, and this continuing aging fleet. In summary, we continue to believe that long-term market statistics for our industry are favorable while oil prices and driving patents are important components to our business and aging vehicle population is particularly critical. In today's environment with fewer new cars are being sold, we are experiencing an increasing population of old motor vehicles reaching high replacement rates for alternators and starters. This should continue to bode well for our business over the long-term and it complements our strategic growth

I'll talk a little bit about some of our cost cutting, since March we have reduced G&A costs related to acquisitions, accounting, logistics and financial personnel and reduce the annual expense run rate by over $900,000. We have also eliminated over $500,000 from indirect expense and cogs. Lastly, we have eliminated over $200,000 from sales and marketing and $100,000 from R&D. The total of this so far is over $1.7 million. We expect to reduce costs further in the next two quarters as we ship our largest customer directly from Mexico. In conclusion, the new fiscal year is off to an excellent start and in many ways the outlook is better than it hat ever been in the Company's history. I look forward to reporting the Company's exciting new developments in the quarters ahead. I continue to appreciate your interest in Motorcar Parts and I'm happy to answer any questions you may have.

So, Kristen, if you can open up the line to questions, I'd appreciate it.

(Operator Instructions). We'll go first to Alan [Hotzemolleo] with BB&T Capital Markets.

Good morning this is Alan [Hotzemolleo] in for Tony.

Hi, Alan. How are you?

Doing well. First question, can you quantify the pickup in sales in June and July relative to last year an is the growth of function of order patterns with some of your larger customers normalizing or is there also some new business that is beginning to come online?

Let me start with the second part of the question first. Two things are happening. Certainly during the last month of the last quarter, patents from our existing customers returned. I think there was a little bit of catch did you know in those numbers, but it not significant. These numbers, combined with new business that we have got, certainly have enhanced the annualized run rate over the last year. In terms of quantifying it, I don't have that data right at my finger tips. But -- I don't know the exact numbers, Alan, but there has been a significant amount of new business that has been picked up, and we started to see that in June. And certainly it's continued in July, and we actually expect to seat pick up further in December.

Without putting specific numbers to the it, would it be fair to ballpark and say all else equal, revenues may be ticking up on a year-over-year basis so far into the second quarter?

Absolutely. I think we should see a strong up tick in revenues quarter over quarter.

Okay. Should the savings seen this past quarter in SG&A from lower audit and other fees continue at this level over the balance of the years and specifically, what changes have you made that allow such significant reduction?

I think when it relates to the audit fees, that's a fixed price. I think there may be some timing in that number, but we've continued to reduce our G&A expenses. Our run rate has come down. Expectations for this year in G&A -- I'll turn it over to David.

Within $23 million.

Around $23 million.

Total operating expenses.

SG&A. So that reflects pretty significant reductions from the prior year.

Moving to gross margins, in the past, discussion has centered on take gross margins back into the low 30s. How soon do you anticipate being able to achieve this level, and is it a situation where margins should show sequential improvement over the balance of this year, but that reaching a 30%mark maybe more of a fiscal 2011 event?

The things that are affecting gross margin are metal prices is one thing, and so we're -- we immediately suffer from the fact that scrape revenue, which has not cost to us has declined. Although we are seeing uptick in copper and stell prices right now so we feel like scrap revenue contributions should come up. The other side of that is it takes a longer time to reflect the increased savings in material costs because of reduced prices so we still should see that increased savings in material costs because it lags as it comes through our standards. So I think we're going to see some increased -- increases in margin sequentially through the quarters relating to material costs. I think one of the variables that is very difficult for us to quantify is depending on the amount of new business that comes in we're optimistic it should be fairly significant, is controlling the ramp up cost, but on a normalized basis I think you will see sequential quarters upticking and I don't think that 30% is out of the realm going forward for normalized margins. Whether that will be by the end of the year or not, we have a few variables that are up in the air right now that I'm not sure.

Two questions on cash flow. First, what was behind the significant reduction in capital expenditures in the quarter? And how should we think about the level of reinvestment back into the business moving forward and then second this is one of the strongest first quarters you have posted in several years from a cash flow standpoint. Can you provide us an update on your thoughts for cash deployment, whether it be reducing indebtedness, pursue acquisitions and the like?

Let's deal with the cash deployment and then maybe you can repeat first part of the question, I didn't get it as quick as you went. But the cash deployment, right now we believe that the EBITDA numbers should be tacking cash flow far more accurately than in the past because in the past we had a major customer lose its factory, and so that, because of the days we had to carry that receivable that ate up a lot of cash. We believe that that customer, we hope, and we believe, that that customer should be returning to factoring position, and we believe we are expecting to generate $15 million plus in cash flow from that factoring arrangement. We also believe that should happen in this quarter, and hope that we can reduce our debt to almost nominal levels just on that transaction between 15 an 19 million in capital. I'm not sure what the number will be. The other side of is it our operations going forward. We expect to remain profitable, and we expect to generate cash flow from that, the CapEx number as we've completed a lot of capital expenditures relating to expanding facilities in Mexico and just upgrading and refining our facilities in the Malaysian factory. We have upgraded our entire IT infrastructure with the newest versions of operating and MRP Systems, and so now we really focus on maintenance CapEx. And that maintenance CapEx number, I mean, we anticipate to be between $2and 3 million for the year.

Okay. Maybe some catch did you know in capital expenditures?

A little bit. We're low CapEx business, because we've just spent a lot on these factories.

Then our last question, have you seen any changes in the competitive landscape is either with respect to pricing or differences in the level of imported product?

Pricing continues to be -- we continue to be pressured on pricing. Again, because of the consolidation in the customer base. There are not a lot of suppliers left in the market, so I think it's critical for the suppliers to keep market share, so the pricing is competitive. We held on to our pricing , as new products enter into the mix for later model cars, we do see price accretion in there. They're more expensive items. As the do it for me market continues to accelerate its growth, which for us in particular, our average selling price point will go up because we are proving application for later model vehicles. As far as the competitive landscape, I think it -- it seems to be rational, but no major significant changes no.

That's all I had had. Appreciate it.

Thank you.

We'll take our next question from Rick Hoss with Roth Capital Partners.

Good morning, gentlemen.

Hey, Rick. How are you?

Pretty good couple quick ones. One, I think I missed it, you said 15 million to 19 million under the increased factoring scenario, is that 15 million to 19 million total or reduction of 15 million to 19 million?

I'm not sure, when you say increased total or reduction, I believe that we will be able to accelerate collections of our receivables within next month or so by about $15 million.

Okay. Isn't that the current level?

No, we'd have an increased factoring level of an additional 15 million.

Oh, I see what you're saying, okay, perfect.

It could be greater. I think conservatively it's 15 million. I think by the end of the quarter we should be able to pay down all of our debt. Based on positive cash flow and if the factoring comes through, as we expect it to.

Right. Okay. Can you give us an update on the acquisition front?

We continue to look at acquisitions. We do have some acquisitions in the pipeline, but we should have releases in the near future on that. Nothing specific.

Okay. And same outlook for additional customer type acquisitions?

Yes, we expect to enhance our customer base by these acquisitions in the very near future.

And David, just a loan item questions that I had. Your press release stated a gain of 964K from currency gain. Of the 10-Q, then your reading of it was 761. What's the difference between those two?

In the prior year, first quarter, we had a gain of approximately 200,000. So in the 10-Q, we discussed a net change.

I see. Perfect. I think that's it. Thanks, guys.

Thanks, Rick.

We'll take our next question from Howard Liu with First Wilshire Securities.

Good morning, this is Dimitri.

Hi, Dimitri. I thought that wasn't Howard.

Actually, pretty much all of my questions have been answered. One thing, what was the gross margin run rate in June?

It's tough for me to give you a monthly gross margin run rate, but I think right now we're sort of in the mid-20s, 25, 25.5%, and we expect that to inch up.

Okay. And then on the derivative gain, does that mean that the peso has been going up against the dollar since you have a gain and a derivative?

When we do the mark-to-market calculation it's a comparison of the spot rate versus the contracts we've had in place, and these contracts we've purchased over the last 12 months, so we bought contracts six months ago, nine months ago at a much higher rate. So because the spot rate has reduced, compared to the contract rates, we're able to recognize a mark-to-market gain.

Okay. And could you quantify the impact of the lower peso on your profitability going forward?

Okay, can you clarify the question?

Yes, just when would we start seeing the lower peso levels, bottom line, and what do you think that affect would be?

It's anybody's guess as to what the currency is going to do. I mean, so that's tricky to forecast it. But I think the peso today is a little over 13 to the dollar. We have a fixed hedging process, which really hedges the cash flow. Doesn't hedge the P&L. The outlook is if oil prices remain moderate, and the dollar gets stronger, which we anticipate, I mean, the P&L gains from the peso could be there but it's very difficult for us to speculate on that. Your guess is as good as we continue to talk to currency people, but everybody -- it's mostly speculation.

Okay. And -- but you're using the drop to sort of to lock-in current level for the future?

We continuously hedge, we're on a fixed hedging program, and so it remains static regardless of what the movement is on the currency, and essentially what it does, it just lowers the level of fluctuation on our cash flow for the most part.

Okay. Sounds good.

Thank you.

We'll take our next question from Bob Sales with LMK Capital Management.

Selwyn, if you can figure out the currency movements, stop selling auto parts and just concentrate on the FX.

I know.

Couple questions. First of progress. Sounds like we're at the -- an inflection point in kind of a long trek of progress, so congrats on that. Selwyn, last quarter you mentioned $140 million to $141 million run rate for 2010. It sounds to me, based on Q1 and your tone on this call, that perhaps that run rate is conservative. Would you agree with that?

Yes, I would.

And then as far as the factoring goes, if we're swapping out a line of factoring, excuse me, swapping out a line of revolving credit for a line of factoring what is the net effect of what you pay for the factoring line versus what you pay today on your line of credit?

It's very similar. So when we look at it, we did do the analysis of whether we should, in fact, embrace the factoring. Interest rates are nominally higher on the factoring, but obviously it's off-balance sheet and pays down our debt, and with the new credit facility, allows us to have $45 million of availability and gives us a lot of flexibility in terms of deployment of capital. And we'll be looking at all aspect of how to deploy that additional capital, plus we are confident that we're going to continue to generate positive cash flow. So we'll look at the broad spectrum from continuing acquisition, stock buybacks, maybe even one day a dividend. But don't bank on any one of those. I'm just trying to make a point that we'll look at the broad spectrum of how to try and enhance the stockholder value using that availability and the additional free cash flow that we start generating.

Yes, and I was just interested in had understanding whether it was simply a cash issue other an interest rate slide one way or the other. Interest expense slide one way or the other, so you answered it. And then how goes the progress in the heavy-duty efforts?

Slow. We've made progress. I mean, it's encouraging. We're new to the marks. And so, people are getting more comfortable with MPA being a supplier of heavy-duty. We have picked up some customers. We do after heavy-duty production cell completed and operating in Mexico, and we've recently picked up a small amount of additional new business in the heavy-duty, but I think it's going to be a nice, solid continuing growth area. It's not spectacular growth, but it is going to be nice embellishment of our revenue growth and earnings growth.

Okay. And then, David, can you walk through the changes in the operating expense total from the March quarter, Q4, 2009, I have a total of roughly $6.6 million for OpEx, to the $4.1 million for the first quarter of 2010.

There are going to be differences in the way that we record, for example, audit fees, in the way that we record Sarbanes-Oxley compliance cost --

David, just give me the big buckets. Sat $2.5 million difference? Am I right in that? The difference between Q4 and Q1?

It is.

Can you just give me the big buckets on a quarter to quarter basis?

Well, I ca identify what the expenses are, the audit fees, the Sarbanes-Oxley cost, are recorded in the fourth quarter. We have certain accruals we make in the fourth quarter that do we not make in the first quarter, there is timing as well as other professional fees that we incurred in the fourth quarter that did not recur in the first quarter.

So we should really think about the $23 million as the right run rate as opposed to the quarterly -- quarter-to-quarter fluctuations?

An an a annual run rate.

Selwyn, can you give us color on the new business, is it DWI, DFM, OEM, after market help us understand just where the success has been.

Well, actually it is all the areas, on the OES side we've had some nice wins, and we expect to add additional business across the DIFM side (inaudible).

How are you getting that new business, Selwyn?

Well, I think -- first of all, we do a great job for our customers. They tell us that, anyway. But we certainly do a good job and we have great fill rate, and I think our pricing is competitive because of our new model, and the services that we offer to help support the customers is very efficient, because of that our facility is very quality driven so the OES -- the OE manufacturers are very comfortable with the quality levels that we are producing particularly in our Mexico facility and we've been abel to produce these OE quality levels at very competitive prices for them.

Last question, if I could. You're talking about 400 basis points of potential gross margin improvement between Q2 and Q1. How do we get the other 500 basis points of potential improvement to a 30% type of growth profitability? The big thing is absorption of indirect overhead. As we ramp up production to support sales is and we've been cognizant of not trying to ramp account because we don't want to grow inventory but as we ramp up production where sales are supported the absorption of direct overhead will get us there. There's nothing major that we have reengineer it is just a matter of utilization of capacity and that should get us there, even with the business that is committed today if it all comes on as expected. The other piece that contributes to the is the fact that we've now basically shipping substantially all of our large customers out of Mexico, and you should see further headcount reductions. Okay, thank you for your patience with my questions.

Thank you.

We'll take our next question from Dwight [Mimanceo] with Winfield Capital.

Good morning, gentlemen. Congratulations on the positive progress thus far. Can you help me understand the magnitude of June, did it represent something like a 40% or 50% number?

Over 40% of the quarter was represented in one month.

Okay, great. And did that also include the delay in the shipment to a large customer or is that still being delayed?

No, we did make that shipment. That customer is now completely normalized. And all of our cash collections, we've collected $1.00 on the dollar we are part of the new entity that arose out of that situation so everything is moving along very well there.

Okay, great. And the capacity utilization in the (inaudible) plant is that creeped up, or is it still around the 50% range?

I still think it's around 50% it fluctuates a little bit but as new business come on we will be able to utilize more capacity. We certainly have more capacity to take on significant new business, and I hope that comes true, but even on the more realistic side, just small gains in productivity resulted in significant contributions to absorption of overhead and gross margin.

Right. Now given the revenue number that you expect to attain by year end, do you think that number that capacity utilization number will creep upwards, or is it still going to --

The the (inaudible) but we shouldn't expect the capacity utilization to increase.

Now the G&A rate of about $2.5 million per month, is that -- can we consider that as a run rate, a monthly run rate moving forward?

I would look at it as an annual run rate, and we discussed earlier approximately $23 million. It will fluctuate through the year and month to month.

23 for G&A only?

SG&A.

Now, in the last conference call, really two points. One is the EBITDA number, which you guys handle EB, so that was good news. The other thing is, on (inaudible) I guess ? purchasing shares in the open market, to help create some kind of ownership mentality, both in -- at the management level and at the board level, any movement on that front? (inaudible) insiders do not purchase shares?

It is very difficult for us to comment on that, but we are very mindful about buying shares. There are restrictions that we need to comply with and so without getting into any detail, I mean, certainly I think that the company, including its board of directors and its management, is optimistic about the future. But potentially could be restricted from buying additional stock.

Okay. But if you weren't restricted, would you believe that you'd be willing to buy shares? Because I believe that last time you said you were going to buy shares. I'm just curious why the sudden turn around.

You are correct if we were not restricted than I am sure there would be some people interested in buying shares.

Thank you very much.

We'll take our next question from Mitchell Sax with Grand Slam Financial.

Most of my questions have been answered. Couple small ones. I think earlier you had had mentioned roughly $140 million run rate for sales for this year. Was that including acquisitions, or is that just strictly off of new customers and existing customers?

New customers and existing customers.

Okay. And then with respect to the capacity utilization that Dwight was just asking about, with the new customers that you have on, or that you the have got agreements with plus the sales of existing, where might the utilization get to just on that alone?

That's a tough question to answer. Again, I think we get more and more efficient. We're handling a lot of the business becomes more efficient, but either way, number of units that we produce goes up, the indirect overhead gets absorbed on a per unit basis, so again, I see enhanced utilization of the factory. If you try and drive that, what percentage of margin that will increase, capacity of the factory, I think the factory gets more efficient and capacity grows as it gets more efficient, but costs get absorbed because the indirect remain relatively constant. So I wish could I give you a detailed answer on that but, I mean, still think there's going to be plenty of capacity to grow. Unless, again, of course something, extraordinary happens which is -- I couldn't count on, but the capacity, we can produce many more units in that facility. We probably have the availability to produce another 4 to 5 million unit just out of that facility alone. And we have very scalable capacity in Malaysia as well. So in terms of our facilities for existing business, there's going to be very little CapEx spent. I think as long as our business doesn't deteriorate, efficiencies are only going to go up, and against metal costs we feel are somewhat hedged because of the scrap offset do the actual cost of componentry, as we get a little more OES business, which is the warranty replacement business, material costs do go up fairly significantly because of the very stringent build spec that they may or may not have. I'm rambling a little bit, but I'm just trying to paint a picture more than give you specifics.

You mentioned earlier that you're sort of hoping that one of your customers gets a factoring arrangements back, and that possibly if that happens and you were to pay down your bank facility, you would have the ability to possibly buy back stock. In your new bank facility have you set aside a bucket to do stock buybacks or is that a negotiated point going going forward?

It's a negotiated point going forward. We have received commitments. We have not received documents. We are in the early of documenting it. But, again, if our performance continues to be positive, then the banks will have more flexibility. If it gets tougher, then there will be less flexibility. But certainly these are things that we try and remain as flexible as possible going forward.

Last question, acquisitions, are you looking more to add new customers, or looking more from an industry consolidation perspective?

I think we look at both. We look at everything. I think we're looking at the low hanging fruit, what's is easy to get to right now. Industry consolidation is somewhat organic, but there's a look to everything. So we are, I can say, very, very much focused at the strategic level on the future right now. And that strategy would involve or may or may not involve acquisitions, but we're definitely looking down the road as to how to go to the next level.

Thanks very much.

Thanks.

We'll take our next question from George Burmann with Gunn Allen Financial.

First, thank you for the very informative conference call here. I think it is brought the potential of your company out in the forefront pretty easily. I've got one question maybe, looking to the future. Would it be possible for you, without additional major capital expenditures to have a run rate of 60 million a quarter?

To do 240 million in revenue we would be able to handle that with our existing facilities, yes.

Great.

And that would probably max us out, but, I mean, that is probably doable. And I'm giving you a very quick answer, George, because it depends on would we get, but, yes, it is -- the answer is there's plenty of capacity, and we're saying around 50%. The answer is yes. I mean, I don't know if that's the exact number, but the story is there's plenty of opportunity for us without spending money.

I won't hold you to it.

Thank you.

If the factoring situation from the customer comes back in, your actual interest cost should drop significant as well, right?

No, because what's going to happen, the discount rate on the factoring is going to offset the line of credit interest. So you are going to have very similar interest but have no debt on the balance sheet. Far more flexibility on the liquidity side.

It looks to me like you're on track possibly to put that dollar in earnings fourth here, come 2011.

I hope so.

Good luck for the future.

Thank you. Appreciate your support.

We'll take our next question from Brian Riley with Wells Fargo advisers. And Mr. Riley, your line is -- hearing no response, we'll take our next question from Bob Sales with LMK Capital Management.

Selwyn, just to follow up on the acquisition front, are you considering potential acquisitions where you would have to take on existing manufacturing facilities?

Our appetite right now when we look at acquisitions is to try not to do that at all. We have capacity, so the concept of our strategy right now is to make acquisitions for customers. And that's our near-term short-term strategy, where we don't take facilities. We don't want facilities. We feel like we have benchmark facilities in place with lots of capacity. So any near-term acquisition that we would make would be -- would involve consolidating facilities.

And then sounds like you have your hat in the ring on some things as we speak. Can you size for us the dollar range you would consider in any near-term acquisitions.

Yes, again, I think we've got to look at what's digestible. Based on our cash flow, we're very sensitive to any dilution. Again, near-term, we're looking at smaller tuck in, and certainly we are always in the market looking at opportunities own a much bigger scale. If I had had to categorize our strategy today, let's consolidate and reap the benefits from where our operating metric is right now. Maybe a couple of small acquisitions. And as we prove ourselves out, then maybe we can look to some bigger opportunities.

Lastly, are you always required to -- generally required to take the core inventory and the acquisition universe as it exists today?

Yes. I think core, that's definitely part of what we have to do. I think the thing that's changed in the industry over the last five years is certainly the financial commitment to cores remains with supplier. It used to be with the retailer. So that has definitely changed the capital metric of the business a little bit. Although, core prices have come down based on the fact that metal prices have come down because of the scrap rates, and the ability for us to be able to carry cores is, I think, a competitive advantage. We get a nice return on invested capital for cores, especially if we can get -- manage the turns of our inventory. The very difficult category, because there's so many part numbers for a limited amount of revenue, and everybody eat got to have the part numbers available when there's a need, because these cars are down, and if you don't have it, they just go to the competitor. So the market demands tremendous coverage of inventory relative to the potential opportunity in sales. Having the financial ability to have that coverage gives you a competitive advantage. We carry a lot of cores on inventory, and while from a financial perspective it may seem like a negative, a it lot of the reason we pick up new business is that we're able to fill orders at that time very high 90% rate on an ongoing and continuous basis, and that's because we have the inventory. So I don't know if that's answered your question.

Yes. As one shareholder speaking, it would sure be much more favorable in our view to see you pick up business without having to invest in new or existing manufacturing facilities, given the opportunities that are out there and given your ability to fill your plants. Gosh, it would be really tough to understand taking on any other sizable operations.

I completely agree with that.

Thank you.

Thanks.

And we'll take a follow-up from Howard Liu with First Wilshire Securities.

You mentioned earlier about 40% of this quarter's revenue was in June. That's about $13 million. So if that's sustainable, that puts you well north of $150 million run rate for the year.

I was waiting for you to do that math. I'm surprised it took you that long. That is true. I think June was a very good month. July has proven to be a very good month itself. We'll see whether it's sustainable or not. I think those are high numbers on sustainable without new business levels. We certainly are seeing a pickup in the volume based on the fact that the older cars are demanding more replacement. So it's very unpredictable in terms of whether this is sustainable or not. But it is, in fact, happening right now. So we'll see. Thanks a lot, gentlemen.

Thank you.

As a reminder, if would you like to ask a question today, star 1, at this time. We'll take our next question from Brian Riley Wells Fargo Advisors.

Selwyn?

Hi, Brian.

How are you?

I'm doing good. You dropped off. I'm glad to see you're back.

I got interrupted. I apologize. My question has been answered about the SG&A going forward. I think the number given was $23 million. So my question is, that's decline of about 7% versus last year, which was $24.7 million. As you and I have discussed ad nauseum, SG&A has grown at about 18% a year for seven years. So we're fully operational up and going in Mexico and in Malaysia. All of the move and all of that is behind us, so do you see this little downturn here as the beginning of the trend down that's going to continue on going down, or is this a blip?

Well, I think, again, I think we've given you $23 million as an estimate for the year. I mean that incorporates absorbing some revenue growth as well. So as a percentage, we expect G&A to decline. Whether we can continue to reduce G&A on a dollar for dollar basis, at this point, with what we off, that's going to be difficult, but we continue to look for opportunities wherever we can.

Yes. I appreciate. That other than the bonus these were listed in the 10-K filing, when were they go through the P&L?

They've already gone through the P&L.

So they're in the June quarter?

Those bonuses were for the prior fiscal year.

Prior fiscal year. So you've got another nine months before those numbers would happen again?

We accrue bonuses based on performance on a quarterly basis.

Okay. I think I'm good, congratulations on the drop. It's a start. There's a lot more that hopefully will come out of that number. So keep it going, Selwyn.

I intend to do that, thank you.

Okay, take care.

And this does conclude today's question and answer session. I'd like to turn the conference back over to Mr. Selwyn Joffe for any closing or additional remarks.

No more remarks, but I just wanted to thank everyone for their time and support, and we look forward for the future.

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