Motorcar Parts of America Inc (MPAA) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Motorcar Parts of American fiscal 2010 third quarter results conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Gary Maier. Please go ahead, sir.

Thank you, Bill, and thanks everyone for joining us. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President, and Chief Executive Officer and David Lee, the Company's Chief Financial Officer, I would like to remind everyone of the Safe Harbor Statement included in today's press release.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements including statements made during the course of today's conference call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by Motorcar Parts of American

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

Thank you, Gary. I appreciate your joining us today for our fiscal 2010 third quarter conference call. As noted in today's -- excuse me. As noted in today's earnings release our performance for the quarter reflects strong new customer sales, gross profit improvement, and a strengthened balance sheet. We are continuing to focus on organic growth as well as making strategic acquisitions that add new customers and new customer opportunities. This new business allows us to utilize available capacity at our state of the art offshore facilities. Our liquidity for the quarter improved greatly supported by the resumption of factoring by one of our customers as well as the generation of cash from operations. The availability of cash enabled the Company to reduce its bank obligations by $13 million during the fiscal 2010 third quarter which supports our strategic focus on enhancing shareholder value. We are delighted to welcome numerous new shareholders to the call this morning.

Let me take a moment to highlight the key dynamics of our business since it is central to understanding our business and appreciating the opportunities for growth ahead of us. 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 products. The number of vehicles in these categories has been increasing in recent years and is expected to continue to grow.

We believe that sales for our category are and will continue to be influenced by the following positive factors. The car population moving from the four to seven year age bracket to the eight to 11 year age bracket is growing by 12% in the aggregate and in conjunction with this 12% growth replacement rates for these alternators and starters in the eight to 11 year age category are more than double than those in the four to seven year category. In addition, we believe that the number of vehicles remaining on the road will increase fueled mostly by the fact that we believe that the car population that is 12 years or older will continue to grow as a result of less people scrapping their vehicles.

The replacement rate for alternators and starters in the 12-year-old plus category is more than twice that of vehicles in the eight to 11-year-old category. These numbers are based on data from IMR reports. In addition, we're beginning to see an increase in miles driven again for the first time since 2007. Industry dynamics such as consumers delaying new car purchases and the miles driven and replacement rate data I have just mentioned will bode well for sales of alternators and starters going forward regardless of our current recessionary climate. As I've stated many times, consumers may delay certain vehicle repairs but replacing an alternator or starter is not an option, as they are critical components to enable the car to run.

I also want to highlight what we have done to try and capitalize on these favorable industry dynamics. Firstly, we have greatly improved our balance sheet at the end of the third quarter we had a $10 million five-year term loan and only $700,000 outstanding on our revolver. This leaves with us a debt to equity ratio of approximately 0.11 and a debt ratio of approximately 0.38 times our pro forma EBITDA run rate of $28 million. We have built a low cost production model offshore, and we believe we can produce the best quality product in the industry at one of the lowest costs. We have built capacity so we could increase production with very little incremental costs. This will enable us to absorb significant new volume in our existing facilities and any new business will help leverage our overall production and over head costs.

We have developed an international footprint that allows us to take advantage of international opportunities. In particular, we're focused on China. In addition, we are being very successful in maintaining strong relationships with our existing customers, and we are encouraged by our ability to attract in new business. The signing of a ten year a renewal of primary supply contract for remanufactured alternators and starters is one of our major automotive retail customers along with an extension of a contract with our US car manufacturer customers underscores our success in strengthening our business with existing customers. It is also worth noting that we have opportunities moving forward for product line expansion. We would utilize existing channel relationships to take advantage of that.

Let me take a moment to discuss our base business. We currently supply all of the top automotive retailers in the industry, and we are quickly becoming one of the major suppliers in the professional installer market. As these industry statistics highlighted above start to play out, we believe that the Company is in a great position to benefit. We are encouraged with the progress that we're making with our gross margins, and are significantly enhanced operating income. We are focused on maintaining pricing and continuously evaluating the Company's cost structure and our entire operating metric. The company is headed in the right direction as we gain new customers, pursue production and purchasing efficiencies, and utilize our additional available capacity we expect to realize further market improvement.

On the financial front, we are deploying cash flow to invest in building working capital for anticipated new business and to enhance faster special order turn around time program. We expect our liquidity to remain strong. At this point I will turn it over to David who will walk you through the specifics of our financial results.

Thank you, Selwyn. Net sales for the fiscal 2010 third quarter ended December 31, 2009, were $36.5 million compared with $35.8 million for the same period last year, an increase of $680,000. This increase was primarily due to sales to new customers acquired in the acquisition of Reliance Automotive earlier this fiscal year partially offset by lower sales to the existing customers. Sales to certain existing customers were positively impacted in the comparable quarter a year ago by the timing of update orders. Gross profit for the fiscal 2010 third quarter was $10.9 million or 29.8% gross margin compared with $10.1 million or 28.3% gross margin for the same period a year ago.

Gross margin for the third quarter was impacted by inventory writedowns of $1.2 million or 3.2% impact to the third quarter gross margin compared with the prior year's third quarter inventory writedown of approximately $240,000 or 0.7% impact to the prior year third quarter gross margin. This inventory adjustment reflects a writedown of inventory as a result of our ability to produce goods at lower costs than our standards. This third quarter inventory standard revaluation writedown will reduce costs of goods sold going forward. To recap this increase in the gross profit percentage was primarily due to lower manufacturing costs and increased revenue from our scrap metal offset by packaging cost increases as a percentage of sales reflecting increased sales to new customers and improved packaging materials and an increase in the provision for inventory reserve.

In summary, the third quarter's profit margin was 29.8%. As explained above, the standard inventory revaluation writedown is $1.2 million or a 3.2% impact to the profit margin which when added to the 29.8% margin resulted in a third quarter profit margin of 33.0%. General and administrative expenses decreased $1.7 million or 30.4% to $3.8 million for the third quarter from $5.5 million a year ago. This decrease in general and administrative expenses during the third quarter was primarily due to a gain of $292,000 recorded due to the changes in the fair value of foreign exchange contracts compared with the loss of $1.347 million during the prior year third quarter.

Other decreases in general and administrative expenses such as stock-based compensation, employee related expenses, professional fees, travel and recruiting were offset by increases including amortization of intangibles assets and bad debt reserve. Sales and marketing expenses decreased $7,000 to $1.5 million for the third quarter compared with the same quarter of fiscal 2009 due primarily to decreased ratio expenses partially offset by the addition of employees as a result of our acquisition of Reliance earlier in the current fiscal year.

Research and development expenses decreased $160,000 or 31.1% to $355,000 for the third quarter from $515,000 in the same quarter of fiscal 2009 due primarily related to lower compensation and supply expenses. Operating income for the fiscal 2010 third quarter was $5.2 million compared with $509,000 a year ago which included a charge of $2.1 million for impairment of goodwill. In evaluating operating performance, the Company considers the impact of noncash expense items on its third quarter operations including inventory writedowns previously discussed, FASB 123-R stock compensation expense of $22,000, and a noncash gain of $292,000 reflecting the impact of mark-to-market accounting for foreign exchange currency contracts based on the fluctuation and the value of the Mexican peso.

In addition, depreciation and amortization for the quarter was approximately $877,000, adjusted for the noncash items mentioned above, EBITDA for the third quarter was approximately $7.0 million. Net of interest income, interest expense for the quarter was $1.8 million compared with approximately $1.2 million in the prior year primarily due to an increase in factored receivables. As a result of the items noted above, the Company reported net income for its fiscal 2010 third quarter of $2.1 million or $0.18 per share compared with a loss of $314,000 or $0.03 per share for the comparable period a year earlier.

As of December 31, 2009, our balance sheet had $465,000 in cash, $160.6 million in total assets, and $10.7 million in borrowing as Selwyn explained including a $10 million term loan and $700,000 in revolver loans leaving $31.5 million available after reflecting outstanding letters of credit. During the third quarter the Company generated approximately $13.1 million in net cash flows from operating activities. Accounts receivable decreased $12.4 million due primarily to factoring proceeds during the third quarter after a customer reinstated the use of a receivables discount program.

Inventory accounts increased approximately $6.2 million partially offset by increases in accounts payable and accrued liabilities of approximately $4.8 million in connection with ramping up inventory for new and potential new customers. Additionally, net income for the third quarter was $2.1 million. Along with the items above, other increases and decreases contributed to net cash provided by operating activities during the third quarter. I will new turn the call back to Selwyn who will make a few additional comments before we open the call to questions.

Thank you, David. As you can see, our financial position is strong. We continue to focus on opportunities to grow our business in both a do-it-yourself and do it for me markets. In the professional installer market or do it for me market, we continue to make end roads by leveraging our quality built brand name. From a strategic standpoint we're continuing to focus on building our business within the rotating electrical category.

As noted in my earlier comments, our infrastructure is in place to grow our business. We're keenly aware of the various opportunities to enhance shareholder value and are committed to evaluating all alternatives and taking the appropriate action. In summary, we continue to believe that long-term market statistics for our industry are favorable and as I've stated many times, oil prices and driving patents are important components to our business and this aging vehicle population is particularly critical. In today's environment where fewer new cars are being sold we're experiencing an increased population of old motor vehicles reaching high replacement rates for alternators and starters. In short, we remain optimistic and excited about our growth potential going forward, and I want to thank everybody for their interest in Motorcar Parts and really happy to answer any questions anyone may have at this point.

(Operator Instructions) We'll take our first question from Rick Hoss, Roth Capital Partners.

Hi. Good morning. The decrease of $12.4 million in receivables on a $13.1 million cash generation from OPs, that implies $700,000 cash flow from operations ex the factoring effect?

Yes.. I think, Rick, what you're going to look at is essentially EBITDA adjusted for the noncash items about $7 million pay down on receivables was about $12 million, and so then we invested about $6 million in inventory. So I think that accurately defines what the cash flow was for the quarter.

Okay. And then how much did scrap benefit gross margin this quarter and I guess looking at it from a sequential basis?

I think generally we don't release our exact scrap numbers. It was solid. It is not the best we have ever had. It all depends on metal prices.

Okay. And then how much revenue contribution from acquisitions hit this quarter? I guess really what I am looking for is the organic number here and I realize that the year-over-year quarter in your prepared remarks you had discussed that it was a stronger than normal quarter, so just trying to find neutral ground here and look for organic number.

Right. I think David will give you the exact numbers. I think the important thing to note is last year in the third quarter we had a number of update orders which we haven't had in this third quarter, and we expect actually to have them in the fourth quarter and first quarter going forward. David, do you want to talk about the numbers?

Included in net sales is $1.3 million from customers acquired in the recent acquisition.

Okay. And then the updates, Selwyn, you said fourth quarter/first quarter.

Fourth quarter and first quarter, yes. We really had most of those orders in-house.

How have sales been thus far in the fourth quarter?

I think a little bit of a soft start. The good news and the bad news is when you have extreme cold weather and snow, that usually reflects the potential for many failures. What happens is battery starts to go and it strains alternators and starters, so we're off to a little bit of a slow start because people are snowed in, but once those cars start to be driven again we anticipate to see big demand come back. I know the weather is still a little extreme on the East Coast, so we're optimistic that the back half of the quarter will be strong but the first half has been a little slow.

Thank you for taking my questions.

Thank you.

We'll go next to Howard Lou, First Wilshire Securities.

Good morning, gentlemen. This is Dimitri.

How are you?

Hi, Dimitri.

Good, good. Could you help us understand the factoring and the interest expense going forward?

During the third quarter a customer factoring program was reinstated, and we don't go into specifics about which customer provides the factoring, but it was for the duration of the third quarter, so we would expect that interest expense from factoring in future quarters would be consistent with the third quarter interest expense.

Okay. So then the current interest expense of around 1.7, 1.8 million would be normalized?

Generally speaking, yes. There is a small portion of interest related to debt and interest expense, so depending on how much we're able to manage the loan balance will also impact the interest expense as well.

Got it And then could you talk a little bit about how the ramp up for the new wholesale customers is going?

Yes We've changed over small percentage of that business, but we are now getting the green light, and we expect that to accelerate quite significantly, so I think the outlook now is to have it completely changed over within 90 days. So starting in our new fiscal year we'll have some strong -- that should be about $8 million of strong annualized revenue.

Great. Thank you very much.

Thanks, Dimitri.

(Operator Instructions ) We'll go next to Tony Cristello, BB&T Capital Markets.

Thanks. Good morning, gentlemen.

Good morning, Tony.

One question. You noted 28 million in EBITDA on a pro forma basis. I am just curious, is that some implication of guidance or can you give sort of some type of framework or reference around that EBITDA?

Yes. Basically we look at the last two -- this third quarter and the second quarter. We adjust out -- when we look at EBITDA, we adjust out we have some few noncash items that we adjust out in EBITDA trying to drive to the cash equivalent of EBITDA, and we adjust out the inventory writedown, and we adjust out the foreign exchange gain or loss because at the end of day it is net zero, and we adjust out the 123 stock option expenses, so if you look at that, we hit $7 million in the last two quarters. I think that's a comfortable run rate right now, and obviously we hope to enhance that with our new business that we bring in.

Okay. When you look at sort of what your expectations are in terms of the peso and when do we see sort of headwinds become tail winds if you will or whether do we see that reverse I should say?

I don't know. David is the resident expert currency trading.

Just to remind everybody, we don't speculate. We have a program. Every month we buy a certain amount of peso, so we're not really focused on either generating or understanding losses. Right now the peso most recently does seem to have settled a little bit more than, for example, the prior year, so we would expect the contributions to be we hope less impactful but more consistent going forward.

Okay. And I guess what I am getting at is if I look at what your EBIT margin was this quarter versus what it was the prior quarter, you showed some noticeable margin expansion, and I guess what I am wondering is how much of that is sustainable because of ongoing operational versus how much of this is going to be fluctuate because it is either related to scrap and/or currency or something like that?

Right. Let me break those down. Again, I will deal with one that the scrap-- at the end of the day the scrap in our purchasing variable should hedge out, okay, over a period of six months, So, I think that is not the big variable for us really and the other side of it is on the income statement when we deal with the peso is that we take what the exchange rate is at the end of the quarter and apply that to the quarterly results, so if you exclude the hedging program, which all of that does is flatten out fluctuation, the peso actually got a little bit stronger because the dollar got weaker over the last quarters, but we're seeing the peso get a lot weaker now, so I think there is opportunity again this is speculative, but we in the Company believe that the peso will get weaker against the dollar going forward, and so there should be opportunity there.

It could go the other way. We don't know. Really the foreign currency hedging is just buying it out nine months forward, so whatever happens it just slows down change from a cash perspective, not from a P&L perspective.

Okay. But when you look at your business, is there more opportunity to lower your costs manufacturing or take more SG&A or really or what we're looking at here is leveraging incremental volume?

Yes If we get incremental volume and we're able to at least sustain the revenue rates that we're running at now, we think the margins should be stable. If we get incremental volume there should be nice opportunity for margin expansion. We have a factory that's running again at 50% capacity, so as we fill that factory up, many efficiencies start to happen.

I think David gave the number of $1.3 million of new business that was included in that revenue for the quarter. How much of-- if you take last year's number and add that and what you actually reported would imply sort of a little bit of a negative impact from your core business? What I am wondering, how much of that is timing of order patterns or seasonal and so how should I think about the core business and the health of the core business and what you have sort of going forward?

That's a great question. I think our core business is driven by the main retailers. That's the major part of our core business and their business is I think that it is substantially flat to nominally up which is our normal organic growth rate. I think the quarter's reflection is irrelevant in understanding the ongoing organic business. We expect them to be up 2%-- 1, 2% based on where they are right now.

As the statistics play out which we're waiting for, it could be higher, but it is all timing in terms of the update orders. These update orders vary, as you know, depending on what the customer needs are by quarter, so we think at the end of the day all of our core customers are heading in the right direction. There is no one heading downwards. We've had a lot of strain on our sales numbers because we were one of the largest suppliers of CS alternators in the industry, and, as you know, the cars that have CS alternators are coming off the road, so while we're experiencing 30% declines in CS business, the remaining business is growing fast enough to more than make up for that.

That will flatten out and starting to flatten out now. As far as new business goes, certainly we talked about the acquisition new volume. We expect to annualize about $8 million of new business starting between March and April of new business that we're changing over right now, and we have awards in-house of approximately $10 million of additional new business that will start a little later on in the year. I don't have exact dates on that yet. Our new business visibility is very positive right now. We think over the next two years to see some very significant revenue growth from new business.

Okay. All right. That's great. That's very helpful. I appreciate it. Thank you.

Thank you.

(Operator Instructions)] We'll go next to [Steve Emerson], Emerson Investment Group.

Congratulations on a great quarter.

Thanks, Steve. Appreciate it.

Can you comment if there were any significantly different terms when you reuped the contract with your major retailer?

No, nothing changed at all, same terms.

Excellent. And to help us lazy people, can you kind of give a thumb nail how you look at fluctuating copper prices and their impact on your quarterly EBITDA?

Right. Copper has been the major probably metal that influences costs of inventory or scrap. The one thing that accompanies that remanufactured, predominantly a remanufacturer is able to do, is when copper prices go down, generally we're now able to buy componentry at less expensive prices. It is going to work its way through the inventory turns, and our scrap sales go down because we're getting less for the copper that we scrap out. It is a built in hedge.

As copper prices go up, our cost of components go up, our revenue from scrap goes up too. So I think if you look at it in a six to nine-month window, it is a net zero gain. I think when metal prices go up after they have been low, we see a quicker pick up than we do when they go down. Does that make any sense?

Yes, it does. So a $0.50 quick change in the price of copper hits us how much?

If we have $0.50 or whatever we're scraping, we get current scrap rates on a daily basis, so whatever we sell today-- copper went up today, the amount of copper we would have in scrap inventory would be sold at the higher prices, and the purchase that is we make will probably only show up in the P&L six months from now.

So we don't have a simplistic way to look at this and I think in the past you said you have no intention of hedging it to smooth out earnings.

No. We looked at it, and based on the foreign -- the metal freighting experts that we interviewed, seems to be too risky and not worth the effort.

Next point. Your unused credit line to what extent can you use this to buy back stock and how much of it could you use should you make that decision?

Right. I think we have up to $5 million right now that we could be using to buy back stock. It is something we are very seriously evaluating in conjunction with other alternatives.

Okay. And obviously you can't tell us which alternative, but maybe you could give us a little color as to what could be under serious consideration. For instance, how much of that $31 million could be used for acquisitions?

Well, again, I think the $31 mill is really a working capital line. I believe the Company should decide to pursue acquisitions we'll be able to get favored financing based on our cash flows right now, but the things that -- the two stories that I think that your questions you should take away from these questions if anybody else is listening is, number one, we're looking at ways to enhance our efficiencies on the production side so that we can get better results, further increase our cash flows, and look at it and try to make earnings as accretive as possible, and second thing is if we're unable to do that, we will buy back our stock because we believe that the prices are favorable right now to invest in our own company.

Okay. How much in internal investment are you thinking of at this point?

Internal investment, can you clarify meaning?

What you just said. You said that you're looking at investing CapEx expenditures --

No, no, not at all. Not at all, Steve. Let me clarify. We don't need any CapEx expenditures to add volume to our facilities. We have completely--

No, I'm talking efficiencies that you just mentioned.

No, no. The efficiencies that we would have would be to add volume to those factories. As we add volume, we're not talking about spending dollars against that. We are talking about focusing on how to get that done and evaluating that against buying back our own equities.

And perhaps as you always tell us what kind of -- could you give us color on the acquisition pipeline at this time?

There are a number of acquisitions that we continue to look at, and so I think there is good opportunity on the acquisition front. We are very -- we will be very careful in terms of what we pay, though, so we're not looking to over spend because we in ourselves are a great acquisition at the current price.

Okay. Thank you very much.

Okay.

We'll take our next question from [Bob Sales, LMK Capital Management.]

I think my questions have already been answered thank you.

Okay, but don't go away, Bob. I just want to clarify the last question with Steve, when I talked about we're good price, we believe the stock buyback of our company for us is at a good price.

All right. Selwyn, I will buy it all then.

Okay. No comment.

We'll go next to George Boltrun Boltrun Investment Partners.

Boletrus What's your incremental profit margin?

Incremental profit margin based on --

For a dollar of sales, you've got operating at 50% of capacity. For every dollar in sales what kind of margin can we expect?

I think it varies based on from a dollar to get to capacity and as you get further into the capacity, the contribution from a margin goes up, but I think there is about 9%-- 8 to 9% if you're running at 100% efficiency of margin accretion, but again that's a very theoretical number.

Thank you.

Thank you.

We'll go next to Erwin Friedman. (inaudible)

Good afternoon gentlemen and gentlemen, Erwin Friedman, How are you?

Good Erwin, nice to hear from you.

Yes, yes, my questions were very succinctly answered by you. So, I'm all set, thank you.

Thank you.

Mr. Joffe, we have no other questions remaining in the queue. I would like to turn the conference back over to you for additional or closing remarks.

Thank you very much for joining the call. I appreciate the support and certainly I will restate that we will be looking at ways to enhance stockholders equity in the most accretive fashion we possibly can going forward. Thank you very much for everybody joining us.

That does conclude today's conference call. Thank you for your participation.