Motorcar Parts of America Inc (MPAA) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Motorcar Parts of America fiscal 2010 year-end conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Gary Maier.

Thank you. 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, I would like to remind everyone of the Safe Harbor statement included in today's press release. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements including statements made during the course of today's conference call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in the forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company and are subject to change based upon various factors. For a more detailed discussion of some of the ongoing risks and uncertainties of the Company's business, I refer you to the Company's various filings with the Securities and Exchange Commission. I would now like to turn the call over to Selwyn and begin.

Thanks, Gary. I appreciate everybody joining us today for fiscal 2010 year-end conference call. As reported earlier today, sales for the fourth quarter were at record levels. This contributed to record sales for the fiscal year. We are encouraged about the overall state of demand for our products in the automotive aftermarket in general. We have experienced growth from both of our historic customer base and are seeing the fruits of our acquisitions. The quarter benefited from both of those efforts. Our performance for fiscal 2010 underscores the Company's success at generating organic growth by leveraging our industry reputation for quality and ability to ship and produce product efficiently. As we begin fiscal 2011, there are a number of new customer relationships that are beginning to ramp up, with opportunities to expand this initial business, as these relationships mature.

In addition, we continue to focus on making strategic acquisitions. Of course at appropriate valuations that add new customers and add new customer opportunities. Let me take a moment to highlight the key dynamics of our business, particularly for our new shareholders over the past fiscal year. These factors are central to understanding our business and appreciating the opportunities for growth. 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 segment for our products. The number of older vehicles has been increasing in recent years, with expectations that they will continue to increase, which according to recent industry reports is being fueled by a drop at the beginning of the year in new vehicle sales.

The other factor in the equation is annual mileage driven. This has been fluctuating up and down during the past few years, but most recent trends have been more favorable with miles driven generally rebounding. Alternators and starters are not discretionary items. When they break, the parts need to be replaced and the complexity in required range of inventory presents a significant barrier to entry and strongly places our Company at a competitive advantage. In short, our business is enhanced by these industry dynamics, as well as the following factors. Our low cost production model offshore that produces the best product quality in the industry accounts today for over 97% plus of our product, which has been produced offshore, available capacity to increase production with little incremental cost and the ability to leverage our overall production and overhead costs.

We certainly believe that this last quarter shows that with increased volume all of the fundamentals of our business improve. And the international footprint that allows us to take advantage of international opportunities; strong relationships with our existing customers and the ability to attract new business; product line expansion opportunities that will benefit from utilizing existing channel relationships; and a strong financial position. We currently supply all of the top automotive retailers in the industry and these customers are posting excellent results. Also we are quickly becoming one of the major suppliers in the professional installer market. We are encouraged by our record sales in fiscal 2010, as well as our gross margin performance for the fourth quarter and our significantly enhanced operating income.

We are committed to rational pricing and continuously evaluating the Company's cost structure and our entire operating metric. While there are always extraneous factors that can and do impact any business every quarter, our year-over-year performance demonstrates our ability to focus on annual and long-term growth and profitability. As we gain new customers, pursue production and purchasing efficiencies, and leverage available capacity, we expect to be further rewarded and take the Company to the next level of its potential. David will now focus on our financials and then I will make some additional comments followed by a question-and-answer session.

Thank you, Selwyn. Net sales for the fiscal 2010 fourth quarter ended March 31, 2010, were $38.6 million compared with $29.9 million for the same period last year, an increase of $8.7 million or 29.1%. This increase was due to increases in sales to existing customers and new customers acquired in our purchase of certain assets of Reliance Automotive earlier this fiscal year. Gross profit for the fiscal 2010 fourth quarter was $12.5 million or 32.3% gross margin, compared with $6 million or 20.2% gross margin for the same period a year ago. This increase in the gross profit percentage was primarily due to lower manufacturing costs and increased revenue from our scrap metal. General and administrative expenses increased $0.8 million or 15.9% to $5.6 million for the fourth quarter from $4.8 million a year ago. This increase in general and administrative expenses during the fourth quarter was primarily due to bad debt expense of $0.6 million in connection with the acquisition of certain assets of Reliance Automotive.

In addition, G&A expenses were negatively impacted by lease related expenses of $0.3 million due to nonpayment of rent from a former subtenant. We are working towards recovering these amounts. Sales and marketing expenses increased $0.3 million to $1.66 million for the fourth quarter compared with $1.33 million for the same quarter of fiscal 2009, due primarily to expenses related to the Reliance asset acquisition earlier in the current fiscal year and higher sales commission expenses reflecting increase of sales. Research and development expenses decreased $37,000 or 8.5% to $398,000 for the fourth quarter from $435,000 in the same quarter of fiscal 2009, due primarily related to lower compensation expenses resulting from headcount reductions. Operating income for the fiscal 2010 fourth quarter was $4.8 million compared with a loss of $680,000 a year ago, which included a charge of $0.1 million for impairment of goodwill.

EBITDA was approximately $6.4 million, adjusted for various noncash items. These items include FAS 123R, stock compensation expense of $16,000, gain of $170,000 reflecting the impact of mark-to-market accounting for foreign exchange currency contracts based on the fluctuation in the value of the Mexican peso, bad debt expense of $0.6 million and lease-related expenses explained previously of $0.3 million. In addition, depreciation and amortization for the quarter was approximately $880,000. Net of interest income interest expense of $1 million was unchanged compared with the prior quarter. Our earnings were positively impacted by lower tax rates for the fourth quarter. As a result of the items noted above, the Company reported net income for its fiscal 2010 fourth quarter of $2.9 million or $0.24 per share, compared with a loss of $1.2 million or $0.10 loss per share for the comparable period a year earlier.

Net sales for fiscal 2010 ended March 31, 2010, were $147.2 million compared with $134.9 million for the same period last year, an increase of $12.4 million or an increase of 9.2%. This increase was due to increases in sales to existing customers and new customers acquired in our purchase of certain assets of reliance automotive earlier this fiscal year. Gross profit for the fiscal 2010 was $41.3 million or 28.1% gross margin compared with $39.5 million or 29.3% gross margin for the same period a year ago. The decrease in the gross profit percentage was primarily due to the reversal of a $1.3 million accrual related to customs duties claims during fiscal 2009, which benefited the prior year by approximately 1%. General and administrative expenses decreased $3.9 million or 20% to $15.6 million for fiscal 2010 from $19.5 million a year ago.

This decrease in G&A expenses during fiscal 2010 was primarily due to a gain of $1.6 million recorded due to the changes in the value of foreign exchange contracts, compared with a loss of $1.2 million during fiscal 2009, $1.3 million of decreased professional services fees, and $372,000 of decreased stock-based compensation. These decreases in general and administrative expenses were partially offset by a $673,000 increase in the provision for bad debt expense during fiscal 2010 primarily related to the Reliance asset acquisition. Sales and marketing expenses increased $0.8 million to $6 million for fiscal 2010 compared with $5.2 million for fiscal '09, due primarily to expenses related to the Reliance asset acquisition and higher sales commissions reflecting increased sales. These increases in sales and marketing expenses were partially offset by a decrease in professional services and consulting fees and travel expenses during fiscal 2010.

Research and development expenses decreased $572,000 or 28.7% to $1.4 million for fiscal 2010 from $2 million in fiscal '09, due primarily related to lower compensation expenses resulting from headcount reductions. Operating income for the fiscal 2010 was $18.3 million compared with $10.6 million a year ago, which included a charge of $2.2 million for impairment of goodwill. EBITDA was approximately $24.4 million, adjusted for various noncash items. These items include FAS 123R stock compensation expense of $136,000, gain of $1.6 million reflecting the impact of mark-to-market accounting for foreign exchange currency contracts based on the fluctuation in the value of the Mexican peso, standard inventory revaluation write-downs of $3.1 million, bad debt expense of $0.6 million and lease related expenses explained previously of $0.3 million. In addition, depreciation and amortization for the fiscal year was approximately $3.4 million and severance expense was approximately $100,000.

Net of interest income, interest expense for the fiscal 2010 was $4.7 million compared with approximately $4.2 million for the prior year due to a higher balance of receivables discounted under the receivable discount programs during fiscal 2010 compared with fiscal 2009. Income tax expense for fiscal 2010 was $5.3 million, reflecting the benefit from lower statutory tax rates and foreign taxing jurisdictions in fiscal 2010 compared to prior year. As a result of the items noted above, the Company reported net income for its fiscal 2010 of $9.6 million or $0.80 per share compared with $3.9 million or $0.32 per share for the prior comparable period a year earlier. On the balance sheet we are pleased to have been able to strengthen the balance sheet by generating $18.3 million in cash from operations. As a result we were able to reduce our revolving credit facility to a zero balance at March 31, 2010.

At March 31, 2010, our balance sheet had $1.2 million in cash, $163.5 million in total assets, and $9.5 million in term loan borrowings, leaving $31.8 million available after reflecting outstanding letters of credit. During fiscal 2010, the Company generated approximately $18.3 million in net cash flows from operating activities, accounts receivable decreased $8.9 million due primarily to factoring after a customer reinstated the use of a receivables discount program. Inventory increased by approximately $10 million offset by increases in accounts payable and accrued liabilities of approximately $9 million in connection with ramping up inventory for new and potential new customers. Additionally, net income for fiscal 2010 was $9.6 million. 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 you can see our financial position is strong. We continue to focus on opportunities to grow our business in both the do-it-yourself and the do-it-for-me markets. In the professional installed market we continue to make in-roads by leveraging our quality built brand name. From a strategic standpoint, we are continuing to focus on building our business within the rotating electrical category. We are still very focused on building our business in a disciplined manner to leverage efficiency in our facilities. In addition, we are focused on further leveraging key production advantages to grow our business. As noted in my earlier comments, our infrastructure is in place to grow our business. We are 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. As I have stated many times, oil prices, driving patterns are important components to our business and this aging vehicle population is particularly critical. We are continuing to experience an increasing population of old motor vehicles reaching high replacement rates for alternators and starters. In addition, as I said earlier, as we gain new customers, pursue production and purchasing efficiencies, and leverage our available capacity, we expect to be rewarded and take the Company to the next level of its potential. We expect growth in both our revenue and our profitability for this fiscal year. The automotive aftermarket for hard parts is thriving and we intend to be a part of that. I appreciate your interest in Motorcar Parts and I am happy to answer any questions you may have.

(Operator Instructions). Our first question comes from Rick Hoss with Roth Capital Partners.

Hi, good morning, gentlemen.

Hi, Rick, how are you?

Selwyn, would you say that the fourth quarter was fully reflective of the acquisitions that were affected in fiscal '10.

Yes.

Okay. And then, there seems to be a wide variation on a monthly basis from a revenue standpoint, would you say that the first quarter of '11, how would you compare that to, say, the fourth quarter from a revenue standpoint.

We don't expect the first quarter to be at the same levels of the fourth quarter. I think, Rick, the big picture here is that sales are continuing to increase. We expect them to increase from our existing customer base. Today we also expect to bring in new business. One of the things that we have proven is that demand for the product fluctuates on a monthly basis and it is very difficult to predict exactly when, what the quarters are going to be.

Okay. And then on the gross margin I realize that some of these [gains] are due to the higher revenue, but how much was due to, if you can quantify it, how much is due to the scrap that if you -- .

Again, there was no extraordinary amount of scrap for the quarter. Certainly at the end of the day, the scrap metal prices and the cost of material components end up being a net zero wash. So while we did have some increase from scrap revenues, that's not the reason for the margin. I mean, that additional scrap revenue is really offsetting higher component costs of inventory from the past and so I would assume that these margin levels of around 29%, which is the trailing 12 month number, are pretty much baseline right now. Obviously we intend to try and increase that margin. And we'd certainly believe that as we have more production in our facilities, in particular in Mexico, that that margin will be enhanced. So -- but our focus is really on putting additional dollars to the bottom-line. We want to maintain rational pricing, we are not looking to start taking down pricing in the market place, but we are very much focused on trying to leverage our production facilities.

Okay. And I didn't see any inventory write-downs. Are those still continuing, or -- ?

Yes, I think what's -- at these production levels, inventory write-downs should be much lower than they have been historically. If we end up picking up significant new business, certainly the overhead component of inventory will need to be written town. But I think that inventory write-downs of have come down to a very, at these levels probably to a nominal level.

Okay. That's good news. Then last question for me, can you give us appreciation for the opportunity in China, what other things are you looking at? I know we have discussed a product line expansion potential in the past as well. Anything that you can give us appreciation for other opportunities out there?

Certainly, I would start by saying that the aftermarket in the North American market is $86 billion of business being done in the hard parts business in North America. We play in a category that's about $1.2 billion of that. So there's tremendous opportunity in other categories. There are tremendous opportunities in foreign markets. We believe that with probably the most efficient production facility in the world based in Malaysia today that we are well situated for international expansion and we believe that our contacts and reach into China certainly could provide opportunity. We have not yet officially announced which direction we are going to go, but this is certainly very much being studied right now.

Okay. Thank you for your insight.

Thank you.

Thank you. Our next question comes from Tony Cristello with BB&T Capital Markets.

Thanks. Good morning, good afternoon, gentlemen.

Morning, Tony.

Couple of questions. First on the sales, if you look at the 29% during the quarter up year-over-year, how much of that was organic growth versus how much should we be viewed as sort of through new or acquisition.

That's not a number that I have at the tip of my fingertips, but I would say the growth percentage, the percentages are probably about 50/50 between acquisition and organic growth

So 15% from acquisitions and 15% from existing customers, is that how we should look at it.

Yes.

Okay. And what are you seeing today across the supply chain in terms of lead time? Are you managing an even tighter inventory relative to what your customers are demanding. What is your visibility in terms of when they need a part how quickly you have to get that to them and how has that changed over the last two to three years.

I think that's a great question. I think clearly the customers want to have inventory available in a shorter lead time as they possibly can. We have in general always had short lead times with our customers. And have always had very significantly high fill rates. So we've always had a higher inventory levels than probably sort of one would normally expect. But customers are -- the other side of it is the customers are doing well. And I think all of the customer base wants to make sure that they have the right inventory mixes available readily ton shelves. So as much as lead times are still very much a focus of them, I think carrying the right inventory level is probably a bigger focus for the customers today.

Are you more integrated today than you were a couple of years ago within their systems from a supply chain management standpoint.

Absolutely. Absolutely. Especially with the larger customers.

Okay. Another question. You noted about the G&A expense, part of it being the Reliance acquisition for bad debt and then the second piece being negative non-payment of rent from a former sub-tenant. How should we think about those impacting subsequent quarters. Is it -- .

These are one-time, this is one-time events. Hopefully we can recover these. But we felt it was prudent to reserve for them at this point in time. We certainly are going to pursue vigorously recovering on both counts.

Okay. Okay. So, there shouldn't be anything we should think about material in the upcoming quarters.

No, no. That's 100% of the exposure.

Okay, okay. And I guess, just on the last question, I mean, you're -- I think you mentioned the tone of business or at least trends for the first quarter to be not as strong as you experienced in the March quarter and obviously there's a seasonality to that as well. But you're almost complete with the June quarter, is there any color you can at least add or provide based on trends you have seen to date given that your quarter's about ready to close here in just a few weeks.

Yes. I think that in fundamentally it is a regular quarter. There's nothing that we feel will be stand out in the quarter. But I will say that visibility on continuing revenue growth and strong sales is very, very positive internally.

Okay. So more from a seasonal standpoint, this would be a typical quarter from, sequential from the fourth quarter into the first?

Yes. I mean, adjusting for seasonality, yes.

Okay, okay.

So looking at comparative ratios is would be appropriate quarter to quarter.

Okay.

In other words comparing us to prior year first quarter as opposed to the fourth quarters.

Correct. Okay. Great. Thanks. Appreciate it.

Thanks, Tony.

Thank you. Our next question comes from Dustin Leonard, a private investor.

Yes, I believe the last caller just touched on one of the questions I had dealing with the bad debt expense and the nonpayment of rent.

Right.

Did those charges hit in the Q4, fiscal Q4?

Yes.

Okay. And they were in the SG&A figures.

Correct.

Okay.

It's about $930,000 something in SG&A for the fourth quarter that we expensed.

Okay, great. I was going to say, you guys, it was a great quarter with the gross profit numbers and then the operating income seemed low, but that explains it. Okay. Let's see. On another thing I was wondering for the sales in the March month, I believe in, it may have been an investor presentation, you had mentioned that sales were on fire and I know this isn't something to expect going forward, but just for some kind of ball park figure of what to imagine a big month would be like. Is it possible for you to highlight what the sales may have been ball park for that month?

I'm not sure I understand the questions. The actual sales were for the month.

38 for quarter.

$38 million for the quarter.

Okay. So you don't break it down into months.

No, we've not reported monthly sales. The reason we gave some updated guidance is that we had in an investor presentation earlier, had experienced -- the beginning of the quarter seemed to be pretty soft and we didn't want to have any misconceptions of what the quarter would end up being.

Right. Okay. So definitely did a very nice job catching back up in that month.

Yes. And that can happen, that is certainly indicative of the nature of the category that we are in.

Okay. Now as far as sales as a percent into the DIFM market, I know that's a smaller market but it is growing. I was curious, as a percent of sales for this last quarter, approximately how much was DIFM related.

We are now at about a third of our sales is probably DIFM right now.

Okay. So it is still ramping. Okay.

Yes.

And is heavy duty at all contributing or is it still pretty much just a very small percent.

Very small percent. We are making some gains there but it is very slow.

Kind of expected being the new kid on the block in that market.

Yes and we are cutting our teeth on it. I expect that once we get more of a reputation and more established in the industry, we will see some big bumps, but my guidance on revenue sort of excludes seeing a bump out of the heavy duty.

Got it. Okay. And I guess the last question I would tip on is we now have the share buyback in place and it has been announced and it's official. It is now up to a $5 million amount that we can tap into versus what was a rather small $1 million before. So it was understandable why not really get into buying back shares back then. But with the revolver paid down, favorable terms on the term loan, inventories are pretty darn healthy, I am not real sure as far as the flow through with getting into having enough to provide customers with what they need when they need it. But, why not be aggressive buying back shares. It looks like the Company still has not yet bought back any shares.

Yes. We do intend to buy back shares. We were restricted a little bit based on knowledge of the fourth quarter. And so the program is in place effective once this, today is over. And depending on again market conditions, we expect to be buying back shares.

Great, yes. We definitely look like a value play out here. I hope Wall Street starts recognizing it on some level here.

Well, I certainly hope so myself. Okay. Well, congratulations on a great quarter, you guys, and thank you very much.

Thank you.

(Operator Instructions). I am showing no further questions at this time.

All right. Thank you, everybody. We appreciate you joining us for our call and we look forward to further reportings. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may now disconnect.