Motorcar Parts of America Inc (MPAA) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Motorcar Parts of America fiscal 2011 first quarter results 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 introduce your host for today's conference call, Gary Maier with Maier & Company.

Thank you very much. Thanks everyone 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, 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 development, and their potential effects on the Company.

There can be no assurance of future developments affecting the Company will be those anticipated by the Company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company, and subject to various factors. For more detailed discussion of some of the ongoing risks and uncertainties of the Company's business, I refer you to the various filings with the Securities and Exchange Commission. I would now like to begin the call, and turn the call over to Selwyn.

Thanks Gary. I appreciate you joining us today for our fiscal 2011 first quarter conference call. As you saw from our press release, our new fiscal year is off to an excellent start. As highlighted in today's press release, we experienced strong sales momentum and solid profitability for the quarter. The nondiscretionary nature of starters and alternators, combined with strong market dynamics such as an aging vehicle population and increased miles driven, bodes well for our leadership position within the automotive aftermarket.

New statistics have been released for the car population. As we have discussed before, the average age of vehicles has increased, in particular the number of cars that are in the 4-7, 8-11, and the over-12 year category have grown. This shows that people are holding onto their vehicles longer. In conjunction with that, replacement rates for alternators and starters increased significantly as the vehicles age. In addition, as the economy remains slow, people are very conscious about choosing low-cost alternatives to repair their vehicles. This means increased demand in the DIFM, the do-it-for-me market, and the do-it-yourself market. MPAA is particularly well-positioned, with strong market share in the DIY market, and fast growing in the independent professional installer market.

The DIFM market -- the DIY market is predominantly serviced by the retailers, and the independent repair facilities serviced predominantly by the traditional warehouses. The financial results of this retailer group in the parts business have been excellent. They report that they see strong tail winds for their business going forward for the foreseeable future. We expect the same trends for our business going forward. Along with favorable automobile aging statistics in an economy that encourages low-cost maintenance, we have experienced severe hot weather throughout much of the country, and that should result in further failures to alternators and starters. These factors bode well for our business going forward. To support this growth, we continue to focus on leveraging our industry reputation for quality, and ability to produce and ship product efficiently. Our fill rates and quality are unsurpassed in the industry. These factors have enhanced our ability to gain a number of new customers. This business, as I mentioned during our year-end call in June, is beginning to ramp up. And we look forward to expanding these relationships as the new fiscal year proceeds.

In addition, we continue to focus on making strategic acquisitions at appropriate valuations, of course, that add new customers and new customer opportunities. This takes time, but we remain optimistic that fiscal 2011 should be a good year in this regard. Other competitive strengths include our low-cost production model, available capacity to increase production with little incremental cost, and our ability to leverage our overall production and overhead. An international footprint that allows us to take advantage of international opportunities. Strong relationships with our existing customers, and the ability to attract new business. And a strong financial position.

In addition, we are quickly becoming one of the major suppliers in the professional installer market. Our gross margin performance for the quarter and strong operating income demonstrate that our strategic initiatives are working. We are committed to rational pricing, and continuously evaluating the Company's cost structure and our entire operating metric. As I stressed last quarter, there are always extraneous factors that can and do impact any business in any quarter. We continue to focus on annual and long-term growth and profitability without getting sidetracked on short-term distractions and the issues we cannot control. Despite unadjusted excellent performance financially, it is worth noting that our earnings were negatively impacted by non-cash losses from our currency hedging programs and further inventory write-downs. The write-downs occurred because we were able to further reduce our production costs. The effect of these two items was an expense of approximately $900,000. In addition, we had unusually high reserves for stock adjustments, which if considered, further highlights our healthy underlying operating metric. David will now discuss our financials, and I will then make some additional comments.

Thank you, Selwyn. Net sales for the fiscal 2011 first quarter ended June 30, 2010 were $36.2 million, compared with $32.7 million for the same period last year. An increase of $3.5 million or 10.8%. This increase was due to increase of sales to our existing customers, and to some new customers. The first quarter was also negatively impacted by higher levels of stock adjustment accruals, resulting in the reduction of operating income of approximately $500,000. Gross profit for the fiscal 2011 first quarter was $11.5 million or 31.9% gross margin, compared with $7.2 million or 21.9% gross margin for the same period a year ago. The increase in the gross margin was primarily due to lower per unit manufacturing costs. General and administrative expenses increased $1.5 million or 60.2% to $4 million for the first quarter from $2.5 million a year ago. This increase in general and administrative expenses during the first quarter was primarily due to a loss of $471,000 recorded due to the changes in the fair value of forward foreign exchange currency contracts -- compared with a gain of $964,000 for the same period last year.

These swings are non-cash, and are merely a reflection on a consistent currency hedging program. Sales and marketing expenses increased $468,000 to $1.7 million for the first quarter, compared with $1.3 million for the same quarter of fiscal 2010. Due primarily to an increase in commissions due to higher net sales, and the addition of employees as a result of our reliance asset acquisition in August 2009. Research and development expenses increased $32,000 or 9.6% to $366,000 for the first quarter, from $334,000 in the same quarter of fiscal 2010. Due primarily to compensation as a result of increased headcount and the cost of supplies. Operating income for the fiscal 2011 first quarter was $5.4 million, compared with $3.1 million a year ago. EBITDA was approximately $7.2 million, adjusted for various non-cash items. These items include FASB 123R stock compensation expense of $21,000, standard inventory re-evaluation write-downs of $400,000 due to lower remanufacturing costs, and a loss of $471,000 recorded due to the changes in the fair value of forward foreign currency exchange contracts. In addition, depreciation and amortization for the quarter was approximately $854,000.

Net of interest income. Interest expense was $1.6 million for the first quarter compared with $1 million for the prior quarter, primarily attributable to a higher balance of receivables been discounted under receivable discount programs. Our earnings were positively impacted by lower tax rates for the first quarter. As a result of the items noted above, the Company reported a net income for its fiscal 2011 first quarter of $2.5 million or $0.21 per share. Compared with $1.2 million or $0.10 per share for the comparable period a year earlier. So, for the trailing 12 months ended June 30 2010, earnings per share was $0.90.

At June 30 2010, our balance sheet had $1.8 million in cash, $167 million in total assets, and $9 million in term loan borrowings, and $1.8 million in revolver loan borrowings. Leaving $30 million available after reflecting outstanding letters of credit. During the first quarter, the Company generated approximately $67,000 in net cash flows from operating activities. Net income of $2.5 million for the first quarter, along with a decrease in accounts receivable of $2.2 million, and other operating activities contributed to generating positive cash flows. Accounts payable and accrued liabilities decreased $5.5 million, using cash from operating activities. 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, and our company is well-positioned to take advantage of the industry strengths I outlined earlier. We continue to focus on opportunities to grow our business in both the do-it-yourself and do-it-for-me markets. In the professional installer market, we continue to make inroads by leveraging our quality-billed 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 expand our business further. As noted in my earlier comments, our infrastructure is in place to grow.

I can assure you that management is committed to enhancing shareholder value, and we believe our results for the past fiscal year and the 2011 fiscal first quarter highlight our progress. In summary, we continue to believe that long-term market statistics for industry are favorable. As I've stated many times, oil prices and driving patterns are important components to our business, and an aging vehicle population is particularly critical. As noted earlier, the average age of the car population is increasing, resulting in higher replacement rates for alternators and starters. We are gaining new customers, we're constantly pursuing production efficiencies and purchasing efficiencies, and we are striving to leverage our available capacity. In short, we are excited about our future. We have expectations for solid revenue growth, and continued profitability for fiscal 2011. And I appreciate your interest in Motorcar Parts of America, and I'm happy to answer any questions that you may have.

Thank you. (Operator Instructions)

Our first question comes from Tony Cristello with BB&T Capital Markets.

Good morning gentlemen, this is actually Alan [Hofmanolis] in for Tony.

Alan, how are you?

I'm doing well, thanks. Just a few questions for you. First, can you give us a sense as to the pace of business by month during the quarter? As well as of the trends that you've seen in July and August, given what's been a very hot summer?

Yes, I think we started out again a little slow in this first quarter, and we saw the momentum definitely pick up. And it's strong. I think we see good volume through all of our customers, and I think the statistics of the aging vehicles are playing -- are now finally coming into being. And the hot weather I think is helping. Certainly it is on the East Coast. Not as much on the West Coast, we'd like to see a little more hot weather out here. But overall, I would say the pace of sales has picked up and is very strong for the register right now.

Okay, and I believe you also alluded in your prepared remarks to some potential new business wins? Can you just update us briefly with the anticipated magnitude and timing of these incremental sales, and whether or not any fell into Q1?

We have nominal amount of new business that fell into Q1. We have noted that we had new customers that were coming on board. They are coming on board, we continue to ramp them up. As usual in this business, it's a lot slower than you anticipate, but the magnitude of new business that's -- we're expecting, at least from the prior new business calls, like we've said, I think we've quantify that as an excess of $10 million in new business. And we continue to win new business on a daily basis in our quality-billed traditional line. Most of the traditional accounts that we pick up are smaller, and we expect to ramp them up as time goes on. I think the good news about this quarter is that this is from our base business. These are really - this is not new business generated in gains that we're looking at.

Okay. And then lastly, if I could, just one more question. Bigger picture, it seems to us that excess industry capacity remains somewhat of a governored probability. So, can you maybe just give us your opinion on the ultimate resolution of this matter, and whether or not your opinion has changed as a result of the economic downturn?

My opinion hasn't changed. I think the demand, obviously, will continue to grow as we have an economic downturn. I think people are shying away from taking their cars to the dealer for repairs. And so, the independent professional installer, the do-it-yourself market are all benefiting tremendously from that. I think we were hurt a little bit by the Cash for Clunkers. If you look at it in hindsight, we had some cars come off the road on Cash for Clunkers that would have been in prime repair stage. But overall, again, I think the fundamental industry continues to be strong. There is some excess capacity in the industry. We are now at a point with our manufacturing where we've reached a -- even though we have tremendous excess capacity still available, we're able to operate at these levels in a very profitable -- with very profitable margins. So any incremental revenue that we pick up would only be value added. Our competitors, I think, are probably seeing the same thing. I couldn't tell you that, though, with any degree of certainty. But hopefully there'll be a rational marketplace and the increased demand will help everybody.

Okay. Very good. Well, I certainly appreciate it. Thank you.

Our next question comes from Rick Hoss with ROTH Capital Partners.

Good morning, gentlemen.

Hi, Rick.

Selwyn, can you give a little insight into the opportunity for M&A here in the next year?

Yes. I still think that opportunity is vibrant. I think that the economic situation, with increased demand for parts across the industry, may make some sellers who are more troubled a little less interested in selling. But we remain very optimistic about the opportunities, and we think with our balance sheet, and strong positive cash flow, and very low debt levels, and our capacity opportunities, our management infrastructure, we have I think probably one of the most advanced IT infrastructures in the industry. Again, I think that we're very well poised to be able to absorb acquisitions, and I would say in my opinion, I think we're probably better poised than anybody in the industry for that. So, we're optimistic. We continue to look. We are very disciplined in the prices that we would be willing to pay, and so we feel patience is a virtue, but we think there's going to be opportunity.

When you look at your revenue growth in future periods, would you say that 75% would come from acquisitions, or 50%, or how would you split that out?

Well, again, we've not given guidance in terms of what'll come from acquisitions. What'll come from acquisitions is an unknown at this point in time. We think we're looking at nice double-digit growth in just base business and our organic growth business. And anything from acquisition will be a bonus to that. There's certainly many little acquisitions that have some key inroads into some good customers, and then there are the larger acquisitions, and that could change everything. So, at this point I can't -- I don't want to speculate on what the percentage could be.

Okay. And then as far as gross margin goes, what do we need to see topline, in, I guess you're estimate, to see a say mid-30s type of gross margin?

Well, right now I think our gross margins are good right now, very good. If we see big increases in capacity absorption, we could see additional gross margin coming to the bottom line. But I think, again, for our ongoing 10%, 12% growth, I think the gross margins you're seeing are good and sustainable.

Okay, so maybe just a small sequential increase, but say a 35% and above would be -- maybe as you near $200 million topline?

Yes, I think we're a little bit away from 35% and above, but we're comfortable at this 31%, 32%. It gets to the point where you need to be cognizant that the marketplace is going to absorb some of that margin. So, we're comfortable at this range right now, and think it's a fair gross margin, and that allows us to support our customers aggressively, as well as allowing us to be nice and profitable.

Okay, and then last question. What can we use for a tax rate from [all in] purposes for the remainder of the year? 38 percent okay thanks guys.

I think 38%? 38%.

Okay, perfect. Thanks guys.

Thank you. Thank you, Rick.

Our next question comes from the line of [Mitchell Sax] with [Grand Slam].

Hey guys. Congratulations on the quarter. Most of my questions have been answered. I have a couple for the add-on questions. When it comes to acquisitions, would you look outside of your particular category? Would you look at other aftermarket automotive parts, or are you stuck in terms of looking in the category you're in right now?

Well, the whole - the aftermarket -- the automotive aftermarket model in North America is an $86 billion market. Right now, alternators and starters relate to $1.2 billion of that, or $1.4 billion of it. So, we would be crazy not to look at that. It would have to be rational for our existing operating model, but certainly the whole aftermarket is something we would look at. Our focus is primarily on rotating electrical, but if the right opportunity arose, we would look outside the category, yes.

Okay, And then with the specificity given to write-downs, how do I think about that going forward? With the new business that you're growing into and bringing on, do we expect to continue to see write-downs for the foreseeable future, or is it sometime going to end in the near future?

Well, -- I mean I think our productivity in our factories is fantastic. And so every time we come in with better costs, I -- it continues to amaze me a little bit. The big opportunity is overhead absorption. If we land significant new business, our overhead absorption per unit will go down. And that will mean -- that may drive writing down some of our existing inventory on hand. Again, it's -- I would look at it all as good news because once you write down that inventory, -- all it does is enhances the margins going forward. Which ties into Rick Hoss's question from ROTH, is that will result in greater margins going forward. So, on our base operating level, I think we're not going to see significant inventory write-downs. I think this quarter may be indicative of what we're going to see, Maybe a little less than that, but if we have big growth, that could change.

And the final question has to do with stock repurchases. With your stock trading extremely low multiples EBITDA somewhere in the three range, how close are you looking at stock buy-backs, and just talk us through a little bit?

Yes, I guess we did buy a little bit of stock in the first quarter. A disappointingly low number for us, but we are committed to continuing on our stock repurchase program. The stock is -- as multiples would say, I would think everyone would agree, extremely cheap, and we think it is too, based on our outlook. And so we hope that we'll be able to pick up more stock and more efficiently this quarter.

Okay thank you very much. I appreciate it.

Thank you.

(Operator Instructions)

And our next question comes from the line of Jason Stankowski with Castle Peak.

Hi guys. Nice quarter. Just to the point on the stock buy-back. I was curious if you discussed at all doing a tender offer, or something that can eliminate the people that seemingly don't want to be involved with the company, and maybe make it more efficient for you to buy back the shares. And I guess to that, I'm wondering if you're seeing acquisitions in the marketplace that trade for people that are willing to let their companies go for three times EBITDA. Any comments or thoughts on that?

Well, let me break it into two, okay? I think those are two questions. On the tender offer that's -- we haven't really focused on a tender offer at this point in time. That's maybe something we should look. I'm not sure -- there are very defined set of rules about stock buy-back, so we will look at that. I think that's an interesting suggestion. On the second piece, are people are willing to sell the company at below three? The only -- we look at what acquisitions could do to us on an integrated basis, and many times even though superficial multiples may seem at six or seven or even eight times EBITDA, when we integrate them, they come in at well below three in terms of multiples to us. So, that's a major consideration when we look at acquisitions.

I think the marketplace is starting to demand higher multiples in the acquisition marketplace. I think deals have gone at bigger multiples, and I think that just bodes well for us as an industry, showing that this is the time for the aftermarket. If you look at our main customers, the retailers, and you look at the operating metrics, the volume that they do in the parts business. Not only the retailers, but across the board, even Genuine Parts of NAPA. All their results are pretty impressive, and so what's happening is that I believe that acquisition prices will be bid up. And the key to making these acquisitions versus buying back our own stock is what it does on a synergetic basis for us.

Okay. Thanks.

Thanks.

And I'm showing no further questions at this time. Id' like to turn it over to our speakers for any closing comments.

Okay. Well, thank you for joining us for the call. We look forward to speaking with you on a continuing basis, and we look forward to a nice positive year, and we appreciate everybody's time. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.