Motorcar Parts of America Inc (MPAA) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Motorcar Parts of America fiscal 2011 second quarter call. (Operator Instructions) I would now like to introduce your host for today's conference, Gary Maier, Investor Relations.

Thank you very much. Thanks everyone for joining us for the call today. 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 the Company. Actual results may differ from those projected in these 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 the risks and uncertainties, I refer you to the various filings with the securities and exchange commission. With that said, I would like to begin the call and turn it over to Selwyn.

Thanks, Gary. I appreciate everybody joining us today for our fiscal 2011 second quarter conference call. We continue to experience solid growth and profitability for the quarter. As I have noted in my previous calls and investment presentations, 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 in the automotive after market. This coupled with financial strength and manufacturing excellence of our organization uniquely positions Motorcar Parts for growth.

As we have highlighted on many occasions the average age of vehicles has increased. Today the average age of a vehicle on the road is over 10 years, with a number of cars in the four to seven, eight to 11, and more than 12 year categories continuing to grow. People are simply holding on that their vehicle longer and making the necessary repairs. This means that there alternators and starters will need to be replaced. As a result, Motorcar Parts is the beneficiary both in terms of the do-it-yourself market and the do-it-for-me market.

The financial results of the after market continue to be excellent. As highlighted by recent earnings reports from our customers and related businesses. With Motorcar parts being an important supplier of a product segment that is in the top grossing sales categories, we clearly have the wind at our back in both the retail and professional installer market. As I noted during our first quarter call, several -- severe hot weather throughout much of the country in the summer months contributed to strong demand for alternators and starters. Cold weather in the winter months should have a similar impact of sales in the second half, depending on the severity, of course. In addition to the ongoing industry dynamics which includes the 240 million vehicles on the road with an average age of 10-plus years, we believe tail winds will continue. As vehicles on the road age, the incidence of replacement for both alternators and starters goes up significantly. There generally is a slight weakness in sales for our third quarter as a result of the number of factors including the number of holidays which affects the consumers time to do repairs as well as financial resources during the holiday season and the inclement weather. However, we are off to a solid start to the quarter. In short, our base business is strong, and we continue to capitalize on our competitive strengths, which in summary include our low-cost production model, our reputation for quality, our ability to produce and ship product efficiently with full rates, unsurpassed in the industry, our available capacity to increase production with little incremental costs, our ability to leverage overall production and overhead, an international footprint that allows us to take advantage of international opportunities and low-cost production, strong relationships with our existing customers, and the ability to attract new business. And last but not least, a strong financial position.

As you probably know, we recently announced a $1.89 million strategic investment in Fenwick Automotive structured as a secured loan with an option to acquire substantial ownership of Fenwick Automotive. The relationship is proceeding as planned. From a conceptual standpoint, we're extremely excited about the potential. For those of you who don't know, Fenwick is a privately held, highly regarded Canadian automotive parts supplier. Its products are focused on the under-car. These parts are important for existing and evolving automotive technology. They are all top replacement parts of the vehicle. They include brake systems, which includes both master cylinders and brake calipers. They include wheel bearings, steering including rack and pinion and power steering as well as drive shafts and clutch systems. Equally important to have a strong management team who have done an excellent job of developing new products. Together, I believe that with the strong management team at MPA, we will be able to have an extremely effective consolidated team. Their senior management team is also committed to quality parts, customer service and innovation. We believe that these attributes will further enhance our ability to grow and provide unequaled service to our customers. It is useful to note that both of our organizations serve many of the same customers, and there are numerous logistical synergies on which we can capitalize. This will be beneficial to us as well as our customers as time goes forward. As noted, when we announced the strategic investment, if we go forward with the intended acquisition we would expect to at least double our sales and add to our earnings growth over time in a meaningful way. Our mutual customers have been very encouraging and we look forward to be reporting progress in the near future.

Getting back to the second quarter discussions, our results demonstrate that our strategic initiatives are working. We have greatly enhanced our manufacturing efficiencies and implemented related initiatives over the past few years to support long-term growth. All of this has clearly benefited our results, and we hope to be able to implement these efficiency into our future acquisitions. As I said before, we're committed to rational pricing and continuously evaluating the company's cost structure and our entire operating metric. We continue to focus on annual and long-term growth and profitability without getting sidetracked on short term distractions and issues that we cannot control. David will now discuss our financials and I will then make some additional comments followed by a Q & A session.

Thank you, Selwyn. Net sales for the fiscal 2011 second quarter and the September 30, 2010 were $40.98 million compared with $39.4 million for the same period last year. An increase of $1.5 million or 3.9%. Net sales for the second quarter were negatively impacted by $876,000 core incentive. Gross profit for the fiscal 2011 second quarter was $12.7 million, or 30.9% gross margin compared with $10.8 million, or 27.4% gross margin the same period of year ago. The increase in the gross margin was primarily due to lower per unit manufacturing costs. General and administrative expenses decreased $82,000, or 2.2%, to $3.6 million for the second quarter from $3.7 million a year ago. Sales and marketing expenses decreased $334,000 to $1.2 million for the second quarter, compared with $1.5 million for the same quarter of fiscal 2010. Research and development expenses increased $62,000, or 18.6%, to $396,000 for the second quarter, from $334,000 in the same quarter of fiscal 2010. Operating income for the fiscal 2011 second quarter was $7.5 million, compared with $5.3 million a year-ago, or a 42% increase.

EBITDA was approximately $8.2 million, adjusted for various non-cash items. These items include FAS123R stock compensation expense of $8,000 and a gain of $139,000 recorded due to the changes in the fair value of for -- foreign exchange currency exchange contracts, in addition depreciation and amortization for the quarter, with approximately $846,000. Net of interest income interest expense was $1.7 million for the second quarter, compared with $1 million for the prior quarter, primarily attributable to a higher balance of receivables being discounted under receivable discount programs. The Company reported net income for its fiscal 2011 second quarter of $3.5 million, or $0.29 per share compared with $3.4 million or $0.28 per share for the comparable period a year earlier. Results for the prior year second quarter included a one-time, $1.3 million, or $0.07 per diluted share gain related to the Company's acquisition of certain assets of Reliance Automotive in August 2009. Adjusted for this $0.07 earnings per share for this prior year second quarter, was $0.21, compared with a current quarter of $0.29 reflecting an increase of over 30%.

At September 30, 2010, our balance sheet had $5.8 million in cash, $172.6 million in total assets and $8.5 million in term loan borrowings related to our acquisitions and a zero balance in revolver loan and borrowing, leaving $31.4 million available after reflecting outstanding letters of credit. During the second quarter, cash provided by operations was $9 million, which includes net income of $3.5 million, decrease accounts receivable of $3.3 million, increase in accounts payable and accrued liabilities of $5.1 million, and other changes in working capital and operations, which increased cash, which were offset by an increase in inventory of $3.7 million. The $9 million cash provided by operations for the second quarter, was used to pay down the $1.8 million revolver loan balance at June 30, 2010, fund the $1.9 million loan to Franco and contribute to a $5.8 million cash balance at September 30, 2010. I will now turn the call back to Selwyn who will make a few additional comments before we turn the call over for questions.

Thanks, David. Excuse me. As you can see our financial position is strong. The second half of fiscal 2011 represents tremendous opportunity for Motorcar Parts with a potential new business dimension for the Company and further growth within both the do-it-yourself and do-it-for-me markets. Our quality built brand name serving the professional installer segment continues to expand and we remain focused on further leveraging key production advantages to expand our business further. Management is committed to enhancing shareholder value and we believe our results and strategic investments confirm this statement. In summary, we continue to believe that long-term markets statistics for our industry are favorable. We are excited about our future, with expectations for solid growth as we move forward. At this point in time, I would like to turn over for questions and answers.

Thank you. (Operator Instructions) Our first question comes from Rick Hoss with ROTH Capital.

Hi, good morning, gentlemen.

Good morning.

Hello, Rick.

Selwyn, in revenue are we seeing full contribution from all the acquisitions over say the last 18 months?

Let me answer that too. I think the contributions have been very positive just going forward. Are we seeing a full 12 months, David, in all the acquisitions? It is, yes.

Acquisitions is less than one year.

Yes, so the last acquisition we made was Reliance and that's a full year. That is correct.

Okay so if we think about organic growth, is it -- I mean, are we -- we're pretty low single digits, is that what you're seeing?

Yes, but I think we have, again, a nice backlog of new business that we're bringing on. I think that we should see a higher -- higher rates of same customer growth as well as new business growth. Still single digits but high single digits. So our momentum, I think, is strong relative to new customers. They have been slow to change over and most of that slowness is based on some other initiatives going on. One of the larger customers that we are changing over, we're about 25% changed over from one of the pretty significant new customers that we already have. Should have been 100% changed over but there have been some delays based on some infrastructure issues at this customer. But it is -- I would say the outlook, Rick, is strong. We had a very exceptionally strong second quarter last year. So I can tell you that the third quarter is off to a solid start. It is a tougher quarter generally but comparatively speaking should be over and above the last quarter of last year. And our fourth quarter looks strong right now. We have a number of orders that are already backlogged into the fourth quarter. So, overall, I would say our momentum continues to be strong. We're guardedly optimistic about the outlook. Have the opportunity to listen to many of our customers public presentations and I think they all seem guardedly optimistic about revenue through the registers and we are seeing that.

Okay.

I think some of the impact in terms of why perhaps sales could even have been more robust is that in two of our larger customers, there has been a little bit of rationalizing of some inventory. And so our understanding is that is coming close to an end now from my meetings with them at the recent AAPEX show. So we will see where that goes, but regardless of that things are still very optimistic right now.

Okay. Then the sales and marketing was quite a bit lower sequentially and really, if you look at, it's similar to the first quarter of fiscal '10 -- is there a reason for that? Should we expect to it bump back up to kind of the $1.5 million, $1.6 million range? Or --

So in the 10-Q we released this morning, we explained that one of the reasons for the lower sales and marketing was due to a commission adjustment. So going forward, we would expect the sales and marketing expenses to be back up to the previous levels.

Okay.

I think also one thing is that we really focused on AAPEX which is our main trade show. We do that major initiative every two years. And so in our last fiscal year we had very nominal expenses at AAPEX. We just have come back from what I would view as an exceptionally strong show, but we -- our sales and marketing expenses will trend up a little bit for the AAPEX show on a comparative basis. But other than that, the outlook is -- again, continues to be very positive.

And last question from me. On the growth margin line, I had expected some contributions from the scrap sales would have been -- would have been fairly positive. David, do you know off the top of your head on how much that helps? If at all?

Well, I think, Rick, the other thing -- before I let David answer in a second -- that what's important to know is that scrap sales are offset by high inventory costs generally. So if copper and aluminum and steel go up, I mean, generally your raw materials, so it is a built-in hedge. Sometimes it can be helpful based on, you know, being ahead of the curve. I'm not sure how you -- David --

I agree with you. The scrap is an offset to our materials cost. The one item that I may comment regarding sales was an impact of $876,000 core incentive. That had an impact on the margin.

All right. Adjusted for that, what would the margin have been?

Approximately 32%.

Okay. Okay, that makes sense. Okay, thanks gentlemen.

Our next question comes from Jimmy Baker with B. Riley and Company.

Hello, good morning.

Good morning, Jimmy.

You know, Selwyn, I know you keep your finger on the pulse of your customers and you guys had a really strong showing at AAPEX. I was just hoping that you could maybe share some of the feedback you might have received from your customers there? I don't know if you can comment on any new business wins and just in general how you felt about the show compared to years past.

Yes, I will say that first and foremost, the meetings with our existing customers were positive in a number of ways. I think all of them acknowledged and reaffirmed the positive trends through the registers and sales of our products. And a couple of them acknowledged some rationalization of build up of inventory, a little bit, in this last quarter. So theoretically we should see that normalize, certainly in this quarter, and we should see -- I think we should see some of our existing customer purchases increase from us based on what I'm hearing from them. So from that perspective it was outstanding. The second piece that was very, very good is -- certainly, our fill rates and our quality levels and warranty levels have been outstanding with our customers. We received numerous compliments on that. And then last but not least -- this is probably not last but another major one that pops into my mind is that the customers were extremely excited about the strategic opportunity with Fenwick. And that came from both our customers and the Fenwick customers and many mutual customers. So I think the momentum and the -- just the spurt of our relationship with Fenwick and the way the customers view the opportunities I feel is exceptionally strong. Now we have got a lot of work to do to get to where we need to get to, but -- but the feedback was extremely supportive for us at the show. And so I couldn't be happier with how the show went. I must say I couldn't -- it was a very, very well-attended show. It was fantastic to see that the industry in general was very reinvigorated from the prior years. I can tell you the last year and the year before were very slow. It was well attended. It was -- people were embracing what I would say are good -- good success stories in the industry and some good tail wind. So overall, again, I would encourage everybody to listen to -- directly to the public comments of our customers. It's certainly not for me to say what they think. And that I would have to say that I felt very positive.

And with regard to Fenwick, could you maybe share some -- any additional color there or give us an update? I'm just wondering if you've encountered any unexpected speed bumps or hurdles or would you say your expectations are relatively unchanged from what you've shared in prior presentations?

Yes, I think they are unchanged. And I -- I actually would say they are not unchanged. I would say that as I get further into it, the momentum from the customer perspective is even better than I anticipated. I think, I just -- and I think the synergy opportunity is very strong so I feel very good about the Fenwick situation. Even more positive than I have perhaps felt as we have gone through it. I do see a lot of work ahead of us to get it completed -- if we can get the acquisition completed and also to integrate. I think the post integration Company is going to be an extraordinarily strong Company. I think the management team combination is going to be exceptional. I think the sales offering is going to be exceptional. The value proposition is going to be exceptional. The quality of our products is exceptional. The mix of product between new and remanufactured is exceptional. The ability for add -on acquisitions into each one of these categories I think will become exceptional. And I think the credibility, by the way, that we seem to be getting post announcement of Fenco has gone up dramatically. So -- not that it was bad before but you -- I sense a lot more visibility within the industry. And so again, cautious but very optimistic about where this could end up.

Can you comment at all about the financial performance there at Fenwick? Maybe what their revenue run-rate looks like or some preliminary indications for where the net income might fall as we think about accretion possibilities for a combined business?

Yes, I think that's a little early for me to get into. I would just say that in general, the sales -- demand for their product is vibrant. They are private and we don't own one share in that company yet so I think it is a little premature for me to comment on their results. But all I would say is their momentum is exceptional. We expect them to complete a refinancing of their debt any day now and hopefully they'll make an announcement of that and -- but overall, again, I just think the momentum behind them is strong. I think the market place for their products is exceptional. And I think their willingness to work with us has been very positive. With us and our management team. I don't know if that answers your question.

It helps. And just last question for me. Could you give us a sense of, kind of the monthly trend in business during the quarter? And if you were able to kind of continue this momentum into October?

Yes. Again, October is complete so we know the numbers. We had a strong -- a strong October. It is hard to track the -- there is some seasonality in the third quarter. There are fewer days, shopping days. There is the distraction of Christmas and Thanksgiving and the holidays and depending on how severe winter is, there are many times where the weather is so severe that people can't work on their cars or can't get to the stores to buy product. But having said all of that, we expect a nice strong quarter. I would not put this quarter run-rate on the next quarter, although that's possible. It's way too early for us to know, quite frankly, so I can't give you that insight. But in general the third quarter has been a little more tricky because of the variables in the quarter. So I don't think there is any change that I could identify in terms of demand for our product through the registers right now and I think I'm hearing that sort of across the industry and from the customers. So, hopefully, we will have the same run-rate, but I wouldn't -- I wouldn't be building that into my numbers. I would be looking at some of the seasonality historically.

Okay, thank you.

Our next question comes from Tony Cristello with BB&T Capital Market.

Thank you. Good afternoon, gentlemen.

Hello, Tony.

I guess the first question has to do with the comment you made about the rationalization of inventory by a couple of your customers. Can you, maybe, comment about how long that has been going on for? Is it finished? And in an environment where sales have been so robust, why would you see rationalization today?

That's a very good -- two very good questions. Let me just talk about cycles first, and then I will talk about why. I think first of all, from what I am hearing from our -- the two customers that we had this conversation with, is that it has been going on probably for the last 90 days. I think they are -- both of them have identified that they are towards the end of it. I think in some cases acquisitions may have resulted in some excess inventory that they're finally burning through and reallocation of inventory between warehouses. And in some cases perhaps some over exuberance and a nice lift in sales. So I think that what's we're seeing. I don't see any fundamental challenges in terms of the inventory they're carrying. I think they're both are very independent situational events and both of them -- in both of those customers' cases, the POS sales to the register definitely have a lift in them. So we're excited about that. We were disappointed not to see the same lift in sales to them this quarter that we could have seen had they not had that inventory issue but that is just part of the game as you know.

When you look at the sort of seasonality to business and you talked about extrapolating one quarter to the next. But if I look at sort of the second half of this year versus the second half of last year -- the fourth quarter from a sales standpoint was up significantly -- a relatively easy comparison but is there a reason why we shouldn't be able to see positive sales for the second half in total for both of those quarters?

We expect it to be positive in both quarters and in total for sure. Our fourth quarter -- well, for sure -- I shouldn't use the words "for sure" but we expect, okay? Again, I'm optimistic. There is nothing to indicate that there is a general slowdown at all. It just is that the third quarter, again, gets tricky with weather and days of shopping days. Our fourth quarter is generally very strong because the customers all getting ready with updates as they come into the summer months. And we have already seen that so -- the outlook for us on the fourth quarter continues to be positive. And I just would be cautionary about the third but it is off to a good start. So I don't mean to be putting a negative slant on any of this. I just want to put a veil of cautiousness over everything. But we're again, very optimistic and we're off to a strong start. We have no indication that this is going to be a weak quarter, at all. To the contrary -- actually to the contrary.

We -- one of the things I wanted to dig a little bit deeper on, too, is your manufacturing, the efficiencies and what -- what today is your -- is your time to market? And I guess what I'm trying to get at is a prior question talking about the rationalization of inventory. Are you more involved today in the supply chain management, one. And then I guess the second part of that is, if you have got customers placing orders today -- I mean, is it a 30-day window, a 60-day window? I mean, how far in advance are they managing their stores, their SKUs and how are you sort of assisting in that process?

All right. Well, first of all, our supply chain -- I will tell that you our inventory levels of the fast movers has never been stronger. We have the strongest inventory base that I have ever seen since I have been -- since 1994, I have been involved with the Company. If you look at the aging of our inventory, a substantial majority of our inventory is in what we would call our eight category of fast movers. And that enables us to -- we're averaging fill rates of 98%, 99%, 100% for all of our major customers. And that has really enabled us. That's a very significant piece. We are far more involved in the supply chain than ever before. We have direct access to movement at the register. And so we have a fairly enhanced visibility in terms of where things have gone for the quarter and how the register sales will go and what the product mix that has been sold. And I would have to say that our whole vendor-managed inventory department has never been stronger at MPA. I mean, we have tremendous visibility with category. We're doing most of the major customers' category reviews and in many cases we're actually place the orders. So, as far as visibility and supply chain, it is excellent, and, again, that validates what I was saying a little earlier in that our customers are doing great. And if our customers are doing great, we will continue to do well. And there is no -- I have not seen a softening of any sort to be worried about with any of our large customers. In terms of placing orders, we have be the ability to have very short lead times. We turn around product very fast. We do have a high value of inventory on our shelf. It's very well positioned inventory. And so we can move exceptionally fast to customers orders. Customers are much less worried about future planning with us than they are in the past and that enables them to be more efficient with their inventory. And perhaps that ties into your earlier question that -- that they don't need to carry as much inventory because they know the turn-around times and fill rates are exceptional. But we can turn around product in many cases on special order. We turn around product within 24 hours of ordering -- of any part number in the industry. So in terms of large orders, it depends on the sizes and generally what lead times we have in effect, but we're moving very fast. And I think, again, I would be shocked to find that we're not in the top -- very top echelon of being able to turn around orders -- of anybody in the industry. I'm not privy to all those turn-around times but we're excellent at that. And I compliment our management team on that. They do a great job.

Okay, and one last question. There is a lot of thought on Fenwick and what is going on there. But I guess the other question I had was, if in the interim, let's say until this transaction either does close or does not, are you thinking, are you -- about stepping away, or not being aggressive in M&A activity until we see what happens here?

No. We are continuing to be full-court pressure on M&A activity. We are fortunate in that the Fenwick opportunity is very -- is very little capital involved in that for us. And we remain almost with no leverage even post transaction. And if we get to a post transaction, which I am confident we will, and no, we want -- we think there is -- in our base business of alternators and starters, we have excess capacity. And we think that we need to fill that capacity. We continue to be aggressive in making sales and making acquisitions. In the Fenwick categories, at this point in time, we would also look at acquisitions but they would have to be -- we don't want to take our eye off the ball on integrating Fenwick. That is our biggest challenge. And we want to make sure that we -- that we're cautious in terms of how we allocate our resources. But, having said that, there are long lead times in terms of acquisitions and we're -- we continue to feel like there is a great market place for consolidation.

Great. Very helpful. Thanks, guys.

Our next question comes from the line of John Lawrence from Morgan Keegan.

Good morning, guys. This is Matt Beasley sitting in for John Lawrence.

Okay. Hi, Matt.

Hi. Just had a question. Now, in light of the strong gains year-over-year on the gross margin line, what are you guys doing and where do you see that going forward -- opportunities for expansion on that line?

Well, again, I think from a base operating model, that we expect the margins to be fairly constant. If we're able to ramp up capacity, we think that there's definite opportunity in those margins. But at this point in time, I think that the 31%, 32% margins are pretty normalized and I would assume for any modeling that's what we would use internally and so going forward, that's what I would estimate. Now, if we had huge wins and you know big market share gains, there is some opportunity on the upside on the gross margin side.

Okay. All right, thanks for that. I'll turn it back.

(Operator Instructions) I'm showing no further questions in the queue. I would like to turn it over to our speakers for any closing remarks.

Yes, I want to thank everybody for their time and giving us this ability to communicate our story. And I thank you for following Motorcar Parts and I look forward to, hopefully, some exciting, continuing strong business trends in the future. Thank you very much.

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.