Motorcar Parts of America Inc (MPAA) 2011 Q3 法說會逐字稿

Godd day, ladies and gentlemen and welcome to the Motorcar Parts of America fiscal 2011 third-quarter results. At this time, all participants are in 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 call is being recorded.

I would now like to introduce your host for today's conference, Gary Maier with Maier & Co.

Thank you, Javon, and thank you, everyone, for joining us today for Motorcar Parts of America's fiscal 2011 third-quarter conference call. 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 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 these ongoing risks and uncertainties of the Company's business, I refer you to the Company's various filings with the Securities and Exchange Commission. With that said, I would now like to begin the call and turn the call over to Selwyn Joffe.

Thanks, Gary. I appreciate everybody joining us today for our fiscal 2011 third-quarter conference call. As highlighted in today's earnings release, we continued to post solid growth and profitability for the quarter with net income climbing 75% on a 13.2% increase in sales.

Our base business which is rotating electrical, alternators and starters continues to benefit from strong market dynamics such as an aging vehicle population and increased miles driven. Recent severe cold weather throughout the country bodes well for part failures as well.

Severe weather obviously impacts immediate repairs and once the weather improves, sales can be expected to pick up which should be a nice catalyst for growth in the near term. Our financial strength, manufacturing excellence and value-added customer service remain the cornerstone of our success. In fact, we were recently recognized by Frost & Sullivan for our commitment to excellence in this regard.

While all organizations can say they are committed to their customers, this best practices award recognizes our state-of-the-art core sorting and management system, the Company's engineering and durability testing and our commitment to customer training, sales assistants and promotional support.

I mention this award not to pat ourselves on the back, but to highlight our competitive edge and the systems, procedures and qualities that will support continued growth among our existing and new customers in our base business and to support our anticipated business expansion through the acquisition of Fenwick Automotive.

As I have mentioned earlier, the average age of vehicles has increased. Today the average age of a vehicle on the road is more than 10 years with a number of cars in the four to seven and eight to 11 year and more than 12 year categories continuing to grow. People are simply holding onto their vehicles longer and making the necessary repairs.

With an estimated 240 million vehicles on the road today, the alternator and starter product segment is clearly important to our customers both in terms of the do-it-yourself market as well as the do-it-for-me market. New car sales have begun to increase and we believe that this is a positive for our business as well.

After all, we need new cars for them to get old. We still expect that new cars will not exceed scrap rates and thus the overall car population should continue to grow and to age. We expect these market dynamics will also support the growth of additional product categories realized through our anticipated Fenwick acquisition.

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 fill rates that are unsurpassed in the industry, available capacity to increase production with very little incremental cost, our ability to leverage our overall production and overhead absorption, a wonderful international footprint that allows us to take advantage of international opportunities, the ability to attract new business and maintain long-term customer relationships, the support and encouragement of our leading customers with regard to the acquisition of Fenwick, a strong financial position to support our growth expectations including Fenwick moving forward.

For those of you don't know, Fenwick is a privately held highly regarded Canadian automotive parts supplier. Its products are focused on the undercar. Card.

They are comprised of a number of top replacement parts on the vehicle. They include brake systems comprising of both master cylinders and brake calipers; steering which includes rack and pinion, power steering, wheel bearings and drive shafts as well as clutch systems.

Equally important, Fenwick has a strong management team which has done an excellent job of developing new products. In particular, we are excited to add new depth to our excellent middle management team with personnel who have great manufacturing expertise.

And I personally think the combination is going to be formidable. As announced last week, we initiated a strategic realignment of three of our senior sales executives in part to support the anticipated Fenwick transaction, but also to support future growth opportunities in our base business from existing and new customers.

As I mentioned during last quarter's call, both Motorcar Parts and Fenwick serve many of the same customers and there are numerous synergies on which we can capitalize which will be beneficial to us as well as our customers. We are 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 and we expect that this discipline will support the Fenwick acquisition and our high expectations for growth and profitability in the future. David will now discuss our financials and then I will take make some additional comments and we will open up the call for some questions and answers.

Thank you, Selwyn. Net sales for the fiscal 2011 third quarter ended December 31, 2010 were $41.3 million compared with $36.5 million for the same period last year, an increase of $4.8 million or 13.2%. Gross profit for the fiscal 2011 third quarter was $13.2 million or 31.9% gross margin compared with $10.9 million or 29.8% gross margin for the same period a year ago.

General and administrative expenses increased $583,000 or 15.3% to $4.4 million for the third quarter from $3.8 million a year ago. This increase was primarily due to a reduced gain from changes in the fair value of forward foreign currency exchange contracts.

Last year we had a currency gain of $292,000 compared with a gain this year of $31,000 for the third quarter. In addition we've had increases in our professional fees.

Sales and marketing expenses increased $250,000 to $1.8 million for the third quarter compared with $1.55 million for the same quarter of fiscal 2010. This increase was primarily due to increased trade show expenses as well as increased commission expenses due to higher net sales. Generally, we rotate the level of our participation in trade shows every other year.

Research and development expenses increased $36,000 or 10.1% to $391,000 for the third quarter from $355,000 for the same quarter of fiscal 2010. Operating income for fiscal 2011 third quarter was $6.6 million compared with $5.2 million a year ago or a 27.6% increase.

EBITDA was approximately $8.2 million adjusted for various non-cash items. These items include standard inventory revaluation write-downs of $687,000 due to lower manufacturing costs.

Note that these reduced costs bode well for future profitability. FASB 123(R) stock compensation expense of $16,000 and a gain of $31,000 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 $905,000.

Net of interest income, interest expense was $1 million for the third quarter compared with $1.8 million for the prior quarter, primarily attributable to a lower balance of receivables being discounted under receivable discount programs and a lower average outstanding debt balance. The Company reported net income for its fiscal 2011 third quarter of $3.8 million or $0.30 per share compared with $2.1 million or $0.18 per share for the comparable period a year earlier, representing a net income increase of 75.3%.

At December 31, 2010 our balance sheet had $622,000 in cash, $176.8 million in total assets and $8 million in term loan borrowings related to our prior acquisitions and $300,000 balance in revolver loan borrowings, leaving $29.7 million available after reflecting outstanding letters of credit. During the third quarter, cash used in operations was $1.4 million which includes an increase of accounts receivable of $3.3 million, an increase in inventory of $4.1 million which decreased cash offset by net income of $3.8 million in non-cash expenses such as depreciation of $900,000.

During the third quarter, an additional $3 million was loaned to Fenco increasing the cumulative loan to $4.9 million as of December 31, 2010. I will now turn the call back to Selwyn who will make a few additional comments before we open the call to questions.

Okay, thanks, David. As you can see, our financial position is strong. We have increased our core inventory for new business and believe our cash flow will be enhanced as we start shipping this business.

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. We also are very excited about the future opportunities 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.

We expect to leverage our strong relationships within our channels with these excellent new undercar part categories served by Fenwick today. We are working aggressively to close the Fenwick transaction as soon as possible and believe that it will close early in fiscal 2012. Management is committed to enhancing shareholder value and we believe our results and strategic investments continue to support this statement.

While we expect that it will take approximately 18 months from the time of closing to integrate Fenwick completely, we believe the result of the integration will result in accretive earnings for MPA going forward. In summary, the long-term market statistics for our industry remain favorable, we are on track to achieve solid revenue growth and profitability for fiscal 2011.

This is in our base business. We have nice visibility on new business opportunities and in addition, our future in our new category is very encouraging and all in all, we feel confident of continuing to build strong value for our shareholders. I appreciate everybody's interest in Motorcar Parts and I'm happy to answer any questions that you may have.

(Operator Instructions) Tony Cristello, BB&T.

A couple questions. One, when you talked about the interest expense, you talked about the receivables and the supply chain program that you have got going on. Are you receiving better terms or quicker payment? I'm just trying to understand better the dynamic of what's going on from a collection standpoint and is that something sustainable going forward.

We are receiving lower rates compared to the prior year and it is a variable rate. So going forward depending on the fluctuation of the variable rate, it could change. But right now we are getting good rates.

Okay, but outside of the rates though, it seems like your end-users or your customers -- are they actually paying you quicker without going through that program? Because it seems like the number of outstanding in that program or that number is less if your interest expense related to that is less. Are they paying you faster and if so (multiple speakers)

Our receivables grew. They're not paying us any faster. I mean, we're collecting at the same days outstanding that we have in the past. It's always been good and our receivables have grown I think is why interest is down a little bit.

Okay, because it did look like you were collecting a little bit faster at the end of this quarter than you had in prior quarters.

No, in fact I think we're collecting a little bit slower. I think it's to the contrary. Our receivables have grown.

Yes.

Again, I don't think it's anything material -- any material change from historical.

Okay, and then I guess the other question I had related to that is if you look in your Q, you had on a filing basis this morning trade receivables, you had some shift go on with some of your customers. It looked like one of your customers -- as you refer to Customer A -- took on a little bit more as a percentage of mix, but then you had a Customer C that was almost down in half. And I'm just wondering is there's something that we should know in terms of buying or seasonality or is there something going on with some of your customer base right now?

No, whatever there is just coincidental. There's no change in the normal operations of our business.

It's the timing of sales. So depending on who had maybe a stronger sale in the month of December versus the quarter, it's all timing.

If the shipments are later in the month to certain customers, then it's delayed into the next month. So there's nothing going on with any of the customers. All is normal and to the best of our knowledge good.

Okay, okay. When you then look at as we start this year which I guess is still in your fourth fiscal quarter, but you had a very strong quarter last year. And I guess what we want to make sure is we don't expect things to do too well relative to the year-over-year comparison. Is there any way you could sort of frame how you would say what the sort of pent-up demand or what your pipeline looks like as we head into a plus 29% comparison?

I would tell you that just in general before we sort of talk about the quarter that the base business continues to be very strong across the board. As always, it's very difficult to predict exactly what product is shipping for which -- during a particular quarter.

We don't see any negative effect on the quarter at this point. We are watching carefully the effects of the extreme weather.

And so while that may delay some shopping trends because of people not being able to get to the stores and not making repairs in snowbound cities, we feel that that may have a little bit of effect on the fourth quarter in terms of timing, but we think that the corresponding lift is going to be significant. So whether it all hits in the fourth quarter or where we have a carryover from fourth to first, it's a little early in the quarter for us to know. I will say that we started out strong and everything appears to be normal at this point. But it's still a little early to tell.

And we are still, I guess to be clear, we're talking about year-over-year growth still even up against a plus 29% in the first quarter?

Yes, we're hoping to. We're not sure exactly. Again a lot of it will depend on some timing of some shipments, but our fundamental base business is up, yes.

Okay, well I'll let someone else ask some questions. I'll get back in the queue. Thanks guys.

Thanks, Tony.

James Fronda, Sidoti & Co.

I just had a question in regards to your facilities. I know the capacity was a little low when we talked a couple months back. Can you give me an update on the facilities and what the capacity looks like?

Well in terms of -- well, not much has changed. I mean, we're still operating around 50% capacity at these margins, we have plenty of capacity to grow.

We are optimistic of new business gains as we go down the road, and I think that is -- we're doing a great job for our customers and so we hope that our business will continue to grow. We do think the base business, organic business is growing and hopefully we can have some customer gains going forward that will help absorb more of the overhead in these facilities.

Right, okay. That's all I have. Thanks, guys.

Jimmy Baker, B. Riley & Co.

Impressive revenue build here off the seasonally strong September quarter. When we look at your business here posting sales up over 13% year on year, can you kind of put that into perspective with your sense of how fast you think the end-user demand is growing in rotating electrical aftermarket?

That's a very good question, that. Most of the growth we are experiencing right now is really from same customer type growth.

We do have some new customers that are coming on that have been delayed but are still committed to coming on board. So, while I would be a little more conservative in terms of the percentage growth, I would say -- and this is knowledgeable speculation -- but I think the organic growth rates in the category are between 4 and 6%, but we hope to beat that because of additional growth through customer acquisition.

Right, well let me ask you from the standpoint of kind of the working capital build that we are seeing, specifically the core inventory build. It seems like that event would be more likely to correspond with you gaining share either through shipping additional SKUs or bringing new customers online as opposed to let's say just accelerated ordering by existing customers in existing SKUs. Am I thinking about that correctly?

Yes, so basically the inventory growth is in anticipation of new customer wins which would be additional SKUs or additional new customers. Right towards the end of the third quarter, we brought on a nice new customer and we began shipping them.

We feel like their levels are very low still and that there will be a continued build. We have one other customer that we were only one-third through in changeovers that we feel could be very significant.

So we think that -- again, and I think we've thrown out this number of around $5 million to $10 million of new business could start coming in over the next six months. That is already committed and that doesn't include any opportunities that may or may not surface as we go forward.

Okay, that's helpful.

That's really in the inventory build in the core. So you can see that in the inventory levels. The receivable level is just timing in terms of when the receivable -- nothing has changed there. I think Tony asked that question. But inventories, we have increased inventories in anticipation of some new business.

Okay, I'm just a little surprised we didn't see a little more leverage off the G&A line. And I know David talked about some foreign currency issues compared to the prior period. And I assume all [Apex] expense was booked in sales and marketing.

So I'm just curious if you are incurring those additional professional fees in conjunction with the Fenwick due diligence and maybe how we should think about that line going forward.

You know, we will be. The Fenwick due diligence costs will start to mount in the fourth quarter. We have been successfully -- Fenwick have been paying some of those bills at this point. So as we get closer to closing, we expect to have some expenses there.

Professional fees have just been around a lot of other issues that mostly just everyday sort of contracts coming up for renewals, general type of things like that; consulting in terms of purchase accounting type questions and things like that.

Okay, and just my final question, if you can just confirm that you will be expecting somewhere just shy of $150,000 in interest income from Fenwick in Q4, and maybe if you could just provide any additional color and update there and maybe what led to you increasing your investment in Q3.

Yes, well you know, I think that clearly that Fenwick's challenges are working capital related. And so we want to make sure that their fill rates continue to remain strong.

We may consider even further increasing the amount of capital that may go out this quarter to them just because we want to make sure they continue to service the customers as well as they possibly can. And our optimism on the potential outcome of Fenwick continues to be high and we feel the synergies, the potential synergies are -- I think there's been double-digit millions being talked about, and certainly we think that that is very realistic. We think that the opportunities on synergies are significant.

(Operator Instructions) Rick Hoss, Roth Capital.

Selwyn, can you tell me what's going on with the inventory trends on your customers, and are they building? Are they flat? Are they maintaining a lowish level?

I think -- you know, I think it's mixed. I think there is a mixed message there. A couple of the larger ones are running fast and hard and a couple of them are pulling back inventory levels a little bit.

So I think we're suffering a little bit. Even despite the good sales results, I think we're underperforming relative to what the registered sales are right now. And some of our customers are pulling back inventory a little bit or have been in the process.

I wouldn't say started. They have been in the process of pulling back inventory. And we are hoping to see a reversal of that and that will further fuel organic growth. We certainly believe that by next fiscal, we should see the backside of that.

What did scrap contribute to growth if anything this quarter?

You know, just the whole scrap thing is -- let me just try and get into a little bit of a dialogue on scrap. Because what I've said in the past is that it's a built-in hedge to metal prices. So we turn our finished goods inventory.

I don't know if you saw those -- we're now turning our finished goods inventory six times a year. So anytime we have high scrap sales, we have a higher cost of components. And we're turning that inventory in less than -- more than one time in order, so you're seeing offsets in higher COGs from that.

And then if we're buying higher than our standards, you have a period cost that results in a charge where there are purchase price variants, where you are paying more for the component than you may have in the standard. So at the end of the day, we look at material costs in total.

And so you can't look at what scrap contributes because then you've got to look at what the inventory write-downs -- what are the additional component costs for new metals. It's just not something that we would disclose nor would we look at it in isolation. It's got to be looked at in total material costs. Our total material cost is up or down, David?

It is a hedge. So the higher material costs and higher scrap would offset.

Offset, yes. So it's pretty much stable then? Yes.

Then what happened a couple years ago then when it was contributing heavily on the growth line?

You know, I think a couple of years ago where we weren't turning inventories as fast as this and that was a little bit of a different story -- but when you're turning finished goods inventory at six times and the markets are far more efficient now, then it's less of a -- it's a major factor but you have to look at all of the elements together. You can't just look at scrap on its own.

Okay, okay. And then, David, tax rate for the fourth quarter or you want to just give us a full-year expectation?

Going forward, a normalized rate is about 38%.

37%, 38%.

Okay did you discuss in the Q about why it was 33%?

Yes, in the Q, we discussed about the way that we allocate apportionment for state tax purposes. We also discussed for the year a result of an IRS review that resulted in a favorable gain to us.

(Operator Instructions) I'm showing no further questions in the queue.

Great, well thank you, everybody. Appreciate you taking the time to follow us and we look forward to further developments as we go down the road. 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.