Motorcar Parts of America Inc (MPAA) 2013 Q1 法說會逐字稿

Welcome to the Motorcar Parts of America's fiscal 2013 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, today's conference may be recorded. It is now my pleasure to turn the call over to Investor Relations, Gary Maier. Please go ahead.

Thank you. Thank you all for joining us for Motorcar Parts of America's fiscal 2013 first quarter 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 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.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. 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. With that said, I would now like to begin the call and turn it over to Selwyn Joffe.

Thanks, Gary. Appreciate you joining us today for our fiscal 2013 first quarter conference call. I especially want to thank you for your continued patience and support with regard to our delayed financial reporting. On a positive note, we expect to file our results for the September quarter next month which will bring us current on our financial reporting.

In the beginning of October, we transitioned to legacy ERP and accounting systems at Fenco to the Motorcar Parts platform which will now enable to us to file our required financial reports on a timely basis moving forward. In addition, we've implemented an entire new warehouse management and ERP system which provides timely internal reporting and facilitates enhanced controls and real-time operating information for the Undercar business segment. Due to the dynamic number of events that have taken place since the June quarter, we will structure this call as we did for our year-end call to address the reported results and also to bring you up to date on our post-June transition progress and the state of our current business.

Let me start by giving you a review of our June 1 quarter results. For our Rotating Electrical business, we experienced continued growth, with sales climbing 17.6% to $46.8 million for the first quarter from $39.8 million for the prior year first quarter. EBITDA for Rotating Electrical for the quarter was $7.8 million, a record for a first quarter, adjusted for certain items, as noted in the press release, in which David will discuss later in this call.

Let me take a moment to give you some insight into our anticipated performance for our Rotating Electrical business for the six-month period ended September 30, 2012, which, as I mentioned earlier, we expect to report before the holidays. We expect all-time record Rotating Electrical sales for the fiscal 2013 second quarter, with EBITDA expected to be more than $20 million for the six-month period. In addition, our liquidity continues to be very strong. Despite some chatter in the industry that aftermarket sales in general have softened, we believe, based on the industry statistics of aging vehicle growth, particularly in the 12-plus-year-old vehicles, and the correspondingly high replacement rates for these vehicles, that the outlook for this category remains strong.

We also believe that we are well-positioned with our mix of business to take advantage of these metrics. For example, the number of vehicles in the 12-year-old-plus category has grown by 6.9 million vehicles, or 8%, in the last year. Equally important to note, the replacement rates for Rotating Electrical in the segment almost doubles from the 8- to 11-year-old vehicle category to vehicles that are more than 12 years old.

With respect to the Undercar segment, it is important to understand the numbers in conjunction with our progress in the transition. We reported sales of $42.2 million for the fiscal 2013 first quarter ended June 30, 2012. As anticipated, we reported a negative EBITDA for the Undercar product segment for the quarter of $4.3 million. Obviously, this is unacceptable and does not reflect most of our cost-cutting transition initiatives. However, based on our accomplished savings to date, which are not all reflected in the June quarter and our expected future savings, the first quarter pro forma results would indicate an annualized $15 million EBITDA run rate.

So let me take a few minutes to walk you through some key initiatives that are involved in getting the transition completed. As mentioned above, a large portion of our cost-cutting initiatives have been completed and the others are nearing completion. We substantially completed the elimination of unprofitable business product lines, such as exiting the clutch business and some select business in our steering and brake categories. The result of this is a downsized Fenco but one with profitable customer relationships and product lines.

We are committed to growing the Fenco business in three strategic areas -- steering, brakes and driveline, or more specifically, wheel hubs and bearings. Each of these categories represents growth opportunities for Fenco. We expect to report approximately $150 million in revenue for fiscal 2013 for the Undercar segment. We reduced sales expenses primarily through the reassignment of sales responsibilities to in-house representatives from outside. This was completed in June. We're in the process of completing our consolidation of warehouses which is being managed carefully in order to avoid any interruption in customer service levels and we're making great progress there. We're continuing to reduce our reliance on third-party logistics providers, representing a [50%] reduction in expenses. We've reduced corporate overhead by 41%.

In summary, we believe these initiatives, when fully implemented, will result in EBITDA of approximately $15 million. We expect that this will all be completed by May 2013, as we originally planned. On a combined basis, we expect EBITDA run rates, as of the end of May, to be in the low $50 million range, with net debt to peak at $120 million by year end and then to start being reduced. In addition, we believe that as we complete our transition, we will be able to reduce our effective interest expense.

I would also like to highlight that we have significantly improved our capital resources. Liquidity levels for the Rotating Electrical segment are as follows. We have cash of approximately $28 million today and an undrawn $20 million revolver. At Fenco, with our new credit facility and strategic supply arrangement, we have enhanced liquidity. We currently have outstanding debt of $44 million on the $55 million revolver. I believe we have adequate capital to complete our plan.

The outlook for profitable growth in the Undercar segment continues to be encouraging. This sector is of course subject to the same dynamics as Rotating Electrical product which benefit from increased demand as a result of a growing aged population of vehicles, as I previously discussed. In addition, technology for calipers and wheel hubs has changed over the last several years, and today the majority of passenger vehicles have four disk brakes rather than two. This is starting to result in an increased number of calipers per aged vehicle. In addition, anti-lock braking mechanisms are now commonly utilized on disk brakes, which create an even further replacement opportunity with double the number of wheel hubs with anti-locking braking devices on aging vehicles.

In summary, the base fundamentals remain solid in all of our product offerings as well as an extraordinary opportunity in both the caliper and wheel hub categories. In a few moments, along with the financial results, David will walk you through some of the key financial metrics related to the Fenco transition which we discussed today in detail in our earnings release. In short, our Rotating Electrical business is strong and our Undercar parts are in transition. We'll continue to capitalize and utilize our MPA operating model and [strength] for the benefit of both Rotating Electrical and Undercar products. For those of you new to our business, there are numerous qualities that distinguish us from our competitors -- qualities that will serve us well moving forward as we integrate and grow our Fenco operation; Our low-cost production model and reputation for quality; our ability to produce and ship product efficiently with [fill] rates unsurpassed in the industry; available capacity to increase production with little incremental cost in our various product lines; our ability to leverage our overall production and overhead absorption; an international footprint that allows us to take advantage of international opportunities; the ability to track new business and maintain long-term customer relationships.

As I mentioned during previous calls, both our product segments serve many of the same customers and there are numerous synergies in which we can capitalize which will be beneficial to us as well as to our customers. Areas such as offshore production and management systems, product delivery, streamline ordering, product education programs, sales training, and the like are important value-added considerations. 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 discipline will greatly enhance the Fenco business moving forward. So for now, I will turn over the call to David who will now discuss our financials, and then I will make some additional comments and we'll follow that up with some questions.

Thank you, Selwyn. Thank you again. While we are still in the integration process for Fenco, the Undercar product line segment, MPA's base business in the Rotating Electrical segment continues to be strong. Net sales for the first quarter ended June 30, 2012 were $46.8 million, representing a $7 million, or 17.6% increase compared to the prior year first quarter and adjusted EBITDA was approximately $8 million. Trailing 12 months ended June 30, 2012, net sales for the Rotating Electrical segment increased to $186 million and adjusted EBITDA to $34 million. As mentioned in our fiscal 2013 first quarter earnings release this morning, operating results for the period ended June 30, 2012, were impacted by Fenco which, again, is the Undercar part segment as the integration strategy progresses. The net loss for Fenco was a result of an inefficient operating structure, unprofitable product lines, inadequate legacy pricing, and transition costs. As we integrate the Fenco business, we continue to address pricing and the efficiency of all of our operations, including production, warehousing, and logistics, as part of the turnaround strategy for Fenco, as Selwyn noted earlier. We have already made progress in each of these areas, including exiting unprofitable customer accounts.

In addition to the overall negative contribution from Undercar product line sales, our gross profit was also impacted by discontinued product lines. The negative gross profit impact of discontinued Undercar product lines was $711,000 for the first quarter of fiscal 2013. Additionally, we will further discuss the impact of contractual customer penalties, unique customer allowances and rebates, non-recurring professional fees related to the integration. We will now review the financial results for the period ended June 30, 2012. Net sales for the fiscal 2013 first quarter ended June 30, 2012 were $89 million compared with $70.5 million for the same period last year, an increase of $18.5 million, or 26.3%. The increase in consolidated net sales was primarily due to the full quarter impact of our May 6, 2011 acquisition of Fenco, and an increase in net sales in our Rotating Electrical product line of $7 million, or 17.6%, primarily to existing customers in our Rotating Electrical product line.

Gross profit for the fiscal 2013 first quarter was $12.1 million, or 13.6% gross margin, compared with $7 million, or 10% gross margin for the same period a year ago. The gross profit percentage in our Rotating Electrical product line slightly decreased to 31.7% from 32.1% during the three months ended June 30, 2012. Productivity in our Rotating Electrical manufacturing facilities continues to be excellent. During the three months ended June 30, 2012, the gross profit percentage in the Undercar product line segment was impacted 6.7% by recording of contractual customer penalties of $1.1 million; unusual freight expenses of $45,000; unique customer allowances and rebates of $1 million; and loss from product lines not supported of $711,000. Excluding the above mentioned adjustments, the Undercar product line segment negative gross -- gross profit margin was a positive 0.3%. We believe that with the implementation of our transition plan, including addressing future pricing and the efficiency of the manufacturing operations, and implementing cost-saving initiatives for our production, warehousing, distribution and logistics, the gross margin percentage for the Undercar product line will substantially increase.

General and administrative expenses increased a net $3.3 million to $11.6 million for the first quarter compared with $8.3 million for the same quarter of fiscal 2012. Rotating Electrical G&A expenses increased $604,000, primarily due to increased professional fees. Undercar product line segment G&A expenses increased $2.7 million, primarily due to professional and related fees related to the integration process and the full quarter impact of G&A expenses compared to the prior year period partial quarter from May 6, 2011, to June 30, 2011. Substantial progress has already been made and we'll continue to reduce these costs and will continue to be reduced.

Sales and marketing expenses increased $1.1 million to $3.54 million for the first quarter compared with $2.45 million for the same quarter of fiscal 2012. The decrease for our Rotating Electrical business was $62,000. Undercar product line segment sales and marketing expenses increased $1.1 million, primarily due to increased advertising, travel, employee related, and catalog expenses, as well as the full quarter impact of sales and marketing expenses as previously explained. Substantial progress has already been made to reduce these costs as well. Acquisition costs for the prior year first quarter of $404,000 were in connection with the May 6 acquisition of Fenco.

Operating income for the fiscal 2013 first quarter for the Rotating Electrical segment was $6.7 million compared with $4.8 million a year ago, both figures before non-cash loss recorded due to the changes in the fair value of forward foreign currency exchange contracts, Fenco-related transition and professional expenses. Operating loss for the Undercar segment was approximately $4.9 million after adjusting for contractual customer penalties, unusual freight expenses, unique customer allowances and rebates, loss from product lines of not supported, and professional fees related to the integration of Fenco. As a result, EBITDA for the first quarter for the Undercar segment was negative $4.3 million, with depreciation and amortization expense of $651,000. EBITDA for the first quarter for the Rotating Electrical segment was $7.8 million, adjusted for various non-cash items and Fenco-related costs explained above. In addition, depreciation and amortization for the Rotating Electrical segment for the quarter was approximately $735,000. After further adjusting for non-cash standard inventory revaluation write-downs, due to the lower manufacturing costs of approximately $304,000, Rotating Electrical segment EBITDA was $8.1 million for the first quarter.

Net of interest income, interest expense was $5.1 million for the first quarter compared with $1.9 million for the prior year first quarter, primarily due to increased outstanding loan balances and higher interest rates incurred by the Rotating Electrical product line during the three months ended June 30, 2012, as compared to the prior year three months ended June 30, 2011, as well as higher factoring interest expense due to higher sales and full-year impact of interest expense incurred on the outstanding loan balances and the cost of receivables being discounted under the receivable discount programs by the Undercar product lines since our acquisition on May 6, 2011. For fiscal 2013 first quarter, the Rotating Electrical product line segment recorded income tax expense of $1.4 million. The Company reported a net loss for its fiscal 2013 first quarter of $9.9 million, or $0.71 loss per share compared with a net loss of $8.3 million, or $0.68 per diluted share for the comparable period a year earlier. Excluding contractual customer penalties, unusual freight expenses, unique customer allowances and rebates, loss from product lines not supported, non-cash mark-to-market loss on foreign exchange contracts and Fenco-related G&A expense, net loss for fiscal 2013 first quarter would have been a negative $0.32 per share.

To recap, the trailing 12 months ended June 30, 2012, for the Rotating Electrical segment, net sales were $186.3 million and EBITDA was $34.3 million before non-cash loss recorded due to the changes in the fair value of foreign currency exchange contracts, Fenco-related financing and professional expenses, and non-cash $800,000 standard inventory revaluation write-downs. At June 30, 2013 -- 2012, excuse me, our balance sheet had $36.1 million in cash and $496 million in total assets. To recap, Motorcar Parts of America's Rotating Electrical segment and Fenco's Undercar segment have separate bank facilities. MPA's Rotating Electrical segment had an $85 million term loan, zero borrowings on the revolving credit facility as of June 30, 2012, and approximately $35.7 million cash resulting in net debt of $49.3 million. Fenco had a $10 million term loan and $46.6 million borrowings on the $15 million revolving credit facility.

In April 2012, Motorcar Parts of America raised $15 million in a PIPE, netting approximately $14 million after fees. During June 30, 2012 quarter, MPA paid approximately $16 million to a Fenco vendor in connection with a prior consignment arrangement. Initially, MPA invested $20 million in Fenco since March 31, 2012. So currently, MPA's Rotating Electrical segment has a $85 million term loan, zero borrowings on the revolving credit facility, approximately $28 million cash resulting in net debt of $57 million. Currently, Fenco has a $10 million term loan and approximately $44 million borrowings on a $55 million revolving credit facility.

On August 22, 2012 Fenco signed a multi-faceted strategic cooperative agreement with one of the world's largest manufacturers of new undercar products, including a $20 million trade line of credit for Fenco, joint sourcing, and quality commitments, as well as expected joint product development and marketing initiatives. This agreement greatly enhances the liquidity of Fenco and should provide a strong strategic alliance for our new product development for both our Undercar and Underhood, or Rotating Electrical product lines. In conjunction with this agreement, M&T Bank, the current lender for Fenco, extended the current Fenco line of credit maturity until October 2014, and increased its line of credit by $5 million to the current $55 million. During the three months ended June 30, 2012, the Rotating Electrical segment used $10.6 million of cash flow in operations primarily due to the previously mentioned $16 million payment to a Fenco vendor in connection with a prior consignment arrangement which was offset by net income of $2.4 million and decrease in accounts receivable of $6.5 million. The Undercar segment used $6.2 million of cash flow in operating activities primarily due to inventory reductions partially offsetting net loss during the quarter.

The Undercar segment loss from operations is primarily due to the negative impact of an inefficient operating structure, unprofitable product lines that have since been discontinued, inadequate legacy pricing and transition costs. As explained previously, as we continue to integrate the Fenco business, we are addressing future pricing and the efficiency of manufacturing, operations and implementing cost-saving initiatives for production, warehousing, distribution, as part of the turnaround strategy for Fenco.

I will now walk you through the income statement exhibits in our press release distributed this morning which we believe will make it far easier to understand the various expenses and adjustments for the first quarter ended June 30, 2012. If you can take a moment to turn to the income statement exhibits in the press release starting with the second to the last page, we can begin. The income statement exhibit on the second to the last page of the earnings press release presents the three months ended June 30, 2012, first quarter results of operations for the Rotating Electrical segment. So as you can see, when you eliminate the effect of financing-related costs, non-cash mark-to-market loss recorded due to the change in the fair value of forward foreign currency exchange contracts, and intersegment interest income, diluted earnings per share was $0.15 for the three months ended June 30, 2012, for the Rotating Electrical segment, reflecting the impact of higher interest expenses. It is calculated by taking the reported earnings per share of $0.17 and adjusting for financing-related costs of $239,000, and non-cash mark-to-market losses of $100,000, primarily related to the changes in the fair value of forward foreign currency exchange contracts, intersegment interest income of $895,000, and a 39% tax rate. So by subtracting the above mentioned items through reported $0.17 per diluted share results in $0.15 per diluted share for three months ended June 30, 2012, for the Rotating Electrical segment.

Additionally, at the bottom of the exhibit for the Rotating Electrical segment, there is a calculation for EBITDA for the three months ended June 30, 2012. Starting with operating income of $6.697 million, and adjusting for the impact of financing-related costs and non-cash items as previously mentioned, and depreciation and amortization expense of $735,000, Rotating Electrical EBITDA is $7.8 million. In addition, adjusted further, the non-cash standard inventory revaluation write-downs of approximately $304,000, Rotating Electrical EBITDA for the three months ended June 30, 2012, was approximately $8.1 million. Now please turn one page forward to the earnings press release showing both the Rotating Electrical segment and Undercar product line segment results of operations for the three months ended June 30, 2012. Consolidated operating results for the three months ended June 30, 2012, were impacted by Fenco-related expenses and non-cash expenses which are highlighted in the Adjustment column.

To recap, these adjustments include -- contractual customer penalties and unique customer period -- unique current period customer allowance and rebates of $2.1 million, unusual freight expenses of $45,000; Fenco-related G&A, financing, and legal costs, as well as professional and related fees related to the integration strategy totaling $2.6 million; and mark-to-market loss primarily due to foreign exchange contracts of $100,000. Additionally, the loss from Undercar product lines not supported is $711,000. So adding the above mentioned items to the reported loss of $0.71 per share results in a $0.32 per share for the three months ended June 30, 2012, for the combined Rotating Electrical and Undercar product line segments. Additionally, at the bottom of the exhibit, there is a calculation for EBITDA for the three months ended June 30, 2012.

Starting with consolidated operating loss of $3.425 million, and adjusting for the impact of Fenco-related and non-cash items as previously mentioned, and depreciation and amortization expense of approximately $1.4 million, consolidated EBITDA for the three months ended June 30, 2012 was $3.5 million. After further adjusting for approximately $304,000, non-cash standard inventory revaluation write-downs and other adjustments mentioned above, EBITDA for the three months ended June 30, 2012, was approximately $3.8 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. Despite some complicated numbers, our proposition for our business remains exciting. Our Rotating Electrical business is strong and the visibility we have with regard to completing the transition plan is clear. We're close to being back on track with regard to our financial reporting, and we feel that operating the Undercar business will be far more efficient with the implementation of the MPA ERP for Fenco. While the numbers are very noisy, we expect to see the results of our efforts more clearly, starting in the fourth quarter of this fiscal year. While there are always challenges, we continue to believe that we are on the right track. We are committed to the highest levels of customer service throughout our organization and excited about the future opportunities for Motorcar Parts of America, both in terms of the continued strength of our Rotating Electrical business and the exceptional opportunities we expect for the Undercar segment. In summary, the long-term market statistics for our industry remain favorable and we're excited about our opportunities and the opportunities presented to us with our new acquisition. We appreciate your interest in Motorcar Parts, and we're happy to answer any questions that you may have.

Thank you, gentlemen.

(Operator Instructions)

Jimmy Baker with B. Riley & Company.

So, even though working capital is a net consumer of cash here in the quarter, you are still making considerable progress in reducing inventory. I'm just wondering if you can talk a little bit about any inventory seasonality and inventory associated with the Fenco business, and maybe just more broadly about your latest expectations for the trajectory of working capital needs.

Let me talk -- address it in more general terms, and maybe David will look at it in more specific. But in general, first, dealing with Rotating Electrical, and then I'll deal with Undercar. On the Rotating Electrical side, we've experienced significant volume increases, and so we've built inventory a little bit. We anticipate to bring it down as we get more stable on our revenue trajectory. We're level -- we very much do level-loading manufacturing, so it should fluctuate, but even out as the year goes on. So, in general, I see that we've had a short-term build in inventory in Rotating Electrical. We will see that come down. Obviously, that will generate additional cash flow.

On the under-the-car product lines, we've downsized that Company dramatically. We've eliminated a number of product lines. We've eliminated customer relationships that were not advantageous to Fenco, and so the inventory levels have come down pretty significantly. I think there's still opportunity, but we are going to invest and make sure that we have the right inventory, and we really are committed to making sure -- we see imminent changes really in our fill rate performance on the Undercar segment at this point. So, we're excited about where we are.

We do think we have some opportunity in the inventory for additional liquidity. But then the other factor is too, we have a tremendous amount of opportunity for growth. And when the model is right, we expect to start taking advantage of that, and that, too, at this point, is a little bit -- we'll have an -- if we take advantage of new business, obviously inventory is going to grow a little bit.

So, I don't know if that answered your question, but that's the general picture. David, do you want to add anything to that, or --?

I think you explained that well, yes.

Okay, that's helpful. And earlier, Selwyn, I think you talked about being able to demonstrate some more significant progress in the fourth quarter of your fiscal year. But you've already made some stride in terms of shutting down non-profitable product lines and in-housing sales reps and so forth. So, can you maybe just help us manage expectations for progress in the under-the-car line in the September and December quarters?

Yes, so I think -- I'll try. It's tricky, again, because there's a lot of moving parts to the transition. We certainly expect to see improved numbers in the September quarter, and a lot of the effect of, in particular, our logistics and warehousing agreement, we'll see that kicking in, in the December quarter. And that's really where the big money is.

As of today, we're probably about 80% complete in the savings in that area. We've eliminated all the business we want to eliminate. Hopefully, we will be able to keep the rest of the business we have. We've had workforce reductions that are substantially complete, so I would say, you will see a little bit of it happening in September. You will see a much more significant part in the December quarter, and we clearly feel very optimistic that we'll be done with the transition by May, as we originally anticipated.

Okay. Then, just longer term, I think you talked again about ending the year with roughly $120 million in net debt, which would be a peak. I guess, first, is that at calendar- or fiscal-year end? And then, how aggressively would you expect to be able to reduce that net debt position by the end of your fiscal-year '14?

Well, I think two things. I think, first of all, we're looking at our fiscal year. Hopefully, we will be able to beat those numbers, but that's the maximum I think we'll be at. At that point in time, we should be generating low-$50 millions EBITDA is what we anticipate.

The big challenge, or the biggest cash drain for us at that point in time will be interest expense. Fenco will have no tax liability on their earnings, because of the net operating loss carryforwards. MPA still has tax liability because it's separate, and cash tax. And so, we think that we'll have -- the first thing would be to refinance or renegotiate the interest levels that we're at on our debt, and the savings there will be significant.

So, taking that into account, that will enhance our free cash flow, and we'll aggressively be looking to pay down debt at that point. So, we think we can pay down the debt quite expeditiously on a stable scenario. Now, if we're growing, and we start seeing exceptional growth opportunities that, again, are profitable and are rationale, then that may affect the free cash flow because the inventory levels that we may require. But that will be a good problem for us to deal with.

Right. Okay. Thank you. And I will get back in the queue.

Thank you, sir. Jacob Muller with AYM Capital.

The G&A numbers that -- they've risen rather -- they have been rising rather precipitously over the last year in Rotating Electrical, as well as quarter over quarter, the last two quarters reported. Can you explain what that's about, and what's the outlook for that line item going forward?

So, as we explained, and there will be further discussions in the 10-Q that we file later today. It is primarily going to be due to professional fees, and we expect that level to be at the higher level, but we're always looking at opportunities to reduce costs and be even more efficient.

The idea is, once we get through the transition and we stabilize the business, the amount of professional fees and outside consultants that we will use will drop dramatically. So, I expect, on a consolidated basis, combined G&A to come down pretty significantly. I think we have reduced Fenwick, to date, the Fenwick -- Fenco G&A by around 41%. And that's adjusted for all the consultants and work out people that we've been using and getting, in particular, audit fees and getting caught up on the financial reporting. Certainly, very messy and very expensive relative to professional fees, but I think, again, you'll start seeing that come down as we get into the March quarter, and the June quarter we'll see tremendous reduction in those fees.

The question was more about the Rotating Electrical side of it, actually, where it went from $4 million a year ago, to $5.5 million or so right now. And that would -- where would the professional fees be applied to that part of the business?

So, there's going to be opportunities in reducing costs, for example, in the integrated audit, both the Undercar and the Rotating Electrical. There's opportunities to reduce legal costs. So, right now, it's at its highest, so we are working towards reducing those professional fees, make it more efficient.

Yes, and I think you will see more and more as we take advantage of synergistic opportunities, you'd have to look at the G&A on a combined basis as we get to completing the transition. So, again, I think on an apples-to-apples basis, that the G&A has been negatively affected at MPA because of the amount of professional fees, even in the audits, relative to the Fenco acquisition, valuations, also to things that are continuously have to be done. Sarbanes–Oxley Compliance, which is at the parent company level, as opposed to the subsidiary level. So, there are enormous number of fees that overlap, but on a consolidated basis, once every synergistic opportunities are taken advantage of, I think you will see a net decrease overall.

Good. Do you know a number that you had mentioned, what are the size of the NOLs at Fenco currently?

It's in the $40 million-plus range. I don't have that number right at my fingertips. We've not been able to book that because of -- until you show profitability, so you can't show the value of that on your books yet. As soon as we complete the transition and we start showing profitability, I think then it will start to reflect in the numbers. So, there's at least $40 million of NOLs there.

Finally, on the interest expense, obviously, you've mentioned in the past and currently the goal to bring that number down, but as things are right now, what would you expect interest expense to be for the coming year without any change?

Without any change?

Yes.

So, interest expense would be in the, about the $20 million range for the combined consolidated Company.

That's reflective of what average coupon, you would say?

Annually, excuse me -- $20 million annually.

That's including the factoring, or -- ?

Yes, including the factoring, as well as the credit facilities for both the Undercar and Rotating Electrical segment.

What's the rate on average you're paying for those [factoring] in total on average?

Well, to be very specific, on the Rotating Electrical, the debt facility is at 10.5%. For the Undercar, it's in the mid-5% range.

Then the factoring is in 3.5% to 4% range.

Right.

Thank you very much.

Thank you, sir. Mark Tobin with Roth Capital Partners.

Thanks for taking my questions. First, just to rehash, I couldn't write quickly enough. You talked about the targets for Rotating Electrical for the September quarter, and I heard revenue is expected to be an all-time record. What was the EBITDA expectation?

We expect to exceed $20 million in EBITDA for the first six months.

Okay. That's helpful. And as far as the downsizing of Fenco with the major eliminations, on the revenue line, is that something we'll see in the September quarter, or does that kick in, in December from a run-rate basis? I guess, in other words, is September revenue going to look something similar to June, with the full Fenco, or is it going to reflect the downsized portion?

For the Undercar segment, the June and September quarter reflect the full business. The back half of the fiscal year, in the December and March quarter will reflect the downsized business.

Okay, that's helpful. And then shifting -- I guess also on under the car, we had talked a little bit previously about the trajectory of the recovery, and you're still confident in the expectations for a $15 million EBITDA run rate in, starting in May. Can you give us a sense of where you would -- when you expect to hit EBITDA profitability at Fenco? Is that something that's achievable by the December quarter, or you think it's further out in the fiscal year?

I think the December, March quarter -- March quarter is probably a safer bet, and to be more conservative, but December is a possibility.

And is that in terms of run rate or in terms of the full quarter?

In terms of the full quarter.

Okay. Okay, and then --

Those are adjusted numbers, I mean, because there's severance and there's all sorts of, again, noise in those numbers. I think you will start seeing it less noisy as we get through to the June quarter, which is that May-June period.

Sure. And finally, when we look at the cash balances, it looks like you've got some room to operate. Can you address the flexibility you have at the Fenco level? Are you comfortable with your cash situation there, given the constraints with downstreaming and so forth?

Yes, I mean, we believe that the Fenco facility gives us adequate capital to execute completely the transition plan, yes. And certainly on the Rotating Electrical side, we have significant excess liquidity. So, in terms of being able to refinance the debt and restructure the debt, there's tremendous upside in the interest opportunity there.

Okay. So, that's all I've got. I'm sorry --

No, I was just saying we're sitting with a significant amount of cash and a very high debt level where we can't -- there's no reason to have the debt levels we have with the cash that we have. So, as we have more stability, we hope to work with our lenders to change that.

Got it. That's helpful. That's all I have.

Thank you, sir. [George Berman] with JPTurner & Company.

A lot of work has been done already, and I guess we have a little bit more to do, huh?

Yes. A significant amount has been done.

The previous caller talked about the sales. If you were to look at next year, what would you expect the Undercar product line to look like in terms of revenues per quarter from the current $44.2 million if you take all the things you've closed down and sold?

So, again, it's hard right now, George, because we -- it's a question of how much new business we take on, I mean, after eliminating the business. And the intent is to make sure that the model is completely profitable before we take on business that's -- and grow. But I think a comfortable level is $140 million range as a base -- as a start. And I think the growth opportunities, again, depending on the timing of when they hit, are pretty significant.

Okay. And the current refinancing opportunities, you mentioned that you're looking to maybe, once you're rightsized and profitable, you have possibilities to redo your funding sources a little bit.

Yes, we do. I mean, obviously we have the existing lenders that we would hope would work with us, but in the event that, again, that we are profitable, we think we can fund debt at significantly reduced rates and use less debt. So, I think that the interest expense line is going to be reduced dramatically.

Now, you mentioned the NOL carryforward in Canada. Can that only be offset with profits generated from Fenco?

Correct. It cannot be used in the consolidated.

So, therefore, you paid, even this quarter, you paid $1.2 million --

Yes, so we are paying tax even though we got losses.

Okay, thanks very much. Look forward to next year, at the latest.

Me, too. Thank you.

Thank you, sir.

(Operator Instructions)

Matt Sherwood with Cooper Creek Partners.

Congrats on a really strong quarter in the Rotating Electrical (inaudible) Undercar.

Yes, we're very excited about that segment. I think when you see the six-month numbers, we've given you the guidance of in excess of $20 million. That's a real big bump for us.

That's right. So, it looks like the second quarter, there's an almost 40% increase in the numbers. If you actually carried forward your six-month increase of 30% for the year, you could do $40 million in that segment. I know you're not trying to over-promise, but is there any potential for that sort of growth in the bullish scenario?

There's potential, but I think we've got to look at seasonality, and so we'll have to see how it unfolds. I would be, again, just be more conservative in that approach. I think the high-30%s are -- we're comfortable with that.

Right.

But there's always opportunity to do better, but we're certainly not giving that kind of guidance.

No. But it sounds like that level should be very achievable, given $20 million in the first six months.

Yes.

That's great. Then on the Fenco side, I know you talked about how some of the noise could be reduced over the coming quarters. Can you walk through just how you expect -- should we start to see these customer penalties decreasing materially now that you're putting your ERP and you've got in the [blank joan] line and should be current with your suppliers?

Yes, so right now I would say that starting in this quarter, really effective now, we should see those penalties come down fairly significantly going forward. So, that is exciting. We are very excited at, so far, and I knock on wood while I say that, not too hard, but the success of the implementation of the ERP and really reformulating the entire accounting group, really is now located in -- the Fenco accounting is now located in Torrance. And so, we just think that just the overall infrastructure and daily management challenges are much enhanced -- are much easier to manage now that we have the new systems and new people in place.

Great. Well, looking forward to seeing continued improvements.

I appreciate it. Thank you.

Thank you, sir. And presenters, at this time, that does conclude our time for questions. I would like to turn the program back over to management for any additional or closing remarks.

Well, again, I want to thank everybody for their patience. It's -- certainly is a tough challenge getting a transition and turnaround completed like this. I do want to, again, want to say one more time that I feel like we've made tremendous progress in the transition, and we're excited about the future, and I appreciate everybody's time. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.