Motorcar Parts of America Inc (MPAA) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America's fiscal 2013 third-quarter results call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions to follow at that time. (Operator Instructions). As a reminder, today's call is being recorded. I would now like to turn the conference over to your host for today, Mr. Gary Maier, investor relations for Motorcar Parts of America. Sir, you may begin.

Thank you, Ben. Thank you, everyone, for joining us. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the Company's Chief Financial Officer, I'd 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 assurances 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.

I would now like to begin the call and turn it over to Selwyn Joffe.

Thank you, Gary. I appreciate everyone joining us today for our fiscal 2013 third-quarter conference call.

Let me start out by discussing our Rotating Electrical business. This business continues to be strong, posting record sales for the third quarter of $50.7 million and a record $155.1 million for the nine-month period. Adjusted EBITDA for this segment for the quarter increased 38% to a record $9 million from $6.5 million a year ago. And for the nine-month period, it climbed 40.8% to a record $30.8 million.

As a result, we are raising our adjusted EBITDA target for the Rotating Electrical segment to be at least $40 million for the fiscal 2013 year end from our previous target of $38 million.

The Undercar segment, however, remains challenging despite continued progress on the transition. To date, we are making good progress of the final stages of our operating transition plan. Most significantly, we have recently begun shipping our Undercar products out of our Torrance, California facility. This is a major step in our plan to consolidate logistics and take control from a third-party provider and to streamline our multiple Pennsylvania locations into one. Prior to this, we successfully exited unprofitable businesses as I will discuss in more detail in a minute.

Along with implementing a new ERP system for the Undercar segment, we relocated the accounting function to Torrance from Toronto. The integration of the Undercar business accounting system into our Company-wide ERP system in October, along with the implementation and integration of a new warehouse management system has enabled us to obtain more accurate and timely information for strategic decision making.

Last year, we closed the CV axle business because it was not cost efficient. During the third quarter, we exited certain Undercar product business with one of our major customers because it was unprofitable. In addition, we exited our clutch business. Overall, we have reduced net sales by approximately $100 million. The lower sales and production rates have, not surprisingly, impacted our accounting accrual estimates such as our excess inventory and obsolescence reserve levels and our warranty reserve rates. The impact on the accounting accrual estimates will be reduced in future quarters as we adjust our expected future production and sales environment.

Given the reduced sales base and production rate of our Undercar products and further analysis, we decided to revise our Undercar May 2013 EBITDA run rate target of $15 million. Our cost structure analysis and alignment with the current Undercar businesses are ongoing. We are evaluating the new state of our business and plan to update our guidance in the near future.

While this quarter was very soft, we do not believe it provides an accurate picture with regard to the potential of the Undercar product segment. The potential for new business is encouraging and we are focused on strengthening our capital structure for the Undercar segment to support these opportunities. At this point, we believe it is best to be conservative and delay providing a revised EBITDA target for the Undercar segment until we have better visibility.

In short, our Rotating Electrical business is strong and our Undercar parts segment is in transition. We'll continue to capitalize and utilize our MPA operating model and its strength for the benefit of both Rotating Electrical products and Undercar products.

David will now discuss our financial statements in detail.

Thank you, Selwyn. Our Rotating Electrical segment had strong results for the third quarter ended December 31, 2012. Net sales for the third quarter were $50.7 million, representing an $8.5 million or 20.2% increase compared with the prior-year third quarter; and adjusted EBITDA was approximately $9 million, representing a $2.5 million, or 38% increase compared with the same period a year ago.

As mentioned in our fiscal 2013 third-quarter earnings release this morning, operating results for the period ended December 31, 2012 were impacted by the Undercar product line segment as the integration strategy progresses including reducing costs in many areas.

We will now review the financial results for the period ended December 31, 2012.

Consolidated net sales for the fiscal 2013 third quarter ended December 31, 2012 were $116.3 million compared with $84.1 million for the same period last year, an increase of $32.2 million or 38%.

The net sales in our Rotating Electrical product line segment increased by $8.5 million, or 20.2%, to $50.7 million for the three months ended December 31, 2012 compared with net sales of $42.1 million for the prior-year third quarter. The increase in net sales in our Rotating Electrical product line segment was due primarily to increased sales to our existing customers.

The net sales in our Undercar product line segment increased by $23.4 million to $65.6 million for the three months ended December 31, 2012 compared with net sales of $42.2 million for the prior-year third quarter. Results for the quarter include revenue of approximately $50.8 million that was recognized as a result of the elimination of the Company's obligation to accept core returns from a customer previously accrued for in the Undercar segment. Separately, sales were reduced by an accrual of $7.9 million for additional expenses to implement recommendations by our category management to reposition our product offerings for several current customers.

Consolidated gross profit for the fiscal 2013 third quarter was $24 million, or 20.7% gross margin compared with gross loss of $1.6 million for the same period a year ago. The gross profit percentage in our Rotating Electrical product line increased to 32.2% from 30% during the three months ended December 31, 2012, which reflects lower per-unit manufacturing cost. Productivity at our Rotating Electrical manufacturing facilities continues to be excellent.

The gross profit percentage in the Undercar segment was negative 12.1% for the quarter adjusted to eliminate core profits of $19.1 million from the revenue recognition of approximately $50.8 million as previously explained; a stock adjustment accrued expense impact of $2.8 million; contractual customer penalties of approximately $104,000; unique customer allowances and rebates of $665,000; unusual inventory purchases and freight expenses of $349,000; inventory obsolescence, write-down, and cost under-absorption inefficiencies totaling $3.3 million; and loss from discontinued product lines of $1.4 million. We believe that gross profits will increase as we continue to implement our plans for the Undercar segment.

Consolidated general and administrative expenses increased $2.6 million to $12.8 million for the third quarter compared with $10.2 million for the same quarter of fiscal 2012, primarily due to non-cash expenses and one-time expenses as further explained below.

Rotating Electrical G&A expenses increased $2.6 million, primarily due to $909,000 of increased share-based compensation expense incurred in connection with the issuance of stock options and restricted stock; an $882,000 mark-to-market loss recorded due to the change in the fair value of warrant liability; $450,000 recorded for the settlement of liquidated damages paid in connection with our April 2012 private placement; and $982,000 of expenses incurred in connection with the Undercar product line segment's initial implementation work related to the compliance with Sarbanes-Oxley, which was previously recorded by the Undercar product line segment.

Undercar product line segment G&A expenses decreased $1.7 million, primarily attributable to lower employee-related expenses due to the reduction in workforce at the office located in Canada. In connection with the transition plan, we expect to further decreases in general and administrative expenses.

Consolidated sales and marketing expenses decreased $682,000 to $2.7 million for the third quarter compared with $3.4 million for the same quarter of fiscal 2012. Rotating Electrical business sales and marketing expenses decreased $75,000. Undercar product line segment sales and marketing expenses decreased $607,000. Again, in connection with the transition plan, we expect further decreases in sales and marketing expenses. Consolidated research and development expenses increased $354,000 to $807,000 for the third quarter compared with $453,000 the same quarter fiscal 2012, primarily due to reallocation of cost.

In prior-year December 2011, it was decided to discontinue the CV axle product line and shut down the related facility located in Bedford, New Hampshire. As a result, an impairment loss of approximately $1 million was recorded for the prior-year three months ended December 31, 2011, which represents a write-off of the carrying amount of plant and equipment.

Consolidated operating income increased to $7.8 million for the third quarter compared with an operating loss of $16.6 million for the prior year. Operating income for the Rotating Electrical segment for fiscal 2013 third quarter increased to $8.3 million, adjusted to exclude mark-to-market losses recorded due to the changes in fair value of warrant liability, FAS 123R share-based compensation expense; Undercar segment Sarbanes-Oxley implementation costs; and private placement liquidated damage expenses compared with $5.6 million a year ago.

Operating loss for the Undercar segment was approximately $6.9 million after adjusting for excluding core profits as previously explained, stock adjustment accruals, contractual customer penalties, unique customer allowances and rebates, severance costs, unusual inventory purchases and freight expenses, inventory obsolescence write-downs, and under-absorption inefficiencies, discontinued product lines, and professional fees related to the integration of the Undercar segment. To recap, adjusted EBITDA for the third quarter for the Undercar segment was negative $6.4 million.

EBITDA for the third quarter for the Rotating Electrical segment was $9.3 million, adjusted for various items as previously explained, and $295,000 non-cash standard inventory revaluation write-down.

To recap on a consolidated basis, adjusted EBITDA was $2.9 million for the third quarter after further adjusting for the $295,000 non-cash standard inventory revaluation write-down from the Rotating Electrical segment.

Net of interest income, consolidated interest expense was $5.9 million for the third quarter compared with $3.3 million for the prior-year third quarter. This was primarily due to the increased outstanding loan balances and higher interest rates incurred primarily by the Rotating Electrical product line segment; interest on certain vendor payable balances owed by the Undercar product line segment; an increased discounts on factored receivables due to a higher balance of receivables discounted due to higher sales for the Rotating Electrical segment. Once the Undercar segment transition is complete, we expect to reduce our interest expense with lower interest rates.

Consolidated net income for the third quarter was $935,000, or $0.06 per share compared with a net loss of $21.8 million, or $1.74 per share for the comparable period a year earlier. For the nine months ended December 31, 2012, consolidated net sales were $316.9 million. Adjusted for the items explained previously, consolidated net sales were $278.2 million and adjusted EBITDA was $18.2 million, including $759,000 of non-cash standard inventory revaluation write-downs for the Rotating Electrical segment.

For the nine months ended December 31, 2012 for the Rotating Electrical segment, net sales were $155.1 million and adjusted EBITDA was $31.5 million, including adjusting for $759,000 of non-cash standard inventory revaluation write-downs. For the nine months ended December 31, 2012 for the Undercar product segment, net sales were $161.8 million. Adjusted for the items explained previously, Undercar product line net sales for the nine months ended December 31, 2012 were approximately $123 million and adjusted EBITDA was negative $13.3 million.

At December 31, 2012 our balance sheet had $25.1 million in cash and $443 million in total assets. The Undercar segment had a $10 million term loan and $49.7 million revolver borrowings as of December 31, 2012. The Rotating Electrical segment had an $85 million term loan; an undrawn revolving credit facility of $20 million; and approximately $25 million cash as of December 31, 2012, resulting in net debt of approximately $60 million.

To recap cash flows from operations, during the nine months ended December 31, 2012, Rotating Electrical segment used $4 million from operations, reflecting a $10.7 million of net income for the nine-month period offset by a one-time payment during the first quarter of fiscal 2013 of $16 million to an Undercar segment vendor in connection with a prior consignment arrangement. The Undercar segment used $23.7 million of cash flow in operating activities, primarily due to inventory reductions partially offsetting the net loss in accounts payable reductions during the nine-month period. For the three-month period ended December 31, 2012, Undercar segment cash flows used in operations were $8.8 million, all of which approximately $10 million was used to reduce accounts payable during the period.

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 third quarter ended December 31, 2012. If you can take a moment to turn to the income statement exhibits in the press release starting with Exhibit 5, we can begin.

The income statement exhibit in Exhibit 5 of the earnings press release represents the three months ended December 31, 2012 third-quarter results of operations for the Rotating Electrical segment. So when you eliminate the effect of financing-related costs, severance and other fees; FASB 123R share-based compensation; non-cash mark-to-market losses recorded due to the changes in the fair value of warrant liability and intersegment interest income, diluted earnings per share was $0.19 for the three months ended December 31 for the Rotating Electrical segment, despite the impact of higher interest rates.

It's calculated by taking the reported net income of $1.786 million and adjusting for financing, severance and other fees of $1.4 million; FAS 123R share-based compensation expense of $917,000 and non-cash mark-to-market expense of net $862,000 related to the changes in the fair value of warrants and forward foreign currency exchange contracts; intersegment interest income of $1.501 million and 39% tax rate. So by subtracting the above-mentioned items, the reported net income of $1.786 million, adjusted net income was $2.676 million, or $0.19 per diluted share for the three months ended December 31, 2012 for the Rotating Electrical segment.

Additionally, at the bottom of the exhibit for the Rotating Electrical segment, there's a calculation for EBITDA for the three months ended December 31, 2012. Starting with reported operating income of $5.050 million and adjusting for the impact of financing and other fees and non-cash items as previously mentioned; and depreciation and amortization expense of $699,000, Rotating Electrical EBITDA is $8.971 million. In addition, adjusted further for the non-cash standard inventory revaluation write-down of approximately $295,000, Rotating Electrical EBITDA for the three months ended December 31, 2012 was approximately $9.3 million.

Exhibits 5 through 8 represent the income statement for the three and nine months ended December 31, 2012 and prior year December 31, 2011 for the Rotating Electrical segment.

Now please turn to Exhibit 1 of the earnings press release, showing both the Rotating Electrical segment and Undercar product line segment results of operations for the three months ended December 31, 2012.

Consolidated operating results for the three months ended December 31, 2012 were impacted by Undercar-related expenses and non-cash expenses which are highlighted in the adjustments column. To recap, these adjustments include Undercar core profits of $19.1 million as previously explained; stock adjustment accrual impact of $2.8 million; contractual customer penalties and unique current period customer allowances and rebates of $769,000; unusual inventory purchases and freight expenses of $349,000; inventory obsolescence write-downs and costs, under absorption and efficiencies totaling $3.337 million; financing, severance, professional and other fees; FAS 123R share-based compensation and mark-to-market items primarily due to warrant liability totaling $4.054 million. So by adding the above mentioned item as well as 39% tax effect for the Rotating Electrical segment and 0% tax effect for the Undercar segment to reported income of $0.06 per share, adjusted net loss was $0.44 per share for the three months ended December 31, 2012 for the combined and consolidated Rotating Electrical and Undercar product line segments.

Additionally, at the bottom of Exhibit 1 there's a calculation for EBITDA for the three months ended December 31, 2012. Starting with the reported consolidated operating income of $7.770 million and adjusting for the impact of Undercar-related and non-cash items as previously mentioned and depreciation and amortization expense of $1.263 million, consolidated EBITDA for the three months ended December 31, 2012 is $2.592 million. After further adjusting for approximately $295,000 non-cash standard inventory revaluation write-downs for the Rotating Electrical segment, EBITDA for the three months ended December 31, 2012 was approximately $2.9 million.

Exhibits 1 and 2 represent the income statement for the three and nine months ended December 31, 2012 for the consolidated Rotating Electrical and Undercar product line segments. Exhibits 3 and 4 represent the income statement for the three and nine months ended December 31, 2012 from the Undercar product line segment.

We will now open the call to questions.

(Operator Instructions) Joe Bess, ROTH Capital Partners.

Selwyn, I was hoping you could touch on, I think you said early on that you are now going to be exiting the clutch business, is that correct?

We have already exited the clutch business. That's one of the businesses --

Okay, just making sure on that. And then I was hoping to get a little bit of an update on the Undercar business and what you guys are saying in terms of the brakes business and as well as steering.

I think in general, our outlook on the Undercar business is still very favorable. We think that there's lots of opportunities in all the categories that we're in, in particular, on the re-manufacturing side. Sales have been softer. We're looking to come into our season now, certainly on the driveline products. Winter seems to be a little less mild than last year, so we'll see where that ends up. But overall, we think the outlook for those product lines is good. We've downsized dramatically. And so now it's the next phase of the plan. I think operationally, we are through the transition -- we're not through it, but we're very much on track to get through it. That is not my worry right now. The next step really on the plan is to rebuild the revenue base.

Okay. And then thinking about that, is this the base level now for us to start thinking about this business?

Correct.

Okay, great.

I think it is a conservative base, but it is the base, yes.

Okay. And then thinking about the Rotating Electrical business, can you talk a little bit about what you guys are seeing in that marketplace? And then any opportunities to gain new customers, or is it really just still a matter of gaining markets through using your current customers?

I think it's both. Let's just talk about our current customers. I think we have a cross-section of customers that are industry leaders. I think these customers are gaining share in the commercial do-it-for-me market. And so we are enjoying some of the benefit there. I think the customers that we service are growing and we see positive momentum within our customer base. So we think the fourth quarter will be very solid fourth quarter.

And the outlook for next year is we expect to continue to grow that business. We think there's still some nice upside left there. So we expect a good year next year as well.

Okay, great. And then thinking about Undercar in terms of EBITDA, I know that you don't want to give any guidance right now as to what we were previously discussing for May, but I was just curious as to -- get a little bit of an idea of what you think the longer-term margin potential could be out of this business --.

Right. I think that's (multiple speakers) a great question. And so -- I think the reason that we are where we're are is we are at an inflection point right now in that Undercar business. I think we've done that key things to reduce costs. We are on track to complete the transition plan on time. We think we've identified opportunity that is significant. But we've got a new ERP system. We have a lot more visibility now. The speed or the ability to ramp up; the capital requirements of the ability to ramp up -- all that's being evaluated. And I think as we get our arms around it, we'll be back with guidance. I think long term, those businesses are excellent businesses, all three of them. I particularly am a big proponent of the remanufacturing businesses because I think you add significant value to our customer base from that perspective. We have set up direct import capabilities out of China at this point in time. We do have a new Chinese warehouse. And we think that the ability to play in the new products out of China will continue to enhance.

But having said that, we just want to make sure we -- I'm very comfortable with the amount of costs that we've taken out, just want to make sure now the timing of new business and the capital structure going forward.

Okay, and then last question, what's your timing that you think you could have enough clarity to provide us with some guidance as to what this EBITDA number could look like in the future?

You know, we're coming up with the ROTH conference. Hopefully we'll have something by then. But we don't -- we want to make sure -- we have a lot of things going on right now. I think, fundamentally, there's a lot of positive activity around us, but we've also got to look at our structure and our capability to take advantage of that, and whether we're capable. And once we get to that point, we will be able to give clearer guidance.

Okay, thank you. I'll jump back into the queue.

Thank you.

Jimmy Baker, B. Riley & Co.

Hey, guys, it's Marcelo Choi in for Jimmy Baker. First question -- can you talk about the impact of higher gas prices on your Under-the-car offerings and if we should be thinking about any of those differently than your legacy business?

Higher gas prices are not a good thing. Obviously I think the statistic I read was for every $0.01 of increased gas prices, there's over $1 billion of disposable income that's taken out of the market. So I think as an industry head wind, that's certainly one that is there.

Despite that, I will say that our businesses look like the outlook continues to be strong. The fundamental carpark is still very much in favor, I believe of the product lines that we are in with the aging and the replacement rates at the enhanced aging levels. But I anxiously track gas prices. People will compromise on anything discretionary when disposable income comes down. And, hopefully, the nondiscretionary will be a little less affected. But gas prices, as you know, has always been a hot topic in our industry. So we'll see where that all ends up. I'm not smart enough to forecast where gas prices are going to be going.

Okay. And just shifting over to debt, are there certain milestones you'd like to hit, in terms of profitability before you look to refinance your Cerberus debt?

Yes, I think the key milestone is -- I think just, from a practical perspective, whether it be refinancing service or bringing down interest rates and total, is to get the Undercar business stable. And we didn't do it this quarter. I believe, I personally believe that pro forma we're profitable when -- once the transition is completed, but we need to show the market, and in particular, the banking market, that that business is stable. And at that point in time, I think there is a lot of opportunity to refinance.

Okay, great. And just last question, some of your largest customers have been working to get more hard parts coverage in their storefronts. Can you talk about what level of strategic input you had during that process and if you think you can make a case for other customers of yours to build up more inventory in your products?

Well, I think -- I'd like to think and I hope our customers agree with this -- that we play a big part of their category management processes. I think -- I believe that we are one of the strongest in the industry in category management and forecasting demand trends and our internal systems really developed on the Rotating Electrical side are now being implemented in our key categories going forward.

So I think we play a big part in that. I hope our customers feel that way. We believe that having inventory at the right place at the right time at the right price is critical. And the consumer's car is down essentially when our products fail, and those that have the inventory available will make the sale. And so we think we're there. We think we are a leader in tracking where failures are coming. We think we are a leader in tracking what applications are going to be good failure applications. We think we are a leader at being able to understand the entire competitive landscape. And so we are able to give our customers great intelligence.

Okay, got it. Thank you so much for your time.

Patrick Tenney, Emrose Capital.

I have a question about the top line and Fenco in particular. I think prior discussions led me to believe that the previous run rate at Fenco was about $135 million. Now it looks like it's around $100 million. Can you talk about that significant reduction and where it came from? Is it from brakes and steering, or is it from wheel hubs?

I think we have referred to the $130 million to $140 million as our target sales level for Fenco in the next fiscal year. And at this point, I don't think we are changing anything there. We so see softer wheel hub revenues in this last quarter. We've seen a little bit soft across-the-board quite frankly, in Undercar. They do have some new business in the brakes that we are rolling out right now. And we are still optimistic that we should be targeting that level. But again, we have a lot of things going on right now and so we'll give updated guidance soon.

Can you talk about the opportunity specifically in brake calipers? Talk about what your current revenue run rate is there and what the lay of the land looks like and what that opportunity set looks like.

I think it again, brake calipers is a great category. The number of calipers on the road has doubled. There used to be two on a vehicle, and now there are four on a vehicle. Rear calipers are starting to fail. We have unique excellent skills at producing brake calipers and so we are optimistic about our brake caliper business.

How about steering?

I think steering opportunities are big as well. We are relatively small in steering. We certainly expect to continue to grow that business.

And when do you think you can achieve the growth that's out there?

Again, I think if you look at my comments that I just made, is we are at about a $100 million run rate and we gave guidance that we are looking to be at $130 million, $140 million for the fiscal year. So we are hoping to land some new business. And so we've now got a platform that we think is a viable platform as we complete the transition. And we will adopt the financing to match the business opportunity. And we expect to start seeing some new business come on.

Fair enough. So I'm still, I have to say I'm confused about this quarter and sort of -- I think in the last quarter, you talked about a reasonably linear progression in margin expansion at Fenco. I think adjusted gross margin at Fenco last quarter was 1%; this quarter adjusted gross margin is minus 12%. Help me understand what happened.

Well, I will clarify that. I did say it was going to be choppy. I think there's a significant amount of accruals and repositioning of product lines, that there is a lot of things going on in the numbers. And that's why it's very difficult to understand from this quarter where we think that -- where we'll go forward. And that's why we want to take a step back, regroup, re-analyze. We've got a new system that is far more efficient right now. We have a lot of new business opportunities. We have challenges in some businesses. And so we will be out there giving you guidance just as soon as we can get our arms around it.

That's all I've got. Thank you.

Thank you.

Jacob Muller, AYM Capital.

I'd just like to follow up on the last line of questioning. There seems to be a lot of confusion on the quarter-over-quarter numbers. If I'm not mistaken, the idea of letting go of the clutch business, is that something that was contemplated previously, or is that something that changed over the last few months?

No, we've been out of the clutch business now -- David, when did we actually finally get out of it? It's been a long time. So yes, that was contemplated.

Because on the most recent call we talk about letting go of around $60 million of business, and now we're talking about $100 million, so where is that $40 million delta compared to what we heard maybe seven weeks ago, and when did that change?

I'm not sure that it has changed, but essentially the three major categories of reduction in sales would be the CV axle business, the clutch business, and then our unprofitable customer that we exited. So those are the three pieces.

And if I heard you before, you mentioned pro forma profitability on the Fenco side. Is that even at the current run rate of $100 million, or would we be required to see some extra new business to reach that level?

I believe that it's marginally profitable at this run rate.

And looking at the quarter run rate right now, directionally, what would you expect -- have we seen the bottom for the revenue in Fenco in your view, or are we looking at probably a couple of difficult quarters here where revenue may still dip below current levels?

Again, I can't tell what's going to happen in the Undercar segment based on just organic demand. I think that the demand for these base products should pick up over the next two months as we get through the winter and we come into the season. My expectation is that would happen. And the last piece is just how fast we'd be able to bring on some additional business.

And right now, the way you see things, when do you contemplate seeing the additional business start to kick in?

That's the difficult thing to comment. Until you have it, you don't have it. So I just don't want to get ahead of myself right now. But again, I think I made a comment earlier as we expect that with the new business that we should be able to reach this $130 million revenue for the year.

And just one final question, in light of all these challenges that the Company has encountered, vis-a-vis the Fenco acquisition, obviously, in hindsight probably we'd be looking at a much higher stock price if not for the acquisition. At what point do you say, this is not working, and just say maybe, this can't carry the debt load, that standing on it -- maybe we move on. At what point do we finally admit that this is not working out and just move on?

I continuously evaluate that. I would tell you that an everyday analysis to make sure that in fact, that we have something that is viable. We think the categories are viable, but we have deadly struggled in terms of getting it profitable as quick as we had hoped. But again, I think the cost savings that we identified are all about to happen or happened. And now the question is, can we rebuild it effectively with our anticipated build in the space. So it's something that is continuously being evaluated.

I just say that because, obviously, the other business is going incredibly well and except for the dilution that we've encountered because of this acquisition, it's just impacting results to a level that at some point -- if it doesn't get better over the next few periods, I would think that somebody's just got to admit to themselves this is not working. So I just wanted to pass that on.

Okay. I appreciate that.

All right. Thank you very much.

Thank you.

(Operator Instructions) Bob Sales, LMK Capital Management.

Selwyn and David, I know you may not have all the numbers you want to have at your fingertips, but can you -- in making the broad statement that the Undercar segment is pro forma profitable on a current run rate basis, can you talk a little bit about a few more of the line items that are impacting the apparent profitability, and then perhaps rank order which of those are creating the distortion between the profitability level you are printing and the underlying profitability of the business?

Again, without getting too granular, I think the big change necessarily -- and challenges -- but changes that we're going through right now are adjusting the overhead absorption to the lower production levels and the lower sales levels. So there are a number of policies that take time to work themselves through from a GAAP perspective. And as we adjust to these levels and the new growth levels, the numbers become much more perhaps understandable, for lack of a better word.

And Selwyn, when you talk about that absorption, is it primarily with the accruals that are made for warranty returns, or is there still overhead in your manufacturing and distribution cost structure that needs to be taken out of the business? In other words, I'm trying to understand if it's really a matter of cost accounting starting -- having to bleed through all the way and whether there are still big items from a cost structure standpoint that you have to go through?

I guess let me divide that -- that was a good question. There are two pieces. We've still got to finish a transition plan. So let's not jump to that yet. We are still going through having double expenses and higher inventory levels because we are consolidating warehouses. So, while we started shipping from Torrance our new units and that will continually grow, that still is in progress.

So there's still a lot of noise in the numbers from the transition. And again, we said by May we will be through that. We are on track I'm getting through that. The next big challenge is -- they're not challenges -- again, things that will make the numbers easier to understand are as the accounting starts matching the ongoing run rate, the accrual levels and all the types of things that we do -- we're helping to adjust customer mixes on the shelf right now, which results in larger provisions for returns. And so a lot of things that we're going through right now that create a little bit of difficulty in being able to give you detailed guidance. And that's why we think we will be through soon. And that's why we will get back to the market in terms of identifying. But it is twofold.

I think it's critical to understand that while I keep saying that the transitional plan is essentially over, it's not over. It's over in my mind because I think we have complete control of it and kind of happened. And those costs are going to be saved. And the identified costs that we thought we were going to save, we believe we are going to save. Nothing has changed there.

The next step is how fast is this new business going to come on. If it comes on, again, we are optimistic but we need to start shipping before we can count that. And the new accounting systems and the new accounting teams and new warehousing systems -- the Company is vastly improved but it has a lot more data that needs to be analyzed before we can get out with a little more definitive information.

Okay. And then the last question on the same subject, Selwyn. Do you believe at the current run rate of the Undercar business that the business tune to the shared infrastructure of the Rotating business, can be managed to a breakeven level on a bottom-line basis, not just on an EBITDA basis?

Well, the challenge is the debt coverage at this level. And so I think it could be close, but I'm not sure that this level can get you to profitability without adding what we think we can add will be adequate to cover the debt coverage. So that's something that we have to look at.

Okay. Thank you.

Thank you, and that does conclude our Q&A session. I'd like to turn the conference back over to Mr. Gary Maier for any closing remarks.

On behalf of Selwyn and David, thank you for joining us and we look forward to speaking with you again soon. Thanks, everyone, have a nice weekend.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.