Motorcar Parts of America Inc (MPAA) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Motorcar Parts of America fiscal year 2014 conference call. At the time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder this conference call may be recorded. At the time I would like to hand the conference over to Mr. Gary Maier. Sir, you may begin.

Thank you. Thank you, everyone for joining us and welcome to Motorcar Parts of America's fourth-quarter yearend 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'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 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 or 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 various filings with the Securities and Exchange Commission. With that said, we would like to begin the call and I would like to turn it over to Selwyn.

Thank you, Gary. I appreciate everyone joining us today. Fiscal 2014, as you can see, was an excellent year for us, ending with an exceptionally strong quarter.

For the full year we achieved a record $52.4 million of adjusted EBITDA as shown in the tables of our press release. Net sales were a record $259 million, up 21.4% from last year reflecting growth in all our product categories. Current economic conditions along with the aging of our car fleet continued to provide strong demand for our rotating electrical product as well as our new and growing wheel hub product line.

As I highlighted on previous calls, data from Polk shows the average age of vehicles is now 11.4 years. In addition, as the number of calls in the 12-plus-year-old category continues to grow, the replacement rates for these vehicles increase significantly.

Current expectations are that the average age of life vehicles will continue to increase and this should continue to be a long-term trend. Our sector of the automotive industry benefits from this aging vehicle population and as such we believe the outlook is strong and stable.

For those of you new to our story let me just mentioned that the size of the aftermarket parts business is estimated to be more than $122 billion at the manufacturing price level with the rotating electrical segment estimated at $1.4 billion, the wheel hub and bearing business estimated at $1.2 billion. Our share in the rotating electrical is approximately 25% and we are well positioned to grow the share in both the DIY, do it yourself, and DIFM, do it for me, markets by leveraging our available manufacturing capacity, distribution strengths, reputation for top-notch products and award winning customer service.

We supply more than 20,000 stores and our customers are gaining share in the professional installer market with their brands which bodes well for us. We are in a very competitive environment, which requires us to focus on continuous improvement.

Equally important we see numerous opportunities to leverage our award-winning customer service and product quality to enhance market share both for rotating electrical and wheel hubs as well as benefit from the near-term introduction of the new product line. We expect to begin shipping this new product line late in our fiscal second quarter and we will provide further information as shipments commence.

With respect to our nicely growing wheel hub product line, which we launched at the end of June 2013, we just completed the third full quarter. As I've mentioned on previous calls and at conferences, this category represents a $1.2 billion market place in North America. It is a fast growing and evolving category for a number of significant reasons.

First, wheel hub assembly contains the antilock braking mechanism. This technology has become more mainstream on vehicles during the last decade and these vehicles are reaching prime placement stages.

Secondly, more recently antilock braking technology has been included in the rear wheel hub which should further enhance the category growth rates because you now have four wheels instead of two. This category has similar failure rate characteristics as rotating electrical. So as cars age failure rates grow significantly.

Industry research indicates that this category will grow at a 7%-plus annual compound growth rate. We expect disproportionately better growth rates as non-OE brands like MPA's gain market share.

In short, the Company's outlook and growth prospects are very positive. We expect our revenues for this fiscal year ending March 31, 2015 to show strong growth supported by the strength of business on all fronts, rotating electrical, wheel hubs and contribution from our new product line.

We have been awarded significant new business in all of our product lines with various dates for shipments to begin. As a result, while we expect continued strong revenues in this fiscal year, our run rate at yearend should be even greater.

Contributing to our success is the fact that our product fill rates remain very strong and customers recognize the value added benefits of our comprehensive customer service program. These factors support customer sales growth and in turn our success.

We feel business has never been better for the Company. We expect net sales for the fiscal 2015 first quarter to increase by approximately 20% over the prior-year period.

I reiterate, business is excellent and stronger than ever for us. We expect excellent organic growth as we ramp up our new businesses.

As we announced this morning, sales for the fourth quarter increased 32.1% to $76.7 million from the same period a year ago. And net sales for fiscal 2014 increased 21.4% to $258.7 million on a year-over-year basis.

On an adjusted basis net income for the fourth quarter increased 86% to $6.8 million or $0.43 per diluted share. And for the year adjusted net income increased 55% to $21.3 million, $1.39 per diluted share. These numbers are even better when you take into account standard inventory revaluation write-downs, which David will discuss in more detail.

David will now discuss our financials, and I will take questions afterwards. Thanks.

Thank you, Selwyn. I am delighted to report that the fourth-quarter and fiscal year 2014 were record results.

Net sales for the fourth quarter were $76.7 million and $18.6 million, or a 32.1% increase compared with the prior-year fourth quarter. Adjusted earnings per share was $0.43 for the fourth quarter and adjusted EBITDA was approximately $14.9 million for the fourth quarter.

Fourth-quarter results benefited from continued contributions from the Company's new wheel hub product line started at the end of June 2013, as Selwyn previously noted. Results were impacted by various factors including the following three items -- $3.6 million non-cash mark-to-market net loss related to warrant valuation, $596,000 of expenses related to discontinued subsidiaries and $419,000 related to non-cash share-based compensation.

Let me now review the financial results for the fourth quarter. Net sales increased by $18.6 million, or 32.1% to $76.7 million for the fiscal fourth quarter compared with net sales of $58 million for the prior-year period a year earlier.

The increase in net sales was due to an increase in net sales of the rotating electrical business by $6.6 million or 11.5% during the three months ended March 31, 2014, compared with the same period of the prior year and sales of wheel hub assemblies and wheel hub bearings of $12.0 million in the fourth quarter. The gross profit percentage remained consistent at 31.2% during the three months ended March 31, 2014, compared with the prior year.

General and administrative expenses increased by $1 million after adjusting for non-cash mark-to-market net losses, expenses related to discontinued subsidiaries and FAS 123R non-cash stock compensation expense. The increase is primarily due to additional general and administrative expenses related for the new wheel hubs product line and additional professional fees.

Sales and marketing expenses increased $248,000 compared with the prior-year fourth quarter due to employee related expenses and travel. Operating income for the fiscal 2014 fourth quarter was $14.3 million compared with $9.7 million a year ago adjusted to exclude discontinued subsidiary expenses and other costs previously explained.

EBITDA for the fourth quarter was $14.9 million adjusted for various items as previously explained and depreciation and amortization expense was $651,000 for the fourth quarter. Interest expense was $3.2 million for the fourth quarter compared with $4 million for the prior-year fourth quarter, or a decrease of $774,000 primarily due to lower bank debt interest rates.

Income tax expense was approximately 52% for the three months ended March 31, 2014, primarily impacted by the nondeductible expenses in connection with the fair value adjustments on the warrants previously discussed. Income from continuing operations for the fourth quarter adjusted for the items previously -- items explained above was $6.8 million, or $0.43 per diluted share. Which also reflects the increase in the weighted average number of diluted shares outstanding to $15.8 million for the fourth quarter compared with $14.5 million for the prior-year fourth quarter, compared with $3.6 million or $0.25 per diluted share for the comparable period a year earlier.

Let me now take a few minutes to review the results for the full fiscal year. Net sales increased by $45.5 million, or 21.4% to $258.7 million for fiscal year 2014 compared with net sales of $213.2 million for the prior period a year earlier. The increase in net sales was due to an increase in net sales of the rotating electrical business by $16.2 million, or 7.6% to $229.4 million for the 12 months ended March 31, 2014, compared with the prior year and sales of wheel hub assemblies and wheel hub bearings of $29.3 million for approximately 9 months from the start of the business in late June 2013 through March 31, 2014.

Adjusted for start-up-related costs of $1.4 million, wheel hub net sales were approximately $30.7 million for the approximately 9-month period From the start of the business in late June 2013 through March 31, 2014. The gross profit percentage decreased to 31.9% for fiscal year 2014 after adjusting for wheel hub startup costs and discontinued subsidiaries cost compared to 32.5% for the prior fiscal year primarily due to product mix.

General administrative expenses increased $1.8 million after adjusting for non-cash mark-to-market net losses, expenses related to discontinued subsidiaries and FAS 123R non-cash stock compensation expense. The increase is primarily due to additional general and administrative expenses related to the new wheel hubs product line and additional professional fees.

Sales and marketing expenses increased $527,000 compared with the prior year due to employee-related expenses and travel. Operating income for fiscal year 2014 was $49.7 million compared with $38.4 million a year ago adjusted to exclude discontinued subsidiary expenses and other costs previously explained.

EBITDA for the fiscal year 2014 was $52.4 million adjusted for various items as previously explained and depreciation and amortization expense was $2.7 million for fiscal year 2014. Interest expense was $14.8 million for fiscal year 2014 compared with $15.8 million for the prior year after adjusting both periods for discontinued subsidiaries-related interest and write-off of prior deferred loan fees, or an increase of $1 million primarily -- excuse me, or a decrease of $1 million primarily due to lower bank debt interest rates and lower factoring interest rates.

Income tax expense was approximately 53% for the 12 months ended March 31, 2014, primarily impacted by the nondeductible expenses in connection with the fair value adjustments on the warrants previously discussed. Income from continuing operations for fiscal year 2014 adjusted for the items explained above was $21.3 million, or $1.39 per diluted share, which also reflects the increase in the weighted average number of diluted shares outstanding to 15.3 million for fiscal 2014 compared with 14.4 million for the prior year, compared with 13.8 million, or $0.96 per diluted share for the prior period a year earlier.

At March 31, 2014, we had a $93 million term loan, $10 million revolver and approximately $24.6 million in cash resulting in net bank debt of approximately $78 million. There was availability of approximately $17.9 million on the $30 million revolver credit facility reflecting approximately $2.1 million of outstanding letters of credit.

Last week we entered into a First Amendment to our bank financing agreement pursuant to which, among other things, the revolver facility was increased by $10 million to $40 million, an increased flexibility for CapEx spending as the business grows by increasing the spending limit. Please refer to more details in the 8-K filing this morning.

At March 31, 2014, MPA had approximately $319 million in total assets. Current assets were $125 million and current liabilities were $103 million.

Cash flows provided by operations during the 12 months ended March 31, 2014 was approximately $13.3 million, which included $16.5 million in income tax refunds and also included working capital use of cash to build inventory levels in anticipation of future sales as well as an increase in accounts receivable due to the high sales levels during the second half of fiscal fourth quarter. Additionally, impacting cash flow for fiscal year 2014 includes $5.8 million in proceeds from stock option exercises, $5.2 million paid in loan fees in connection with the refinancing of the credit facility and a $2.2 million payment to purchase our lenders' warrants.

MPA expects to realize a total tax benefit of cash and credit of approximately $38 million as a result of the losses incurred for the investment in previous subsidiaries which has already contributed to liquidity and should further enhance liquidity. As of March 31, 2014, we still have $7 million of tax credits remaining.

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 fourth quarter ended March 31, 2014. If you can take a moment to turn to the income statement exhibits in the press release starting with Exhibit 1, we can begin.

So when you eliminate the expect of all expenses related to the discontinued subsidiaries and other one-time and non-cash expenses as reflected on the earnings press release, for the three months ended March 31, 2014, adjusted net income was $6.778 million. Adjusted diluted earnings per share was $0.43 and adjusted EBITDA was $14.9 million. Additionally, for the full fiscal year 2014, when you eliminate the effect of all expenses related to discontinued subsidiaries and other one-time and non-cash expenses as reflected in the earnings press release, fiscal year 2014 adjusted net income was $21.258 million, adjusted diluted earnings per share was $1.39 and adjusted EBITDA was $52.4 million.

Exhibits 2 through 4 are the reconciliation tables to reconcile the reported results to the adjusted results including net income, earnings per share and EBITDA. We'll now go over the adjusted net income calculations for the fourth quarter, so please turn to Exhibit 2. Starting with reported net income of $3.067 million, or $0.19 earnings per share for the three months ended March 31, 2014, we adjust for discontinued subsidiaries legal, severance and other cost of $670,000, non-cash share-based compensation expense of $419,000, mark-to-market losses related to warrants of $3.645 million and the tax effect of the above of $1.023 million which results in adjusted net income of $6.778 million, or $0.43 earnings per share.

In the same way for the full fiscal year 2014, please turn to Exhibit 3 for the adjusted net income calculation for the four months ended, March 31, 2014. Starting with reported net income of $107.359 million, or $7.01 earnings per share for the 12 months ended March 31, 2014, we adjust for results from discontinued operations, start-up-related costs for the new wheel hubs product line in early fiscal year 2014, discontinued subsidiaries, legal, severance and other costs, non-cash share-based compensation expense, mark-to-market losses related to warrants, discontinued subsidiaries, higher revolving credit line interest and write-off of prior deferred loan fees and tax effect of the above, which results in adjusted net income of $21.258 million, or $1.39 earnings per share.

Finally, we will go over Exhibit 4, which is the adjusted EBITDA reconciliation. Starting with reported net income of $3.067 million for the three months ended March 31, 2014, we adjust for results from discontinued operations, add back interest expense, income tax expense, depreciation and amortization, discontinued subsidiaries, legal, severance and other costs, non-cash share-based compensation expense and mark-to-market losses related to warrants which results in adjusted EBITDA of $14.940 million.

Adjusted further for standard inventory revaluation write downs due to lower cost of manufacturing of $1.8 million, adjusted EBITDA was $16.7 million for the fourth quarter. In the same way for the full fiscal year 2014 starting with reported net income of $107.359 million the 12 months ended March 31, 2014, we adjusted for results from discontinued operations, added back interest expense, income tax expense, depreciation and amortization, start-up-related costs for the new wheel hubs product line in early fiscal year 2014, discontinued subsidiaries legal, severance and other costs, non-cash share-based compensation and mark-to-market losses related to warrants resulting in adjusted EBITDA of $52.419 million.

Adjusted further for standard inventory revaluation write-downs due to lower cost of manufacturing of $3 million, adjusted EBITDA was $55.4 million in the 12 months ended March 31, 2014. I will now turn to call back to Selwyn.

Thank you, David. Going forward we will continue to focus on growing our business organically and working with our customers to grow their business through superior product quality and customer service. In addition to growing our existing business we will continue to look for additional product line opportunities that can complement the needs of our customers and our operating model.

We remain optimistic about our existing businesses and excited about new business opportunity. In summary, there are more than 240 million vehicles on the road and these vehicles are staying on the road longer.

This translates into exciting opportunities for Motorcar Parts of America and the customers we serve. We will now open the call to questions.

Thank you, sir. (Operator Instructions). Philip Shen, ROTH Capital.

Hey, guys. It's Matt Riley on for Phil.

Hey, so just kind of wanted to start off with market share. Can you talk about what kind of share gains you had in the quarter for both rotating electrical and wheel hubs? How does this trend ahead and in addition, wheel hubs were about $30 million of revenues in fiscal 2014, how could this trend in 2015?

Okay, the fourth quarter didn't have significant market share gains. I think it was more the revenue from the maturing and the ramp up of existing customers.

So we expect to have, we do have, awards that will enhance that revenue base. We expect to start shipping those again later in this year.

So we are optimistic that there is going to be good growth from our existing customer business just because category has grown, we are growing share and we are excited with the new business opportunities we've got. Certainly we are very excited about how the business is going.

And by the way that also, that same statement can be made for rotating electrical. It's the same customers, essentially no new business there. But we expect we will begin shipping a little bit of new business right now on rotating electrical and that should grow as the year goes on.

All right, great, Selwyn, That's helpful. Just turning to margins for a moment.

On a year-over-year basis margins were flat. So realistically it's a positive given the inclusion of the wheel hubs. With wheel hubs ramping, with this new product line being introduced, how can we think about margins in fiscal 2015?

It's a tough question because the unknown is how successful we will be with the new product line. We certainly have revenue coming out of the gate but we hope to continue to grow both -- all of our product lines. So I think we gave some conservative guidance I think on our last call of 27% to 30% or 31%, if I remember that, to 30%?

Yes.

And we certainly think that that is conservative still and hope to end on the upside of that.

Okay, great. I will jump back into. Thanks, guys.

Steve Dyer, Craig-Hallum.

Thanks, nice quarter, guys. Thanks for taking my question. Or questions, I should say.

So, Selwyn, you I think alluded to the new product shipping I think late fiscal Q2. Can you give us any indication maybe the initial size or the initial how you think about it on an annualized or even a quarterly basis?

And then secondly, just so we kind of have the cadence of the year down correctly, I think you had indicated a nice new material wheel hub customer. Maybe when that will start shipping just so we can get the revenue cadence down?

Yes, I think we are ramping small amounts of new business now, it takes a little bit of time. We think that the majority of the business start kicking in in the third quarter and then accelerate it in the fourth quarter.

The new product line at this point I would like to stay away little bit from that and some of the revenue until we start shipping that. It will be smaller than the wheel hub business but we feel like it has margin upside and nice upside opportunity there.

And all our supply agreements have been signed and everything is on track to begin shipping very late this quarter -- late second quarter. I guess we're still in the first quarter -- late second quarter. So I think when we look at revenue, Steve, there's so much new business and there is so much growth coming that really it is back-end loaded for the last six months and certainly in the last quarter as well.

Okay, that helps. And then you kind of touched on another question is, is the new product line going to be distribution, remanufacturing? And I guess the offshoot of that is are we thinking about margins more along the lines of rotating electrical, or more wheel hub?

Yes, again we are not commenting specifically on the segments. I think it is going to be a distribution based margin, a distribution business, and so the distribution model will apply. Having said that the margins are a little higher than they are on wheel hubs.

Okay. You mentioned the accounts receivable jumping pretty significantly. Is that just purely a function of timing of stuff that you hadn't had a chance to factor yet at the end of the quarter as opposed to any kind of change in philosophy about factoring or not?

No, no change at all. I mean the month of March was a record for us by probably 40%, so a lot of those receivables generally are collected in about 30 days. So that reflects all the tremendous volume that we did in March.

Okay. Last question, and I'll hop back in the queue. Operating expenses kind of this $9.5 million level, is that sort of a good level, or is there anything one-time or extraordinary in the quarter just given I don't know if you had to pay over time in March given the strength? How should we kind of be thinking about that quarterly run rate going forward?

Generally the fourth quarter the operating expenses are a little high but I'm going to turn it over to David to give you more detail on that.

I think if we look at this trend for fiscal 2014 we've seen it slightly increase quarter over quarter. So the fourth quarter is not reflective of a current run rate. I think it's usually the highest in the four quarters of a fiscal year.

So that trend should continue. Usually the fourth quarter has some additional professional fees and other types of expenses but it is not reflective of the current run rate, no.

So June will come back in some and then kind of modestly work its way higher throughout the year again?

Yes. That has been the trend.

Okay. Thank you, gentlemen.

Jimmy Baker, B. Riley & Company.

Hi, good morning guys and congratulations on the progress. So, just given your almost ramping the fiscal first quarter here could you maybe just talk about, particularly in light of those (technical difficulties) what you are seeing or what you saw in April and May? Did your customers pull back at all as the weather moderated, or are you continuing to see here (technical difficulties) in double-digit year-over-year growth in rotating electrical continue?

The question was a little muffled, Jimmy, but I think I got the gist of it. To comment perhaps more on the first-quarter revenues, generally we came off such a strong fourth quarter and so I think inventory is settling.

I think the fundamentals of our customer sales are good without commenting on any one specifically. I think there is some adjusting of inventory levels a little bit.

But I don't see -- we think the first quarter again will reflect probably around 20% in growth over the prior first quarter. I don't see anything fundamental. I think that the growth rates will grow from there as we go down through the year.

The weather, I would've expected a better lift from the weather than I'm seeing to be honest but time will tell. I think it's still a little bit early.

I think we saw some -- in rotating electrical we saw some acceleration of demand towards the end of the quarter. So I think it's normalizing out now.

And I think the deferred maintenance, these parts are under excess stress when you have extreme cold like we had. And so I expect that over the year that we should see increased replacement rates. But we haven't seen that yet, it's still a little bit early for that.

Okay, understood. And then most of my will have questions have been answered but maybe could you just share with us how many customers you are shipping wheel hubs to today?

And then maybe just update us on the last call you talked about the potential to more than double that wheel hub business. Any update kind of on your view of the timing of that, like when you would get to let's say the nearly $50 million revenue run rate you exited this fiscal year on?

Well, in terms of number of customers we sell to a lot of customers. I don't know the exact number off the top of my head. We sell pretty much most of the industry on rotating electrical.

Yes, this was just about wheel hubs.

On wheel hubs, again I don't want to get into the exact number, but we certainly have grown our customer base slowly but surely. And we have a significant new customer starting in the near future. And in terms of when we will double that business, we are working hard at it.

I think we going to see some very very strong double-digit growth this year. Sorry to be so elusive but I just don't have definitive numbers I can give you on that.

Okay, fair enough. And then just lastly, since the 10-K is (technical difficulty), can you just give us-- maybe this is for David -- but free cash flow for the full fiscal 2014? And then as we look towards fiscal 2015, any unusual items or meaningful move in working capital that should drive a deviation from net income to free cash flow?

Yes, I will let David answer it but just in general we have had again very strong growth. So this Company in a very stable environment generates great cash.

We have reinvested capital into inventory and obviously receivables based on when you hit the cycle. And that growth is going to require additional working capital but I will turn over to David for more detail.

So for the 12 months ended fiscal 2014, cash flows provided by operations was $13.3 million. That did include $16.59 in income tax refund.

So there was a working capital use of cash primarily for inventory as well as AR growth. And as Selwyn reiterated, we are growing our business so as we grow our business we're going to need to invest our free cash flow back into our working capital to grow the business successfully.

We did grow inventory substantially during the year. And that's twofold. Number one we are ramping up for new business and number two is our business has grown and number three is is that our fill rates continue to be excellent.

And we also did add the new product line during the fiscal year.

And we added a new product line and we are adding another new product line, which inventory has already started coming in for.

Okay, so I lied and said that was my last question. Can you give us the initial outlay that you will have on a cash basis to bring on that new product line?

Well, again I think that the net payback on that investment is two years. So I think our return on invested capital is going to be very very high.

I think we would rather stay away from exact inventory levels because we haven't given any guidance on revenue for that product line. But the return on invested capital there is very strong, once again. And certainly our budget shows we should recoup 100% of our capital investment within two years and hopefully we will beat that.

Okay. Thanks very much, Selwyn. Thanks, David.

Steve Dyer, Craig-Hallum.

Thanks. Selwyn, I just wanted to clarify one thing you said.

You had indicated that you expect revenue growth accelerating above that first-quarter 20% level throughout the rest of the year. Did you mean that the actual numbers are getting bigger, or that actually 20% growth is going to be faster than that throughout the rest of the year?

Let's see what I meant. That's a good question. I think on a comparable quarter over quarter same year to same year, the growth rates should increase as we get through the end of the year as we launch the new products and the new customers.

So that implies more than 20% every quarter throughout the year?

Yes, I don't want to get ahead of ourselves a little bit but I would rather be on the conservative side of that.

Fair enough.

Theoretically that is a possibility but there is a lot of new growth and it's difficult for us to forecast that way.

Sure. Understood. Thank you.

Thank you. And I'm showing no further questions at this time, gentlemen.

Okay. We appreciate your continued support, everybody and we thank you again for joining us for the call. Not too long before we start talking about the first quarter and we can give you more updates on developments.

But again we are optimistic about the outlook and we look forward to our next call in August. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.