Motorcar Parts of America Inc (MPAA) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America fiscal 2015 first-quarter's results conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Gary Maier. Please go ahead.

Thank you, Sway. Thank you, everyone, for joining us this morning and welcome to the first-quarter conference call. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer, and David Lee, the Company's Chief Financial Officer, let me remind everyone of the Safe Harbor statement included in today's press release.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements including statements made during the course of today's conference call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company.

There can be no assurance that future developments affecting the Company will be those anticipated by the Company. Actual results may differ from those projected in these forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company and subject to change based on 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.

Thanks, Gary, I appreciate you joining us today. Fiscal 2015 is off to an excellent start. Adjusted net income for the quarter increased 45.6% to $4.7 million from $3.2 million a year ago, as shown in the tables of our press release. And net sales climbed 25.3% to $63 million, up from $50.2 million last year reflecting growth in all product categories.

Current economic conditions, along with the aging of the car fleets, continue to provide strong demand for our products. In addition, we also benefitted during the quarter from our growing wheel hub product line business. As I have highlighted on previous calls, data from Polk shows the average age of vehicles is 11.4 years.

In addition, as the number of cars in the 12-plus-year-old category continues to grow the replacement rates for these vehicles increases significantly. Current expectations are that the average age of life vehicles will continue to increase and this should be a long-term trend. This bodes well for us.

Today we announced that we have entered into the brake master cylinder business. We began shipping this product line in late July. Industry sources estimate the market size for master cylinders to be approximately $500 million at the consumer level and we expect this business to expand nicely.

The brake master cylinder is an essential component in virtually all vehicle braking systems. It provides hydraulic pressure to operate the calipers and wheel cylinders which control the braking power of the vehicle. This complements the lineup of the products that we offer in that it is a critical component and one that is prone to wear.

It is estimated that 1.1% of all vehicles have their master cylinders replaced on an annual basis. And for vehicles that are 12-plus-years-old the failure rate almost doubles to approximately 2%.

As the car population ages the category should continue to grow. We expect this new line to be profitable immediately adjusted for the one-time inventory lift. We expect EBITDA contribution percentages to be similar to rotating electrical as we are able to leverage our existing infrastructure costs.

We are committed to making service and quality levels exceed expectations and believe that this will allow us to successfully grow our business in this and other categories.

I complement the work of all of our team members who are successfully executing our business in these exciting and very competitive times. In addition, our new product team continues to be actively at work looking for the next new parts for us to introduce. And I believe they are well on their way with some very exciting news.

For those of you new to our story, let me just mention 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 and the wheel hub and bearing business estimated to be $1.2 billion. I mentioned earlier that master cylinders is approximately $500 million.

We supply more than 20,000 stores and our customers continue to gain share in both the DIY and the professional installer markets. We continue to see numerous opportunities to leverage our award-winning customer service and product quality to enhance market share for all of our products including rotating electrical, wheel hubs and now brake master cylinders. In short, the outlook for the Company's growth prospects continues to be very positive.

Firstly, our rotating electrical business is strong, we are experiencing strong organic growth from our existing customers. More recently we have gained market share with two of our larger customers. This, along with the organic growth of our existing business, should contribute significantly to revenues starting in the fourth quarter of this fiscal year.

Secondly, as I have mentioned on previous calls and at conferences, the wheel hub category represents a $1.2 billion market in North America. It is a fast growing and evolving category for a number of significant reasons. First, the wheel hub assembly contains antilock braking mechanisms. This technology has become more mainstream on vehicles during the last decade and these vehicles are reaching primary replacement stages.

In addition, more recently antilock braking technology is being included in the rear wheel hub, doubling the amount of potential failures which again should further enhance the category growth rate.

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 MPAs gain market share.

Recently we picked up at meaningful new business from additional customers which we expect will even further accelerate our wheel hubs growth. We expect to see the benefits of this in our fiscal fourth quarter.

Last but not least, in addition, as I mentioned earlier, we have recently begun shipping brake master cylinders. We expect initial revenues on an annual run rate basis to be approximately $8 million to $10 million.

In total we expect to revenues for this fiscal year ending March 31, 2015 to show strong growth supported by the strength of business on all fronts. As I stated, we've been awarded significant new business in all of our product lines with varying dates for shipments to begin.

While we expect continued strong revenues in this fiscal year, our run rate at year end 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.

Our Company outlook has never been better. We expect net sales for the fiscal 2015 second quarter to continue to grow over the excellent results of last year's comparative quarter. I reiterate, business is stronger than ever for us. We expect excellent organic growth as we ramp up our new businesses. David will now discuss our financials.

Thank you, Selwyn. I am pleased to report that the fiscal 2015 first-quarter results were a record for a first quarter. As Selwyn briefly mentioned, net sales for the fiscal first-quarter were $63 million, a $12.7 million or 25.3% increase compared with the prior year first quarter.

Adjusted earnings per share for the first quarter was $0.30 which is up 36% over the prior year's comparative quarter after reflecting a 9% increase in fully diluted shares outstanding. And adjusted EBITDA was approximately $11.8 million, which is up 20% over the prior year's comparative quarter.

On a comparative basis first-quarter results benefited from a full quarter of contributions from the Company's wheel hub product line which commenced at the end of the prior fiscal year in late June. Additionally, first-quarter results were impacted by various factors which I will discuss when I review the financial results.

Let me now review the financial results for the first quarter. Net sales increased by $12.7 million or 25.3% to $63 million for the fiscal first quarter from net sales of $50.2 million for the prior year -- prior period a year earlier.

The increase in net sales was due to an increase in net sales of the rotating electrical business by $2.9 million or 5.8% during the three months ended June 30, 2014, compared with the same period of the prior year and sales of wheel hub assemblies and wheel hub bearings, which were $10.2 million for the first quarter compared with $393,000 for the prior year first quarter.

The gross profit percentage was 28.3% for the first quarter compared with 31.9% for the prior year primarily due to a full June 2014 quarter of wheel hub sales compared with will hub sales in the prior year first quarter which we began to ship in late June, 2013.

Additionally, adjusted for $442,000 of customer allowances related to costs for new business, which were recorded as a reduction of net sales, $189,000 of startup costs for new product lines, and $731,000 for non-cash lower of cost for market reevaluation charge for cars on customer shelves which are both increases in cost of goods sold, adjusted gross margin for the three months ended June 30, 2014 was 30.2%.

Adjusted gross profit for the first quarter increased by $2.8 million or 17.1% to $19.2 million from $16.4 million a year ago adjusted for various items as previously explained.

General and administrative expenses increased $544,000 to $5.7 million after adjusting for non-cash mark-to-market net gains and losses, expenses related to discontinued subsidiaries, severance and FAS 123R non-cash stock compensation expense. The increase in general and administrative expenses include business development costs for new product lines and incremental expenses related to our growth.

Adjusted operating income for the fiscal 2015 first quarter increased by $2.1 million or 23.2% to $11.1 million from $9.1 million a year ago. These adjustments reflect discontinued subsidiaries expenses and other costs previously explained.

EBITDA for the first quarter increased by $2 million or 20.4% to $11.8 million from $9.8 million a year ago adjusted for various items as previously explained. Depreciation and amortization expense was $633,000 for the first quarter. For the trailing 12 month ended June 30, 2014, adjusted EBITDA is $54.4 million.

Interest expense was $3.4 million for the first quarter compared with $3.9 million for the prior year first quarter or a decrease of $512,000 primarily due to lower bank debt interest rate.

Income tax expense was approximately 40.7% for the three months ended June 30, 2014. Net income for the first quarter increased by 45.6% to $4.7 million or $0.30 per diluted share from $3.2 million or $0.22 per diluted share a year ago adjusted for the items explained above.

Earnings per share increased 36% over the comparative quarter last year. These results also reflect a 9% increase in the weighted average number of diluted shares outstanding.

At June 30, 2014, we had a $90.8 million term loan, $10 million revolver and approximately $24.7 million cash resulting in net bank debt of approximately $76 million. There was availability of approximately $28.6 million on the $40 million revolver credit facility reflecting approximately $1.4 million of outstanding letters of credit.

At June 30, 2014 the Company had approximately $310 million in total assets. Current assets were $110 million and current liabilities were $93 million. Cash flows provided by operations during the three months ended June 30, 2014 was approximately $2.6 million, which included approximately $215,000 in income tax refunds. As of June 30, 2014, we had approximately $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 first quarter ended June 30, 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 effect of all expenses related to discontinued subsidiaries and other one-time and non-cash expenses highlighted in today's earnings press release for the three months ended June 30, 2014, adjusted net income was $4.719 million, adjusted diluted earnings per share was $0.30, adjusted gross margin percentage was 30.2% and adjusted EBITDA was $11.8 million.

Exhibits 2 through 4 are the reconciliation tables to reconcile the reported results to the adjusted results including net income, earnings per share, gross margins and EBITDA. We will now go over the adjusted net income calculation for the first quarter, so please turn to Exhibit 2.

Starting with reported net income of $3.949 million, or $0.25 earnings per share for three month ended June 30, 2014, we adjust for customer allowances for cost of new business of $442,000; new product line start-up costs of $189,000; lower of cost or market revaluation for cores on customer shelves of $731,000; discontinued subsidiaries legal, severance and other costs of $560,000; non-cash share-based compensation expense of $498,000; mark-to-market non-cash gains related to warrants and foreign contracts of $1.347 million; and tax effect of the above of $303,000 which results in adjusted net income of $4.719 million or $0.30 earnings per share.

Exhibit 3 is a reconciliation of adjusted gross profit and gross margin percentage for the three months ended June 30, 2014. Starting with reported gross profit of $17.816 million or 28.3% gross margin percentage, we adjusted for customer allowances for cost of new business of $442,000; new product line startup costs of $189,000; and lower of cost or market revaluation for cores on customer shelves of $731,000, which results in adjusted gross profit of $19.178 million or 30.2% gross margin percentage.

Finally we will go over Exhibit 4, which is the adjusted EBITDA reconciliation.

Starting with reported net income of $3.949 million for three months ended June 30, 2014, we adjusted for results from discontinued operations; add back interest expense; income tax expense; depreciation and amortization; customer allowance for cost of new business; new product line setup costs; lower of cost or market revaluation for cores on customer shelves; discontinued subsidiaries, legal, severance and other costs; non-cash share-based compensation expense; and mark-to-market non-cash gains related to warrants, which results in adjusted EBITDA of $11.782 million.

Adjusted further, for standard inventory revaluation write-downs of inventory in our facilities -- due to lower cost of manufacturing and purchasing of $1.1 million. Adjusted EBITDA was $12.9 million for the first quarter.

I will now turn the call back to Selwyn.

Thank you, David. As our fiscal year evolves we will continue to focus on growing our business and working with our customers to help grow their businesses through superior product quality and customer service.

In addition to growing our existing business, we will continue to look for additional product line opportunities. We remain optimistic about our existing business and excited about new business that we have received in each of our product lines. We will now open the call to questions.

Sway?

(Operator Instructions). Steve Dyer, Craig-Hallum.

Thanks, guys, nice quarter. If I could just dig a little bit into the master cylinder business. And to be clear, is that a peer distribution agreement or is there some remanufacturing involved in that?

With everything that we do we are going to look at some of the best opportunity, whether it be billed or purchase. At this point in time it is distribution.

Okay. So is there a potential opportunity down the road when this and wheel hubs may be -- may move into more of a reman role, is that possible?

They're certainly in master cylinders -- we don't believe that wheel hubs are remanufacturable.

Okay. And so, I think you guys had talked a little bit about the margin profile on master cylinders being kind of similar to rotating electrical on an EBITDA margin standpoint. What about gross margin? I am assuming kind of slightly less.

Yes, but again we are not segment reporting, so we're really not going to comment on gross margins. But I will say, Steve, that our guidance on gross margins we are comfortable with still. Which is that sort of 27.5% to 30%, we are comfortable we will be in that range, hopefully at the top end of that.

You've kind of consistently outperformed that. Is that -- not that you necessarily want to assume it quarter in and quarter out. But things should only really be getting better from here on out just given volumes and so forth, is that right?

We hope so.

Okay. Okay. And then as it relates to a second wheel hub customer, have you begun shipping yet? And if not maybe some clarity on when that may be and what that may be worth on an annualized basis?

So we have got -- we have a number of new customers, so we don't want to just focus on a customer. And sort of going forward we're going to try and get away from talking about each customer separately. But just in light of the previous sort of dialogue that we have had, the new major business in wheel hub will kick in in November -- November/December.

And so we expect to see the full effect of that really in the fourth quarter. We do have other customers that are ramping up and scheduled over time to come in. So we've had a fair amount of success bringing in some new customers in that business.

Okay. So as we look at revenues in the fiscal second quarter, the September quarter, really the only thing that is additive year-over-year to last year would be the master cylinder getting going? Am I -- or is there some other --?

That is correct. No, that is correct. We do have some additional rotating electrical business that we have begun shipping as well, we've had some gains there that we have already started to take on, major gains in rotating electrical will begin in the fourth quarter. Major gains in wheel hubs will begin in the fourth quarter. And master cylinders has just begun now. And we're optimistic about the growth of that line as well.

Okay, great. And then last question and I will hop back in the queue. Operating expenses, are we just kind of -- I mean could you address those either maybe as a percentage of revenue or I guess directionally how we should think about that?

So in the current quarter it dropped from the prior year fourth quarter. So if you look at historically the first quarter tends to start out lower and as the year progresses the operating expense line does increase. So we don't see too much of a difference in the growth in fiscal 2015 compared to prior years. But it does increase sequentially in quarters as the fiscal year progresses.

But sort of -- I mean if you take sort of a modest growth rate and you keep sort of the cadence amongst quarters the same that is a reasonable way to think about it?

That has been the historical trend, yes.

Okay. Okay, thank you, guys. Congratulations.

Jimmy Baker, B. Riley & Company.

So just had a couple follow-ups on the master cylinder. So could you maybe just speak to the market for reman master cylinders? And I believe Cardone has had some success there. Could you just help us maybe break down that $500 million total market size between new and reman?

I think the substantial majority of that is in the reman sector. But the markets keep changing. So we are optimistic we can compete whether it be new or reman.

Okay. Could you just speak to maybe then the breadth of your coverage that you are able to offer? And this would be maybe helpful in both wheel hubs and master cylinders in comparison to the very full coverage that you can offer in rotating electrical. Are you immediately able to walk in and supply essentially all makes/all models in wheel hubs and master cylinders? Or is there still some kind of SKU build out for you to accomplish?

Well, I mean our intent as a Company right now, our strategy is to have full line offerings. So we can always enhance it and we continue to enhance coverage. But essentially we have full coverage, yes.

Okay, great. And I was just hoping you could maybe quantify (technical difficulty) major customers that you highlighted on the rotating electrical side. I mean are we talking $5 million or $50 million here on an annual basis? And then maybe you can just talk about the cash outlay that is needed to acquire the core deposits as part of those share gains and how we should expect cash flow to progress?

Yes, I mean the number is North of $50 million in terms of new business that we will be bringing in. We -- all of the incremental business is positive cash flow in terms of just -- I think until we enter into and finalize we will publish the contracts as we get there a little closer. So I would rather not comment on the dollar amount, but I will tell you it is all accretive and all positive cash.

So to clarify, you are expecting more than $50 million of incremental rotating electrical revenue in let's call it calendar year 2015? Am I hearing that correctly?

No, I am referring to all products. I mean the rotating electrical is large. There is another larger piece as well -- a large piece as well in wheel hubs. So all in all we are North of $50 million of new business, well north of it.

Okay. And last one for me and I will get back in the queue. Can you just speak to maybe how many additional product lines your customers have already expressed interest in? And maybe give us a little bit more color on the genesis of these conversations and why your customers are coming to you looking for supply in categories where you don't even currently participate.

Well, I mean I think it is twofold. It is not only a one way direction. I mean we are also very aggressive right now looking at new categories. We have a dedicated product development team. So we've gone to our customer base to test ideas with them.

I think the customers' cooperation with us is based on really, I believe, prior performance. I think that there is a trust factor in our relationships with our customers. We are very customer centric as an organization. And we don't just say customers come first, we make them come first. We really believe that the success of our customer is our success.

So we learn by that and I think at the end of the day there is no one reason. I think it is just a lot of little things. There is no really one significant thing that we do different from anybody else.

Okay, thanks very much. Great quarter, Selwyn. I will pass it off.

Thank you very much.

Matt Koranda, ROTH Capital.

Nice quarter I just wanted to start out with rotating electrical. How much additional room do you think there is for margin expansion there to kind of drive the blended gross margins beyond 30%? And over what time frame do you think that could happen?

And then also, if you could just touch on the pricing environment there with customers. I know you've said in the past that it would be healthy for a little bit of pricing inflation there. Do you see any room for this during fiscal 2015?

Yes. Will I will tell you that it is extraordinarily competitive. Pricing is tough. We've been fortunate in that we -- our pricing has -- I mean, while being under pressure we've still been able to maintain our margins. Our productivity and efficiencies have continued to increase offsetting the pricing pressures for the most part.

But there is no -- we don't believe there is margin expansion in this next -- in the next 12 months. Now I do believe that for the sake of everybody in the industry that some inflation is critical. I think that is critical for -- quite frankly it starts with the consumer at the end of the day, what are they going to pay.

But consumer is getting a great deal on product right now in the industry. I think that the customer base, as it continues to grow out, needs some price inflation to comp up. And certainly I think the manufacturing base has been under enormous pressure for a number of years as we have seen the customer base consolidate.

So while everything is very competitive and price pressures are significant now, I don't believe that there will be margin accretion in the next 12 months, but I do believe that over time there needs to be margin accretion for the safety of our industry.

So, I mean that is a long-winded answer to your question, but we are comfortable with the margins we are at despite margin pressure. And we are comfortable we have capacity to expand and we are comfortable that once we digest the expansion we are going through that there is production efficiencies always. We always are looking at production efficiencies. So over time we are still optimistic our margins will remain positive.

Okay, that is really helpful. A lot of my questions have already been answered, but I will just end with this one here. Once you are ramped in the master cylinder segment there, what kind of market share do you think would be reasonable to expect to capture out of that $500 million master cylinder market that you mentioned?

You know, it is so hard to tell. We have very good competitors. I mean, again, in all the spaces that we are in we have formidable competitors. And so it is hard to tell. We're optimistic that we will grow it and we have been successful growing our product lines double-digit on a consistent basis for a number of years. And I am not -- I don't see any reason why we couldn't continue to grow this one on a double-digit plus sort of rate.

Great. Thanks. That's it for me, guys, and I will jump back in queue.

Colin King, Kir, Marbach & Company.

Going back to the question on the new products, how deep is that bench of new product development? Would you say that your vision of the Company say three to five years out is to have a portfolio of half a dozen or so of these product lines?

Yes, I think there is lots of opportunity in new products. There is new products coming into the market, there is mature markets that present opportunity for efficient suppliers. So we are confident we can continue to stream new products into our channels from a foreseeable near future.

Great, thanks for the color.

Jimmy Baker, B. Riley & Company.

Just wanted to get a sense from you of the breakdown on your wheel hub and master cylinders sales between DIY and DIFM. Understanding that today they are primarily through the national retail accounts, but do you have visibility to sell-through breakdown between DIYers or the professional installers?

I can't give you percentages, but I will tell you -- I mean, again, I think you are right on the money is that it is hard to tell retailers or also DIFM distributors -- players now, so it is hard to tell how much of your product is really getting into that marketplace. I mean all of our retail customers have reported growth in the commercial sector.

I think the acquisition of Advance -- of Carquest by Advance even further blurs that number. So we are -- it is hard to tell. But in terms of the buying groups, which I view as distinctly separate from retail and distinctly separate from the DIY, we are growing there. I mean we are not experiencing the same speed of growth in those categories as we would like to, quite frankly. But it is perpetual, we are picking up businesses.

The growth there is a little bit slower because you've got to pick up smaller customers. I think the majority of the new business, because of just the nature of the customers, comes from the retail environment from us. But having said that, I will tell you that the number of names that we are adding to our portfolio of professional installer distributor, traditional distributors grows every day.

So it's slow and stable but very productive new growth in all of our categories. We are hopeful that the wheel hub business can pick up more traction there and certainly we feel master cylinders can pick up some traction there. And as we have a broader array of products and more efficiencies in our system that we will become more and more competitive in that arena.

Okay, great. And then on the -- just a follow up on that new product -- new products yet to be announced I suppose. Do you think it is reasonable to expect this cadence of kind of one new product line per year to continue over the next few years or anything that would meaningfully delay or accelerate that?

You know, it is hard -- I mean it is hard to tell. I mean what I would tell you now is speculative is that I think at least one product line a year should be reasonable. But that is speculative because until we know and we test the -- sort of the thesis of these customers we don't really know what is going to be launched or not.

I mean we have a lot of great ideas, but the concept for us is that we don't lunch unless we have customer traction. And so every item that we will launch, certainly we would like to make sure we have a commitment before we launch it. And so having said that you never know whether you are going to get a commitment or not.

But we're optimistic. I mean we have a great team of people working on this. We think the market opportunities are voluminous. We have plenty of liquidity to manage it. And we have a team of people that we think are some of the finest in the industry, if not the finest. And a work ethic and passion for our business that exists internally that I would challenge any company period to match the passion our employee base has for our business.

So, at the end of the day when you put all of those things together with a market opportunity of $120 billion plus, I don't think there's a reason why we shouldn't continue to grow.

Understood. And then lastly, just given the wide disparity of your margins by product line and the fact that you won't be segment reporting. Will there be a point at which you would be comfortable offering some formal guidance in terms of either EBITDA or EPS to kind of help us better understand the cadence of new customers coming into the mix, new product lines ramping and kind of the impact of all those moving parts?

I would love to be able to do that. I mean I think it is a little speculative for us now, but I will tell you that even though the margins may vary we really are less focused on the margin, and not just that it is not important, of course it is very important. But we are very focused on our return on invested capital.

And so, the master cylinders we believe will exceed 50% cash-on-cash returns and our product lines that we try and launch, certainly we are very focused on the cash returns on the investments in those businesses.

And so, while it is too tough to predict because different product lines have different margins and different competitive factors in all these different markets, but at the end of the day we are not going to invest in businesses unless there is some very compelling strategic reason that don't exceed significant double-digit cash-on-cash returns.

Understood. Thanks very much for the color.

Thank you. (Operator Instructions). I'm not showing any further questions. I would like to turn the call back over to management for any closing remarks.

I want to thank everybody for their support and their interest in our Company. And we look forward to future reports. Thank you very much.

Ladies and gentlemen, this does conclude today's program. You may all disconnect. Everyone have a great day.