Motorcar Parts of America Inc (MPAA) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America fiscal 2016 third-quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. Gary Maier of Investor Relations. Sir, you may begin.

Thank you, Chelsea. And thanks, everyone, for joining us for the fiscal 2016 third-quarter conference call. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President, and Chief Executive Officer; and David Lee, the Company's Chief Financial Officer, I would like to remind everyone of the Safe Harbor statement included in today's press release.

Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during the course of today's conference call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by Motorcar Parts of America.

Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company and are subject to change based upon various factors. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the Company's business, I refer you to the various filings with the SEC.

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

Okay. Thank you, Gary. Appreciate you joining us today. Particularly pleased with what we achieved -- all-time record sales and profitability for a quarter, supported by continued strength across all of our product lines, which currently include rotating and electrical, wheel hubs, and our emerging Brake Master cylinder product line.

The outlook is very encouraging, and we are well-positioned for continued growth in the current fourth-quarter and approaching new fiscal year. Adjusted net income for the quarter increased 23.5% to $9.9 million, or $0.52 per diluted share, from $8 million and $0.43 per diluted share a year earlier. I should mention that the sales and profit performance of the prior third-quarter reflects the benefits of recognizing net core revenue of $12.6 million that was previously deferred, which increased the prior-year earnings per share by $0.11.

So, in fact, our adjusted net income increase was even better. David will discuss the financial results in more detail in a moment.

Take a moment, for the benefit of our new shareholders, I should mention that a number of factors continue to provide tailwinds to the aftermarket hard parts business in total. Miles driven have increased as a result of lower unemployment and lower fuel prices. In addition, despite the growth of new car sales, the average age of vehicles in operation continues to grow, exceeding 11 1/2 years and possibly reaching 12 years by the end of 2016.

As the vehicles get older, the number of replacement parts needed continues to grow to support their maintenance. Additionally, whether they are new strong car sales or not, current indications are that people will continue to keep their cars longer, which will contribute to an increased aged car population and result in accelerated growth for replacement parts.

I might add that our purchasing power with the strong US dollar is also an advantage. All of these factors bode well for both current and future business for both our parts and all hard parts in the automotive aftermarket industry.

In particular, as a number of cars in the 12-plus-year-old category continue to grow, the failure rates for parts in these vehicles increase significantly, resulting in increased parts replacement. Since we focus on nondiscretionary parts that require increased levels of replacement as vehicles age, we anticipate continued growth as we move forward.

To put our overall potential in perspective, industry sources estimate the market size in the USA and Canada for our current products to be approximately $3.8 billion at the consumer level. The remaining potential in these markets for hard parts is estimated to be approximately $106 billion, which should provide us with lots of opportunity to introduce new parts and grow our business organically, with growth in existing and new product lines and through appropriate acquisitions.

We are proud that our service and quality levels continue to exceed expectation. And we believe this, in parts, has allowed us to gain further market share in all of our product categories. Today, we supply more than 23,000 stores, and our customers continue to gain share in both the DIY and professional installer markets. We expect this will continue to grow as we further leverage our award-winning customer service and product quality to enhance market share gains with a growing offering of nondiscretionary parts.

In summary, the Company's growth prospects continue to be very positive. Business is strong and we expect our solid growth to continue.

I will now turn the call over to David to review the results of the fiscal third-quarter in more detail, and then end with my perspectives on the outlook before we take questions. David will now discuss our financials.

Thank you, Selwyn. In summary, net sales for the fiscal 2016 third-quarter ended December 31, 2015, reached a record high for a quarter -- for a third quarter of $94 million compared with adjusted net sales of $85 million for the prior-year third-quarter, which represents an increase of $9 million or 10.6%. Sales and profit performance for the prior-year third-quarter reflects the benefits of recognizing net core revenue of $12.6 million that was previously deferred.

Excluding the recognition of net revenue related to cores of $12.6 million for the prior-year third-quarter ended December 31, 2014, net sales increased $21.6 million or 29.8% to $94 million for the current third-quarter compared with $72.4 million for the prior-year third-quarter. As Selwyn just mentioned, adjusted net income for the fiscal 2016 third-quarter was $9.9 million compared with $8 million for the prior-year third-quarter, which represents an increase of $1.9 million or 23.5%, and adjusted earnings-per-share for the third quarter were $0.52 compared with $0.43 for the prior-year third-quarter.

Prior-year results include $0.11 per diluted share from the recognition of previously deferred core revenue of $12.6 million for the prior year. Adjusted EBITDA increased $2.6 million or 15.4% to $19.6 million from $17 million for the prior-year third-quarter, which includes $3.9 million EBITDA from the recognition of previously deferred net core revenue of $12.6 million for the prior year. Excluding the $3.9 million EBITDA from deferred core revenue for the prior year, EBITDA increased $6.5 million or 49.8% to $19.6 million from $13.1 million for the prior year.

I will now review the financial results in more detail for the third quarter. Net sales were $94 million for the third quarter compared with $84 million for the prior-year comparative quarter, which represents an increase of $10 million or 11.9%. Adjusted and reported net sales were at $94 million for the third quarter compared with $85 million adjusted net sales for the prior-year third-quarter, which represents an increase of $9 million or 10.6%.

As previously mentioned, the prior-year third-quarter includes a recognition of net revenue related to cores of $12.6 million. Excluding the recognition of net revenue related to cores of $12.6 million for rotating electrical for the prior year, third quarter, net sales increased $21.6 million or 29.8% to $94 million for the third quarter from $72.4 million for the prior-year third-quarter, due to the following.

Rotating electrical adjusted net sales increased $16.9 million or 29.9% to $73.6 million for the third quarter compared with $56.7 million for the prior-year third-quarter. Net sales of wheel hub assemblies and bearings increased $4.1 million or 29.6% to $17.8 million for the third quarter compared with $13.7 million for the prior-year third-quarter, and net sales of Brake Master cylinders increased approximately $600,000 or 29.9% to $2.6 million for the third quarter compared with $2 million for the prior-year third-quarter.

We launched a Brake Master cylinder line in late July 2014. The gross profit percentage was 30.7% for the third quarter compared with 29.1% for the prior year, adjusted for non-cash, lower of cost-to-market revaluation of cores on customers' shelf, non-cash inventory step-up amortization. And for the prior-year third-quarter, stock adjustment returns accruals for new business, adjusted gross margin for the three months ended December 31, 2015 was 31.5% compared with 29.7% for the prior year, primarily due to overall lower per-unit costs.

In dollar terms, adjusted for items previously mentioned, gross profit for the current third quarter increased to $29.7 million, which represents an increase of $4.4 million or 17.4% from $25.3 million for the prior-year third-quarter, which includes $3.9 million gross profit from the recognition of previously deferred net core revenue of $12.6 million for the prior year.

General and administrative expenses increased $1.4 million to $7.5 million after adjusting for non-cash mark-to-market net gains and losses; one-time 5.8 million payment received in connection with the settlement of litigation related to discontinued subsidiaries; $4.5 million bad debt expense, resulting from the bankruptcy filing by a customer; discontinued subsidiaries' legal fees, severance, and other costs; and FAS 123(R) non-cash stock compensation. The increase in general and administrative expenses was primarily due to growth and increased business activities.

Sales and marketing expenses increased $390,000 to $2.7 million, primarily due to an increase in staff to support our growth initiatives and increased advertising expenses. Adjusted operating income increased $2.4 million or 15% to $18.8 million for the fiscal 2016 third quarter from $16.4 million for the prior-year third-quarter, which includes $3.9 million operating income from the recognition of previously deferred net core revenue of $12.6 million for the prior year.

Adjusted EBITDA for the third quarter was $19.6 million compared with $17 million for the prior-year third-quarter, which represents an increase of $2.6 million or 15.4%. As previously mentioned, the prior-year third-quarter ended December 31, 2014, adjusted EBITDA of $17 million includes $3.9 million from the prior-year recognition of net revenue related to cores of $12.6 million.

Excluding the $3.9 million EBITDA from deferred core revenue for the prior year, EBITDA increased $6.5 million or 49.8% to $19.6 million from $13.1 million for the prior year. Depreciation and amortization expense was $782,000 for the third quarter. For the trailing 12 months ended December 31, 2015, adjusted EBITDA was $80.1 million.

Interest expense was $2.5 million for the third quarter compared with $3.2 million for the prior-year third-quarter. We entered into a credit facility on June 3, 2015, which resulted in a decrease in interest expense due to lower interest rates and lower average outstanding balances on our loans. This was partially offset by higher balances -- balance of receivables discounted during the three months ended December 31, 2015, compared with the three months ended December 31, 2014.

Income tax rate expense was approximately 45% for the three months ended December 31, 2015. The income tax rate was higher due, in part, to nondeductible expenses, primarily losses, in connection with the fair value adjustment on the warrants.

Adjusted net income for the third quarter increased $1.9 million or 23.5% to $9.9 million or $0.52 per diluted share compared with $8 million or $0.43 per diluted share a year ago. As previously mentioned, sales and profit performance for the prior-year third-quarter reflects the benefits of recognizing net core revenue of $12.6 million that was previously deferred, which increased earnings-per-share by $0.11 for the prior year.

I would now like to highlight the results for the nine months ended December 31, 2015. On an adjusted basis, net sales increased $52.5 million or 22.9% to $282.4 million from $229.8 million for the prior nine-month period. Excluding the $12.6 million deferred core revenue for the prior year, net sales increased $65.2 million or 30% to $282.4 million from $217.2 million for the prior-year nine-month period.

Net income adjusted for the items previously noted and summarized in the financial exhibit of this morning's earnings press release was $30.1 million or $1.59 per share compared with $22.9 million or $1.33 per share a year earlier, which represents a $7.1 million or 31.2% increase. The prior-year nine-month period includes $0.12 per diluted share from the recognition of previously deferred net core revenue of $12.6 million for the prior fiscal year.

Adjusted EBITDA was $60 million for the nine months ended December 31, 2015, compared with $49.4 million a year earlier, which represents an increase of $10.6 million or 21.5%. Excluding the $3.9 million EBITDA from deferred core revenue for the prior year, EBITDA increased $14.5 million or 31.9% to $60 million from $45.5 million for the prior-year nine-month period.

At December 31, 2015, we had a $24.2 million term loan, borrowings of $7 million on the revolving credit facility, and approximately $13.7 million in cash, resulting in net bank debt of approximately $17.5 million. There was availability of approximately $91.5 million on the $100 million revolving credit facility after reflecting approximately $1.5 million of outstanding letters of credit.

Total cash and availability on the revolving -- revolver credit facility was approximately $105 million at December 31, 2015. In June 2015, we entered into a $125 million credit facility with PNC Bank, consisting of a $100 million revolver and $25 million term loan.

Loans outstanding under the new credit facility bear interest at the Company's auction at the domestic rate or at the LIBOR rate plus, in each case, an applicable per-annum margin. The current applicable LIBOR interest rate for both the revolver and the term loan is 3.2%, consisting of LIBOR of 0.45% plus a margin of 2.75%. At December 31, 2015, the Company had approximately $383 million in total assets. Current assets were $116 million and current liabilities were at $117 million.

Net cash provided by operating activities during the nine months ended December 31, 2015, was approximately $10 million. For the reconciliation of non-GAAP financial measures, please refer to the exhibits 1 through 7 in this morning's earnings press release.

I will now turn the call back to Selwyn.

Okay. Thank you, David. As you can tell, we are excited about the multi-product growth in our business and look forward to continued success ahead. We continue to focus on gaining market share in our existing product lines as well as actively working to introduce new product lines.

As we previously indicated, we expect to launch a new product line in the second fiscal quarter ended September 30, 2016. We remain dedicated to manage growth and continue to focus on enhancements to our infrastructure and making investments in resources to support our customers. Our financial position remains strong and our capacity for further growth is excellent. Business continues to be good and we expect the momentum to continue. We remain confident with our sales guidance for fiscal 2016 of $380 million in adjusted sales.

I want to thank all our team members for their commitment and customer-centric focus on service and for their exceptional pride in all the products we sell, and the excellent customer services that we provide. Our ongoing success and accomplishments are due to this incredible team.

We appreciate your interest in Motorcar Parts of America and now we welcome your questions.

(Operator Instructions) Matt Koranda, ROTH Capital Partners.

Thanks for taking my questions. Just wanted to start off with the guidance that you guys reiterated here at $380 million. It does seem to imply a bit lower than where consensus sits for Q4. Is there an element of conservatism there, given some of the customer purchasing patterns you have seen? Or is it -- just maybe talk a little bit about what that accounts for.

Yes. I think -- look, we put this guidance out early in this year or the beginning of this year -- I'm not sure exactly when we put it out. We are comfortable we're going to be there. Fourth-quarter is always a very strong quarter for us. We don't expect it to be much different this year.

The revenue, though, generally comes right at the end of the quarter, so we are just at the beginning now. And we will see. We will see where it ends up. But we think it is going to be a good quarter, but the timing of orders at the year -- right at the year-end, may affect it or positively or negatively. But again, I can tell you that the fundamentals are very strong. I mean, there has been (technical difficulty) -- the weather being a little bit moderate, but at the end of the day, I think it is just the nominal timing issues. I think our demand is very strong on an ongoing basis.

Okay. Great to hear. Maybe we could touch on weather briefly, since you did. I mean, cold you maybe talk about the weather impact on the quarter here? I know that some of your customers have mentioned it was a headwind on the quarter. So, any color on that would be helpful. And then maybe just on a go-forward basis, what you guys are seeing in the current quarter?

Yes. Look, I think that weather -- extreme weather is really advantageous for the replacement of car parts. I think replenishment orders are probably a little softer than they could have been, had the weather been more extreme. But, despite that, I think registered sales for us is strong. We're experiencing 80-degree weather on the West Coast, as you know. I mean, the weather has been far more moderate than it was last winter.

So that may have some slight effect on us. But, again, I have never been big on sort of blaming weather or taking credit for extreme weather helping or hurting sales because it is hard to measure. And the effect is -- we have a lot of distribution. The customers reselling are strong customers. If they are not buying this week, they'll buy the following week.

There is 240 million vehicles on the road. They are aging. They are all going to need new alternators, starters, wheel hubs, master cylinders, and other products. So, I would tell you, in general, without sort of focusing on the weather, that the fundamentals for our business are as strong as they have ever been.

Yes, we could have some more snow and that type of stuff, but if you look at miles driven, interest rates, aging car population, currency benefit that we have, productivity benefits on the market share that we picked up, the industry categories that we are still new in that we continue to pick up market share, new products launches that are coming, the acquisition potentials that are coming -- we continue to see very positive tailwinds for us over the next number of years.

Got it. Understood. In terms of margin, I think you guys had really strong adjusted gross margins here of, I think, about 180 basis points year-over-year. Maybe you could just help us understand the impact there from the better overhead absorption that you are getting in rotating electrical versus the benefit from the devaluation of the peso? And then, maybe if you could thread in how much of a headwind was low aluminum and copper pricing and the distribution businesses as well?

Yes. So we had so many different variables affect pros and cons of where we are. This continued pricing pressure in the industry, which is not new, continues on. So, a lot of productivity, eliminating waste, really helps offset those which we have been successful in doing.

Certainly, the currency translation helps us. Now, we hedged that currency so we are buying nine or 10 months out. I mean, the gains on this currency probably won't show up for another six, seven, eight, nine months because we are still using currency from seven months, eight months, nine months ago.

But the ringgit is weaker, certainly the peso is weaker, and certainly the Chinese RMB is weaker, so purchases of all of our components, we benefit from that. The scrap sales with commodity prices lower certainly hurt us a little bit, but I think now that the commodity prices have been this low for sort of -- at least 12 months, we are now cycling through inventory costs start coming down. Because we use a 12-month weighted average and standard costing.

And so, all in all, when you throw it all into the bucket, it is fundamentally positive. And we expect that to continue on. The mix, as well, by the way, Matt, affects margins. I mean, this last quarter, we had a pretty stable mix. But if we see a big bump in wheel hubs or master cylinders, that may affect the margins a little bit. But we don't expect major variances right now.

Got it. Very helpful. And then one last one for me here. On the acquisition front, I mean, with public company multiples taking a hit in the last couple of months, maybe you could just comment on what you are seeing in the M&A space among some of the private companies you may be looking at or something that's in the pipeline? I guess -- and to add on to that, I mean, would you continue to expect that 3 to 3.5 times leverage that you mentioned on potential acquisitions? What do the opportunities look like in the pipeline?

There's -- well, I mean, we are looking at a lot of opportunities. We are very selective. I think we wanted to be real accretive, for sure. We're certainly looking for opportunities that will grow into larger opportunities as we get our sort of fundamental attributes applied to these entities.

There are a number of deals out there. Some big, some small. Very hard to find the high quality ones and that is what we continue to look for. We are not desperate to make an acquisition and we will make the right one when the time is right. I think the leverage ratios of 3 to 3.5 are the right ratios. We have almost no leverage right now, so I think David mentioned the trailing 12-month EBITDA adjusted of $80 million and net debt fluctuates between zero and $15 million depending on the day.

But we have a lot of liquidity to make the right acquisition. We have a lot of momentum in terms of customer support. And our performance and our shipping and fill rates have been very good. I mean, we are shipping at -- on the very low end, our shipping fill rate would be 95% for us. And the majority of those shipments go out at 99% to 100%.

So, our customers are happy with our performance, which, at the end of the day, will give us opportunity to grow our business organically and through acquisition. But, again, we're not going to rush an acquisition. We are looking for proven earnings. We are looking for proven opportunity and for proven growth opportunities.

Got it. Very helpful. I'll jump back in queue, guys. Thank you.

Steve Dyer, Craig-Hallum.

I don't want to belabor the Q4, the fiscal 2016 guidance issue, but if we were to say sort of $380 million, that would imply a fourth-quarter with year-over-year growth of 7.5%, 8%, which is the lowest that it would have been post-Fenco, which, to me, seems extremely conservative. And I appreciate your desire to stick to things conservative. But assuming strength overall and perhaps even a little bit of business from December into March, given weather, any color about sort of your -- the level of conservatism you're sort of building in there?

Well, again, it is an unknown. Steve, I would love to come out and say we're going to grow 20% nonstop. But I think over long periods of time, when you look at the annualized and I am comfortable that that can happen, quarter-to-quarter is a little more tricky. We are lapping now some significant new business we got last year. So that factors into it.

And then the timing of the orders of the customers. So, yes, I think it is conservative. We prefer to be conservative than more aggressive. Again, I think that the outlook as we go down through the next fiscal year, we will continue to grow this business pretty significantly. And we would not be targeting under 20% growth on an annualized basis.

The quarters are going to fluctuate up and down. Again, I am not implying that we have a weak quarter on our hands. I am trying to be conservative. I don't want people to get ahead of their skis. I think we're going to have a strong quarter, but let's see.

Yes. And the 20% growth you are targeting, I don't want to hold you to 2017 guidance before 2017 has even started yet, but I mean, is that kind of the number you're -- in the back of your head, you guys are shooting for as well?

Yes. I think if you looked -- if you look at our internal discussions of where we need to be as a company, we think we are in the near-term, over the next couple of years, a 20% growth company. But it is not going to all come in one quarter. It is not going to all come organically. There is going to be all sorts of different things happening.

We have a lot of opportunities, and we are just managing through capital allocation and infrastructure to deal with growth. And we feel like the industry, again, there is $106 billion, at least, of opportunity out there. And we are trailing 12 months -- I am not sure what our revenue is, but [$360 million] or something.

[$370 million].

[$370 million] trailing 12 months. We are a baby in terms of the opportunities this Company is going to have. And as long as we keep our service levels up and our integrity up in dealing with the customers with the right product quality, we are going to see this growth for a number of years.

Got it. Getting a little bit more granular, new products sound like September quarter. Any sense, are you willing or able to talk about how meaningful that might be kind of first year out of the gate, compared to some of the others you have rolled out?

Yes. I think it's a similar profile to a master cylinder, is probably somewhere between master cylinders and wheel hubs, it is a great product line. We already have customers signed up for it. And I think it is a nice margin product line as well.

So, we are excited. We think the return on capital is going to be good there. We have a number of other product lines that are being evaluated for launch. So, we think there is a nice pipeline there. And we think we have got a nice acquisition pipeline and we think our organic growth from new customer share is going to be strong. And we think our organic growth from new customer share in all categories will be strong.

So, we have invested a little bit, Steve, in some incremental G&A, I think, to support our acquisitions group. We have some new technology that we are working on that will help with our backbone and our customer support. And so our marketing backbone has been increased. So we have got a little bit higher G&A expenses, but it is all because we anticipate the growth coming in the future.

As it relates to that, was there any sort of one-time -- whether it was APEX or what have you, just with G&A being higher? Or is it going to be a little bit higher to the run rate going forward?

I think it is going to be a little bit higher. Again, we have added and expanded the marketing department significantly. We have got new R&D efforts that will go along with new product launches, and we have got a full-time dedicated Acquisitions Group that are working as well. And then we have got a full-time dedicated new Products Group.

So I think we are sort of at levels now where I think you will see it stable. We have ramped it up a little over the last 120 days. But it's -- I think it is now at a rate that is a stable rate to be able to handle the next wave of growth that we expect.

And, conversely, now that you have some of the litigation behind you, would you expect any sort of a downtick from the legal expense you have been incurring? It has been pretty heavy, obviously, for a few years now.

Yes. I think we get into the end of all that, thank God. And yes, I would expect that to go down significantly.

Are you able to like give a -- just give a spitball at quantifying that at all?

In terms of legal expense, you mean?

Yes. What it might save you on an annual basis now that you have got most of that behind you.

Go ahead, David.

This is David. So in our reconciliation tables, we actually back out those litigation expenses. So, in the past, we have been averaging a few-million dollars per quarter. This past December quarter, it was [a little under $109,000]. So we are already seeing it coming down. But we do adjust for that in the reconciliation tables already.

Yes. So that is -- I mean, if you are looking at it, David, there is always going to be some legal, but obviously you are picking up $2 million, $2.5 million a quarter, at least, in opportunity.

All right, great. I'll hop back in the queue. Thanks, guys.

Thank you.

(Operator Instructions) Jimmy Baker, B. Riley & Co.

So on -- just on the 20% topline growth outlook for 2017 and I guess beyond, as you kind of think about that as a sustainable growth rate going forward, can you just help us bucket that growth into, let's say, existing products versus new products you are introducing organically, and then the third bucket being M&A? Do you see that growth coming from somewhat even thirds or more heavily weighted somewhere?

You know, the -- I think, Jim, you may be getting a little ahead of ourselves. I mean, I think we are going to see growth in all of our product lines this year. We certainly feel like our momentum on picking up new market share is strong, and we think that the organic growth in [pesos] we have will continue on.

So, I think that you are going to see a nice organic growth, whether that is going to be a third of it, a half of it, or 1% or 2%, I don't really know. The acquisition front is much more hard to forecast what that percentage will be. I mean, there are acquisitions of companies in the hundreds of millions of dollars and we are looking at acquisitions of companies in the $5 million. You know, so -- which have strategic opportunity for us going forward.

So until a deal happens, we don't know. And the new product launches will continue to be strong. I mean, they gain momentum as they get launched. Generally, we launch with one or two customers exclusively in the beginning and then several leading them out. But I can tell you that, on the acquisition front, on the organic front, and on the new product front, there is lots of opportunities right now for the Company.

We are busy sorting through what the right things are to do and the right capital allocation, and being cautious that we manage the growth in a profitable manner. So, I wish I could give you more granular data. Maybe next quarter we can focus on that. But overall, lots of momentum in all of the areas.

Sure. Understood. Just a couple of questions here, then, on the competitive environment. I guess, first, have you seen any change in the way your primary competitor is behaving now under the control of a larger parent? And then, separately, can you just comment at all on the Pep Boys transaction and any expectation that they would either evolve their retail square footage or make some strategic changes to under hood, under car services that might impact your business?

Yes. Well, on the first part of that question, I think there is a new owner. It is still early to tell what they are going to do or not going to do. So nothing I could really talk about there.

On the second part, I mean Pep Boys was acquired. There is a new owner there. We do supply 100% of Pep Boys. We think we have a good program, have been a great supplier to Pep Boys for a lot of years. What they do there is, I think, somewhat of a mystery to the industry right now. You have got a company that is focused on the professional installer business now entering into the retail arena.

I think they have announced that they intend to keep the retailers as well as the commercial business -- the bays. So, we wait to see. I think that the owner is now financially strong. They have, it looks like, a good management team in place and, hopefully, they will continue to appreciate the great services we do and we'll have some more growth opportunity with them.

Okay. Last question for me. It just looks like you added about $8.5 million of net debt to the balance sheet sequentially. Could you just walk us through some of the bigger cash flow items that were cash consumers and offset the settlement payment?

Sure.

So it is going to be working capital. It is going to be mostly inventory growth -- to fund the growth.

Yes. We have a -- look, we have a lot of new business coming in, and we are building inventory and we are busy. And so, the cash flow is deployed really in growth, other than the legal settlement that we had, which took some cash and we recovered some of that.

Okay. Thanks, guys.

Thank you.

Thank you.

Steve Anderson, Venator.

Obviously, I am just looking at the stock, too, and the reactions in the quarter. I guess I wanted to clarify something. Are you guys seeing any weakness at all from a macro perspective in your underlying business?

Any weakness in what business?

In your business at all -- anything.

Not at all. No. No. Our business is fundamentally strong.

And it's getting better?

I mean, it could be stronger if the weather were more extreme, but it is strong either way. All of the elements that are out there right now, whether it be potential recessionary -- pullback in the growth of the economy or recessionary economy, fundamentally lead to good opportunity for us.

Every indication are out there in our marketplace that people are continuing to keep their cars longer. As you keep those cars longer, the replacement rates go up. The average complexity of our parts continues to go up, so that average price point over time will go up.

The interest rate outlook, we think, we are comfortable with. The new car sales, it doesn't really matter. They can sell a lot of cars and they don't have to sell a lot of cars. All we care about is that, fundamentally, the car population continues to grow and that is what is happening regardless.

Currency translation is all favorable for us. Our footprint is favorable. I mean, we are doing business in low-margin countries. You know, our fundamentals are exceptional. And whether -- again, I don't want to be too euphoric, and that is why I am trying to keep a lid on it, but our fundamentals are all good. We think, as an entity -- we have just come off our planning meetings; as an entity, we have lots and lots of opportunity to really grow this business over the next couple of years to be a significant growth company.

And is there any strained relationships with any of your clients? Or how are you doing there?

No. we don't -- no. Not that I am aware. I mean, generally, it is the opposite. We have excellent relationships with our customers. (multiple speakers) And our suppliers for that matter, which is equally as important. So I mean, again, I said the other day and I -- and certainly the markets do whatever they do and that is nothing we control. But our fundamental business is, on all fronts, positive. I mean, there is always challenges with the business, but our business is fundamentally good.

Well, and, typically, how does the spring qualify versus the fall quarter? So Q2 versus Q4, if you look at that historically?

David, do you want to comment on that?

So, historically, Q4 has been a little bit higher, but I think we are seeing -- it really depends on customer order patterns and timing of shipments.

Yes. Q4 -- again, there is no reason why Q4 won't be strong. I do think weather is affecting it a little bit, but --

Yes, but the weather wasn't bad in the fall, either, right, Selwyn?

No. So it just -- it depends on the patents and replenishment orders. And there's just so many variables. The problem that we have in terms of giving guidance is that one order, as a percentage of the potential revenue for a quarter, could significantly affect a quarter. If that ships on the first day of the next quarter or two days earlier, in this quarter, you have a variance in what your cut-off is.

So, it is very difficult until you get much more deep into the quarter. Now, back orders and all the update orders, and all of the activity that are happening is positive right now. We thought a $380 million year would be a fantastic year, and certainly we feel that that is going to happen and hopefully we will do better.

Okay. Thanks, guys.

Thank you.

Thank you.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back to Mr. Gary Maier for closing remarks.

I'll take it -- it's Selwyn. And, first of all, I want to thank everybody for the continued support. I know the market conditions and the public markets are tough at this point, but, as an entity, we continue to focus on our knitting, which is doing a good job for our customers and supplying high-quality product on time.

And we look forward to updating where we are as we go down the road. We look forward to speaking with you when we host our next conference call, which will be our year-end fiscal 2016 conference call sometime in June, and at various conferences in the interim. And we thank you again for your support and we appreciate your interest.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.

Thank you, Chelsea.