Motorcar Parts of America Inc (MPAA) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America FY16 fourth-quarter results conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Gary Maier, Investor Relations. Please go ahead.

Thank you, Kat, and thanks, everyone, for joining us for the call this morning. Before we began and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer, and David Lee, the Company's Chief Financial Officer, I would like to remind everyone of the Safe Harbor statement included in today's press release.

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

These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company and are subject to change based upon various factors. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the Company's business, I refer you to the various filings with the Securities and Exchange Commission. I would now like to begin the call and turn it over to Selwyn Joffe.

Okay. Thank you, Gary. I appreciate you joining us today. We are pleased with the results of our FY16 year ended March 2016. We're encouraged to have achieved record adjusted sales of $383.3 million for the year, which exceeded our adjusted net sales guidance of $380 million. We achieved these sales levels despite a mild winter, which results in deferred failures for our products.

All of our products, which are non discretionary, fail more frequently in a harsher weather environment. Our results were supported by continued strength across all of our product lines, which currently include rotating electrical wheel hubs and our emerging brake master cylinders. The outlook is equally encouraging and we are well-positioned for continued growth as FY17 progresses.

Other than the impact of mild weather, the fundamentals of our business continue to be strong. We have new business commitments in all of our product lines. In addition, the replacement rates for all of these product lines will continue to grow as the car population ages. While there are factors that may influence replacement rates on a short-term basis, ultimately, all of the 250 million vehicles on the road other than those scrapped will require replacement parts.

To summarize our results, net income for the year was $10.6 million, or $0.55 per diluted share, and adjusted net income was $39.6 million, or $2.08 per diluted share. While our GAAP earnings per share decreased to $0.55 per diluted share for the year from $0.65 for the prior year, our adjusted earnings per share increased to $2.08 per diluted share for the year from $1.87 a year ago.

While our GAAP gross margin was 27.4% for FY16, we achieved an adjusted gross margin of 30.7%, which was higher than the top range of our guidance for the year. I should mention that gross margin was negatively impacted by product mix and lower scrap revenue due to declining commodity prices over the past 12-month period. David will discuss the financial results in more detail.

For those of you who are new to Motorcar Parts of America, I should mention that a number of factors continue to provide tailwinds to the aftermarket hard parts business in total. Miles driven has increased for a variety of reasons including reduced unemployment and lower fuel prices. In addition, despite the growth of new car sales, the average age of vehicles in operation continues to grow, now exceeding 11.5 years and possibly reaching 12 years by the end of calendar 2016.

As vehicles get older, the number of replacement parts needed continues to grow to [defer] their maintenance. Additionally, whether there are strong new car sales or not, current indications are that people will continue to keep their cars longer, which will contribute to an increased age car population and result in accelerated growth for replacement parts. All of these factors bode well for both current and future business for both of our parts and all hard parts.

In particular, as a number of cars in the 12-year old plus category continues to grow, the failure rates for parts in these vehicles increased significantly resulting in increased parts replacement. The 12-year plus category will begin to include later model vehicles with more sophisticated and higher priced parts than the earlier models, eliminating some of the parts that have low gross margins. We anticipate continued positive contributions as we move forward through the aging cycle.

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 $106 billion plus, which should provide us with a lot of opportunity to introduce new parts and grow our business organically with the growth of existing and new product lines and through appropriate acquisitions.

We are proud that our service and quality levels continue to meet or exceed expectations and we believe this in part has allowed us to gain further market share in all of our product categories. Today, we supply more than 23,500 stores and our customers continue to gain share both in the DIY and the professional installer markets. We expect continued growth in both segments as we further leverage our award-winning customer service and product quality coupled with a growing offering of non-discretionary products.

In summary, the Company's growth prospects continue to be positive. The fundamentals of the business are strong and we expect our solid growth to continue. I will now turn the call over to David to review the results for the fiscal fourth quarter and 12-month results in more detail, and then I will end with an update on the numerous initiatives and progress the Company has made and also highlight our expectations for the year ahead. And then we will open the call up for questions. So David, I'll turn it over to you now.

Thank you, Selwyn. I will now review the financial highlights for the fourth quarter. Before I begin, I would encourage everyone to review the 8-K filed this morning with respect to our March 31, 2016, earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures.

Net sales were $97.4 million for the fourth quarter, compared with $83.9 million for the prior-year fourth quarter, which represents an increase of $13.5 million, or 16.1%. Adjusted net sales were $100.9 million for the fourth quarter, compared with $90.9 million adjusted net sales for the prior-year, which represents an increase of $10 million, or 11.1%.

The adjusted net sales increase of $10 million was due to the following: rotating electrical adjusted net sales increased $3.1 million, or 4.2%, to $76.6 million for the fourth quarter, compared with $73.5 million for the prior-year; adjusted net sales of wheel hub assemblies and bearings increased $6.5 million, or 40.8%, to $22.3 million for the fourth quarter, compared with $15.8 million a year earlier; and net sales of brake master cylinders increased approximately $540,000, or 34.4%, to $2.1 million for the fourth quarter, compared with $1.6 million a year ago. We launched a brake master cylinder line in late July 2014.

Gross profit for the fourth quarter increased to $24.2 million from $20.9 million a year earlier. Gross profit as a percentage of sales for the fourth quarter was 24.8%, compared with 24.9% a year earlier. Adjusted gross profit for the fourth quarter increased to $29.8 million, from $28.2 million a year earlier. Adjusted gross profit as a percentage of sales for the fourth quarter was 29.6%, compared with 31.1% for the prior-year fourth quarter, impacted by product mix and lower commodity prices resulting in lower scrap revenue.

General and administrative expenses increased $1.3 million to $11.3 million. Adjusted G&A expenses increased $1.9 million to $8.2 million. Sales and marketing expenses increased $475,000 to $2.4 million. The increase in adjusted general and administrative expenses and sales and marketing expenses reflect new investments for innovation, growth in acquisitions, as well as the Company's value added customer service programs including Motorcar Parts of America's industry-leading customer service training and quality assurance initiatives.

Operating income was $9.6 million for the FY16 fourth quarter compared with $8.4 million for the prior-year fourth quarter. Adjusted EBITDA for the fourth quarter was $19 million, compared with $20.1 million for the period a year ago. Depreciation and amortization expense was $723,000 for the fourth quarter.

Interest expense was $2.7 million for the fourth quarter, compared with $3.1 million last year. 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 the higher balance of receivables discounted during the fourth quarter compared with the prior-year fourth quarter.

Income tax expense rate was approximately 67% for the fourth quarter. The income tax rate was higher due in part to nondeductible expenses in connection with a fair value adjustment of our warrants.

Net income for the fourth quarter was $2.3 million, or $0.12 per diluted share, compared with $3.1 million, or $0.16 per diluted share a year ago. Adjusted net income for the fourth quarter was $9.5 million, or $0.50 per diluted share, compared with $9.9 million, or $0.53 per diluted share a year ago.

We will now discuss the fiscal year-end results. For FY16, net sales reached a record high $369 million, compared with net sales of $301.7 million for FY15, which represents an increase of $67.3 million, or 22.3%. Excluding the $12.6 million deferred core revenue recorded a year ago, net sales increased $79.9 million, or 27.6%, to $369 million, from $289.1 million for FY15. For FY16, adjusted net sales reached a record high $383.3 million, compared with adjusted net sales of $320.7 million for last year, which represents an increase of $62.6 million, or 19.5%. As previously mentioned, excluding the $12.6 million deferred core revenue recorded in FY15, net sales increased $75.2 million, or 24.4%, to $383.3 million from $308.1 million for the prior-year.

Net income for FY16 was $10.6 million, compared with $11.5 million for FY15. And earnings per share for FY16 was $0.55, compared with $0.65 a year ago. FY15 includes $0.12 per diluted share from the recognition of previously deferred core revenue of $12.6 million. Adjusted net income for FY16 was $39.6 million, compared with $32.9 million for FY15, and adjusted earnings per share was $2.08, compared with $1.87 a year ago. As previously mentioned, FY15 includes $0.12 per diluted share from the recognition of previously deferred net core revenue of $12.6 million.

Adjusted EBITDA was $79 million for FY16, compared with $69.5 million a year earlier, which represents an increase of $9.6 million or 13.8%. Excluding the $3.9 million EBITDA from deferred core revenue for the prior year, EBITDA increased $13.5 million, or 20.6%, to $79 million for FY16, from $65.6 million for FY15.

At March 31, 2016, we had a $23.4 million term loan, borrowings of $7 million on the revolving credit facility and approximately $21.9 million in cash, resulting in net bank debt of approximately $8.5 million. There was availability of approximately $92 million on the $100 million revolving credit facility, after reflecting approximately $1 million of outstanding letters of credit. Total cash and availability on the revolver credit facility was approximately $114 million at March 31, 2016. I should mention that we used approximately $45 million in cash to pay down our prior term loan, which was primarily a long-term liability related to our June 2015 refinancing.

As I will now discuss, we have a far more flexible loan facility, which will help us deploy capital efficiently for growth. Last month, we signed an amendment to the PNC Bank credit facility, which increased the revolving line of credit to $120 million from $100 million, and also allows us to expand in Mexico. This amendment also increased the pre-approved limit for permitted acquisitions. Currently, loans outstanding under the $120 million revolver facility and $23 million term loan bear interest at the Company's option 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 2.95%, consisting of LIBOR of 0.45% plus a margin of 2.5%.

At March 31, 2016, the Company had approximately $413 million in total assets. Current assets were $140 million and current liabilities were $131 million. Net cash provided by operating activities during the 12 months ended March 31, 2016, was approximately $15.3 million, after spending approximately $4.4 million in net legal expenses and settlements related to discontinued subsidiaries. For the reconciliation of non-GAAP financial measures, please refer to exhibits one through seven in this morning's earnings press release. I will now turn the call back to Selwyn.

Thank you, David. As you can tell, we're excited by the multi-product growth in our business and we look forward to continued success. We're focused on gaining market share in existing product lines as well as actively working to introduce new products. As we previously indicated, we expect to launch a new product line in the second fiscal quarter ending September 30, 2016. We expect to begin shipping that actually at that timeframe.

We remain dedicated to managed 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.

As we enter a new fiscal year with significant opportunities, I want to preface my outlook by saying that the most recent winter was quite mild compared to the severe winter in the previous year. While our results were strong, we believe that sales were negatively impacted in the short-term by weather and that we certainly experienced a tough comp. Having said that, it should be noted that we provide non-discretionary parts, hence sales are not lost but merely deferred. These parts will ultimately fail. We've seen the influence of mild winter weather through May, but we're starting to see more normal ordering patterns.

I will now focus on some of the highlights we expect in our next fiscal year. As I stated earlier, despite some softening sales, which we believe is due to milder weather, we're optimistic about our industry and the Company's position in the non-discretionary parts sector. We're off to a strong start with new sales opportunities for our existing product lines. Commitments for significant new business are also strong. These sales will begin rolling out at various times during this fiscal year.

We will have costs associated with this new business. It is anticipated that our new line of hard parts will begin shipping in the second fiscal quarter of this year. There's lots of interest from potential new customers relating to all of our product offerings. In addition, we're excited to have identified another category that we are pursuing and expect to announce details in the near future.

In connection with our growth plans, we recently doubled our Chinese footprint and expanded our Malaysia operations. At the same time, we're in the process of expanding our Mexican distribution footprint. This will allow us to recognize quite significant operating leverage as we continue to expand our business. Our Torrance, California, facility will be utilized to develop our technology, incubate new product opportunities and enhance our customer service backbone.

We've made significant investments in new technology, including further strengthening of our industry-leading global quality control systems, customer support and logistics systems. While I cannot get more granular at this point for numerous reasons, I look forward to sharing more information with you as these initiatives evolve. Our Company is driven to innovate and to lead our industry to new age opportunities and systems. We're excited with these initiatives.

In summary, business continues to be good, albeit that we are being affected by some milder weather, as I discussed earlier. We anticipate a vibrant year of evolving initiatives that will help position our Company to continue to enhance value for our shareholders. Excluding acquisitions, our adjusted net sales target for FY17 is between $420 million and $440 million, with an adjusted gross margin target between 27.5% to 30.5%.

We're also pleased to welcome David Bryan and Jay Ferguson as two new independent board members. David Bryan brings us new expertise in the fields of education and the Internet, areas that MPA is now pursuing. Jay brings us significant experience in both the acquisitions arena and in providing guidance with respect to managing high growth opportunities.

I want to thank all our team members for their commitment and customer-centric focus and service and for their exceptional pride in all the products we sell and the customer services we provide. The energy of our team is exciting to watch as we push to execute our plans. Our ongoing success and accomplishments are due to this incredible team and I thank them.

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

(Operator Instructions)

Matt Koranda, ROTH Capital Partners.

Good morning, guys. Thank for taking the questions. I just wanted to start off with the new business that you had alluded to at the end of your comments, Selwyn. You alluded to new business coming online throughout the year. Maybe you could just talk about the magnitude of some of that new business?

Is it mainly skewed toward rotating electrical or is there a mix of some of the distribution products in there? And then maybe just talk about the cadence of how that ramps throughout FY17?

So I think we have had some very significant wins in the rotating electrical category. They've begun shipping in June, some of these new ones. And so we expect to see a nice solid year in rotating electrical. I think in the June month, we started to see a return to much more normal ordering levels. So I am hoping that the aftereffects of the mild winter are now beginning to pass us, but we will have to wait and see that. But having said that, again, the fundamentals are we picked up significant amount of new business for multiple customers in rotating electrical.

The same applies quite frankly, for the other product lines. They are all experiencing continued growth. Some of the ramp up will be a little later in the year, so I think you'll see a disproportionate amount of growth probably coming in the latter half of the year. But having said that, there's significant commitments in place for all of these product lines now.

Our new product line, we are excited about. I can tell you that the amount of interest in that product line probably exceeds any of the ones that we've launched so far. There just seems to be a much broader and excitement about the new product line. We are in production already on that new product line and hope to begin shipping that in late August, early September. Then there's one more to come.

So I would just say that it's going to be spread out over the year, lots of new commitments. I think there's fundamental strength in demand for our products. Pricing pressure continues on with all of our products, it's just normal for us. But the outlook, we think is very positive going forward.

Got it and just to clarify, that $420 million to $440 million that you guys provided in the guidance, factors in the new business for the year as well?

Yes. Obviously on the run rate, it's going to be a lot higher than that because not all the business starts day one. So our run rate going into the next fiscal year, we think is going to be very strong.

Got it, okay. And then you alluded to weather being an impact on fiscal Q1. How much of an impact are we expecting? Is it going to be down year-over-year, or how do we think about just the seasonality here?

Normally, we would we would be up year-over-year on an equal comp. April, May has been soft. We are talking and we listen, we see all register sales across the board. It looks like the industry's turning now for our products. So we expect a much stronger June.

I am not sure whether it will be down over the prior year. Hopefully, it won't. I think it will be up. But we definitely would be under normal circumstances doing a lot better. Having said that, if this continues on, the trends of June continue on through the rest of the year, I think there will be some catch up. Again, we don't lose a sale, we defer a sale.

Got it, okay.

(Multiple speakers) in the first quarter. It's going to be strong, but I'm just not sure how strong.

Got it. Okay. When we look at gross margins and even the margins this quarter, a little lower than the run rate that you guys have been at over the last several quarters. Maybe you could just talk about the primary drivers there? And then for FY17, how do we think about the margins in FY17 on a go-forward basis?

I think if you look at the fourth quarter, the growth of our product lines, wheel hubs grew 40% I believe, David?

Stronger than rotating electrical.

Yes, so rotating electrical was up 4%, 5%. So you just see there is no fundamental change in the margin profile in the fourth quarter other than mix. I do think there was a lot of ramp up going on in the fourth quarter, so there's always some inefficiency for a very significant new customer.

So it's hard to tell depending on the mix and which way the growth comes. But we've generally been at the high-end of our guidance. But depending on mix, it could be a little lower. So I don't know. I don't know the answer to that question. So I think the 27.5% to 30.5% is again, is good guidance and hopefully, we will be at the high-end of that.

Got it, okay. Maybe one last one for me here. When you talk about -- I think in the past, you've alluded to some of the incremental growth in rotating electrical could be skewed toward domestic content, greater domestic content, just given your strength in the past in import business. Could you just talk about how you're thinking about bidding for new business in rotating electrical given that some of that new business could be slightly lower margin? Just how are you being selective and thinking about that new business?

I think what's interesting now, over the last 10 years, you saw a lot of early market share, which is dominated by the domestic applications with alternators and starters that were relatively crude. These units, these cars stayed on the road a long time and these units have, we've not been able to charge more for the value of these units and the value of the vehicle is so low and the units are very heavy metal consumers of raw materials.

I think as we see and I mentioned a little bit in the script, as we see the car population aging now, some of those cars are beginning to come off the road. And as the domestic car population ages going forward, we should see far more really sophisticated, really import applications that are now being installed in domestic vehicles.

So we think over time, the domestic business is going to get better. And we're always looking to the future, to be honest with you, and so we are positioning ourselves where we think that that can be equivalent business. Now, we may have a little bit of margin pressure in the beginning from that growth, but we don't think that's a long-term effect. We think that will neutralize out with import margins as time goes on.

Got it, okay. I will jump back into queue, guys. Thank you.

Steve Dyer, Craig-Hallum.

Good morning. You talked a little bit about the new product launch in the September quarter. Is there anyway of quantifying that? If not specifically, maybe bigger or smaller than wheel hub, bigger or smaller than brake master cylinder, the first year out?

Yes, I think it should be bigger than master cylinders. Not quite as big as wheel hubs. It's hard to tell on how -- we'll open it up for mass distribution. So we think it's going to be a good product line.

We think the margins are going to be good and we think it's a good product line. But I would just include that the guidance of the $420 million to $440 million includes that as well. But we think that as time goes on, will be a very good product line.

And just relating to that guidance, I don't know if there is some conservatism in there or if it's just maybe you're anticipating a slow start to the fiscal year, I guess given all of the new business that you are winning, new product lines coming on, et cetera, I guess I would've thought maybe it would be a little bit higher than that? Maybe it's just conservatism on your part, but any granularity as to what you see there?

No, I think you'll see a very strong run rate going into the next fiscal year, because a lot this is requires ramp up and is starting to ship late. And then you've seen some softness for sure April, May are softer than normal certainly than the prior April and May. And again, I think June is going to be very strong and we're back.

But I think we're off to a slower start. Again, I think it'll catch up and I think going into the back end of the year, you will say some nice gains and I think through the end of this fiscal year, the run rate going into next fiscal year is going to be very strong.

But our business is fundamentally strong. We do get, we end non-discretionary parts, and it's not like we can advertise to increase sales. We depended on car failures. So to the extent that there is generally a decline in failures because of replacement rates, there's nothing we can do.

But I will tell you we've been through this many times. There's ebbs and flows of demand for this product as that fails. They are all these vehicles, other than those that are going to get scrapped, are going to need new alternators, starters, wheel hubs, master cylinders and our new products. So that's not changing and as long as we maintain efficient customer service and treat our customers the way we treat them today, I believe that we will have strength in an ongoing basis.

And then in addition to that, I'm sorry I'm rambling a little bit, in addition to that, I can tell you the initiatives and the investments that we've made in technology to support this growth are I think very exciting. I think they're not something tangible I can say that this is going to result in X, Y and Z, but I can tell you when our customers visit and they see what we are doing, you can get lip service, but you can see in their faces that this is, it's impressive to them. And so we believe that's just going to help our growth and continue on with hopefully a very good strong success story going forward.

As it relates to those investments, OpEx has jumped a decent amount the last couple quarters. This kind of run rate implies something like $46 million or so for all in, all the categories in FY17. Is that a good way to think about it?

Yes, I think it is. I think we certainly took a step up in infrastructure. We launched a whole new marketing team. We've built a complete new innovation center and staff that with the appropriate people. We've staffed up a new acquisitions team.

Our distribution capabilities are enhanced. Our IT capabilities are being enhanced. Our IT and Internet technology infrastructure is being enhanced. But I think now we are at a -- we plateaued again from the next level of growth.

Okay. That's good. And then lastly, you guys have referred to acquisitions a few different times over the last six months or what have you. Are you seeing anything specific there or are you just -- anything that's additive or is your appetite increasing for that or any color around kind of the acquisition strategy going forward?

I think the one thing is, we don't need acquisitions to grow our organic growth rates. We believe we're going to continue to be strong. So we are selective. We want to make sure that it fits right, that the pricing is right and that the opportunity going forward is stable.

I think we have committed to being very much involved in that world. We're not committed to making an acquisition for the sake of making an acquisition. But when we see something right, we will pull the trigger and we will make that move.

We have lots of liquidity to do an accretive acquisition. As I think David mentioned, we have net debt of only $8 million on trailing 12-month EBITDA of $79 million plus. So we've got plenty of capability to make the right acquisition.

But we are very diligent in terms of making sure that we buy the right thing and I think the addition Jay Ferguson to our Board will help that a lot. He is just a great guy in terms of helping us understand that arena and valuations on the diligent side. So we are excited to have him there. We will make an acquisition at the right time and at the right price. I wish I can give you -- there's a lot of opportunity out there, but we have to find the right one.

Got it. Okay. Thank you.

Jimmy Baker, B. Riley & Company.

Good morning, Selwyn. Good morning, David. Just wanted to start on the revenue guidance. So breaking down that $420 million to $440 million, call it $37 million to $57 million in incremental revenue, can you help us bucket that between let's say underlying market growth, share gains in rotating electric and then new product contribution?

That's a tricky one, but I would tell you that the majority of it is from the existing product growth. What we're seeing already, we have commitments for our new product line. So again, that only starts in August, but on our existing product lines, we have quite a lot of that committed already on our existing product lines.

Okay. You made a few references to a stronger run rate exiting the year. What do you think is a realistic annualized run rate coming out of this fiscal year? Could you be as high as $470 million or $480 million, something like that as we layer this in?

I think Jimmy, maybe at a later call I can get more granular. I don't know off the top of my head, I don't have that number and I don't want to mislead everybody. But certainly via percent, certainly a percentage higher than the actual calendar year revenue. I would anticipate and I am probably getting myself in trouble here, but I would anticipate the vast majority of the growth starting towards the middle of the year.

Okay. Sorry, go ahead.

So a lot of it is back ended, which means that the run rate will obviously -- the run rate will be higher disproportionately higher than the calendar year -- than the fiscal year, excuse me.

Sure, understood. And the $3.5 million customer allowance adjusted for in Q4, was that a competitive inventory purchase to win new business? And I guess just help us frame expectations there in FY17? You've been in an annual range of $14 million to $15 million a year over the past couple of years. Would you say that is reasonable for FY17? I guess specifically, do you expect to purchase competitive inventory to win customers in the new product line you'll be launching in Q2?

So that was -- let me try and breakdown that. There was lift of prior competitors inventory, some very inefficient inventory quite frankly. And so we lifted that. We ended up replacing some inventory and continue to replace inventory in that customer and we think that customer's revenue will go up with the right mix of inventories.

So there is generally some type of core deval inventory purchases that are part of most of the new business wins. Almost all of it. I would tell you that in the next quarter, we have a material contract win and so the numbers are probably a little disproportionate in terms of the upside as well as the cost of that win which we will get into more in the next quarter.

But at the end of the day, we try and work with return on invested capital north of 35%, and we think we have done that. And we think we can sustain that for this 12 months. So we will see where we end up.

Okay and just going back for a moment to the revenue guidance. I know on the last call, you stated that you would not be targeting less than 20% revenue growth on an annualized basis including FY17. I guess at that point, did you just not have as good a read on the weather back in February?

Is some of your new business ramping a little bit later in the fiscal year than you thought? Or were you including acquisitions in that figure? I'm just trying to understand what's contributing to a little bit lower revenue outlook here?

I certainly was including acquisitions when I mentioned that. That was not just organic growth. And having said that, we are aggressive. The way we manage our business is very aggressive and we push for growth, for organic growth. And while we give guidance, which we think is realistic guidance to the public market, we manage to higher expectations.

So the organization is energetic and passionate and capable quite frankly, of a fair amount of significant growth here. I think 20% is just an overall number that I mentioned. I did qualify in saying don't count on that as guidance yet, but we want to grow 20% plus. But again, organic levels I think that the $420 million to $440 million is a reasonable range of where we will end up.

Okay, great. And last question just wanted to understand the $2.4 million in legal severance and other during the quarter. Was that actually a cash cost and what drove that expense and do you expect to continue some legal spend in FY17?

That was a disappointing number for us. We had one the last of the remnants of lawsuits from discontinued sub. We ended up settling it. Quite frankly, we felt like we had no obligation to pay it. But at the end of the day, when evaluating the alternative cost of legal costs of that claim, we decided to get it behind us.

I will tell you that for this quarter, that legal expense is a couple hundred grand, it was significantly down. I think now, certainly there's nothing in the hopper that I can see or anywhere near the levels of what we've had to experience.

So I think, I said this a little earlier, that fundamentally it's behind. This was the last lingering one that we had that quite frankly, my intent was to defend it and actually go to trial. As disappointed as I was with what I thought was a bogus claim. But legal system being what it is, we ended up with calmer heads and doing the analysis, deciding that this was the most prudent way to conclude it. So that's what happened. And I think there's a lot of detail in the 10-K when we file later today, so you will get a little more granularity on that.

Okay, understood. Thanks very much for the color.

Thank you. Appreciate it.

(Operator Instructions)

Scott Stember, C.L. King.

Good morning. So we've talked about how in June, that sales and rotating electric started improving. Was this happening before the new business wins that you started ramping up with or it was just because of the new business? Or was it just a combination of both?

That's a great question. It's a combination of both. I think that overall, from what I can tell that the demand is starting to resurrect itself.

I think April, May, was for the industry, certainly for our industry or our sales because I'm not going to talk about anybody else, but was a little perplexing to me. The softness in it. But now, I am seeing just across the board, June demand seems to be getting back to normal. And in addition to that, we started to ship a chunk of new business, so both of it helps.

Got you. And on the gross margin side, is it as simple as looking at the gross margin in the sales and assuming that you have to hit the high-end of your sales to hit the high-end of your gross margin? Or is there some wiggle room or some other factors that come into play like scrap?

Well I think first of all, we can hit the gross margin at the lower end of our guidance. I don't think the range is going to affect the gross margin. Certainly higher revenues are always better for everything. But I think depending on what happens. I think what's happened with scrap prices, we may have seen the worst of that now. Scrap volume has dropped dramatically over the last 12 months. I think we are down probably $7 million in scrap over the last 12 months.

But what's happening now is that the supply side of your raw material is coming down so that helps offset it a little bit. So I think it will be a little more normalized going forward now because we have had a probably 12 months to 16 months of depressed metal pricing. So I think that should normalize itself a little bit.

We are going to have some noise in the numbers because of the new contracts that we've got. We will as always call it out. I think it's useful that for people to be able to understand the base business.

We are a growth company. We are in the legacy type of industry with organic growth rates that are generally low single-digit growth rates, but that's just not our target. Our target is double-digit growth and trying to change up the industry to be more value added than our competitors are. And that is where we focus and we think we can outpace, with margin pressure, we think we can outpace the market. (Multiple speakers).

Okay, back on scrap again. It seemed that the commodity markets stabilizing actually coming back up a little bit. Just remind us how long it takes for you to see some relief on the other side of it?

I would say 12 months to 18 months. And I think we have come through that now. We're getting close to the end of that cycle. But the problem is you've got your own inventory, which I think successfully now turning at 6.5 times I believe, a year, which I think is industry-leading.

But our supplier is not turning their inventory fast enough. So we're not getting the benefit. As much as we try and pressure them as we can, we're certainly not getting the benefits quick enough for the decline in commodity prices. But and unfortunately, you scrap at spot market, so whatever you are replacing and scrapping in a declining commodity market, you hurt. But again, I think we're somewhat through that and we've stabilized now.

Okay, just last question on interest expense. I know that when rates go up, obviously your factoring costs go up, what are your assumptions for the year coming up as far as rates and costs? I know that you said that $46 million is probably a good place to -- I'm sorry, on the interest expense, if you could just talk about that, where you would expect that to be for the full-year if you have that much visibility?

I think we believe rates will be relatively stable for this fiscal year. I don't anticipate huge bumps. Of course, nobody knows for sure that, of what that will be. I will turn it over to David to talk a little bit about interest expense.

The largest component of our interest expense is the factoring interest. So as our top line net sales grows, net sales, the interest expense will also grow. I think the easiest way to look at it is the interest expense will grow proportional to the sales growth. That's the easiest way to look at it.

And the cost of factoring is what?

2.5%

Right now, we are paying about 2.5% on revenue for factoring.

Okay, got you.

So that will grow proportionally. And then we don't know where interest rates will go, but hopefully, they won't be too much movement in the interest rates.

Got you. Alright, great. Thanks for taking my questions.

Thank you.

That does conclude today's Q&A portion of the call. I would like to turn the call back over to Selwyn Joffe, for any closing remarks.

Again, thank you everybody for their interest in Motorcar Parts of America. We appreciate your continued support. We thank you for joining us for the call. We look forward to speaking with you when we host our FY17 first quarter call, which will be in August. And obviously, we will be at various conferences in the near future and we're always available for questions. So appreciate your interest.

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