Motorcar Parts of America Inc (MPAA) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America Fiscal 2019 First Quarter Results Conference Call. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Gary Maier, Investor Relations. You may begin.

Thank you, Katherine. Thanks, everyone, for joining us. Before we begin, I'll turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the Company's Chief Financial Officer. I'd like to remind everyone of the safe harbor statement included in today's press release. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during 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 these forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond 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.

With that, I'd like to begin the call and turn the call over to Selwyn Joffe.

Okay. Thanks, Gary. I appreciate everyone joining us today. Before I discuss the positive outlook for the balance of the fiscal year, I will address our first quarter, which we mentioned would be weak during our fourth quarter conference call. Most of the negative factors for the quarter relate to future growth, and we are at an inflection point for resumed growth and profitability.

From a sales perspective, we have good visibility for the next 3 quarters, and we expect a record for the next 9 months and on. In addition, management has a clear bridge from the reported gross margins to the guided gross margins.

In fact, we are reaffirming our annual adjusted sales guidance at the high end and adjusted gross margins for the year to be approximately at the mid-range of our guidance. We expect our sales growth rate for the balance of fiscal 2019 and fiscal year 2020 to be in the double digits.

I'll address the quarter first and then move to the strong outlook. The following 10 items significantly affected our first quarter. I mean, firstly, lower sales due to a very soft start to the quarter, particularly in April. I might add now that we are off to a great start for the second quarter. Second, significant stock adjustments related to new business and future update orders.

Third, impact of core buybacks relating to new business. Fourth, impact of cost relating to the transition of our distribution facilities into our new building, which is beneficial for our growth and efficiency.

Fifth, costs in connection with launching our new product lines, which will be launched in this fiscal year. Sixth, lower overhead absorption as a result of lower sales, which have now reversed. Seventh, noncash expense related to the lower cost or net realizable value of cores on customer shelves.

Eighth, noncash expense related to mark-to-market on currency. Nine, impact of the industry-wide increase in freight costs, which we have incorporated into annual gross margin guidance. And tenth, an increase in interest rates, which is more concerning.

David will address these items further, but I will summarize these events by saying that they impacted almost every line item in our income statement. However, substantially all of them are even noncash related to lower cost or net realizable value of cores on customer shelves and mark-to-market on currency or upfront expenses to sign up new business and costs related to the transition of our facilities to facilitate our growth and the startup of new products. These costs are disproportionately high as a percentage when you have lower sales. The majority of the expenses relate to positive progress as we transform our business to the next level.

I'll now focus on an overview of the next 9 months of our year. As we enter the second quarter of our fiscal year, we are seeing the benefits of some industry recovery and the growth of our market share.

While the past winter was certainly not the harshest, it had some ice-chilled days and even snow in the usual cold weather states. This was a change from the previous year's lack of snow or ice or even cold temperatures.

We are also having a nice hot summer, which is driving demand for our products. In addition, it appears that our customer base is starting to look at updating and increasing the inventory levels to accommodate this demand. The current second quarter is the start of what I believe is an inflection point for our company and for the industry.

On the industry side, we have seen stronger financial results begin to emerge from industry-leading retailers. We should all start to see the benefits of macro-industry trends.

With respect to MPA, we are seeing a resurgence of demand as well as market share growth in all of our categories. We experienced record sales for July and expect this to continue.

On the operation side, we have made great progress in transitioning our distribution to our new distribution center. We currently have moved 100% of our rotating electrical distribution into the new facility, and we are currently shipping record numbers of units. This transition has expanded our capacity and will result in our ability to consolidate shipment of all product lines from 1 distribution warehouse, which will enhance our freight efficiencies, among others. We are also continuing with our efforts to make Malaysia a more important part of our manufacturing model. We have an excellent management team there that is making great progress and should be helpful with increasing Malaysia supply capacity, which will help mitigate the tariff impact in the future.

However, in the meantime, we intend to pass through all tariff costs. Our D&V Electronics acquisition, which, as you know, offers rotating electrical and electric vehicle diagnostic products, is growing, enhanced by a solid team of operating personnel and the recently announced appointment of Bill Hardy as CEO of this business. Bill is a seasoned veteran in this field, and we are excited to have him join us, and we look forward to solid contributions from D&V. We expect to be a significant participant in the emerging electric vehicle market. I refer you to our investor presentation on our website, which shows some macro-industry charts, which I believe summarizes the anticipated recovery of the industry and some exciting growth opportunity. See the graphs of the growing car population, increased miles driven and the aging of the car park, and in particular, the resurgence of the 8- to 11-year-old car park category over the next 3 years, which was impacted by lower new car sales during the previous recession.

In summary, over the next 3 years, we will see growth of vehicles in all of the high replacement categories. Overall, we have opportunities to grow all of our product lines, including the planned new products we intend to launch this fiscal year. We are excited about the progress we are making with these initiatives, which will drive shareholder value.

I will now turn the call over to David to review the results of the first quarter.

Thank you, Selwyn. I will now review the financial highlights for the fiscal 2019 first quarter. Before I begin, I encourage everyone to read the 8-K filed this morning with respect to our June 30, 2018, earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10-Q, which will be filed later today.

Net sales for the fiscal 2019 first quarter were $92.6 million compared with $95.5 million for the same period a year earlier. Adjusted net sales for the fiscal 2019 first quarter were $93.8 million compared with $95.9 million a year earlier. The adjusted net sales decrease of approximately $1.7 million was due to the following.

Rotating electrical net sales decreased $2.5 million to $72 million for the first quarter from $74.5 million for the prior year. Wheel hub assemblies and bearings net sales decreased $206,000 to $17 million for the first quarter from $17.2 million a year earlier.

Brake master cylinder net sales remained flat at $2.5 million for the first quarter.

Additionally, the combined net sales for the first quarter for brake power boosters, turbochargers and testers increased $1 million to $2.2 million from $1.2 million in the prior year. There were no tester sales in the prior year.

Gross profit for the first quarter was $17.3 million compared with $26.7 million a year earlier. Gross profit as a percentage of net sales for the first quarter was 18.6% compared with 27.9% a year earlier. Gross margin was impacted by customer allowances related to new business, transition expenses in connection with the expansion of our operations in Mexico, noncash lower of cost or net realizable value, reevaluation of cores that are part of finished goods on the customer shelves and other factors further discussed below.

Adjusted gross profit for the first quarter was $22.8 million compared with $28 million a year earlier. Adjusted gross profit as a percentage of adjusted net sales for the first quarter was 24.4% compared with 29.3% for the prior year first quarter. The following items negatively impacted adjusted gross margin but have not been adjusted for.

Customer stock adjustment accruals in connection with future update orders; the impact to sales related to the transition to the company's new distribution center; lower overhead cost absorption, which is expected to reverse as sales increase; and increased freight expenses related to external market rates.

The impact of the first 3 items is expected to diminish and have a positive impact in future quarters. The above 4 items resulted in a combined negative impact of 2.7% to adjusted gross margin.

Total operating expenses increased by $7.9 million to $18.5 million for the first quarter from $10.6 million for the prior year. This increase was primarily due to a comparative increase in noncash expenses of $3.7 million, as a result of a loss of $2.7 million for foreign currency exchange contracts in the first quarter. This compares to a gain of $1.1 million recorded for the prior year.

In addition, the prior year included a noncash gain of $1.3 million due to the change in the fair value of the outstanding warrants. These warrants were exercised in September 2017. Adjusted operating expenses increased $2.5 million to $14.3 million from $11.8 million for the prior year, primarily due to a $1.3 million increase in expenses related to our acquisition of D&V Electronics and increases in expenses to enhance our value-added customer service programs. Based on the items discussed previously, including the large impact of noncash items, operating loss was $1.2 million for the fiscal 2019 first quarter compared with operating income of $16.1 million for the prior year first quarter.

Adjusted operating income was $8.5 million for the first quarter compared with $16.2 million for the prior year. Adjusted EBITDA was $10.1 million for the first quarter compared with $17.2 million for the period a year ago.

Depreciation and amortization expense was $1.6 million for the first quarter. Interest expense was $5.1 million for the first quarter compared with $3.3 million last year. The increase in interest expense was due primarily to higher borrowings to fund our growth, higher LIBOR interest rates related to factoring and our credit facility, and a noncash write-off of $303,000 of previously capitalized debt issuance costs in connection with the amendment of our credit facility.

Income tax benefit for the first quarter was $1.3 million compared with income tax expense of $4.6 million for the prior year period. The new tax law resulted in lowering our blended corporate tax rate from 39% to 25%, effective January 1, 2018.

Net loss for the first quarter was $5 million or $0.27 per share compared with net income of $8.2 million or $0.42 per diluted share a year ago.

Adjusted net income was $2.8 million or $0.15 per diluted share for the first quarter compared with $8.3 million or $0.43 per diluted share for the prior year.

Adjusted net income for the quarter includes a negative impact of nonadjusted items, which I just previously mentioned. These items mentioned above resulted in a combined negative impact of $0.15 per diluted share.

As of June 30, 2018, trailing 12 months adjusted EBITDA was $68.6 million and the average equity and net debt balance was $311 million, resulting in a 22.1% return on invested capital on a pretax basis. Our method of calculating ROIC is to divide trailing 12 months adjusted EBITDA by the average equity and net debt balance for the 12-month period.

At June 30, 2018, we had net bank debt of approximately $62.9 million. Total cash and availability on the revolver credit facility was approximately $166 million at June 30, 2018, based on a total $200 million credit facility and subject to certain limitations.

At June 30, 2018, the company had approximately $549 million in total assets. Current assets were $291 million, and current liabilities were $199 million. Net cash used in operating activities during the 3 months ended June 30, 2018, was $924,000. The $924,000 cash used in operating activities reflects an increase in inventory for new business; a $4.6 million refundable payments for core purchases related to new business, partially offset by a decrease in accounts receivable.

Excluding the $4.6 million refundable payments for core purchases relating to new business, cash flow provided by operating activities was $3.6 million for the first quarter.

For the reconciliation of non-GAAP financial measures, please refer to exhibits 1 through 5 in this morning's earnings press release. Effective April 1, 2018, the company adopted accounting standards codification topic 606, Revenue from Contracts with Customers, using the full retrospective transition method. The company believes the effect on our income statement is not material. The effect on the balance sheet is to reclassify certain accounts. Additional information is available in the company's Form 10-Q filing later today.

We will now open the call for questions.

Thanks. Yes. Go ahead. Thanks, David.

(Operator Instructions) And our first question comes from Matt Koranda with Roth Capital.

I guess, the outlook -- your positive outlook sort of on the high end of your former revenue guidance, looks like it does require sort of north of 10% revenue growth for the remainder of the year, if I kind of evenly split it. What kind of visibility do we have in the replenishment or restocking orders? And just kind of talk about sort of confidence levels there. And then maybe just by product category if you could break it down, what's sort of driving the majority of the growth? Is it really going to be more rotating electrical? Or are we looking at a pickup in some of the distribution products?

Yes. So let's deal with visibility first, and then we can deal with products. Let me deal with products first actually. First of all, rotating electrical is by far the largest product line, and so you're going to see a significant amount of growth in rotating electrical. The growth that we were going to experience and are experiencing right now is an increase in replenishment rates across the board in addition to market share gains. So market share gains are incremental to that. So I think what you're seeing -- what we're seeing right now is really an increase in our base business, replenishment and the potential -- and the new update orders that are coming from that. And that applies across the board to all of our product lines that are in existence now. I think as you get to the fourth quarter, you'll see the effects more clearly on market share gains, as we ramp up and change overall the new customers that we have. So visibility, I can tell you we're shipping every single day at record numbers. Our order book is very, very, very strong, and we feel very confident about where we're heading for this year, and quite frankly, for next year.

So I think we've been through the inflection points. I think the weather is particularly helpful. I think the aging of the fleet, if you look now over the next 3 years, your 8- to 11-year cars, there's going to be an increase in the number of vehicles that go into the 8- to 11-year-old category, where there hasn't been in the past. And that's going to increase replenishment needs. And certainly, failure rates are higher in that sector. And then the 12-plus-year category for the car park continues to go up. So I think, personally, the outlook for MPA over the next 3 years is exceptionally strong, and quite frankly, I feel that way about our industry. So couldn't be more confident of where we are today looking forward.

Okay. Just the one thing, I think, you didn't touch on was sort of cadence throughout the year, and just where we're going to see the strongest growth. Or is it pretty evenly split in terms of just growth trajectory by quarter?

Yes. I think I tried to mention that, but I'll repeat it. I think what you're seeing today in this quarter will be all replenishment, and it'll be significant growth. But I think it will accelerate as we get through to the end of the year as well because we'll hopefully continue on with the same product line and same distribution point growth throughout the year. And then we'll see the new market share kick in, which really is towards the later end of the year, which is the latter half of the third quarter and certainly the fourth quarter should be -- our run rate should be pretty spectacular going into our next year.

Okay. And then on margins, I know you guys are dealing with fixed-cost absorption. Obviously, freight was called out as well. But I think you guys also called out stock adjustment accruals for -- as part of the headwind this quarter. Can you just dumb that down for me a bit? I mean, is that just essentially you're accruing the lower gross margin assuming that you're going to get returns? Once you -- and that does -- will reverse once you do the stocking updates. I mean, help me understand just the dynamics there. And is that a big portion of the year-over-year headwind in margin?

Yes. I think that's a part of it. I mean, I think all of the 10 points David can classify on the sides. But just to dumb down the stock adjustments, our accounting policy in its most simplest terms is to anticipate when stock adjustments will be coming in the future and accrue for them now. So we look out 6 months, we estimate what we anticipate the stock adjustment under the B, and we take hits for that. And the update order that usually -- not usually but always goes with the stock adjustment comes at a later time. So you have expenses being recognized now for revenue that's going to come in, in the future. I mean, I just want to, what's the word I'm looking for, just be sure that we have -- when you look at the margin for the first quarter that we've experienced that we have a very detailed reconciliation and bridge from the reported margin to where we expect our guidance to be, and we feel comfortable we'll be there.

Okay. And then I guess, does scrap copper factor into the margin issues at all in terms of the headwinds? I mean, I don't know that you called that out, but just in terms of the pricing degradation there, does that -- is that meaningful to your margins in any particular way? Or is that not really going to be that meaningful?

We think that this upside to the margins if coppers -- we've sort of got accustomed to the tough scrap markets certainly over the last 2 years, 18 months. So we have no anticipation of increases in copper scrap rates. But certainly the downside, we don't believe, will affect our margins if there's a downside.

Okay. All right. And then last one is just a balance sheet question. I know you touched on it and you probably have more in the queue. But just wanted to get a sense for -- I mean, there was a big move of long-term core inventory and it looks like maybe it went into just the current inventory net item, but just wanted to get a sense for sort of the movement there and how that sort of works with the ASC 606.

So let me introduce Kevin Daly, who's our Chief Accounting Officer, who's on the call with us, and he can walk you through some of the classifications on the balance sheet -- the reclassification on the balance sheet, which, by the way, I think is very positive. So Kevin, why don't you?

Okay. Just to give you some background, Matt, the important sections of the new revenue recognition requirements as they impacted MPA had to, primarily, do with the previous breakout between unit and core in our financial statements. And that net of core accounting that we used to use was no longer going to be allowable under the new revenue recognition rules because the unit and core were deemed to be one performance obligation. So once you delivered a product, which included both the unit and the core, those were deemed to be the satisfaction of one performance obligation, and therefore, you had to record the revenue at that point in time. So that was some of the impact on the P&L.

In addition, contract identification, once you identify that you have a contract with a customer that assumes that the collectability of any revenue from that customer. And therefore, we did not have to wait for reconciliations to record that revenue what was now basically an estimate.

In regards to the balance sheet, the reason the balance sheet items also changed is because we are, in fact, looking at cores and units as one item. And therefore, when items are moved or removed from our finished goods inventory and put into cost of goods sold, they're coming out of one account, the inventory account that's on our books. And that is one of the reasons why the items that were in long-term core accounting were moved down to the regular inventory accounts. And the other accounts that were established, the contract asset and contract liability accounts, which are required under the new revenue recognition guidance, are established to basically record any type of liability that you may have under that contract with the customer. And any related asset related to that liability that might -- that you might have with that customer.

So for example, once we send a core to a customer, and he is going to return it, we have to record a liability in order to show that we have that liability to repay the customer for the core, but we also record a contract asset for the value of that core on our books. So that's what you're seeing in terms of movement, the long-term core asset that used to be on the books is now divvied up into contract assets and regular inventory. And the contract liabilities come from what used to be a contra accounts receivable account plus the liability for payment for cores that are going to be returned from the customer. So in -- that, in a minimum of words, is basically what's happening.

Okay. Lot to digest, I guess.

Yes. On the maximum number of words are going to be. But anyhow, hopefully -- but we can take it off-line. I think it's mostly (inaudible) and we'll be happy to take it off-line. And we have a lot more detail in the 10-Q, and we are going to be posting a new video on all of the accounting on our new -- on our website. So that's pending within the next week.

Okay. That'll be helpful. Just one clarifying thing on that though. I mean, we're going to be seeing, I guess, maybe, are we going to get a lift to the revenue line now then? Because we're going to be essentially including cores instead of selling product net of core, we're now including cores, so is there an uplift that you get...

No. No. So I think the only -- just to clarify that because I want to stop everybody there. And I think if you've -- look, we still only hold revenue net of core. However, if there's no core return, we will have an estimate for the under return, and that will be part of the revenue. It's still very nominal, and actually, in fact, there's, I think at the end of the day, no difference on the revenue recognition.

That's correct.

And our next question comes from Brian Nagel with Oppenheimer.

So the question I have, I guess, somewhat of a follow-up to the first question, just with regard to the bridge on the top line from what we saw here in fiscal Q1 to the guidance you reiterated, and I guess, potentially even up a little bit for the full year. But as you look at the first quarter, you called out weakness in April well-documented as a result of weather, but can you talk a little bit more about just the trend we saw through fiscal Q1 and then maybe to the extent that in and of itself gives you confidence to as you look towards the balance of the year?

Yes. And I think that's a great question. I think a number of other industry players have talked about the quarter a little bit, the previous quarter. But we definitely had sequential billed April, May, June. So April, reflecting it was a very bad month for us. I mean, for whatever reason, I mean, the industry called it out as being a bad month, and I think everyone sort of pointed to the weather there. And I think also, as we go through the quarter, it probably showed a little worse than it would have based on the timing of orders and some revenue recognition. Some of the orders got pushed out, which means they couldn't be recognized in that quarter, they'll be recognized in this quarter. But having said that, just the volume of reorder and the sheer numbers and units of demand, I think the customer base in general is recognizing that inventory needs to be in place for what they see as a resurgence. And so we're seeing enormous amounts of volume coming back to all of the product lines. And I think the fundamentals are just stronger across the board. I mean, I don't want to talk for our customers, but certainly our order demand, just sequentially, continues to be up. We had a record July. And I would tell you now that we're in the market recruiting significant amount of new people because we anticipate even continuing growth in the revenue base.

I would say that the second quarter is strictly very -- almost no new business in -- this quarter that we're in, almost no new business reflected in that. The third quarter will have a little bit of new business reflected, and the fourth quarter will have a lot of new business. But our expectation is organically besides the new business that there's definitely been an inflection point. And I think the confidence level in the market in general seems to be getting stronger.

Got it. That's helpful, Selwyn. The second question I have, a separate topic, but you mentioned in your prepared comments about tariffs and you said pretty emphatically that you would pass along higher costs. The question, have you seen -- is that just looking forward? Have you actually now started to use a sample of some tariffs in your premiums in place?

Sorry. Can you repeat that question? You faded out. I apologize.

Well, you obviously had to do with -- the comments you made in your prepared comments regarding tariffs. You indicated that -- you sounded pretty emphatic if you would pass along or plan to pass along any costs associated with tariffs. The question I have is, in your business now, have you seen that yet or is that just all looking forward?

I think that's all looking forward. It's just beginning now. Yes. So it's looking forward. I think with the new proposed tariffs, I think everyone in the industry is going to be subject to those. Certainly, anyone who's bringing product from China, which is the vast majority of the industry. And I don't think there's any choice but to have to pass it through because these are significant tariffs. And the whole supply chain is not going to be able to digest them. So I think that the expectation is that these tariffs will be passed on. I think they have been some already, some of that has become already, and we expect to do it.

And we have a question from Scott Stember with CL King & Associates.

A quick question. Obviously, it sounded as if the replenishment rates are doing just fine. I know that last quarter or the quarter before that, there was some issues with inventory optimization. Is what you're seeing right now net of any inventory optimization? Or the inventory optimization process seem like it's certainly in its later innings right now?

It's definitely in its later innings. We are seeing that net of inventory, obviously. I mean, the numbers we're talking about is net of that of any adjustments or returns. It is in the later innings. I do think that there will be a little bit still going on. But I think as we go down through the year, that'll be further and further behind us. I think we get to more normal levels. Again, the fundamentals, look, I don't want to get ahead of -- again, get ahead of myself on the industry. So I can just comment about our product lines, but our product lines, we're seeing significantly increased demand in all of our product lines. And again, I always go back to the statistics. Sometimes you can be wrong short term on statistics, but I think long-term statistics don't lie, and that car population is growing. And the cars that are in the higher failure rate categories are growing, and the failure rates in those high failure rate categories are growing. And even though we've had higher fuel prices, miles driven is growing. And so statistics don't lie at the end of the day. And so we have invested based on that. And I think that the fundamental base investments we have made in the future are going to result in nice returns.

Got it. And as far as cadence, you did a good job of explaining. It sounds like for sales and even with the second quarter being more driven by replenishment orders that you could be up low double digits across the board, I guess, throughout the quarters. But when it comes to the gross margin, you talked about being towards the midpoint for the full year. Is that the same case as far as gross margin performance? Or is there going to be a gradual ramp up throughout the year?

It's going to be a ramp up as well throughout the year because just the volume -- we are -- we have set our infrastructure now to go to the next level. I mean, we certainly focus on reaching $1 billion level. Certainly, in sales and the minimum evaluation. And so we have begun paving the way with infrastructure that will lead to -- that will enable us to get to these growth rates. And so we have new products coming, and so we think that as well that's not in our guidance numbers now, so that'll be incremental. And so as we are able to ramp up the sales volume through an increased-size infrastructure, the overhead absorption becomes more efficient, shipping becomes more efficient where you can put more products in full truckloads or intermodal truck, intermodal units. So everything that we do as we scale through the next phase of our growth and absorb our infrastructure, both from a human capital and from a material-capital perspective, is going to help the profitability. Now I will caution one thing is that we're going to have product mix variations, and that may affect the margins. But on an overall basis, we expect margin accretion from our fundamental infrastructure absorption.

Got it. And maybe just going to tariffs a little bit more detail under that. It sounds like you were referring to the latest round, I guess, on the $200 billion worth of goods, the 25% that was proposed, but under what is actually going into legislation at this point, which I think is $232 billion, any product coming from China. How -- is that impacting you right now yet? And if so, what maneuvers are you putting in place to fight price increases to potentially offset that?

So yes. So some of it is now starting to -- some of the first wave does affect some of our products. It is not that material, but it is -- there's real expense. I will tell you that our footprint and our efforts going forward, we think we're well situated to deal with tariffs on a more permanent basis, as if they remain as a permanent basis. And in terms of how we will handle that and transition away from -- and minimize the impact from them, perhaps I'll say it that way. So I think we have a very good footprint and a very good plan for that.

The second wave affects us more significantly. That really is where the rotating electrical begins. So that -- they're on the list for the second wave and first wave. Rotating electrical has very limited effect on us. And again, I think if you look at our footprint, I think we're in a leadership position to be able to facilitate supply and minimize the tariff impact besides passing it on. But we certainly want to be value-add to the consumer at the end of the day, which means being value-added to our customer. And so we need to be very aggressive in making sure that how we source product, how we assemble product, how we add value to product and how we distribute the product is efficient based on whatever the current legislation will be at the time.

All right. And just one last quick one. As far as pricing goes, you talked about freight, interest rates obviously going up. In fact, you're factoring in your interest expense line. But can you just talk about the process of working with your customers on price to offset this in the future? Is any of that within your guidance at this point? And that's all I have.

Yes. So the guidance does not include price increases other than for tariffs, no. Our customers are tough. I'm sure they're listening in. So they can -- they don't have to panic. No. Our guidance includes stable pricing. Where we are today, it includes the existing freight rates, it includes existing interest rates, even though we don't guide on net income but existing interest rates are really what we're hoping for. We are making significant effort, and that's our new distribution warehouse to consolidate freight and make it more efficient. We think freights is a little more concerning to us the near term. When I say the near term, I mean the next 9 months because of 2 things, capacity issues primarily; and secondly, fuel cost. I think capacity issues generally have taken place -- or neutralized supply and demand. So I think as more capacity is demanded, I think the industry will finally catch up to capacity, and we certainly believe that will be the case. The question is what fuel prices will do to the freights. We are looking at significant more consolidation of freights to our smaller customers in particular who can't sometimes fill up a truckload of product on their own. So single-purchase orders going forward, I guess, transition will help us be more efficient on freight. But the guidance in the margins includes the risk factor of freight as it stands today. And if it gets much worse, we'll have to keep you updated. But we think it's pretty bad right now, and we think it'll be stable at these levels for a little bit of time.

And our next question comes from Chris Van Horn with B. Riley FBR.

So can you talk a little bit about the new distribution center? It sounds like there was a little bit of a headwind in the quarter. Just was curious how -- if looking out the next couple of quarters, is there continued headwinds? And then ultimately, what's the operating efficiencies that we can maybe quantify around this?

Yes. That's a great question. So the first phase of the new distribution center has been completed -- well, substantially completed, and that's moving rotating electrical into that distribution center, which is, by far, the biggest part of the effort. We expect to transition all of the other product lines into that distribution center, and that's probably going to take another 9 months before we get through all of that. So there will be -- we will call out those expenses as we go through. There'll be more expense relating to that transition. Once we get into that building, we think that they have significant savings coming from that. Over time, certainly as high as $5 million on an annualized basis, but it'll take us a little bit of time to get there. But that's certainly for the next fiscal year in terms of seeing the benefits out of it. So we're excited about that. As we make space in our other facilities that we're moving out, it enables us to extend our new product developments. So not only do we have products lined up to launch this year, but I think we're going to be very [far from the hills] on the following fiscal year with additional new product lines. So overall, let's say, we call it internally our footprint of the future. It's a significant change to how we operate. And we're going through that now, which does cause a little bit of noise. But quite frankly, we're calling it out, and I don't think -- I think the hardest part is probably gone at this point. So hopefully, that answers your question. I'm rambling a little bit.

Yes. No. No. Absolutely. And then you've had success in new product wins, and I was just curious, what you're seeing in the pipeline for some of the new products and maybe even taking share in rotating electrical. Just curious on the update of the pipeline for those.

Yes. So I think we had announced that we had about $40 million of annualized new business coming on board this fiscal year. And I'll just clarify a point. I think that's one of the last questions that came through is, are we going to experience double-digit sales each quarter. I will tell you that as we go down sequentially each quarter, the sales number will increase sequentially. The first -- this quarter we're in, we certainly expected a record quarter and a significant increase in sales, but I think you'll see it much greater in the next quarter and even the following quarter. So -- and that relates to when we bring on the new business. And I will tell you that we haven't stopped. I would say that the momentum in every one of our product categories continues to be very positive for incremental new business wins. And our challenge today is making sure we can manage our customers' expectations and making sure we live up to our obligations. And while we're scaling very quickly, we are also very cognizant to make sure that our service levels are excellent. So it's controlled. And again, we're excited. If you sit in our meetings internally, you read the numbers for this first quarter and you sit in the meetings and look at the outlook, it's 2 different things. And we're happy that this quarter is behind us at this point, and we're excited about the future quarters.

Got it. Got it. Thanks for that color. And then final one for me. Stock's been a little volatile relative to your peers. I think you're trading at a significant discount and now you've increased your share repurchases. Given the outlook, would you be able to maybe comment on how you see that playing out on the share -- from the share repurchase perspective?

Yes. I think the board recently increased the authorization. We are very serious about using that authorization. We're not doing it for upticks. We think we have a great value in our stock, and we intend to buy back stock. Obviously, we're going to be calculated and evaluate the appropriateness. But I could tell you that as we sit here today, we're excited for the window to begin opening so we can buy back stock. One other thing, and perhaps I [admit] from when we talk to, I think this overlaps a lot of questions, is the diagnostic business that we're in, and I'm -- again, I publicly welcome Bill and thank the great operating team that he has at D&V Electronics. But we really see some nice opportunities unfolding over the next 3 years in the electric vehicle market for us, I mean, besides the regular internal combustion engine diagnostics, which continues to be exciting to us. But we think that the development phase of electric vehicles throughout the world plays right into the strengths of the D&V diagnostics capabilities. So we're excited to have what we think is a great team in place. We're going to be adding people to that team, and we expect D&V in the years ahead as well to be a big contributor to our results. I mean, they're not as significant in this year but certainly are growing nicely. But in the years to come, I think we've got something really special there.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Selwyn Joffe for closing remarks.

Thanks, Katherine. Okay. Well, in summary, as I think you've all heard, we are at an inflection point for significant growth in near term. While we've had expenses relating to our growth, I believe they are a necessary part of our path to drive significant shareholder value over the next 5 years. As we noted in today's press release, we increased our share repurchase program authorization to $37 million from $20 million, with $25.5 million remaining available. And as always, I want to thank all our team members for their commitment and their customer-centric focus on service and for their exceptional pride in all the products we sell and the great customer services that we provide. Their commitment to quality and service is also reflected in the wonderful contributions that they make to their communities and our society, and we don't -- we really appreciate that. And we appreciate everybody's interest and your continued support. And thank you, again, for joining us for the call, and we really look forward to speaking with you when we host our fiscal 2019 second quarter conference call in November, and obviously, at the various conferences that we attend in the interim. Thank you.

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