Motorcar Parts of America Inc (MPAA) 2019 Q3 法說會逐字稿

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

I would now like to turn the conference over to your host, Gary Maier. Sir, you may begin.

Thank you, Valerie, and thank you, everyone, for joining us for the call today. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the company's Chief Financial Officer, I'd like to remind everyone of the safe harbor statement included in today's press release.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during today's 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 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 more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's various filings with the Securities and Exchange Commission.

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

Thank you, Gary. Appreciate everyone joining us today. Our record sales for the quarter highlight the company's continued success and growing position within the estimated $125 billion automotive hard parts aftermarket. While the quarter-end gross margin were impacted by several items, of which approximately 40% was noncash as highlighted in today's press release, we expect adjusted gross margin improvement in the next fiscal year.

We were excited by the opportunities. Our business and our product lines are growing. Our footprint is expanding to support this growth. We are at an important inflection point.

As I highlighted during our call last quarter, we are ramping up production for new business wins, expanding our infrastructure to bolster our industry-leading customer support programs for our new business and products, launching our new brake program, increasing our diagnostic business for both internal combustion and electric vehicle applications, which has recently been enhanced by our recent acquisition of E&M Power, and we are expanding our footprint in both our Mexican and Malaysian facilities.

In addition to our new 400,000 square foot distribution center in Mexico, we are in the process of expanding our global facilities with an additional 350,000 square feet. This expansion addresses a number of strategic initiatives. Number one, it enables us to support existing as well as new business commitments commencing in the upcoming fiscal year and expand our capacity to support future sales growth. Number two, the customers' buying experience will be enhanced by consolidating shipments from multiple product lines from a single point of origin. Number three, it will facilitate a more effective cost structure resulting in enhanced gross margins.

I should also mention the growth opportunities that will be realized through our recent acquisition of the heavy-duty company, Dixie Electric. It has a solid customer base, innovative products, enhanced heavy-duty expertise and a dedicated team of professionals. The acquisition also provides additional light-duty rotating electrical sales expansion opportunities as well as growth from our current brake offerings, diagnostic testers and future product lines. In addition, we gained capacity and manufacturing capabilities in India, which could over time supplement our current Chinese sources while also providing a strong hedge against inflation in China and recently announced trade tariffs.

To highlight our positive overall outlook, I refer you to our investor presentation on our website, which shows some macro industry charts, including a chart related to the expansion of the car park, sweet spot for repairs. We are now seeing the back end of lower new car sales from recession years in the prime parts replacement time frame. Essentially, the number of prime replacement age vehicles is growing. These statistics further support our company's and our industry's optimism for growth over the next several years.

I will now turn the call over to David to review the results for the fiscal third quarter.

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect to our December 31, 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 we filed later today.

Let me take a moment to review the financial highlights for the fiscal 2019 third quarter, reflecting record sales for both the quarter and 9 months on a reported and adjusted basis. The results for the quarter and gross margin were impacted by 5 items totaling $9.7 million as follows: customer allowances and stock adjustment costs of $2.7 million related to new business and product line expansions, including upfront cost and core buyback premium amortization expense; core sales of $7,753,000,000 less related cost of goods sold of $7,750,000,000, which had no effect on cash or net income for the quarter but did negatively affect our gross margin percentage for the quarter and a fixed cost of $767,000, all in connection with the cancellation of a customer contract; a noncash write-down of $2.6 million associated with the quarterly revaluation for cores on customer shelves. This does not affect the reimbursable amount for the full value of cores on the customer shelves should business with the customer be discontinued. Net tariff costs of $1.5 million paid for products sold before price increases were effective. And transition cost of $2.1 million associated with the expansion of manufacturing and distribution capacity to support increased demand for our products, including new brake product lines.

Net sales for the fiscal 2019 third quarter increased 20.6% to $124.1 million from $102.9 million for the same period a year earlier. Adjusted net sales for the fiscal of 2019 third quarter increased 14.4% to $119.6 million from $104.5 million a year earlier.

The adjusted net sales increase of approximately $15.1 million consists of the following: rotating electrical net sales increased $14.5 million to $95.2 million for the third quarter from $80.7 million for the prior year. Wheel hub assemblies and bearings net sales decreased $839,000 to $18.3 million for the third quarter from $19.1 million a year earlier, due in part to lower demand.

As in the slides, we expect the recent extreme cold weather conditions to positively impact wheel hub sales. Brake master cylinder net sales decreased $246,000 to $1.6 million from $1.8 million for the prior year, substantially due to unusual inventory adjustments by the customers. We anticipate increased momentum as we launched our full brake line program.

Additionally, the combined net sales for the third quarter for brake power boosters, turbochargers and testers increased $1.7 million to $4.6 million from $2.9 million in the prior year. We expect exciting growth in each of these product lines.

Gross profit for the third quarter was $21.2 million compared with $26.1 million a year earlier. Gross profit as a percentage of net sales for the third quarter was 17% compared with 25.3% a year earlier, which was impacted by the 5 items previously highlighted. Adjusted gross profit for the third quarter was $30.9 million compared with $30.7 million a year earlier. Adjusted gross profit as a percentage of adjusted net sales for the third quarter was 25.8% compared with 29.4% for the prior year third quarter. Our adjusted gross margin for the quarter was impacted by several factors, including higher freight and wage costs, higher returns, the introduction of electric vehicle test systems, overtime and other costs related to the increase in new business and other strategic initiatives for long-term growth.

Total operating expenses increased by $1.9 million to $19.5 million for the third quarter from $17.6 million for the prior year. Adjusted operating expenses increased by $1.5 million to $16.2 million for the third quarter from $14.7 million for the prior year. The increase of adjusted operating expenses was primarily due to personnel and related expenses to support our value-added customer service programs and growth, including sales in both our hard parts and diagnostics businesses, merchandising, marketing and engineering, commissions due to increased sales, Mexico-related expansion expenses and overall expense increases related to growth.

As mentioned previously, due primarily to the several items impacting gross margin, operating income was $1.6 million for the fiscal 2019 third quarter compared with $8.4 million for the prior year third quarter. Adjusted operating income was $14.7 million for the third quarter compared with $16 million for the prior year. Adjusted EBITDA was $16.2 million for the third quarter compared with $17.2 million for the period a year ago.

Depreciation and amortization expense was $1.7 million for the third quarter. Interest expense was $5.8 million for the third quarter compared with $4 million last year. The increase in interest expense was due primarily to an increase in the utilization of our accounts receivable discount program, increased average outstanding borrowings as we build our inventory levels to support higher sales, and higher interest rates on our average outstanding borrowings under our credit facility and our accounts receivable discount program.

Income tax benefit for the third quarter was $1 million compared with income tax expense of $7 million for the prior year period. The new tax law resulted in lower -- lowering our total blended corporate tax rate from 39% to 25% effective January 1, 2018. The income tax expense for the prior year third quarter of $7 million includes a $4.8 million tax charge, of which $4.3 million is a onetime noncash book tax charge for the revaluation of deferred tax assets and liabilities related to the December 2017 enacted Tax Reform Act and a onetime tax charge of $545,000 due to the transition tax on deemed repatriation of accumulative foreign income.

Net loss for the third quarter was $3.1 million or $0.16 per share compared with net loss of $2.5 million or $0.13 per share a year ago. Adjusted net income was $6.7 million or $0.35 per diluted share for the third quarter compared with $7.9 million or $0.41 per diluted share for the prior year.

Let me now discuss the results for the 9 months ended December 31, 2018. Net sales increased 11.7% to $343.7 million from $307.8 million for the prior year 9 months. Adjusted net sales for the 9 months increased 9.5% to $343.6 million from $313.7 million for last year. Net loss for the 9-month period was $5.1 million or $0.27 per share compared with net income of $10.9 million or $0.56 a year ago.

Adjusted net income for the 9 months was $21.2 million compared with $26.5 million for the prior year 9 months. And adjusted diluted earnings per share were $1.10 compared with $1.37 last year. Adjusted EBITDA was $49 million for the 9-month period compared with $55 million a year earlier.

As of December 31, 2018, trailing 12 months adjusted EBITDA was $71.7 million and the average equity and net debt balance was $349 million, resulting in a 20.6% 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 December 31, 2018, we had net bank debt of approximately $98.6 million. Total cash availability on the revolver credit facility was approximately $129 million at December 31, 2018, based on a total of $200 million revolver credit facility and subject to certain limitations.

At December 31, 2018, the company had approximately $606 million in total assets, current assets were $330 million and current liabilities were $251 million. Under the authorized share repurchase program as of December 31, 2018, $15.7 million of the $37 million common stock authorization has been utilized and $21.3 million is available to repurchase shares.

Net cash used in operating activities during the 3 months ended December 31, 2018, was $13.9 million, primarily due to a $6.9 million increase in inventory net of accounts payable for new business and growth and $6.3 million refundable payments for core purchases relating to new business.

When further analyzing the $13.9 million cash used in operating activities, please note that we had 3 significant categories of cash expenditures for the quarter totaling $19.7 million comprised of: first, $11.8 million spent on items that relate to growing our business, which includes expenditures for growth inventory, transition costs relating to moving to larger facilities, customer allowances and returns for new business, new product development costs and expenses related to our 2 new acquisitions; second, $6.3 million spent for core buyback payments related to new business; and third, $1.5 million spent for net tariff costs before price increases.

For the reconciliation of non-GAAP financial measures, please refer to Exhibits 1 through 7 in this morning's earnings press release. Effective April 1, 2018, the company adopted accounting standards quantification topic 606, revenues 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.

I will now turn the call back to Selwyn.

Thanks, David. As you can see, we have a clear path ahead for growth with multiple opportunities. First, we have a significant array of nondiscretionary hard part product lines, including rotating electrical, which is alternators and starters; brake-related products, which we define as the wheel hubs and bearings, brake rotors, pads, master cylinders and boosters; and we have turbochargers.

With the new Dixie acquisition, we've extended our rotating electrical offering and channel to the heavy-duty market, and we now have additional opportunities to sell our full broad range of products in the heavy-duty channel. In addition, we will now be able to offer our heavy-duty products to our current customers. We have a strong offering of diagnostic products to complement these nondiscretionary hard parts. Beginning with our rotating electrical testers and following up with the possibility of launching diagnostics for all of our hard parts. Second, we have a strong offering for our diagnostic products for electric vehicles. We are aggressively pursuing integrating the technology and management of our new E&M Power acquisition into D&V, which will have a global footprint and an exceptional management team enhanced by E&M. The combined offerings will make the D&V product more important in the electric vehicles space and complements the demand in growth for electric vehicle diagnostic testers for both pre and postproduction applications.

In summary, as you heard, we have many growth opportunities and the new business commitments are continuing. Our position in our base product lines and new product lines is robust, and we anticipate accelerated double-digit sales growth and margin enhancement as we progress through our inflection for fiscal 2020 and forward. The company and a whole -- as a whole is very well positioned to create value, and we look forward to updating you on the significant opportunities as they evolve.

We will now open the call for questions.

(Operator Instructions) Our first question comes from Christopher Van Horn of B. Riley.

Just to follow up on your comments just at the end there, Selwyn, just to make sure I heard you correctly, did you say a goal of double-digit top line growth for fiscal year 2020?

Yes. I mean I said accelerated double-digit. So I think we feel we can sustain the growth rates we have now for the next couple of years.

Okay, got it. And would you be able to -- I know you've said margin expansion from current levels, would you be able to give any more detail there around maybe some ranges of what we might expect in 2020?

Yes. I think the big thing to understand today is we have so much growth on our hands and there's so much happening in terms of embellishing all of our capacity around the world. But certain parts of our operation are not as efficient as they could be because they've been delayed from moving into the new footprint just based on demand for new products. So I think at a minimum, the fundamentals of our margins will return and quite honestly, as we get into the new footprint, I mean, we should have incremental savings. And I think restoring our margins back to the high end of our range of guidance we believe is very realistic. Now the one thing I will just want to point out is that a lot of different product lines are going to be growing in different rates. So as these product lines grow, there could be differentiation in the margin just because of product mix. But the fundamentals of the gross margin key elements by product line, we believe, are very much -- are very sound and will improve as time goes on, as we get through the transition into our new space.

Got it. And then kind of on that front, I know you had talked about some cost efficiency opportunities out of the Mexican distribution plant. And I'm wondering where you are on that front. And then this $350,000 additional, I think, you mentioned, there's some opportunity for cost savings as you open that new footprint. What's your timing on that as well?

Yes. So the new 400,000 square foot distribution center is up and running and it's fully handling all of rotating electrical. It's also ramping up for the new brake product lines. It's also handling some of our undercar items but not fully yet. In conjunction with that, we have -- this is in Mexico, we have 2 new buildings going up there. I would say that those buildings should be complete, one is further ahead than the other, but -- by the end of this calendar year. And we should see new revenue from new product lines start shipping in the July time frame and our commitments are significant. Again we'll give further guidance in the next quarter hopefully, but our commitments are significant.

Got it. And then last one for me. Just from a macro perspective, we've seen some of your customers report really good comp sales growth and they're identifying weather as a good trend. Obviously, this winter especially for us here on the East Coast. Just wondering what you're hearing on that front in terms of customer order trends? And I imagine there's probably the destocking as well behind us now and just some update there.

Yes. I think, again I'm listening to the same information that you are. And I think overall our industry is optimistic on where we are. The car park is aging and is moving back into sort of prime metric opportunities. The weather with the polar vortex certainly is going to help. We hope we have some continued extreme weather. I'm sorry for you guys on the East Coast and the Midwest. But certainly we hope that continues for a little bit longer. But the outlook is very positive from the fundamentals. I will point out that December what you've heard publicly sort of December, January, we're a little bit softer but that's -- that happens every now and again, but it's back. So the fundamentals of our industry, I believe if you look at the statistics and you see what our customers are doing that the fundamentals are very sound and the next 3 years are going to show some nice growth in just fundamental replacement.

Our next question comes from Scott Stember of CL King.

Can you maybe talk about last quarter you had updated your guidance for the full year? You had said that you expected to be at the high end of your sales range of $465 million to $475 million and I guess the gross margins at the lower end of 27% to 31%. Do you maybe just -- with little less than a quarter to go here, what you're thinking for the full year? And this will give us a better idea of what kind of a base we could look for towards 2020, if the margins seemingly are going to improve.

Yes. So I mean we don't want to give quarterly guidance, Scott, but we are not revoking our annual guidance. And clearly you can see we've got some strong revenues. So our guidance remains, but you can see the strength in the revenue base. So our fundamentals are positive, and we are making great progress. And I think next year you're going to see better margins. And probably the guidance will be -- we're hoping that for next year, next fiscal year we'll give you some more guidance in the next quarterly -- the year-end report.

Okay. So what you said last quarter, I guess, still stands as of now for the rest of the year or for the full year?

Correct, correct. But look, again, just looking at it, the revenue is a little stronger than we thought I mean so which is good and so we'll see.

Okay. And as far as I know price increases, I know some of these items that you talked about will be a little bit stickier and tougher to go away, whether it's labor and just given the work environment here and the shortage of workers and some other items. Maybe just talk about your ability -- or what you're seeing on the price increase side? What you've been able to do so far to counteract that? And if not, what will be the ways of fighting that next year whether it's just getting some streamlining and cost cutting and things like that?

Yes. Well, again, firstly, the tariff pricing is now fully in effect. So we are able to compensate for the increased tariffs out of China and obviously we continue to monitor it very carefully where that is. I think the headwinds in costs are clearly in labor rates around the world and freight rates. I mean we hope that freight will reverse itself. I mean, we believe that with our new moves, with our new footprint, freight will become more efficient because of our consolidated shipping points so the ability to eliminate as much LTL less than full truckloads is going to be enhanced dramatically by having multiple product lines come out of one distribution point. Productivity is always a focus with us. We believe we have some of the most productive plants in the world. We have a fabulous continuous improvement team, and we continue to work to make our facilities more efficient. But at the end of the day, if pricing -- if cost inflation is going faster than we can get productivity, I mean, at some point someone has got to pay for that. And so that's going to -- we'll come to price increases. We intend to be very rational in our pricing. We intend to make sure that we don't have waste in our system. So we're not charging the customer for waste but if they are true costs and they are going up, we truly believe that, that needs to be passed through and ultimately paid for by the entire process, which is ultimately the consumer.

All right, that's great. And just a last question here before I jump back in the queue. One of the adjustments to sales for $6.9 million, $7 million, I guess, in connection with the canceled contract, was this business that was lost and I guess money coming back to you to compensate for that? Or was that something else?

We lost -- we did lose a customer and this is basically a reversal of the deferred asset and liability accounts that relate to that customer. It's noncash in this quarter. At some point, it was cash way back when. But it's noncash and the loss of this customer is not affecting any of our guidance at this point. Yes.

And this is -- do you expect further -- this covers everything related to that customer?

Yes. I mean, we've still got to clean up the last bit of the receivables from that. But we expect that this is the end of it.

Our next question comes from Matt Koranda of Roth Capital Partners.

Just maybe to drill down a bit more on the fiscal year '19 outlook. I guess, revenue looks like it's well ahead of the range you guys provided. But to get back to sort of the low end of your gross margin guidance, I guess it looks like when I run through my model, it would require at least 30% gross margins in Q4, but with the wage and freight pressure that you're citing, I guess what are the puts and takes that sort of allow you to get back to that level in a relatively quick time period?

Yes. I can -- the fundamentals are in place. I think, Matt, what we're suffering from is a lot of growth costs. Not everything can be captured and adjusted, and we're cognizant of the size of the adjustments which we don't like but we're trying to show what the underlying factors are. I mean, I believe we can hit the low end of our guidance of around 29% gross margins for the fourth quarter. So we do expect a recovery in our margins soon and as times goes on, it will get better. I mean there is some -- I would say, be conservative on the margins at this point because we are in a heavy-growth mode and there are variables relating to that. But we -- again, I've said it a lot of times, it doesn't seem too clear in the numbers because of the noise in the numbers, but the fundamentals of our margins once this transition completes are very much intact and the footprint is efficient, and I think the environment we're in today in the market and I the hope that this is -- this as an accurate statement it is rational in terms of pricing. So there is escalating cost coming from all directions and we've done a great job in my opinion of managing that. Again other than the noise factor in the numbers and -- so we don't believe that we're any worse off from a cost structure than anybody else in the industry and that everybody is going to be making appropriate moves for some cost inflation.

Okay. And just to clarify on the pricing commentary made earlier, have you guys actually put through price increases to address passing through the tariffs? Is that what you were saying? And you haven't put through any further price increases. I just wanted to pin that down.

That is correct.

Okay. Got it. Maybe you could talk about it on a go-forward basis. I mean, there's obviously been some competitive changes in your environment. And it does seem like your customers at least in the DIY retailer and DIFM retailer channel are at least somewhat amenable to passing through sort of like-for-like SKU inflation to their customers. So could you talk a little bit about what's happened with the pricing environment? If it's changed at all in the last couple of months in terms of that discussion?

Yes. I don't know if it's changed in the last couple of months because I mean maybe it's evolved. But if you think about the customer base, I mean, they need sound supply, they need viable suppliers, they need reliable suppliers. Fill rates are critical to these customers. If they don't have the inventory, they certainly are not going to be able to sustain their revenue growth numbers and so at the end of the day, while the customers are extremely tough and challenging in terms of monitoring their costs, I think when they understand the realities of inflation and, I think, the competitive base if everybody is saying the same thing and they start doing their homework, I think, just gravity takes effect. I mean, we're in a phase of inflationary costs and inflationary global wage rates, I mean, forget about tariffs even, wage rates through all of Southeast Asia, Northern Asia, African states, we do global surveys all the time and when there's an inflationary -- we're in an inflationary wage rate environment. And so I think our competitors are rational and I think our customers are ultimately, as much as they don't want that, are rational. And I think at the end of the day, if they have solid suppliers and they are able to get appropriate inflation in their pricing, the consumer needs to pay a fair price for the product they're receiving. They're getting a very fair price today and they'll continue to get a fair price. I mean, no one is going to be paying for waste. But if there is fundamental inflation, someone has to pay for it. I mean, we all live with that unfortunately or fortunately, I don't know. So I think at the end of the day, while it's not an easy challenge, I do think that if we continue on this trend that there has to be those conversations.

Got it, that's helpful. Maybe on the wage inflation from Selwyn, is there a way to quantify the headwind that you're facing in hourly wages in your Mexico facility? Any help there would we appreciated. And then also just in terms of the percentage of your cost of goods, that's represented by direct labor, some dimensioning there would be helpful as well.

I think we have seen the worst, but it's over now in terms of -- we had -- we had that base -- the Mexican -- new Mexican government had implemented a base increase in their minimum wage. I mean, we've absorbed that. We've adjusted our wage rates across-the-board. So it's to me -- while it is not -- at this point it's not material going forward. I would tell you that freight is a bigger -- is probably a much bigger drag right now. I believe that and I think in an American way there's a shortage of capacity, their freight industry is not going to sit back and let a shortage of capacity continue on people who want to get more share and there's going to be more capacity that's going to come on board. And so I think that one will correct itself at the end of the day because we're in a very competitive freight environment. So I don't know when that happens. I also don't -- can't predict fuel prices but everything I read is that they should be at least stable not too inflationary at this point if not coming down. So I think freight should reverse itself out and then I can tell you just the mix of how we produce and where we produce. We're going to save a lot of money when we get through this transition, and we've got a whole new inflection point in terms of revenue. So it's a little bit of a noisy time for us but it's going to change.

Okay, that's helpful. Just last one to follow-up on the cancellation of the customer contract. I guess, I was under the impression that there would be a cash inflow with certain cancellations. If you're getting -- if you're essentially getting rid of cores, long-term core inventory that's on your balance sheet. So is there a future cash implication of this? Or why wouldn't there be a cash in-flow associated with the cancellation?

Yes. So in case where you -- there are 2 types of programs we have with customers. We have full core programs and we have penny core programs. This particular customer is on a full core program, which means when they get a core, they pay for it. When they return it, they get a credit. So all of this is a reversal of accruals really on the balance sheet and that's all this is, so there's no cash implication at all on this one. The cash happened when the transactions happened. These are reversal of accruals for future business and future returns and so that all just goes away. So really that you have significant effect on the gross margin percentage, no cash effect and very little P&L and that bottom line effect.

What percentage of your long-term core inventory would you estimate is on the full core versus the penny core sort of arrangements that you described?

I don't know the answer to that. David, do you know the answer?

So more than half of our programs are on zero core, penny core basis.

Okay. So 50-50 or a little over 50? Like 60-40?

More than 50.

(Operator Instructions) Our next question comes from Steve Dyer of Craig-Hallum.

A question -- just a quick question on any revenue contribution that you can sort of quantify on the most recent 2 acquisitions, E&M and Dixie. Is that something either in the March quarter or next year that you sort of can attribute or ascribe significant revenue to or material [anyway]?

Well, I think the combined base that we bought is about $25 million plus in revenue. But what we're going to do with it is we have big plans for both those companies. So we think that first I'll talk about the heavy duty. The heavy-duty opportunity for us is one we have never really played in. I think now we feel comfortable. We've got the right expertise and the right structure. We've put a great -- we think we have a great program that will come of that and there's going to be a lot of revenue growth coming out of it. But that's not overnight because it takes a little bit of time obviously to cultivate and get going. But it's definitely going to help us in terms of growth and that's -- to me that's even -- that's over the gravy of what we have committed today when we talk about the optimism in our growth. And then on E&M, the emulation technology for the electrical vehicle space and -- is significant. I mean, they're able to test the rotors and electronic powertrain and the full really -- the full chassis of the full complement of the electric vehicle and that emulation technology, I think, is leading-edge and now in technology things change quickly. But we think we've got something that's going to put us -- that will accelerate our growth pretty dramatically. And so we committed to that. We think there is a very fast-evolving market that needs this and so we think that's going to happen. And then I think the other thing that's -- that we're hopeful for and certainly making great progress towards is our alternator and starter testing diagnostic business. I mean, you can see some doubles already in revenue. And we hope that we continue to -- that should grow exponentially over the next 2 years, so -- and then you look at our turbocharger line. I mean, turbocharger is evolving. We're now starting to make progress there. Although the brake lines, we think, have got all big opportunities to grow. We're constantly optimistic about continuing to grow rotating electrical in a very rational manner and so I mean it's -- we have a lot of growth [problems] in play right now.

All right, great. And then just again as it relates to gross margin both in the current quarter we're in and then into next year, a lot of your commentary would suggest that a lot of these things are sort of persistent whether it's wage increases or freight or different sort of things like that. But the numerical guidance would suggest a pretty quick bounce back to the top ends of some of your historical ranges. What are you sort of doing that's able to overcome all of the headwinds in a way that you can kind of get back up to that 29%, 30% relatively quickly?

So I'd like to say we have a magic formula, but we don't. I mean, we're always watching our costs and our productivity. I think our operations team is excellent. But I think the biggest contributor to that is the return rates are really significant -- have been significant for us. I mean as people have adjusted their inventory and hopefully -- not hopefully, we certainly expect that those return rates will become more rational and as demand from our customers ramps up, they're going to need more product. I think there's been some deinventorization of the channels. So I think there will be more ramp-up coming. The weather affects our business. So I listen to -- certainly we're involved day-to-day in tracking our demand, but from a public perspective, you just got to listen to the reports that are coming out from the various retailers and distributors, et cetera, of products, and they're more and more optimistic. So as returns come down, margins go up pretty dramatically. We've had a disproportionate hit from returns.

Okay, that's helpful. Last one for me. The core inventory write-downs seem to be a pretty regular event lately. Can you just sort of remind me what those are related to?

Yes. I mean, that's -- it's actually that's one that I keep asking the same question you asked about. That is basically the value of the core inventory on the customer shelf and so what's happened is for -- we've had, probably in the last 2 years, consistent devaluation of that core, and I think that's because we -- scrap values have come down pretty dramatically, I mean, with the Chinese tensions with the U.S. and some of the embargoes on taking scrap in. And so core values have come down. I question how much further down they can go. But we've been writing them down. Again, it's noncash and it doesn't affect our contractual refundability of those cores at all, so -- but there's going to be a time where they start to come back up. I mean, just -- I don't think it's permanent. But it has been quite a long run and it's probably a longer run of deflation in core prices than we expected or anyone really would expect. But I think that's -- that will reverse itself out. And again, it's noncash.

And so to be clear, that doesn't change if you were to lose a penny core customer, does -- [I think we should] get the full amount back?

You get -- whatever the contractual buyback was, whatever you paid for the core, you get back.

I'm showing no further questions at this time. I'd like to turn the conference back over to Selwyn Joffe for any closing remarks.

Great. So as always, I just want to thank all of our team members for their commitment and again, customer-centric focus on service and for their exceptional pride in all the products we sell and the customer services we provide. Their commitment to quality and service is also reflected in the incredible contributions they make to their communities and our society. We value our integrity. We value our core principles of the company. I think one of the greatest assets we have is our people and the trust that our customers have in our people and the faith in MPA to deliver projects and programs that sometimes were not even involved in to start with. So that continues to be our feeling in the industry, and I attribute that to the incredible team of people that we have.

I also want to appreciate everybody's continued support and I thank you again for joining us for the call. We look forward to speaking with you soon when we host our fiscal 2009 (sic) [2019] fourth quarter and year-end conferences, call in June and hopefully, we'll be at a number of conferences where we can see you again. Very excited about where we are, and we look forward to reporting our progress. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.