Motorcar Parts of America Inc (MPAA) 2019 Q4 法說會逐字稿

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

I will now like to turn the conference over to your host, Gary Maier, Investor Relations. You may begin, sir.

Thank you, Nicole. Thanks, everyone for joining us today and welcome to our Motorcar Parts of America's fourth quarter and fiscal, the year-end.

Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the company's Chief Financial Officer, let me remind everyone of the safe harbor statement 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 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.

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

All right. Thank you, Gary, I appreciate everyone joining us today.

Let me begin by briefly addressing the issues that required us to file a Form 12b-25 on June 14, which provided a 15-day extension for filing our fiscal 2019 results. This extension was due in part to internal control issues related to our review of certain accounting policies and to our growth and recent acquisitions. Ultimately, we determined that our controls and procedures were not as effective as they need to be. It was determined that the combined efficiencies in the aggregate was a material weakness. However, I should note that the acquisition in scope only represented approximately 2% of our revenues in fiscal 2019. We take these deficiencies seriously and have a remediation plan that has begun. Additional details will be available in our Form 10-K filed later today.

Okay. So I'm going to move on to -- our record sales for the fiscal fourth quarter and improved adjusting operating margins are indicative of the opportunities for us as we complete our transition into our new footprint. We have expectations for continued growth, enhanced profitability and improved cash flow. I should mention that the fourth quarter results were impacted by a number of items, predominantly noncash, which David will discuss in more detail later in this call.

We are at an exciting inflection point. Our business has grown, our product lines are expanding and our global footprint is rapidly evolving to support the strategic growth. We have evolved to become a major multiproduct supplier to the North American aftermarket from a company with a single focus on rotating electrical just several years ago. We have made the investments in infrastructure and related initiatives to support our strategic plan. In short, our vision to be the global leader for parts and solutions that move our world today and tomorrow is becoming more and more meaningful on a daily basis.

Our expansion from being a company with a single focus on rotating electrical started with the introduction of wheel hubs. From this base, we've continued our expansion with master cylinders, brake boosters and turbochargers, and have made investments to support additional significant growth. Our economic metrics are improving for our evolving product lines as they gain traction in the marketplace, and we complete the transition into our new footprint.

The move into our new facilities will be substantially complete by the end of this fiscal year. Despite the short-term expansion challenges of transforming our footprint, ramping up production for our growing business while we move between facilities and building inventory levels to support our excellent fill rates during the transition, significant improvement in operating metrics will result.

Inventory levels for existing product lines will reduce throughout the latter part of this fiscal year. This combined with a substantial reduction of payments for core buybacks from our existing business and increased profitability will significantly improve operating cash flow.

In addition, during the second half of this year, we will have a significant new business, which will also contribute to operating cash flow and profitability. In short, we're excited by our emerging growth and the economic metrics and the opportunities to further leverage our expanded footprint and our well-deserved reputation as a premier supplier to the aftermarket.

Our new 400,000 square-foot distribution center in Mexico was designed with the capacity to ship multiple product lines from a single point of origin. And we are adding to our production capacity with 2 other adjacent facilities. Upon completion of these new facilities, our footprint in Mexico will expand to more than 1 million square feet. In short, this will enable us to support our existing business as well as new business commitments that have commenced or are in the process of being launched throughout this fiscal year.

Let me take a moment to discuss the heavy-duty business, which we acquired late in the fiscal year. To start, I emphasize that as part of our expansion of Dixie, we have already added or are in the process of adding infrastructure, which will complement our internal control remediation plans. Dixie Electric has a solid and growing customer base, innovative products, and enhanced heavy-duty expertise and a dedicated team of professionals. We anticipate continued success as it benefits from investments in the sales team and sales team expansion and enhancements to manufacturing marketing and merchandising and other synergistic opportunities since we acquired them. We are already seeing positive sales momentum for our heavy-duty products. The D&V diagnostic business is gaining momentum in both the internal combustion engine and electric vehicle market. As part of our growth strategy, we have added sales infrastructure in key OE electrical markets around the world. In addition, due to the expected growth of D&V, we are adding infrastructure, which will support our financial remediation plan. As sales for D&V combustion engine diagnostic equipment, including benchtop testers are progressing well, and services and software solutions will also provide additional opportunities as our installed base grows. The emerging electrical vehicle and aerospace markets are gaining traction for pre and post-production testing equipment, and we continue to be excited by emulation testing capabilities within the automotive and aerospace industry. We look forward to sharing news about our milestones and wins throughout the fiscal year.

Let me now discuss fiscal 2020 guidance. We expect adjusted net sales for fiscal year 2020 ending March 31 to be between $552 million and $562 million, representing between 16% and 18% organic growth year-over-year, significantly ramping up in the second half of the year. This reflects our expectation to grow our annualized adjusted sales run rate by approximately $100 million by fiscal year-end.

Adjusted gross margin for fiscal year 2020 is expected to be approximately 27%, impacted by our product mix and the launch of our new product line. As we discussed, profitability and cash flow are expected to improve on a year-over-year basis. I should mention that the company has instituted much-deserved price increases across all existing product lines beginning in the latter part of this year.

To highlight our overall positive 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 and the prime parts replacement time frame. Essentially, the number of prime replacement age vehicles is growing. These statistics further support our company's and the industry's optimism for growth over the next several years.

I'll now turn the call over to David to review the results for the fourth quarter and year-end.

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect for our March 31, 2019 earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10-K filed later today.

Let me take a moment to review the financial highlights for the fiscal 2019 fourth quarter, reflecting record sales for both the quarter and 12 months on a reported and adjusted basis.

The gross margin for the quarter was primarily impacted by 3 items totaling $12.9 million. Noncash expenses of $8.5 million, comprised of a write-down of $7.4 million, associated with the quarterly revaluation for cores on customer shelves and $1.1 million of amortization related to the premium for core buybacks. Transition costs of $2.5 million associated with the move into the larger consolidated distribution center to support the growth in sales and customer allowances and stock adjustment costs of $1.9 million related to new business.

Net sales for the fiscal 2019 fourth quarter increased 7.8% to $129.1 million from $119.7 million for the same period a year earlier, reflecting sale has increased for both hard parts and diagnostic products.

Adjusted net sales for the fiscal 2019 fourth quarter increased $9.3 million or 7.5% to $132.7 million. Gross profit for the fourth quarter was $26 million compared with $29.1 million a year earlier. Gross profit as a percentage of net sales for the fourth quarter was 20.1% compared with 24.3% a year earlier, which was impacted by the 3 items previously highlighted.

Adjusted gross profit for the fourth quarter was $39 million compared with $36.3 million a year earlier. Adjusted gross profit as a percentage of adjusted net sales for the fourth quarter was 29.4% compared with 29.4% for the prior year fourth quarter.

Total operating expenses increased by $5.5 million to $20.5 million for the fourth quarter from $15 million for the prior year.

Adjusted operating expenses increased by $961,000 to $16.3 million for the fourth quarter from $15.3 million for the prior year. This increase in adjusted operating expenses was primarily due to expenses for newly acquired assets of E&M Power in December 2018 and Dixie Electronics in January 2019. Additionally, adjusted operating expenses increased 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. The increases were partially offset by a $2.2 million decrease in bonus expense.

As mentioned previously, due primarily to the several items impacting gross margins that I discussed, operating income was $5.5 million for the fiscal 2019 fourth quarter compared with $14.1 million for the prior year fourth quarter.

Adjusted operating income was $22.7 million for the fourth quarter compared with $21 million for the prior year.

Adjusted EBITDA was $24.8 million for the fourth quarter compared with $22.2 million for the period a year ago.

Depreciation and amortization expense was $2.4 million for the fourth quarter. Interest expense was $6.7 million for the fourth quarter compared with $4.7 million last year.

The increase in interest expense was due primarily to an increase in the utilization of and higher interest rates on our accounts receivable discount programs, increased average outstanding borrowings as we build our inventory levels to support higher -- to support anticipated higher sales and higher interest rates on our average outstanding borrowings under our credit facility.

Income tax expense for the fourth quarter was $1.6 million compared with income tax expense of $1.1 million for the prior year period. The new tax law resulted in lowering our total blended corporate tax rate from 39% to 25% effective January 1, 2018.

Net loss for the fourth quarter was $2.8 million or $0.15 per share compared with net income of $8.4 million or $0.43 per share a year ago.

Adjusted net income was $12 million or $0.63 per diluted share for the fourth quarter compared with $10.5 million or $0.54 per diluted share for the prior year.

Let me now discuss the results for the 12 months ended March 31, 2019. Net sales increased 10.6% to $472.8 million for fiscal '19 from $427.5 million for the prior year 12 months.

Adjusted net sales for the 12-month period increased 9% to $476.3 million from $437.1 million for last year.

Net loss for the 12-month period was $7.8 million or $0.42 per share compared with net income of $19.3 million or $0.99 a year ago. Adjusted net income for the 12-month period was $33.3 million compared with $37.1 million a year earlier. And adjusted diluted earnings per share were $1.73 compared with $1.90 last year.

Adjusted EBITDA was $73.8 million for the 12-month period compared with $77.2 million a year earlier.

As of March 31, 2019, trailing 12 months' adjusted EBITDA was $73.8 million. And the average equity and net debt balance was $381 million, resulting in a 19.4% 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 March 31, 2019, we had net bank debt of approximately $128.4 million. Total cash availability on the revolver credit facility was approximately $98.6 million at March 31, 2019, based on a total $200 million revolver credit facility and subject to certain limitations, which was increased subsequent to fiscal year-end to $238.6 million.

At March 31, 2019, the company had approximately $632 million in total assets. Current assets were $353 million and current liabilities were $279 million.

Under the authorized share purchase -- repurchase program, as of March 31, 2019, $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 fiscal year 2019 was $40.3 million primarily due to a $53 million increase in inventory net of payables for new business and growth.

As Selwyn previously discussed, we have invested in inventory to support a seamless transition to our new -- to our expanded footprint and growth. We anticipate increased cash flows from reductions in this inventory related to existing product line in the latter half of this fiscal year. Additionally, there will be a substantial reduction of payments for core buybacks from our existing business, which will generate stronger financial profitability and operating cash flow on a year-over-year basis.

For the reconciliation of non-GAAP financial measures, please refer to Exhibits 1 through 7 in this morning's earnings press release.

I will now open the call for questions, and Selwyn will then provide some closing remarks.

(Operator Instructions) And our first question comes from Steve Dyer from Craig-Hallum.

Question on gross margins. You guided for 27% for the year. This quarter was certainly better. The March quarter was quite a bit better than I had expected. So can you just help us with the cadence through the year. I am assuming maybe it takes a step below that 27% and works its way higher through the year? Or how do you sort of arrive at that 27-ish-percent?

I think you got it, Steve. It does take a step back because generally, our first quarter is much slower quarter than the rest of the year and it ramps up. And so it may -- it kind of takes a step back and then will take a step forward. I mean a lot of things going on in the gross margin percentage number. There is a lot of -- there is new activity in sales for new product lines that we have -- that we'll be launching and so there is some margin pressure when you launch those in the beginning. And then obviously, we're going through a transition. When we get through the transition, you'll see a nice bump in margins again. But a lot of noise right now because of the differing product mix that is out there. But again, I think that's all incorporated into this guidance on 27%. And as we get towards the latter half of this year, you -- we should see significant margin improvement across the board because we're getting through to the end of this Mexico transition program. The buildings have progressed on target right now, and we expect the end of the second quarter to be just start moving into one of the new buildings. So -- yes. So the cadence is a little slower in the beginning of the year. You can see that -- I mean, the exciting part of the story, in my opinion, is that you see the fourth quarter margins and that's indicative of where we are when we start running at capacities that the new facility is ready to take on. And these revenue levels, again, are much lower than we're going to be at. But in the next quarter, I think I mentioned in the call, we expect to increase our revenue run rate by at least $100 million. So -- and that will absorb a lot of the overhead, and again have some traction in the margin number.

Okay. Just then looking at the growth number for this year, I'm sort of trying to parse out how you're thinking about organic versus the 2 acquisitions that you did? And I think we have talked about what you expect from them. Recently, the math would suggest something like, I don't know, 12% or 14% organic. And then the rest, whatever 3, 4 points of acquired growth. Is that generally ballpark for your growth assumptions for this year?

No. Yes. Let me just comment and then I'll comment on that. To us, it's all organic because we have made the acquisitions. But it's annualizing some of them annual -- those acquisitions. And you're right, it's around that percentage. But there is a lot of growth in our -- just in our existing hard parts business. I mean we are seeing some pretty exciting activity in the diagnostics business as well right now, but it's predominantly driven by hard parts.

Okay. Got it. And then last for me. Obviously, the transition here to the new building, you've built a ton of inventories but a big drag on cash flow, big drag on margins. What part of the fiscal year sort of do you expect that to swing back to the positive? I mean is that a Q3 thing? Is it more likely Q4? Can it be earlier? When would you expect to be able to kind of get some of that working capital back in your direction?

So we expect that in Q3, you'll start seeing a reduction of the inventories albeit still a little bit of a build in the first quarter, and then you'll see it. We think it's a pretty big number from where we are today. I think we're looking at generating at least $10 million from existing inventory plus. And then we've also -- the amount of core payments from a cash perspective has gone down. David, what's that amount it's gone down by?

It's going down by $16 million in fiscal 2020 compared to '19.

Yes. So there's an incremental $16 million of free cash flow from reduced core payments relating to the existing business as well. We're getting through buying back these cores, which is you're only buying back once. And then you own them, you don't have to buy them again. And so -- once you own all these cores, the economic metrics from the cash flow change dramatically.

Got it. Okay. So just then to be clear, you guys will be plenty cash flow, free cash flow positive in fiscal '20. That's the expectation?

Yes, the expectation that you'll see that stock coming in the second and third -- in the third and fourth quarter, yes.

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

Just to follow up on that organic growth for 2020. Is there anything that you can really point to? Is it continued market share gains? Is it some of the new product orders that you expect? Can we see possibly new other product launches that we -- that you might be looking at as well? Just a little more detail on the organic side.

Yes. So, it's existing product -- we've seen growth everywhere. So I'll start with that comment. Some is more exciting than others, but we've seen growth in all of our product lines. We expect also to have new products that will be -- retraction from the new products that will also be launched sort of the back half of the year. So between the new products, all of our existing product hard parts revenue will go up. We're seeing increases in our diagnostics revenue going up. Our electric vehicle initiatives will go up. I mean the challenge on the diagnostics side is that very specialized equipment, and so it's choppy in the quarters, but a pretty significant as this grows. So you'll see it across the board. But I think you'll see a lot of new business coming on board towards the back half of the year. Again, from organic hard parts, I mean that's really where the biggest focus is.

Okay, great. And just to dig in maybe a little bit on the diagnostic side. Could you just remind us, is that both for desktop testing as well of some of the stuff you're doing on the OEM side? And then -- although I'm not sure if you've commented before, but the margin profile for diagnostic revenue kind of versus your company average? Any sort of information there would be great.

Yes. So the 2 types of diagnostic equipment, we've got the combustion engine diagnostics and we've got electric vehicle diagnostics, which includes aerospace and automotive and trucks for that matter. On the combustion engine side, we have the benchtop testers. We have a number of OEs that use our equipment and this is all related today to rotating electrical and hybrid vehicle technology, belt-start generators, which is another area as more hybrid cars get on the road. We'll see -- the margin profile on that is a little bit lower than the electric vehicle side. That certainly should not be a drag at all, but hopefully accretive at some point to these margins that we've given guidance on. The electric power vehicle side, the margins are all higher. As of today, it's a very competitive market. But I think we have a very niche spot and we're very much software-driven, so the margins are a lot higher and the maintenance and potential for sort of a SaaS model on the electric vehicle side is pretty exciting. So as the electric vehicle business takes traction, margins -- those margins are a lot different and then a lot higher than some of the hard parts aftermarket margins.

Okay. Got it. Then just on the core, no pun intended but on the core part of the business, rotating electrical, can you talk about the competitive landscape? Is there some pricing pressure going on there and -- or what are you kind of seeing? Because I know there's only a couple of you guys out there now, and so I kind of feel like -- and you've been taking share, I kind of feel like you are in a great position, but just want to see what's going on from a capacity standpoint?

Yes. I mean there really -- there are 2 major players in the market. There are others that obviously are trying to get into the market. Our rotating electrical business continues to be a very good business for us, continues to grow. We have high expectations for it to continue to grow. We don't expect that growth to slow. We still have a lot of share that's out there and think there is a lot of opportunity for both players that are left -- both of the major players that are left in the marketplace. There's, obviously, as you know, been price -- cost inflation around the world in terms of labor costs, occupancy costs, utility costs, transportation costs, fuel costs, cleaning supplies, tariffs on things that you don't pass through. So there's been some, I would say, headwinds in terms of our operating expense in the -- in our rotating electrical and our hard parts business. And that's why we're taking the price increases through on that. I think at this point in time, it's always competitive from a price perspective. But we are absolutely adamant that price increases will be introduced. And we think there's stability there. I think the market, hopefully, is rational. There's no waste in the system. Consumers -- our customers are getting a good deal, and I believe the consumers are going to get a good deal and that will continue. I think the tariffs is an unknown in terms of how pricing will affect the consumer. But we, again, are passing through and will intend to pass through all of that tariffs. And so, I mean, that's a long-winded answer to it. I think the market is stable. It's still competitive. I think there's opportunity for everybody to stabilize that market and I think there's opportunity there still. The pricing pressures are real, so the customers are getting competitive rates, but yet the suppliers can survive and have viable businesses going forward. So that's a long-drawn-out speech, but I think it's important for all the different constituents that are listening on the phone to understand exactly where we are.

(Operator Instructions) And our next question comes from Scott Stember from CL King.

David, I don't know if I heard, did you give out the breakout by segment for revenues within the quarter?

We did not.

Could you give that out? It's just something that we've been getting for a while. It helps from a modeling perspective.

Yes. I think the key thing there is that there is a lot of movement in different product lines. There are a lot of competitive challenges for us and confidentialities that we have on our product line growth right now with our customer base, so we don't mean to be elusive on it. But I mean I think right now, we would just look at hard parts in general from organic products. So a little difficult to break it out for us now. As we go down through the year, we can just -- we can talk about that more. But a little sensitive time for us right now, Scott, I apologize for that, in terms of breaking out what the growth is going to be. And again, I -- we don't want to be -- we want to be as transparent as possible. But certainly, we have some industry challenges in being able to be more transparent than we are.

No. And I could appreciate that. But could you give us some directional -- just on -- because obviously, you have some new business that you won. It'd be nice to know how much of that is contributing and versus some of the core stuff? And obviously, a lot of that plays into the margin, right, as well. So is there anything you can give us?

Yes. So let me try and give you a little bit of a bridge, but it's not going to be by part number but it will be by hard parts and -- I think the -- this is probably on the run rate, okay? I mean I think there's probably a contribution of around 20 -- a little over $20-plus million of incremental sales from both the 2 new acquisitions. So that's the run rate of where they are today. So that's about $20 million of it. And then the hard parts -- the hard parts growth is $70-plus million in hard parts growth. And you'll see that sequentially through the year, but you'll see big jumps in the third and fourth quarter.

So when you say hard parts, you're referring to your existing products?

Existing products and the -- and new products in the hard parts category. And it's nicely -- yes, it's -- yes, I mean that should get you through some of the modeling challenges that you guys are having. We'll try and provide color as we go down through -- as we get into the -- more developed into the year.

Okay. And just to flesh out the comments about organic growth again that was asked earlier. The organic growth -- is that a true organic 16% to 18%? Or again, the 3% to 4% is coming from business that -- have these acquisitions anniversaried already? Or this is just incremental sales or growth that you expect from these acquired businesses?

No. A small amount of it is going to anniversary. I mean on the Dixie, we bought at the end of the year. So that's -- that -- the annualization of that is in that number. I mean we've classified that as organic. But that's a relatively small amount of it. The rest is all organic, the rest have all anniversaried and the rest is all just straight organic growth. So a very small amount of it. If you want to -- if you don't count the annualization of the Dixie acquisition as organic, I mean, I think that's going to be $8 million to $10 million of the growth -- of the $100 million that we're looking at.

All right, so I back that out to get to your organic numbers. Okay, got it.

Yes, that's the annualized amount of that.

All right, and with regards to -- you mentioned price increases and I just want to talk about gross margins and some of the puts and takes from next year again. Obviously, if you were looking at the as-adjusted number, that already smooths out I guess for the $2.5 million worth of transition into the new facilities. So maybe just talk about some of the headwinds, just specifically again, whether it's freight, labor and product mix? You did talk about product mix. Maybe just talk about those things and maybe in order of importance?

Yes. So I mean, obviously, labor -- I'll start with labor. In order of importance, labor is extremely important. Labor is up all over the world. We have new minimum wage rules in Mexico, which basically escalates all your levels of wage increases. You have new minimum wage levels in California, escalates wage increases all the way up. We have new minimum wage rules in Malaysia. We have new minimum wage rules in India. I mean so -- certainly, there's wage inflation in China. I can tell you, occupancy costs in all third world countries, in particular, in Mexico have gone up because everybody's running to try and get into tariff relocations. Occupancy costs have gone up. Utility costs have gone up. Companies have been passing through the direct effect of tariffs on the products that they sell, but there is a tremendous indirect effect of tariffs. And it's amazing what comes out of China and what you'll see in terms of increases in costs from soaps to brushes that you clean your floor with. I mean it's just -- it's everywhere. And the price increases, certainly, I would view them as neutralizing headwinds, as not windfalls for us as you can see by the guidance in our margins. And that's another reason I would tell you that we're absolutely adamant that we will not ship products unless we get our price increases. So it's just, it's fair, it's for the industry. There's a lot of that headwind and we expect that to go on. But having said that, we've incorporated that into our guidance and that's -- we're at 27%, which is similar to where we ended it this year. And -- but we think that as time goes on with the efficiencies, with the new facilities that we would see some margin expansion also with the growth of our electric vehicle initiatives.

Got it. And last question. You mentioned lower core purchases expectations for next year. Can you maybe just walk us through why that's happening again? And what's triggering that? Whether, I don't know, we have too many cores, or just trying to balance things out? Or is there something else that we need to look at?

So the focus is on cores on customer shelves on the buyback amount that we're talking about. So I'll hand over to David to talk about that.

Yes. So during fiscal 2019, payment for those previous core purchases for new business was approximately $28 million. And in the fiscal '20, we expect that to come down to about $12 million. So that's the $16 million decrease in those payments.

Yes. And I'm just trying to figure out what the rationale why is it coming down? I mean is it...

Sure. So 4 years ago, we got new business. We purchased cores. So that 4-year payment has now ended. So as years move on, then the payments become less because you're just trying to pay off for those cores, which are paid for only onetime. You don't have to pay for them again. So a large 4-year payment plan just ended in fiscal '19.

Okay. And obviously going forward, would that mean also that there'll be less -- or there'll be -- GAAP earnings will be more closely aligned with the as reported? Or it was just strictly cash flow we're talking?

On the sales, there will continue to be amortization of the core premium. And it really depends on amount of new business that we get and what kind of allowance that we give the customer for those core buybacks. But again, once we do buy those cores, that premium is amortized over the life of the contract.

So there are 2 things. I mean there's the cash component of it, which is coming down dramatically. But when we buyback cores, we amortize generally over, I think, an 8-year period?

Correct.

We amortize the premium that we bought back the cores over an 8-year period. So the cash, we own the cores, but we still have to amortize this premium. And that was the change we made in the restatement in the second quarter. So you still got this sort of noncash amortization of cores on customer shelves. But the other thing to remember is that, again, nothing has changed. If we ever lose the business, which hopefully we won't, we don't expect to we get reimbursed the full amount of cash. It's not based on lower cost of the realizable value. It's a fixed contract price.

And there are no further questions at this time. I will now like to turn the call back to Selwyn Joffe, Chairman, President and CEO for any further remarks.

Thank you. In summary, everybody, as you heard, we have many growth opportunities and the new business commitments are continuing. The company, as a whole, is very well positioned to create value. And we look forward to updating you on the significant progress we make as we go through the year. And as always, I want to thank all our team members for their commitment and customer-centric focus on service and for their exceptional pride in all the products we sell and the customer services we provide. That commitment to quality and service is also reflected in the wonderful contributions they made to their communities and our society. They are terrific and I am proud to work with them. We appreciate your continued support, and we thank you again for joining us for the call. We look forward to speaking with you when we host our fiscal 2020 first quarter conference call in August and at the various conferences that we attend. Thank you.

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