Motorcar Parts of America Inc (MPAA) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Motorcar Parts of America Fiscal 2020 Second Quarter Results. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Gary Maier, Investor Relations. You may begin.

Thank you, Tanya. Thanks, everyone, for joining us for the call today. Before I 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 statements included in today's press release. Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during 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 the company. 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 these ongoing risks and uncertainties of the company's business, please refer to the various filings with the Securities and Exchange Commission.

I'd like now to turn the call over to Selwyn Joffe to begin.

All right. Thank you, Gary. I appreciate everyone joining us today. Before I begin, I'd like to recognize and thank the great MPA team members for their ongoing commitment and excellence to servicing our customers and shareholders with outstanding performance. It is a pleasure to receive the ongoing positive feedback from our customer base reconfirmed at the recent AAPEX trade show last week and to see how the extraordinary efforts of the team are resulting in positive returns. Thank you.

Okay. We're excited about the results for the quarter, which highlights the benefit from the progress of our strategic initiatives. We believe that our initiatives once complete will result in even further upside, enhancing our scalability and our financial performance.

Let me update you on the progress of the initiatives that are outlined on last quarter's conference call to improve profitability. The first thing I discussed was that we would increase the absorption that has resulted from our newly expanded capacity. We have made significant inroads on this initiative. We've increased the absorption of overhead that has resulted from our newly expanded distribution center by relocating and growing our hard parts business, including the launch of our new brake caliper line. Brake calipers began shipping in the middle of the second quarter, and we have continued growth in our existing business. As an aside, we have visibility for additional new business that will result in substantial increased sales to further absorb this overhead.

The second initiative I discussed was the relocation of operations from high-cost to lower-cost locations, leveraging our capacity in Mexico and Malaysia. We have substantially completed our transition into our new consolidated distribution facility in Mexico. There are still 2 remaining facilities in Mexico, which are at various stages of completion. We expect one to begin incremental operations in our 2020 fiscal fourth quarter and the other by the end of the second quarter of fiscal 2021. With respect to Malaysia, our facility expansion has been substantially completed. This will allow us to increase capacity and productivity for our existing product lines.

Finally, we implemented price increases, which became effective in the latter half of the second quarter. As we enter the second half of fiscal 2020, we are well positioned to benefit from our investments for continued growth. Our global footprint is nearing completion to support expansion across multiple nondiscretionary off the market hard parts, further solidifying our position as a valued premier supplier in North America.

Let me now discuss our diagnostic and testing business, which is emerging and gaining traction. While our OEM alternator and starter production testers have long been the industry standard, our new aftermarket benchtop tester is heading in the same direction. Our outlook for the benchtop tester is exciting and rapidly evolving. We expect significant revenue generation opportunities over the next few years.

The diagnostics market for automotive electric vehicles and electrification of the aerospace market is also quickly evolving. We have received purchase orders from a number of highly respected global companies in both automotive and aerospace industries. In addition, our strategic partnerships within the space are fast evolving. We recently announced a strategic relationship with OPAL-RT. This has enhanced the scope of our services relative to developing the electric powertrain for electric vehicles that will leverage D&V's expertise in advanced high-powered automotive testing. D&V's power amplifiers and emulators will be available with OPAL-RT's real-time simulation, offering customers greatly increased accuracy in test capabilities. These dynamic technologies are ideal for electric hybrid vehicles, their battery patch charges, inverters and high-voltage DC power systems; the hardware in the loop for dynamic high-power sources or load emulation with real-time simulation; DC microgrid testing and alternative energy systems; and aerospace DC power systems and components. We will decrease time-to-market particularly for electric vehicle development and renewable energy systems. We are excited to be a part of this fast evolving business.

Overall, the company has become a major multiproduct supplier to the North American aftermarket -- automotive aftermarket and a leader in all of its product categories. We are also fast expanding our presence in electric vehicle diagnostics with our cutting-edge offerings. All of this represents significant value-creation opportunities. In short, we are now well positioned for sustainable growth, enhanced profitability and positive cash flow from operations, which we expect in the second half of this year. We look forward to sharing news about our milestones through the fiscal year. We remain encouraged by the outlook for our current and expanding product lines, and the benefits from our strategic investments to support our current and future growth.

Let me reiterate what we expect for fiscal 2020 based on the timing and completion of various initiatives, and the ramp up of our new caliper business. Continued year-over-year sales increases; high adjusted gross margins and operating income; and last but certainly not least, positive cash flow from operations in the second half of this fiscal year. We are maintaining our adjusted net sales guidance for fiscal year 2020 for now and the amounts that refers to be between $552 million and $562 million, representing between 15% and 18% growth year-over-year. Adjusted gross margin for fiscal year 2020 is expected to be approximately 27% impacted by product mix. As we discussed, profitability and operating cash flow are expected to improve on a year-over-year basis.

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 spots 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-aged 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 second quarter.

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect to our September 30, 2019 earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10-Q.

Let me take a moment to review the financial highlights for the fiscal 2020 second quarter, reflecting record sales for the quarter and 6 months on a reported and adjusted basis. Net sales for the fiscal 2020 second quarter increased 17.5% to $150.4 million from $127.9 million, the same period a year earlier, reflecting sales increases for both hard parts and diagnostic products. Tariff cost pass-through contributed approximately 3.6% of the sales growth for the second quarter. Adjusted net sales for the fiscal 2020 second quarter increased 16.4% to $151.4 million from $130.2 million a year earlier. Gross profit for the fiscal 2020 second quarter was $36.6 million compared with $25.7 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2020 second quarter was 24.3% compared with 20.1% a year earlier. Adjusted gross profit for the fiscal 2020 second quarter was $42.9 million compared with $36 million a year ago. Adjusted gross profit as a percentage of adjusted net sales for the 3 months was 28.3% compared with 27.6% a year earlier.

The results for the quarter and gross margin were primarily impacted by 2 items totaling $6.3 million. First, noncash expenses of $4 million, including a write-down of $2.9 million, associated with the quarterly revaluation for cores on customer shelves and $1.1 million of amortization related to the premium for core buybacks. It is important to recognize that even though the core value for cores and customer shelves may be written down on our balance sheet, we're entitled to a full contractual price refund in the event that the relationship with our customer is terminated. Second, transition costs of $2.3 million, associated with the move into the new facilities in Mexico, support the company's anticipated growth. Total operating expenses increased by $6.6 million to $21.9 million for the second quarter from $15.3 million for the prior year. This increase was impacted by a noncash $663,000 loss for the quarter compared with a noncash gain of $1.9 million for the prior year recorded due to the change in the fair value of the forward foreign currency exchange contracts, a noncash loss of $1.1 million due to the remeasurement of foreign currency denominated lease liabilities and $1.5 million of operating expenses attributable to our fiscal 2019 acquisitions. Adjusted operating expenses increased by $4.1 million to $19 million for the second quarter from $14.9 million for the prior year. This increase in adjusted operating expenses was due in part to $1.6 million expenses attributable to our fiscal 2019 acquisitions, $489,000 expenses in connection with our internal control remediation efforts and approximately $367,000 of increased depreciation and amortization. Additionally, approximately $400,000 is related to increases in both personnel and infrastructure expenditures to accommodate our anticipated growth.

Operating income was $14.7 million for the fiscal 2020 second quarter compared with operating income of $10.4 million for the prior year second quarter. Adjusted operating income was $23.9 million for the second quarter compared with $21.1 million for the prior year. Adjusted EBITDA was $26 million for the second quarter compared with $22.5 million for the period a year ago. Depreciation and amortization expense was $2.2 million for the second quarter. Interest expense was $6.5 million for the second quarter compared with $5.7 million last year. The increase in interest expense was due primarily to increased average outstanding borrowings to support our growth initiatives. Income tax expense for the second quarter was $2 million compared with income tax expense of $1.2 million for the prior year period. Net income for the fiscal 2020 second quarter was $6.2 million or $0.32 per diluted share compared with net income of $3.5 million or $0.18 per diluted share a year ago. Adjusted net income for the fiscal 2020 second quarter was $13 million or $0.68 per diluted share compared with $11.5 million or $0.60 per diluted share a year earlier.

Let me now discuss the results for the 6 months ended September 30, 2019. Net sales for the fiscal 2020's 6-month period increased 18.2% to $259.5 million compared with net sales of $219.6 million for the prior year 6 month. Adjusted net sales for the 6 months increased 16.1% to $260 million compared with $224 million for last year. Gross profit for the fiscal 2020 6-month period was $54.2 million compared with $42.1 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2020 first half was 20.9% compared with 19.2% a year earlier. Adjusted gross profit for the fiscal 2020 6-month period was $69.1 million compared with $58.9 million a year ago. Adjusted gross profit as a percent of adjusted net sales for the 6 months was 26.6% compared with 26.3% a year earlier. Net income for the 6-month period was $38,000 or $0.00 per share compared with net loss of $2 million or $0.10 per share a year ago. Adjusted net income for the 6 months was $14.7 million compared with $14.6 million for the prior year 6 months, and adjusted diluted earnings per share were $0.76 compared with $0.75 per diluted share last year. Adjusted EBITDA was $36.7 million for the 6-month period compared with $32.8 million a year earlier. As of September 30, 2019, trailing 12 months' adjusted EBITDA was $77.8 million and the average equity and net debt balance was $407 million, resulting in a 19.1% return on invested capital on a pretax basis. Our method of calculation ROIC is to divide trailing 12 months' adjusted EBITDA by the average equity and net debt balance for the 12-month period.

I should point out that we have just begun to realize the benefit of expanding our Mexico operations and the launch of our new brake categories, with the expectation of significant revenue growth from both new and existing product lines. As of September 30, 2019, we have net bad debt of approximately $163.5 million, total cash and availability on the revolver credit facility was approximately $80.5 million at September 30, 2019, based on a total of $239 million revolver credit facility and subject to certain limitations. At September 30, 2019, the company had approximately $713 million in total assets, current assets were $376 million and current liabilities were $304 million. This reflects the adoption of the new lease accounting announcement, which requires a balance sheet recognition of a leased asset and leased liability for all leases. We are particularly pleased with the reduction in inventory during the second quarter, reflecting the progress we are making in our transition to Mexico. Net cash used in operating activities during the fiscal -- fiscal year 2020 second quarter was $8.4 million primarily due to a $25.2 million increase in accounts receivable, reflecting record sales for the second quarter partially offset by a reduction of inventory of $8.2 million and net income of $6.2 million. We expect to generate positive cash flows from operating activities in the second half of the fiscal year. Contributing to this, there will be reduction in payment for core buybacks from our existing business, which will help generate stronger operating cash flow. For the reconciliation of non-GAAP financial measures, please refer to exhibit 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) Our first question comes from the line of Justin Clare with Roth Capital.

So I guess just first off in terms of your fiscal 2020 revenue guidance, it seems like the guidance implies revenues for Q3 and Q4 that could be kind of in line with Q2 around $150 million. Just wanted to see if this is how we should be thinking about it. Or if there is some potential upside here because I know you have been ramping up new business.

Yes. It's -- we don't want to get ahead of our SKUs, Justin. That's a good question but we're very comfortable of sustaining our 16% plus growth rate in the third quarter. And then we should see exponentially additional growth in the fourth quarter. We've got a lot of large initiatives that will probably need to be shifted in the fourth quarter as opposed to the third quarter, but I don't want to get ahead of our SKUs right now, but we're very comfortable with our guidance.

Okay. Great. And then, I know you've been rolling out price increases. Just wanted to see where you are in that process. I think you were starting price increases kind of midway through Q2. So should we see those increases reflected fully in Q3?

Yes. Yes.

Okay. Great. And then, in terms of your capacity utilization, you're adding a significant amount of capacity here in Mexico and Malaysia. Can you speak to how you see utilization trending ahead? Is this something that will continue to improve this year and into next year? And then, if you can speak to how that could benefit your profitability as well?

Yes. So as we -- I think I -- just in summary, I'll sort of go through it again. The distribution center is up and running. We certainly feel that we can get to operating, I wouldn't say capacity, but real operating efficiencies in terms of overhead absorption now -- in the next 6 months. And we're actually operating quite well already out of it now. There's 2 new buildings. Malaysia is completed. So there will be incremental capacity there. That capacity, again, will scale almost -- the manufacturing guys would always disagree with me, but we'll scale very quickly. I mean it's -- we have a lot of SKUs, so it's always challenging to scale at the speed that I would like us to scale, but that'll be imminent as well. And then when I say imminent, within the 6-month period -- next 6 months.

And then last but not least is the new Mexico facilities and production facilities, and as of now, we have demand to take up all our capacity as we scale it. It will not be fully absorbed for some time still. So it's hard to describe, but this new footprint -- basically, the way we operate is not that we have a whole bunch of extra space. We utilize all the space in the buildings, based on lean manufacturing principles. And so as we have more demand for our product, we can utilize those buildings more efficiently by adding employees into the lean manufacturing model. We expect that as fast as we can ramp, we should have business to absorb capacity. I mean that's a long-winded answer because there is no short real simple answer to that. But we should see -- I do think there's some work to be done. So I don't want anyone -- everyone to get ahead of themselves, but we do have some work to be done still in Mexico. They are very big initiatives, but there's very big demand behind those initiatives. And again, I'll reiterate, we've got a fabulous operating team, and I think they're going to do a good job and the pain should be fairly small.

Our next question comes from the line of Chris Van Horn with B. Riley FBR.

So when I look at your guidance of 27% on the gross margin line, seems to be roughly flattish with what you were able to do last year. And I'm just curious of the puts and takes on that number.

Yes. There's a lot of ramp up cost in that, there's a lot of new product cost in that. And there's -- again, there's still some inefficiencies in the gross margins. So again, once this thing settles and the complete transition is done, there should be an uptick in a few points out of that. So -- but again, we've been -- I think we've been realistic cautious right now, but there's definitely upside as we go further down. I mean obviously, competitive issues are things we're going to have to keep monitoring and the tariff situations, but just as a matter of -- as a side product, Chris, maybe I'll just go into that for a second. I believe that the expansion of Malaysia and the Mexican operations are going to further allow us to have more flexibility around the import tariffs. So there may be some headwinds in terms of getting in and out of those Chinese product lines, but -- so again, I don't want to get ahead of us, but I think that as time goes on, you will see margin improvement because the efficiency of the new footprint is expected to be very positive for us.

Okay. Makes sense. And then on the revenue growth, it seems like even at the midpoint, you're going to return to this kind of mid-double-digit teen range here. And I was just -- was curious could you breakout is there anything that's overly contributing? I imagine its market share gains, it's new product introductions, maybe there's a little bit of a price component, but is there anything that really stands out that's going to drive that?

No. I think the great news about everything is that everything is performing right now. We think hard parts in general is -- I mean obviously, we got new product line. We think that next year, that should breakout more. But for this year, it's our existing product lines of diagnostics -- just across the board, we're seeing some -- just fundamental base increases. And we are benefiting a little bit from, as David mentioned, I think 3.5% from the tariff pass-throughs, but which -- by the way that's a headwind on gross margins as well. So it's a pickup in revenue, but it's a pass-through, so our gross margin percentage is normally affected by that. But no, it's across the board. I think we hope, and I mean we remain optimistic about seeing growth in all of our categories. And we certainly expect to see -- right now we've got headwinds in our diagnostic business in terms of profitability. So we hope to see that turn in the fourth quarter as well. We've got a lot of great orders that are coming in and we expect to ship them in the March quarter, so by then we should have that -- again, that'll further add to margins for next year.

Okay. Okay. Then last for me. Anything you can mention to us on the heavy-duty truck side? I know you're kind of still transitioning there, but anything that you're seeing from a demand perspective? And maybe from a market share perspective there?

Well, I think that's another great question. I think the heavy-duty integration is a tough one. I mean it's not a business that -- even though it's rotating electrical, it's not a business that we were previously in. We have a good team up in Toronto. I think we now announced at the trade show that our customers can order seamlessly heavy-duty product and light-duty product out of our new distribution warehouse in Mexico. And I think that's going to help heavy-duty initiative for our existing channels significantly. And we are ramping up infrastructure and systems, and all around making a big push for the actual heavy-duty category and channel. And I'm optimistic that we can pull it off, but it's still -- still some work to be done there. But short term, I think we're going to see gains just because having the products which is -- can be consolidated into existing orders, out of our existing distribution warehouse will help our customers make the decisions to buy their heavy-duty needs from us.

Okay. Got it. Congrats on the quarter.

Thank you very much. Appreciate all your support.

Our next question comes from the line of Steve Dyer with Craig-Hallum.

Ryan Sigdahl on for Steve. Congrats on a nice quarter. So just coming at gross margin guidance, I guess, from another angle, but it implies that it'll take a step down from Q2 here in the second half. Despite overwhelmingly positive commentary, it seems like that you'll see improving overhead absorption, efficiencies as facilities ramp, et cetera. So I guess what's the offset there to keep -- that's going to constrain margins in the back half relative to the number you just put up here in Q2?

There's a lot of update orders that go out in the fourth quarter. So you get some returns before you get update orders. And so we're just a little sensitive to the -- really it's all about timing of the third and fourth, and then you see a bigger jump in the fourth. I don't think they're going to decline that significantly in the third, but overall -- overall, again, we're optimistic on gross margins. We don't want to get ahead of ourselves, but on a combined basis, we're comfortable we should be at our guidance level at least. And going into the next year, we should see -- once we get these facilities operating, we're expecting gross margin increases. Now again, it all depends on product mix and who knows what competitive forces are out there, but we have a pretty good insight into this.

And then one more on guidance, on revenue. So similar revenue growth in Q3, 16%, implies something like a $12 million sequential decline in revenue. Any way you can bridge it? I guess was there any pull forward of shipments or anything into Q2 that...

No.

Q3.

Yes. So that's -- at this point, I think it's the same answer to the last question is when you pre the update orders you've got stuck, we accrue for stock adjustments 6 months in advance. Anything we anticipate in 6 months, it's one of our fundamental policies. So the accruals against revenue for potential returns for the big stock adjustments -- the big stock updates go out in the fourth quarter. They're still not 100% known, but we're -- we know that there will be some. And so the accruals we anticipate to go up, but we also -- again, we have more than significant offsetting revenues that come in the following quarter from it. So tough to break it down between 2 quarters because of the amount of volume that's going out -- but that's really it. It's all timing really between quarters, third and fourth.

And then maybe just one quick point of clarification on the stock adjustments. Are you seeing that you're changing -- because I presume they're on a percent of sales on historically what you've seen. So are you increasing that accrual? Or is it just going up with -- as sales increase?

No, no. What happens is while there is an allowance to the customers for a certain amount, we don't have an accrual of -- we don't have a flat accrual policy. We've accrued based on expectation. And so if we expect a certain amount of adjustment, then we'll accrue that amount. And so the stock adjustments are not an even flat percent quarter-by-quarter. They are basically an accrual based on identified stock adjustments. So again -- so that'll have to play out. We don't know that exact number yet until the quarter is over.

Got it, got it. One for me, then I'll turn it over. ARO was up -- accounts receivable was up $25 million quarter-over-quarter. What caused that and then do you expect that to normalize here in the second half?

All right. Thank you. This is David. So this has to do with the record sales that we had. We did have a lot of sales in the month of September. So that will all turn into cash in the subsequent third quarter.

(Operator Instructions) I'm not showing any further questions. I would now like to turn the call over to Selwyn Joffe for closing remarks.

Thank you. In summary, our investments are now starting to bear fruit. We have had many -- we have many and have had many growth opportunities and we have many growth opportunities ahead of us. Our new business commitments are continuing, supported by this expanding product line -- expanding line of products in both hard parts and diagnostics. We are proud of our more than 50-year history in the aftermarket industry. And we're really committed to our vision of being the global leader for parts and solutions that move our world today and tomorrow. Again, I want to thank our team members for their commitment and customer-centric focus on service, for their exceptional pride in all the products they sell and the customer services we provide. Their commitment to quality and service is reflected in the contributions that they make to their communities in our society, which is important to us. They are terrific and I'm proud to work with them. We appreciate your continued support, and we thank you again for joining us for the call. And we look forward to speaking with you when we host our fiscal 2020 third quarter conference call in February and at the various conferences that we may attend. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.