Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Motorcar Parts of America, Inc. (NASDAQ:MPAA)

F3Q08 Earnings Call

November 10, 2008 1:00 pm ET

Executives

Gary S. Maier – Maier & Company

Selwyn Joffe – Chairman of the Board, President, Chief Executive Officer

David Lee – Chief Financial Officer

Analysts

Tony Cristello – BB&T Capital Markets

Mitchell Sachs - Grand Slam

Rick Hoss - Roth Capital Partners LLC

[Dimitri Kernasofsky - First Wilshire]

[Bob Sells - LMK Capital Management]

[Erwin Friedman] - Private Investor

[George Burman – GunnAllen Financial]

Operator

Welcome to the Motorcar Parts of America fiscal year 2009 Q2 conference. This conference is being recorded. At this time I would like to turn the conference over to Mr. Gary Maier with Maier & Company.

Gary S. Maier

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 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 the course of today’s conference call.

Such forward-looking statements are based on the company’s current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance of future developments affecting the company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties some of which are beyond the control of the company and subject to change based upon various factors.

For more detailed discussion of these ongoing risks and uncertainties of the company’s business I refer you to the various SEC filings. With that said I would now like to begin the call and turn it over to Selwyn.

Selwyn Joffe

I appreciate you joining us today for our fiscal 2009 second quarter conference call. If I sound a little different I apologize, I have a touch of laryngitis. As highlighted in today’s financial release, we are continuing to build upon the success of our year-end and first quarter fiscal performance. We had record revenues and a substantial increase in profitability. Prospects look good for the second half in terms of consumers returning to more normal driving patterns. This is supported by the declining oil prices and we have new customers coming on board and acquisition opportunities.

We believe as our revenues grow and we can leverage our production facilities we can generate better cost efficiency and more profitability. While sales performance accomplished record results for the quarter, it could have been better and it was not as robust as we would have liked. We are nonetheless very encouraged by overall success in a challenging environment.

It is important to remind everyone that our products are not discretionary. When an alternator or a starter needs to be replaced, it is not an option. Whether it is a professional doing the repair or a consumer purchasing the part and fixing the vehicles themselves, the part needs to be available otherwise the vehicle will not work.

Statistics in the marketplace continue to show the age of cars increasing and as the car population ages so do replacement rates for alternators and starters substantially increase. In addition, we are optimistic that our recent initiatives to grow the company’s heavy duty business and professional market will generate meaningful contributions in the second half.

On the financial front our gross profit climbed 44% as highlighted in this morning’s release with gross margins jumping to 32.7% for the quarter compared to the 24.4% a year earlier. Operating income was $5 million for the second quarter compared to $2.4 million from the same quarter prior year. David will discuss the contributing factors in more detail in a few minutes.

As I have mentioned before, current economic conditions support demand for our products. As consumers delay new car purchases and hold onto their vehicles longer, replacement rates will increase. For the benefit of new shareholders, the average age of vehicles today is 9.4 years. [Inaudible] age group demand for replacement parts will climb dramatically doubling when they enter the eight to 11 year group and then almost doubling again once the vehicles are more than 12 years old.

Today there are approximately 27 million vehicles within the eight to 11 year old age group. There are 59 million vehicles registered that will enter the eight to 11 year group during the next three years. That is a growth of a higher replacement opportunity vehicles of 26% and the replacement rates double and registered vehicles within the more than 12 year old category are also expected to climb significantly during this period and even their rates even double incrementally.

This is obviously good for our business future and that of our customers. As you have heard me state before, our business is somewhat recession resistant particularly as drivers return to the roads and add miles to their vehicles and if drivers stay home the company does not lose a sale but rather sales are deferred because the part failure is delayed.

Now let me take a moment to provide an update on our strategic initiatives. Our organic business continues to remain strong. Our relationship with our existing customer base remains strong and the market fundamentals for our product are moving in the right direction as I have just mentioned. Our customers are holding steady with their part sales and are expecting increases due to the current environment.

We have just returned from the show and a number of CEOs have made presentations inferring the same conclusions. In addition, as I referenced above, we are expanding our offerings in the new heavy duty business. Our new production sales in Mexico are substantially completed as we look forward to adding revenue in this category.

Our prospects for new business overall looks very exciting. We have commenced shipping new customer business with approximately $10 million in annualized revenue in the first six months of fiscal 2009 and in the past few quarters we have built up inventory for this anticipated new business.

In addition we are planning for the future with initiatives in new technology such as hybrids which actually employ an alternator and a starter in one unit. As I indicated in last quarter’s call, we are prudent in pursuing new business opportunities whether small or large and cognizant of maintaining pricing and terms that make good business sense.

In addition to the offshore manufacturing and successful transition of our core sorting and material receiving to non-domestic facilities we are now packing a substantial majority of our requirements in Mexico. Equally significant we commence shipping during the first quarter directly from Mexico to many of our leading customers in the United States. All of these developments will contribute to customer savings moving forward.

This clearly is a competitive advantage and greatly enhances our leadership position within our consolidating industries. David will now discuss our financials and then I will give you a summary and we will open up the call to more questions.

David Lee

As announced this morning, net income for the fiscal 2009 second quarter climbed sharply to $2.3 million or $0.19 per diluted share compared with $466,000 or $0.04 per diluted share a year earlier. These results included non cash charge of $560,000 or $0.03 per diluted share recorded general and administrative expenses to adjust for a significant fluctuation in the value of foreign exchange contracts. Excluding this charge operating income would have been $5.6 million and net income $2.7 million or $0.22 per diluted share.

Let me take a moment to explain how our foreign exchange contracts work. We enter into forward foreign exchange contracts to exchange US dollars from Mexican pesos in the future in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. We do not hold or issue financial instruments for trading purposes. The forward foreign exchange contracts are designated for forecasted expenditure requirements to fund the overseas operations in Mexico that expire in a year or less. While the contracts are in effect there are fluctuations in how we value them based on mark-to-market calculations, but the overall impact eventually has a net zero effect.

Net sales in the second quarter of fiscal 2009 were $36.4 million compared with $33.8 million in the same quarter last year. As someone mentioned, gross profit in the quarter increased 44.4% to $11.9 million or 32.7% of sales from $8.2 million or 24.4% of sales in the same quarter of fiscal year 2008.

The increase in the gross margin was due primarily to lower manufacturing costs, increased operating efficiency and increased net sales. General and administrative expenses increased 5.2% to $5 million from $4.7 million a year ago. This increase was due to the currency exchange charge I just discussed. Excluding this foreign exchange charge, general and administrative expenses would have actually declined by 5.5%.

Sales and marketing expenses increased $547,000 to $1.3 million from $797,000 in the same quarter of fiscal 2008. Due primarily to the addition of sales employees which resulted from our acquisition of AIM, increased trade show and advertising expenses. Research and development expenses increased to $306,000 to $581,000 from $275,000 in the same quarter of fiscal 2008 due primarily related to an increase in expenses in connection with our heavy duty marketing initiative.

Operating income during the fiscal second quarter was $5 million up from $2.4 million a year ago. In evaluating operating performance the company considers the impact of non cash expense items on a second quarter operations including foreign exchange charge of $560,000, inventory write-downs of $297,000 and FAS 123 stock compensation expense of $157,000. In addition, depreciation amortization for the quarter was approximately $732,000.

Net interest income expense for the quarter was $1.1 million down from $1.5 million in the prior year. This was attributable to a lower balance of receivables being factored and a decrease in short term interest rates. As of September 30, 2008, our balance sheet had $129,000 in cash, $161.4 million total assets and $17.6 million in borrowings on our line of credit, leaving $19.4 million available after reflecting outstanding letters of credit.

During the first six months of fiscal 2009, short term borrowings under a line of credit were used to pay down our accounts payable balances, acquire certain assets of [inaudible] and Suncoast and to offset certain customer accounts receivable which are no longer factored. Shareholder’s equity was $96.9 million at September 30, 2008.

I will now turn the call back over to Selwyn who will make a few additional comments before we open the call to questions.

Selwyn Joffe

As I mentioned last quarter and earlier on the call, we are actively seeking new business and growth opportunities. Of course, only if these opportunities are profitable and priced right to reflect commodity prices and provide a fair return to our shareholders.

We continue to remain optimistic about our prospects for expanding the company’s presence in both the do-it-yourself market and the do-it-for-me markets. In the professional installed market which is the do-it-for-me market, we continue to make end roads by leveraging our quality build brand name. Our expectations for new customer revenue growth which are based on current commitments should increase our annual revenue run rate by approximately $20 million.

That excludes the $10 million of incremental that David referred to while he was presenting. While we have these commitments we are still evaluating the timing of when this new business will begin shipping. In addition our aim in Suncoast acquisitions are proving themselves as we anticipated. As our retail customers focus on expanding their professional installer sales we look forward to the greater growth opportunities we expect to experience alongside them.

Given Motorcar parts strong customer relationships and reputation as a value added supplier, we believe we are in an excellent position to benefit from our customer’s efforts to expand their share of the rotating electrical market and to increase market share from new customer additions. Our net uses of cash from operating activities have declined in the second quarter as compared to the first quarter and we believe that the working capital ratios will stabilize moving forward.

In summary, long term market statistics for our industry are favorable. We are optimistic that lower oil prices will support a return to more normal driving patters and hence even more demand for our products as vehicles aged. We’ve just returned from the [APEX] show in Las Vegas which was a tremendous success for us. The strong customer interest in our products as well as numerous opportunities to take advantage of industry consolidation which we evaluate on a case-by-case basis.

As I’ve said before, we have nominal leverage and an increasingly favorable operating structure which places the company in a strong position to pursue growth strategies that enhance shareholder value. I appreciate all your interest in motorcar parts and I’m happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tony Cristello – BB&T Capital Markets.

Tony Cristello – BB&T Capital Markets

I guess one question, while you look at the gross margins up nicely year-over-year it was down sequentially from last quarter. Is there anything there that you can contribute that too or is that sort of just more seasonal in nature?

Selwyn Joffe

I think Tony what we are seeing when we launched the Mexico initiative we had target production metrics that we wanted that we thought we could hit in terms of costs and strategically the company made the decision to produce at a level that we could evaluate what those production metrics could be at and as a result we built some excess inventory but we saw tremendous favorable cost metrics.

In fact, we think we can get better costs than we thought we would initially. But, we also then pulled back because of our growth in our inventory balances, we pulled back production in the last quarter. As we pulled back production the absorption of the indirect overhead and the offshore facilities get a little bit less efficient and so you see slightly higher costs.

But, the good news is that we believe that as we go in to the second half of this year we will be required to ramp up inventory. We have a lot of new customer opportunity and I believe again, and I’m seeing this in reality in our trends that our existing customer’s businesses are picking up and we think that the production metrics will get more favorable as we go down the road.

Tony Cristello – BB&T Capital Markets

Do you think you’ll see them return to where they were in the first quarter or be better than they were in sort of the second but may not – it will take a little while to ramp back up to those levels.

Selwyn Joffe

I think we should see them go back to the first quarter levels and I think they will get better as we pick up new business.

Tony Cristello – BB&T Capital Markets

One of the questions I have is it relates there’s a lot of news about AC Delco and I believe they’re a large customer of yours, with GM shopping those assets does this expose your inventory to any additional risk should AC Delco customers begin to pull back demand due to sort of general uncertainty?

Selwyn Joffe

You know we’re watching it carefully. Again, generally we don’t talk about specific customers, this is a very unusual circumstance but as of now the customer base seems solid. We’re watching it carefully. One thing that I think that’s important to be aware of is that, that demand has to go somewhere. Those people are selling alternators and starters and if it’s not AC Delco there’s a possibility that the demand could come to us as well.

We have to watch it carefully. I don’t know yet what the outcome could be but that’s certainly a factor that we continue to evaluate daily. We have very open communication with AC Delco and as of now I think things seem relatively stable but they’re unfolding very quickly on a day-to-day basis.

Tony Cristello – BB&T Capital Markets

I guess in this environment do you tend to see your customers and not specific to AC Delco, just in general, do you see more of a managing of inventory leaner levels just as the credit environment has placed further pressure on the ultimate end consumer? Are you seeing some adjustments?

Selwyn Joffe

When I look at our logic customers and everyone of the cases of our larger customers they’re all looking to expand coverage, have greater inventory levels, we have not seen issues on reductions in inventory. We saw that a year ago a little bit with some repositioning of a couple of our customers but as of now I think the outlook is that they see that there’s a possibility for expanding demand and certainly I think their register sales are showing that and we are seeing a demand for incremental coverage, not a shrink at all.

Tony Cristello – BB&T Capital Markets

Maybe David, you noted foreign exchange had an impact I believe of about $560,000 this quarter. How should we think about this as an ongoing issue in subsequent quarters?

David Lee

We are tracking the exchange rate on a daily basis and it really depends on the rates going forward. We’re in close contact with our bank to track as well as look in to opportunities for other hedging type vehicles. It really depends on the markets and most lately it’s been fluctuation more than we’re use to so it’s hard to tell right now where it’s going to end up at the end of quarter.

Selwyn Joffe

Can I add to that as well? The way these hedges work is you buy a currency forward so we know what our fixed rate of cost of the Peso is going to be for the next nine months. In the interim when we convert dollars to Pesos we get the current exchange rate and not the rate that we’re buying forward so at the end of the contract even though there will be fluctuations in mark-to-market on a quarterly basis up and down, at the end of the contract we have fixed the amount we are paying per Peso and it’s irrelevant in terms of what the mark-to-market fluctuations are through the period.

Tony Cristello – BB&T Capital Markets

So you may have some ultimate true up at the end when that contract expires?

Selwyn Joffe

Right. You may have a gain, you may have a loss and at the end of the day if the dollar continues to grow in value relative to [inaudible] and Pesos we essentially will be paying less for our production. So, the fundamentals are forgetting about the hedging because I think the hedging is in fact what it is, it’s a hedge and there is a net zero differential but the fundamental metric of the dollar increasing in value, if that continues on will enable us to produce at far cheaper rates.

If the dollar goes the other way, we will long term have higher cost of production but we continue to hedge them nine months in advance. So, when we look at that and we’ve been evaluating whether we should be going through I forget the technical FAS B 133 change for us and we put this on our balance sheet but, at the end of the day even if it runs through the balance sheet, at the end of the contract it has to hit the P&Ls. So, we end up in the same place.

So, fundamentally when we look at our foreign exchange risk we leverage the future markets to hedge and to take no currency risk on our metric for at least nine months in to the future and so all of this fluctuation quarterly in my opinion is obviously it’s required by GAAP but at the end of the day it’s a net zero situation.

Tony Cristello – BB&T Capital Markets

You’ve given guidance in the past and there was no guidance given in the press release or in the prepared remarks and I’m wondering have you withdrawn guidance or is there something that you can give us in terms of the back half of this year what [inaudible] are still looking for?

Selwyn Joffe

Well, let me deal with that in two pieces, as far as new customer commitments they’re far in excess of what we anticipated. These are commitments that we have from people, now of course, until you ship you haven’t shipped yet but as far as new customer commitments they are in excess. The thing that will affect our revenue guidance will be the timing of when these shipments kick At this point we’re evaluating to see whether the guidance for the second half is still valid but we think we’re going to be close at this point in time. On an ongoing forward basis going into the next fiscal year we think we’re going to be way ahead of where we thought we would be on revenue. I’m not in a position to withdraw guidance and I’m not in a position to validate it either but again I think we’re going to be close. It all depends on when these new programs kick off.

Operator

Our next question comes from Mitchell Sachs - Grand Slam.

Mitchell Sachs - Grand Slam

You talked about $10 million revenue through new customers. I couldn’t tell if that was through the rest of this year or if that was to next year. Then you talked about the $20 million in new business commitments going forward. Could you sort of frame that for me? I was a little bit confused.

Selwyn Joffe

That is a little bit confusing. I apologize for that. In the first six months we brought on new customers and acquisition new customers that totaled $10 million. Probably a little greater but at least $10 million of new annualized revenue that rolled in during the first six month period. Over the next six months or eight months because we’re trying to figure out exactly when these customers will roll out, we have commitments of at least $20 million in new business. That will roll out over the next six months and we think that right now that’s a conservative estimate.

Mitchell Sachs - Grand Slam

Is the $10 million part of the $20 million then?

Selwyn Joffe

No. Over and above the $10 million.

Mitchell Sachs - Grand Slam

So it’s a total of $30 million essentially new business?

Selwyn Joffe

On an annualized basis. Obviously we’re not going to have $30 million of increased revenues for the period but on an annualized run rate we will have this increased $30 million of business going into our next fiscal year.

Mitchell Sachs - Grand Slam

Getting back to the question on the peso and how that flows through. G&A was increased by 560 for the peso fluctuation for the period. Assuming that the currencies didn’t move again through the rest of the contract, how does that then flow through G&A? Do you sort of get an add back as it goes through as your costs go down to the local price level or how does that flow through?

David Lee

With our existing forward contracts, they were mark-to-market as of September 30. If the exchange remained flat, you’d have no mark-to-market impact.

Selwyn Joffe

And in the meantime your COGS would be getting better because you’re buying pesos at lower rates. But you’d be offset by the loss that you’ve already taken.

Mitchell Sachs - Grand Slam

So the G&A line’s not impacted but your cost of goods sold line is impacted?

Selwyn Joffe

Yes, because the cost of goods sold line is affected, and correct me if I’m wrong David, by the actual purchase value of the peso. If there’s a demand for hypothetically a million pesos in Mexico, if we pay cheaper dollars for that, then our COGS are lower. If we pay higher dollars for that, our COGS are higher. But the offset is that we’ve already paid a premium and we’ve locked in a peso rate. So at the end of the hedge it should be a net zero.

Mitchell Sachs - Grand Slam

In terms of the R&D and the sales & marketing line, are those run rates more normal now for the rest of the year or is there any kind of one-time in there?

Selwyn Joffe

No, but I think what you’ve got is expense without revenue in there. We expect to see revenue start kicking in from those initiatives in the last six months so that I think the run rates are normal but you don’t see the revenue benefit from the initiatives yet.

Operator

Our next question comes from Rick Hoss - Roth Capital Partners LLC.

Rick Hoss - Roth Capital Partners LLC

Not to beat a dead horse, but this $10 million annualized revenue, did we see full contribution in the first quarter? Obviously the second quarter we’ve seen $10 million divided by 4 would be $2.5 million so we’ve seen an incremental $2.5 million in the second quarter. Did we see that the first quarter?

Selwyn Joffe

No. You saw almost nothing in the first quarter and you only saw a portion in the second quarter. So of that $10 million now you’ll see the full effect of $5 million in the second half of the year because these have ramped up through the six month period.

Rick Hoss - Roth Capital Partners LLC

If you were to take out that contribution, would we see revenue flat to down year-over-year for the second half?

Selwyn Joffe

Yes. Let me talk about that for a second because I think that’s an interesting question. There is a product mix. In our industry there are various family groups of alternators and starts, and this has got nothing to do with the fundamentals of supply and demand. I want to talk a little bit about product mix.

In the early year models there was an alternator called a CS alternator. It’s a domestic alternator and the failure rates of CS alternators were spectacular. I mean, they failed very frequently. Those vehicles on average now are over 15 years old and they’re starting to come off the road. If we eliminated the 30%+ decline in the demand for those vehicles, and we were the largest supplier by the way of those, if you eliminated that from our same-store growth analyses, you’d see that we are actually experiencing very high double-digit growth in all of our other product categories.

So the fact that we’re growing nominally or flat despite experiencing 30% sales declines in the CS alternator category, and by the way this is happening throughout the whole retail chain and the professional installer chain, the CS alternator cars are no longer on the road. They’re coming off. So the fact that there’s no substantial declines shows the incredible increase in all the other categories.

To answer your question is we do see some softness on a same customer basis but we’re going through that. Those CS alternators are going to be gone and a new part numbers are coming in to high failure rates. I don’t know if I confused you more than anything on that answer. Does that make sense to you?

Rick Hoss - Roth Capital Partners LLC

Yes, that helps.

Selwyn Joffe

Our base business is very strong but the fundamental demand for CS alternators which was a strong part of our business and a strong part of all of our customers’ business is gone away. So you can see that we’ve made it up with incremental growth pretty dramatically.

Rick Hoss - Roth Capital Partners LLC

It helps to make a substandard alternator for a while but then you’ve got to pay for it.

Selwyn Joffe

What happened is those substandard alternators are now off the road and the new substandard’s coming in. The beauty is for our business that we get to look in hindsight as to what’s good and bad. The OE guys, they don’t really know until it actually performs.

Rick Hoss - Roth Capital Partners LLC

On the AR it looks like they bumped up. Is this just kind of a one-time event or do we see the accounts receivable maintaining that elevated level?

Selwyn Joffe

I think what happened is we made reference to a significant customer lose their factoring and so we’ve been carrying their receivable. Those terms are now at fruition so we should now see constant payments and that’s why we think our working capital ratios will now turn positive.

Rick Hoss - Roth Capital Partners LLC

So we’ll see 13-ish maintained on the AR line throughout the rest of the year then?

Selwyn Joffe

Yes. We should start seeing cash being generated now.

Rick Hoss - Roth Capital Partners LLC

Yes. I think we’re slightly below a current ratio of 1.

Selwyn Joffe

Yes. We should start seeing cash being generated. We’ve absorbed that growth in the receivable. We’ve also had some suppliers with shortening terms. There’s been some pressure on the supply base in terms of being able to hold those terms as well but we’ve substantially cycled through a large supplier having to contract terms because of their financial situation and a large customer building receivables because of their loss of factoring. So we’ve gone through all of that now and it seems very stable at this point.

Rick Hoss - Roth Capital Partners LLC

Can you take a guess at what the timing would be when you’d have more visibility into this large new business opportunity? The $20 million that you spoke of?

Selwyn Joffe

It’s not one opportunity. Again I’ve given you what I think is a conservative estimate of our new business commitments. It’s multiple opportunities. One of them we began shipping last week and another we should begin shipping in the next few weeks. Some of them are pretty significant that’ll take longer periods of time. Again this is the variable as to why we haven’t come out and given you more clearance on the guidance because it’s a little bit of an unknown for us as well right now.

Rick Hoss - Roth Capital Partners LLC

But it’s not an all or none?

Selwyn Joffe

No. This is multiple customers. This is not one. We have a tremendous demand across the board from new customers talking to MPA right now. I’ve never seen it this strong certainly in my tenure at the company.

Operator

Our next question comes from [Dimitri Kernasofsky - First Wilshire].

[Dimitri Kernasofsky - First Wilshire]

Just a question on next year’s guidance. At what point do you think you may be putting that out?

Selwyn Joffe

I’ve still got to figure out this year. I don’t know the answer to that to be honest with you. Again I think we’re giving you some insight into revenue growth right now. I think you can look at next year’s annualized run rate to be up on a revenue basis. I think if you read the release, we certainly look like we should be up at least $30 million on annualized revenue for next year based on what we’ve said.

[Dimitri Kernasofsky - First Wilshire]

Could you talk a little bit about the competitive environment, what other players are doing and pricing in the industry?

Selwyn Joffe

I think the competitive environment has softened. I think you have just a few major players. I think each one of the players is very cognizant of making sure that they don’t give out foolish deals. I think each one of them is concerned with performance and profitability and are cautious in a very tight credit market.

So I think we have probably amongst the major competitors far greater sensibilities in terms of maintaining margins and maintaining integrity of our businesses. I still think it’s very competitive but I don’t think any one of us are in a position to make moves that involve too much investment spending at this point in time. While I think it again continues to be competitive, I think the pricing pressures are a little less extreme than they have been in our industry. I think it’s settling down pretty dramatically.

[Dimitri Kernasofsky - First Wilshire]

Any threats that any of them might go out of business or significantly weaken? I remember one of them was very distressed.

Selwyn Joffe

I really don’t want to comment on their situations. I think there’s data available that you can read. I’m not sure that I’m in a position certainly to comment on any one of the competitors’ financial positions.

[Dimitri Kernasofsky - First Wilshire]

For the new business that you’re getting, the $30 million, what kind of customers is it?

Selwyn Joffe

It’s a mixture of all types. We have in both sectors, the do-it-yourself and the professionals, so it’s across the board. I would say that all of these customers are strong well-known brands that exist in the market place; well-known companies. It’s not marginal business; it’s very good business. They range from smaller customers to larger customers.

[Dimitri Kernasofsky - First Wilshire]

In terms of operational improvements, are you pretty much done or is there more that you can do?

Selwyn Joffe

There’s always more. I think we’re just in the beginning stages. I think the first thing that we need to do is to stabilize volume through our facilities. We have lots of excess capacity, which is fortunate because we’re able to take on a lot of new business. If we could maximize our capacity through the plants, there’s a lot more savings on a per unit basis. We still have some inefficiencies because we haven’t completed all of the shipping direct from Mexico. We expect to see substantial changes in that over the next quarter in terms of moving the majority of our shipping down there.

And we are very much a lean manufacturing company and under the definition of lean is we pursue continuous improvement. We have a team of people that’s all they do is evaluate continuous improvements. So I think while our costs are good, I think they can continue to get better. We look at external influences like cost of metals to see how much material costs but certainly from labor and operating costs, there’s potential.

[Dimitri Kernasofsky - First Wilshire]

Could you talk some more about having additional opportunity and how big that market is and what it means to you?

Selwyn Joffe

It’s a tough market to get exact size because in the case of the light trucks and vehicles you have pulp registration. We know exactly how many vehicles are on the road. There’s a lot of data that can specifically identify it. When we talk about heavy duty, we talk about trucks which we can identify on the size of that and we talk about industrial equipment and we talk about agricultural equipment.

Most of those types of equipment are not registered so we’ve done some calculations and I can’t vouch to you how 100% accurate they are, but we think that that volume in that side of the business is probably at least the same size as it is in the automobiles and light trucks which is about $1.2 billion. We don’t expect to get a huge market share up front. We do expect to start picking up new business sin that area. I think it’ll start small and we’d be excited.

Our first benchmark is to get to $10 million in revenue. Quite honestly we have small goals and then we’ll start accelerating from there. We are excited about our manufacturing progress in terms of getting that set up offshore. I think either during this week we’ll start producing our first unit or perhaps next week, and we are excited about our preliminary sales successes in that market.

We do have indications of some new business and while not a material part of what we’re talking about in terms of the new business, it’s nice. It’s a start, and I think it’s a great extension to what we do in the car and light truck business. I think we can get it to be a nice substantial volume as we go down the road. But it’s not the immediate euphoria.

The immediate euphoria for us as a company is focused on our existing mix that we offer, leveraging up with new business and leveraging our manufacturing capabilities for that new business to result in greater operating metrics and efficiencies.

[Dimitri Kernasofsky - First Wilshire]

What was the revenue run rate for the heavy duty business you acquired?

Selwyn Joffe

Very small. Again, we try not to break it out but it’s small. At this point it’s not material to the numbers and from a competitive perspective we just want to try and keep that quiet for now.

Operator

Our next question comes from [Bob Sells - LMK Capital Management].

[Bob Sells - LMK Capital Management]

Just a question about the capital structure. When I look at the business, as long as working capital gets to the state, it looks like you’ll generate something in the order of $10 million a year in free cash flow and you spent about $7 million in the first half of the year on acquisitions. How do you think about looking for additional acquisitions versus simply buying in your stock with the thought that that’s equal to in excess of 20% of your market cap, almost 30% and that would be a pretty significant impact to the bottom line versus the acquisitions?

And I say that within the context of understanding that you have $20 million worth of new business lined up, you have heavy duty, so you have the ability to fill some of your Mexican facilities with that without the additional acquisitions that would cost cash? I would appreciate your thinking on that.

Selwyn Joffe

It’s a question we grapple with constantly. It’s a very good question because the market value of our company today makes it very attractive to buy back stock. We have to balance that with the opportunity really to leverage our market share opportunity. We think that we could probably as low as we are valued on certain metrics that we think we can probably make acquisitions at lower prices.

From a capital availability perspective today lenders are more apt to allow us to spend on generating incremental EBITDA than to leveraging our share count down. So from a financing perspective it has proven to be a lot easier to get capital for acquisitions than to buy back stock. We are right now restricted to a maximum of $1 million for share buy-backs and it’s something we discuss whether we should do that even if it’s $1 million. Where the price of the stock is today we can get quite a lot of shares for $1 million right now.

So you ask a good question. I think as of right now we feel like if we can enhance our market share, leverage our production capabilities, it would put us in a very strong stead to maximize profitability. Going forward if we don’t see a move in our stock price at that point, then maybe we would refocus and start buying back stock.

But it’s something that we grapple with every day and certainly if you did the arithmetic without the external growth analysis and you were able to eliminate the availability of cash, buying back stock would be probably the right answer. Unfortunately we’re not able to leverage ourselves to buy back stock in this market that would make a meaningful difference. We have not been able to get a lender to agree to buy back significant portions of stock.

[Bob Sells - LMK Capital Management]

How much is available on your current line of credit?

Selwyn Joffe

For stock re purchase?

[Bob Sells - LMK Capital Management]

No, just total availability?

Selwyn Joffe

Approximately $17+ million.

[Bob Sells - LMK Capital Management]

I would just encourage you to think about whether or not banks are willing to do things with the borrower thinking about less capacity rather than more. It just strikes me that there’s an opportunity here in terms of shareholder value on the stock repurchases. I guess enough said on that point. I do appreciate you listening to the opinion.

Selwyn Joffe

Believe me, we are looking at it. I guess our big limitation is just to be clear and I think I mentioned it is that within that $17.5 million we have a specific restriction on stock buy-backs of a maximum of $1 million from the bank. So we would have to go and restructure our facility and it’s a tough time right now to get that done.

[Bob Sells - LMK Capital Management]

Yes. I agree there. What percent is AC Delco of your revenue today?

Selwyn Joffe

I’d love to answer that. I know AC Delco’s a hot topic. We generally first of all don’t even talk about our customers by name. I know we’ve been saying AC Delco during this call and we don’t give out percentages by name of any particular customer. It is a good customer of ours and again we continue to make sure that we stay ahead of the curve with them but as of right now I can’t give you any guidance as to what may or may not happen with AC Delco. You’re in the loop as much as I think everybody else is because I think they’ve been pretty public with what’s going on there.

[Bob Sells - LMK Capital Management]

The CS alternators, what do you think that comprises in terms of your overall volumes today?

Selwyn Joffe

I would say CS and I probably will make a mistake as I’m doing this off the top of my head, but it used to be about 30+% of our business and I think it’s down to well below 10% of our business today.

One other thing to clarify it. There is some CS business. Even though it’s down to 10%, there is still some new CS later model business that does exist. So it’s not gone away 100% but it’s reduced dramatically.

Operator

Our next question comes from [Erwin Friedman] - Private Investor.

[Erwin Friedman] - Private Investor

This is for you Mr. Joffe. It’s a strategic question. In your narrative you mentioned that the company continues to seek acquisitions, small or large. My question is addressed to the large. The company looks very well positioned with its organic growth in taking customers and my question would be, in order to look at a large acquisition; there aren’t that many out there; but looking at a large acquisition we would have to be quite leveraged to successfully pull that over. Now we have open capacity to service new customers and we seem to be very successful which I’m very pleased to say with getting the new customers. If we have the capacity and we’re successful getting the customers, why would we seek a large one in this environment?

Selwyn Joffe

The answer is that we wouldn’t unless it was accretive and made sense for us. I’m just opening up the whole spectrum. I’m not indicating that a large one or a small one is imminent. It’s just that we’re open to looking at everything. You’re comments are 100% accurate. We would not be looking to over-leverage the company unless there was some substantial accretive value to that.

Operator

Our next question comes from Mitchell Sachs - Grand Slam.

Mitchell Sachs - Grand Slam

I wanted to get back on the question regarding free cash flow. You had talked a little bit about it earlier as possibly this quarter being a quarter where you would be able to begin to generate free cash flow. Does that assume that your customers and your vendors keep the same credit terms that they currently have with you?

Selwyn Joffe

Correct, that does assume that yes.

Mitchell Sachs - Grand Slam

Then does it also assume that you would start to work down some of the inventory that you’ve built up for some of these new customers?

Selwyn Joffe

Yes, either it would be worked down or absorbed in incremental revenue.

Operator

Your next question comes from [George Burman – GunnAllen Financial].

[George Burman – GunnAllen Financial]

A quick question, the currency situation, in general from what I understand a stronger US dollar helps your cost tremendously?

Selwyn Joffe

That is correct because we’d be paying less dollars to fund our offshore facilities.

[George Burman – GunnAllen Financial]

In other words all your manufacturing costs and input costs are in Mexican Pesos or [inaudible] and if the dollar which has appreciated against some currencies at roughly 25%, that would tremendously reduce your cost of sales?

Selwyn Joffe

Exactly.

[George Burman – GunnAllen Financial]

The only reason you had this $0.03 one-time non cash charge is because not knowing, the world was predicting even weaker dollars you hedged your forward position to a certain point at specific rates?

Selwyn Joffe

That is correct. So, once the hedge expires which we generally hedge out nine months at a time and we only hedge 75% of our requirements, once those hedges expire we’ll be able to then buy currency at cheaper rates, absolutely.

[George Burman – GunnAllen Financial]

If the current worldwide economic situation continues and the dollar is seen as a flight to equality you may choose with the current exchange winds not to hedge down in to the future or even hedge it? Then, should the dollar weaken you would lock yourself in to even lower manufacturing costs?

Selwyn Joffe

That is correct.

Operator

It does appear there are no further questions at this time so I’ll turn the call back to management for any closing or additional remarks.

Selwyn Joffe

I want to thank everybody for taking the time to follow us. I know times are tough out there. We are again happy at our progress, especially considering the market we feel like we’re contra cyclical play right now and we thank you very much for spending the time with MPA and we look forward to further announcements going forward. Thank you.

Operator

Ladies and gentlemen that does conclude today’s conference. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Motorcar Parts of America, Inc. F3Q08 (Qtr End 9/30/08) Earnings Call Transcript
This Transcript
All Transcripts