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

F3Q 2014 Earnings Call

February 10, 2014, 1:00 PM ET

Executives

Gary Maier - Investor Relations

Selwyn Joffe - Chairman, President and Chief Executive Officer

David Lee - Chief Financial Officer

Analysts

Philip Shen - Roth Capital Partners

Steve Dyer - Craig-Hallum

Jim Baker - B. Riley & Co.

Travis Hogan - Riva Ridge

Jacob Muller - AYM Capital

Operator

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America's fiscal 2014 third quarter results. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference may be recorded.

I would now like to turn the conference over to our host of today's call, Mr. Gary Maier. Please begin.

Gary Maier

Thank you, Tanya. Thanks, everyone, for joining us. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer and David Lee, the company's Chief Financial Officer. I would like to remind everyone of the Safe Harbor statement included in today's press release.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during the course of today's call. Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in these forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based upon various factors. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's various filings with the Securities and Exchange Commission.

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

Selwyn Joffe

Thank you, Gary. I appreciate everyone joining us today for our fiscal third quarter call. We are approaching the end of fiscal 2014 on a high note, with rotating electrical products remaining strong and our wheel hub assembly sales continuing to ramp up nicely. We believe the macroeconomic conditions of our economy, along with the aging of the car fleet, provides strong demand for our products.

As I highlighted last quarter, the latest data from Polk shows the average age of vehicles has increased to 11.4 years. In addition, as the number of cars in the 12-plus-year-old category continues to grow, the replacement rate for these vehicles goes up significantly. In the presentation I referenced last quarter, Anthony Pratt, VP of Forecasting for Polk stated that on average vehicles have an extended life of two additional years. In the future consumers on average will buy four fewer vehicles over their lifetime. This means that the average age of light vehicles will continue to increase and that should be a long-term trend.

Our sector of the automotive industry benefits from an aging vehicle population and as such we believe the outlook is strong and stable. For those of you new to our story, let me just mention that the size of the aftermarket parts business is estimated to be more than $122 billion at the manufacturing price level with the rotating electrical segment estimated at $1.7 billion and the wheel hub and bearing business estimated to be $1.2 billion. Our market share in rotating electrical is approximately 25% and we are well-positioned to grow this share, in both the do-it-yourself and the do-it-for-me markets by leveraging our available manufacturing capacity and distribution strengths, our reputation for top-notch products and our award-winning customer service.

We supply more than 20,000 stores and all of our customers are gaining share in the professional installer market of their brands, which bodes well for us. We see pricing pressure in the marketplace and as a result we intend to continue to adjust our operating model to compensate for this margin pressure. We believe that despite pricing pressures today, in the future some inflation in pricing is necessary to sustain supply and quality levels. In the meantime, we are making appropriate moves to keep updating our operating model to be able to maintain our operating margins and have a structure to continue enhancing market share.

With respect to wheel hubs, we just completed the second full quarter of our wheel hub and bearing product line which we launched at the end of June 2013. As I just mentioned, this category represents a $1.2 billion market in North America. It is a fast-growing and evolving category for a number of significant reasons.

First, the wheel hub assembly contains the antilock braking mechanisms. This technology has become more mainstream on vehicles during the last decade and these vehicles are reaching prime replacement stage.

Secondly, more recently, antilock braking technology is being applied to the rear wheels which would further enhance the category growth rate. This category has similar failure rate characteristics as rotating electrical.

As cars age, failure rates grow significantly. Industry research indicates that this category will grow at a 7% annual compound growth rate as the car population with antilock brakes grows and ages. We expect disproportionately better growth rates closer to the mid-teens as we see the non-OE brands like MPAs growing share significantly. We are encouraged by the strong interest in our growing wheel hub program.

Our product fill rates and our quality are excellent and our unique capability to offer expedited turnaround on orders is an important competitive strength. As we announced this morning, sales for the quarter increased 29.4% to $65.6 million for the same period a year ago and net sales for the nine-month period increased 17.3% to $182 million on a year-over-year basis.

It is worth noting that despite a strong inventory build by one of our major customers in the prior nine-month period, sales growth continue to be strong in our rotating electrical product line in this nine-month period. On an adjusted basis net income for the three months was $5.9 million or $0.39 per diluted share and for the nine months was also up nicely reaching $14.5 million or $0.98 per diluted share.

We anticipate the fourth quarter will continue to be strong. These numbers are even better when you take into account standard inventory revaluation write-downs, which David will discuss in more detail.

David will now discuss our financials and I will be back to answer questions.

David Lee

Thank you, Selwyn. I am excited to review our record results for the quarter. Net sales for the third quarter were $65.6 million, a $14.9 million or 29.4% increase compared with the prior year third quarter and adjusted EBITDA was approximately $14.1 million for the third quarter.

The third quarter results benefited from continued contributions from the company's new wheel hub product line started at the end of June 2013. Results were also impacted by various factors including the following three items, $2.6 million non-cash mark-to-market net loss related to warrant valuation, $463,000 of expenses related to discontinued subsidiaries and $2.8 million related to write-off of deferred loan fees for the prior loan charged to interest expense.

We will now review the financial results for the third quarter. Net sales increased by $14.9 million or 29.4% to $65.6 million for the fiscal third quarter compared with net sales of $50.7 million for the prior period a year earlier. The increase in net sales was due to increase in net sales of the rotating electrical business by $6.1 million or 12% during the three months ended December 31, 2013 compared with the same period of the prior year and sales of wheel hub assemblies and wheel hub bearings of $8.8 million for the third quarter.

The gross profit percentage increased to 33.4% from 32.2% during the three months ended December 31, 2013 primarily due to enhanced utilization of our facilities due in part to higher production and purchasing volumes resulting in lower per-unit cost.

General and administrative expenses increased $537,000 after adjusting for non-cash mark-to-market net losses, expenses related to discontinued subsidiaries and FAS 123R non-cash stock compensation expense. The increase is due to additional general and administrative expenses related for the new wheel hubs product line and additional professional fees.

Sales and marketing expenses decreased $78,000 compared with the prior year third quarter.

Operating income for the fiscal 2014 third quarter was $13.4 million compared with $8.3 million a year ago adjusted to exclude discontinued subsidiaries expenses and other costs previously explained.

EBITDA for the third quarter was $14.1 million adjusted for various items as previously explained and depreciation and amortization expense was $675,000 for the third quarter.

Interest expense was $3.7 million for the third quarter excluding the $2.8 million write-off of deferred loan fees related to the prior loan compared with $3.9 million for the prior year third quarter adjusted for $1.5 million net interest income.

I will discuss the November 6 new credit facility in more detail later on this call but in summary the interest rate on a new bank debt decreased approximately 4% from 10.5% on a prior term loan to a new blended rate of approximately 6.4% at closing.

Income tax expense was approximately 67% for the three months ended December 31, 2013 primarily impacted by the nondeductible expenses in connection with the fair value adjustments on the warrants previously discussed.

Net income for the third quarter, adjusted for the items explained above, was $5.9 million or $0.39 per diluted share which also reflects increased number of shares outstanding compared with $2.7 million or $0.18 per diluted share for the comparable period a year earlier.

At December 31, 2013 we had a $95 million term loan, $10 million revolver and approximately $33.3 million in cash resulting in net bank debt of approximately $72 million. There was availability of approximately $17.5 million on the $30 million revolver credit facility reflecting approximately $2.5 million outstanding letters of credit.

During the third quarter, on November 6, we entered into an amended and restated $125 million credit facility comprised of a $95 million term loan and a $30 million revolving credit facility. The amended and restated credit facility replaces a previous $125 million credit facility comprised of $105 million term loan with a $20 million revolver facility. Based on current LIBOR, the interest rate for the new term loan is 6.75% consisting of a LIBOR floor of 1.5% plus a margin of 5.25% which is down from 10.5%. The revolving credit facility interest rate equals approximately 3% based on LIBOR plus a margin of 2.5% which is down from 3.5%. As a result, the interest on our bank debt decreased approximately 4% from 10.5% on a prior term loan to a new blended rate of approximately 6.4%.

At December 31, 2013 MPA had approximately $297 million in total assets, current assets were $103 million and current liabilities were $90 million. Cash flow as provided by operations during the three months ended December 31, 2013 was approximately $12.2 million which included $9.5 million in income tax refunds and also included working capital use of cash to build inventory levels in anticipation of future sales.

Additionally impacting cash flow for the third quarter includes the $3.6 million in policies from stock option exercises, $4.6 million paid in loan fees in connection with the refinancing of the credit facility and $2.2 million payment to purchase our lenders' warrants during the third quarter.

MPA expects to realize a total tax benefit of cash and credits of approximately $38 million as a result of the losses incurred for the investment in previous subsidiaries which has already contributed to liquidity and should further enhance liquidity. Through December 31, 2013 approximately $30 million of the $38 million tax benefits have been realized and the remaining tax benefits will be recognized through a portion of the next fiscal year 2015.

I will now walk you through the income statement exhibits in our press release distributed this morning which we believe will make it far easier to understand the various expenses and adjustments for the third quarter ended December 31, 2013. If you can take a moment to turn to the income statement exhibits in the press release starting with Exhibit 1, we can begin.

So when you eliminate the effect of all expenses related to the discontinued subsidiaries and other one-time expenses, as reflected in the earnings press release, diluted earnings per share was $0.39 for the three months ended December 31, 2013. It's calculated by taking the reported net income of $1.148 million and adjusting for discontinued subsidiaries, legal, severance and other cost of $478,000, FAS 123R share-based compensation expense of $309,000, non-cash mark-to-market losses of $2.6 million related to the change in the fair value of warrants and foreign currency exchange contracts and write-off of deferred loan fees related to prior loans of 2.8 million.

This write-off was charged in interest expense in connection with the November 6, 2013 refinancing of the credit facility. All the adjustments were tax effected at a 39% tax rate. So by adjusting the above-mentioned items from the reported net income of $1.148 million, adjusted net income was $5.912 million or $0.39 per diluted share for the three months ended December 31, 2013.

Additionally, at the bottom of exhibit, there is a calculation for EBITDA for the three months ended December 31, 2013. Starting with reported operating income of $9.989 million and adjusting for the items previously explained, then depreciation and amortization expense of $675,000, adjusted EBITDA was $14.081 million. The adjusted EBITDA of $14.081 million is also calculated by starting with adjusted net income of $5.912 million and adding income tax expenses of $3.779 million and interest expense $3.715 million and depreciation and amortization $675,000. Adjusted further for standard inventory revaluation write-downs due to lower cost of manufacturing of $952,000, adjusted EBITDA was $15 million for the third quarter.

Exhibit 3 represents the adjusting calculations for the nine months ended December 31, 2013 showing adjusted earnings per share of $0.98 and adjusted EBITDA of $37.5 million. Adjusted further for standard inventory revaluation write-downs of $1.2 million adjusted EBITDA was $38.7 million for the nine-month period.

Exhibits 2 and 4 represents the adjusting calculations for the prior year three and nine months ended December 31, 2012.

I will now turn the call back to Selwyn.

Selwyn Joffe

Thank you, David. Going forward, we will continue to focus on growing our business and working with our customers to grow their businesses through superior product quality and customer service. In addition to growing our existing business, we continue to look for new products that complement the product needs of our customers and our operating model. We are optimistic about our existing business and excited about the new business opportunities for the New Year.

In summary, there more than 240 million vehicles on the road and these vehicles are staying on the road longer. This translates into exciting opportunities for Motorcar Parts of America and the customers we serve.

At this point in time, we will open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Phil Shen. Phil, you may begin.

Philip Shen - Roth Capital Partners

Hi, thanks for taking my questions.

Selwyn Joffe

Welcome.

Philip Shen - Roth Capital Partners

I would like to confirm that wheel hub revenues were $8.8 million in the quarter. Is that correct?

Selwyn Joffe

Correct. Yes.

Philip Shen - Roth Capital Partners

Thanks, and what's your latest view on how wheel hub revenues will grow going forward? And do you have an update or sense for when a new customer might be added or secured?

Selwyn Joffe

Okay. So let me answer it first organically. The weather, this extreme weather conditions we are having is very positive for the wheel hub business. I think it negatively impacts on the short-term because customers are snowed in. But as soon as that we see a thaw out there we expect wheel hub business seasonality start kicking in. So we are very optimistic about the base business in our wheel hubs and the growth rates in it. We have had success, yes, in picking up additional customers who are excited about that as well. So we continue to be optimistic and feel like we should experience double-digit growth in our wheel hub business.

Philip Shen - Roth Capital Partners

Great. Now that wheel hubs, as you have established a nice base of business there and you are getting some momentum, how are you guys thinking now about your next product line? What could it be and when could that come to fruition?

Selwyn Joffe

Again, we expect to announce a new product line in the next fiscal year. We are optimistic and comfortable that that will happen. As far as what it will be, we won't release that until we actually get into the business.

Philip Shen - Roth Capital Partners

Okay, good. I know you guys don’t provide official guidance, but as we think about the strength of your core business as well as the potential of wheel hubs, can you talk to us about what kind of revenue growth we could see in fiscal '15?

Selwyn Joffe

David, do you want to address that? Again, we have had a policy of not trying to guide. We think both our businesses that we are in today, we are in the parts business, it is fundamentally strong and we expect to see nice growth rates out of our businesses. We offer a great product. There has been some pricing pressure in the marketplace. We believe at the end of the day that we will be winners from that. We are committed to rational pricing but we have seen some moves of desperation but our operating model is very, very strong and getting more and more efficient and so we are in a great position to absorb and to grow and to enhance.

Philip Shen - Roth Capital Partners

Okay, that's helpful. You guys had a nice quarter as well for margins. Should we expect these levels to sustain, especially as you ramp up wheel hub or should we expect there to be some degree of erosion as a result of the lower wheel hub margins?

Selwyn Joffe

Yes, I don’t think it relates to wheel hub margins. I think in general, again we have reported consolidated margins. In general, we see margin pressure, but our cost cutting and our efficiencies have been very effective and by being more efficient and not compromising any quality or service levels, we think we are optimistic as we move forward.

Philip Shen - Roth Capital Partners

Great, one last one and I will jump back in queue. Can you talk about your priorities for free cash flow? Thoughts on either buying back stock or reinvesting in the business, acquisitions, paying down debt, given those options out there, what's your latest thinking on that score?

Selwyn Joffe

I think we are excited about the new business opportunities that we have. So as we get a better handle on that, certainly we will be deploying working capital towards new business opportunities and then we will evaluate the surplus from there. We expect to have very nice positive cash flows but we are committed to investing in working capital and continuing the growth rates in our businesses.

Philip Shen - Roth Capital Partners

Thank you, Selwyn and David, and congrats on a nice quarter.

Selwyn Joffe

Thank you very much. I appreciate it.

Operator

Our next question comes from Steve Dyer. Please begin.

Steve Dyer - Craig-Hallum

Good morning and congratulations, guys. Great results.

Selwyn Joffe

Thank you, Steve.

Steve Dyer - Craig-Hallum

Several have been asked and answered, within I think you had mentioned, Selwyn, a new wheel hub customer. Is that just one additional one or are there multiples? Any color you could give around there, may be in size relative to the first customer, et cetera?

Selwyn Joffe

Generally, we don't comment of customers but I would give you the flavor is very positive. We are not talking about one new wheel customer. We have many that are interested. We have multiples that we have signed up. So we are optimistic about our wheel hub business. We should see revenues start to ramp in this current quarter that we are in as it reaches towards the end of the quarter and for the next New Year we expect to see some nice growth. We certainly hope that we will see some significant double-digit growth in our business.

Steve Dyer - Craig-Hallum

And would you say the new ones, combined will amount to something similar to the first one? I am just trying to gauge the size.

Selwyn Joffe

It's hard to tell because it depends how many we pick up but certainly we expect to more than double our business as time goes on. I can't give you a timeframe on that, but certainly we expect to more than double the existing business that we have.

Steve Dyer - Craig-Hallum

Sure, okay, makes sense. You had mentioned a new product line in the next fiscal year. I am assuming that would be in the [peer] [ph] distribution side as well?

Selwyn Joffe

At this point, Steve, we are not going to comment about that. It could be either.

Steve Dyer - Craig-Hallum

Okay, got you. Jumping over back to the core rotating electrical business historically and certainly our checks would conclude that you guys have been taking share over the last couple of quarters. Anything you have been able to say there terms of whether it’s a new customer or any customers that you are gaining a lot of share in in particular?

Selwyn Joffe

Yes, I think we have a great customer base. I think the customers that we are servicing are doing a great job organically of growing their business. So we certainly are experiencing the success of our customers. We feel like we are a major add to those customers and we certainly, our motto is to make sure that our customers do better than our competitors' customer. So as far as that is concerned, we are gaining share just because of that, organically. We are well-positioned in both the do it-for-me and the do-it-yourself market. We have significant share in the DIY market which is growing its share in the DIFM markets. So again we continue to be optimistic about our growth in our rotating electrical business as well. We have experienced double-digit growth. Certainly much more difficult. It's a very competitive environment but we feel that we are value-added supplier and we are committed to being a value-added supplier and so we think we will continue to grow our business.

Steve Dyer - Craig-Hallum

Perfect. Excuse my voice here. I guess I will take another crack at margins. It would seem with the growth in wheel hub which, I think, generally carries lower gross margins although operating margins were impressive there, are we thinking about it in terms of this most recent quarter or lower 30s, high 20s? How do you think about that as wheel hub becomes a more prominent part of the business?

Selwyn Joffe

So we had given guidance in the 27.5% to 30% range. We think we will beat it but we are not going to upgrade the guidance right now. I would be conservative. We are very optimistic about our model and our operating models but we don’t want to get ahead of ourselves. Our efficiencies and our quality systems and new testing systems that we have in place, all leading to better efficiencies and better quality product as we continue down the road. So you know we may see these levels but I would like to really be conservative and stick to our existing guidance that’s out there.

Steve Dyer - Craig-Hallum

Understood. That's it for me. Thanks, guys. Congrats, again.

Selwyn Joffe

Thanks, Steve. I appreciate it.

Operator

Our next question comes from Jim Baker of B. Riley & Co. Your line is open.

Selwyn Joffe

Hi, Jimmy.

Jim Baker - B. Riley & Co.

Hi, good morning. Good morning, Selwyn. Good morning, Congrats on the quarter. Just had a couple of follow-ups, most of mine have been addressed already, but just to follow-up on the wheel hub assembly side. It look like sales were roughly flattish quarter-over-quarter, adjusted for the startup cost, but now you have talked about not only new customers but also some organic growth there. So the double-digit growth that you mentioned on wheel hubs, should we take that to mean sequentially here into the March quarter or once you start lapping the business in the September quarter that's when you see the growth on a year-over-year basis?

David Lee

It’s a (inaudible) we are in the business so it's a little hard to predict but the things that are happening, the dynamics and I think this just in our parts in general is because of the extreme weather you have some acceleration of business that happens contemporaneously with the cold weather and then you have some delays in business and generally a wheel hub replacement could actually be delayed until the weather clears. So we think that the extreme weather is going to help enormously but it will delay slightly the start of the season but I think it's a nominal timing. We think that the op is going to strongest. I think we are going to have very strong double-digit organic growth and I think we are going to have very strong incremental growth of new customers and that should be also in double digits. So conservatively, I estimate 20% growth the next year in the wheel hub business on a minimum. I think we can beat that significantly.

Jim Baker - B. Riley & Co.

Okay, that's helpful. And then in the prepared remarks that you talked about posting growth on top of the inventory build at one of your major customers. It seems, at least from what we are hearing, the retailers seem to be very focused on enhancing availability of product that will help them on the commercial distribution side while at the same time pruning back some of the unproductive SKUs. Is it fair to say that you are not seeing many of your SKUs being pruned and on the other hand are seeing sell through improved as coverage and availability has improved in some of your lines?

Selwyn Joffe

Absolutely, I think you are right on the money. The product is moving off the shelf. I think that availability is becoming a bigger and bigger concern for healthy customers and we just see a lot of vibrancy coming down the road. We really do. We have a lot of good orders in-house and things look optimistic.

Jim Baker - B. Riley & Co.

Do you think that your customer base, particularly the DIY retailers, are continuing to consolidate this industry? Can you just talk about consolidation opportunities on the end of the supply base? It seems like we are seeing more supplier broadening their product categories whether organically or inorganically. So how do you expect that trend to evolve and how do you see MPA participating?

Selwyn Joffe

Well, certainly the customer consolidation is significant. The latest announcement from Advance on their acquisition of Carquest, we see other customers making strategic acquisitions and we have got really just a handful or less than a handful of supply out there for those customers. So it's very competitive. I would imagine at some point there would be consolidation on the supply side as well but just because I think that make sense but I don't see anything imminent, I don't know of anything imminent going on but I hope the market remains rational. I think that's an important part for the consumer to continue receiving good quality products. I believe that the customer base is responsible and that they will make sure that supply is credible and that quality levels and fill rates will be sustained by their key suppliers. So I think it's an interesting time in the marketplace and I think it’s a vibrant time for the aftermarket but also an interesting time.

Jim Baker - B. Riley & Co.

Thanks, and last one for me. Just a housekeeping item. I believe you repurchased the balance of the outstanding warrants. So just wanted to understand what drove the sequential increase in the share count and is 15.3 million the appropriate go forward share count here?

David Lee

We did buyback the lender warrants. We had a number of options, 10-year-old options expiring in the money. So we had a tremendous amount of the employee base exercising options because they were expiring. So with the increase in the share price and the number of options expiring, that’s what drove it. I would tell you, we are very focused on watching the share count. So you know we have bought back some stock including the warrants that we repurchased and some employee stock options and certainly depending on the amount out of our cash flow, that would be something we would look at very carefully.

Jim Baker - B. Riley & Co.

Got it. Thanks very much for the time.

Selwyn Joffe

Thank you. I appreciate the questions.

Operator

Our next question comes from Travis Hogan of Riva Ridge. Your line is open.

Travis Hogan - Riva Ridge

Yes, congratulations on a great quarter. My questions have been answered. Thank you.

Selwyn Joffe

Okay. Thanks, Travis.

Operator

Our next question comes from Jacob Muller of AYM Capital. Your line is open.

Jacob Muller - AYM Capital

Good morning, Selwyn.

Selwyn Joffe

Hi, Jacob. How are you?

Jacob Muller - AYM Capital

Thank you. Congratulations on your strong performance. I wanted to just follow up on a couple of the questions that have previously been asked. As far as the market share gains, in the past you had pointed at potential gains in 2014 at certain suppliers and opportunities for the company and now that we are into the calendar year, how have those played out and what kind of impact you have had at rotating electrical?

Selwyn Joffe

I think overall, at rotating electrical, we have had some good gains. We have some gains that are pending that we are waiting for confirmation. So I think you will see some incremental revenue on new customer gains for this fiscal year. Of course, I might say that I have to knock on wood, which I don’t have in front of me right here but fake wood and hope that we are not changing ourselves but the fundamentals look very strong for new business in all of our categories.

Jacob Muller - AYM Capital

And as far as the seasonality and the start of the fourth quarter has been much stronger seasonally than the third quarter, do you expect that to hold up this year as well or is there some kind of pull-forward here that’s at play that’s going to make it look pretty similar?

Selwyn Joffe

No, I think the fourth quarter is going to be strong. It is seasonally strong. At this point, it will be strong. I think we will miss a few days from extreme weather but I think that's very good news because that reverses itself up very quickly. The fourth quarter looks very strong for now.

Jacob Muller - AYM Capital

That’s all I have. Thank you very much. Congratulations again.

Selwyn Joffe

Thank you.

Operator

(Operator Instructions). Our next question comes from the Steve Dyer of Craig-Hallum. Your line is open.

Steve Dyer - Craig-Hallum

Yes, just one follow-up, guys. There has been a lot of chatter about the (inaudible) tax treatment of them, particularly ones operating in border towns or producing in border towns. Is that anything you anticipate any type of an impact in the foreseeable future?

David Lee

No, we think there will be a nominal impact on cash flow just because there are some deposits or taxes that have to be paid early. We are exempt from most of it and it's nominal. It's not something that we expect to even come up as being an issue.

Steve Dyer - Craig-Hallum

All right. Appreciate it. Thanks, guys.

David Lee

Thank you.

Operator

I am showing no further questions at this time.

Selwyn Joffe

All right. Thank you, everybody. We appreciate everyone's interest and look forward to further updates as we go down through the next year and I appreciate everybody's interest. Thank you for calling in.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.

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