Fenix Parts' (FENX) CEO Kent Robertson on Q4 2015 Results - Earnings Call Transcript

| About: Fenix Parts (FENX)

Fenix Parts (NASDAQ:FENX)

Q4 2015 Results Earnings Conference Call

April 15, 2016, 09:00 AM ET

Executives

Chris Kettmann - Clermont Partners, IR

Kent Robertson - Chief Executive Officer

Scott Pettit - Chief Financial Officer

Analysts

James Albertine - Stifel

Matt Koranda - ROTH Capital Partners

Tony Cristello - BB&T Capital Markets

Bob Labick - CJS Securities

Gary Prestopino - Barrington Research

Joel Tiss - BMO

Bijel Doshi - Norwood Capital

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2015 Fenix Parts Conference Call. (Operator Instructions). As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to Mr. Chris Kettmann. Please go ahead, sir.

Chris Kettmann

Good morning, everyone, and thank you for joining us. You should have already seen the press release which was circulated yesterday, and the 10-K that was filed yesterday. In the room with me today are Kent Robertson, Fenix Parts' Chief Executive Officer; and Scott Pettit, Chief Financial Officer.

Before we begin, let me remind you that during the course of this call, participants may make certain forward-looking statements regarding various matters related to our business and Company that are not historical facts. Such statements are based upon current expectations and certain assumptions of management, and therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially.

Please refer to our SEC filings for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Also, please note that the Company undertakes no duty to update or revise forward-looking statements.

And with that, I'll turn the call over to Mr. Kent Robertson.

Kent Robertson

Thanks, Chris. Good morning, everyone, and thank you for joining us for our fourth quarter and year end call. As noted in our press release, revenues for the three months ended December 31, 2015 were approximately $30.2 million, which includes acquisition related revenue on our mid-August acquisition of Ocean County Auto Wreckers and our October acquisitions of Butler Auto Sales and Tri-City Auto Salvage.

Yesterday, we filed a 10-K, our press release and an updated investor presentation. We have included a revenue breakdown of the press release and investor presentation to show the overall makeup of Fenix Parts, recycled parts business, including drivers of revenue as compared to last year.

The table provides a breakdown of revenue to show the impact of Part sales, Canadian operations, expansion, commodities and trade within the Fenix network. We believe this level of detail should prove useful to investors as they evaluate the significance of the key business drivers.

We were pleased to see sales growth of recycled original equipment parts driven by the favourable industry dynamics and a successful execution of our growth initiatives. Over the past year, as we began gearing up for the IPO, the core drivers for the recycled automotive parts industry including demand for original equipment parts have remained strong. New car sales, an increasing number of vehicles on the road and the average age of those vehicles continue to provide a healthy industry backdrop.

Furthermore, miles driven were up 3.5% in 2015 compared to the prior year, in part due to low fuel cost. We expect this positive trend to continue going forward providing the tailwind for Fenix’s growth.

Importantly, we have seen strong sales growth in parts compared to prior year, and we have seen this continue to the first quarter despite a mild winter. However, it’s clear that we faced some challenges since our IPO in May, including first, substantially lower average prices for commodities including crushed car bodies, which declined by approximately 68% from the fourth quarter of 2014 to the fourth quarter of 2015 and declined 42% between the third and fourth quarters of 2015.

Second, the impact of the strong U.S. dollar as it relates to our Canadian operations and the effort in cost to consolidate our financial reporting in compliance with GAAP accounting and SEC reporting of the company. I want you to know that we have aggressively confronted each of these challenges which are managing the strength in our business right now. Let me tell you how.

As you know sales from other ancillary activities or other services consists primarily of the sale of commodities including scrap, which is a by product after the sale of parts in both full-service and our self-service locations.

During the quarter, revenue from these ancillary activities was approximately $3.5 million or roughly 12% of revenue. Our goal is to reduce that percentage even further, largely by continuing to focus on the sale and expansion of our recycled parts business, both organically and through acquisitions.

As discussed in the last call, we are continuing to leverage our self-service business by aggregating products such as batteries, copper wire, catalytic converters, aluminum wheels and other commodities into truckload quantities in order to get improved pricing and incur lower transportation cost at the time of sale.

This has helped partially offset the dramatic decrease in commodity values. It’s important to note that we cannot control the price of commodities and we do not aggregate commodities respectively, but instead to obtain the best possible pricing for the by product of our Parts business.

The second challenge relates to our Canadian operation. As you know Standard Auto Wreckers operates three facilities located in Canada and one in Niagara Falls, New York. Prior to the March 2014 fire at the Toronto facility, Standard have purchased and dismantled vehicles in both Canada and the U.S. and then sold those parts primarily into the Canadian market. With the stable currency exchange rate, the country in which they bought vehicles and sold parts didn’t matter as much as it does in today’s environment.

Following the fire at the Toronto facility, Standard relied more on its Niagara Falls location to supply parts to its Canadian customers, increasing the exposure to exchange rate fluctuation. Standard subsequently relocated the full-service operations to 150,000 square foot facility in Port Hope, Ontario. While we encourage significant start up cost and transition to this location, we now have greater dismantling capacity and warehouse to better service the Toronto market.

We are supplying the bulk of our inventory to the local markets from both Port Hope and all other locations. Our Niagara Falls facility is now focussed on supporting our U.S. operations. In addition, we have taken significant steps to change how we do business in Canada in order to strengthen the fundamentals of our Canadian operations as a whole. For example, we reduced shipping U.S. parts to be sold in Canada as a result of a new Port Hope facility. Sourcing product from Port Hope and Auto level drive better economics on every part we sell in the Canadian market giving impact of exchange rates.

We implemented new pricing policies for inventory source from our U.S. operations to reflect the impact of the currency translation on those parts. This further insulates us from the impact of the exchange rate differential. The Toronto facility is now focussed on self-service. Using the space created from the relocation of the full-service operation to Port Hope to lay out the facility has been modified to improve access to vehicles in order to sell more parts.

We’ve also implemented facility upgrades to more efficiently process cars and yield higher revenue per car. And as is the case throughout the organization, we are continuing to place a strong focus on improving the cost structure of our Canadian facilities. One way we are doing that is by leveraging the best practises and technology we have developed in our self-service operations, making for more efficient and higher margin Canadian facilities.

We have taken initial steps to improve the Canadian operations and limit the impact of foreign exchange fluctuations and partially offset lower commodity prices. The third challenge we’ve continued to confront is the cost and effort associated with combining the eight founding companies and the appropriate GAAP accounting and SEC reporting necessary as public company. We moved away from the reliance on outside providers to compile our financial statements and are now doing that work in-house.

As you recall, upon IPO we did not have an accounting or other support functions for the consolidated entity. With the team now in place, we are making significant progress. We’ve also integrated some of the back-office functions. We have migrated several of our founding companies and our three new acquisitions on the one favourable system as well as our consolidated 401-K help and other benefit programs, creating efficiencies for the business and consistency across our workforce.

Now I’d like to take a few minutes to provide an update on the business as a whole. During the fourth quarter, we continue to focus on the integration of our companies in an effort to capture organic growth opportunities and realize synergies with several initiatives underway that are designed to drive inventory diversity and product availability.

Our buying team is now using a co-ordinated approach to purchasing vehicles more effectively, to eliminate internal competition for the same cars at auction and to cover more auction opportunities. We are utilizing one standard bidding platform that allows our team to review historical part demand, inventory stock levels and sales history based on company wide information to support the vehicle procurement process.

This was the first step towards our goal of improving diversity of cars we buy and eliminate the number of redundant parts we keep in inventory. Not only are the founding companies on this system, but so are the newest additions Ocean County, Butler and Tri-City.

The second step toward our goal of increasing parts diversity relates to our ability to determine the appropriate inventory stock levels, eliminate redundancies and provide a wider variety of parts for sale to our customers. We expect the benefits of this new process to have a material impact over the next several quarters on a roughly 18,000 cars we buy at auction annually. Further, all of our companies are fully integrated onto our inventory and logistics platform. We can now leverage our hub and spoke network to deliver products to our customers in order to improve fulfilment and the economics of overall business. As a result, our customers enjoy reduced lead times and increased order fulfilment.

The third strategic initiative relates to online parts procurement platforms. One example is the Parts Trader program, which is utilized by more than 8000 collision repairs as well as state farm and several other insurers. We recently completed a pilot with Parts Trader in the fourth quarter and in the fourth quarter we began a soft rollout across the Fenix locations and we are already seeing the benefits. We will provide an update on the next call.

With better visibility in to our inventory and procurement process, we have initiated a new coordinated pricing strategy to ensure that we capture profit and turn slower moving parts. Our goal is to increase inventory turnover and have the right parts available at the right price.

Now, let me provide some insight to recent acquisitions. Ocean, Butler and Tri-City have been integrated into the Fenix Parts family. We have incorporated the event to our vehicle procurement process which reflects not only their inventory in parts demand but companywide as well, connected them to our hub and are now in the process of standardizing certain quality program for Parts delivery.

As a reminder, the general process following the acquisition is to spend the 90 days or so getting the acquired company plugged into the hub and move it on to our systems so that they have access to the broader inventory. The next few months are focussed on upgrading the quality in parts spreads [ph] so we can sell more of their parts to the hubs to customers in other markets.

We are already beginning to see the benefits of this approach. Ocean County head over 20% volume growth in the fourth quarter of 2015 versus the same quarter a year ago, mostly due to the fact they had more product to sell as part of the hub. We are also very encouraged with Butler and Tri-City’s results in the first quarter of 2016.

All-in-all we are extremely pleased with the integration of our founding companies and subsequent acquisitions to date. We will continue to focus on additional organic growth opportunities such as parts availability, enhancing the effectiveness of our sales force and by drawing our distribution in existing and adjacent markets.

As discussed in our last call, we have also begun implementing several initiatives aimed at increasing efficiencies and reducing cost. As mentioned earlier, we are leveraging our self-service business by aggregating different commodities from our locations in the [Indiscernible] low quantities in order to maximize our value at the time of sale.

Also, we are leveraging our volume to realize savings on towing, route distribution and other cost. We’ve implemented a companywide towing program to leverage the most cost effective options and are now evaluating a variety of new factors such as route productivity and customer overlap, in order to identify the lowest cost approach to delivering our parts.

Another area of focus continues to be on growth through acquisition. In October, we closed the second and third of our acquisitions since our May IPO with the purchase of Butler Auto sales and Tri-City Auto Salvage, both of which are located in North Carolina. Butler is a full service auto recycling facility located in Forest City, North Carolina that Charlotte and the surrounding markets; and Tri-City is a full-service automotive recycling facility servicing Greensboro, Raleigh-Durham and the surrounding markets.

These acquisition’s fits perfectly into our growing East Coast footprint by filling key positions between our Jacksonville Florida and north eastern locations. Both Butler and Tri-City are well regarded full-service auto recyclers with experienced leadership teams. They are specialized in acquiring high quality; newer domestic and foreign vehicles which help diversify our overall inventory, providing our customers with greater parts availability. We are thrilled to have Butler and Tri-City as part of the team.

We believe there is a huge opportunity to consolidate this industry. As we mentioned before, there are a significant number of quality acquisition candidates available and our newly acquired companies are realizing the benefits of scale of our business, especially the additional parts available to the hub as well as the synergies related to how we buy cars, manage towing and distribute auto parts to our customers.

Fenix Parts reputation continues to grow throughout the industry as other auto part recyclers recognize the positive impact we are having on our acquired companies and the markets we serve. The acquisition pipeline is robust. The companies in our pipeline that meet our acquisition criteria still represent more than $150 million of annual revenue. We have numerous deals in various stages of the acquisition process and while we don’t control the exact timing, we are pleased with our progress. Our future cadence will obviously be influenced by our operating performance, availability under our credit facility and the nature and formal consideration for each transaction.

Before wrapping up, I’d like to recognize our newest board member, Seth Myones. Seth, most recently served as Chief Operating Officer and Executive Vice-President of Covanta Holding Corporation, a provider of waste energy, waste disposal and renewable energy solutions. We are delighted to have Seth on our Board of Directors as his 25 years of operational, financial and management experience in the environmental services recycling industries will be a key resource for our management team moving forward.

With that, I’ll turn the call over to Scott to provide some additional color on the fourth quarter and full year results.

Scott Pettit

Thanks, Kent, and good morning everybody. Let me start by making one overall comment. We originally filed the extension to incorporate the new amended and restated credit agreement. We used that extra time to expand our disclosure including what has been incorporated into the press release and investor presentation.

Following our initial public offering, the 11 acquisitions provides credit agreement, our first 10-K and all the necessary work that goes into those items, it’s important to get 2015 wrapped up so we can move forward.

As Kent mentioned, for the fourth quarter ended December 31, 2015, we reported revenues of $30.2 million, which includes sales from our eight founding companies, and our subsequent acquisition Ocean County, Butler and Tri-City. I want to spend a little time and give color on revenue cost of goods sold, operating expenses and the non-cash item in turn starting with revenue.

In order to get more visibility of the components that make up revenue, we have provided the detailed reconciliation of gross revenue to net revenue for the fourth quarter in the press release in the updated investor presentation. This includes the breakdown between Part sale, commodities and the inner company elimination which represents our trade within the Fenix group.

Part sales is further broken down in the U.S. founding company, newly acquired company and Canadian locations to clearly show the building blocks of revenue and the impact of acquisitions and Canadian operations.

I’ll make some comments on each of those components. Net revenue for part sales which includes the sale over recycled OEM automotive parts through both our full-service and our self-service location was approximately $30.9 million before elimination and approximately $26.7 million after eliminations for the fourth quarter of 2015, including sales related to Ocean County, Butler and Tri-City. This represents our core business and 88% of our total sales for the fourth quarter.

Let me break down part sales on a gross revenue basis for the fourth quarter to provide clarity of the components of revenue and how they have changed since last year. Same store founding company locations gross part revenue increased to $21 million [ph] for the fourth quarter from $19.3 million in the same quarter of 2014. We saw recycled OE parts growth of over 10% to our retail and repair shop customer partially offset by a reduction in wholesale parts sale to other recyclers as we focus on distribution of parts through our hub and spoke system to our collision and repair shop customers.

Ocean, Tri-City and Butler generated gross parts revenue of $6.2 million for the fourth quarter which represents an approximately 15% increase in part sales to retail and repair shop customers compared to the same pro forma fourth quarter of 2014.

For our Canadian locations, gross parts revenue in U.S. dollars was $3.7 million in the fourth quarter of 2015 compared to $4 million in the fourth quarter of 2014 and increase of part sales was more than offset by the impact of a change in foreign exchange.

Sales from other ancillary services consist primarily of the sale of commodities including scrap through both our full-service and self-service locations. During the quarter, revenue from the sale of this category totaled approximately $3.5 million roughly $2 million less than the pro forma fourth quarter of 2014.

As we mentioned in our press release, substantially lower average prices for commodities including crushed car bodies cost fourth quarter 2015 revenues to be less than pro forma revenues in the same period last year.

We utilize American Metal markets data for crushed car bodies in New York as a comparative metric. This data showed per ton averages dropping from roughly $227 in the fourth quarter of 2014 to an average of $74 for the fourth quarter of 2015 or down about 68% year-over-year.

Our revenue from commodities was down approximately 35% from pro forma fourth quarter of 2014. This resulted in this revenue category which is a by product of our parts business dropping to roughly 12% of total sales in the fourth quarter of 2015.

Switching next to cost of goods sold and margins for the year ended December 31, 2015. Cost of goods sold was $53.6 million; gross profit was $15.4 million or 22.3%. A number of factors impacted our reported cost of goods sold and gross profit for the quarter and the year ended December 31, 2015.

First, fourth quarter includes the incremental cost of goods sold for the fourth quarter of Ocean County and the majority of the period for Butler and Tri-City. As a result, cost of goods sold in dollar term has certainly gone up. Consistent with the third quarter, there are significant adjustments to reconcile our operating loss to net cash.

Within cost of goods sold, we took a non-cash charge related to the amortization of the step up in inventory to fair market value that was required for GAAP accounting purposes. This amounted to a 1.6 million charge for the fourth quarter and 8.6 million for the full year 2015.

Cost of goods sold also includes 800,000 of depreciation and amortization. As stated on the last call, we have all of our companies on the same general ledger have moved the GAAP accounting function in-house and have better metrics for each of the locations on sales and purchases. Because of those changes we have additional insight into cost of goods sold and the impact of historic vehicle purchasing statistics.

At year end, we had over 90 million of parts at retail prices in inventory and available for sale to our customers. The cost assigned to that inventory reflects the actual purchases from the applicable historic period by location, based on inventory turn and does not reflect the current cost to replace those parts in inventory.

In the press release, we reference the deferral in inventory of the benefits of lower prices paid for vehicles in the second half of 2015. Cost of goods sold for the full service operations reflect purchasing and sales patterns for the last four quarters.

To put some statistics behind this in the fourth quarter of 2015, we purchased approximately 4500 vehicles from auctions and paid an average of $2,071 per vehicle, compared with $2,220 sellers in Q3 and $2,244 in the first half of 2015.

In the U.S. the reduction of vehicle purchase cost is even more pronounced. The effect of our buying initiative coupled with a drop in commodity prices is certainly reflected in the price we're paying for vehicle.

However, we don't recognize the benefits of lower prices reported in inventory until we sell that inventory in future period. For self-service operations cost of goods sold effectively represents the prior quarter purchasing activity.

We bought approximately 8,000 vehicles per quarter and paid $140 per vehicle in Q4 compared with the $188 in Q3 and over $215 in the first half of 2015. Importantly, the average price paid for vehicles in the fourth quarter was substantially below the past year run rate.

We experience the revenue reduction for lower commodity pricing in the current period, but don't get to report the lower cost structure until that inventory return to our system.

The use of historic cost has been incorporated in our calculations of cost of goods sold and in inventory. We expect to see the impact of lower prices paid per vehicles in the second half of 2015 reflected in our financial results in the quarters ahead.

It is also important to note that the selling price for our parts has remained strong despite lower vehicle purchase price. Also relevant as we talk about cost of goods sold, Fenix move to a consistent classification methodology for expenses that are included n cost of goods sold across all founding companies and the new acquisitions.

In addition to material costs these includes related auction, storage and toll fees and other cost of procurement and dismantling primarily labor and overhead allocated to dismantling operations and preparing our parts for sell.

The methodology was consistently applied for 2015 and the year to-date true-up resulted in larger expenses hitting cost of goods sold in Q4 for rent, benefits, freight and certain non-cash item.

The refinement to our inventory costing methodology and related true-up should minimize fluctuations in growth profit between quarters and allow Fenix to report more consistent margins as we move forward.

Moving next to operating expenses, for the fourth quarter ended December 31, 2015 operating expenses were $16.4 million and $46.2 million for the full year. A number of factors influence our reported operating expenses for the quarter and the year ended December 31, 2015.

Similar to cost of goods sold, Q4 includes incremental cost of operating expenses in the fourth quarter for Ocean County. Butler and Tri-City, along with non-cash charges for depreciation, amortization and stock compensation we took a $6 million charge for contingent consideration.

The charge was primarily attributable to the increase in estimated earn out consideration, potential payable to former owners and one of our founding companies Jerry Brown's Auto Parts.

This earn out was the result of a new facility and related yard expansion that had not come on in when the deal was negotiated. Because of the significance of this item we broke it out a separate line in our income statement.

One of the noticeable reduced expenses in Q4 relative to previous periods related to the professional fees which drop from the third quarter to the fourth quarter. We expect Q1 to be high as result to the additional audit work tied to completion of our first 10-K. We would then expect our expense for professional fees to drop considerably in Q2 through Q4 of 2016 as our filings become more straightforward.

As an aside, during the fourth quarter we also focus on initiatives aimed at achieving standardization across our business and reducing our cost structure. One prime example relates to our property and casualty insurance program, which move to a paid loss retro program that could save us up to $0.5 million a year depending on actual claim.

Net operating loss for the quarter – fourth quarter of 2015 was $9.1 million and $30.8 billion for the full year as a result of the revenue, cost of goods sold and expense item we just covered.

We provided detail in the press release, 10-K and in investor presentation that present a number of significant adjustment to reconcile operating loss, net cash for the fourth quarter and full year of 2015.

Adjustments outlined on those schedules totalled $11.3 million in Q4 and $22.6 million for the full year. I'll be happy to answer any additional questions you might have later in the call.

Looking at our balance sheet, at December 31, 2015 we had $2.8 billion of cash and cash equivalents on hand, a $9.6 million term loan outstanding and $11.2 million in borrowings against the revolving line of credit. The additional borrowings under our revolving line of credit were largely used to fund the Butler and Tri-City acquisitions in October.

We recently entered into an amended and restated credit agreement with BMO Harris that increases the company's leverage and revises certain terms and conditions. We feel the new agreement provides us with the capacity to execute our business strategy and gives us capacity to continue to grow and prove the economics of our business model.

Looking forward as revenue, margins, EBITDA improve we believe we'll be well positioned to expand our credit facility further in order to capitalize on acquisition opportunities.

A final note about 2015 before I turn it back to Kent. Before the IPO we had two employees. We relied heavily on the founding companies' historic cash basis statement and outside consultants to perform the initial GAAP accounting and SEC reporting.

During the fourth quarter we moved those functions in-house using a consolidated general ledger and SEC reporting software. That process from no GAAP in SEC reporting capacity to outsourcing those functions to moving them in-house has created a fair amount of challenges.

With the filing of this 10-K we put 2015 behind us and look forward to a more efficient process moving forward. Our reporting process has, and will continue to get simpler and more straightforward. There are certainly more work to be done and we expect to continue to make significant progress throughout 2016.

With that, I will turn the call back to Kent for some final comments before moving into Q&A.

Kent Robertson

Thanks, Scott. Let me conclude by offering some insight into Q1. While we do not provide guidance, we thought investor would find these data points helpful, while recycle parts volume was stable in January compared to the fourth quarter of 2015 run rate.

We've seen a nice uptick in parts volume in both February and March. In fact many of locations set new records for part sales during those periods. We've seen stabilization in the commodity market recently. Crushed car bodies for example that picked up slightly over the last several weeks and are now approximately $100 per ton.

We are also pleased with our buying initiatives. The shifts in our inventory available for sale at retail and improved diversity of that inventory, we believe that sets us up for improved sales growth. And lastly, I want to thank our team for the hard work and commitments with the IPO.

And with that, I'd like to turn the call back to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from James Albertine of Stifel. Your line is now open.

James Albertine

Thank you, gentlemen. Good morning. And I appreciate for taking the question. And welcome back. It sounds like you've been working on a lot of interesting things for the last few months, so glad to have you back. Really appreciate all the detail?

Kent Robertson

Thanks, Jamie.

James Albertine

So, wanted to just -- I mean I went through as much as quickly as possible the 10-K last night, this morning and trying to piece together all the adjustments, but maybe just a cut through it, our primary question, we talked about an IPO roughly $12.3 million in FY 2014 to the pro forma EBITDA on an adjusted basis. Where did we ended roughly, if you can only gives us back or even directionally you can give us that in FY 2015 understanding there's some sensitivity as to what one-time and that one-time given your limited operating history?

Kent Robertson

I think what we try to do is layout the non-cash adjustment to get to our cash and those were $22.6 million in the back half of the year. Obviously, our results of operations were only for May and we have the new acquisitions in there. We reported a loss of $30 million. We have some exceptional expenses as far as professional fees in the year which gets us back to I think a positive EBITDA, but with the change in commodity pricing since the IPO that's really affected our ability to generate the operating profits we expected to. So that's where the big significant disconnect is from what we thought we would be at and where we're at today.

James Albertine

Got it. That's helpful directionally and that sort of what we were figuring out on our own, just wanted to confirm that with you. It does sound however like you pulled quite a bit of work that you had planned -- maybe that even some work you didn't have planned and that was kind of behind you. And Kent, if I hear you correctly some of the things like you're selling to other recyclers for the moment that's probably pressuring margins. It sounds like you can get back into kind of that 40% gross margin territory, in relatively short order. Is that fair? And is that something that we should expect for the duration of FY 2016 or there's still some pressures there on the gross margin side that we need to consider with respect to all the different moving parts you're filling doing on?

Kent Robertson

No. I think that's right. We're finding back towards that number, I think we'll get there sooner than later. I definitely think that the initiatives we have in place and the way we're managing through some of our sales efforts, we certainly get to that back to the high 30 range, low 40.

James Albertine

And then over the longer term presumably, that's sort of mid 40s goal is still achievable?

Kent Robertson

Yes. I mean, obviously Jamie, that kind of uncharted waters for us. We're very comfortable with the high 30s, sneaking into the 40s and accelerating. I'm not sure just sort of where that takes us ultimately?

Scott Pettit

Yes. I think a lot of it depends on what happens in the commodity piece of that, because to the extent that commodity prices bounce back. Obviously our expectations for our margins improve. So, I think we're comfortable in the high 30s right now and then lot of it depends on how we see changes going forward in commodity prices.

James Albertine

Okay. And then just couple -- hopefully quick ones here just as we tick through kind of housekeeping items, it sounds like I understood correctly, I mean you had recycled OE parts growth of over 10%, so basically that's the number we should be focused on as it relates to your 7% to 9% organic growth sort of longer terms target. Is that right?

Kent Robertson

Yes. That is correct. To retail shop and repair shop customers for ours, we're seeing -- we saw over 10% growth, and obviously more than that in the case of the new acquisition.

James Albertine

Okay. And then shifting to M&A quickly, one to three deals a quarter with sort of the target we discussed while back. This is great that you've gone back and done all the heavy lifting. I'm sure it was appropriately distracting to management and maybe took your shifted priorities away from acquisitions for the short term. Can we expect though that one to three goal sort of going forward, I mean, we haven't seen anything in the first quarter obviously and sound like anything is percolating imminently, but just want to get a sense of the cadence there?

Kent Robertson

Yes. We're comfortable of that the one to three deal cadence as far as our ability to acquire the companies and integrate them, we feel comfortable with that. Obviously we got to get our performance in line, so as we get that EBITDA numbers back up and get things where it need to be I think that freeze up more capacity in the deal flow starts back with it.

James Albertine

Is it reasonable to expect the deal flow starts backup for the second half this year or is it going to take a little bit longer than you thought?

Kent Robertson

I think that's right. I think that as – as we're executing now you see sort of the water starting to clear with Q4, I think that continues to get better and as that happens and I think the deal flow start. I think we are probably in that time line makes sense.

James Albertine

Okay, great. I'll get back in the queue. Thank for taking all my questions. Appreciate it.

Scott Pettit

Thanks, Jamie.

Kent Robertson

Welcome back.

Operator

Thank you. And our next question comes from Matt Koranda of ROTH Capital Partners. Your line is now open.

Matt Koranda

Hey, guys. Thanks for taking the questions. Just wanted to follow the line of questioning that Jamie was on regarding acquisitions, and I wanted to dig into a bit deeper maybe, I know you guys still have the 150 million pipeline and that the revise credit agreement with BMO does enable acquisitions for you guys. But I guess what I'd like to figure it sort of with the revise covenants and I guess the availability in the 10-K you guys had called out was $4.7 million on the revolver. Could you just talk about that gating item to your ability to get acquisitions done during 2016 and sort of how you see that expanding throughout the year?

Kent Robertson

Well, obviously with BMO we've got a great relationship with our bank and they're working through the new terms, the credit agreement was a big step for us. Now, the way the facility is structured is really around the performance of the business. So while our performance, historical performance doesn't get us where we need to be for expanding that facility, we certainly have within the facility the ability to get back, so it doesn't prohibit us, it just at this point based on financial metrics, we're at place where we can't do much with it. So, again as the numbers come through, that will open backup for us.

Matt Koranda

Okay. And then coincides with the second half commentary that you had mentioned earlier essentially that we should see some improvement throughout the year and that will enable additional increase in the cadence in the second half of the year in 2016? Is that right?

Kent Robertson

Yes. That's right.

Matt Koranda

Okay. Got it. And then, I was curious if you guys are seeing multiple change at all, like so when you look at your pipeline and just given the dislocation obviously with scrap pricing down year-over-year pretty aggressively. Are some of the parties that you're talking to more amenable to lower multiples? What is the valuation, sort of discussion look like these days there?

Scott Pettit

I think it's not so much the multiples. The multiples are still in that four to six times. Obviously, the lower commodities have affected their EBITDA and what we would expect that run rate EBITDA to be. So we might be paying the same multiple as we were, but it's on our lower EBITDA. So that's what we're -- part of this is waiting to see how those – the lower commodity prices work through the economics of the each of the businesses we're talking to. And once we've got that understanding then we can figure out what multiple make sense.

Matt Koranda

Okay. Got it. And just a couple of housekeeping items from me. So when we look at the gross margins for the quarter adjusting for that $1.6 million in amortization of inventory SMB [ph], it does like gross margins were kind of in the 30% range. And I know, Scott you had called out in your prepared remarks some adjustments, but maybe you could just elaborate a little bit on some of the true-up stuff that you had do during the quarter to kind of put that with more gross margins ended up in the quarter?

Scott Pettit

Yes. I think it comes back to each of the individual companies was looked at as a separate entity and we had adopted certain accounting for each entity based on how fast they turn inventory and what their individual space would utilize. And so, we've gone to kind of some more generic overall company consistent allocations of those costs and that's why in the third quarter when you look at the numbers the gross profit was pretty high and its fairly significant operating expenses.

Now you look at the fourth quarter on a same basis, our gross profit margin has dropped a little bit to non-cash items, some additional rents and some other things up above the line and our operating expenses actually come down quite considerably excluding the contingent consideration.

So, we've move some of those cost back in forth. We think on a year to-date basis, on a adjusting for the non-cash items we're about 35% on average for the year and that's a number that we think as this inventory that we're paying less for today starts to roll through. That's why we're comfortable with the upper 30% for gross profit margins going forward.

Matt Koranda

Got it. That's very helpful. And then last one. The contingent consideration that you guys increase by that 6 million and I guess mainly because of the improvement that Jerry Brown for their 2016 outlook in EBITDA, could you just provide a bit more color around the yard expansion that you had just mentioned in the prepared remarks? And will that be paid eventually in cash in 2016 or 2017. How does that eventually get paid out?

Kent Robertson

And so what's happened to Jerry Brown's in 2014, they had actually began a construction project that hadn't been completed at the time of the IPO, and with that construction project coming on line in the back half of 2015 is the EBITDA was tied to 2016 metric, so it was actually payable in 2017. But it was really about that new facility. As we talk to folks that they put value on featured performance that can't necessarily be proved out and they want to get -- they want the value, if we can see it, they will put an earn out in place, we think it’s a great way to bridge the gap. So, in this case clearly that's the way we put the deal together. And his business is doing really well, so we've adjusted the consideration for the potential payout.

Matt Koranda

Got it. Okay. Helpful guys. Thanks. I'll jump back in queue here.

Kent Robertson

Thanks, Matt.

Operator

Thank you. And our next question comes from Tony Cristello of BB&T Capital Markets. Your line is now open.

Tony Cristello

Thank you. Good morning.

Kent Robertson

Good morning.

Tony Cristello

First question I had has to deal with sort of the turn times for you guys. You talk about sort of getting caught up in some inventory, I guess, [Indiscernible] step up or adjustment or however we want to phrase it, but on the full-service side of your business between when you buy a car and when that car gets parted out for – or crushed scrap, what's the time line on that? And then the same thing on the self-service side, because I want to understand sort of how I should be thinking then going forward when you're buying what the impact is or how many months or quarters down the road I should see the results?

Kent Robertson

Okay. On a full-service car when we buy that vehicle we put those parts and inventory and it takes roughly a year to turn all those parts before the crushed the balance of what we haven't sold and obviously rotate that out to different cars. So we're looking at the previous four quarters cost data in order to figure out what we're going charge the P&L for cost of goods sold.

On a self-serve car, it really a 60 to 120 day process where we buy the cars, bring them in, drain the fluids, put them in the yard to sell parts and then disassemble the balance. So in that case it takes about 90 days. So when you're looking at the valuation you got to look at on the full-service. The last year's average cost versus what is currently costing today. And on a self-serve you look at the prior versus what is the current quarter, those are the numbers that you can kind of work the math out and figure out how much of this going into inventory and what the benefit should look like later.

Scott Pettit

I guess I would figure that, a year seems like an awful long time to buy a car before it considered crush. And I'm assuming that there is some 75% of that the part should be used within the first 90 to 120 days and then as you get into the second half of the year then they use very little. But shouldn't you see the benefits of lower costs coming in well before a year and then obviously in self-service that I understand it takes sort of 90 day period to turn it.

Kent Robertson

Yes. I think that's absolutely true. When we get a car in, we will see a lot of collision parts sold within a fairly short period of time, certainly within the first six months, but depending on the age of the vehicle the engine, transmission and some of those mechanical parts might take longer to sell. And if you look at the $90 million inventory we have at retail in order to buy the cars to put that much inventory out there, it took a year to on average about a year's worth of purchases to build that inventory out.

Tony Cristello

Okay. Yes. Sure, go ahead.

Kent Robertson

Maybe to help, add a little bit color to this is, as some of our larger locations as we don't have as much real estate, where we don't hold cars, for example, our Toronto location, Port Hope location, and Niagara location, those cars tend to move a lot more quickly and locations where we tend to have larger footprint real estate to hold cars, we tend to hold the cars a little bit longer, especially with scrap being downward, so we can harvest those parts and harvest deeper into the cars. So that's kind of where the math is coming from.

Tony Cristello

Okay. But I'm assuming there's no intentional holding of parts and/or scraps just to wait for prices to return, is that correct. I mean there's no…

Kent Robertson

No.

Tony Cristello

Stockpiling going on? Okay.

Kent Robertson

No. There's not.

Tony Cristello

Okay. And then on the inventory turns initiative and maybe fill rate is combined with that. Can you sort of talk about where you are today in terms of a run rate where you'd like to be and then on fill rate basis, I mean, are you filling 60% of the time in terms of when you're getting called for a part, is it higher than that or is it less than that?

Kent Robertson

So, anecdotally we're in somewhere between 50% and 60%. One of the things we're doing with the – as we get better information as we're pulling that together, Tony, so we're still working through that. I think our goal to think about for us as we're trying to get to a place whereas quarter four turns a year on the inventory. So standby we'll keep doing some more work. We know that's important to investors to understand what the inventory turns look like and the fulfilment rates and we're working to get that.

Tony Cristello

Okay. And then, is there anything else in terms of network connectivity in terms of how you're communicating, how you're distributing parts within the network. What are some of the things we can start to look for? I mean, it seems like some of that traction is continuing to improve, but are there anything you have to do internally or from an infrastructure standpoint that's going to taking to another level or really give a sort of a boost in terms of sell-through?

Kent Robertson

Yes. I think the network is solid, everybody is plugged into it and it's efficient. Now, we're working on the fine-tuning of the network to make sure that our trucks are getting a max number of stops per day and they're going out full everyday and we're running efficiently, looking at things like parts trader initiatives and some other things that help driver more volume demand to the network.

So we're starting to see again just by sharing of inventory, that starting to move through, we're starting to see the uptick from some of the training and some of the initiatives we're doing with our sales team. So I think it really comes down. It's in place. We're just doing the fine-tuning and tweaking to keep generating the synergies we've identified.

Tony Cristello

Okay. Very good. Thank you for your time.

Kent Robertson

Sure.

Operator

Thank you. And our next question comes from Bob Labick of CJS Securities. Your line is now open.

Bob Labick

Good morning.

Kent Robertson

Good morning.

Bob Labick

Hi. Obviously a lot of work went into getting all the financials together and getting reporting. There's still obviously a lot of noise. Can you just give us an update on how you think this year plays out in terms of timing of when we get just clearer, better picture of the actual cash flows of the underlying businesses. And do you expect in terms of free cash this year, what are your expectations. Is there seasonality to that or how will that play out?

Kent Robertson

Well, I think first and foremost what we see is our willingness to breakdown the information and try to get it reported in a format that allows you get to a free cash flow or adjusted EBITDA number. Clearly, now that the first partial year that we were in business is behind us we'll start to see cleaner data in first quarter, second quarter and throughout the year.

As far as the seasonality, this winter was a little bit soft as you noticed from weather out East, but there really doesn't appear to be a significant seasonal impact on the business. It's largely driven by collisions and people driving their cars on the mechanical side. So to the extent miles driven continues to drift up, obviously we think that's good for the industry.

But we'd expect throughout this year on a quarterly basis to provide the same level of information we did in the fourth quarter, if not a little more to give you the visibility you need to look at the adjusted EBITDA and kind of a cash EPS number.

Bob Labick

Okay, great. And just obviously based on the significant changes in scarp prices and that effects and everything that's impacting the, call it, the inventory purchase a half year ago, I understand why things are hard to see right now, is the underlying, again the underlying strength of these businesses, but effectively overtime these become a past through unless scrap just keeps going to zero and that kind of stuff.

So, how do you think about the core underlying performance and cash flows in the business now versus when you purchase them? Is there any change in your thoughts towards the overall model going forward or how do you think about that?

Kent Robertson

Obviously on the scarp side, since the IPO is roughly a $175 a ton and it drifted down to $74 a ton in the fourth quarter of last year. So that $100 per ton coming out of those roughly 4500 cars per quarter certainly has an impact on cash flow, because that's the cash that went with the commodity pricing. So to the extent as you said it doesn't go to zero and it stays stable, you know we are at a rate now where we think we start to climb back up and get the benefit from the part sales and as that, those commodities strengthen the net flow through will come back obviously in a bigger way.

Bob Labick

Great. Okay, thanks very much.

Kent Robertson

Sure.

Operator

Thank you. And our next question comes from Gary Prestopino of Barrington Research. Your line is now open.

Gary Prestopino

Hey, good morning everyone.

Kent Robertson

Good morning Gary.

Gary Prestopino

Most of the questions have been answered, but just a couple of housekeeping things here. Scott, is it your intent to, when you report in your numbers here to give us this continual break down of recycled OE Parts as you did here or are you just going to report net revenues?

Scott Pettit

My preference, the reason we reported it at this time is we thought it was very relevant to the investor community. I would like to continue to do so. I think it’s important that people see what we are doing in the newly acquired facilities, what we are doing in our existing locations year-over-year. So yeah, it would be in our intent to either through the phone call or through an updated investor presentation or some other methodology to continuing to give this level of detail.

Gary Prestopino

Okay, just where it was, we build our models, but I just want to make sure we are going to have consistency. And then, what kind of shares outstanding should we use for next year? Is it somewhere around 21 million, or is that too high?

Scott Pettit

Yes. It’s around 21 million. The 99 million that was in the 10-K does not include the Canadian preferred shares.

Gary Prestopino

Right.

Scott Pettit

So that gets you up a little north of 21 million.

Gary Prestopino

Okay. And then just looking at your slide 20 on your capital structure, do I have this right, you have about 26 million left on the BMO credit facility plus 4.7 million under the revolver, and then your cash flow, it looks like about 33 million, 34 million of total liquidity, or am I wrong there?

Scott Pettit

I think we look at it as about; we have the 9.6 million term loan, the $11.2 million that’s on a revolver. We get the 5.9 million letter of credit we have for Canada is counted against this on that. So we got $2.8 million in cash and then that $4.7 million in U.S. on the revolver, that’s really our liquidity at those two items. To the extent that we want to go back and expand that term loan or do something different with the bank we have the capacity to do that, but it’s got to be mutually agreed upon between the bank and Fenix.

Gary Prestopino

All right. I’ll follow up with you later on that. In terms as you have mentioned that you had about a 20% volume listed Ocean after it was acquired, did you see similar list of Butler and Tri-City, I realize that you don’t -- the network isn’t fully developed down there, but did you see any kind of lift as you acquire those companies or were able to trade parts between Butler Tri-City and Jacksonville?

Scott Pettit

Yes, we got them plugged in Gary. They have started to kind of get in that 10% lift range so far.

Gary Prestopino

Okay. That’s good.

Kent Robertson

Yes, we’ll give out -- excuse me; we’ll try to give out those numbers in the next call, what we saw in the first quarter.

Gary Prestopino

So in terms of your go-forward acquisition strategy is it fair to say that your target is obviously to get scrap down, are you going to avoid yards or businesses that have a component of self-serve?

Kent Robertson

No, I mean the self-serve adds some level of support to the full-service side and again as we aggregate commodities to do some of those things to get the benefit, as we view this that those businesses more as a speciality so the skills necessary to do the things over there a little bit and the equipment are different than what we do with the full service side, so it’s really just leveraging the two together, so obviously our focus is on OE Parts recycler, that’s first and foremost. And you know those yards have co-located facility you know we’ll look at those but we are not necessarily looking for self-service yards as a pure acquisition play.

Gary Prestopino

And the last question is, you know you guys had a lot on your plate, a lot to do as far as integrating versus where -- you know versus your initial plans, where are you now? Are you ahead of plan, on plan, behind plan on what you need to do to get us to a point where we are going to get basically, we are going to see the true run rate of this company and the true profitability of this company in 2016?

Kent Robertson

Yes, I think the -- as far as bringing the companies together and getting the initiatives in place, you know we are materially on the way through that, so I think you’ll start seeing that flow through. We are still working through obviously on getting all the financial reporting and the systems geared up the way they need to be, so that’s probably lagging a little bit, but as far as the execution out in the field feel pretty good about where we are with our original plan.

Gary Prestopino

Okay. Thank you.

Kent Robertson

Thanks, Gary.

Operator

Thank you. And our next question comes from Joel Tiss of BMO. Your line is now open.

Joel Tiss

Hey guys, how’s it going?

Kent Robertson

Great, Joe.

Joel Tiss

Is there any, were there any structural changes on the scrap side or is that decline all just from commodity prices coming down?

Kent Robertson

That’s all commodity pricing.

Joel Tiss

Okay, so there isn’t a concerted effort or a focus on trying to reduce the exposure to that, it’s just sort of naturally happening.

Kent Robertson

Well in the acquisitions we made, all three of them were full service operations with more than 90% of their business being part sale and a fairly small component being commodities. And so when we talk about focusing more and more on full-service businesses that minimizes our exposure to changes in commodity pricing and really our core strategy is to sell more recycled OE Parts. So those acquisitions were done deliberately to be in more and more in the full-service side of the business.

Joel Tiss

Okay. And Kent, can you talk a little bit about what you are hearing from your long list here of potential acquisition candidates, are they kind of chopping it a bit to join the company or are they taking a wait and see to see where you guys come out, just sort of any little bit of color you can give us there.

Kent Robertson

Yes, I think that there has been several companies that have been pinched because of scrap values, the commodity values, so certainly they have talked to a lot of those types of companies, but as far as the pure play recycler is doing the parts business. I mean they have been added, most of these companies were for multiple generations and they have seen scrap come and go, so they buy and sell cars and parts everyday in their systems.

So what we are seeing is really the steady state. We have you know the deal flow as far as wanting to be part of Fenix, I think people are still interested, very interested in what we are doing and I think that as we execute our business strategy and folks understand that we are actually doing what we said we would do with regards to the operations and implementing the initiatives and making things better and moving more parts and the people are involved with the people that are delivering it that the opportunity is pretty interesting to them. So, no I wouldn’t say people are chopping [ph] it a bit, but I would say that there is still a lot of interest out there.

Joel Tiss

Okay. And then just one structural I wonder Scott can you work on all this financial integration and everything into the quarter or is it still like there is a lot of and its kind of more backend loaded towards when you have to really report?

Scott Pettit

Well in between reporting period we are trying to take steps so that we go to one general ledger system instead of multiples; streamlining how we close the books at every single location making that consistent across all of the locations so that we can reduce the time it takes to close the books at the end of each month, make sure that we get the right level of detail through operating focus so they can run the business. A lot of those steps have occurred over the last four or five months and certainly we’ll continue over the next six months.

But we like to get to one general ledger system, we’d like to get this close processes streamlined as possible, not only will it help us on our business as it sits today, but with every new acquisition candidate how we need to modify the way they do their month end close and expedite the closing process. I think it’s important to get all of that, kind of streamlined as much as we can and it just makes life easier for everybody.

Joel Tiss

All right, great. And then I’ll just glue a couple together here more or just about the color of the market. I wonder if you can give us a sense of what the underlying growth rate of the industry was in 2015 and what it might look like in 2016 and you know I guess your ability to take share which are more focussed on you know what are you hearing from your customers? Are your customers still excited about what you guys are doing or are they -- is there a little bit of you guys were a little bit behind schedule on making acquisitions or consolidating the industry or I just wonder what you are hearing from them?

Kent Robertson

Well obviously with our collision and mechanical repair shops the volume we’ve seen in the parts sales was through those customers. So you know that kind of points to the fact that our fulfilment rates were getting better. We think that our parts programs to quality programs are getting better and we are starting to have conversations with lots of other folks in the industry just to get in the game where we have initially had opportunities before.

So we’ll provide a little more detail on that one at the next quarter call but as far as the volume of the parts and what we are doing with our customers we see that moving well, we see opportunity in the adjacent markets being well received. We talked to a collision shop and the issue is and has been for recycled OE parts that the demand exceeds the supply. So you know as we get more inventory and more distribution, I think that we can help close that gap a little bit, at least in our small way.

So what we’d like to see is going to take I think several quarters and years that have a play out is the alternative parts usage is it got to a place last year and kind of flattened out in the 37%, 38% range. We think that as we continue to get our network built out and have more high quality parts available to the market that, you know that potentially goes up a little bit more. So not necessarily just taking shares really more about from other recyclers so forth, it’s really more about getting awareness and the quality parts out there to have more opportunity.

Joel Tiss

That’s great. Thank you so much.

Kent Robertson

Thank you.

Operator

Thank you. And our last question comes from Bijel Doshi of Norwood Capital. Your line is now open.

Bijel Doshi

Hey good morning. Thank you guys for the additional disclosure, really helpful. Just wanted to make sure I am thinking about building blocks correctly. So if I take a look at your slide in the fourth quarter it seems like EBITDA was now adjusted about $2.2 million. You guys have talked about 9 million of professional fees that you know I think and I’m just assuming on a more normalized that 3 million to 4 million, so if I kind of run rate that I get 14 million of EBITDA on a base business as it stands today.

And then talking about double digit growth and parts and all that benefits that you guys get on gain an integrated hub and spoke network, if that’s double digits I get even in sort of conservative scenario and incremental 10 million of revenue that should flow through at higher incremental margins just given all the things you said you are selling to retail and repair versus other recyclers and you know just the benefits of operating leverage.

So even that gets me to sort of mid to high teens on a run rate, you know even if that’s exiting EBITDA, even if that’s exiting 2015 just want to make sure I am thinking about the building blocks correctly. And then, secondly you guys have interest expense, we understand that very little cash taxes and CapEx given how capital like the model is, so that EBITDA number is you know converts to a high free cash flow so just want to make sure I’m thinking about that correctly.

Kent Robertson

Yes, I think when we look at this business, we are looking at it similarly to the way you are obviously. We haven’t given out guidance on what we expect in the next few quarters or next year. But certainly as you look at the business the ability to organically grow in this 7% to 9% we did better than that, hopefully we continue to but the guidance of 7% to 9%, the ability to acquire companies to grow our margin I think all of those things that you are looking at are certainly true and the reason why we decided to put this together.

Bijel Doshi

It’s great. Thank you so much.

Kent Robertson

You got it…

Operator

Thank you. And that concludes our question and answer session for today. I’d like to turn the call back over to Mr. Robertson for closing remarks.

Kent Robertson

Thank you. Fenix Parts was formed on the premise that there was significant market demand to create a national distribution network in the highly fragmented recycled auto parts industry. Our model provides a network to efficiently buying dismantled cars and share inventory across our platform fuelling and organic growth and accelerated with acquisitions. Our business remains solid with strong year-over-year growth in part sales to our customer. We look forward to providing you further updates on the first quarter call. And with that, have a great weekend and thank you for your time.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a good day everyone.

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