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

F4Q08 Earnings Call

June 16, 2008 2:00 pm ET

Executives

Gary S. Maier - Maier & Company, Inc.

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

David Lee - Chief Financial Officer

Analysts

Mitchell Sachs - Grand Slam

Steve Emerson - Emerson Investing Group

Richard Hoss - Roth Capital Partners

Frank Kristina - Micro Capital

 

Operator

 

Good day, everyone, and welcome to the Motorcar Parts of America fiscal 2008 and fourth quarter year-end conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Gary Maier. Please go ahead, sir.

Gary S. Maier

Thank you very much and thanks everyone for joining us for Motorcar Parts of America fiscal fourth quarter and year-end conference call. 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 conference call. Such forward-looking statements are based on the company’s current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by 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.

For a more detailed discussion of some of these ongoing risks and uncertainties of the company’s business, I refer you to the company’s various filings with the Securities and Exchange Commission.

With that said, I would now like to begin the call and turn it over to Selwyn Joffe. Selwyn.

Selwyn Joffe

Thanks, Gary. Good morning or afternoon, everybody. I appreciate you joining us today for our fiscal 2008 fourth quarter and year-end conference call. As highlighted in today’s financial release, we are on our way to accomplishing our goals. We are continuously focused on increasing top line revenue growth and these efforts have been bearing fruit, as indicated by our solid sales increase for the fourth quarter, with sales climbing more than 14% for the quarter.

In addition to sales growth, we have significantly completed our offshore transition and are now realizing our anticipated savings from this initiative. Our gross profit reached record levels for both the fourth quarter and the year. Gross margin jumped to 31% for the quarter from 11% a year earlier, while gross margin for the year climbed to 28% from 16% in fiscal 2007.

David will discuss the contributing factors in more detail in a few minutes.

In addition to the benefits of the relocation of our manufacturing operations offshore, which are now substantially completed and which should help stabilize future profitability, let me also highlight several other key operating metrics that were noted in today’s press release.

We recorded a $1.5 million inventory write-down of finished goods on hand to reflect our current lower production costs. This will have a positive impact on future gross margins as we sell through that inventory.

Fiscal fourth quarter results also include a non-cash accelerator promotion expenses of $1.5 million to one of our customers. From a cash perspective, these credits are granted evenly over the year.

I would also like to note that full year results reflect the accrual of customs expense for cause of approximately $1.3 million, of which $80,000 was accrued in the fourth quarter. We are hopeful that this expense will be reversed upon a successful resolution of a pending customs review of our position regarding the potential exposure related to the omission of certain cost elements in the appraised value of used alternators and starters, which were remanufactured in Malaysia and returned to the United States since June of 2002.

Aside from the points just noted, fiscal 2008 was a significant year for us in many other respects. We changed our entire operating model to an offshore global one, reducing costs and expanding the company’s global capabilities. This also included a number of other initiatives, including the completion of a $40 million private placement to strengthen the company’s balance sheet and facilitate the company’s successful transition to our offshore manufacturing model.

Our NASDAQ listing was also an important accomplishment in fiscal 2008. In addition, there were various promotions within the company’s senior operating management team, as well as the finance department, which we announced in the third quarter, as well as enhancements in our internal control and board enhancements.

We added Scott Adelson, a senior managing director and global co-head of corporate finance for Houlihan Lokey to our board and recently announced the appointment of Duane Miller, a former senior GM executive, as a director.

We received a clean opinion on our internal controls over financial reporting and in addition, the transition to our new audit firm, Ernst & Young, has gone smoothly. All of these represent important developments in the company’s repositioning for the future with a globally competitive model.

Several other events during the past year are worth highlighting. We successfully extended an exclusive three-year extension of a supply contract for new and remanufactured alternators and starters from a major automotive retailer, with estimated aggregate sales of approximately $50 million. We were also successful in sub-leasing and closing our distribution facility in the national region, with an estimated reduction of future expenses on an annualized basis of approximately $1.6 million.

On May 31, 2008, we returned to our landlord approximately 80,000 square feet, or 35% of the total space at our Torrance facility. This will save us approximately $500,000 in annual rent expenses, along with the corresponding overhead and incidental costs, all accounting for significant savings opportunity for the future.

On the acquisition front, we completed as you know an acquisition subsequent to fiscal year-end of certain assets of a privately held company engaged in the production of remanufactured alternators and starters. This acquisition adds a group of premier customers and provides a product line expansion with the addition of heavy duty and industrial applications. We expect to pursue these new business channels aggressively as possible this year.

We believe our strong financial foundation, coupled with a cost effective off-shore manufacturing operation, will enable us to capitalize on other accretive opportunities moving forward.

Let me just say a few additional words about sales while we are talking about sales growth. Sales in fiscal 2007 included net sales of $11.7 million associated with the discontinuation in August 2006 of the company’s pay-on-scan arrangement with an automotive retailer. Excluding this $11.7 million of net sales in fiscal 2007, net sales for the fiscal 2008 would have increased by $8.7 million, or 7% on a year-over-year basis.

We continue to believe that certain economic conditions support favorable trends within the automobile after-market industry and support demand for our products. As consumers delay new car purchases and hold on to their vehicles longer, the opportunity for replacement parts will continue to grow.

As I noted in the call last quarter and in recent conferences, the average age of vehicles today is 9.4 years. Once vehicles reach the four to seven year age group, demand for replacement parts climbs dramatically. What’s important to understand is that they double when they enter the eight to 11 year group, and then almost double again once the vehicles are more than 12 years old. It is also worth mentioning that today there are approximately 49 million vehicles within the eight to 11 year old age group. There are 60 million vehicles registered today that will enter the eight to 11 year group during the next three years, a growth of high replacement opportunity vehicles of in excess of 22%, and registered vehicles within the more than 12 year old category are expected to also climb significantly during this period as people like to continue to hold on to their vehicles

So this is obviously good for our business future and that of our customers. In some respects, it makes us recession resistant. The ongoing rising oil prices may cause consumers to cut back on driving, which could result in some deferred maintenance and sales fluctuations. However, we still believe that in numerous parts of the country, miles driven have not declined.

As we have said in the past, the company does not lose a sale; rather, sales are deferred if part failure is pushed out.

Let me take a moment to talk a bit about our strategic initiatives concerning further cost reductions. In addition to the offshore manufacturing and the successful transition of our core sorting and material receiving to non-domestic facilities, we are now packing a substantial majority of our requirements in our offshore locations. Equally significant, we have commenced shipping, and this is subsequent to year-end, directly from Mexico to one of our leading customers.

All of these developments will contribute to gross margin enhancements moving forward. This clearly is a competitive advantage and greatly enhances our leadership position within our consolidating industry.

David will now discuss our financials and we will then open the call to any questions you may have.

David Lee

Thank you, Selwyn. As announced this morning, net sales in the fourth quarter of fiscal 2008 were $35.9 million, compared with $31.4 million in the same quarter last year, representing an increase of 14.3%, as Selwyn mentioned earlier. Gross profit in the quarter increased more then three-fold to $11.3 million, or 31.4% of sales from $3.3 million, or 10.6% of sales in the same quarter of fiscal 2007.

The increase in the gross margin was due to the lower manufacturing costs resulting from improvements in manufacturing efficiencies at our Mexican facility, as Selwyn noted. The gross profit for the quarter was impacted by the $1.5 million write-down of inventory due to lower production costs. Despite the write-down, which negatively affected our gross margin, it certainly is encouraging that our current production costs are less than the costs we incurred to produce our finished goods inventory. This is a result of the fact that our initiatives offshore are continuing to pay off.

We look at a trailing 12-month average on our standard costs to value our inventory at the lower of cost to our market. Excluding the inventory write-down, gross margin would have been approximately 36% for the quarter.

General and administrative expenses decreased 21.7% to $4.7 million from $6 million a year ago. This reduction was due primarily to a decrease in Sarbanes-Oxley compliance costs of $870,000 in the fiscal 2008 fourth quarter, and a $211,000 net realized gain recorded from the redemption of short-term investments for the payment of deferred compensation liabilities in the fourth quarter of fiscal 2008.

Sales and marketing expenses decreased $270,000 to $906,000 from $1,176,000 in the same quarter of fiscal 2007.

Operating income during the fiscal fourth quarter was $5.3 million, up from an operating loss of $4.2 million a year ago. The company considers the impact of non-cash expense items on its fourth quarter operating results, including the inventory write-down of $1.5 million, FASB-123R stock compensation expense of $196,000, and in this quarter our non-cash promotion expense of $1.5 million. In addition, depreciation for the fourth quarter was approximately $650,000.

Net of interest income, interest expense for the quarter was $1 million, down from $1.9 million in the prior year. This was primarily attributable to a decrease in the average outstanding balance in our line of credit and a decrease in short-term interest rates. For the fourth quarter of fiscal 2008, net income was $2.7 million, or $0.22 per diluted share, compared with a net loss of $2.6 million, or $0.32 per diluted share in the fourth quarter of 2007.

Total shares outstanding in the fiscal fourth quarter 2008 included approximately 4 million additional shares related to our private placement in May 2007. At March 31, 2008, our balance sheet at $1.9 million in cash, $6.9 million in working capital, and $141.4 million total assets. At year-end, we had no borrowings on our line of credit, leaving $31.9 million available after reflecting outstanding letters of credit.

Shareholders’ equity was $91.9 million at March 31, 2008.

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

Selwyn Joffe

Thanks, David. As I mentioned on last quarter’s call, we are actively seeking new business and are optimistic about our growth opportunities. But we are cautious that we only to take advantage of these opportunities if the are profitable, priced right to reflect increased commodity prices, and provide a fair return to our shareholders. We continue to remain optimistic about our prospects for expanding the company’s presence in both the do-it-yourself and the do-it-for-me markets. In the professional installer market, we continue to make inroads by leveraging our quality built brand name. As our retail customers focus on expanding their professional installer sales, we look forward to the greater growth opportunities we expect to experience alongside them.

Given Motorcar Parts’ strong customer relations and reputation as a value-added supplier, we believe we are in an excellent position to benefit from our customers’ efforts to expand their share of the rotating electrical market and to increase market share for new customer additions.

In summary, long-term market statistics for our industry are favorable though there continue to be some deferred maintenance trends that the after-market industry is experiencing. Overall we see an expanding pool of older vehicles on the road and we should experience growth in our sales as a result of this.

Despite recent reports that certain retail automotive outlets are experiencing some sales softness for discretionary products in this challenging economy, our products are not discretionary and sales of our products are somewhat immune to the current economic situation. We do believe, however, that lower miles driven will cause deferral of replacement rates. The industry continues to undergo consolidation and Motorcar Parts is clearly in an ideal position to capture the opportunities available in the market. We have nominal leverage and an increasingly favorable operating structure, which places the company in a strong position to pursue growth strategies that enhance shareholder value.

I appreciate your interest in the company and I am happy to answer any questions you may have.

Question-and-Answer Session

 

Operator

(Operator Instructions) We’ll take our first question from Mitchell Sachs with Grand Slam.

Mitchell Sachs - Grand Slam

Congratulations on a nice quarter. I wanted to just sort of walk through EBITDA for the fourth quarter and for this last year, this last fiscal year. So for the fourth quarter if I calculate it right, it comes to a $9 million number, using your release. Is that correct?

Selwyn Joffe

The detail of the way we come to this number is we have adjusted for both The Pep Boys and the inventory write-down. That’s about $3.1 million, and then we have about $200,000 from 123R stock compensation expense, non-cash, and the depreciation of $677,000, so we end up with about $9.2 million in adjusted EBITDA.

Mitchell Sachs - Grand Slam

Okay. And can you do the same thing for me for the year, for the fiscal year?

Selwyn Joffe

I’m going to give it to David. Do you want to do that?

David Lee

Sure.

Selwyn Joffe

It’s much more of a tongue-twister.

David Lee

For the year, reported operating income is $12.75 million and depreciation is $2.4 million, so to that, to cost of goods sold we have our standard inventory write-down of $3.2 million and we have customs accrual of $1.4 million. So the items affecting cost of goods sold totals $4.6 million. In G&A, we have stock compensation expense of $1.1 million, and we include other costs such as severance in connection with the offshore transition. That was approximately $800,000. We have also costs for restatements, as well as NASDAQ listing related costs. That amounted to approximately $250,000 combined. We have Laverne distribution warehouse closure costs. In the third quarter, we closed our Laverne, Tennessee distribution warehouse. That was approximately $110,000. We also experienced costs to change over our auditors, as well as legal fees related to the customs. And finally, we have a cost incurred with the SEC comment letter. Those last three items, the auditor change, customs related legal fees, and well as the SEC comment letter costs, is approximately $260,000.

So the total G&A adjustments we’re looking at was about $2.5 million, so combined with the cost of goods sold of $4.6 million and G&A of 2.5, we’re looking at operating income of approximately $19.9 million, adding depreciation of approximately $2.4 million, to get to EBITDA approximately $22.3 million.

Mitchell Sachs - Grand Slam

In your 10-K, it looks like G&A is about $3 million. Is it using a lower number?

David Lee

In the cash low statement, you will see that we have two lines that really affect depreciation and amortization and you have --

Mitchell Sachs - Grand Slam

There’s a negative. I see it. Okay. And then -- okay, so then for this year, you previously talked about doing $35 million in EBITDA for fiscal ’09. Is that still in the ballgame?

Selwyn Joffe

Yeah, and I think I just want to clarify that takes into account adjusted for the inventory write-downs and other non-cash expenses.

Mitchell Sachs - Grand Slam

Okay. And then in terms of revenue growth, you’ve got a 150 number that you put out in your release. I think you talked about the acquisition as adding roughly $6 million, so basically you are looking for $11 million of organic growth then roughly? Is that a fair number?

Selwyn Joffe

That’s a fair number. I mean, that will be -- there may be another acquisition or two small ones which would change that number, but we expect to add, you know, separate from the acquisitions we expect to add new business of around $11 million, $12 million.

Mitchell Sachs - Grand Slam

Okay. And then could you talk a little bit about how commodity prices are impacting your business? I mean, you must consume I’m sure some of the metals that go into remanufacturing. Can you just talk about that a little bit?

Selwyn Joffe

Yeah. Clearly we’ve seen dramatic increases in copper prices, dramatic increases in aluminum and steel, and the two-fold discussion really is for those who manufacture new product, mostly the Chinese imports, they are becoming less competitive because the cost of metal has gone up significantly. For us in the reman business, predominantly the reman business, certainly as we replaced components our material costs has gone up. I think we are cognizant in making sure that our pricing needs to reflect this and with our greatly enhanced operating structure, we’ve been able to absorb it fairly efficiently.

And so -- but that’s something we need to keep an eye on.

Mitchell Sachs - Grand Slam

Is your competition doing anything in terms of price increases due to commodities?

Selwyn Joffe

I think that the general market is looking at price increases due to commodities. I definitely think that we will see some inflation relative to that in pricing. Our competitors seem to be moving in that direction. You’ve also got the incremental cost of freight and freight surcharges, which I assume need to be passed on to the consumer at some point.

Mitchell Sachs - Grand Slam

And just a final question before I step back into the queue; can you talk a little bit about your quarters? I mean, you had some lumpy quarters in fiscal ’08. How do I think about it in fiscal ’09?

Selwyn Joffe

I think, Mitch, one of the things that -- I think that’s a very good question, especially in light of the fuel prices and the fluctuation. As prices of fuel go up, we see these little spikes in the downturn of miles being driven and then it comes back up. We expect to see fluctuating quarters. This is not going to be an even year in terms of quarters. And while they are going to be fluctuating, we are confident that we can accomplish our year-end number. But I think that the public should be cognizant that this is just not flat, you know, smooth sailing through this economy.

Mitchell Sachs - Grand Slam

Thanks a lot, guys. Appreciate it.

Operator

We’ll move next to Steve Emerson with Emerson Investing Group.

Steve Emerson - Emerson Investing Group

I would like to compliment both management and the prior caller.

Selwyn Joffe

Oh, yeah, he did a good job answering questions. Thank you.

Steve Emerson - Emerson Investing Group

The $19 million for last year EBITDA, can you perhaps just total the extraordinary items on top of that that won’t be expenses this year? For instance, of the $1 million increase in auditor fees, how much lower will that be this year?

Selwyn Joffe

Let me try and take a stab at what David outlined for these adjustments in terms of non-recurring, and I’ll start with the COGS analysis which he broke down into two components. One was our standard inventory write-down and our customs accrual. We certainly don’t believe the customs accrual for $1.4 million will occur and I personally am optimistic that we should have favorable outcome to the resolution on customs.

Steve Emerson - Emerson Investing Group

So 1.4, we should use a range of zero to 1.4 for the coming year?

Selwyn Joffe

I would think again, in my mind, and this is not resolved yet, but it should be zero.

Steve Emerson - Emerson Investing Group

Okay, excellent.

Selwyn Joffe

And then on the standard inventory valuation write-down, that’s sort of a little bit of a trick question because we do believe that we will continue to have some declining costs in our production, so we may see another $3 million over the next 12 months in reduced inventory write-down, which would be good news for us because that means we’re furthering our efforts in reducing our costs.

On the 123 stock option compensation, I think that will be recurring, even though it’s non-cash. It will be recurring. We will have some severance still. We’ve still got people that will need to be laid off, so we still do have some severance that we would -- but it will not be this significant. I think it will be 25% of this.

Steve Emerson - Emerson Investing Group

Okay.

Selwyn Joffe

So from $800,000 down to $200,000.

Steve Emerson - Emerson Investing Group

Excellent.

Selwyn Joffe

On restatements, with $144,000, we certainly do not expect to have anymore restatements and we already are listed on NASDAQ so we don’t expect to have application fees for NASDAQ again. We’ve closed down our distribution warehouse in Tennessee, so we don’t expect that to be recurring. Our auditor transition costs, certainly we’re very happy with our auditors at this point in time and do not expect any changes there.

Steve Emerson - Emerson Investing Group

How much do we save of the million dollar increase?

Selwyn Joffe

So in total -- in total -- no, there’s no -- it’s actually a million dollar decline going forward in total fees. So we expect to save just of the one-time that we announced, that would be -- just give me one second; of $1.4 million I think of the one-time amounts would $1 million at least -- a million of it, at least a million of it.

Steve Emerson - Emerson Investing Group

What I’m trying to get at is the $19 million EBITDA plus extraordinaries that are not going to continue, give us what adjusted EBITDA for the last year?

Selwyn Joffe

I think you could add at least $2.5 million back to that number.

Steve Emerson - Emerson Investing Group

Excellent. Now trying to elaborate on the last questioner’s sales issues, what is a reasonable way to look at the market, or per unit? In other words, if we’re going to get $11 million of organic growth, how much of that would you guess is price, how much of that is real unit growth or are we looking at a real unit decline if miles driven is going to decline a few percent?

Selwyn Joffe

We’re expecting to get real unit growth through the acquisition of new customers, both through acquisitions and through just organic new customers coming on board. And so the pricing is relatively flat. I think we should hopefully see a little price accretion through just the fact that the most later model applications are higher priced than early model applications, and so I think the majority of our growth that we’ve outlined is new unit growth.

Steve Emerson - Emerson Investing Group

Okay. New unit growth is -- I’m trying to figure out a baseline, something equivalent to same-store sales. In other words, let’s say where you are fully utilized by a customer and you’re their sole source, are sales per customer going down 2%, flat, or going up?

Selwyn Joffe

I think sales per customer are in the 2% accretion range.

Steve Emerson - Emerson Investing Group

Okay, and that --

Selwyn Joffe

And the rest would then be units.

Steve Emerson - Emerson Investing Group

And that would assume a 3% decline in miles driven?

Selwyn Joffe

And that assumes -- that is correct.

Steve Emerson - Emerson Investing Group

Something like that.

Selwyn Joffe

About that. The reason I say that is because our customers are not only selling to their existing customer base but they are growing their reach by reaching into the professional installer market. So we think their market share will go up, even though --

Steve Emerson - Emerson Investing Group

Okay.

Selwyn Joffe

-- purchases in total may not be growing that fast.

Steve Emerson - Emerson Investing Group

Of that growth that you are seeing, how much of it is from the professional market versus your traditional DIY, DYI customer? In other words, we’ve discussed this on previous calls. That’s excellent growth in the face of declining miles, so obviously your, as you just said, your professional market is growing very rapidly but maybe you could somehow quantify it or what percent is professional end market versus retail, last year, this year?

Selwyn Joffe

I would say that the vast majority, and I don’t have a defined percent, Steve. I can get back to you on that but the vast majority of our anticipated growth, whether it be through the retailer or through our traditional sales effort, will be in the professional installer market.

Steve Emerson - Emerson Investing Group

And would you guess that’s a quarter of your sales now or how -- in your opinion, what -- about how big is it for you?

Selwyn Joffe

Let me give that some thought for a second. I would say that 30% of our sales are today professional installer.

Steve Emerson - Emerson Investing Group

And how would that compare to a year ago? How quickly is that growing?

Selwyn Joffe

It’s up dramatically. Compared to a few years ago it was zero, so I mean that’s -- that sort of puts it into perspective. I'm not sure exactly what a year ago was but it continues to grow.

Steve Emerson - Emerson Investing Group

So it’s around a 10-point per year increment? Is that 30% of your revs growing at 30% or 25% or what?

Selwyn Joffe

That percentage of our revenues is growing at -- we expect to add on that 30%, we expect to add at least 10% to 15% minimum on that base, and maybe higher.

Steve Emerson - Emerson Investing Group

Well, I consider this excellent and I congratulate you.

Selwyn Joffe

Great. And I think the other thing to add is that we are now positioned to expand our channels into the heavy duty business, and so that overlaps a little with both the do-it-yourself and the professional installer market, and we intend to pick up some market share in the heavy duty agricultural industrial segment as well.

Steve Emerson - Emerson Investing Group

Well, I am looking forward to the day when I can call Motorcar Parts of America a low PE AG play.

Selwyn Joffe

Good.

Steve Emerson - Emerson Investing Group

Thank you very much.

Operator

(Operator Instructions) We’ll move to Irwin [Friedman], a private investor.

Irwin Friedman - Private Investor

Congratulations, Mr. Joffe and the team. A great job. My questions have been answered.

Selwyn Joffe

Okay. Well, that was easy but thank you for the congratulations.

Operator

Thank you. We’ll move on to Richard Hoss with Roth Capital Partners.

Richard Hoss - Roth Capital Partners

A couple of questions here; David, if you can remind me what was last quarter’s write-down and of that, how much of that positively benefited gross margins for this quarter? And am I looking at that correctly?

David Lee

In the third quarter, the inventory write-down was $1.1 million.

Richard Hoss - Roth Capital Partners

Okay. And would we have seen that positively impact the fourth quarter gross margins?

David Lee

Yes.

Selwyn Joffe

You would see that but you would see it based on the number of turns, so if we are turning our inventory at four times, 25% of that cost would be showing up -- of that cost reduction would be showing up in the gross margin, I believe.

Richard Hoss - Roth Capital Partners

Okay, so stripping out the effect of that write-down, the gross margin, we’re still very, very solid for the quarter.

David Lee

Yes.

Richard Hoss - Roth Capital Partners

Okay. And then as far as the acquisition, when does that start to contribute?

Selwyn Joffe

Now. I mean, I think this -- we’ve basically gone through the complete transition on the acquisition. There will be some transition costs reflected in this quarter but it took us basically 30 days to fully integrate the entire acquisition.

Richard Hoss - Roth Capital Partners

Okay, so that $6 million annualized run-rate should be reflected in the second quarter then, fully reflected in the second quarter?

Selwyn Joffe

In the second quarter, correct.

Richard Hoss - Roth Capital Partners

Okay. How much are you seeing price concessions, or additional price concessions from retailers? Any pressure there?

Selwyn Joffe

There’s continued pressure from the retailers on price concessions but I think the market is moving in the other direction. I think it’s coming to a point in time where the reality of increased costs are being portrayed by the supply chain, not only us but by our competitors and that this is a non-discretionary item and really the consumer’s got to pay for what the item really costs. So while there are pricing pressures, I do believe that we are in the trough of that and that the industry needs to start seeing some price increases.

Richard Hoss - Roth Capital Partners

Okay. And then as far as the existing capacity of the Mexican facility, I guess based on the current conditions, how much additional capacity is there that can be utilized? In other words, what sort of a revenue run-rate that you could still integrate in there without having to spend too much?

Selwyn Joffe

Well, I would tell you that our biggest challenge today is that we don’t have enough volume to run through our plans. We certainly believe that we are running -- we think the Mexico capacity right now is utilized at maybe 50% and in addition to that, we have excess capacity in our Malaysia facilities as well.

Richard Hoss - Roth Capital Partners

Okay, so you could easily get say $300 million through your existing facilities.

Selwyn Joffe

Yeah, nothing is easy but I think we could get that through.

Richard Hoss - Roth Capital Partners

Okay. And then -- okay, and then last question, the G&A level for this quarter, I know there’s a lot of one-timers and things go up and down -- 4.7, do we see that as the run-rate?

David Lee

Currently we do. We are always looking at our costs and looking for opportunities for savings and we do have two locations here in Torrance as well as Mexico and looking to maximize the efficiencies.

Selwyn Joffe

One other proviso to that is that I believe we will be spending a little more on the sales and marketing effort to launch the heavy duty program. I think it will become accretive almost within a six month period, but yes, other than -- I just wanted to add that on to David’s answer.

Richard Hoss - Roth Capital Partners

Okay. So I guess looking at it from the full year, similar to what we saw in ’08 as a whole?

David Lee

Our efforts as we continue throughout the year is looking to reduce costs, absolutely.

Richard Hoss - Roth Capital Partners

Okay, so we’ll look to come down a little bit?

David Lee

Yes.

Richard Hoss - Roth Capital Partners

Okay, perfect. All right. Thank you very much, guys.

Operator

(Operator Instructions) We’ll move to Mitchell Sachs with Grand Slam.

Mitchell Sachs - Grand Slam

I’ve got a follow-up question on the heavy duty; can you quantify roughly for me how big that market is, what kind of market share you currently have in the market, what you need to do to capture material share there?

Selwyn Joffe

Right. You know, that’s a very good question, Mitch. No research group that I’ve seen has been able to really specifically quantify the size of the market. The estimates that I’ve seen have been in the $600 million range. We have insignificant market share. I mean, we just made one small acquisition. We have a very small customer base in that area right now. We feel we have great capability in this area. We feel like we are able to compete effectively on cost at this point in that area and so where we can get to in the short-term, I’m not sure but I think we can make it accretive very quickly. And I think there’s a lot of revenue opportunity as time goes on in that category.

Mitchell Sachs - Grand Slam

Does this get produced out of Mexico or Malaysia or where?

Selwyn Joffe

Combined. Everything we do is capable of being produced in either location.

Mitchell Sachs - Grand Slam

And heavy duty, so that would be -- you said agriculture and what else falls into that category?

Selwyn Joffe

Heavy duty is also a word that is used differently in the industry a lot. I mean, when we talk about heavy duty, we are talking about anything that’s higher than a light truck, heavier than a light truck and then also including industrial, agricultural, and marine applications. So that would be forklifts, boats, you know, international harvester type equipment for farming and all those types of applications.

Mitchell Sachs - Grand Slam

And the customers for buying -- the professional store customers who are buying this equipment, is it the same customers you are selling to now for the light application?

Selwyn Joffe

It’s the same -- there is an overlap but there is a separate distribution channel as well.

Mitchell Sachs - Grand Slam

Okay, so you can only leverage some of your relationships then?

Selwyn Joffe

Yeah, yeah, but the leverage with the existing relationships is enough to get us going in a nice positive manner and then we would expand our channels into the more focused heavy duty distribution channels.

Mitchell Sachs - Grand Slam

Okay. Thanks very much, appreciate it.

Operator

We have a question from Frank [Kristina] with Micro Capital.

Frank Kristina - Micro Capital

Yes, thank you. Many of the questions have been answered. I did want to clarify -- the inventory write-downs have a negative affect on your gross margin, correct?

David Lee

The inventory write-down negatively impacts the reported margin for the quarter.

Frank Kristina - Micro Capital

Right, so -- I just want to make sure -- so if we were to strip that out, that $1.5 million, your ongoing gross margin was closer to like 36%.

David Lee

Correct.

Frank Kristina - Micro Capital

Okay. Excellent. Congratulations, guys. Great quarter.

Operator

It appears we have no further questions in our queue at this time. I will turn the call back over to Mr. Joffe for any additional or closing remarks.

Selwyn Joffe

Well, I wanted to thank everybody. I know people were waiting in anticipation of this quarter. I wanted to thank everybody for signing in to listen to our conference call and we will be actively communicating with the street as we continue through the year, and I think you all once again.

Operator

This does conclude our conference call for today. We do thank everyone for their participation.

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