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

F1Q09 Earnings Call

August 11, 2008 12:00 pm ET

Executives

Gary S. Maier - Maier & Company, Inc

Selwyn Joffe - Chairman, President, Chief Executive Officer

David Lee - Chief Financial Officer

.

Analysts

Mitchell Sachs - Grand Slam

Richard Hoss - Roth Capital Partners

Dimitri Cornasofskia - First Wilshire

Seth W. Hamot - RRH

Rod Cerney - McCarthy

[Bob Sails] – Capital Management

Operator

Welcome to the Motorcar Parts of America fiscal 2009 first quarter conference call. (Operator Instructions) At this time for opening remarks I’d like to turn the program over to Gary Maier.

Gary Maier

Before we begin, and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer, and David Lee, the company’s Chief Financial Officer, 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.

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, please refer to the various filings with the Securities and Exchange Commission. With that said, we’d like to begin the call, and I’ll turn the call over to Selwyn.

Selwyn Joffe

I appreciate everybody joining us today for our fiscal 2009 first quarter conference call. As highlighted in today’s financial release, the momentum from year-end has continued in the first quarter and the company’s of to an excellent start for its fiscal year, with some solid earnings performance and solid metrics. While sales performance was not as robust as we would have liked, we are nonetheless encourage by our overall success in the challenging environment.

As I noted during our year-end call, we are very focused on the top line sales growth and believe there are numerous opportunities to enhance the company’s market position, both organically and through acquisitions. Our operations in Mexico are performing very well and can easily absorb additional business and enhance margins. Our gross profit climbed 12.5% as highlighted in this morning’s release, with gross margin jumping to 35.1% for the quarter, from 28.8% a year earlier. David will discuss the contributing factors in more detail in a few minutes.

We recorded a $1.3 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 first quarter results also reflect the reversal of an accrual of customs expense for cause of approximately $1.3 million, and this is based on the successful resolution of a customs review of certain cost elements in the appraised value of used alternators and starters, which were remanufactured in our Malaysia facilities and returned to the United States since June of 2002.

We continued 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, which is happening in the marketplace and hold on to their vehicles longer the replacement of parts becomes more essential. As I’ve noted in recent conference calls and for the benefit of new shareholders the average age of vehicles today’s 9.4 years.

Once vehicles reach the four to seven year age group, the demand for replacement parts climbs dramatically. They double when they enter the 8 to 11 year group and then almost double again once the vehicles are more than 12 years old. Today there are approximately 49 million vehicles within the 8 to 11 year old age group. There are 60 million vehicles registered, that will enter the 8 to 11 year group during the next three years.

A growth of this high replacement opportunity vehicles of 22%, and are compounded with that 22% when it accelerate its replacement rate by 50%, and registered vehicles within the more than 12 year old category are expected to also climb significantly during this period.

So this is obviously good for our business and that of our customers. We would like to stress that in some respects, it makes us recession resistant. The rise in oil prices appears to have cause consumers in certain parts of the country to cut back on driving, which could result in some deferred maintenance and sales fluctuations. However, we still believe that numerous parts of the country, miles driven has not declined and as we have said in the past, the company will not lose a sale but rather sales are deferred if the part failure is pushed out.

So, let me take a moment know to talk a bit about our strategic initiatives, lets first talk about our initiative for sales growth. Despite of our first quarter sales decline our organic business continues to strengthen. We suffered from some timing on shipment of new orders versus recognition of returns. In addition because shipments are coming from our Mexico plant now, we have deferred some revenue recognition to allow for the extra time it takes for the products to reach our customers.

Overall we continue to see the demand grow with our existing customers. In addition we are expanding our offerings in the new heavy-duty business and the outlook for sales in our business looks very good at this point in time.

Our prospects for new business overall are very existing. We expect to begin shipping new customer business with approximately $10 million of annualized revenue by the third quarter. We have additional business opportunities and discussion that are far along in the progress. We have and will continue to build to a lesser extent, inventory find new business. In addition we are planning for the future with our initiatives in new technologies. I will reiterate that we are being careful to be prudent in the new business we pursue and cognizant of maintaining our pricing and terms in this increasingly, costly business environment.

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 Mexico. Equally significantly we have commenced shipping during the first quarter directly from Mexico to many of our leading customers in the United States. All of these developments will contribute to cost saving moving forward. This clearly is a competitive advantage and greatly enhances our leadership position within our consolidating industry.

One point that I failed to make in the earlier discussion on sales is that we have not recognize the full impact for the first quarter of the recent acquisition that we made. We only experienced one month of sales form that.

David will now discuss our financials and then we will then open up the call, I have some comments and then we’ll open the call for some questions.

David Lee

As announced this morning, net income climbed sharply to $3 million or $0.25 per diluted share compared with $1.6 million or $0.16 per diluted share a year earlier. As Selwyn alluded, to these results include a $1.3 million onetime cost recovery associated with the reversal of the customs duties accrual and an inventory write-down of $1.3 million.

Net sales in the first quarter of fiscal 2009 were $32.7 million, compared with $35.4 million in the same quarter last year, reflecting the impact of customers purchasing and return pattern.

Gross profit in the quarter increased 12.5%, to $11.3 million or 35.1% of sales from $10.2 million or 28.8% of sales in the same quarter of fiscal 2008. The increase in the gross margin was due to the lower manufacturing cost resulting from the improvements and manufacturing efficiencies and the reversal of the customs duties accrual in the quarter.

The gross profit for the quarter was also impacted by the $1.3 million write-down of inventory due to a lower production cost. This number is determined by looking at a trailing 12-month average on our standard costs to value our inventory at the lower cost or market. Excluding the inventory write-down and the reversal of the customs duties accrual, gross margin would have been 35.1% for the quarter, which is the same as the reported gross margins.

General and administrative expenses decreased 12.2% to $4.2 million from $4.8 million a year ago. This reduction was due primarily to decrease severance and other related expenses, and the decreased audit and other professional services fees.

Sales and marketing expenses increased $83,000 to $1.0 million from $929,000 in the same quarter of fiscal 2008. Research and development expenses increased 187,000 to 462,000 from 275,000 in the same quarter of fiscal 2008.

Operating income during the fiscal first quarter was $5.8 million, up from $4.2 million a year ago. In evaluating operating performance the company considers the impact of non-cash expense items on its first quarter operations, including the inventory write downs of $1.3 million and FAS 123R stock compensation expense of $229,000. In addition depreciation, amortization for the quarter was approximately 662,000.

Net of interest income, interest expense for the quarter was $818,000 down from $1.6 million in the prior year. This was attributable to a lower balance of receivables being factored, decrease in the average outstanding balance on our line of credit and decrease in short term interest rate.

As of June 30, 2008 our balance sheet had 354,000 in cash, $5.3 million in working capital, $153.8 million in total assets and $10.75 million in borrowings under our line of credit, leaving $21.3 million available after reflecting outstanding letters of credit.

During the quarter short term borrowings under our line of credit were used to pay down our accounts payable balances, acquirer certain assets of AIM and offset certain customer accounts receivables, which are no longer being factored. Shareholder’s equity was $94.7 million at June 30, ’08.

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

Just in summary, as I mentioned that at fiscal year end and previously in this call we are actively seeking new business and growth opportunities, but only if these opportunities are profitable, priced right to reflect increased commodity prices and that provides 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. Our acquisition is on track with expectations and 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’ a strong customer relationship 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 from 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 expect to experience growth in our sales as a result.

Although, recent reports indicate 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 some 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 Motorcar Parts and I will be happy to answer along with David any questions that you may have.

At this point we’d like to open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mitchell Sachs - Grand Slam.

Mitchell Sachs - Grand Slam

I’ve got a couple questions on the revenue both for the quarter and going forward, I was just trying to keep up with the information. You mentioned, I think David that there was a deferral revenue because you are now shipping from Mexico? What impact did that have in the quarter?

David Lee

Well, the lead times will treat Mexico and our customers because of the board are slightly enhanced and so our revenue recognition policies from certain of our customers where we handle freight we only recognize revenue once they receive them and we’re looking at probably 500,000; 600,000; 700,000 compared to last quarter, but compared to a quarter or a year ago that compared the last quarter greater - probably 25% to 30% greater than that.

Mitchell Sachs - Grand Slam

Is that a recurring going forward or is that just a one time?

David Lee

Well, it will depend again. One of the things that affect our revenue Mitch is the timing of the orders. So, if we have big orders towards the end of the quarter, those generally will be recognized in the next quarter. So, we expect sequentially growing quarters, each quarter right now. I can tell you that our customers are doing well for their registers and we see that data and we are starting to accumulate orders and we’re comfortable with our revenue guidance, that 600 and a $100 million to $50 million right now.

Mitchell Sachs - Grand Slam

I thought I heard you say you have a new account of the $10 million or account that starts in Q3 is that calendar Q3 or fiscal Q3?

David Lee

Fiscal, Q3, so, yes and that again we’re not releasing any details of that account; it may represent one it may represent more and I’m sorry for that being vague but we don’t want to release any details until we actually ship, but we do have agreements in place and we expect to at the latest begin shipping that by Q3, and we also expect to sign up other additional business as we continue on along the road. We continue to be successful in our do-it-yourself business and we’ve signed up customer way that smaller customers and that will add out and in addition to that as I mentioned early in the call have not recognized we only had one month of the acquisition revenue in the first quarter.

Mitchell Sachs - Grand Slam

And what annual run rate was that business running at?

David Lee

It’s about $6 million, and we expect to build that.

Mitchell Sachs - Grand Slam

Can you will me a little in the inventory build? Can you just go through about the rational in that and how that runs through?

David Lee

First of all we wanted to make sure that we completed all our transition into Mexico and the way to do that was even though we had a little bit of softness in revenue demand of the last six months or even a year, we were building into a production metric and in conjunction with that our strategy was to build our market share, to absorb that production and we’re now see that come in to effect.

We do expect to see a small, continually small build for the next quarter or two, because of the launch of some new heavy-duty business that we will be taking on and then we expect it to normalize. In addition to that we’ve built some inventory because of the acquisition and we expected to go through that inventory as well.

One of the good things in our industry is that that inventory does turn to cash and it’s very little obsolescence and there is some benefit in having inventory available to grow your business, and it can.

Mitchell Sachs - Grand Slam

I know you mentioned in the call that you’re doing some stuff with heavy duties; is that why your R&D’s coming up a bit?

David Lee

While we do suffer heavy duty we are also very much on the cutting edge on the hybrid technology arena and our whole green movement. We had to position in our plants where we have almost no trash and we certainly are looking at alternative technologies and alternative product offerings within our distribution channels to grow our business and we are optimistic about that as well.

Mitchell Sachs - Grand Slam

On G&A, I get a very nice number; it went in the right direction. Is that number that you would expect to stay there or go up a little bit?

David Lee

It may go up a little up because again we’re getting ready to expand into some new areas, which we’ll discuss later on in the cycle of this fiscal year, but not enormously.

Operator

Your next question comes from Rick Hoss - Roth Capital Partners.

Richard Hoss - Roth Capital Partners

Gross margins were impressive this quarter is there variability or seasonality I should look or can we look at this is as a base going forward?

Selwyn Joffe

There is some variability, because to tell you the gross margins affected by few other things because that difference in our gross sales to net sales is pretty significant and sometimes gross margins are affected by timing of promotional allowances. Our operating cost metric build that we show in this quarter we feel strongly that we can continue on that cost metric and if we can build our revenue that cost metric will even come down and margins could potentially go up further, but I think the base margin is good. We may have some small fluctuation and hopefully overall increasing margin, but we don’t expect to change in our cost or our revenue or our pricing.

Richard Hoss - Roth Capital Partners

And the magnitude of inventory write-downs is that consistent?

Selwyn Joffe

I think what we’ll start seeing is some declines in inventory write-downs because we’ve gone through a lot of cost savings now we are cycling through where we are getting to, where we are competing on it. As David mentioned earlier its a trailing 12-months competition and so the trailing 12-months includes a number of months where we have a lot of production in Mexico in particular and so we’ll see a decline in the inventory write-down in the near term and then again if we can experience some good revenue growth, which we’re anticipating. We think we’ll start seeing margin expansion again and inventory cost coming down.

Richard Hoss - Roth Capital Partners

So write-downs really last a year until you lap the Mexico transaction, okay and then I noted in the Q, you said that you’re unable to factor receivables; give more detail on that?

Selwyn Joffe

Yes, we have one of our customers and again we don’t mention -- there’s a policy of against mentioning customer names. One of our customers is no longer operating their vendor factory and program and as a result of that you’ve seen some receivable growth, at the end of the day it does effect our cash situation, although the cost of that factoring is equivalent to the line of credit. So, on a net, net basis we should end up in the same place. We’re hoping that customer will reinstate their factory and program as they go down the road. In addition to that we had receivables growth, because we had such a great quarter in the fourth quarter, and so those receivables are factoring through our collection process.

Richard Hoss - Roth Capital Partners

So, the termination between allowing the factoring, does that have to do with the financial health of your vendor or what's the decision behind that?

Selwyn Joffe

Yes I think it deals with the financial perspective of the vendors and involved in some activity in the marketplace and I’ve raised a significant amount of capital and so we think it’s a great vendor, we certainly don’t think there is any issue with their receivables if that’s where you’re drive in. We think that as they settle through certain transactions that they’re taking on that, that they will reinstate the factoring program.

Operator

Your next question comes from Dimitri Cornasofskia - First Wilshire.

Dimitri Cornasofskia - First Wilshire

Could you quantify the impact of timing and return patterns on the top line?

Selwyn Joffe

What's happened is, just to speak a little generically. In the fourth quarter of last year we saw some big sales coming in from almost all of our customers. In the first quarter almost all of our customer sales were up other than one whose orders came in late in the quarter and will be shift in this quarter, so really for the most parts had the timing been different by a week or two we probably would have reported some nice gains for the quarter, we are not worried at all by the declining sales in the first quarter. We think it’s a superficial reflection of where sales are going. So, to quantify it is very difficult, but I think our organic business is on track to increase by at least 8% to 10% and acquisition revenue should increase our base by another 8% to 10%. So, we’re comfortable again and that gets us to $150 million.

Dimitri Cornasofskia - First Wilshire

So in other words we can expect for us, some of that revenue to be made up in the second quarter?

Selwyn Joffe

In this quarter, yes correct. The most important that I would observe on the revenue side is, our customers are doing a lot better through their registers and so that will impact us. We’ll start having to ship more product to them and I think there’s nice optimism in the aftermarket that the parts businesses will continue to do well despite recessionary fears in the U.S. and gas prices have declining, we’re seeing consistent declined over the last probably 60 days and as these gas prices comedown mileage goes up and cars are cars are older and we can start rubbing our hands together hopefully and enjoying potentially some new sales.

Dimitri Cornasofskia - First Wilshire

Now you said that acquisitions could have increased you revenue by 8% to 10%, is that just having these acquisitions or is there more in the works?

Selwyn Joffe

We expect to announce small acquisitions.

Dimitri Cornasofskia - First Wilshire

What are you doing right now to integrate that and what synergies to expect to realize?

Selwyn Joffe

We are in the process right now of completing our Mexico production facility for heavy duty and we have already received the nice commitment for some new business in the heavy duty arena. We’ve embellished our workforce, which we will release publicly in the near future with some great executives and we will hope to grow that business, it’s a big business.

Dimitri Cornasofskia - First Wilshire

Would the margins be higher or lower or comparable to your current business?

Selwyn Joffe

I think at this point in time they’ll probably comparable.

Dimitri Cornasofskia - First Wilshire

What CapEx should we expect incrementally from that Mexico facility?

Selwyn Joffe

Almost nothing, it’s in our CapEx, but it’s very small CapEx; to get and then most of the applications that will be adding to our product offering. We’re already capable making with our existing setup, so it’s a very nominal CapEx.

Dimitri Cornasofskia - First Wilshire

You mentioned that, your customers are doing a lot better through their registers, could you elaborate on that?

Selwyn Joffe

Yes, I think we’re in many cases involved in planning our customers’ inventories. As we do vendor managed inventories, we are able to see the flow of sales through our customer registers on a daily basis and we definitely can see additional volume going through the registers and it continuous to stick upwards now over prior period. So at the end of the day, we can measure our sales, but we are dependent on our customers moving product through their registers, so when that happens, the future for us is good.

Dimitri Cornasofskia - First Wilshire

And it’s selling at the same prices that it sold before?

Selwyn Joffe

Yes, I think pricing has been relatively stable and category prices have not gone up and they’ve not gone down. I think what you’ve seen is a lot. The main manufactures to have a great job controlling costs and have been able to whether some price increases because of the increased material costs that are out there. So, I don’t see prices going down certainly not in this environment.

Dimitri Cornasofskia - First Wilshire

On the raw materials, what percentage of your cost of goods is revenue part that you have to buy that are affected by the commodity prices?

Selwyn Joffe

I would say on a percentage it used to be a third a roll of our cost, but today its much clear because our labor component has come down dramatically, so I’d say its a greater than 50%.

Operator

Your next question comes from Seth Hamot - RRH.

Seth W. Hamot - RRH

To follow-up on a Mitch’s question he asked about SG&A and you said that it may go up a little bit. Okay, I just wanted to understand, is that going to go up as a percentage, terms of the top line or is that going to go up in whole numbers?

David Lee

What we’ve typically seen is throughout the year, the first quarter starts out with lower levels of G&A as we just ended the fiscal year and as that year progresses, G&A growth for different accruals that we make and as the business grows there will be slight increases in G&A in dollars.

Selwyn Joffe

The percentage one we think it should remain constant to us.

Seth W. Hamot – RRH

You’re expecting for modeling purposes that we should be able keep a 35% gross margin and a similar net margin?

Selwyn Joffe

Yes, now you might see some fluctuations. I would model the gross margin slightly lower, because you may see some fluctuations in the quarters of new business coming on, and then I would say that on the G&A side I would keep it relatively flat.

Seth W. Hamot - RRH

Up flat in percentage case, percentage wise?

Selwyn Joffe

Yes.

Operator

Your next question comes from Rod Cerney - McCarthy.

Rod Cerney - McCarthy

I just like you to go over a little bit more on the cost of your products, I suppose specifically some of the new raw materials you have to buy and how that’s effecting your cost structure and I think you have told me on the past, so I’m wondering that you do have some scrap help to offset that and then secondly could you go run through the EBITDA numbers for the quarter and also your EBITDA projections for the year if that has remained the same as it has in prior quarter announcements?

Selwyn Joffe

Let me start with the first one, on materials. Clearly, the price of copper and aluminum had gone up. We have been fortunate that we’re predominantly a remanufacturing companies, so the amount of copper and aluminum that we put into the product is far less than new product and that served us well because competition from China, new has become almost non-existent because they just cannot compete on price because of the material costs and not necessarily only China, but from the new market, newers have very small piece of the offering in the marketplace.

To the extent that we do have to buy new componentary, we scrap the old componentary and we were able to get a very nice price for our scrap, especially since now we are now in low labor markets, we’re able to separate the metals out so we’re able to sell the metals at good commodity prices. So, we’ve been able to hedge, our metal costs organically by recouping the scrap, the medals that we don’t using in the scrap rates.

So, for us metal has not been that big of an issue and we have a number of initiatives now to lower material costs. Our first focuses was heavily on a rename process in our labor, direct and indirect labor, now our plants operating very efficiently and we have a more seasoned labor force and we can now move to next levels of efficiency which will help us save some money or material and so I know Seth asked the questions, what you model the gross margins at, I want to be two optimistic but for modeling purposes, but we are internally optimistic that we maybe able to grow our margins.

David Lee

For the first quarter, operating income was $5.8 million and the depreciation and amortization was 660,000. So, reporting $6.46 million in EBITDA, we talked about earlier the inventory write-down was $1.3 million for the quarter as well as the reversal of the custom duties accrual was $1.3 million, so they offset, but the only add backs that we have, that we look at was the non-cash stock compensation expense of 230,000 and there was a severance expense about a 160,000 in connection with moving more positions towards down to our Mexico facilities, so approximately $400,000 add backs gives you a $6.86 million.

Selwyn Joffe

And then adjusted earnings per share would be what?

David Lee

Based on that it would be $0.27.

Rod Cerney - McCarthy

And then I think you’ve indicated in past quarters that your target for this fiscal year is in the range of $35 million of EBITDA; is that still a doable number?

Selwyn Joffe

Yes, I think the thing to make sure that we haven’t changed our story at all; we believe $35 million is doable, that is after adjusting for the inventory write downs on these non-cash expenses as well. So, we’re again we think it is going to be close, but we’re still optimistic we can hit that number. There is a lot of new business that’s coming on, that we already have circled and again it’s cumulative, we’ll see increased results there on the quarterly basis, but a lot of this we expect to see a big second half.

David Lee

And we’re in place to accomplish that.

Operator

Your next question comes from [Bob Sails] - Capital Management.

[Bob Sails] – Capital Management

Hi, can you please just walk through your available credit and the impact in the quarter of the receivables that you took on your balance sheet and then so when if you could give us and thinking on how you manage that credit given your desire to bolt on some acquisitions to the Mexican operator, to utilize the Mexican operations given the what I view to be an ongoing type credit environment.

Selwyn Joffe

We are fortunate that we have an excellent relationship with our bank. In fact, we haven’t announced this publicly, but this will be a precursor, we have increased our line of credit to $40 million as of today or yesterday; I’m not sure when it becomes effective. The bank is onboard with our strategy on acquisition and as we grow the EBITDA, we’ll be looking at carving out at some acquisition financing from the operating line of credit. At this point in time, we’re still financing the acquisitions through our working capital line, but the understanding is that if and when they became significant we would be copying out that from our working capital line.

From a cash flow perspective we obviously couldn’t expect to continue to be profitable. We haven’t had a growth and inventory and receivables. The receivable growth will continue a little bit as we hedge through one of our large customers getting rid of the factoring agreement; that’s probably a $7 million to $8 million affect on us.

The bank again is in the loop on that and understands their working capital requirement on that and so we believe that our leverage capacity is far greater than where we are at today and in addition to that we believe that while we’ll have a growth in our debt balance from an operating perspective short-term that we will quickly turn that around and start generating cash and working capital.

So, we think we’ll be able to reduce inventories, we think we’ll be able to reduce receivables, our payables levels is at a pretty stable right now. We are working on some strategies to get payables to exceed receivable in terms of returns and I think we’re making some progress down that road as well and so we feel comfortable with our liquidity position right now.

[Bob Sails] – Capital Management

How much is your availability incur, you mentioned in the call, I missed it.

David Lee

As of June 30, our borrowings underline of credit was 10.75, so after reflecting approximately $3 million under our outstanding letters of credit, there is $21.3 million available at June 30, ’08.

[Bob Sails] – Capital Management

And that was assuming the line of credit, was at what level?

Selwyn Joffe

$35 million.

[Bob Sails] – Capital Management

Then given your expectations for the second half of the year, it looks like inventory at least last year has peaked. I’m assuming that inventory peaks somewhere into the summers; do we expect this year that inventory will grow as we look towards the end of the calendar year, given the ramp in business.

Selwyn Joffe

We have two components to that inventory analysis. The first is that on our base business today. We expect that inventory is essentially has peaked. We’ll grow very normally and then comedown; grow probably from the next quarter normally and then comedown in the second half, but we are building inventory in our heavy duty. We do have some nice business that’s coming in on the heavy duty side and so we build a little bit of inventory and that build will go on for the next 180 days probably until that programs starts to fuel itself on a base inventory level.

[Bob Sails] – Capital Management

David, how much do you expect that inventory build to be roughly?

David Lee

There is many factors that contribute to the inventory balance, we’re making sure that we are managing the level, we are building based on what we planned to sell. There is a lot of contributing factors that’s going to determine the inventory balance. Of course they will want to have balances that reflect our model and not let it grow too much.

Selwyn Joffe

Yes, I think in maximizing, it should not grow more than $7 million or $8 million on a short-term basis and then start coming down.

[Bob Sails] – Capital Management

And then last question along this line. Can you describe the types of acquisitions you are looking for relative to the one you completed this quarter with respect to the amounts of cash it will consume?

Selwyn Joffe

Yes, we are clearly looking at accretive acquisitions that we can bolt on to our existing capacity. In the first acquisition we made, we were successful in transitioning that down to Mexico within matter of weeks. Our transition costs were few hundred thousand dollars to get that completed and it’s running very successfully right now. We expect to be able to make others that are similar to that, where we would leverage the time capacity, those acquisitions may artificially bump our inventory levels as we take that asset as part of these acquisitions, but we believe we can make acquisitions at under three times EBITDA, in some cases even lower than that.

[Bob Sails] – Capital Management

Selwyn, the last acquisition was a little over $4 million, is that correct?

Selwyn Joffe

Correct.

[Bob Sails] – Capital Management

What do you expect the acquisition price to be, ballpark range relative to the acquisition you made this quarter in size?

Selwyn Joffe

I’m not sure I understand the question. What would I expect? For the new acquisitions you say? Yes and again we are looking at opportunities that are tiny and then we are looking at some bigger opportunity. So, I think it will for me to give you a number because whatever is opportunistic out there that make sense for us and we make sure we don’t out strip our capital base, to the extent we can bring them in and grow market share then they are strategic and they add value quickly, if the dollar amount will be less important than the actually economic metric of that acquisition. We believe we can take them big and we can take them small, based on the model that we build for acquisitions.

Operator

Your next question is a follow-up from Rick Hoss - Roth Capital Partners.

Richard Hoss - Roth Capital Partners

I don’t know if you’d break it out, just looked at the Q, I didn’t see it. Do you break our DIY versus DIFM revenues?

Selwyn Joffe

No, we have not done that. I think we’ve given some guidance in the past as to what it is. It’s very difficult with our retailer customers, a portion of that business is the DIFM business, but excluding that analysis we assume all retailers of DIY business for sake of discussion. Our DIFM business today probably represents 30% of that business.

Operator

Your next question is a follow-up from Mitchell Sachs - Grand Slam.

Mitchell Sachs - Grand Slam

I not sure if you have talked of this before, but could you talk about heavy duty as an industry segment and how that is compare to the regular segment that your in and what the opportunities is there?

Selwyn Joffe

Yes, let me give you a few parameters, we were hoping to do much more exciting press release later on as we got further into this. It’s a little early to get into too much detail, but we think the segment itself is probably the same size as the light duty segment and we define the segment by 18 wheel trucks agricultural and industrial application, so it could be 18 wheels, could be buses, could be fire engines, could be cranes, could be trackers and all those types of things.

Again I think because we are in it, I think all of our competitors are going to jump into it, and so I’m sure it will be the same competitive scenario we are in, but we think with our cost model and our distribution base and our great sales team and all things that we putting in place that we could become a leader in this area.

Operator

We have no other question standing by.

Selwyn Joffe

And thank you everybody for joining us, and we look forward to further communication.

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