Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the <unk> parts of America fiscal 2022nd quarter results.
This time all participants on it.
Oh.
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Well now like to have the conference over to your speaker for today.
Mayer Investor Relations you may begin.
Thank you it's one of the thanks, everyone for joining us for the call today before I begin and then turn the color to show a job <unk> Chairman, President and Chief Executive Officer, David Li The Companys, Chief Financial Officer, I'd like to remind everyone of the Safe Harbor statement included in today's press release.
Private Securities Litigation Reform Act of 1995 provides the safe harbor for certain forward looking statements.
Putting statements made during today's conference call.
Such forward looking statements are based on the company's current expectations and beliefs concerning future development and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by the company actual results may differ from those projected in these forward looking statements before.
Looking statements involve significant risks and uncertainties some of which are beyond its control the company and are subject to change based on various factors.
The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.
For 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 I'd like now to turn the call overdue Selwyn Joffe heat to to begin.
Alright, Thank you Gary.
Appreciate everyone joining us today.
Before I begin I'd like to recognize and thank the grade mph team members for their ongoing commitment and excellence to servicing our customers and shareholders with outstanding performance.
It is a pleasure to receive the ongoing positive feedback from our customer base reconfirmed that the recent apex trade show last week and to see how the extraordinary efforts of the team are resulting in positive returns. Thank you.
Okay. We're excited about the results for the quarter, which highlights the benefits from the progress of our strategic initiatives. We believed that our initiatives. Once complete will result in even further upside enhancing our scalability enough financial performance.
Let me update you on the progress of the initiatives that are outlined on last quarters conference call to improve profitability.
The first thing I discussed shows that we would increase the absorption that has resulted from a newly expanded capacity.
We have made significant inroads on this initiative, we have increased the absorption of overhead that has resulted from a newly expanded distribution center by relocating and growing a hard parts business, including the launch of a new break caliper line.
Great Calipers began shipping in the middle of the second quarter.
And we have continued growth in our existing business.
As an aside we have visibility for additional new business that will result in substantial increase sales to fill the absorbed this overhead.
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The second initiative I discuss what's the relocation of operations from high cost to lower cost locations, leveraging our capacity in Mexico and Malaysia.
We have substantially completed not sure incision and John you consolidate a distribution facility in Mexico.
Yes, so two remaining facilities in Mexico, which are at various stages of completion.
We expect want to begin incremental operations enough 2020 fiscal fourth quarter.
Yeah, but by the end up the second quarter fiscal 2021.
With respect to Malaysia facility expansion has been substantially completed.
This will allow us to increase capacity and productivity for our existing product ones.
Finally, we implemented price increases, which became effective in the latter half of the second quarter.
As we entered the second half of fiscal 2020, we're well positioned to benefit from our investments for continued growth.
Our global footprint is nearing completion to support expansion across multiple nondiscretionary aftermarket hard parts further solidifying our position as a valued prime meal supply in North America.
Let me now discuss that diagnostic and testing business, which is emerging and gaining traction.
Oh, we alternate and started production test as have long been the industry standard.
A new aftermarket Benchtop test that is heading in the same direction.
Our outlook for the outlook for the bench top testing is exciting and rapidly evolving we expect significant revenue generation opportunities over the next few years.
The diagnostics market for to motivate electric vehicles on the electrification of the aerospace market is also quickly evolving.
We have received purchase orders from a number of highly respected global companies in Buffalo automotive and aerospace industries.
In addition, our strategic strategic partnerships within the space a fast evolving.
We recently announced the strategic relationship with <unk>.
This is enhanced the scope of ourselves to services relative to developing the electric powertrain for electric vehicles that will leverage dnbi. His expertise in advanced high powered automotive testing.
DMV is power amplifiers and emulate as will be available Oh parties Realtimes formulation.
Print customers greatly increased accuracy in test capabilities.
These dynamic technology is ideal for electric hybrid vehicles, they battery packs charges Invotas high voltage DC power systems.
Todd when the loop for dynamic high power sources are load emulation with real time simulation.
D.C. micro grid testing, an alternative energy systems.
And aerospace DC power systems and components.
We will decrease time to market, particularly for electric vehicle development and renewable energy systems.
We're excited to be a part of this fast evolving goes.
Overall, the company has become a major multiproduct supplier to multi American aftermarket automotive aftermarket and the lead and all of its product categories.
We're also fast expanding our presence in electric vehicle diagnostics without cutting edge offerings.
All of this represents significant value creation opportunities.
In short, we're not well positioned for sustainable growth enhanced profitability and positive cash flow from operations, which we expect in the second half of this year.
We look forward to sharing news about a milestones through the fiscal year.
Right, we remain encouraged by the outlook for current and expanding product lines and the benefits from a strategic investments to support our current and future growth.
Let me reiterate what we expect for fiscal 2020 based on the timing and completion of various initiatives and the ramp up of our new capital business.
Continued year over year sales increases.
Hi, adjusted gross margins and operating income.
Last but certainly not least positive cash flow from operations in the second half of this fiscal year.
We are maintaining our adjusted net sales guidance for fiscal year 2020 for now and the March 31st to be between 552 million in 562 million, representing between 16 and 18% growth year over year.
Adjusted gross margin for fiscal year, 2020 is expected to be approximately 27% impacted by product and that's.
As we discussed profitability I'm operating cash flow are expected to improve on a year over year basis.
Hi, Lotta overall positive outlook I refer you to investor presentation on our website, which shows a macro <unk> macro industry trends, including a charge related to the expansions with ballpark sweet spot for repairs.
We're now seeing the backend of lower new car sales from recession years in the prime parts replacement timeframe.
Actually the number of prime replacement aged vehicles is growing.
Statistics further support our companies and our industry's optimism for growth over the next several years.
I'll now turn the call over to David to review the results for the fiscal second quarter.
Thank you sell it to begin I encourage everyone to 80 8-K filed this morning with respect to our September Thirtyth 2019 earnings press release for more detailed explanations of the results, including a reconciliation of GAAP to non-GAAP financial measures and the 10-Q.
Let me take a moment to review the financial highlights for the fiscal 2022nd quarter.
Reflecting record sales for the quarter and six months.
On a reported and adjusted basis.
Net sales for the fiscal 2022nd quarter increased 17.5% to 150.4 million from what had a 27.9 million at the same period, a year earlier, reflecting sales increases for both hard parts and diagnostic products.
Terra cost pass through contributed approximately 3.6%, but the sales growth for the second quarter.
Adjusted net sales for the fiscal 2022nd quarter increased 16.4% to 151.4 million from 130.2 million a year earlier.
Gross profit for the fiscal 2022nd quarter was 36.6 million compared with 25.7 million a year earlier.
Gross profit as a percentage of net sales for the fiscal 2022nd quarter was 24.3% compared with 28.1% a year earlier.
Yes, it gross profit for the fiscal 2022nd quarter was 42.9 million compared with 36 million a year ago.
Adjusted gross profit as a percentage of adjusted net sales for the three months.
28.3% compared with 27.6% you earlier.
The results for the quarter and gross margins were primarily impacted by two items totaling 6.3 million first non cash expenses of 4 million, including a write down to 2.9 million associated with the quarterly revaluation for cores.
Thank you, Michelle and 1.1 million of amortization related to the premium for core buybacks.
It is important to recognize that even though the poor value for cores on cluster, Michelle maybe written down on our balance sheet, we are entitled to a full contractual price be fun in the event that their relationship with their customer is terminated.
Second transition costs up two point threemillion associated with the moved into the new facilities in Mexico support the company's anticipated growth.
Total operating expenses increased by 6.6 million to 21.9 million for the second quarter from 15.3 million for the prior year. This increase was impacted by.
A non cash 663000 loss for the quarter compared to what the noncash gain of 1.9 million for the prior year record is due to the change in the fair value of the Ford foreign currency exchange contracts.
Hey, noncash loss of 1.1 million due to the remeasurement of foreign currency denominated lease liabilities and 1.5 million up operating expenses attributable to our fiscal 2019 acquisitions.
Adjusted operating expenses increased by 4.1 million to 19 million for the second quarter from 14.9 million for the prior year. This increase had adjusted operating expenses was due in part to 1.6 million expenses attributable to our fiscal 2019 acquisitions.
489000 expenses in connection with our internal control remediation efforts.
At approximately 367000 that increased depreciation and amortization.
Additionally, approximately 400000 is related to increases in both personnel and infrastructure expenditures to accommodate our anticipated growth.
Operating income was 14.7 million for the fiscal 2022nd quarter compared with operating income of 10.4 million for the prior year second quarter.
Adjusted operating income was 23.9 million for the second quarter compared with 21.1 million for the prior year.
Adjusted EBITDA was 26 million for the second quarter, compared with 22.5 million, but a period a year ago.
Depreciation and amortization expense was 2.2 million for the second quarter.
Interest expense was 6.5 million for the second quarter compared with 5.7 billion last year.
The increase in interest expense was due primarily to increased average outstanding borrowings to support our growth initiatives.
Income tax assessment second quarter was 2 million compared with income tax expense of 1.2 million for the prior year period.
Net income for the fiscal 2022nd quarter was 6.2 million or 32 cents per diluted share compared with net income of 3.5 million or 18 cents per diluted share a year ago.
Adjusted net income for the fiscal at 2022nd quarter was 13 million or 68 cents per diluted share compared with 11.5 million or 60 cents per diluted share a year earlier.
Let me now disgusted result for the six months ended September Thirtyth 2019, net sales for the fiscal 2026 month period increased 18.2% to 259.5 million compared with net sales of 219.6 million for the prior year six months.
Adjusted net sales for the six month increased 16.1% to 260 million compared with 224 million for last year.
Gross profit for the fiscal 2026 month period was 54.2 million compared with 42.1 billion a year earlier.
Gross profit as a percentage of net sales for the fiscal 2021st half was 20.9%.
There was 19.2% a year earlier.
Adjusted gross profit for the fiscal 2026 month period was 69.1 million compared with 58.9 million a year ago.
Adjusted gross profit as a percent of adjusted net sales.
Six months was 26.6% compared with 26.3% a year earlier.
Net income for the six month period was 38000 or one cents per share compared with net loss of 2 million or 10 cents per share a year ago.
Adjusted net income for the six month was 14.7 million compared with 14.6 million for the prior year six months.
And adjusted diluted earnings per share.
76 cents compared with 75 cents per diluted share last year.
Adjusted EBITDA was 36.7 million for the six month period, compared with 32.8 million a year earlier.
As of September Thirtyth 2019, trailing 12 month, adjusted EBITDA was 77.8 million and the average equity and net debt balance was 407 million, resulting in a 19.1% return on invested capital what a pretax basis.
Our method of calculating Oh I see is a divide trailing 12 month adjusted EBITDA by the average equity and net debt balance for the 12 month period.
I should point out that we have just begun to realize the benefits of expanding our Mexico operations and the launch of our new break categories with the expectation a significant revenue growth from both new and existing product lines.
As of September Thirtyth 2019, we had net bank debt of approximately 163.5 million total cash availability on the revolver credit facility was approximately 80.5 million at September Thirtyth 2019, based on a total 239 million revolver credit facility and south interest.
Certain limitations.
At September Thirtyth 2019, the company had approximately 713 million total assets.
Current assets were 376 million incur liabilities were 304 million. This reflects the adoption of the new lease accounting pronouncement, which requires a balance sheet recognition of at least assets at least liability for all leases.
We are particularly pleased with the reduction in inventory during the second quarter, reflecting the progress we are making it our transition to Mexico.
Net cash used in operating activities during the fiscal 2000 fiscal year, 2022nd quarter was 8.4 million, primarily due to a 25.2 million increase in accounts receivable, reflecting record sales for the second quarter, partially offset by a reduction of inventory of 8.2 million.
And that income of 6.2 million.
Expect to generate positive cash flows from operating activities in the second half of the fiscal year.
Contributing to this there will be reduction in payment for core buybacks from our existing business, which will help generate stronger operating cash flow.
But a reconciliation of non-GAAP financial measures. Please refer to exhibit one was seven in this morning's earnings press release.
I will now open the call for question and someone will then provide.
Provide some closing remarks.
Thank you, ladies and gentlemen, as a reminder to ask the question you would need to press Star then one on your telephone to.
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Okay, and that's all I want to ask the question.
Please standby why we compile the county roster.
[noise].
Our first question comes from a lot of Justin Clare with Roth capital.
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Hi, everyone. Thanks for taking my questions.
Hi, Hi, Justin.
So I guess just first off in terms of your fiscal 2020 revenue guidance.
It seems like.
The guidance implies revenues for Q3 in Q4 that could be kind of inline with Q2 around 150 million I just wanted to see if this is how we should be thinking about it or there's some potential upside here because I know you're you have been ramping up a new business.
Yeah. It's you know we don't want to get ahead of US skews Justin that's a good question, but you know, we're very comfortable of sustaining all 16% plus growth rate in the third quarter.
And then we should see exponentially a additional growth in the fourth quarter, we've got a lot of ER launch.
Initiatives that you know will probably need to be shipped in the fourth quarter as opposed to the third quarter, but I don't want to get ahead of us skis right now, but we're very comfortable with our guidance.
Okay great.
And then I know you've been rolling out.
These increases just wanted to see where you are in that process. I think if you were starting price increases kind of midway through Q2, So should we see those increases reflected fully in Q3.
Yes, yeah.
Okay great.
And then in terms of your capacity utilization.
You are adding a significant amount of capacity here in Mexico and Malaysia.
Can use can you speak to how you see utilization trending ahead is this something that we'll continue to improve this year and into next year and then if you can speak to how that could benefit your profitability as well.
So you know as we were I think I've just in summary also to go through it again, the the distribution centers up and running we certainly feel that we can get to operating.
I wouldn't say capacity, but off real operating efficiencies in terms of overhead absorption you know.
Now you know in the next to the next six months and we're actually operating quite well already out of it now.
There's two Newbuildings I'm, Malaysia is completed so there will be incremental capacity there that capacity again, we'll scale almost uh huh.
The manufacturing guys would would was a disagree with me, but we'll scale very quickly I mean, it's we have a lot of skew. So it's always challenging to skill and speed, but I would like us to scale, but.
You know that'll be eminent as well and then when I say eminent within you know within the six month area next six months and that allows could not leases in new Mexico facility some production facilities.
And as of now we have demand pick up all our capacity as we scale. It it will not be fully absorbed fall for some time so.
So.
No it's hard to describe that but but this new footprint basically.
The way we operate is not that we'd have a whole bunch of extra space. We utilized all the space in the buildings based on lean manufacturing principles and so as we have no no demand for our product we can utilize those buildings more efficiently by adding employees into the lean manufacturing model.
We expect that.
As fast as we come ramp we should have we should have business to absorb capacity I mean, that's a long winded answer because there's no short real simple answer to that.
But we should see I do think we I do think there's some work to be down so I don't want anyone ever want to get ahead of themselves, but we do have some work to be done so in Mexico.
Very big initiatives with is very big demand behind those initiatives and again I'll reiterate we've got a fabulous operating team and I think they're going to do a great job and the pain should be fairly small.
Okay, great. Thanks for the detail I'll pass it on.
Thank you.
A question comes from Milan, Chris Van Horn with B. Riley.
Honestly.
Good morning, everyone. Thanks for taking my call.
Hi, Chris How're you doing good so when I look at your guidance of 27% on the gross margin line seems to be roughly flattish with what you ever to do last year and I'm just I'm curious on the puts and takes on on that number.
Yeah, there's a lot of ramp up cost in that there's a lot of new product cost to the ninth.
As you know the again, there's still some inefficiencies in the gross margins. So you know again once this thing settles and the complete transitions dawn.
There should be an uptick in a few you know in a few points out of that as you know so you know, but again, we're being I I think we're being realistic cautious right now.
But there's definitely upside as we as we go further down I mean, obviously competitive issues on things, we gonna have to keep monitoring.
And the and the tariff situations, but.
Just as a matter of you know as a side product, Chris maybe I'll just go into that for a second I believe that.
The expansion of Malaysia.
And I'm, a Mexican operations are going to further.
Allow us to have more flexibility around the import tariffs. So they may be some you know some headwinds in terms of getting in and out of those those Chinese product lines, but.
You know so again I don't want to get ahead of us that I think that as time goes on you will see you know margin improvement because the efficiency of the new footprint is expected to be.
Very positive for us.
Okay.
Makes sense and then you'd on the revenue growth it seems like even at the midpoint you know you're going to return to this kind of mid double digit teen range here and I was just was curious you know could you break out what you know is there anything that's overly contributing I imagine its market share gains its new product introductions, maybe there's a little bit of a pro.
Component, but is there anything that really stands out that's going to discuss the drive that.
No I think the great news about everything is that everything is performing right now.
We think hard parts in general is it I mean, obviously, we've got new product line, we think that next year that should break out from a more but for this year.
Our existing product lines that diagnostics.
Just across the board were saying, we're seeing some you know just fundamental base increases and we are benefiting a little bit from as David mentioned, I think three and half percent from the tariff.
Tariff pass throughs, but which by the way that's a headwind on gross margins as well so HM.
It's a bit some pickup in revenue, but but it's a pass through so gross margin percentages nominally affected by that but.
No it's across the board I I think we hope and domain, we remain optimistic about seeing growth in all of our categories.
And we are and we certainly expect to see right now, we've got headwinds and not diagnostic business.
In terms of profitability. So we hope to see that turn in the fourth quarter as well.
We can a lot of great orders that are coming in and we expect to ship them in the March quarter. So.
By then we should have that ER.
Again that will further rach margins for next year.
Okay. Okay. Thanks for the color. There then last for me you I think you mentioned to us on the heavy duty truck side, I know, you're you're kind of still transitioning there but.
Yeah, I think that you're seeing from a dip demand perspective, and maybe from a market share perspective there.
I think that's that's another great question I think the heavy duty integration is a tough one I mean, it's not a business up even though its rotating electrical and some other business up.
We were previously or we have a good team up in Toronto I think we're now announcement the trade show in.
Our customers can auto seamlessly heavy duty product and light duty products have a new distribution warehouses in Mexico, I think that's going to help the heavy duty initiative.
Our existing channels are significantly and we're ramping up infrastructure and and systems and all around you know, making a big push for the actual heavy duty category.
And channel and I, you know I'm optimistic that we can pull it off but it's still.
Still some work to be done that but but short term I think we're going to see gains just because.
Having the products, which is no can be consolidated into existing orders out of existing distribution warehouse will help our customers make the decision to buy other heavy duty needs from us.
Okay got it thanks again for the time and congrats on the quarter.
Thank you very much appreciate all your support [noise].
Thank you are nice question comes from the line of Steve Dyer with Craig Hallum.
That's helpful.
Hey, guys trying to go on for Steve Congrats on the next quarter. Thank you Hey, how are you.
So just coming that gross margin guidance I guess from another angle, but it implies that it'll take a step down from Q2 here in the second half despite overwhelmingly positive commentary it seems like that.
You will see improving overhead absorption efficiencies as these new facilities ramp et cetera. So I guess, what's the opposite there to keep that's going to constrain margins on the back half relative to the number you just put up here in Q2.
There's a lot of a lot of update autos of go out in the fourth quarters. So you get some returns before you get update autos and so we just a little sensitive.
Two you know to the so that really it's all about timing of a third and fourth them and you see you see a bigger jump in the fourth.
I don't think they're going to decline that's significantly in the third.
But overall you know a roll again, where we were optimistic on gross margins, we don't want to.
Get ahead of ourselves, but but on a combined basis, we're comfortable we should be at our guidance level at least.
And going into the next your.
We should see once we get these facilities operating.
We we're expecting a gross margin increases now again, it all depends on product mix and who knows what competitive forces out there, but we you know we were pretty pretty good insight into this.
And then one more on guidance on revenue. So similar revenue growth in Q3, 16% implies something like a 12 million dollar sequential decline in revenue anybody can bridge I guess was there any pull forward of shipments or anything into Q2 no three.
Yeah. So that's the point I think it's the same answer to the last question is when you treat the update orders you you've got stuck we accrued for stock adjustment six months in advance.
Anything we anticipate and six months is one of our fundamental policies. So the accruals against revenue for potential returns before the big stock adjustments to the big stuck updates go out in the fourth quarter.
Let's go I'm, not 100% known but.
Where we know that there will be some and so the accruals we anticipate to go up.
But we also again, we have more than you know significant offsetting revenues that come in the fall imported from it so tough to break it down between two quarters because of the amount of volume that that's going out.
But that's that's real yet.
It's all timing really between quarters.
And fourth.
And then maybe just one quick point of clarification on the stock adjustments are you, saying that you're changing because I presume there on a percent of sales on you know historically, what you've seen so are you increasing that that accrual or is there just going up with sales increase.
No no what happens is while there's an allowance to the customers for a certain amount. We don't we don't have an accrual of we don't have a flat accrual policy, we accrued based on expectation.
And so if we expect a certain amount of adjustments and will accrue that amount and so the stock adjustments are not an even flat descent quarter by quarter, they're basically an accrual based on a identified stock adjustments. So again, so that'll have to play out we don't know that exact number you up to a quarter. So.
Got it got it a one for me then I'll turn it over our was up accounts receivable was helped by 25 million quarter over quarter. You know what caused that and then do you expect that to normalize here in the second half thanks and good luck.
I think you. This is David So this has to do with and record sales that we had we didn't have a lot of sales in the month in September so that won't turn into cash in the subsequent third quarter.
Great that's it for me.
Thank you.
Thank you as a reminder, ladies and gentlemen that star one to ask a question.
[noise] I'm not showing any further questions I would now like turn the call over to Selwyn Joffe for closing remarks.
Thank you I in summary, our investments are now starting to bear fruit. We've had many we have many and never had many growth opportunities and we have many growth opportunities ahead of us and new business commitments are continuing supported by these expanding product line expanding line of products in both hard parts and diagnostics.
We are proud of that more than 50 year history in the aftermarket industry.
And [noise].
We are really committed to our vision of being the global leader for parts and solutions that move our world today and tomorrow.
Again, I want to thank all our team members for their commitments and customer centric focus on service for their exceptional pride and all the products, we sell them with customer services, we provide their commitment to quality and so this is reflected in the contributions that they make to the communities in our society, which is important to US you know terrific and I'm proud to work with them we approve.
As you all continued support and we thank you again for joining us for the coal and we look forward speaking with you when we hosted a fiscal 2023rd quarter conference call in February and up to various conferences that we may have time.
Thank you.
Ladies and gentlemen, this concludes todays conference. Thank you for participating you may now disconnect everyone have a once a day.