Q1 2021 Motorcar Parts of America Inc Earnings Call
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I like to hand, the call over to your speaker today, Gary Maier. Please go ahead.
Thanks, Josh Thanks, everyone for joining us for our first quarter.
Fiscal 2021 conference call.
Before we begin I'd turn the call over to someone job <unk>, Chairman, President and Chief Executive Officer, and David Li The Companys Chief Financial Officer.
Let me remind every one of the Safe Harbor statement included in todays press release.
The private Securities Litigation Reform Act of 1995 provides a 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 developments and their potential effects on the company.
There can be no assurances of future developments affecting the company will be those anticipated by motorcar parts of America.
Actual results may differ from those projected in the forward looking statements. These forward looking statements involve significant risks and uncertainties.
Some of which are beyond the control of the company and are subject to change based upon various factors. The company undertakes no obligation to publicly update or revise any forward looking statements.
However, as a result of new information future events or otherwise.
For more detailed discussion of some of the ongoing risks and uncertainties of the company's business.
I refer you to the various filings with the Securities and Exchange Commission with that we'd like to begin the call and I'll turn it over to Selwyn. Thank you Gary I appreciate everyone joining us today.
First off I want to thank all our team members for their ongoing commitment and customer centric focus on service. During these challenging times their health and safety remain our top priority and our proactive initiatives during the past several months to protect our global team have proven to be highly effective in helping to mitigate this howard.
No bars.
Equally important these initiatives have enabled us to continue to provide a central products for transportation across the board, including consumers fleets, an emergency response vehicles.
For the most part our corporate team is continuing to work remotely as much as possible, though we remain committed to gradually and safely returning our team back to the office as conditions permit.
As a result of everyone's contributions operations have continued largely uninterrupted.
I'm extremely proud of our company.
Clearly this remains a challenging period for all of US as you know the month of April was strongly impacted across the automotive specter of sales in April went down by approximately 50% on a year over year basis.
We were encouraged however, the driver started to return to the roads in May and sales for our Nondiscretionary automotive parts were up strongly in June.
Anyway into July.
Preliminarily, indicating vehicle recovery.
I should point out that sales in June were up on a year over year basis.
Notwithstanding the challenges related to the global pandemic, we're making excellent progress and execution of our strategic plans and investments for the future.
Remain essentially on target to complete our strategic Buildout in Mexico by the end of the fiscal second quarter.
In short, we have a scalable infrastructure and our growth opportunities are exciting.
The competitive landscape continues to change and customers are placing even more important some reliable suppliers to meet anticipated demand as we gradually recover from the global pandemic.
Let's drive is returning to the road in the economy improving.
In summary, all the initiatives will enhance our financial performance, particularly as we realize the benefits from our new state of the art Caliphate production facility.
The relocation of certain additional product lines to operations in Mexico from higher cost domestic production and other related overhead absorption initiatives.
In addition, our facility expansion, Malaysia is complete and ramping up which will allow us to increase capacity in productivity by existing product lines and allow us to utilize the additional capacity to reduce dependence on outsourcing certain products and components.
For more than 50 years MP has established itself as a leader in the supply of internal combustion vehicle hawk parts to our industry.
Hi, good size for our current categories is more than $6 billion at the retail level.
According to land marketing research internal combustion engine vehicles in operation in the United States will increase by 36 million from 2023 2030.
From approximately 282 million vehicles in operation last year.
These vehicles will continue to age fueling significant growth in the aftermarket parts replacement industry well beyond 2030.
In fact, these statistics should further benefit from vehicles coming into the call Oh from sales during the peak starches and now entry in the prime thoughts replacement age.
In short our strategy before and since the pandemic.
Has been to leverage our significant channel relationships for aftermarket parts and offer superior parts and solutions to our customers and consumers.
Today, we are relentlessly focused on maintaining our growth rates and enhancing our profitability for the hard parts categories that we offer as well as launching and establishing ourselves within the multibillion dollar break parts category.
Given the current situation, let me make a few observations.
The vast majority of consumers now target market or unable to work from home and reticent to use mass transportation her rideshare.
As a result, these workers are more dependent on have a than ever on their personal difference. According to data from apples mobility trends request would driving directions in the U.S. were up 34% since mid January well mass transit was down 46% during the same period.
In addition.
Recently reported and rideshare bookings were down 73% over last year.
We believe a personal vehicles will continue to be the preferred mode of transportation for daily activities implications for the foreseeable future.
All of this bodes well for our business.
Furthermore, during the current environment and recessionary times people keep their vehicles longer rather than purchasing a new one this results in an increasing age fleet, which is currently at a new record of approximately 12 euros and consequently higher aftermarket parts replacement.
As these vehicles age the rate of replacement of parts increases substantially for example, causing the zero to three year age group have a replacement rate for alternate as of 2.4% compared with a 6.65% for causing the 12 euro and above age group.
Nonetheless, new car sales so should return at some point, but regardless, we expect to benefit because scrap rates are generally lower than new car sales, resulting in an increased car park and further opportunities for parts replacement.
We're also making good progress on the integration of Dick's electric and the rollout of our heavy duty program.
I should also mentioned that we recently started selling and I'll hop pods aftermarket program into Mexico through our new epic subsidiary.
Well. This is currently a small percentage of our business. We are excited by the opportunities in this market and look to expand our sales in Mexico.
In short all our initiatives in light of market conditions I, just discussed will further solidify our position as a valued premier supplier automotive aftermarket parts in North America.
With respect to our diagnostic business demand five Benchtop test it continues to grow as our customers upgrades to existing testers to meet the latest protocols for starters and alternatives.
As aftermarket business continues to pick up our customers are resuming their expenditures for diagnostics, which as I noted during our year end coal were delayed due to the pandemic.
As I also mentioned these customer purchases support admission to provide continuing trustworthy advice with regard to whether or not a consumer's alternate aristada is working properly.
This helps significantly reduce the misdiagnosis into vehicles problem, which is one of the largest reasons.
For a return.
To complement our internal combustion business. We have also embraced the advancement of the task during world of electrified transportation.
Consequently, we've made investments in the rapidly advancing diagnostics for automotive electric vehicles, and electrification of the aerospace market, including military applications.
Our offering of complete solutions to simulation emulation and production testing for the electric powertrain is gaining traction.
Sales activity is gaining momentum, but orders have been temporally temporarily slowed as OE manufacturers for these vehicles reopened.
Nonetheless, we are encouraged by what activity from key Blue Chip global companies in both the automotive and aerospace industries and the strength of our strategic partnerships within the space.
The increase in global demand for electronic testing products and subscription services represent significant value creation opportunities.
In short our entire companies well positioned for sustainable top and bottom line growth as we generally return to a new norm.
Despite favorable sales trends beginning in may and the strong June supported by demand for do it yourself repairs and improved demand from the professional install market. We continue to believe it is not prudent to provide annual guidance.
In summary, notwithstanding the human and economic impact of this terrible pandemic, we're cautiously optimistic about the outlook.
Healthcare professionals and medical researchers around the world appear to be making significant progress in addressing the virus and we're prepared to do up ought to keep vehicles on the road.
Expect the number of vehicles in their prime Pos replacement range, we'll continue to grow and I'm pleased to see the number of repairs and miles driven regained momentum, particularly as personal vehicles become even more important lifestyle change vacations turn to road trips and a new normal takes hold.
All of this supports our optimism for growth and profitability over the next several years and we remain convinced that our strategy to enhance shareholder value is on target.
I'll now turn the call over to David to review the results for the first quarter.
Thank you sell in to begin I encourage everyone to read the 8-K filed this morning with respect to our June Thirtyth 2020 earnings press release for more detailed explanations are the result.
For information about the items that impacted results.
Exhibit one or two or three of the press release.
Let me take a moment to be the financial highlights for the fiscal 21 first quarter.
Net sales for the fiscal 21 first quarter, where it 95.1 million compared with 109.1 million the same period a year earlier.
As someone indicated following extremely weak April.
Sales rebounded pretty remained in the quarter and were better than expected.
Gross profit for the fiscal 21 first quarter was 13.4 million compared with $17.6 million a year earlier.
Gross profit as a percentage of net sales for the fiscal 21 first quarter was 14% compared with 16.1% a year earlier.
For the fiscal 2001 first quarter was 17.5 million compared with 22.6 million a year ago.
Adjusted gross profit as a percentage of net sales for the three mine.
Was 18.4% compared with 20.7% a year earlier as detailed exhibit to in this morning's earnings press release.
Gross profit and adjusted gross profit as a percentage of net tail.
Fiscal 21 first quarter, we're further negatively impacted by 3.5%.
This 3.5% is comprised Doug.
Cobot 19 related expenses impacting cost of goods sold of 1.8 million or 1.9% and 1.6% due to court buyback premium amortization and return accruals related to new business.
This 3.5% is not adjusted for India, adjusted gross margin of 18.4%, which I just mentioned.
Gross profit and adjusted gross profit as a percentage of net sales. The prior year period were also impacted by several items as detailed in exhibit to.
Totaling 2.5%.
Results for the fiscal first quarter were impacted by increases for both cost of goods sold and operating expenses related to safety and health initiated associated with cold in 19, including incremental costs for personal protection equipment.
Increase disinfecting procedures.
Extraordinary payroll expenses, especially at work bonuses and non work payments to vulnerable personnel.
These items impacting results for the quarter by approximately 2.3 million on a pre tax basis.
Nine cents per share on a tax effective basis.
In addition results for the first quarter were negatively impacted by higher cost production to lower due to lower production volumes.
Total operating expenses decreased by 6.3 million to 13 million for the first quarter.
From 19.3 million for the prior year.
This decrease was primarily due to.
A noncash gain of 2.8 million for the first quarter compared with a noncash gain of 35000 recorded for the prior year.
Due to the change the fair value of the forward a foreign currency exchange contracts.
A noncash gain of 2 million during the first quarter compared with a noncash gain of 500 in 2000 recorded for the prior year due to the re measurement of foreign currency denominated lease liabilities.
Additionally, as part of the cost reduction measures implemented in response to the impact of the covert 19 pandemic on our business.
Effective may four 2020 senior management agreed to at least a 25% reduction in base salary, which along with reductions in base salaries for middle management and staff headcount.
Result in a wage cost decreases of approximately 900000 for the first quarter.
In addition, travel restrictions contributor to a reduction of travel and related expenses of approximately 622000.
The overall decrease in first quarter operating expenses also included a 338000 deduct reduction in marketing and supplied expenses.
Interest expense was 4.4 million for the first quarter.
That was 6.2 million last year.
The decrease in interest expense was primarily due to lower interest rate.
Income tax benefit for the first quarter was 1 million compared with income tax benefit up 1.7 million for the prior year period.
Net loss for fiscal 21 first quarter was $3 million was 16 cents per share.
Compared with a net loss of 6.2 million or 33 cents per share a year ago.
Results for the fiscal 2001 first quarter were impacted by expenses of approximately 9.8 million.
Consisting primarily of non cash expenses totaling 3.7 million for revaluation of course and custom shelves.
Your buyback premium amortization and share based compensation.
Transition expenses of 3.6 million related to the expansion of the company's footprint in Mexico.
And Covance related expenses of 2.3 million further explained previously.
These expenses were partially offset by 2.0 sorry.
Offset by 4.8 million a gain in connection with the re measurement of the company's Mexico lease liabilities and forward foreign exchange contracts due to the strengthening of the Mexican peso.
Looking at a net negative impact of 5 million on a pre tax basis or 20 cents per share on a tax effective basis as detailed in exhibit one in this morning's earnings press release.
The net loss for the prior year period was impacted by items totaling approximately 10.1 million on a pre tax basis or 41 cents per share on a tax effected basis as detailed in exhibit one in this morning's earnings press release.
The company's us historically used adjusted EBITDA to compute its auto lyski.
We will no longer use adjusted EBITDA instead in order to compete return on invested capital. The company now utilize its operating income and adds back non cash expenses.
Excluding depreciation and amortization write down of course and customer shells.
Core buyback premium amortization that 123 on expenses.
Foreign currency, mark to market gains or losses, and certain non cash accruals and onetime expenses.
The company believes that this metric consider together with GAAP measures.
Provides a useful information to investors and to management regarding the company's return on invested capital.
In short we take this metric, which was approximately 73.2 million. The 12 months ended June 30, 2020 divided by the average equity and net debt balance of 409 million, resulting in a 17.9% pre tax return on invested capital I.
I should point out that we have just begun to realize the benefits of expanding our Mexico operations and the launch of are you pray categories with the expectation of increased returns from both new and existing product lines. This should result in higher higher ROI seat as it benefits of our strategic expansion are realized.
At June Thirtyth 2020, we had net bank debt of approximately 107.8 million total cash availability on the revolver credit facility was approximately 112.6 million at June Thirtyth 2020, based on a total 238.6 million revolver credit facility and subject to a certain.
Funds.
Consolidated EBITDA for the purposes, a bank covenant calculations. The 12 months ended June Thirtyth 2020.
76.2 million.
We accumulated cash of $27.5 million as of June 30.
Paying down 40 million on our revolving credit facility during the first quarter.
Our credit arrangement for competing the senior leverage ratio only allows up to 6 million of credit for cash.
If we had paid down the revolving credit facility further with cash on hand, our senior leverage ratio would have been 1.62 at June Thirtyth 2020, compared with 1.82 ratio based on the banks define calculation of the senior leverage ratio.
At June 32020, the company had approximately 760 million in total asset.
Current assets worth 381 million in current liabilities were 293 million.
Net cash provided by operating activities during the fiscal year 21 first quarter was 22.4 million compared with cash used in operating activities at 18.4 million for the prior fiscal 2021st quarter.
For the reconciliation of items that impacted results and non-GAAP financial measures. Please refer to exhibit one through three in this morning's earnings press release.
I will now open the call for questions and someone will then provide some closing remarks.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound Keith.
Your first question comes from Matt Koranda with Roth Capital. Please go ahead.
Hey, guys. Thanks for taking the questions.
So just wanted a little help with the monthly sequential cadence within the quarter if possible I know you guys mentioned.
April was down I think about 50% year over year.
It sounds like May you may have seen a little bit of growth.
But any help what sort of the magnitude of growth year over year in May and June it sounds like things may have accelerated through the quarter.
I mean any assistance on that front.
So again April down 50 may was probably down about 9% year over year in June was probably up 25%.
Okay got it all right it sounds like.
And then maybe I know you guys do get to see the Pos trends, so and so maybe you had kind of help us with.
Much of that was sort of.
Catch up on restocking and not up 25% in June versus kind of Pos and how's that trending through July.
So the gains a move ill continue into July Pos definitely trended up through June.
No.
Again for our products they it's it's stable.
You know sort of the June levels.
But every day as new day with this covance situation, so we keep watching it but so far.
We're cautiously optimistic that where we want to be we want to be conservative.
We're busy okay got it that's helpful.
Then David I don't think I heard you guys break out sort of just the.
The breakout between rotating electrical.
Brake master cylinders, and the other products wheel hub or whatnot.
Could you provide a breakout for us on the call here.
So we have any filing our 10-Q later today and the 10-Q, we disclosed so we break down rotating electrical products for about 72% of soon.
The other products were 18%.
And break related products are 9% and others, 1%.
Got it okay. That's helpful.
And then let's just talk through the co bid related expense.
Yes in the quarter want to get a sense for what the right level of ongoing cobot headwind that we should be factoring in on a go forward basis.
Loud and clear on the 1.8 or so and gross profit this quarter and then I think another 400 500 in an opex how much of that should we kind of continue to carry forward.
For the next several quarters.
During the pandemic.
Yes so.
As you said was 18 1.8 million in Grand total 2.3 million for the entire quarter, including operating expenses. So we're projecting for the remaining nine months about 2 million total.
As you know it depends on we don't know that's our current estimate.
Yes, a lot of us upfront spending in order to get all the whole safety requirements in place but.
It should it will come down pretty dramatically.
Okay.
Got it that's helpful.
And then just on the cash flow fronts.
Generated cash from operations. It does look like some working capital plus there, but help us with.
Sort of sources there as I did notice payables looks like it was had a relatively large balance.
We ended the quarter anything to call out there on that front.
The largest item was a collection of a are that was existing as of the year end.
But we do we did put in measures to reduce our costs, though.
There was also helped but the biggest item was the reduction or they are.
Okay got it and then lastly, just on the Capex from help us with the capital expense in the quarter.
And how much of that went to the Mexico build out.
And then how much is remaining.
The that slotted for the Mexico build out for the remainder of this year.
So the first quarter Capex was 5 million 3 million was related to expansion of our Mexico footprint and 2 million. It was just maintenance capex.
So for the full year, we're estimating totaled 11 million for expansion.
This expansion Capex at about 6 million for maintenance, So Grand total 17 million for the full year.
Got it okay. So 12 million left to spend for the rest of America, Okay got it.
Thank you guys. Thank you.
Your next question comes and Steve Dyer with Craig Hallum Capital. Please go ahead.
Good afternoon, guys trying to go on for Steve.
Hi, Good you mentioned a lot of cost kind of some temporary some have went away but can you just.
Sum it all up within Opex, how much of the cost cuts were permanent versus temporary costs and then what's the timeline to bring back those temporary ones.
Let me talk in more general and then and then.
David can address and perhaps more specifically.
No.
This will visit look we're trying to be a frugal as possible going forward and so we're not in a rush to reinstate cost to our infrastructure to the extent, we don't have to.
At some point people need to get a fair fair wage on that but I would tell you that the executive group, including myself is very committed to making sure that.
We're back on track and stable before any any.
And the resumption of those expenses our model has changed somewhat them in trade shows travel.
You know.
Just a lot of the sort of what was normal day to day expenses have changed.
We don't expect to see that coming back this year at all.
I'm not sure at the new model will look like going forward, but understanding that the opportunity to use technology and and leverage some of the efficiencies we're learning about today.
We will continue.
So I mean, we're not looking to reinstitute.
A lot of expense unnecessary expense or any any expense that we cannot if we can help us, but but we are going to be looking at quarter to quarter.
So.
No that's sort of the big picture, David you want to add to that so we mentioned that since may 4th in about a 900000 reduction related to a wage costs. The small portion of that it wasn't permanent yes, but the majority of that.
Wage reduction I do want to point out that we've got pretty significant new business commitments that are coming on board and so.
We're going to where we're business is normal and we're growing and all the demand hopefully will continue but again I I you know that's uncertainty so where we were active very active and some of that requires expenditure.
We continue to fuel the growth that we were on growth rates that we're on.
Great then just on free cash flow just following up on that sounds like a favorable working capital is the biggest driver this quarter, but do you think you can maintain positive free cash flow in Q2, and then the back half of this year.
You know as we're growing our top line, we're going to need additional inventory to support the customer's demand. So we are playing to add inventory working capital.
We have many of the substantial new contract for new business that begins October flows.
So we're in the process of ramping up for that.
So there will be some inventory build and then demand you know from what was a very temperate environment for demand demand has accelerated dramatically and so.
We need to invest in inventory and production increased production levels to keep up with the demand.
Can you elaborate on that new significant new contract, what our product category Tim.
Yes, and break calipers.
Okay.
And then just switching over to you talked about their appreciate the cadence kind of within the quarter for topline sales.
To be clearly I think you said June was up 25% year over year that has remained steady in July. So I guess does that imply July in early August sales are tracking plus 25% for you guys.
Let me, let me, let me put out some caution that because and sort of paint the picture.
Just rewind a little bit and look at the outlook.
When you know when co that approach I mean, we.
So customers be more cautionary about how they place their orders a lot of the update orders were.
I wouldn't say deferred but basically pushed out and so last year, we had a significant number of update orders, we had a record second quarter last year.
Hey, significant amount of update autos are replenishment rates are exceptionally strong right now the update orders for the second quarter.
Well probably be pushed out into the back six months so.
Well I see the growth as being extremely strong it's not the timing now it's a little difference in terms of the cadence quarter over quarter.
And so time will tell you know exactly first of all is this kind of sustain itself. If it does that's fantastic. It does look very strong right now.
Although I assume there's some catch up in the marketplace I don't know.
And we don't on Monday.
The ongoing sort of secondary effects of the.
This this virus cores to two miles driven et cetera, but it looks to us like.
Our target audience and that's the key thing is that a number of people working from home, but our target markets is unable to work at home fundamentally and the amount of driving and again amount of public commuting mounted driving has gone up of them because the amount of public commuting has gone down for them and so we see fundamental.
Strengthen the business today.
We expect that to continue but we don't know.
[music].
If that does continue at most of the big if it does we expect customers to continue to be aggressive with update orders and inventory and we expect presumption on big update orders, but that's kind of be pushed back.
So I think the back six months is going to be very interesting wants to see where that ends up men. So far so good strong.
I would be I want to be cautious to say that just because we were up 25% in June.
Replenishment continues to be strong, but we got to make sure we don't confuse with yes, it orders as well.
So again continues to be strong, but I'd be cautious.
Got it so sell in little bit stronger in the near term.
For June and early Q2.
Yeah.
Last question, just kind of high higher level, but it seems like end customer DIY wide demand is shifting more online cobot accelerating that how are you guys position for that shift I know your big three customers account for most of your inventory, they're doing some omni channel stuff, but do you have any pure plays online or.
How are you guys thinking about that shift.
Yes, now we realize we don't have a pure online.
Play I mean, we sold to customers that sell online and you know and so we were pretty much.
You know well represented across the board in terms of all types of customers from and whether it be our wide DIFM those that sell through omni channel and so I feel like.
If there is a growth in our products online that we will get our fair share.
Just because of the customer base that we have.
For the most spot.
Some of our.
Our rotating electrical is not being a huge online driver, but some of the other categories.
You know the consumer realize we'll use online more and so we'll have to see how that unfolds. I think we are we're well positioned whether it be online on not through our customer base.
Thanks, guys I'll hop back in the Q.
Your next question comes from Brian Nagel Oppenheimer. Please go ahead.
Hi, good afternoon guys.
Right.
So my first question I think it's a good of a follow up to that.
Question, you've just some why but if you look at the rebound sales you've seen in June the here.
In July.
Have you noticed any variability across across markets as you do the viruses went back up maybe there's been some time next some in some some further actions of Macquarie. Sir shut things down if you guys are theres a bit greater variability across the country.
Well you know we have it's interesting I mean, the answer is yes and no. The yes is that if you look at the speed that certain places reopened up.
Those those certainly rebounded quicker.
And so we did see that now on a lot more have rebounded.
What's what's been pretty strong in terms of in India, and the indicator on and you know anyone can use us I hate to be promoter of the Apple website, but you can see you can see a correlation between.
Between there.
Their request for directions, and the pickup in the marketplace. So initially the northeast was slower than it picked up and got much stronger.
The west as being a little slower and picking up.
The matters the most seem middle of the country seems pretty stable and so yes. It does does reflect.
It does reflect how the different.
Regions are opening up or getting tighter but.
Again overall that seems to be no trending in one direction, even even with that sort of regional fluctuation.
That's very helpful. Then the second question I haven't maybe a bit longer term in nature, but.
You're talking about about just the shift into Mexico, which seems like we're getting closer now to the completion of that as we think about your financials, you only especially the shift happening I understand there's a lot of.
Ill get noise going on right now, how where should we see the fed how would you think about the financials flexes that is that shift habits.
Yes, so what's happening.
Got to get through December and them into December end of the December quarter were around the corner from there now that that will be a big inflection point for us.
You know a getting the new footprint up and running on operational which is happening now your notes its in process.
The new brake business, that's thoughts that starts in October.
Meanwhile, this some start up expenses and all of that but.
Is that settles down the company's sort of is.
Got it through a complete inflection point in Malaysia is expansion.
Makes us a little less dependent on.
You know less dependent on Chinese goods, which we feel all with the political so the geopolitical situation today, we think it's good to.
You have hedged up there.
So we feel pretty good that we're on track you know we've got to sort of variable covert issue, where nothing is happening as fast as other than business demand right now is happening faster than we thought it would but other than that things happened a little bit slower you know people not in their offices takes longer to get apartment takes longer to get such and such.
So that's a little bit of the overhang, but right now we don't see.
Much substantial variation and now in our.
And our progress we feel like we're we're still in pretty good shape to hit our deadlines.
And targets.
And that that will change the business pretty significantly.
Thanks, I want I appreciate the color.
Thank you.
Your next question comes and Scott Stember with C.L. King. Please go ahead.
Hi, good afternoon, guys or good morning.
Can you talk about how the extreme weather is having an impact on your business I know that starters alternators, but one of them.
Certainly, we'll see advance failure rates during the he can you just talk about how that's playing out with your business.
It's hard to tell Scott because there's so much the demand has increased so much from such an extraordinarily low I mean I've never in my career has seen a drop of 50% without a loss of a customer.
End demand in any in any period and I've been involved since 1994 in this industry I've never seen now and I've never seen an increase on a same customer basis of 25%.
So isn't whether is a pent up demand is it stimulus. It's just hard to define what's what's causing you know these little these these big gyrations I mean, I listened to our customers.
Public presentations on.
No we tracked Pos in.
It's hard to tell but I'm certainly extreme weather helps and also is very hard to put our finger on it but it's definitely helps.
Okay and I appreciate you guys aren't giving guidance at this point, but it's clear that businesses rebounded pretty significantly how should we just.
Bigger picture be looking at gross margins I know that heading into the year at least.
We were thinking I guess high 27 high 20% range was something that could be achievable again is there any reason.
That you couldn't get there assuming that the worst is behind us and.
The industry was to return back to a normal environment.
So by the end of the fiscal year, you know, we should be back in that range.
You know this this first quarter also was impacted a little bit by product mix.
So lot of variable that we did indicate that we had a little higher production cost due to lower production volume, but as that ramps up we're going to be able to leverage more overhead cost per unit would need to a more favorable but by the ended the year, we really should be back in that range, we've been talking about in the upper twentys.
We're talking on as a run rate net for the full year, obviously right.
Right Okay.
Okay.
Got it and just lastly on the interest expense line.
I know thats, where you're factoring costs reside you talked about it interest being down a lot just because the lower rates, how how would that factoring play into that.
Oh, So there's also party down because sales were also down but if I look at historical trend in fiscal 20 interest expense was about 4.6% of sales.
First quarter was about 4.5% of sales. So you know as interest rates come down a little bit it should be in that low to mid 4% of sales because the majority of our interest is that's factoring a supply chain interest expense.
Got.
And just one follow up just said just to clarify what we're talking Pos.
I guess clearly in June.
Pos that you've talked about or the sell him up 25% it sounds like Pos was.
Was higher than that could you just maybe quantify how much higher with the exit rate.
No I wouldn't assume that Pos is higher than that come in I you know.
We can't really quote our customer sales events. So that's a little tricky for me to do that I know.
Our customers a strong I mean, I would look to then today guidance really as to how the register sales of doing.
They are strong, but I would not equated to 25%.
No no higher than 25% Pos some in normally sort of levels out our growth rates normally level out with the customers Pos sales.
Plus or minus a few points here and there, but depending on where they are in the phase of you know of inventory buildup or not.
So I wouldn't assume that their Pos is greater than 25%.
Okay.
That's all I have thanks, a lot. Thank you. Thank you.
Your next question comes from Sarkis Sherbetchyan with B. Riley. Please go ahead.
Hey, good morning, and thanks for taking my question here.
Sarcone.
So you guys mentioned the need to ramp inventory to support the demand I'm just wanted to kind of get a sense for how much of that would be the new kind of contract or the new business that you one and then how much of it would just be too maybe shifting gears and begin to replenish.
You know kind of that the different product categories relative to what you're seeing now for demand.
Yes, I think look we've been ramping even in a declining inventory levels that we've had we've been ramping for those new business.
You have a significant amount of inventory already on hand.
And so I.
I think it's sort of spread across most of the all categories now I think that's there's no.
I think a lot of the extreme ramp up we've already been through to get ready for this new business. So we're ready to go.
They have to wait till October Unfortunately, but we're ready to go.
We are so I think you know.
You know people.
This has this been an interesting sort of roller coaster ride when coal that started in China, everybody anticipated that the the the supply was going to be a problem.
We were very fortunate we got ahead of that than we were able to make sure that supply channel was was was safe and then.
Launch Middlemarch hits and all of sudden the U.S. becomes.
Ill.
Has its challenge with covert and.
Demand just placements and so now all of a sudden we don't have a supply problem, we have a demand problem.
And so people start cutting their their supply obviously, two to sort of readjust and make sure that there's enough adequate liquidity and within one month and a half all of a sudden that's now becomes a.
In the demand is incredible than supply becomes a challenge. So it's been up and down you know so dramatically very unusual again times four for supplies and for the retailers and for the the W. diesel.
And the.
The the mechanics, and the professional install those of the world but.
So it's been tricky, but I will say that we were ahead of the curve on on that on the supply side. So we had excess inventory, we will be sitting pretty waiting you know, especially with a with a defining demand than all of sudden demand pop we've been in pretty good shape from in relative to most I think fill rates has still been pretty good.
And now we've gotta catch set up now the question is how much catch up do you need because what is the new norm.
And the new norm is so you know.
While we are again cautiously optimistic we watch sales day to day, we listen to our customers carefully we listen to the news carefully we're cautiously optimistic but it's it changes. So quickly. So the question is how much do we have to ramp up.
We going slowly.
But we gonna, we certainly are committed to making sure our customers get goods.
And so.
We will have to adjust as we see things develop day by day.
Sorry to be surveys of but that's sort of.
Just the new norm.
No that's fair and I guess, a little related to that is if I look at the total debt position of the company came down nicely quarter on quarter, I guess relative to the comments you just made.
How are you managing liquidity kind of given you know this rollercoaster situation and the fact that you're kind of building working capital to to meet your order commitments.
Yes, unequivocally looks good man Weve, a as you can tell our leverage is no bank levies about 11.6 times. So we've got a fair amount of liquidity.
We don't expect again, unless we have complete shutdowns, we don't expect too.
To having liquidity challenge and then where we're looking at it and see how it stabilizes and maybe this opportunities with liquidity levels that we have so.
We we watch a day to day, we re forecast to when are we on a rolling 12 12 week forecast right now weekly. So we just we just want to make sure. We stay ahead of a domain sales could change quickly and and so.
So we're very very cautious our customer base has been great theyre paying their bills on time and we.
We don't have much problem, there and our supply base is holding their terms and so that's a has been good and and we have a great bank relationships. So we feel like we have.
Not only do have adequate liquidity that we have the we have a real strong relationship you know.
The two provides liquidity that we needed.
In tough times, so, but we don't expect that I mean, we're we're in pretty good shape right now, but having said that we sold.
All watching every penny I mean, we're being as frugal as we possibly can.
Understood. Thanks for that'll take the rest offline.
Thank you.
[noise] comes from a bill that'll take on capital. Please go ahead.
Thank you I had a a couple of questions or the first one is you'd mentioned that June revenues were up 25% versus June of last year.
And you said that July was holding steady.
With that with a June does that imply that July was also up 25% or maybe I should just ask directly what was July a up versus July of 19.
Yes, I think we don't want to get into those sort of a monthly.
Financial I'm out of them again don't mean to be a evasive I'm in July.
July's strong I would say that you know I would just stick with that for now and we've said it's held up so I just don't want to get into a monthly a monthly reporting sequence but.
Again, you know and we expect the quarter to continue on that were having said that again I want to reiterate is that last quarter, we had huge amounts of update autos.
Which we think will be which we are which all pushed further out in the euro. This this year. So in a replenishment is certainly up double digits, but be cautious in terms of year over year total sales.
Alright, Thank you and.
And then have you seen a difference I think someone else asked about GE, a geographic differences, but about between different product lines have you seen a difference in ER and sales level or behaviors or point of sale or is it pretty much.
Very similar across product lines and depending on the Covitz situation.
Again, Yeah, I think we wouldn't you see the Q, you'll see those see the numbers that I you know I think that the slower come back really has been in rotating electrical which is our our core so that provides us more upside opportunity hopefully as.
As the.
As this fleet gets back on the road I mean, some of other product lines and ops before.
About performed a rotating electrical on the growth.
So will we love to see I mean, that's generally.
Would probably be understandable because you know the first thing that goes with the battery I think the next thing is when I look at the alternatives and see you.
With us or would that goes.
From here, but that that that's the main kind of the other main categories. All the other categories are basically up and rotating as a little bit softer.
Alright, thank you and that a.
Outperformance in the other categories.
Does that have anything to do with that new business wins or is that really an indication of what's happening at retail.
Yeah, so a little but.
The the break Caliper program was not enough in effect last year, so that that's part of it.
We've had margin we've had.
Growth in our in our share.
I was sort of consistently over the euro, but again I think the fundamental the fundamental is is that the break the break season got pushed out and so generally.
Gotcha April wouldn't be sort of your peak break repair season, and now it looks like it got pushed out in a further out so that may June so thats been a big help and that's catching up.
And then now rotating electrical is coming into it sort of seasonal with the hot summer and.
Hopefully, we should see some pickups there but.
So I think that has more to do with that again, a very unusual because timing the cadence of everything sort of got thrown all you know off kilter.
Understood. Thank you for a for taking the questions Helen Thanks.
Thank you.
Your next question comes from Vincent Stockton TCW. Please go ahead.
Hi, guys.
Uh huh.
Quick question regarding adjusted gross profit.
In the previous year. It was originally reported at 26.2 million and now the previous years adjusted gross profit as stated that 22.6 million or.
What accounts for the discrepancy.
So if you look at exhibit two of its earnings press release.
Hi, there is adjusted gross profit and there are iden not adjusted for the low when you add up the adjusted gross profit plus the item not adjusted for they will be inline with last years adjusted gross profit.
Okay I got it alright, thanks, guys.
Thank you.
No no further questions at this time I'll turn the call that the seldon jockey for closing remarks.
All right. Thank you so much and appreciate all the good questions.
I just want to you know summarize them basically in summary, our investments. We believe are bearing fruit, we have solid new business commitments for break calipers, we expect strong business growth as we ramp up production.
Notwithstanding the many many challenges that we have in the world today, New business commitments are continuing supported by an expanding line of products in both hard parts and diagnostics.
The near term outlook appears positive, though unpredictable we are proud of our more than 50 year history in the aftermarket industry and all of US are committed to our vision of being the global leader for parts and solutions that move our world today and tomorrow.
We appreciate your continued support and we thank you again for joining us on the coal and quite frankly, we look forward to seeing this unfolding. We look forward speaking with you I wouldn't we owe stuff fiscal 2021 next quarter conference call.
So again, thank you for everybody. Thanks told me the great mph.
Teammates.
For the incredible commitment.
This concludes today's conference call. Thank you for joining you may now disconnect.
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