Q2 2022 Motorcar Parts of America Inc Earnings Call
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Good day, and thank you for standing body welcome to motorcar parts of America's fiscal 2022 second quarter conference call. At this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session.
I asked a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your first speaker today, Mr. Gary Maier Investor Relations. Sir. Please go ahead.
Thank you. Thank you Rachel and thanks, everyone for joining US today welcome to our fiscal Q2, 2022nd conference call second quarter before we begin I want to turn to 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'd like to.
Remind everyone of the Safe Harbor statement included in today's press release.
Private Securities Litigation Reform Act of 1095 provides a safe harbor for certain forward looking statements, including statements made during today's conference call such forward looking statements are based upon the company's current expectations and beliefs concerning future developments and their potential effects on the company there can be no assurance.
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, whether 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 company's various filings with the Securities and Exchange Commission with that said I would.
Now I'd like to begin the call I'll turn it over to Selwyn Joffe. Thank.
Thank you Gary.
Appreciate everyone joining us today I hope, everyone is staying safe and healthy.
<unk> noted in this morning's press release, let me highlight our results.
Record net sales for the quarter and six month period net sales for the quarter up 13, 5% and 29, 8% for the six months and 25, 1% from the pre Covid fiscal 2020 quarter.
Net income before impacting items for the second quarter was $13 3 million or 68 per diluted share.
Was $14 3 million or 74 per diluted share.
Over the last year, and $13 1 million or <unk> 68 per diluted share for the pre COVID-19 fiscal 2020 quarter.
Net income before impacting items for the first half was $21 8 million or $1 11 per diluted share versus $15 1 million or <unk> 78 per diluted share for last year.
And $14 5 million or <unk> 78, <unk> per diluted share for the pre COVID-19 fiscal 2020 period.
Pre tax ROIC was 21, 1% at September 30 of 2021 versus 17, 5% from the prior year.
Let me provide some color about the automotive aftermarket in a solid position within the hard parts business, then I will briefly discuss our emerging presence within the electric vehicle market.
The outlook for hotspots replacements continues to accelerate.
Despite global issues related to the new COVID-19 variance and challenges impacting the supply chain, both of which don't really require much explanation given the extensive daily news coverage of the situation.
Let's just say the challenges are real from a social and business standpoint, and we're doing our part to keep our employees safe and our customers prepared for continued strong demand for automotive replacement parts actually.
Proudly say, we demonstrated our capabilities in meeting the strong consumer demand by our record second quarter performance.
Our team has done an amazing job meeting customer orders. These orders continued to be driven by strong consumer demand in both the do it yourself and do it for me markets as drive has returned to the roads and the used car sales continued to climb to record levels.
Our investments from multi growth platforms in a hard parts business contributed to our strong second quarter performance.
This momentum is expected to continue and moving forward operational efficiencies will be enhanced as new production facilities mature have supply chain challenges normalize.
It is important to note that the country of Malaysia was shut down for most of the second quarter due to COVID-19, which impacted our operations in that country with significantly reduced capacity and required us to outsource production to meet customer demand.
This unfortunately resulted in additional costs, both of which negative negatively impacted gross margins.
Our team in Malaysia did an exceptional job during this period and addressing these challenges and Fortunately we are now back at work and operations are ramping up again.
As I noted last quarter, our facility expansion in Malaysia is now complete and we are focused on utilizing this increase capacity and productivity across multiple product lines to reduce dependence on outsourcing and to support our customers.
Demand for our product lines across the board continues to grow, especially for our brake related products to put this growth in perspective, our brake related products as a percentage of overall sales doubled to 14% for the quarter from 7% for the same period a year ago at the same time road.
Electrical sales have also increased.
The ramp up momentum of our state of the outbreak caliper re manufacturing facilities and infrastructure, including core sorting and distribution is proceeding as planned notwithstanding supply chain challenges.
Manufacturing efficiencies will improve as the operation matures.
The market for our current hotspots category represents more than $6 billion at the retail level.
There are approximately 287 million vehicles on the road with an average age of 12, one years in the United States alone, which fuels our optimism about the growth opportunities on aftermarket hard parts business.
This will fuel growth in aftermarket hard parts replacement industry, well beyond electric vehicles, becoming mainstream.
Industry reports continue to show that people are keeping their vehicles longer use.
Used car sales continued to climb to record levels, resulting in increased miles driven by <unk>.
I'll kind of vehicle. It is interesting to note that colony's residuals relative to the value of the vehicle at least are now sharply lower than the value of the vehicle.
As a result consumers are buying out the leases rather than leasing a new vehicle contributing to an increased aging of the vehicle population.
Obviously, this bodes well for the after market parts replacement industry and are non discretionary product offerings.
As I've said before the rate of replacement of parts increases substantially as vehicles age.
Cause in the zero to three year age group have replacement rate for alternatives of 248% compared with $5 nine 8% in the 12 year and above age group.
I should note that the replacement rate for startups of the same period is 7% for the zero to three age group and 334% of the 12 and above age group.
The replacement rates for brake calipers is currently two 2% for the zero to three age group and 575% for the 12 and above age group.
Yeah.
As a complement to our solid position within the internal combustion engine aftermarket our diagnostic business for alternate as Todd is fast emerging supported by strong orders from our retail customers as deferred spending due to the pandemic resumes.
As many of you know we acquired the DNV electronics business in 2017 impart to complement our rotating electrical business and offer our retail customers a superior testing product for Alternators and starters.
In addition, our presence for electric vehicle testing applications in the areas of development and production continues to gain traction.
We remain enthusiastic about the outlook encouraged by new strategic partnerships.
Generic strength industry, leading technology and the significant opportunities as driving options evolve.
While we don't segment report, let me just take a few moments to comment about this exciting business.
Demand for test equipment related to performance endurance of production of electric Motors, Inverters and batteries for electric vehicles as well as belt starter generators for hybrid vehicles is gaining momentum.
We are honored as we announced earlier today that Dnb is electric motor emulator was selected to support the development of the Rota motor controllers for NASA as Dragonfly mission to acceptance Moon, Titan, which is a testament to our technology and its exciting applications.
All of these opportunities have required investments, but given the $5 4 billion estimated global automotive testing market. We believe the investments will generate solid results.
In addition, our vision is to offer EV manufacturers contract testing services via our newly established Detroit technical semi.
This also offer significant growth opportunities and we look forward to announcing developments in this area.
In short our strategy before and since the pandemic has been to leverage our significant channel relationships for after market parts and office superior parts and solutions to our customers and consumers.
Certainly there are challenges facing the after market industry today, including supply chain freight raw materials and other pandemic related headwinds, we continued to experience supply chain challenges for freight still semiconductors and packaging to mention a few items.
We believe these are short term issues that there is still much uncertainty in the supply chain.
We are working hard on a daily basis with our global team to manage production, while working with our suppliers and logistics providers to address the challenges.
Market dynamics, and rational economics, including price increases will contribute to overcoming these challenges as we continue to focus on taking full advantage of our competitive strengths.
I should point out that gross margins for the quarter.
Only reflect a small portion of the first round of price increases and.
And we will be fully reflected in our current third quarter.
While our second round of price increases becomes effective during the third quarter, they will be fully reflected in our fiscal fourth quarter.
In summary.
Despite the challenges our entire company is well positioned for sustainable top.
And bottom line growth for parts and solutions that move our world today and tomorrow.
Our footprint for the future is now the footprint of today and we are encouraged by the strong demand for automotive replacement pumps, Despite global Covid dynamics.
I can assure you we remain focused on benefiting from our multi year strategic expansion initiatives based on our results for the first half of fiscal 2022, we anticipate solid year over year sales growth in short demand is strong and capacity is available.
We remain focused on enhancing gross margins due to economies of scale from the consolidation of operations as well as further expansion of brake caliper production.
Pricing initiatives and other product line activities.
I will now turn the call over to David to review the results for the fiscal 2022 second quarter.
Thank you Selwyn to begin I encourage everyone to read the 8-K filed this morning with respect to our September 32021 earnings press release.
A more detailed explanation of the result.
For information about the items that impacted the results. He exhibits one through five of the press release.
Let me take a moment to review the financial highlights, including record sales for a quarter and six months periods.
Net sales for the fiscal 'twenty, two second quarter increased 13, 5% to $175 5 million from $154 7 million a year ago, and 16, 7% from the pre COVID-19 fiscal second quarter two years ago.
Net sales for the three months ended September 30 towards any one included $13 7 million in core revenue.
Paired with $12 8 million in the prior year second quarter period.
Due to a realignment of inventory at customer distribution centers with expected future sales benefits as product mix changes.
Gross profit for the fiscal 'twenty, two second quarter was 36 million compared with $39 7 million a year earlier.
Gross profit as a percentage of net sales for the fiscal 'twenty two second quarter was 25% compared with 25, 7% a year earlier.
The quarter's gross margin was negatively impacted by an aggregate of five 1% comprised of the following.
Three 1% due to higher freight costs and other expenses related to Covid.
5% for brake caliper startup cost and relocation transition expenses.
And one 8% noncash core and finished good premium amortization impacting sales.
Partially offset by net 3% favorable impact or noncash revaluation of cores on customer shelves and gain from core revenue.
Let me provide a little more color to the factors impacting gross margin.
Great caliber set up costs and relocation transition expenses.
Part of our footprint expansion in Mexico as you May recall, we completed the construction of our buildings in Mexico. This past fiscal year and are focused on increasing production a brake calipers.
Including core sorting and related activity to meet current and future demand.
Second quarter ramp up and transition expenses were significantly reduced by approximately 80% to 797000 on a year over year basis.
We also incurred higher freight and other costs of approximately $5 1 million for the.
Fiscal 'twenty, two second quarter due to a shortage of freight and supply chain inefficiencies caused by Covid.
I noted earlier.
With regard to additional corporate related expenses, we have address health and safety initiatives that also impacted gross margins. Fortunately these corporate related expenses decreased as a point of reference fiscal second quarter expenses were approximately 382000 versus $1 5 million in the prior year.
Quarter.
Core premium amortization and revaluation of cores on customer Michelle that impacted gross margins are noncash and non economic.
For a complete summary of items impacting gross profit please.
Please see exhibit three in this morning's earnings press release.
In addition to the above items gross profit was further impacted by growth initiatives in connection with expansion of our new product lines and product mix.
And inflationary costs related to the global pandemic, especially disruption with worldwide supply chain and logistics services.
This includes higher cost for raw materials and supplies.
Should also mention that we recently experienced offshore wage inflation, which further impacted results.
We are focused on making mitigating these expenses, including higher freight costs with price increases that have been implemented.
We only realized a small price increase impact during the second quarter, primarily affected for the month of September.
Total operating expenses increased to $26 4 million for the fiscal second quarter from $14 8 million for the prior year period.
The increase was primarily due to a $3 9 million noncash loss.
<unk> with the prior year period gain of $4 million for the foreign exchange impact of lease liabilities in foreign contracts.
The remaining $3 7 million increase on a year over year basis was primarily due to salary reductions in the prior year in response to the COVID-19 pandemic increased share based compensation and increased commissions marketing and advertising related and travel expenses.
Interest expense was $3 6 million for the fiscal second quarter, which was the same as last year.
Income tax expense for the second quarter was $2 3 million compared with $6 1 million for the prior year period, which was due to lower pre tax income.
Net income for the fiscal 'twenty, two second quarter was $3 $7 million or <unk> 19 per diluted share compared with a net income of $15 2 million or <unk> 78 per share a year ago.
In addition to the items impacting gross margin discussed previously I should emphasize the noncash non economic foreign exchange impact of lease liabilities.
For contracts totaled $7 9 million on a pretax basis or <unk> 30 per.
Kurt.
<unk> per diluted share on a tax effected basis for the quarter compared to the prior year.
Details of items impacting net income.
<unk> 49 per diluted share or an exhibit one in this morning's earnings press release.
Net sales for the fiscal 'twenty two six month period increased to 29, 8% to $324 6 million from $250 1 million a year earlier and 25, 1% from the pre pre COVID-19 fiscal six months period two years ago.
Net sales for the six months ended September 32021 included $13 7 million in core revenue compared with $12 8 million for the prior year period as I discussed.
Gross profit for the fiscal 'twenty two six month period was $59 5 million compared with $53 1 million a year earlier.
Gross profit as a percentage of net sales for the fiscal 'twenty. Two six months period was 18, 3% compared with 21, 2% a year earlier.
Gross margin for the six months period was negatively impacted by five 9% comprised of the following.
Higher costs related to COVID-19, including higher freight costs for which we have implemented price increases and these will become effective during the third quarter breakout.
Brake caliper setup costs relocation transition expenses and other items, including noncash expenses as I previously discussed.
Factors impacting gross profit as a percentage of net sales totaling five 9% are in exhibit four in this morning's earnings press release.
Net income for the fiscal 'twenty two six months period was $4 5 million or <unk> 23 per diluted share compared with net income of $12 2 million or <unk> 63 per share a year ago.
I should emphasize the noncash noneconomic foreign exchange impact of lease liabilities in foreign contracts totaled $10 2 million on a pretax basis or <unk> 39 per share on a tax effective basis for the six month period compared with the prior year.
Items impacting net income totaling 88 cents per diluted share arent exhibit two in this morning's earnings press release.
Net cash used in operating activities during the fiscal year 'twenty, two second quarter was $19 6 million and during the fiscal year 'twenty. Two six months period was $24 3 million, reflecting working capital requirements to support the company's record sales and anticipated growth while considering.
Supply chain challenges due to COVID-19 and the upcoming impact on the industry of the Chinese new year holiday shutdown.
This compares with cash provided by operating activities of $16 9 million for the prior year.
Fiscal second quarter, and $39 3 million for the prior year six month period.
Net debt was $120 6 million at September 32021, compared with $88 9 million at March 31, 2021, reflecting the required inventory increases for anticipated growth as I just mentioned.
As you know there are various methods to calculate return on invested capital.
Our our purposes, we calculate ROIC.
By taking operating income, adding back non cash expenses and certain onetime expenses we.
We believe this metric considered together with GAAP measures provides useful information to investors and to management regarding the company's return on invested capital.
In short we take this metric which was approximately 87.3.
$3 million for the 12 months ended September 32021 divided by the average equity and net debt balance of $414 million, resulting in a 21, 1% pre tax return on invested capital.
Paired with 17, 5% a year earlier.
We are continuing to realize the benefits of expanding our Mexican operations and the launch of our new brake category with expectation to increase returns from both new and existing product lines as the benefits of our strategic expansion are more fully realized.
As I mentioned at September 32021, our net debt was approximately 126 million total cash and availability under revolver credit facility was approximately $109 million at September 32021, based on a total $238 6 million revolver credit facility and subject to certain limitations.
At September 32021, the company had approximately 927 million total assets.
Current assets were $456 million and current liabilities were $349 million.
During the fiscal first quarter the company extended its credit facility with PNC Bank for five years through May of 2026, including amendments, which further increase the company's strong liquidity base.
But our reconciliation of items that impacted results and non-GAAP financial measures.
These refer to exhibit one to five in this morning's earnings press release.
I'll now open the call for questions and someone will then provide some closing remarks.
Thank you David as a reminder to ask a question just press Star and then the number one on your telephone keypad and so we do all your question just press the pound key please standby, while we compile the Q&A roster.
Yeah.
Your first question comes from the line of Sarkis <unk> from B Riley Securities. Please proceed with your question.
Hi, Thank you for taking my question here I just wanted to start off on.
The item called out at $13 7 million in the quarter for core revenue aside from that were there any pull forwards.
First sales that impacted this quarter.
No no. It's a vibrant Florida demand continues to be very strong so qs.
Got it and would you care to frame up kind of what youre seeing for the for the back half of your fiscal year. It still sounds like demand is pretty robust for the sector.
And just wanted to kind of get a sense for are you able to work through some of the supply chain situations in order to deliver to your customers.
We've been quite successful doing that so far.
I expect I expect us to continue into the third quarter.
There are a lot of update orders and scheduled you know in the fourth quarter and so that's a little bit of an unknown Novo demand. We know is very very strong as to where those shipments will arrive until the point in time.
For the first quarter, but that revenue is already there.
Orders have already been committed to.
So the fourth quarter, we will either have them will be.
Early in the first quarter.
Got it and I wanted to come back to the Malaysia facility. I think you mentioned it was shut down for most of the second quarter because of their situation there and that reduced your capacity it sounds like you're running again any sense for what that's going to contribute here at least in the near term and then separately.
And kind of the midterm.
Well I'll, let David talk a little more specifically, but the implications of it being close though where we outsource.
A lot of the outsource came from from Chinese companies, which means we have to pay incremental tariffs.
Our pricing.
More efficient when we produce it in Malaysia.
Some of those sunk expenses with a factory that's not open even though at a workforce that we continue to pay while they're not operating.
And so those were headwinds that will change it will take us another.
60 to 90 days to get it re ramped up to the levels that it was at.
But certainly those are.
Our next fiscal year, we should see some significant margin enhancements.
Comes back online.
Okay.
Thanks, and David any more quantitative color that you can provide on how it impacted the quarter.
Cable is in exhibit three we have the total increased expenses related to Covid. It's all part of that $5 5 million, which impacted the quarter three 1% on the gross margin percentage.
Thank you I'll hop back into queue.
Thank you. The next question comes from the line of Matt Koranda with Roth Capital. Please proceed with your question.
Hey, guys. Thanks.
Just really quickly a housekeeping one day.
David maybe could you run through the revenue breakdown between.
Rotating electrical wheel hubs break and other.
Yes, so for the second quarter rotating electrical was 73% of sales, we will have 11% break related products was 14% and others 2%.
Got it okay.
And then.
You mentioned some some additional price tag so that goes into effect.
And I think you said the third quarter, the full impact of which would be felt in the fourth quarter and then some prior pricing action that went into effect in the second quarter you get the full impact in the third quarter.
Maybe you could just frame up for us what that means in terms of the implications for revenue growth as we look into the back half of this year.
Any gating items that you can help provide to kind of gauge the size of the price increases or at least just how it how it impacts revenue that'd be helpful. And then maybe also.
On the gross margin front.
You mentioned, it's basically in reaction to some of the supply chain headwinds.
Yeah.
And so does that mean, we just essentially recover towards the kind of mid twenty's like 26 plus percent gross margin rate.
That we were at pre Covid how.
Should we be thinking about revenue growth and gross margins for the next couple of quarters, Yes. So I'll start with the gross margins I mean, you commented in the 26 plus margin should should we should we should be back at that.
And having said that I think there is more margin upside as we go into the next fiscal year based on.
Utilization more effective utilization of the operating facilities, both in Malaysia, and Mexico, especially with regards to a ramp up of our brake caliper business.
And we expect.
The rationalizations based on the move.
And so the new footprint, which is in place now and so we should see margin gross margin of produce I think fairly decent gross margin accretion for the next fiscal year and then the second part of it that you ask is.
<unk>.
It's the the.
The price increases.
No.
Should should contribute.
The incremental 5% plus.
To revenues.
But as I say that when launching new products and new customers and so it's hard to say.
Say that youre not going to be able to extrapolate just the price increases just to our revenue growth in our revenue growth should exceed.
<unk> exceed the pricing increases.
Okay great.
Then just.
Any.
The commentary you can provide on that.
The rotating electrical.
The growth rate and just sort of what youre seeing in terms of order rates from.
Some of your customers and it looks like it.
Did decelerate a bit on a year over year basis, maybe it was there just a pause in terms of order flow or fewer update orders during the quarter, how should we expect sort of.
Thanks for trying to in rotating electrical.
I guess, maybe it kind of in the quarter and then kind of how I would think about it for the next few quarters as well.
Yes, So I think you see the percentages of the total come down for rotating electrical but rotating electrical shock.
It's just that we have such a fantastic growth in the break related products.
You can see that the percentage of revenue has gone from 7% to 14, but that's despite rotating electrical increases as well.
So we expect rotating electrical to continue to grow.
We have.
It's 50% market share of this so it's going to be.
A more moderate growth rate, but the demand for the product is definitely up through the register <unk> got a lot of.
After foot maintenance on used cars around the vehicle and so there's plenty of.
Plenty of tailwind as relating to rotating electrical and.
And I expect that to continue I also expect.
All of our product lines to continue to growth.
Including the diagnostics business, which has been I mean, we.
We suffered actually the revenue.
Think about the revenue for this quarter.
We have a fairly significant amount of demand that we were unable to ship. Despite the fact of having record record sales.
And then in addition to that I think the diagnostic business got disproportionately hit because of.
Supply chain challenges.
That relates to not only on.
On the diagnostics side with our customers.
Production Assembly lines have to be in place before you can put in our diagnostic equipment. So they're holdups hold us up.
So a little bit of rabbit in the amount of time, hopefully I got to your question.
Yes.
Thank you addressed them there.
No.
Just wondered on the.
The supply chain fraud, obviously.
The topics probably been beaten to death this earning season with a number of companies, but you mentioned sort of some of the bigger pain points for you guys right steel so amazing packaging.
And just wondering if you could provide a little bit more color on sort of how the.
How those items progressed through the quarter.
And <unk> for you guys that things get better.
Month by month, and then how we trended I guess since the quarter that did that kind of through October and the early part of November here.
Would you kind of characterize things getting better or worse or about the same.
Well I would say things got better fill rates got better.
And supply chain got better having.
And continue to get better having said that our demand is also growing.
Globally faster than them.
That normal and maybe this is the normal I'm not sure anymore, but.
So the supply chain, while we're getting better and better.
The dollar effect of that those delays are pretty significant.
And this is not a.
<unk> quantitative.
Number one off for you, but just to sort of.
We could have done had there been no supply chain challenges or let me restate that have we gone back to normal supply chain environment.
There's probably $15 million to $20 million incremental revenue and demand for the quarter.
Then we could have we could have probably ship, so and thats taken a little bit of of a grain of salt because some orders or shipment of capsule is very hard to get the exact number of what gets deferred.
Hum.
But having said that so the deferral remains fairly constant.
But the actual fill rates are going up and the demand is going up.
Got it very helpful.
We are also making.
Pretty significant investments pre Chinese new year.
No.
To try and get the ball, sorry inventory and a lot of that the effectiveness of that will depend on whether we can get the inventory out of the ports as you probably can see from the office.
But theres nothing on ships.
And outside of the long beach waiting to get in but.
I don't know where that is and we look.
I'll give you some sort of broad feel for where we are but.
My expectation is we have about $100 million of new business coming on board in the next.
As we can get towards visits at least the euro.
So lots of new demand for us correct.
Yes.
Okay very helpful I'll jump back in queue here.
Thank you. The next question comes from the line of Scott timber from C. L. King. Please proceed with your question.
Good afternoon.
Hi.
David I heard you correctly, you said that the I guess, the extraneous costs out of Malaysia.
In that I guess, that's six plus million covered lives in exhibit one.
But if you look at the footnote it says that basically all of it was just related to increased freight costs. So I'm just trying to get a sense of.
Is are you assuming that all of you.
Including the Malaysia.
Cost.
Well the extra costs there within that freight costs or is it just a smaller piece of that six point much smaller piece alright. Good question. Its the ladder. So that number is mostly freight.
And you got about a $1 million related to the Malaysia.
Okay.
Got it so.
Obviously, we have a round of price increases that went through a small piece of it I guess you could say one part of it probably in the.
Throughout the quarter.
Can you quantify how much that was or was it just really de minimis.
Yes.
It's pretty small and it's it's hard for us to quantify.
A lot of is proprietary so it's hard to quantify that but it's pretty small for the quarter Youll see it.
Youll see it for the full quarter this quarter.
Alright, so as we get into the back half of the year and the offsetting.
Ben benefit will release so to speak.
What's to come through and assuming that we're in a more.
The supply chain issue is going to be with us for a while.
Where are you in your exhibit one in the quarter.
Orders coming up have a line.
Adjusting for the price increases since you're already backed out the costs related to those.
We will take out any adjustments that are going to be compensating us from our price increases so to the extent that we have a freight surcharge. For example, we would not put freight in a material item anymore. That's correct.
Okay. So the adjustment should come down pretty significantly as we move forward.
Okay, and I guess, just lastly on the rotating electric again.
One of the hottest summers we've had in <unk>.
Pension of he's all the way into.
Paul could you talk about.
How that benefited rotating electric and.
Where I guess customer inventory for rotating electric must be as low as it's been in years.
Yes.
Well I mean definitely has some hardware that helps its very difficult to quantify exactly how much it helped.
Customers want more inventory I can tell you customers are selling the product that's gone through the register.
They are experiencing positive sales for the register.
And we're filling our fill rates in rotating electrical.
Right good.
I want to compliment our team in terms of how they handle it well.
We do have.
We think as the state of the art manufacturing.
Facilities and global footprint in terms of probably the most efficient global footprint in terms of all of our sourcing capabilities.
So having said so rotating electrical continues to be very strong.
Having said that we have new product lines that are even stronger so as they ramp up not only because of demand through the register but because of market share gains.
Got it.
That's all I have thank you.
Thank you.
Thank you. Your next question comes from the line of Brian Nagel from Oppenheimer. Your line is open.
Hey, guys good afternoon.
Hi.
So a couple of questions.
And then some follow ups to the prior questions, but first off with regard to supply chain and we talked a lot about.
What youre seeing I guess is there a way for you given the perspective, you have now in the kind of conversations youre, having with your various partners.
Is there a way for you to say.
When do you think the supply chain could potentially get significantly better to the point, where it's not and it's not.
Not it's not the type of drag its been on your business.
Wow.
I mean, if I have to say, yes, or no ramps I would say no.
Having said that because I mean, we just don't know.
If they would just catch the ports up here that would make an enormous difference the capacity for our product is available our product is available we just can't get it yet.
So to the extent the long Beach Port Authority is talking about 2047.
The shortage of axles I wish I could say that that it's a short term problem, but I think that thats going to go on I don't see it.
Sure.
I think the next 12 months, we're going to be talking about those quickly.
<unk> said that its much much better for US right now, although we have a lot of product on the waterfall for full anticipated needs and inventory.
The good news for US is that we were able to bulk up inventory when we can get it because.
We don't have perishable inventory and then the useful life of this inventory is 10 to 20 years.
So there's no risk of obsolescence.
<unk>.
Real obsolescence.
And so we're doing whatever we can to mitigate it I think that our fill rates will continue to get better quarter over quarter.
And I think we will will will eat into that backlog.
That backlog over the next 12 months, but I really am not.
I just got back from the APAC show and I don't think anyone feels like this is a short term short term.
There is a short term solution in place and then I think everyone's looking at around 12 months out.
Excellent. That's very helpful. Then the second question I have just with regard to demand.
I'll frame. It similarly have you talk about.
Yes.
You and others have talked about this which seems to be it is an extraordinarily solid demand backdrop for space right now and for M. P. A a.
How do you view as the underlying sustainability, particularly as hopefully the U S economy continues to pull away from the Covid crisis.
Well I think that question came up and it was discussed a lot of the Tradeshows will look.
Potthast, this and I've been saying this for a long time and I've been wrong for a fair amount of time is that the fundamental statistics of the aftermarket.
A tailwind for us I mean, the number of vehicles on the road continues to go up average age continues to go up and I think now as you see.
Uh huh.
Covid came into effect.
And the number of vehicles in Prime replacement age is gone up Covid came into effect, we had hot weather.
All of a sudden you have this massive spike which for some reason people assigned world.
Temporary, but I don't see that as I think the fundamentals for non discretionary hotspots, which is what we are in.
I just think there's just good fundamental statistics that support a tailwind growth for a number of years I don't see this.
Changing.
Having said that for discretionary items, you may want to look at differently, but we don't people don't go I got I got.
Extra money I'm going to go and replace an alternative I mean.
They make it a paint job.
<unk> their wheels or whatever they are doing but there is certainly not buying a new alternative for funding.
So for our business I think the fundamentals are in the statistics and again, you look at $241 million or whatever that number is not that keeps growing every quarter I used to be able to say the same number quarter over quarter now it keeps going up every quarter and the average age has just gone up in their miles driven even hasnt fully recovered.
But.
But we'll continue to do better and better.
I was looking at all of the numbers I mean people are more dependent on the vehicle RV sales are up and I think it's just indicative.
What's going on I think used car lots of empty residuals on leases I mentioned.
It makes it much more beneficial to exercise the purchase option at the end of the lease.
And with the shortage of new causes those causes just staying on the road not that they would go off the road.
There's just less new cars are being sold so.
In some ways I hope that new car sales come come back soon because seven eight or nine years from now.
I want to be able to replace their alternatives and start it so we want both.
Okay very helpful. As always thank you.
Thank you.
Thank you once again, if you have a question just press star and then the number one on your telephone keypad. Our next question comes from the line of Bill <unk> from.
Titan capital. Your line is open. Thank you the price increase that you have.
<unk> put in place the first one will that be enough to offset the $6 million of logistics and freight cost.
That that you called out this quarter.
No.
Because we had two rounds of price increases.
So as someone mentioned on the remarks, we have the first round that went to effect during the second quarter will be fully reflected in our third quarter. The second round becomes effective in our third quarter will be fully reflected in the fourth quarter, which would then offset all the freight increases assuming that fed doesn't go forward.
We will continue to index rates on price increase that's correct.
That's that's helpful. Thank you and then secondarily.
Longer term I'm, not asking about any individual quarter or year for that matter, but just thinking about this business what gross margin should generate.
That's a tough question because you know we've been under a lot of pressure on gross margins, but our fundamental gross margin by product line. This month.
It has not declined at all but our product mix has declined and so to the extent that you have startup costs and new product lines. Those margins are lower to start but they should this should normalize and then to the extent that you have products that you are not manufacturing that you're buying out youre going.
Have a lower a lower gross margin, but you're going to have higher return on invested capital.
Bill I don't know where were the mix tops out at over a period of time, but certainly in the high twenty's shouldn't be shouldn't be you know it should be as realistic.
Return on invested capital pushing on 30 plus percent should not be unrealistic.
I appreciate that and then I will I will add one thing bill that.
When I when I when I address that question not only I'm addressing.
Hotspots now obviously in the electric vehicle space.
We're a different model because as we start selling software as a solution and that starts you know I mean, it will be pretty small, but it starts in January and our electric.
Electric vehicle solutions.
<unk>, Ohio R&D expenses.
As a bigger number.
That should that should.
That could be a significant thing for us.
I will say as well.
As we ramped up on new we want vendor of the year when it was largest retailers for our new product initiatives.
We actually wanted to two of them.
Three large retailers.
This year for new product initiatives, so that was a pretty significant for us.
Well congratulations on that and I do want to ask a theoretical question building off what you just said so.
Once the business achieves its lets say normalized gross margin picking that number whatever that is in the high twenty's.
And then if if you are successful with your software initiative overtime. The implication would be that you would have a generally upward trending margin.
From that point forward.
Are we thinking about a what you just said correctly.
Yes, absolutely.
Okay.
It's very simple and if you look at our strategy I always have the analogy of back gap and.
And if you play I'd like to block the back.
Next quarter, Okay, and then I'll worry about the front cabin, so when I say block the back quarter, let's get the market share, let's take out the categories that we think are important to learn we'll grow into that margin.
We're not we look at and the board is very active in this is that we've always got rolling five year estimates going on and we I believe so.
He is very well positioned for strategic growth over the next five years as well as significant growth in our profitability.
Great. Thank you I would like to ask one additional question if I may.
Relative to your comment in the press release, and I think you've alluded to it here in the and on this call.
You have increased inventory for anticipated business growth.
Would you talk in more detail.
Around that because that sounds like that increased inventory is.
Is separate distinctly separate.
From the increased inventory trying to navigate the supply chain issues.
It's both.
Life.
Kim I think I mentioned both of them.
I see.
I see new business coming to us.
Sure.
This is a pretty round numbers, well, but about $100 million in.
So we certainly are gearing up for that but thats in a lot of that tonight existing product lines and and.
And and.
And we're trying to build inventory.
I'm just concerned if you have another COVID-19 shutdown somewhere.
And so we were operating under a model today, oh of carrying incremental inventory levels and what would be our norm.
Our cost of capital is as.
As fairly.
Fairly low.
Albeit that the stock price performance slide set up a little bit, but you know.
But overall our cost of debt is efficient.
Carrying inventory and having it available in the market. The way. It is today I think will reward us.
So it's a combination.
It's not all new.
Thank you I appreciate both your comments.
Thank you. Thank you. Thank you.
Thank you there are no further questions on queue I will now turn the call back to Mr. Sullivan Jessie sure. Please go ahead.
Thank you I'd like to conclude our call today with a brief recap of our business.
Obviously, there are many variables in the world that we cannot control, but we do control our strategy and our record performance for the first half of fiscal 'twenty to underscore this point.
Our added capacity supports growth today.
As well as our strategic sales objectives to.
To accomplish our goals we are extremely focused on our coal hard parts after market business and expect to continue to grow this business organically for each product line.
In addition, we are expanding our brake related product lines that were excited about the opportunities, which will even further accelerate our growth.
Also as a new production facilities mature, we will realize increased productivity, which will lead to enhanced gross margins.
While there are many variables and cost today, we expect this to stabilize through a combination of appropriate pricing and enhanced efficiencies that I mentioned, our margins will improve.
This in conjunction with accelerated revenue growth bodes well for increased earnings and shareholder returns.
In addition to our hard parts business, our diagnostic business in both internal combustion engines and electric vehicles continues to pick up momentum.
Along with this diagnostic business, we are focused on adding contract testing at year end.
Well it will start in January which would further enhance our revenue and our contribution margins.
Allows us to scale revenues without linear scaling of capital expenditures and enables our customer base to get quicker and more efficient results and feedback with less capital outlay.
Our vision group is also working diligently on numerous technologies that positioned us to take advantage of EV power systems, either software or licensed intellectual property.
While the world of electrification is fast evolving we have a strong opportunity to be a significant player in this space.
These strategies when implemented will serve to grow shareholder value and increased growth rates in our business.
In closing 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, our top priority and they've done a fantastic job, we remain extremely vigilant to protect our global team from this horrible buyers and we are working diligently to get even more of our employees and their family members vaccinated.
Debt that we are currently more than 91% vaccinated worldwide.
For the most product our corporate team has continued to work remotely, though we remain committed to gradually and safely returning that team back to the office as conditions permit most likely beginning in January.
As a result of everyones contributions our operations have continued largely uninterrupted and I'm extremely proud of our company.
In summary, our investments are bearing fruit and we have meaningful opportunities to enhance shareholder value and the dynamics of 130 billion.
Automotive aftermarket in the United States and the emerging electric vehicle industry. We are proud of our more than 50 year history in the aftermarket industry and are excited about our emerging presence in the electric vehicle space 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 for this call. We look forward to speaking with you when we host our fiscal 2022 third quarter conference call in February and at future Investor Conference.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
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