Q2 2023 Motorcar Parts of America Inc Earnings Call
Yes.
Ladies and gentlemen, thank you for standing by today's conference call is scheduled to begin momentarily until that time your lines will once again be placed on music hold thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by.
It is Brent and I will be your conference operator today.
This time I would like to welcome everyone to the motorcar parts of America's fiscal 'twenty to 'twenty three second quarter results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one. Thank you. It is now my pleasure to turn today's call over to Mr. Gary Maier, Vice President of Investor Relations. Sir. Please go ahead.
Thank you and thanks, everyone for joining us today for our call.
Before I turn the call over to sell and Jonathan Chairman, President and Chief Executive Officer, and David Lee The company's Chief Financial Officer, I would like to remind everyone of the Safe Harbor statement included in today's press release.
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 on the company's current expectations and beliefs concerning future developments.
And their potential effects on the company there can be no assurance that future developments affecting the company will be those anticipated by the company 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.
Subject to change based upon various factors.
In particular expectations about anticipated future growth and opportunities with customers may not be achieved 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 a more detailed discussion of some of the ongoing.
Risks and uncertainties of the company's business.
I refer you to our various filings with the Securities and Exchange Commission with that I'd like to begin the call and turn it all over to sell them.
For his prepared remarks, thank you Gerry.
Appreciate everyone joining us today and hope everyone is safe and healthy.
Well, we had a less than satisfactory quarter, we remain optimistic about the second half and have been diligently focused on achieving solid year over year results and we are reaffirming our previously issued 2023 guidance.
Let me begin by discussing the challenges impacting each segment of our financials for the fiscal second quarter, some of which were company specific and others, which were macro related issues.
<unk> dive into the specific drivers to support this optimism.
Briefly touch on the challenges for the quarter.
First despite sales being strong for the quarter, which were in fact, an all time record. If you exclude coal revenue from the same period a year ago. We continued to experience supply chain challenges, primarily due to shortages of components and test temporary customer order delays driven by specific customer dynamics.
Yes.
It is important to note that sales for heavy duty and diagnostic businesses were significantly lower than anticipated, which negatively affected gross margins and resulted in disproportionate losses for the quarter.
We believe these sales were primarily delayed.
And we're already seeing a pick up which will help mitigate the impact on gross margin and on losses.
Second with respect to gross margins as I, just stated we experienced headwinds from heavy duty and diagnostic products. Additionally, we also experienced headwinds due to the continued impact of inflationary costs, which include higher labor higher component costs and higher production suppliers.
While we incurred increased costs the prices did not take effect.
Until the beginning of our third co.
Our price increases.
An additional round of price increases will go into effect at the beginning of the fiscal fourth quarter.
The October price increases will immediately help to enhance margins followed by the additional price increases in January which will further improve margins.
In addition, operating efficiencies will also enhance margins moving forward.
Third our profitability was impacted by higher interest expense, primarily from a significant rise of market condition to interest rates related to customers' supply chain finance programs and interest rates related to the Companys average debt balance we have implemented price increases to partially offset inflationary.
Costs, including some increases in interest rates and other items that David will discuss.
Okay.
Now, let me highlight several items that support our optimism including included in this morning's press release.
Number one we expect sales to be in the range of $680 million $700 million for the fiscal year, representing between four six and seven 6% year over year growth reaffirming our annual guidance.
We also anticipate margin improvement with a full benefit of the latest price increases.
Expected in the second half of the fiscal year.
As well as further operational efficiencies and cost reductions.
Three we expect cash flow improvements from enhanced profitability across all product lines with regard to this last item I should mention we have been working diligently to adjust our investments in inventory levels, which have been higher than normal to mitigate supply chain disruptions and I'll now stabilizing.
This supports our goal of improving cash flow from operations.
As a result of these initiatives the company is well positioned for sustainable top and bottom line growth for parts and solutions in future periods.
Now, let me expand a bit further and discuss the other drivers to support our ability to achieve second half and longer term financial targets.
Our brake pad line utilizing an exclusively licensed industry, leading formulation continues to gain traction as a brake rotors.
Orders for both product lines are growing, particularly since the beginning of the second quarter. We expect this momentum to continue to increase in the second half of this fiscal year and moving forward.
Our brake caliper product line continues to gain momentum with expected operating efficiency improvements as volume increases with further fixed cost absorption opportunities.
We believe our brake related business will exceed $300 million in annual sales above our fiscal 'twenty to reported results in the next three to five years.
We are continuing to expand sales in Mexico with multiple product lines as our customers experienced increased demand for aftermarket parts, including currently rotating electrical wheel hubs and master cylinders.
All major automotive retailers are continuing the rollout of our rotating electrical bench top tester and we expect sales from this opportunity to reach accumulative of $80 million in the next five years. We also expect additional revenue from maintenance and add on services.
Our electric vehicle contract testing center in Detroit, Michigan, Michigan continues to attract customers, including a leading agricultural and construction equipment provider and leading EV automotive manufacturers to support their design and development of electric vehicles.
This contract testing as initial entry into our software as a solution.
Business.
We were encouraged by the response from customers of last week's apex trade show in Las Vegas, and we're excited about all of our multiyear new business commitments and expect these numerous opportunities to continue to fuel that growth.
In short we are well positioned to address both internal combustion engine market and the emerging electric vehicle market with product functionality and applications across both markets.
We expect continued strong demand for internal combustion engine applications for decades, notwithstanding electric vehicle growth, which will which still represents a small percentage of the overall car park.
In summary, with a broad line of non discretionary aftermarket parts necessary to service internal combustion engine car population and approximately 280 million vehicles on the road.
And excited by our opportunities.
Our bench top tester for Alternators and starters, continuing to rollout of retail customer store locations across the country.
These bench top tester is enable retailers to offer accurate advice with the latest protocols to diagnose problems for consumers and reduce unnecessary returns.
This provides a value added benefit for the retailer while strengthening their consumer relationships.
Notwithstanding the continued domestic and global challenges, we are working diligently every day with our customers and suppliers to meet the demand for our products as well as the inflationary pressures we are all facing.
I will now turn the call over to David to review our results in greater detail.
Thank you Scott and good morning, everyone I encourage everyone to read the earnings press release.
Issued this morning as well as the 10-Q that was filed later today.
Let me now provide a review of our fiscal second quarter and six months financial results.
Net sales for the fiscal 'twenty three second quarter, we're at one one.
$72 5 million, representing a six 6% increase compared with $161 8 million in the prior year, which excludes $13 7 million of core revenue due to a realignment of inventory at customer distribution centers with sales benefits evolving as product mix changes.
Gross profit for the fiscal 'twenty three of second quarter was $26 5 million compared with $36 million a year earlier.
Gross profit for the quarter was impacted by noncash items as well as cash items.
Let me provide details for each and then I will provide further details on the impact on each additional line item that you can further understand underlying fundamentals between periods and the opportunities to enhance profitability.
The noncash items reflect core and finished good premium amortization and.
And revaluation of cores on customer shelves, which are unique to certain of our products and required by GAAP.
The total of these noncash items in the quarter was approximately $4 3 million.
A more detailed explanation of Cora County is available on our website and I would encourage anyone with questions about this topic to review the video.
In terms of the cash items, we incurred higher freight costs and access our customer freight surcharges that we already implemented. In addition, there were remaining higher tariffs due to the shutdown of Malaysia that impacted our facilities.
And other related supply chain disruption costs.
The total cash impact of these transitory costs.
Including freight tariffs and other related costs related to supply chain disruptions on gross profit was $3 7 million compared with $5 5 million a year ago as referenced in exhibit three of this morning's earnings press release.
We are encouraged that these costs are decreasing.
Before moving on I should note there were no ramp up and transition expenses related to our Mexico expansion this quarter compared with 797000 in the prior year second quarter. We are pleased that brake caliper operations are increasing nicely and we expect greater sales volume and related benefits with.
Enhanced financial performance as Selwyn previously referenced.
Non adjusted second quarter gross profit as a percentage of net sales was.
Was 15, 4% compared with 25% a year earlier.
<unk> margin was impacted by two 5% and the previously mentioned noncash items.
As well as a two 1% from the previously mentioned cash items, some transitory costs related to supply chain disruptions.
Additionally, gross margin for the quarter was impacted by unusual supply chain shortages of critical as semiconductor chips for the company as diagnostic products and critical components for heavy duty products.
We continue to experience extraordinary global supply chain challenges and inflationary costs.
Our most recent price increases were not fully in effect.
In summary, gross margin for the fiscal year 'twenty, three second quarter compared with the prior year was impacted by higher inflationary costs.
Unusual supply chain shortages of critical components that accompanies diagnostic and heavy duty products.
Changes in product mix and the benefit of core revenue in the prior year due to a realignment of inventory of certain customer distribution centers.
Gross margin is expected to benefit from certain price increases that went into effect at the end of the current fiscal quarter as well as anticipated future price increases discussed earlier.
Moving on operating expenses were down $1 7 million for the quarter to $24 7 million from $26 4 million in the prior year period.
This includes a lower noncash expense of $2 8 million for the Mark to market foreign exchange impact of lease liabilities and for contract compared with the prior year and 900000 of increased noncash expense due to foreign currency transactions.
We reported a net loss of $6 5 million or 34 per share results were impacted by items that totaled $8 9 million or <unk> 46 per share as detailed in exhibit one of this morning's earnings press release.
Results reflect the impact of noncash items totaling $5 million or <unk> 26 per share, including core and finished goods premium amortization and revaluation of cores on customer shelf totaling $4 3 million as previously explained.
Noncash items also included a loss of $1 1 million for the foreign exchange impact of lease liabilities of forward contracts.
Cash items that impacted results include China trade costs related to supply chain disruptions totaling $3 9 million or <unk> 20 per share.
In addition to the above items results for the quarter were primarily impacted by unusual supply chain shortages of critical components for the company's diagnostic products and heavy duty products as referenced previously.
I should note that we have implemented cost reduction initiatives throughout the company, including travel outside services labor costs, and overall cost saving opportunities, which are expected to enhance profitability.
Additionally results for the fiscal second quarter were also impacted by higher interest expenses, primarily due to higher interest rate compared with the prior year.
Interest expense was $9 3 million compared with $3 6 million last year.
Significantly due to higher interest rates on the accounts receivable discount programs offered by our customers.
Should emphasize that the large interest expense incurred in the second quarter was primarily driven by a sharp rise in interest rates at three 3% compared with the prior year, but the accounts receivable discount program offered by our customers. This increase is nearly triple the discount rate the company paid an interest expense and the.
Prior year period.
In order to address the significant rise in interest rates, we are implementing price increases which are expected to help offset these higher rate and certain costs as noted previously.
We're also focused on improving cash flow to pay down borrowings.
Additionally income tax benefit it was $914000 compared with $2 3 million income tax expense for the prior year period.
As you also mentioned that the effective tax rate was affected in part due to specific foreign jurisdictions from which we did not expect to recognize the benefit of losses. However, we expect these assets will be utilized against future profits, which will benefit future tax rates.
Net income was $3 7 million or <unk> 19 per diluted share in the year ago period.
A year earlier were impacted by a total of $9 6 million or 49 per diluted share. These.
These include noncash items totaling $8 1 million or <unk> 41 per diluted share.
Including a non cash loss of 39, $3 9 million or <unk> 20 per diluted share on a pretax basis.
The foreign exchange impact of lease liabilities, and Florida contract and.
And cash items totaling $1 5 million or <unk> <unk> per diluted share primarily transitory costs related to supply chain disruptions.
EBITDA for the second quarter was $4 9 million EBITDA was impacted by $6 7 million of noncash items as well as $5 1 million in cash items, primarily due to the trend to a cost of failure to supply chain disruptions.
Before the impact of noncash and cash items mentioned above was set at $16 7 million for the second quarter in.
In addition to the above items EBITDA for the quarter was impacted by unusual supply chain shortages of critical components for the Companys diagnostic product and heavy duty products as referenced previously.
EBITDA for the prior year second quarter was $12 8 million EBITDA year ago was impacted by $10 8 million of noncash items as well as $2 million of cash expenses, primarily transitory costs related to supply chain disruptions.
EBITDA before the impact of noncash and cash items mentioned above was $25 5 million for the prior year second quarter.
Now, let me discuss the six months results.
Net sales for the fiscal year 2026 month period were $336 5 million, representing an eight 3% increase compared with $310 8 million in the prior year, which excludes $313 7 million and core revenue due to realignment of inventory at customer distribution centers with.
Sales benefit evolving as product mix changes.
Gross profit for the fiscal at the six month period was $56 8 million compared with $59 5 million a year earlier.
Gross profit as a percentage of net sales for the fiscal 'twenty three and six months period was 16, 9% compared with 18, 3% a year earlier.
This margin for fiscal 'twenty three six months period was impacted by two 4% of noncash items and.
And one 8%.
Primarily by transitory supply chain disruptions.
Detailed in exhibit four in this morning's earnings press release.
Gross margin for the fiscal 'twenty, two a six month period compared with the prior year was impacted by various items discussed previously for the quarter.
Net loss for the fiscal 'twenty three six months period was $6 $7 million 35 per share compared with net income of $4 5 million or <unk> 23 per <unk>.
Diluted share.
A year ago.
Results were impacted by a total of $15 8 million or 83 per share. These include noncash items totaling $9 2 million or <unk> 48 per share and.
And cash items totaling $6 6 million or <unk> 35 per share primarily transitory costs related to supply chain disruption as detailed in exhibit chip.
In addition to the above items results for the six months period were primarily impacted by unusual supply chain shortages of critical components by the companies' diagnostic product and heavy duty products as referenced previously.
EBITDA for the fiscal year 'twenty three six months period was $15 4 million EBITDA was impacted by $12 2 million of noncash items as well as $8 9 million in cash items.
Similarly, due to the transitory cost pressures related to supply chain disruption.
EBITDA before the impact of noncash and cash items mentioned above was $36 5 million for the current period.
In addition to the above items EBITDA for the six month period was impacted by unusual supply chain shortages of critical components for the Companys diagnostic products in heavy duty product as previously as referenced previously.
EBITDA for the prior year fiscal 'twenty, two six months period.
$21 7 million EBITDA was impacted by $13 4 million of noncash items as well as $9 3 million in cash items, primarily due to transitory cost pressures related to supply chain disruptions.
EBITDA before the impact of noncash and cash items mentioned above was $44 4 million for the prior year period.
Now, we will move on to cash flow and key corporate items.
Net cash used in operating activities during the fiscal second quarter was 16 million versus $19 6 million cash used in operating activities in the prior year period.
This reflects working capital requirements to support solid sales growth, including increases in accounts receivable.
We do expect to generate cash from operating activities for fiscal 'twenty three.
We expect to generate an increase in operating profit on a year over year basis supported by organic growth from customer demand introduction of the new product category price increases and operating efficiency efficiencies from our footprint expansion.
Our return on invested capital on a pretax basis at September 32020, Q, plus 15, 1% compared with 21, 1% a year earlier as our investments bear fruit, we expect to realize further benefit from the expansion of our Mexican operations and the launch of our new brake categories with expectations of inquiry.
<unk> returns from both new and existing product lines.
Our net debt ended the quarter was approximately $172 million, while our total cash and availability under our revolving credit facility was approximately $76 9 million.
Lastly, we recently entered into a fourth amendment to our credit facility to modify the covenants to match the timing of implementing price increases to address inflationary costs and nearly tripling of interest rates.
For further explanation and a reconciliation of items that impacted results and.
non-GAAP financial measures. Please refer to exhibits one through five in this morning's earnings press release.
I would now like to open the line for questions.
At this time, if you would like to ask a question press star followed by the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from Matt Koranda with Roth Capital. Your line is open.
Hey, guys good morning.
I guess I'll ask the usual question first okay.
David can you just give a breakdown by product revenue in the quarter.
Yes for the second quarter rotating electrical was 67% wheelhouse was 11%.
<unk> related products was 20% and others was 2%.
Okay, Great I appreciate that.
And then I.
The top of my question here is you.
You put through a couple of rounds of pricing earlier in the year can you just remind us how many around the pricing have you done prior to the October price increase that you just mentioned that you mentioned in the prepared remarks, and why is that not filtering through into margin improvement. Thus far just curious like what the what the big headwinds or because if I look at gross.
Margin on a year over year basis, it's still even after the adjustments were down north of 500 bps year over year is there something happening adversely with mix. It doesn't seem like volumes impacting because revenue is still healthy, but maybe just help us unpack sort of what pricing has gone into place thus far and then.
Why that's not kind of fully translating into margin improvement in the quarter.
Okay. Thanks for that so previously we had three rounds of price increases.
As we mentioned there was another price increase that went in at the end of the second quarter going into the third quarter and there is one more going in at the end of the third quarter weighs in the fourth quarter for those price increases are further addressing the inflationary costs.
We have seen further cost increases in material and component supply.
These latest rounds further address increasing inflationary costs. So we do expect as we pointed out in our prepared remarks that gross margins will be enhanced in the second half.
And then I think one thing else to add for this last quarter. This last reported quarter is the unusual effect.
From the two product lines from the diagnostic product line and from the heavy duty I mean, that's.
Yeah.
It was a big disproportional loss for us very little capacity utilization because of the deferred sales of delayed sales.
And obviously less overhead absorption and so that really had a big impact.
Significant impact on the losses for the quarter.
Okay and can you highlight exactly where the material costs are sort of really in the plating on a year over year basis, I'm, just trying to get a sense for.
What are the what are the pain points for you guys in particular.
On the components side, especially when it comes to I guess the rotating electrical.
Our core business there.
Yes, I think look the biggest issue right now I mean in general it's easing the semiconductor shortages costing us.
Closing out some some holiday right now and in particular when it comes to power modules, whether it before.
Emulation on diagnostic business and.
Particularly for.
For certain Alternators.
Shortages of semiconductor chips.
So we're bidding that up pretty significantly to try and.
I'm trying to make sure we have the fill rates that we have so.
We expect that to mitigate.
We certainly are seeing a little bit of that mitigated and we expect.
We have some significant price increases that are scheduled to go into effect will that are in effect now for this quarter on that and additional ones that will go into effect at the beginning of the next.
But mostly related to two chips and power supplies.
Okay, and then I noticed.
At brake products revenue as a bigger percentage of the mix just curious is that running below kind of where your mature lines.
In terms of gross margin.
It seems like maybe there is some adverse mix effects potentially from from brake products, but maybe speak to that a little market.
Yes, I think definitely we are lower than some of the legacy legacy products, although they are beating our expectations. So.
No negative surprise on the margins there that that is a business that's growing fast and those margins will be.
We will continue to get better as it grows.
And be accretive to gross profit contribution.
And I think in general all of the hard parts.
The hard parts categories.
A living somewhat up to expectations or exceeding expectations.
Okay got it maybe just.
One more on the.
On the reiteration of the guidance and sort of what it implies for the back half of this year curious one.
Do you have enough visibility.
It seems like you do.
To sort of indicate that the back half topline growth rate's going to be approaching double digits, how much I guess in terms of shipments that were missed in the quarter.
It is baked into that that implied outlook for the second half and maybe speak to sort of weather customer like why you're confident customers are ready to take those shipments just given that they've been a little bit challenged and receiving stuff and then two on the margin front I guess it just seems like we're counting on a pretty big snapback in EBITDA margin.
Get to the full year guide for 'twenty three so.
Just maybe speak to.
How the pricing around that you're putting out are going to help you get there. It's like a 500 gasify it step up in the back half hour I'll hit I'll hit the headlines and then David can take any more details but.
We certainly received.
Some.
Delays from a large customer and we received some orders.
To catch up some of those delays so that's pretty significant in visibility for the quarters.
Update orders that are scheduled for the fourth quarter already already.
And so the visibility on the hard parts lines is pretty good and.
And we feel we feel comfortable there.
We do have some OE customers that are in the electrification business that are delayed taking supply.
And making supply on both sides of that and there's a little bit of risk there but.
We feel like we're really seeing a pick up.
<unk>.
So that's on the revenue side, so I think we see a pretty clear.
Pretty clear.
Clear path to hitting the top line guidance on the revenue side on the margin side clearly we have the price increases.
And we know what they are and.
And again as we as we ramp up for this increased volume in the back half.
Not only will we have the benefit of price increases, but we should have the accretive.
In fact on product production efficiencies as well as we get through that.
<unk>.
Okay.
And we see SG&A coming down as well from a number of the cost cutting initiatives that we've taken and so.
So this target with 93% to 97 of adjusted EBITDA. If you do all the math.
As for solar is still reachable.
Alright.
Your next question is from the line of Carolina Jolly with Gabelli. Your line is open.
Thank you for taking my question. My first one is a quick clarification question from your comments.
Colin can you answer that.
Your line customer purchases is that a 100% from the heavy duty and the diagnostics or is any part of that and our March additional aftermarket aftermarket light vehicle.
Category that you have.
It's both I mean, I think the more surprising one for us for the quarter was in the OE.
The electric vehicle space.
The other we anticipated and so.
No.
But it is in both.
Yeah.
Does that answer your question Cherilyn.
Yes, Thank you and then Tim.
In terms of the.
The non OE.
And do you Joseph.
And industry are kind of customer specific.
Okay.
I think it's very customer specific.
Very much customer.
Can you just expand on that.
No.
The core alignment differences from last year and this year.
If that non cash or cash and can you just explain to us what that is.
What kind of factors drive those changes over time.
Are you referring to the core revenue from the last quarter that we.
Battery wherever you referred to.
Yes, yes.
Okay. So what happens is we own.
The core portion of the inventory on the shelf of the customer and so when we have a realignment and we lose some of that business that customer repays us for that call for those closed out along the shelf.
They are reimbursed by the new supplier. So we went from a mix of our SKU mix too.
Two warehouses to a warehouse mix. So a one customer went from SKU specific mix of suppliers too.
Aligning warehouses and so the net net result for US there was we had to pay for some and we received some the net result is we got an extra I think $13 7 million as demand correct $13 7 million in revenue. It's unusual revenue we normally we only account for coal revenue.
If we know for sure that it's actually received them.
It's unusual it's real revenue and Thats real cash for sure.
But it's not our normal course of business.
Okay. Thank you very much.
Thanks, Kevin.
Your next.
Question is from the line of Bill <unk> with <unk>.
Autonomy capital management your line is open.
Great. Thank you.
First of all.
Relative to the price increases.
What's the volume of dollar amount I should say that you expect to flow through.
Q3.
Yes.
A question that we can't really answer because it's.
It's really confidential between us and the customers in terms of what price increases.
It is significant.
It is significant we've been in a product line that we had a price lock on for two years.
We've now come through the <unk> so we've.
Implemented a touch up for for really for two years.
<unk> on that product line.
So it is significant but.
Can't give you the exact numbers bill.
And maybe I'll try a slightly different way the size of the price increase that you anticipate in January how does it compare company wide compared to the price increase that you just.
<unk> received in October .
It will be bigger.
It will be bigger and be more dollars.
And and you did say that the October price increase is significant so the January price increase a significant plus.
Correct.
And would you like to share a magnitude.
Hi, Larry versus the increase yes.
I just cant I mean.
Just.
Rice increases are so sensitive for our customers why.
Why are we get them and who we get them from.
That's just something I cannot go into at this point.
Okay.
That's fine.
<unk>.
Sure.
I think you addressed the skin in response to a prior question, but you've seen a couple of things that seem a little bit in conflict I think there's just more mind not listening well you've talked about the easing supply chain conditions, but that seems counter to the semiconductor and power them.
Module challenges that you're having.
Trying to tie all of those together.
So unless you are a little slower in the room.
Yes, no I think my references that in general across the board other than the semiconductor power power supply arena.
The other supply chain seems to be easing.
<unk> seems to be easing.
Certainly there's less there's less freight caught up in the docks.
So in general I see easing on the semiconductor side on the specialty power supply side.
Which is very significant for our OE customers on diagnostics business in total and our <unk> and specialty Alternators.
Semiconductors.
The shortage in inflationary prices are still a significant headwind.
So does that clarify for you.
Hopefully absolutely no. That's that's very helpful. Thank you.
Lastly.
David in your opening remarks, you referenced cost reductions.
Are being implemented across the company.
Could you talk about the magnitude of those from.
From a couple of reference points number one the impact that you expect in the December quarter, and then secondarily the ultimate impact when when fully implemented please.
So that's a good question if you look at prior years historically, the sequential increase in operating expenses from the first to the fourth quarter.
So at a minimum we believe sequentially, it's not going to increase so we're working very closely with all the.
Upon managers companywide and looking at our spending as I mentioned in my prepared remarks travel outside services and overall cost reduction opportunities.
Yes, that's been a big reduction in labor costs as well as we moved into new footprint in Mexico. So.
There is some efficiencies in labor as well.
Great. Thank you both.
There are no further questions at this time I will now turn the call back to Mr. Selwyn Jaffe.
Okay. Thank you very much I appreciate that.
Just want to reiterate a couple of things.
<unk>.
I just we're excited about our future.
Hi, everyone.
It's a tough we had a tough quarter and I and we feel that as a management team as much as our shareholders do and we're very much focused on continuing to strive to hit the guidance and feel like we can.
Notwithstanding the headwinds that impacted our performance for the quarter. We have built a solid foundation for both the topline and bottomline growth from our existing product lines supported by strong demand for replacement parts tailwind from an aging car park.
We look forward to a strong second half based on these factors and all the other considerations we discuss during this morning's call.
And in closing I want to thank all our team members for their ongoing commitment.
And they are extremely customer centric focus on service just being at apex and being in the customer meetings.
Number of complements we are.
<unk> is a supplier is extraordinary and I am extremely proud of our team members and our company.
We appreciate your continued support and thank you again for joining us for the call. We look forward to speaking with you when we host our fiscal 2023 third quarter conference call in February and at future Investor conferences.
Thank you.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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