Q1 2020 Earnings Call

Hello, and welcome to the Motorcar parts of America fiscal 2021st quarter results Conference call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at this time.

If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call.

Very nice you may begin.

Thank you the Wanda and thanks, everyone for joining us for the call today before I begin I turn the call over to someone Jaci, 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.

The private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward looking statements, including statements made during todays conference call.

Such forward looking statements are based on the company's current expectations and beliefs concerning future developments.

And their potential effects on the company there can be no assurance that future developments affecting the company will be those anticipated by motorcar parts of America actual results may differ from those projected in these forward looking statements. 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 on various factors. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.

For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business. Please refer to the various filings with the Securities and Exchange Commission.

With that said I'd like to begin the call and turn it over to Selwyn Joffe. Okay. Thanks, Gary I appreciate everyone joining us today.

As I stated in our fiscal year and coal we are reaching at an exciting inflection point our business has grown a product lines are expanding and our global footprint is rapidly evolving to support strategic growth.

The financial results for the quarter, while disappointing on the bottom line, we're in line with our expectations.

We now expect to start seeing sequential improvement in margins profits and cash flow.

We are focused on the future with clear visibility, but tangible value creation.

While the company has grown we have incurred frontloaded expenditures to pave the way for an exciting future.

We have invested upfront in adding human and capital infrastructure to support growth and to facilitate transformational value creation.

We have strategically invested to expand our current product capacity and to launch a full brake products offering which will begin shipping this quarter.

The market for our complete product portfolio is substantial and we expect to gain out fair share.

The footprint, we have created will be extremely efficient and this along with our expanded team of professionals will allow us to continue our leading position in the industry in particular as a remanufacture.

Before I continue and discuss our diagnostics business, let me summarize three key steps, we are taking and the progress we are making to increase profitability in the near term.

Number one we will increase the absorption of overhead that has resulted from our new expanded capacity.

We have new business that start shipping this quarter and continued growth in our existing business along with visibility for additional new business that will result in substantial increase sales to support the incremental overhead absorption.

Number two we are making significant progress to relocate operations from high cost locations to lower cost locations, leveraging our expanded Mexico and Malaysia capacity.

Number three we have implemented price increases, which become effective the latter half of our second quarter.

Let me reiterate what we expect in the upcoming quarters.

Firstly, a solid increase in sales substantially scaling up starting in our second quarter.

Number two on a sequential adjusted gross margins and operating income for the second quarter and increased year over year adjusted gross margins and operating income for the back half of the fiscal year and number three positive cash flows from operations starting in the third quarter.

Let me now discuss our diagnostic and testing business.

This business is emerging and gaining traction.

Well, our OEM alternate and started production testers have long been the industry standard a new aftermarket Benchtop test is fast moving in that direction.

The electro diagnostics market for automotive electric vehicles and electrification of the aerospace market is also quickly evolving.

In the short term, while we have good positive gross margins sales are not yet adequate to absorb the related operating expenses and hence we are experiencing some operating losses.

However, we have visibility and believe these businesses are quickly scalable and will benefit from growth in equipment sales and thereafter software and maintenance service revenue.

We expect these businesses to turn the corner in the fourth quarter of this fiscal year.

We are enthusiastic about the opportunities for our electric vehicle technology and are particularly encouraged by recent order from NASCAR announced last month for emulation equipment to be utilized for the development of hybrid electric aircraft testing applications.

Our sales for combustion engine diagnostic equipment, including Benchtop testers are progressing well and service and software solutions will also provide additional opportunities as our installed base grows.

Overall the company it has become a major multi products supplied to the north American automotive aftermarket and the leader in rotating electrical and electric vehicle diagnostics.

From a company.

Which previously had a single focus on aftermarket remanufactured alternatives and start us just several years ago.

This represents a significant change in our value creation opportunity.

The launch of a breakout for program, which we announced earlier. This week represents an important new product category for us it complements our strategic focus on expanding our nondiscretionary onto the call product line.

Brake caliper program now allows us to offer customers a complete line of braking system products.

We have made investments to get to this inflection point supported by the completion of the company's new state of the art 410000 square foot distribution facility and great progress on our 370000 square foot extension of our re manufacturing capacity and Tijuana.

In addition, we've added to our manufacturing capacity in Malaysia.

Let me take a moment to discuss our heavy duty business, which we acquired late in the fiscal year.

Dixie electric has a solid and growing customer base innovative products enhanced heavy duty expertise and a dedicated team of professor professionals.

We anticipate success as it benefits from investments in the sales team expansion and enhancements to manufacturing marketing and merchandising and other synergistic opportunities since we acquired them.

In short we are now well positioned for sustainable growth enhanced profitability and improved cash flow and we look forward to sharing news about our milestones and I went through the fiscal year.

[noise] fiscal 2020 guidance.

We remain encouraged by the outlook for our current and expanded and product lines and the benefits from our strategic investments to support our current and future growth.

We will update guidance as appropriate as the fiscal year.

Evolves.

At this point, we are maintaining our adjusted net sales guidance for fiscal year 2020 ended March 20 March 30 photos to be between 550 and $562 million, representing between 16 and 18% growth year over year.

Significantly ramping up in the second half of the year.

Adjusted gross margin for fiscal year, 2020 is expected to be approximately 27% impacted by product mix.

As we discussed profitability and operating cash flow are expected to improve on a year over year basis I should mention that the company has instituted much deserved price increases across all existing product lines beginning in the latter part of this year.

So how about the overall positive outlook.

I refer you to our investor presentation on our website, which shows some macro industry trends, including a charge related to the expansion of the car park sweet spot for pets.

We are now seeing the backend of lower new Pos sales from recession years, and the prime parts replacement timeframe.

Essentially the number of prime replacement aged vehicles is growing.

These statistics further support our companies and industries optimism for growth over the next several years.

I will now turn the call over to David to review the results for the fiscal first quarter.

Thank you sell it to begin I encourage everyone to be the 8-K filed this morning with respect to our June Thirtyth 2019 earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10-Q.

Let me take a moment to review the financial highlights for the fiscal 20.

First quarter, reflecting record sales for a first quarter on a reported and adjusted basis.

The results for the quarter and gross margin were primarily impacted by four items totaling 8.5 million.

For non cash expenses of 5.7 million in putting a write down of 4.6 million associated with the quarterly revaluation for cores on customer show.

And 1.1 million amortization related to the premium for core buybacks.

It is important to recognize that even though the core value for cores and customer shelves may be written down on our balance sheet.

We are entitled to a full contractual price we fun.

In the event that the relationship with our customer is terminated.

Second transition costs of 1.4 million associated with the move into the new Mexico facilities to support the company's anticipated growth.

Third net cash cost of 1.1 million for products sold before cost increases would pass through to customers.

And fourth cost accrual of 426000 related to the pending resolution of a previous because we're a customer contract.

Net sales for fiscal 21st quarter increased 19.1% to 109.1 million from 91.7 million for the same period a year earlier.

Reflecting sales increases for both hard parts and diagnostic products.

Adjusted net sales for the fiscal 21st quarter increased 15.7% to 108.6 million from $93.8 million a year earlier.

Gross profit for the fiscal 21st quarter, what 17.6 million compared with 16.4 million a year earlier.

Gross profit as a percentage of net sales for the fiscal 21st quarter was 16.1%.

Compared with 17.8% a year earlier.

Adjusted gross profit for fiscal 21st quarter was 26.2 million compared with 22.9 million a year ago.

Adjusted gross profit as a percentage of adjusted net sales for the three months was 24.1%.

Compared with 24.4% a year earlier.

Impacted by lower overhead absorption relative to the expanded capacity.

Total operating expenses increased 1.1 million to $19.3 million for the first quarter.

From 18.2 million for the prior year.

Due in part to operating expenses for the new acquisitions in December 2018, and January 2019.

Adjusted operating expenses increased by 3.7 million to 17.8 million for the first quarter by $14.1 million for the prior year.

This increase in adjusted operating expenses was due in part to 1.5 million expenses for newly acquired assets up yet and power in December 2018.

And Dixie electronics in January 2019.

And 1.6 million and professional fees.

The balance of approximately 600000 is related to increases in both personnel and infrastructure expenditures to accommodate our anticipated growth.

As mentioned previously due primarily to several items impacting gross margin that I discussed.

Operating loss was 1.7 million for the fiscal 21st quarter.

Compared with operating loss of $1.9 million for the prior year first quarter.

Adjusted operating income was 8.4 million for the first quarter compared with 8.8 million for the prior year.

Adjusted EBITDA was 10.7 million for the first quarter compared with 10.2 million for the period a year ago.

Depreciation and amortization expense was 2.4 million for the first quarter.

Interest expense was $6.2 million for the first quarter compared with $5.1 million last year.

The increase in interest expense was due primarily to increased average outstanding borrowings.

In connection with our growth initiative as we built inventory levels to support anticipated higher sales.

In addition interest expense increased due to higher sales level to customers that utilize and accounts receivable discount program.

Income tax benefit for the fourth quarter was 1.7 million compared with an income tax benefit of 1.4 million for the prior year period.

Net loss for fiscal 21st quarter was 6.2 million or 33 cents per share.

Reflecting the previously mentioned items impacting the quarter compared with net loss of $5.5 million or 29 cents per share a year ago.

Adjusted net income for fiscal 21st quarter was 1.7 million or nine cents per diluted share.

Compared with 3 million or 16 cents per diluted share a year earlier.

As of June Thirtyth 2019, trailing 12 month, adjusted EBITDA was 74.3 million and the average equity and net debt balance was 385 million, resulting in a 19.3% return on invested capital on a pretax basis.

Our method of calculating all I see is a divide trailing 12 month adjusted EBITDA by the average equity and net debt balance for the 12 month period.

As someone noted we have expanded our Mexico operations and launched new break categories with expectation of significant revenue growth from both new and existing product line.

At June Thirtyth 2019, we had net bank debt of approximately 151 million.

Total cash availability under revolver credit facility was approximately 84 million at June Thirtyth 2019.

Based on a total 238.6 million revolver credit facility and subject to certain limitations.

At June Thirtyth 2019, the company had approximately 694 in total assets.

Current assets were 371 million and current liabilities were 310 million.

This reflects the adoption of the new lease accounting pronouncement, which requires a balance you recognition of a lease asset at a lease liability for all he said.

Net cash used in operating activities during the fiscal 21st quarter was 18.4 million, primarily due to a 31 million increase in inventory for new business and growth.

And also impacted by payments made to customers a 4.1 million for core buybacks made in connection with new business.

We anticipate increased cash flows from reductions and this inventory inventory related to existing product lines in the latter half of this fiscal year.

In addition, we expect to generate positive cash flow from operation in the second half of the year.

Contributing to this there will be a reduction in payments for core buyback from our existing business.

Which will help generate stronger operating cash flow.

For the reconciliation of non-GAAP financial measures. Please refer to exhibits one through five five in this mornings earnings press release.

I will now open the call for questions and someone will then provide some closing remarks.

Ladies and gentlemen, if youd like to ask a question it's fine.

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Our first question comes from the line of Chris Van Horn with B. Riley Your line is open.

Good morning, Thanks for taking my call.

Thanks, Chris.

You know you cited you know record sales in the hard parts categories and I think you said despite relative softness throughout the industry could you give us a little bit it sounds like you're probably taking share and is there any specific product line that jumps out at you or you know anything just maybe site from from some from the term softness.

Yes, I think let me just talk about the softness first and then I think the.

You know listening to all the different the different public statements from our customers on a novel supplies I think that we've had some headwinds in the VR wide business you know I think most of it driven by.

Okay, well the feeling is most of that is driven by rainy weekends.

In home sequential rainy weekends that have been pretty tough.

HM.

You know we think it's we again, we I continue to say that the fundamental metrics about industry a strong.

And we think Thats a temporary phenomenon than we are seeing some of that change.

As as I speak.

Our growth is driven suddenly from this is all existing product lines, none of the new product line revenues reflected yet in this growth.

I think it's reflective of you know market share gains that we've made.

Through the through the end of last year.

And.

And you know how customers perhaps performing.

Well still weaker than what could be if the industry was stronger.

So outperforming our competitors customers so.

I think that's what it really boils down to.

We expect to this type of revenue.

We also expect to the net income numbers for the quarter.

I will tell you that just forgetting about new business for a second that the existing business. We expect to continue to scale as the year goes on.

And then.

Are we going to see some further growth from from the addition of the new business and timing is a little unpredictable Chris right now boasts.

You know the fundamentals the outlook on the momentum a have a very positive for us right now.

Got it okay and it sounds like you know the momentum is good it's kind of translate into the gross margin throughout the year can you give us a perspective on what you might be able to finish the year in terms of a run rate would it be something north of that 27 or is that kind of your your target that you think you might hit by the end of the year.

Yes, a lot of it depends on product mix, but if you looked at what happened in the fourth quarter of last year.

As we get to these higher revenue rates you know, we certainly around the 29% gross margin range. We've got a lot a lot of moving parts still and and while we already see the inflection beginning now.

I think you won't see the eye.

Thank you can see those margin levels, but you won't see the effect of all the initiatives Weve.

Taken until we get through to the end of March or May not having said that please don't read into the fact that I think things are going to get worse, they're going to get much better through the end of March, but we won't be a 100% complete.

With all of the restructuring of our costs on those logistics and those production some of those model in terms of you know Chinese furnaces Malaysian of Us Mexico sourcing.

That all sort of comes to the majority of that will be done by the end of March.

A little bit a little bit little bit left in no small part after that but the significant majority have been done by that so I would say that run rates.

As we get to the end of the year should should reflect what they were last year.

Just just borrowing product mix and we have a lot of a lot of initiatives going on and a lot of different product lines all existing now.

That can affect that slightly one way or another.

Got it. Thank you for that color one more from me and I'll jump back in the queue on the on the brake Caliper program could you maybe describe is it multiple customers is it private label or do you have a specific brand and then you know anything you can give us in terms of margin profile for that.

Yeah, we we would like to be a little I'm I don't mean to be evasive, but I think it's a little early so I don't want to get too granular.

We have significant revenue commitments I'll leave it at that and as far as identifying how many customers on I'll leave that out from now.

It is scaling we actually in fact started shipping today, so suddenly not planned to be today, but Uh huh.

First shipments went out the door today on going out the door today.

It is going to be a ramp up its not instant where you know you have all this volume right in day, one but the.

The outlook for that category is extremely positive for us.

Based on existing commitments and a lot of the initiatives going on.

I also would say that the margin profile is potentially the same as rotating electrical margin profile. It's a remanufactured profile the cost from getting into that business, how a little higher upfront.

Well you know we are experiencing that but the margin profile is positive we think that it will not be.

As of <unk>, when it ramps will not be dilutive to.

You know to our gross margins I mean, we think that hopefully will be accretive.

So we think it's good category. It also is the first step I think we previously announced a road isn't friction.

And.

We've been quite a.

Uh huh.

Calculated and how we launching those other categories, but now that we have a full line offering.

I think how sales offering is going to be a very powerful.

We will offer both private label and the private brands at this point I prefer not to talk about the private brand.

But there.

They all customers in both in both.

In both in both arenas that we will be service.

Great. Thank you so much for the time.

Thank you.

Thank you next question comes from the line of Scott Stember C.L. King.

Good morning, and thanks for taking my questions.

Good morning launched.

So let me talk about the market again, you talked about some softness but it sounds like your at least your experience is more on the again on the do it yourself. So if you look at the.

I guess, what's more key to your business. The do it for me side, maybe just talk about what you're seeing there and maybe just retail versus the wholesale travel have you seen any.

Material changes or differences.

You know over the last quarter too.

Yes look I think Scott I I leave you know that sort of analysis to to the retailers and the traditional.

People take on so I'm not going to I'm not going to answer for my customers in terms of what they see but I will tell you in general in the industry I believe and I only believe this based on factual statistics that the market will continue to get stronger.

Number of causing the road continues to grow and I'm talking about combustion engine cars.

Replacement rates are stable, if not getting better.

Average age continues to go up miles driven.

Remained stable or positive and so it's only a question of timing and so the entire markets.

And tire market should go up and with statistics are lying and I wouldn't I don't believe anyone in our industry believes that.

It's a little tumultuous right now there's a lot of activity with the Chinese supply on tariffs.

And I think that May have a short term effect on the deal while relative to the discretionary purchases.

But nondiscretionary, while they may want to put it off much certainly its non discretionary.

We believe that.

There's necessary price inflation in the category and that.

It will not affect the volume of replacements for months for Sri parts at all.

So.

So I mean in terms of the breakdown between professional and DIY, Wyoming the cause of getting more complicated.

All of the customers believe the professional market is probably outgrowing the D.R.Y. as a percentage, but having said that you know no. One believes the I was going away that's for sure.

Okay, great and just that Dovetailing on your comments on tariffs.

The.

Implementation of less for a 10% does that have any impact on your business and if so has that been accounted for and the price increases you put through a ready.

Yes. The line is not very clear, but I think the question was the latest round of kind of what kind of government your functions yet so it's all about lists for.

Okay. Yeah. Okay. So that has no effect I mean, we have had increased full about products was subject to the first rounds of tariff increases.

On us and.

And I will tell you that we have pass through 100% of the tariff increases to the marketplace and so Uh huh.

But that is happening has happened and that is happening.

We have no.

I don't know what's going to happen next on the tariffs, but suddenly it looks like they are here to stay for a little bit so we'll have to see.

I think at the end of the day for Us quite frankly.

We were in a good position to.

Sure just to.

To the tariff the tariff headwinds created by China, just based on our Oh significant footprints and in Mexico and Malaysia.

Got it and just lastly, I appreciate all the details on guidance you alluded to a little bit I guess the ramp up in the back half of the year, but just give us a little bit.

Better idea maybe for the second quarter.

Looks like sales, obviously should be accelerating on the gross margin should be improving but just trying to figure out how much of a step up there really will be from the second quarter.

Into the back half of the year just to give a little more granularity that will be great. Thanks.

Yeah, I don't want to get into sort of quarterly guidance, but I you know I mean, there's going to be a significant increase in in revenue you know I mean, it's right on track with where we think our revenue guidance is on an annual basis, it'll accelerate even faster in the third and fourth quarter. I mean, clearly you see that we've announced a new product line and that takes a little time to ramp up.

We also have some other initiatives that are ramping up through.

Let's talk more specific significantly in third and fourth but we will see big increases in the in the second does this current quarter that we're in right now.

So.

No I I think you know I think that the worst of the heavy lifting on and I Hope I don't eat my words here, but I think the worst of heavy lifting is behind us.

And.

I think that as we go through the year.

We will give you more guidance I mean, we're a little cautious because of the.

Slowness in the stock for the industry, which I mentioned earlier and so hopefully if we see a turn in that.

We may have some upside so.

So.

Hopefully that answers your question without getting into quarterly numbers.

No that's fine that's perfect. That's all I have thank you.

Thank you.

Thank you.

Our next question comes from the line of Steve Dyer with Craig Hallum. Your line is open.

Thank you most of mine have been have been asked and answered just a couple of questions. One clarify on on cash flow I think you talked about the second half of the year being a positive from a cash flow from operations perspective, what kind of Capex are you anticipating for this fiscal year.

We were anticipating about about 20 million for fiscal 20.

And so then I I I will say Stephen is that that the positive cash flow will will pay for that.

[noise] see anticipate as a as an entire company being free cash flow as defined by cash from ops less.

Less capex free cash flow positive for the year or just the second half.

We expect that it should be for the year.

Yeah.

Okay.

So you know obviously the the leverage ratio has crept up quite a bit here in the last couple of years to around two times net leverage.

I guess.

That's right.

A safe number if you if you anticipate bringing down debt as well as the year progresses or or should we think differently.

Yeah. We are we believe that we sweep through the end of this quarter, we will see some peaking and then everything will start coming down.

We'll fund Capex and start paying down debts and.

Certainly expect that positive cash flow will reduce that as we go forward once we get completed with the this capex and that this last capex initiatives.

Got it Okay Thats all I think the other the other thing Steve I, you know I just want to add on if you don't mind.

And I think that's important I think we've now with the product lines that we have available to us right now.

There is a huge amount of growth that's available to us to take advantage of so the things I want to reiterate is.

The big cash spend is to get these lost buildings completed and once that's done then it's a matter of now starting to you know to tap the pipeline and so the categories that we were in billions of dollars and so we think we've got a number of years of very strong growth. If we can do a good job within the categories that we have right now we don't need to really look for of the I'll, just say that we won't but we certainly don't need other categories and I'm not focused on other categories.

In order to grow our business I mean, we've gone through a big transformation, we're getting towards the end of that and we're now in the process. Once we get through that to start milking the benefits from that paying down debt and creating value and profits.

Got it okay. Thank you.

Thank you.

I'm showing no further questions at this time.

I would now like to turn the call back over to Selwyn Joffe for closing remarks.

Oh. Thank you I appreciate everybody in summary, I just want to say our investments. We believe are now starting to bear fruit.

We have many growth opportunities ahead of us and new business commitments are continuing supported by an expanding line of products in both non discretionary hard parts business and diagnostics. We are proud of our more than 50 year history of the aftermarket industry.

And all of US are committed to our vision of being a global leader for parts and solutions that moves our world today and tomorrow.

And as always I want to thank all of our team members for their commitment and customer centric focus on service and for their exceptional pride in all the products, we sell and the customer service we provide.

Their commitment to quality and service is also reflected in the wonderful contributions they make to their communities in our society.

They are terrific and I'm proud to work with all of you.

We appreciate your continued support and thank you again for joining us for the call and we look forward to speaking with you when we host a fiscal 2022nd quarter conference call in November and at various conferences in the interim.

Thank you.

And that concludes today's call. Thank you for participating.