Motorcar Parts of America, Inc. (MPAA) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Motorcar Parts of America’s Fiscal 2016 First 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 that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Gary Maier, Investor Relations. Please go ahead.

Thank you and thanks everyone for joining us today for Motorcar Parts of America's fiscal 2016 first quarter call. Before we begin and I turn the call over to Selwyn Joffe, new [ph] 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 statements 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 the course of 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 Motorcar Parts of America. Actual results may differ from those projected in these forward-looking statements. Forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company and 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 a 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 like to begin the call and turn the call over to Selwyn Joffe.

Good morning everybody and thanks Gary. I appreciate you joining us today. We’re off to an excellent to fiscal 2016, all of our product lines continue to grow and the momentum is strong. I should mention that we recently expanded our brake master cylinder product line with the introduction of re-manufactured units which will now allow us to provide 100% product line coverage. This will help grow this category both from existing customers and other potential customers. As David will discuss in a moment, net sales on an adjusted basis for fiscal 2016 first quarter climbed 36.6% to $86.6 million from $63.4 million a year earlier. Net income on an adjusted based climbed 77% to $8.4 million or $0.44 per diluted share from $4.7 million or $0.30 per diluted share a year ago. This is even after an 18.6% increase in the diluted average weighted shares outstanding. Favorable economic conditions increased miles driven along with the growth in ageing of the car population which a record level of an average age of 11.5 years continues to drive industry growth. These factors bode well for both our parts and all the hard parts in the automotive aftermarket industry. As the number of cars in the 12-plus year category continue to grow, replacement rates for parts in these vehicles increase significantly. The current expectations are that the average age of vehicles will continue to increase and reach 12 years by 2016. Since we focus on nondiscretionary parts that require increased levels of replacements as vehicles age, we anticipate continued growth as we move forward. To put our overall potential in perspective, industry sources estimate the market size for our current products to be approximately $3.8 billion at the consumer level. The remaining potential market for hard parts is estimated to be approximately $106 billion, which gives us a lot of potential to introduce new part and grow our business. We are proud that our service and quality levels continue to exceed expectations and we believe this in part has allowed us to gain further market share in all of our product categories. In short, our ongoing success and accomplishments are due to all our team members and their commitment and customer-centric focus on service with exceptional pride in all the products we sell and all the customer services we provide. Today, we supply more than 23,000 stores and our customers continue to gain share in both the DIY and the professional installer markets. We expect this will continue to grow as we further leverage our award-winning customer service and product quality to enhance market gains with a growing lineup of nondiscretionary categories. In summary, the company's growth prospects continue to be very positive. Business is strong and we expect our solid growth to continue. I will now turn over the call to David to review the results for the first fiscal quarter in more detail and then end with my perspectives on our outlook before we take questions. Thanks, David.

Thank you, Selwyn. In summary, adjusted net sales for the fiscal 2016 first quarter ended June 30, 2015 were $86.6 million compared with $63.4 million for the prior year first quarter, which represent an increase of $23.2 million or 36.6%. Adjusted net income for the fiscal 2016 first quarter was $8.4 million compared with $4.7 million for the prior year first quarter which represents an increase of $3.6 million or 77%. And adjusted earnings per share for the first quarter were $0.44 compared with $0.30 for the prior year first quarter even with an 18.6% increase in the fully diluted shares outstanding. Adjusted EBITDA was $17.7 million compared with $11.8 million for the prior year first quarter which represent an increase of $5.9 million or 50.4%. On a comparative basis, the first quarter results reflect continued benefit from the introduction of the new brake master cylinders product line in late July 2014 and the addition of rotating electrical business that started during the fiscal 2015 fourth quarter. Let me now review the financial results in more detail for the first quarter. Net sales were $85.8 million for the first quarter compared with $63 million for the prior year comparative quarter which represents an increase of $22.9 million or 36.3%. First quarter results were impacted by customer allowances related to new business of $718,000. After adjusting for these allowances, as well as comparative customer allowances related to new business in the prior year, net sales increased by $23.2 million or 36.6% to $86.6 million compared with net sales of $63.4 million for the prior period a year earlier. The increase in adjusted net sales of %23.2 million was due to an increase in rotating electrical net sales of $13.5 million or 25.4% to $66.7 million for the first quarter compared with $53.2 million for the prior year. An increase in net sales of wheel hub assemblies and bearings of $5.2 million or 50.6% to $15.4 million for the first quarter compared with $10.2 million for the prior year first quarter and sales of new brake master cylinders product line of $4.5 million, which was launched in late July 2014. The gross profit percentage was 30.3% for the first quarter compared with 28.3% for the prior year. Adjusted for the previously mentioned customer allowances related to new business, adjusted gross margin for the three months ended June 30, 2015 was 30.9% compared with 30.2% for the prior year. In dollar terms, adjusted for customer allowances related to new business, gross profit for the first quarter was $26.8 million compared with $19.2 million for the prior year first quarter, which represents an increase of $7.6 million or 39.6%. General and administrative expenses increased $1.2 million to $6.8 million, after adjusting for non-cash mark-to-market net gains and losses, expenses related to discontinued subsidiaries legal, severance, acquisition, financing and other expenses and FAS 123R non-cash stock compensation. The increase in general and administrative expenses was primarily due to professional fees, including additional costs for Sarbanes-Oxley compliance and business development, employee-related and acquisition-related costs. Additionally, our prior year general and administrative expenses included a gain of $288,000 due to the reversal of the holdback recorded in connection with the prior business acquisition. Sales and margin expenses increased $354,000 to $2.2 million primarily due to increased commissions due to higher sales and increased infrastructure costs for customer support. Adjusted operating income for the fiscal 2016 first quarter was $17 million compared to the prior year first quarter of $11.1 million, which represents an increase of $5.9 million or 52.7%. Adjusted EBITDA for the first quarter was $17.7 million compared with $11.8 million for the prior year first quarter, which represents an increase of $5.9 million or 50.4%. Depreciation and amortization expense was $691,000 for the first quarter. For the trailing 12 months ended June 30, 2015, adjusted EBITDA is $75.4 million. Interest expense was $8.4 million for the first quarter compared with $3.4 million for the prior year first quarter. The overall increase in interest expense was due primarily to the write-off of previous deferred loan fees of $5.1 million related to the termination of the prior financing agreement in connection with entering into a new credit facility in June 2015. The increase in interest expense was also affected by the benefit of lower interest expense resulting from interest rates and average outstanding balances or unknowns and offset by higher balance of receivables discounted due to higher sales. Income tax expense was approximately 40% for the three months ended June 30, 2015. Adjusted net income in the first quarter increased $3.6 million or 77% to $8.4 million or $0.44 per diluted share compared with $4.7 million or $0.30 per diluted share a year ago. Earnings per share reflects 18.6% increase in the weighted average number of diluted shares outstanding due to the public offering of 2,760,000 shares of common stock, which raised approximately net $67 million in September 2014. At June 30, 2015, we had a $25 million term loan, $15 million borrowings under revolving credit facility and approximately $17.3 million cash resulting in net bank debt of approximately $22.7 million. There was availability of approximately $82.2 million on the $100 million revolving credit facility after reflecting approximately $2.8 million of outstanding letters of credit. In June, we entered into a new $125 million credit facility with PNC Bank consisting of a $100 million revolver and $25 million term loan. Loans outstanding under the new credit facility bear interest at the company's option, at the domestic rate or at the LIBOR rate plus, in each case, an applicable per annum margin. The current applicable LIBOR interest rate for both the revolver and the term loan is 2.94%, consisting of LIBOR of 0.19% plus a margin of 2.75%. The new credit facility replaces a previous credit facility, comprised of an outstanding $82.4 million term loan and an undrawn $40 million revolver. The applicable LIBOR interest rate for the previous term loan was 6.75%, consisting of a LIBOR floor of 1.50% plus a margin of 5.25%. At June 30, 2015, the company had approximately $386 million in total assets. Current assets were $127 million and current liabilities were $125 million. Cash flows provided by operations during the three-months ended June 30, 2015, were approximately $3.3 million. For the reconciliation of non-GAAP financial measures, please refer to the exhibits 1-5 in this morning’s earnings press release. I will now turn the call back to Selwyn.

Okay. Thank you, David. As you can tell, we are extremely excited by the multi-product growth in our business. I look forward to continued success ahead. We remain focused on gaining market share in our various existing product lines as well as actively working to introduce new product lines. We remain dedicated to manage growth and to continue to focus on enhancements to our infrastructure and making investments resources to support our customers. Our financial position is strong and our capacity for further growth is excellent and very scalable. Business continues to be good and we expect a strong fiscal year 2016. We continue to target fiscal 2016 sales guidance of approximately $380 million on an adjusted basis. We appreciate your interest in Motorcar Parts of America, and now we welcome your questions.

[Operator Instructions] And our first question comes from Matt Koranda from ROTH Capital Partners. Your line is now open, please go ahead.

Good morning, guys and congrats on a good quarter.

Thanks, Matt, good morning.

So just wanted to start out I think with a question that everyone is wondering about here, which is probably with the recent acquisition of Remy by BorgWarner. Maybe you could just talk about the dynamics you’re seeing in the rotating electrical after-markets, are there any opportunities that may come out of this? We’d just love to hear your take on that.

Yeah, that’s a tough question, a very good question. Immediately we don’t see much, but obviously this is a big change in the category. We are not sure where we will end up, what the ultimate strategy is of BorgWarner, but we remain focused in seeing if there are any opportunities that will develop from it, but nothing specific at this point.

Okay, got it. In terms of acquisitions, I think in the last call you guys mentioned you had a full-time team looking at opportunities. What’s the state of the pipeline right now, as it pertains to potential acquisitions? Maybe if you could try to quantify how many opportunities you may have looked at, what’s interesting in terms of potential acquisitions to you at the moment?

Yeah, so that’s another good question, that’s tough to answer. But I would say, we have looked at a number of acquisitions without quantifying the exact number. We are very picky at this point, we do have others in the pipeline that we are looking at, but again nothing that I can tell you it is real or not really, yet still little early. There is a nice pipeline of acquisitions, multiples in the industry actually quite high though. So we have a lot of – we need to balance our allocation of capital, we have got a lot organic growth that’s ahead of us. Our categories are all growing, we are optimistic we can continue to grow all the categories we are in. And we’re optimistic about our new products, launch opportunities that are coming down the pipe and so I think we’re in a good position to be able to sit back and be very choosy in terms of what acquisition we really would pursue. Having said that, I believe that acquisitions is definitely a part of our strategic plan.

Okay. Got it. In terms of the introduction of brake master cylinder re-man here, could you help us understand potentially the revenue lift you may get this year from that? I mean I know that brake master cylinder, that category was already growing off a relatively low base, but incrementally what does that give you in terms of revenue lift in FY16?

I just -- let me put the FY16 apart, but on an annualized basis, I would expect to see 100% growth in the master cylinder business. It’s off a small base and hopefully we can do better than that. I mean I think we’re just at really a transition point in master cylinders with a new program, where I believe we probably now have the broadest coverage in the industry. We have significant competitive pricing facilities, state-of-the-art in terms of a remanufacturing capability. So I believe, again it’s hard to tell you, never know until you get customers signed up, but I believe I would like to see a couple of years of 100% growth in mater cylinders, I mean that’s certainly what my internal focus is.

Okay. Got it. Very helpful. I’ll jump back in queue here guys. Thank you.

Thank you. And your next question comes from Steve Dyer from Craig-Hallum Capital Group. Your line is now open. Please go ahead.

Good morning, Selwyn and David. Nice quarter.

Thank you, Steve. Good morning.

If I could just dive in to the brake master cylinder a little bit further, it sounds like you’ve rolled out re-man capability, is that going to be purely a re-man business going forward or are you going to kind of make that determination based on what makes more sense?

Yeah. And we have both the new product line and a re-man line. Different customers view their needs differently in the category. For those who want all re-man, we’ll have re-man coverage. For those who want new and re-man, that’s a sort of a combined program. We’ll have that and so it just gives us the flexibility really to meet the needs of whatever the customer wants. And so I think in general, most people or most customers out there are looking for, I don’t want to use the word hybrid, I guess I’ll use mixed program between new and re-man. And again, we have both and we feel like we have the best products in the industry at this point. So we’re excited about that opportunity.

Great. As you kind of look at the balance of the year, kind of going forward, the relative growth rates of the different categories and the margin structure, any changing in your thinking on the margin structure, gross margin overall, I know you’ve kind of always said 28% to 30%, but you’ve been fairly routinely above the 30%. How should we think about that going forward?

Yeah. I mean, that’s a tricky question as well and you guys are all over [ph] this, but we’ve seen growth in all of our categories. They are -- the wheel hub business is a lower margin business for us. Depending on the relative growth and the different opportunities that open up in different categories, it’s hard to tell. I mean it really is hard to tell. I will tell you that the exciting thing about your question is that rotating electrical continues to grow and to be very vibrant. And our customers are gaining share there and we’re picking up new customers in that category. Wheel hubs continues to grow. We’ve got a number of new customers coming on board in that and our existing customers are doing well with the product. And now with master cylinders, and we expect to have another new product launch by the end of the year. So it’s difficult to tell Steve, but I would stick to the guidance and hopefully we can continue to surprise in the upside, but there is -- it does fluctuate dramatically depending on their update orders in a category that has low margins versus not having update orders. And so I wish I can give you better guidance than that, but I think we should stick to what we got right now.

Okay. Got it. Entering this calendar year 2015, you guys had won a bunch of new business that you had in the Q, where are we sort of I guess maybe using a baseball analogy in terms of innings or how far sort of into the role out of those different wins are we?

Well, we’ve started certainly some of them, some of them will start this quarter, I don’t know in terms of the baseball, I think we’re probably about halfway, second base I guess I don’t know, between second and third maybe.

Last question from me, any update on the timing for another new product launch?

It will be end of -- I will tell you what’s happening is, that this great interest in couple of product lines, what we’ll see is, it will be towards the end of the year, I don’t think new products are going to have a huge impact on revenue this year but I do think they’re going to have a big impact on revenue for next year, I mean and it’s -- what we may see is just some expanded opportunities really for the new year. The outlook is, I would have to say very favorable there on launches, product launches.

Very good, okay, thanks guys.

Thank you. [Operator Instructions] And your next question comes from Jimmy Baker from B. Riley. Your line is now open, please go ahead.

Hi guys, this is actually Robert in for Jimmy, I have a few questions. Can you speak to inventory positions at your major customers, it seems like most of them are still selectively adding inventory to attack commercial customers, would you say that’s in your categories, and separately what effect if any, do you see rising rates having on channel inventory levels?.

I got to be honest with you, the line is not clear, and I couldn’t discern exactly what you’re asking, can you repeat that?

Sure. Can you speak to inventory positions at your major customers, it seems like most of them are still selectively adding inventory to attack the commercial customer, would you say that’s true in your categories and separately what effect if any, do you see rising rates having on channel inventory levels?

Okay. So, let me answer the first one, because I couldn’t get the second part, and I will ask you to ask that in a second. But in terms of inventory levels at our customers, I think the general inventory consensus out there is that, in our business you need to part in inventory and we see that the majority of our customers are on board with that strategy. And so, while I don’t see huge levels of inventory increases, I don’t see them decreasing inventory. I think we’ve gone through a fairly significant inventory build last year. But having said that again, I think they still, they need coverage, I mean this market, the cars are continuing to age, the number of cars that are coming to the product replacement rate are going off, the number of cars that are remaining on the road that are over 11.5 years are going up, the number of miles driven is going up. So, the fundamentals for our customers which is good for us are good, and so, I don’t see them reducing inventory right now. The second part of your question, I couldn’t -- if you could repeat the second part, I couldn’t make that out, if you could repeat that, and I’ll try and answer that.

Sure. And what effect if any, do you see rising rates having on channel inventory levels or on channel inventory levels.

I think it’s a little muffled, I’m not sure if you’re on a cell phone but to what extent is -- can you repeat that one more time.

Sure. What effect if any, do you see risking rates having on general inventory levels?

Rising interest rates, is that what you’re referring to?

Yes.

Oh, I don’t -- I don’t see that as -- right now, I don’t see that as a near-term impact at all.

Okay.

Thanks.

Alright, and then my second question is, going back to guidance, what would you need to [indiscernible] $380 million target for revenue and what are the primary swing factors?

Yeah, I mean, I think we’ve reiterated the $380 million, we’ve got to get there, the primary factors are making sure, again we don’t need inventory reduction, customers that won’t help but making sure that we meet our fill rate requirements and making sure that our product quality is good and I don’t see much change in the industry quite frankly in the next nine months. We certainly are trying to continue to grow our market share in all of our product lines as well. So, I mean those all contribute to that 380, but we are ahead of schedule. But I think that the quarters will be a little less seasonal than perhaps they had been in the past. I think that we are seeing lot of flattening of seasonal plan just because of the [indiscernible] product that we offer. So we are optimistic we will hit that number, but we will have work to do.

Okay, just one final question. On an adjusted basis, how do you see operating expenses trending for the balance of the year?

So for the first quarter, adjusted SG&A or operating expenses was about $9.7 million, $9.8 million, so currently it's about a $14 million run rate. We’ve dedicated resources to the business development. We have higher commissions. So because of higher sales we have our R&D costs that we are looking at. We have a little bit of acquisition integration cost, we have higher support costs for customer support, while getting functions. For all those reasons, we expect SG&A to be a little over $14 million for the year.

All right, great. Thanks for answering my questions.

Thank you. And you next question comes from Matt Koranda from ROTH Capital Partners. Your line is now open. Please go ahead.

Hey, guys, thanks for taking follow-ups here. Just a couple of housekeeping things. I was wondering with the introduction of re-man for brake master cylinder, is there going to be an element of core accounting to that going forward and how should we kind of treat on the balance sheet on a go-forward basis?

Yeah, I mean, unfortunately that goes along with the re-man, so the same accounting will apply to the master cylinder re-man for cylinder product that applies to the rotating electrical. And so we will own cores on customer shelves for those that are on the zero core programs and so it's the same old story, but I do think that the majority of the revenue growth that is going to come even though we have the re-man now, the majority of the revenue growth will be new units.

Okay, got it. That's helpful. And then last one, what was that contribution from OE Plus on the quarter, if you could break that out and share that with us?

I mean, it's not material. I will tell you that, I don't know that number at the top, but it's a pretty immaterial number.

Okay, great. That's it from me. Thank you

Yeah, so that didn't make or break the quarter, I mean very immaterial.

Got it, okay. Thank you.

Thank you. I am not showing any further questions at this time, I would now like to turn the call back to Selwyn Joffe for any closing remarks.

We appreciate everyone's continued support and interest and we thank you again for joining us for the call. We are looking forward to speaking with you when we host our fiscal 2016 second quarter conference call. We have a lot of exciting things going on and we are looking forward to continuously updating you. Appreciate everyone's interest.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect. Everyone, have a great day.