Motorcar Parts of America, Inc. (MPAA) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America Fiscal 2017 First Quarter Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Gary Maier. Sir, please begin.

Okay. Thank you very much, and thanks for joining us for Motorcar Parts of America's fiscal 2017 first quarter conference call. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the company's Chief Financial Officer, I'd like to remind everyone of the Safe Harbor statement included in today's press release. 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 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 the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based upon various factors. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For 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 turn the call over to Selwyn Joffe, and begin.

Thank you, Gary. I appreciate you joining us today. We are excited about our results for the first quarter. So we achieve record profitability for the quarter on a GAAP and adjusted basis. GAAP sales was slightly down at $85.4 million for the first quarter, however we had record adjusted net sales of $93.8 million for the first quarter. GAAP sales were reduced by customer allowances for new business. These allowances are investments to support our future growth, and our ability to gain market share and enhance shareholder value. I should note that the first two months of the fiscal first quarter were impacted by the mild winter, which should result in some deferred sales opportunities. As I've said before, all of our products which is non-discretionary fail more frequently in a harsher weather environment, whether colder or hotter. Nonetheless, we did see strength across all of our product lines later in the quarter, though we would've expected stronger performance with harsher weather. Based on current trends, we expect sales momentum to continue to be strong in the current quarter. As we announced yesterday, we've expanded our product offerings with the introduction of Brake Power Boosters, which will begin shipping later this month. By way of a brief introduction, both vacuum and hydraulic Brake Power Boosters provide additional stopping power by generating increased braking force. Every vehicle that has power assist brakes has a brake power booster. Currently almost all vehicles have brake power boosters. Generally, every passenger vehicle and light-duty truck on the road should have at least one replacement during its lifetime. Industry sources estimate the size of this market to be approximately $350 million at the end-user level in the United States. We see excellent opportunities for us to leverage our footprints and our value-added customer services to gain market share. This new category as well as our other non-discretionary parts is expected to grow as the car population ages. Recently there have been reports that new car sales have slowed, which may in fact be a positive for us. While there are various factors that may influence replacement rates on a short-term basis, ultimately all of the 250 million vehicles on the road, other than those scrapped, will require replacement parts, and our expanding product line will benefit as these vehicles age. We're also excited about the opportunities that we expect from our acquisition of ZOR industries, which positions us in the rapidly emerging replacement market for turbochargers in the United States. By way of a brief overview, turbocharger systems utilize the exhaust waste stream to power the turbo. This results in an increase of airflow into the combustion chamber, thereby enhancing engine power and decreasing fuel consumption. In short, turbochargers offer improved power and fuel economy, as well as a reduction in emissions. We are entering this market with an experienced management team and a developed knowledge base at a time that we see as the beginning of a high-growth stage. Based on the industry reports, the turbocharger aftermarket size at the end-user level in the United States is estimated to be more than $500 million, which today is dominated by heavy-duty applications. It's anticipated to a fast growth category for light-duty passenger vehicle applications as well as others. Turbochargers became Mainstream in Europe more than 10 years ago. The Europe turbocharger market, including original equipment is estimated to be over $5 billion. This bodes well for the future opportunity in the U.S. market. In the U.S. turbochargers are an emerging technology, and utilized in both diesel and gas applications. Today, in the U.S. approximately 8% of new passenger vehicles have turbochargers, with expectations that by 2020 more than 25% of new vehicles will include turbochargers. In addition, turbochargers are being used in a number of heavy-duty industrial, agricultural, and power sports applications. This represents a significant opportunity for aftermarket replacement. In short, we're excited about the ramp up and future opportunities for this product line. For those of you who are new to Motorcar Part of America, I should mention that a number of factors continue to provide tailwinds to the aftermarket hard parts business. Miles driven has increased for a variety of reasons, including reduced unemployment and lower fuel prices. In addition, despite the growth of new car sales, the average age of vehicles in operation continues to grow, now exceeding 11.5 years and hopefully will continue to grow. As vehicles get older the need for replacement parts grows to support their maintenance. Additionally, whether there are strong new car sales or not, current indications are that people will continue to keep their cars longer, which will contribute to the ageing of the car population, resulting in accelerated growth for replacement parts. All these factors bode well for our current and future business. As the number of cars in the 12-plus-year-old category continues to grow the failure rates for parts in these vehicles increase significantly, resulting in increased parts replacement. Also, the 12-plus-year category includes later model vehicles with more sophisticated and higher priced parts than the earlier models. We anticipate continued positive contributions as we move forward through the ageing cycle. To put our overall potential in perspective, industry sources estimate the market size in the USA and Canada for our current products to be approximately $4.7 billion at the consumer level. The remaining potential in these markets for hard parts is estimated to be $106 billion-plus, which should provide us with a lot of opportunity to introduce new parts, and grow our business organically with the growth of existing and new product lines, and through appropriate acquisitions. 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. Today, we supply more than 25,000 stores, and our customers continue to gain share in both the DIY and the professional installer markets. We expect continued growth in both segments, as we further leverage our award-winning customer service and product quality, coupled with a growing offering of non-discretionary products. In summary, the company's growth prospects continue to be positive. While our industry is very competitive, and pricing pressures continue, we believe the fundamentals of our business are strong, and we expect our solid growth to continue. I'll now turn the call over the David to review the results for the fiscal first quarter in more detail. And then I'll end with an update on the numerous initiatives and progress the company has made. We will then open the call for questions. And so David will now discuss our financials.

Thank you, Selwyn. I will now review the financial highlights for the first quarter. Before I begin, I encourage everyone to read the 8-K filed this morning with respect to our June 30, 2016 earnings press release for more detailed explanations of our results, including reconciliation of GAAP to non-GAAP financial measures, and the 10-Q, which will be filed later today. Net sales were $85.4 million for the first quarter, compared with $85.8 million for the prior year first quarter. Adjusted net sales were $93.8 million for the first quarter compared with $86.6 million adjusted net sales for the prior year. The adjusted net sales increase of $7.2 million was due to the following. Rotating electrical adjusted net sales increased $3.2 million or 4.8% to $69.9 million for the first quarter, compared with $66.7 million for the prior year. Adjusted net sales of wheel hub assemblies and bearings increased $3.4 million or 22.3%, to $18.8 million for the first quarter, compared with $15.4 million a year earlier. And net sales of brake master cylinders increased approximately $559,000 or 12.4% to $5.1 million for the first quarter, compared with $4.5 million a year ago. Gross profit for the first quarter was 20.4 million compared with 26 million a year earlier, gross profit as a percentage of sales for the first quarter was 23.9% compared with 30.3% a year earlier, primarily impacted by customer allowances related to new business. Adjusted gross profit for the first quarter was 30.3 million compared with 26.8 million a year earlier, adjusted gross profit as a percentage of sales for the first quarter was 32.3% compared with 30.9% for the prior year first quarter, impacted by overall lower per unit costs from increased volume of purchases and production resulting in better absorption of overhead costs, general and administrative expenses decreased 7.7 million to 3.6 million impacted by 5.6 million gain recorded due to the change in the fair value of the warrant liability. Adjusted general and administrative expenses increased 587,000 to 7.4 million, sales and marketing expenses increased 354,000 to 2.6 million, the increase in adjusted general and administrative expenses and sales and marketing expenses reflect new investments for innovation, growth and acquisitions as well as the company's value added customer service programs, including Motorcar Parts of America's industry leading customer service, training and quality assurance initiatives. Operating income was 13.3 million for the fiscal 2017 first quarter compared with operating income of 11.6 million for the prior year first quarter. Adjusted EBIDTA for the first quarter was 20.2 million compared with 17.7 million for the period a year ago. Depreciation and amortization expense was 860,000 for the first quarter. Interest expense was 2.68 million for the first quarter compared with 8.4 million last year. The decrease in interest expense was due primarily to the write-off of previous debt issuance costs of 5.1 million for the prior year first quarter in connection with the financing agreement which was terminated when we entered into a new credit facility in June 2015. In addition, interest expense decreased due to lower interest rates and lower average outstanding balances on our loans. Income tax expense rate was approximately 28% for the first quarter; the income tax rate was lower due in part to a non-taxable gain in connection with a fair value adjustment of our warrants. Net income for the first quarter was 7.5 million or $0.39 per diluted share compared with net income of 1.9 million or $0.10 per diluted share a year ago. Adjusted net income for the first quarter was 10.1 million or $0.52 per diluted share compared with 8.4 million or $0.44 per diluted share last year. At June 30, 2016 we had a 22.7 million term loan, borrowings of 21 million the revolving credit facility and approximately 19.7 million in cash, resulting in net bank debt of approximately 23.9 million, there was availability of approximately 98 million on the 120 million revolving credit facility after reflecting approximately 1 million of outstanding letters of credit. Total cash and availability on the revolver credit facility was approximately 118 million at June 30, 2016. As I will now discuss we have a far more flexible loan facility, which will help us to deploy capital efficiently for growth. In May, we entered into an amendment to the P&C Bank credit facility which increased the revolving line of credit to 121 million from 100 million. This amendment allows us to expand in Mexico and increases the pre-approved limit for a permitted acquisition currently loans outstanding under the 120 million revolver facility and our 23 million term loan bear interest at the company option at the domestic rate or at the LIBOR rate. In each case, an applicable per annum margin applies. The current applicable LIBOR interest rate for both the revolver and the term loan is 3%, consisting of LIBOR of 0.5% plus a margin of 2.5%. At June 30, 2016, the company had approximately 441 million in total assets. Current assets were 159 million and current liabilities were 156 million. Net cash used in operating activities during the three months ended June 30th, 2016, was approximately 13.8 million, primarily due to inventory ramp up and upfront customer allowances for new business. For the reconciliation of non-GAAP financial measures, please refer to the Exhibits one through five in this morning's earnings press release. I will now turn the call back to Selwyn.

Okay, great. Thank you, David. As you can tell, we are excited about the multi-product growth in our business, and we look forward to continued success. We are focused on gaining market share in our existing product lines, which now includes brake power boosters and our emerging turbocharger line, which is in its early stage. We remain dedicated to manage growth and continue to focus on enhancements to our infrastructure and making investments in resources to support our customers. Our financial position remains strong and our capacity for further growth is excellent. Despite some softening sales in April and May, which we believe was due to mild weather, June was stronger and we anticipate ending the first half of our fiscal year 2017 well positioned with new sales opportunities for existing product lines and the ramp up of brake power boosters. The turbocharger business offers tremendous potential and we look forward to reporting our accomplishments in growing this business. There's lots of interest from potential new customers relating to all of our product offerings. As I noted during our year-end call, we recently doubled our Chinese footprint and expanded our Malaysian operations. At the same time, expansion plans for our Mexican distribution footprint are proceeding as planned. Once complete, this facility will position us with greater operating flexibility and leverage as we grow our business, including expansion relating to the brake power booster and turbocharger businesses as well as other future product introductions. 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 services we provide. The energy of our team is exciting to see as we push to execute our plans. Our success and accomplishments are due to this incredible team. We appreciate your interest in Motorcar Parts of America, and we welcome your questions.

[Operator Instructions] And our first question comes from the line of Matt Koranda from ROTH Capital Partners. Your line is open.

Good morning, guys. Thanks for taking the questions.

Good morning, Matt.

Good morning.

I had a quick question on margins. It looks like they were really strong in terms of gross margins this quarter. If I hold margins constant by product category quarter-over-quarter, it looks like they should have been kind of in the mid 29% range, and that's essentially despite having lower sequential revenue. So I can assume that the improvement here is just from fixed cost absorption. It does look like you have some fundamental margin improvement going on in at least in one of your product categories. Can you just speak to that for a moment?

I think we benefit from beneficial mix this quarter. So, again we don't want to get ahead of our skis [ph] on margin. We had a great quarter margins. We always try to be at the top end of our guidance on margins, but David any comments on the margins? I mean, again the fundamentals have not changed. And, just we had a fortunate mix to get a good margin.

Due to increased volume we definitely had…

We had absorption, yes.

Absolutely, yes.

Yes. I mean that's the big thing. Our volume is definitely ticking up pretty significantly, and we had [ph] absorptions being positive.

You are talking about, I guess, year-on-year comparison then…

Yes.

And how to think about it. Okay. I can take the rest of that stuff offline. Also, I mean just in terms of the guidance, I know that you guys last quarter talked about 27.5 to 30.5, but essentially you are well ahead of the top end of guidance. I mean, should we assume the run rate kind of starts ticking up towards the low 30s now? Is that kind of the way to think about it, or what would give you pause? I guess, is there any kind of element…

There's so much pressure, Matt, I mean, on pricing. I would stick with the guidance and certainly we hope to be at the top end of that. And we have been -- again, I think the team has done a great job of managing expenses and we continue to take waste out of our system, but it's a very price competitive world we live in. We think we're on the right side of it, but I'd be cautious.

Sure, okay. And then the ramp up, I wanted to touch on the ramp up in new business in rotating electrical, how much of the growth this quarter was driven by that ramp up in new business in rotating electrical? Could you just break that out versus your existing supply agreements and how those…

I'd tell you, it's almost immaterial. It was very small. It started very much at the end of the quarter. We should start to see more of that this quarter.

Got it. Okay. And then I think you guys came in below sort of what you had commented on OpEx for the year. I think last quarter you talked about the run rate being similar to Q4 of last year, which I think it was around 11.5 million. Maybe just talk to OpEx for the remainder of the year and then sort of how you see that playing out.

So, previously we gave guidance on 46 million. The first quarter, usually at a smaller, and then as the year progresses, as sales increases, we do expect operating expenses to increase and we're still keeping to the 46 million for the year.

Got it. Okay. Maybe we touch on new products just briefly here. In terms of the brake booster product, which I understand is beginning to shift this month, could you touch on the mix that you see starting out between reman versus distribution in that category? And maybe just touch also on what margins look like in that category as you had a full run rate.

All right. So I mean, I think we will talk about revenue first. We should begin shipping any week now. I mean, we are ready to go. We should start receiving some orders. We've decided that we have one large customer already signed up. We have not offered it to others, although we have significant interest in that product line. I think in terms of the margin profile, it's in development stage. I mean, it's brand new. It's being launched. So, until you get the critical volumes and the benefits of higher volume in the production line, we think the margins again are appropriate for the guidance levels that we've given. So, you know, somewhere in the -- similar to master cylinder margins. As time goes on, we think that business is going to ramp. We think it will be a faster ramp than perhaps master cylinders even, and margins will increase as we get better incremental volume. I forgot the first part of your question. I hope I answered that, but I think it slipped my mind.

Yes, just a mix between reman versus.

The mix. It's substantially reman. I mean, there will be some fill in with new units, but it's a substantially reman product line.

Got it. Okay. Just last one from me. In terms of inventory, I know it ticked higher here at 73 million. Maybe you could just speak to is that an inventory bill in the face of the ramp up that you have here with rotating electrical business and the new brake master cylinder product. Maybe just touch on that.

Yes. The increase in the finished good inventory is for the upcoming new business. Typically our September quarter is a stronger quarter for us. So we are getting ready for the second quarter as well.

The business is strong right now.

Got it. I'll jump back in queue. Thank you.

Thank you. Our next question will come from the line of Jimmy Baker from B. Riley and Company. Your line is open.

Hi, good morning guys. Thanks for taking my question.

Good morning.

Good morning.

Just a follow-up there on the two new product line, can you just break down the market size figures that you coded earlier on the call between new and reman?

That's a good question. So let's start with break power booster. I think the break power booster line, for the most part, is a reman line. There is always fill in with new units that you make sometimes are more efficient than reman, but it's substantially a remanufactured product line. I mean even somewhat to rotating electrical, there is always some new units but I would say 95–5, 90-10 about in terms of reman new. On the turbo charges, I think again substantially somewhat to that, right, it's about 95% reman, 5% new.

Okay, that's helpful. Just help me, kind of walk through the revenue adjustments in the quarters in detail behind the allowances and any color as to the magnitude of new business that those allowances are attached to would be very helpful.

Recap for the first quarter in our earning press release tables, we show approximately $1.85 million for initial return accruals related to new business and we show $6 million for customer allowances related to new business. So the $6.6 million is for new business. And we talked about in the past getting additional rotating electrical business as well as other product lines, all of the new business is going to be included in our revenue guidance that we are sticking to which is the $420 to $440 million.

So is it fair to say that half of the incremental growth that you are seeing this year is generated in part by these allowances, I mean is there a way for us in the outside looking in to sort of attach an incremental revenue to these incremental incentives?

I mean, I think half is probably a fairly close guess, hard to tell exactly what, again we are estimating run rates. So, at the low end of the guidance probably half of it is in new.

Okay. And then maybe a bigger picture question for you selling as you think about the capital intensity of the business, I guess using round numbers right now you have called it $390 million in trailing 12 months adjusted revenue and about 250 million in core inventory and deposits on the balance sheet. I guess so long as you are growing in reman categories, is it appropriate to think that this ratio holds in other for every incremental dollar of revenue that you generate you will invest a little more than $0.60 of that in cores separate from what you might have to invest in finished goods inventory?

That number sounds a little high to me, I mean I don't have that on my fingertips to give you an answer on too.

So that core balance, later today we will be filing the 10Q. We break down the core inventory balance by different categories. So what Jimmy was focused on is the cores or customer shelf, is that right?

Right, as well and deposit the smaller number but, what I am trying to understand is if your incremental gross margin is somewhere in the 30% range is that enough to self fund the growth going forward giving the, not only the traditionally working capital intensity but the core inventory intensity?

Yes, again it depends on how fast you turn that inventory but then we have been turning that inventory about six times. I mean we internally separate the cores on customer shelf buyback, because that's inventory we don't control and at cash we get back if we ever lose that business. But if you look at our operating metrics and you see that generally the value of cores is worth 30% of the total value of the finished good and you are generating 30% gross margins of 31 -32 or 29 whatever we have been doing. If you can turn that inventory more than three times a year it self-funds the core. So that's really what we are doing, I think last year in our 10K we had a close to seven times turn in on inventory and I think in the 10K it went down a little because we ramped up significantly for new business and the additional business that comes from existing business in the second quarter and I think went down to like six times. So I believe and we also have our work in capital ratio on receivables and payable is very positive. So I believe it self-funds. I believe that the day's outstanding on cores in general are closer to 360 day outstanding and the day's outstanding on receivable collection on them is 30 days. Now those are around non-core programs, there is a reconciliation in some cases every quarter or every six months you don't see that cash as quick but I believe that it self-funds the cores. I mean I think all of the reman business elf-funds with cores, other than the buybacks that we have to make.

And if I can clarify earlier, Jim, you mentioned the June 30, balance for long-term core inventory is about 244 million, of that the cores on customer shelf is about 170 million.

So that makes sense to you, so the ongoing, if you separate the cores on customer shelf which you buyback, which is view as the deposit and we look at our cost to capital to get that inventory, the rest of the inventory is self funds.

It does makes sense, I suppose your track record is so strong, you haven't lost a customer right and so to me that's a relatively permanent investment if you are not planning on losing that customer, so just want to understand kind of what's changing in the business, because it's not as if that net cash balance has been building off late as you have been growing and it sounds like your expectation is going forward, you got to be able to self fund and if that's the case, just want to understand maybe what's changing the business mix or customer mix or if not you have completed these core repurchase obligations and we should see the cash flow broke out change going forward.

Yes. So, again as we completed many of them. But as we add new business, the new ones come up, so and it is sort of the one-time buy, so when you get to completing that initial core buyback, then again my operating metric kicks in and so that's a one-time by depending on the size of the category and the price of the cores and it just fluctuates, there is just no way I can give you a summary of what that is, we look at every deal individually; to make sure that the arithmetic works.

Understood, I will take the rest offline, if I could get a quick question on the acquisition any framework, in terms of their trailing revenue or what you are assuming for a full year run rate going forward.

Yes, it's very small. I mean, we are looking at probably $0.5 million in revenue but the key there is all the development work and the management team that we get. So I mean there is knowledge of the -- significant knowledge of the category, there is significant catalog development, there is significant product specifications that have been developed. So know how in terms of the remanufacturing of these products, sourcing know how, way to find the components, way to find the cores and so we think the combination of that in conjunction with the management team that we will acquire for the MTA side and the new footprint in Mexico's is going to make for formidable law frame.

Understood thanks very much for the color.

Thank you. Our next question will come from the line of Steve Dyer from Craig Hallum. Your line is open.

Thanks, good morning guys.

Hi Steve.

Good morning.

Just digging in a little bit more on the new products, so the Brake Booster it sounds like will shipped imminently to the first customer, [technical difficulty] size for the first customer, I mean is that more along the lines of master cylinder or is that more along the lines of kind of the initial wheel hub business, that's the first?

No, it's more in line with the master cylinders. It's a smaller, a little bit smaller than the master cylinders. Again I think the ramp will outstrip the master cylinders, but we will see that.

My next question, so how long before you would potentially start shipping to subsequent customers there.

I think we can start shipping additional customers soon, by year-end the latest.

Okay…

By calendar year, Steve, just -- we clarified by calendar year-end at the latest.

Right, right, okay, and then just so I am clear, what's the timing on turbo chargers, I mean it was kind of in the same release, but it sounds like maybe it's a little bit later than the brake boosters, in terms of shipping etcetera.

We are shipping existing customers and then we intend to ramp what we got right now. So but the real I believe the real, the real bump is going to come probably in 12 months. But this business we have right now, we are not stopping and the management team is committed to continuing to grow them and we have capacity. So, in the existing facility, so it's kind of -- we are going to continue to sell, we got some exciting things coming in discussion there as well. It's a much more developmental than say the brake boosters, we already have pass, I mean this is a new pass for us in turbos, so we will keep you all updated as that progresses.

So, size-wise this is maybe even little bit smaller than the boosters?

Well, for the first year but I think in this category I think it's going to be another rotating electrical size category. This is a very fast going, vibrant category.

Okay, you mentioned sort of the prevalence of turbo chargers in Europe, do you have an opportunity, I know you don't do much of anything in Europe right now. I mean do you have an opportunity to capitalize on that going forward?

We could, we certainly could, I mean we're not focused on Europe right now and I would say that our immediate plan is really to focus on the U.S. distribution channel. I mean having said that, we are a week or so into this acquisition. We haven't really, that is a possibility but again our focus is to leverage the U.S. channel right now. But you never know, I mean with our capability we maybe able to do something in Europe.

Sure, and then just final question from me, as it relates to rotating electrical you guys have gained a ton of share it seems like in the last few years and hence a lot of the core purchases and a lot of the revenue growth et cetera, I mean do you feel like you are getting close to a ceiling with some of your customers in terms of the portion of that category they are willing to give you, or do you feel like there is still lot of runway left?

Well, we are certainly going to have growth in the rotating electrical this year in share and we want to keep going. There is still plenty of revenue we don't have and there is plenty of growth in the category. It is not going to be as easy, not that it ever was easy, it gets more and more competitive as you get more and more shares. So, I think in near term there is still growth in it in the next year or two, we will have to see what happens on the supply chain there. We are seeing lots of opportunities still in terms of new sales opportunities, again the category, all of our categories are price sensitive, so that's the thing we have to balance is growth as well as the pricing. But there is growth, I mean there is definitely growth still in all of the categories, I mean rotating electrical being one that we are more mature in that all of the categories have growth opportunities and again when I say that, I say that with knowledge of an incredible amount of interest, I mean we never know where the interest converts to sales but there is a significant amount of interest in every one of the categories.

Sure, got it, alright, thanks guys.

Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question will come from the line of Scott Timber from C. L. King. Your line is open.

Good morning, guys.

Hey, Scott.

Good morning.

I missed the first five minutes of the call when you were talking about the new business wins and aside from rotating electrical, the brake booster and turbo charges was there anything else that sounds like maybe on brake master cylinders there was something new?

I mean there is something new across the Board, I mean we have new business coming in everywhere, but we didn't get into anything granular in terms of byproduct line what the new business is. But again I will reiterate that there is not a product line that we are not seeing interest and significant opportunity for double digit growth across the board.

Got it. And as far as the turbo charger business, it sounds as if you were doing a little bit, obviously nothing was in this quarter that was reported, right?

No.

Okay. And going forward, brake boosters, that is a totally separate category that you will be reporting in…

Yes, that will be coming, again we don't segment report but that will be another offering, we will break down the revenue as we have done in the past that will begin shipping shortly.

Okay. And going back to rotating electric to the question about market share, obviously just some very big contract wins and there seems to be some business left, so maybe you could just give us an estimate of where you think your market share is in all the categories that you are in right and particularly rotating electrical so we just can frame that out.

Yes, in rotating electrical it's probably 35% to 40% of sort of the non-other category in rotating electrical, I mean the other smaller conglomeration of customers actually fillet this chunk of the category but amongst the large customers I think we probably have 35% to 40% of that. On wheel hubs, I think we got a way to go, I don't know the exact off the top of my head, it's probably closer to 10%, very competitive category though high growth category that's continued to grow there. Master cylinders, we just barely scratching the surface, I mean I would say less than 5% there. Obviously brake power boosters, we haven't begun yet but it would be less than 5% once we get into it. And turbo chargers, I mean it's not even on the radar, it's still very, very small compared to what's out there. So, lots of opportunity, again in my opinion lots of opportunity for growth.

Got it. Just a couple last questions Dave, and then we can help with this on the interest expense line down year over year, could you talk about how factoring costs played in there particularly with sales up I would have thought that would have led to interest expense being a little bit higher particularly even with the fact that you do have lower borrowing costs versus a year ago? And then also on the share count, it looks like it was up about 600,000 shares year-over-year and 500,000 sequential, maybe just talk about that, and then I am all good.

So, of the $2.8 million interest expense for the June quarter, most of that is factoring interest. If you are comparing versus the prior year, so we indicate in the prior year we had the write-off of the differed loan fees, but also this year we have lower, again interest rates as you mentioned as well as the lower average loan balance. So, going forward the best way to look into expenses is as sales increase, because the majority of the interest expense is factoring. So interest expense should increase proportionately as sales increases. And the second part of the question, we did have additional auctions exercised and as a result of our calculation the share count increased.

Got it, that's all I have guys, thanks for taking my questions.

Thank you.

Thank you. At this time I'm showing no further question. I would now like to turn the call back to Selwyn Joffe for any closing remarks.

Thank you. Thanks everybody, look we are excited with our business, we appreciate everybody's interest, we appreciate continued support and thank you again for joining us for the call. We look forward to speaking with you when we host our fiscal 2017 second quarter call which should be in November 2016, this year and various conferences in the interim which we will be attending, so again thank you everybody.

Ladies and gentlemen, this concludes the program. You may disconnect. Everyone have a great day.