Gary Maier - Investor Relations Selwyn Joffe - Chairman, President and Chief Executive Officer David Lee - Chief Financial Officer.

Matt Koranda - ROTH Capital Partners Steve Dyer - Craig-Hallum Jimmy Baker - B. Riley & Company Scott Stember - C.L. King.

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

Thank you, Kat and thanks everyone for joining us for the call this morning. 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 would like to remind everyone of the Safe Harbor statement included in today’s press release.

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 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 various filings with the Securities and Exchange Commission. I would now like to begin the call and turn it over to Selwyn Joffe..

Okay. Thank you, Gary. I appreciate you joining us today. We are pleased with the results of our fiscal 2016 year ended March 2016. We are encouraged to have achieved record adjusted sales of $383.3 million for the year, which exceeded our adjusted net sales guidance of $380 million.

We achieved these sales levels despite a mild winter, which results in deferred failures for our products. All of our products, which are nondiscretionary, fail more frequently in a harsher weather environment.

Our results was supported by continued strength across all of our product lines, which currently include rotating electrical wheel hubs and our emerging brake master cylinders. The outlook is equally encouraging and we are well-positioned for continued growth as fiscal 2017 progresses.

Other than the impact of mild weather, the fundamentals of our business continue to be strong. We have new business commitments in all of our product lines. In addition, the replacement rates for all of these product lines will continue to grow as the car population ages.

While there are 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.

To summarize our results, net income for the year was $10.6 million or $0.55 per diluted share and adjusted net income was $39.6 million or $2.08 per diluted share.

While our GAAP earnings per share decreased to $0.55 per diluted share for the year from $0.65 for the prior year, our adjusted earnings per share increased to $2.08 per diluted share for the year from $1.87 a year ago.

While our GAAP gross margin was 27.4% for fiscal 2016, we achieved an adjusted gross margin of 30.7%, which was higher than the top range of our guidance for the year. I should mention that gross margin was negatively impacted by product mix and lower scrap revenue due to declining commodity prices over the past 12-month period.

David will discuss the financial results in more detail. For those of you are new to Motorcar Parts of America, I should mention that a number of factors continue to provide tailwinds to the aftermarket hard parts business in total. 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 possibly reaching 12 years by the end of calendar 2016. As we of course get older, the number of replacement parts needed continues to grow with their maintenance.

Additionally, whether they are strong new car sales or not, current indications are that people will continue to keep their cars longer, which will contribute to an increased age car population and result in accelerated growth for replacement parts.

All of these factors bode well for both current and future business for both our parts and all hard parts. In particular, 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.

The 12-plus year category will begin to include later model vehicles with more sophisticated and higher priced parts than the earlier models eliminating some of the parts that have low gross margins. We anticipate continued positive contributions as we move forward through the aging cycle.

To put our overall potential in perspective, industry sources estimate the market size of the USA and Canada for our current products to be approximately $3.8 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 meet or exceed the 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 23,500 stores and our customers continued to gain share both in 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 nondiscretionary products. In summary, the company’s growth prospects continue to be positive. The fundamentals of the business, was strong and we expect our solid growth to continue.

I will now turn the call over to David to review the results for the fiscal fourth quarter and 12-month results in more detail and then I will end with an update on the numerous initiatives and progress the company has made and also highlight our expectations for the year ahead. And then we will open the call up for questions.

So David, I will turn it over to you now..

rotating electrical adjusted net sales increased $3.1 million or 4.2% to $76.6 million for the fourth quarter compared with $73.5 million for the prior year.

Adjusted net sales of wheel hub assemblies and bearings increased $6.5 million or 40.8% to $22.3 million for the fourth quarter compared with $15.8 million a year earlier and net sales of break master cylinders increased approximately $540,000 or 34.4% to $2.1 million for the fourth quarter compared with $1.6 million a year ago.

We launched the brake master cylinder line in late July 2014. Gross profit for the fourth quarter increased to $24.2 million from $20.9 million a year earlier. Gross profit as a percentage of sales for the fourth quarter was 24.8% compared with 24.9% a year earlier.

Adjusted gross profit for the fourth quarter increased to $29.8 million from $28.2 million a year earlier. Adjusted gross profit as a percentage of sales for the fourth quarter was 29.6% compared with 31.1% for the prior year fourth quarter, impacted by product mix and lower commodity prices resulting in lower scrap revenue.

General and administrative expenses increased $1.3 million to $11.3 million. Adjusted G&A expenses increased $1.9 million to $8.2 million. Sales and marketing expenses increased $475,000 to $2.4 million.

The increase in adjusted general and administrative expenses and sales and marketing expenses reflect new investments for innovation, growth in 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 $9.6 million for the fiscal 2016 fourth quarter compared with $8.4 million for the prior year fourth quarter. Adjusted EBITDA for the fourth quarter was $19 million compared with $20.1 million for the period a year ago. Depreciation and amortization expense was $723,000 for the fourth quarter.

Interest expense was $2.7 million for the fourth quarter compared with $3.1 million last year. We entered into a credit facility on June 3, 2015, which resulted in a decrease in interest expense due to lower interest rates and lower average outstanding balances on our loans.

This was partially offset by the higher balance of receivables discounted during the fourth quarter compared with the prior year fourth quarter. Income tax expense rate was approximately 67% for the fourth quarter. The income tax rate was higher due in part to nondeductible expenses in connection with the fair value adjustment of our warrants.

Net income for the fourth quarter was $2.3 million or $0.12 per diluted share compared with $3.1 million or $0.16 per diluted share a year ago. Adjusted net income for the fourth quarter was $9.5 million or $0.50 per diluted share compared with $9.9 million or $0.53 per diluted share a year ago. We will now discuss the fiscal year end results.

For fiscal 2016, net sales reached a record high of $369 million compared with net sales of $301.7 million for fiscal ‘15, which represents an increase of $67.3 million or 22.3%. Excluding the $12.6 million deferred core revenue recorded a year ago net sales increased $79.9 million or 27.6% to $369 million from $289.1 million for fiscal year 2015.

For fiscal 2016, adjusted net sales reached a record high of $383.3 million compared with adjusted net sales of $320.7 million for last year, which represents an increase of $62.6 million or 19.5%.

As previously mentioned, excluding the $12.6 million deferred core revenue recorded in fiscal 2015 net sales increased $75.2 million or 24.4% to $383.3 million from $308.1 million for the prior year.

Net income for fiscal 2016 was $10.6 million compared with $11.5 million for fiscal ‘15 and earnings per share for fiscal 2016 was $0.55 compared with $0.65 a year ago. Fiscal 2015 includes $0.12 per diluted share from the recognition of previously deferred core revenue of $12.6 million.

Adjusted net income for fiscal 2016 was $39.6 million compared with $32.9 million for fiscal 2015 and adjusted earnings per share, was $2.08 compared with $1.87 a year ago. As previously mentioned, fiscal 2015 includes $0.12 per diluted share from the recognition of previously deferred net core revenue of $12.6 million.

Adjusted EBITDA was $79 million for fiscal 2016 compared with $69.5 million a year earlier, which represents an increase of $9.6 million or 13.8%. Excluding the $3.9 million EBITDA from deferred core revenue for the prior year, EBITDA increased $13.5 million or 20.6% to $79 million for fiscal 2016 from $65.6 million for fiscal 2015.

At March 31, 2016, we had a $23.4 million term loan, borrowings of $7 million on the revolving credit facility and approximately $21.9 million in cash, resulting in net bank debt of approximately $8.5 million.

There was availability of approximately $92 million on the $100 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 $114 million at March 31, 2016.

I should mention that we used approximately $45 million in cash to pay down our prior term loan which was primarily our long-term liability related to our June 2015 refinancing. As I will now discuss, we have a far more flexible loan facility, which will help us deploy capital efficiently for growth.

Last month, we signed an amendment to the PNC Bank credit facility, which increased the revolving line of credit to $120 million from $100 million and also allows us to expand in Mexico. This amendment also increased the pre-approved limit for permitted acquisitions.

Currently, loans outstanding under the $120 million revolver facility and $23 million term loan 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 2.95%, consisting of LIBOR of 0.45%.

At March 31, 2016, the company had approximately $413 million in total assets, current assets were $140 million and current liabilities were $131 million.

Net cash provided by operating activities during the 12 months ended March 31, 2016 was approximately $15.3 million after spending approximately $4.4 million in net legal expenses and settlements related to discontinued subsidiaries.

For the reconciliation of non-GAAP financial measures, please refer to Exhibits 1 through 7 in this morning’s earnings press release. I will now turn the call back to Selwyn..

Thank you, David. As you can tell, we are excited by 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 as well as actively working to introduce new products.

As we previously indicated, we expect to launch a new product line in the second fiscal quarter ending September 30, 2016. We expect to begin shipping that actually at that timeframe. 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. As we enter a new fiscal year with significant opportunities, I want to preface my outlook by saying that the most recent winter was quite mild compared to the severe winter in the previous year.

While our results was strong, we believe that sales were negatively impacted in the short-term by weather and that we certainly experienced a tough comp. Having said that, it should be noted that we provide nondiscretionary parts hence sales on that loss was nearly deferred. These parts will ultimately fail.

We have seen the influence of mild winter weather through May, but we are starting to see more normal ordering patterns. I will now focus on some of the highlights we expect in our next fiscal year.

As I stated earlier, despite some softening sales which we believe is due to milder weather, we are optimistic about our industry and the company’s position in the nondiscretionary parts sector. We are off to a strong start with new sales opportunities for our existing product lines. Commitments for significant new business are also strong.

These sales will begin rolling out of various times during this fiscal year. You will have cost associated with this new business. It is anticipated that our new line of hard parts will begin shipping in the second fiscal quarter of this year. There is lots of interest from potential new customers relating to all of our product offerings.

In addition, we are very excited to have identified another category that we are pursuing and expect to announce details in the near future. In connection with our growth plans, we recently doubled our Chinese footprint and expanded our Malaysia operations. At the same time, we are in the process of expanding our Mexican distribution footprint.

This will allow us to recognize quite significant operating leverage as we continue to expand our business. Our Torrance, California facility will be utilized to develop our technology, incubate new product opportunities and enhance our customer service backbone.

We have made significant investments in new technology, including further strengthening of our industry leading global quality control systems, customer support and logistic systems. While I cannot give more granular at this point for numerous reasons, I look forward to sharing more information with you as these initiatives evolve.

Our company is driven to innovate and to lead our industry into new age opportunities and systems. We are excited with these initiatives. In summary, business continues to be good, albeit that we have been affected by some milder weather as I discussed earlier.

We anticipate a vibrant year of evolving initiatives that will help position our company to continue to enhance value for our shareholders. Excluding acquisitions, our adjusted net sales target for fiscal 2017 is between $420 million and $440 million, with an adjusted gross margin target between 27.5% to 30.5%.

We are also pleased to welcome David Bryan and Jay Ferguson as two new independent board members. David Bryan brings us new expertise in the fields of education and the internet, areas that MPA is now pursuing.

Jay brings us significant experience in both the acquisitions arena and in providing guidance with respect to managing high growth opportunities. I want to thank all our team members for their commitment in customer-centric focus and 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 watch as we push to execute our plans. Our ongoing success and accomplishments are due to this incredible team and I thank them. I appreciate your interest in Motorcar Parts of America and we welcome your questions..

Thank you. [Operator Instructions] Our first question comes from the line of Matt Koranda with ROTH Capital Partners. Your line is open..

Good morning, guys. Thanks for taking the questions..

Good morning, Matt..

Just wanted to start off with the new business that you had alluded to at the end of your comments, Selwyn, you alluded to new business coming online throughout the year.

Maybe you could just talk about sort of the magnitude of some of that new business? Is it mainly skewed toward rotating electrical or is there a mix of some of the distribution products in there? And then maybe just talk about the cadence of how that ramps throughout FY ‘17?.

Yes. So, I think we have had some very significant wins in the rotating electrical category that begun shipping in June, some of these new ones and so we expect to see a nice sell in rotating electrical. I think June – in the June month, we are starting to see sort of a return to much more normal ordering levels.

So, I think I am hoping that the after effects of the mild winter are now beginning to pass us, but we will have to wait and see that, but having said that, again the fundamentals we picked up significant amount of new business from multiple customers in rotating electrical. The same applies quite frankly for the other product lines.

They are all experiencing continued growth. Some of the ramp up will be little late in later in the year. So, I think you will see a disproportionate amount of growth probably coming in the latter half of the year. But having said that there is significant commitments in product lines now.

Our new product line we are excited about I can tell you that the amount of interest in that product line probably exceeds any of the ones that we have launched so far. There just seems to be a much broader excitement about the new product line.

We are in production already on that new product line and hope to begin shipping that in late August, early September. And then there is one more to come.

So I would just say that it’s going to be spread out over the year, lots of new commitments, I think there is fundamental strength in demand for our products, pricing pressure continues on with all of our products is just normal for us, but the outlook we think is very positive going forward..

Got it.

And just to clarify that $420 million to $440 million that you guys provided in the guidance factors in the new business for the year as well?.

Yes. Now, obviously on a run-rate, it’s going to be a lot higher than that, because not all the business starts day one. So, our run-rate going into the next fiscal year we think is going to be very, very strong..

Got it, okay.

And then you alluded to weather being an impact on fiscal Q1, how much of an impact are we expecting? I mean, is it going to be down year-over-year or how do we think about just the seasonality here?.

Yes. I mean, normally we would be up year-over-year on an equal comp. April, May has been soft. We are talking and we see all registered sales across the board. It looks like there has been – the industry is turning now for our products. So, we expect a much stronger June, but I am not sure whether it will be down over the prior year.

Hopefully, it won’t, I think it will be up. But we definitely would be under normal circumstances doing a lot better. But having said that if this continues on, the trends of June continue on through the rest of the year, I think there will be some catch up. Again we don’t lose a sale, we defer a sale..

Got it. Okay..

Cautious in the first quarter, I mean, it’s going to be strong, but I am just not sure how strong..

Got it, okay. And when we look at gross margins and even the margins this quarter, a little lower than the run-rate that you guys have been at over the last several quarters.

Maybe you could just talk about the primary drivers there? And then for fiscal ‘17, how do we think about the margins in fiscal ‘17 on a go-forward basis?.

Yes.

I think if you look at the fourth quarter, the growth of our product lines, we will have us grew 40% I believe, David?.

Yes, stronger than rotating electrical..

Yes. And rotating electrical was up 4%, 5%. So, you just see there is no fundamental change in the margin profile in the fourth quarter other than mix. I do think there was a lot of ramp up going on in the fourth quarter. So, there is always some inefficiency for very, very significant new customer.

So, it’s hard to tell depending on the mix and which way the growth comes, but we have generally been at the high end of our guidance. But depending on mix, it could be a little lower, so I don’t know. I don’t know the answer to that question. So, I think the 27.5% to 30.5% is again is good guidance and hopefully we will be at the high end of that..

Got it, okay. Maybe last one for me here, when you talk about, I think in the past you have alluded to some of the incremental growth in rotating electrical could be skewed toward domestic content, greater domestic content, just given your strength in the past in import business.

Could you just talk about sort of how you are thinking about bidding for new business in rotating electrical given that some of that new business could be slightly lower margin, just how are you being selective and thinking about that new business?.

Yes, I think what’s interesting now, I mean, over the last 10 years, you saw a lot of early market share, which is dominated by the domestic applications with alternators and starters that were relatively crude.

These units – these cars stayed on the road a long, long time and these units have not – we have not been able to charge more for the value of these units. The value of the vehicle is so low and the units are very heavy metal consumers of raw materials.

I think as we see and I mentioned a little bit in the script, as we see the car population aging now, some of those cars are beginning to come off the road and as the domestic car population ages going forward, we should see far more really sophisticated, really important applications that are now being installed in domestic vehicles.

So, we think over time the domestic business has gone to get better and we are always looking to the future, to be honest with you. And so we are positioning ourselves where we think that, that can be equivalent business.

Now, we may have a little bit of margin pressure in the beginning from that growth, but we don’t think that, that’s a long-term effect. We think that, that will neutralize our import margins as time goes on..

Got it, okay. I will jump back in queue guys. Thank you..

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

Good morning..

Hi, Steve..

You talked a little bit about the new product launch in the September quarter, is there anyway of kind of quantifying that if not specifically maybe kind of bigger or smaller than wheel hub, bigger or smaller than break master cylinder kind of the first year out?.

Yes. I think it should be bigger than master cylinders, but not quite as big as wheel hubs. I mean, it’s hard to tell on how quick we will open it up for mass distribution. So, we think it’s going to be a good product line and then we think the margins going to be good and we think it’s a good product line.

But I would just include that the guidance for the $420 million to $440 million sort of includes that as well, but we think that as time goes on will be a very good product line..

And just relating to that guidance, I don’t know if there is some conservatism in there or if it’s just maybe you are anticipating the slow start to the fiscal year. I guess, kind of given all of the new business that you are winning, new product lines coming on, et cetera.

I guess, I would have thought maybe it would be a little bit higher than that, maybe it’s just conservatism on your part, but any granularity as to kind of what you see there?.

No. I think you will see a very strong run-rate going into the next fiscal year, because a lot of this requires ramp up and starting to ship away. And then you have seen some softness for sure April, May are softer than normal certainly than the prior April and May.

And again I think June is going to be very strong with that, but I think we are off to a little slower start, but I think – again I think it will catch up and I think going into the back end of the year, you will see some nice gains.

And I think through the end of this fiscal year, the run-rate going into next fiscal year is going to be very strong, but our business is fundamentally strong. We do have – we have nondiscretionary parts and it’s not like we can advertise to increase sales. We depend on our car failures.

And so to the extent that there is generally a decline in failures, because of replacement rates, there is nothing we can do. But I will tell you, we have been through this many times. I mean, there is ebbs and flows of demand for this product as that fails.

And it’s going to – they are all – all these vehicles other than those are going to get scrapped, they are going to need new alternators, starters, wheel hubs, master cylinders and our new products.

So, that’s not changing and as long as we maintain efficient customer service and treat our customers with the way we treat them today, I believe that we will have strength on an ongoing basis.

And then in addition to that, I am sorry, I am rambling a little bit, but in addition to that, I can tell you the initiatives and the investments that we have made in technology to support this growth are I think very, very excited.

I mean, think they are not something intangible, I can say that this is going to result in X, Y and Z, but I can tell you when our customers visit and may see what we are doing. I mean, you can get a lift service, but you can see in their faces that this is – it’s impressive to them.

And so we believe that’s just going to help our growth and continue on with hopefully a very good strong success story going forward..

And as it relates for those investments, OpEx has jumped a decent amount the last couple of quarters. Is this kind of run-rate implies something like $46 million or so for kind of all-in all the categories in fiscal ‘17.

Is that kind of a good way to think about it?.

Yes, I think it is. I mean, I think we certainly took a step up in infrastructure. We launched our whole new marketing team. We built a complete new innovation center and staff that was with the appropriate people. We have staffed up a new acquisitions team. So, our distribution capabilities have enhanced. Our IT capabilities have been enhanced.

Our IT and internet technology infrastructure has been enhanced, but I think now we are at a – we plateaued again from the next level of growth..

Okay, that’s good. And then lastly, you guys have referred two acquisitions a few different times over the last 6 months or what have you.

Are you seeing anything specific there? Are you just anything that’s sort of additive or is your appetite increasing for that or any color around kind of the acquisition strategy going forward?.

So, I think one thing is we don’t need acquisitions to grow our organic growth rates. We believe we are going to be – continue to be strong. So, we are selective. We want to make sure that it fits right that the pricing is right and that the opportunity going forward is stable. So, I think we have committed to being very much involved in that world.

We are not committed to making an acquisition for the sake of making an acquisition. But when we see something right, we will – we will pull the trigger and we will make that move. We have lots of liquidity to do an accretive acquisition. As I think David mentioned, we have meant that of only $8 million on trailing 12-month EBITDA of $79 plus million.

So, we have got plenty of capability to make the right acquisition. But we are very, very diligent in terms of making sure that we buy the right thing. And I think the addition of Jay Ferguson to our Board will help that a lot. He is just a great guy in terms of helping us understand that arena and valuations on the diligence side.

So, we are excited to have him there. And so we will make an acquisition at the right time and at the right price, just I wish I can give you this. There is a lot of opportunity out there, but we have to find the right one..

Got it. Okay, thank you..

Thank you. Our next question comes from the line of Jimmy Baker with B. Riley & Company. Your line is open..

Hi, Jimmy..

Hey, good morning, Selwyn. Good morning, David..

Good morning..

Just wanted to start on the revenue guidance, so breaking down that $420 million to $440 million, call it $37 million to $57 million in incremental revenue, just can you help us bucket that between, let’s say, underlying market growth, share gains in rotating electric and then new product contribution?.

That’s a tricky one. But I would tell you that the majority of it is from under the existing product growth. I mean, what we are seeing already – I mean, we have commitments for our new product lines. So, again that only starts in August.

But on our existing product lines, we have quite a lot of that, I mean, committed already on our existing product lines..

Okay.

And you made a few references to the stronger run-rate exiting the year, what do you think is a realistic annualized run-rate coming out of this fiscal year? Could it be as high as $470 million or $480 million something like that as we layer this in?.

I think, Jimmy, may be at a later call, I can get more granular. I don’t know off the top of my head, I don’t have that number and I don’t want to mislead everybody. But certainly it will be – certainly a percentage higher than the actual calendar year revenue.

I would anticipate and I am probably getting myself in trouble here, but I would anticipate the vast majority of the growth starting towards the middle of the year..

Okay. Sorry, go ahead....

So, a lot of it is back ended, so which means that the run-rate will obviously – that the run-rate will be higher disproportionately higher than the calendar year – than the fiscal year, excuse me?.

Sure, understood. And the $3.5 million customer allowance adjusted for in Q4 was that a competitive inventory purchase to win new business? And I guess just help us frame expectations there in fiscal ‘17. I mean, you have been in kind of annual range of $14 million to $15 million a year over the past couple of years.

Would you say that’s reasonable for fiscal ‘17? And I guess specifically, do you expect to purchase competitive inventory to win customers in the new product line you will be launching in Q2?.

Yes. So, that was – let me try and break down that. So, that was a lift of prior competitor’s inventory, some very inefficient inventory quite frankly. And so we lifted that, we ended up replacing some inventory on and continuing to replace inventory in that customer and we think that customer’s revenue will go up with the right mix of inventory.

So, there is generally some type of core Deville [ph] inventory purchase that are part of most of the new business wins, I mean, almost all of it. I would tell you that in the next quarter, we have a material contract win. And so the numbers are probably a little disproportionate in terms of the upside as well as the cost of that win.

So, we will get into more in the next quarter. But at the end of the day, we try and work with return on invested capital north of 35% and we think we have done that and we think we can sustain that for this 12 months. So, we will see where we end up..

Okay. And just going back for a moment to the revenue guidance, I know on the last call, you stated that you would not be targeting less than 20% revenue growth on an annualized basis, including fiscal ‘17.

I guess, at that point, did you just not have as good a read on the weather back in February? Is some of your new business ramping a little bit later in the fiscal year than you thought or were you including acquisitions? And I figured I was just trying to understand what’s contributing to a little bit lower revenue outlook here?.

Yes. So certainly, I was including acquisitions when I mentioned that. There was not just organic growth. And having said that, I mean, we are aggressive.

I mean, the way we manage our business is very aggressive and we push for growth for organic growth and while we give guidance, which we think is realistic guidance to the public market, we manage to higher expectations. So, the organization is energetic and passionate and capable, quite frankly, of a fair amount of significant growth here.

So, I think 20% is just an overall number that I mentioned. I did qualify in saying, don’t count on that as guidance yet, but we want to grow 20% plus. I mean, but again, the organic levels, I think that the $420 million to $440 million is a reasonable range of where we will end up..

Okay, great.

And last question just wanted to understand the $2.4 million in legal, severance and other during the quarter, was that actually a cash cost and what drove that expense? And do you expect to continue some legal spend in fiscal ‘17?.

Yes. So, I mean, that was a disappointing number for us. We had one sort of the last of the remnants of lawsuits from discontinued sub. We ended up settling it. Quite frankly, we felt like we had no obligation to pay it. But at the end of the day, we are evaluating the alternative cost of the legal costs of that claim. We decided to get it behind us.

I will tell you that for this quarter, that legal expense is a couple hundred grand. I mean, that was significantly down. I think now – certainly there is nothing in the hopper that I can see that any of the – anywhere near the levels of what we have had to experience. I think, I said this a little earlier, that fundamentally it’s behind.

This was the last lingering one that we had that, quite frankly, my intent was to defend it and actually go to trial as disappointed as I was with what I thought was a bogus claim, but legal system – be it what it is, we ended up with calmer heads and doing the analysis deciding that this was the most prudent way to conclude it.

So, that’s what happened. And I think there is a lot of detail in the 10-K when we file later today, so you get a little more granularity on that..

Okay, understood. Thanks very much for the color..

Thank you. Appreciate it..

Thank you. [Operator Instructions] Our next question comes from the line of Scott Stember with C.L. King. Your line is open..

Good morning..

Good morning, Scott..

So, when you talked about how in June that sales in rotating electric started improving, was this happening before the new business win that you started ramping up with or it was just because of the new business or was it just the combination of both?.

Yes, it’s a great question. It’s a combination of both. I mean, I think that overall, from what I can tell you that the demand is starting to resurrect itself. I think April, May was for the industry, certainly, for our industry or our sales since I am not going to talk about anybody else, but was a little perplexing to me, the softness in it.

But now I am seeing just across the board and sort of June demand seems to be getting back to normal. And in addition to that, we started to ship chunk of new business, so both of it helps..

Got it.

And on the gross margin side, is it as simple as looking at the gross margin in the sales and assuming that you have to hit the high end of your sales to hit the high end of your gross margin or is there some wiggle room or some other factors that come into play like scrap?.

Yes. Well, I think, first of all, we can hit the gross margin at the lower end of our guidance. I don’t think the range is going to affect the gross margin. Certainly, higher revenue is always better for everything. But I think depending on what happens, I think what’s happened with scrap prices, we may have seen the worst of that now.

I mean, scrap volume has dropped dramatically over the last 12 months. I mean, I think we are down probably $7 million in scrap over the last 12 months. But what’s happening now is that the supply side of your raw material is coming down, so that helps offset it a little bit.

So, I think it will be a little more normalized going forward now, because we have had probably 12 to 16 months of depressed metal pricing. So, I think that should normalize itself a little bit. We are going to have some noise in the numbers because of the new contracts that we have got. We will as always call it out.

I think it’s useful that for people to be able to understand the base business. We are a growth company. I mean, we are in the legacy type of industry with the organic growth rates that are generally low single-digit growth rates, but that’s just not our target.

Our target is double-digit growth and trying to change up the industry to be more value added than our competitors are. And that’s where we focus and we think we can outpace with margin pressure we think we can outpace the market..

Okay. Back on scrap again, it would seem that the commodity markets stabilizing actually coming back up a little bit.

Just remind us how long it takes for you to see some relief on the other side of it?.

I would say 12 to 18 months. And I think we sort of have come through that now. We are getting close to the end of that cycle, but the problem is you have got your own inventory, which I think successfully now turning at 6.5x, I believe a year, which I think is industry leading, but our suppliers are not turning their inventory fast enough.

And so there we are not getting the benefit as much as we try and pressure them as we can. We are certainly not getting the benefits quick enough for the declining commodity prices, but – and unfortunately you scrap – at spot market. So, whatever you are replacing and scrapping in a declining commodity market, you get hurt.

But again, I think we are somewhat through that and we are stabilized now..

Okay. Just last question on interest expense that when rates go up, obviously, you are factoring costs go up. What are your assumptions for the year coming up as far as rates and cost? I know that you said that $46 million is probably a good place too.

I am sorry, on the interest expense, can you maybe just talk about that where would you expect that to be from a full year if you have that much visibility?.

Yes. So, I think we believe rates will be relatively stable for the next – for this fiscal year. I don’t anticipate huge bumps. And of course, I mean, nobody knows for sure that of what that will be, but then I will turn it over to David to talk a little bit about interest expense..

Right. The largest component of our interest expense is the factoring interest. So, as our top line net sales grows, net sales – the interest expense will also grow. I think the easiest way to look at it the interest expense will grow proportional to the sales growth, that’s the easiest way to look at it..

Yes, net cost factoring is what?.

2.5%..

Right now, we are paying about 2.5% on revenue for factoring..

Okay, got it..

So, that will grow proportionately. And then we don’t know where interest rates will go, but hopefully, there won’t be too much of movement in the interest rates..

Got it. Alright, great. Thanks for taking my questions..

Thank you..

Thank you..

Thank you. And that does conclude today’s Q&A portion of the call. I would like to turn the call back over to Selwyn Joffe for any closing remarks..

Well, again, thank you everybody for their interest in Motorcar Parts of America. We appreciate your continued support. We thank you for joining us for the call. We look forward to speaking with you when we host our fiscal 2017 first quarter call, which will be in August.

And obviously, we will be at various conferences in the near future and we are always available for questions. So, appreciate your 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..