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

Scott Timber - C.L. King & Associates Matt Koranda - ROTH Capital Partners Steve Dyer - Craig-Hallum Capital Group LLC Jimmy Baker - B. Riley and Company.

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America Fiscal 2017 Third 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 be given at that time.

Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Gary Maier, Investor Relations. You may begin..

Thank you, Nicole. Thanks, everyone, for joining us. Before we begin, 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 these forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based 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. I’d like to begin the call and turn it over to Selwyn Joffe..

Okay, excuse me. Thanks. Thank you, Gary. I appreciate everyone joining us today. As highlighted in our earnings press release this morning, we achieved record profitability in our reported and adjusted basis for the quarter and our nine months profits increased sharply over the prior year.

We expect to end the full fiscal 2017 year with double-digit sales growth. This bodes well for the future of our company, as we continue to execute on our multi-product growth strategy. To put our performance in context, we operate within an estimated $116 billion U.S. automotive hard parts aftermarket business.

Our product categories represent approximately $4.7 billion of the total market size. We have a lot of growth opportunities available. Our focus is on non-discretionary parts for both do-it-yourself and do-it-for-me markets.

We are fortunate to have a global footprint that enables the company to pursue new product line expansion opportunities based on sound economics and quality. In general, we continue to evaluate new product opportunities based on three criteria.

First, we identified non-discretionary product line categories in which we have the ability to compete effectively, then we seek to get a strong indication of interest or purchase commitment from, at least, one customer, and thirdly, we determine if we can achieve a favorable return on invested capital.

During the 12 months ended December 31, 2016, we achieved 35% return on invested capital on a pre-tax basis, continuously look for opportunities to further deploy capital at favorable return on investment metrics.

Our current leverage is approximately 0.4 times adjusted EBITDA on a trailing 12-month basis through December 31, 2016, which we regard as as low and which provides us an opportunity to deploy more capital in an accretive manner. Let me reiterate our business plan fundamentals.

First is, to grow our existing product lines; second is, to launch new product lines; and third is, to deploy capital to enhance shareholder value, including potential stock buybacks and acquisitions; and fourth is, to be more important to our customers through industry-leading value-added customer services.

We see opportunities in each one of these business initiatives. Currently, we offer the following products. Rotating electrical, which we have sold for more than 30 years consisting of alternators and starters.

At the consumer sales level, it represents an estimated $2.4 billion market, of which we hold a 39% market share at the supplier level, which is generally 50% of the consumer level. There was a $900 million market for wheel hubs, which we entered in June of 2013, of which we currently have an estimated 18% market share.

Brake master cylinders is an estimate of $500 million market at the consumer sales level, which we entered in July 2014. We have an approximately 5% market share in this category. Brake power boosters, which is in the early stage of launching is an estimated $350 million market.

Turbochargers is a $500 million market, which we entered through a small acquisition completed in July of 2016. This emerging technology in the domestic market is utilized in both diesel and gas applications. Turbochargers became mainstream in Europe more than 10 years ago and the aftermarket in the United States is still in its infancy.

By way of perspective, European turbocharger market, including OE is estimated to be more than $5 billion. This bodes well for the future opportunity in the U.S. market. Today in the U.S., approximately 25% of all new passenger vehicles have turbochargers, with expectations for significant growth.

Turbochargers provide a nice solution to add power to small engine vehicles, while still enhancing fuel consumption. 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, and we’re excited about the ramp up in future opportunities for this product line.

In short, we see excellent opportunities in all of these categories for us to leverage our footprint and provide value-added customer services, all of which further enables Motorcar Parts of America the ability to gain additional market share.

These new categories and our other non-discretionary categories are expected to continue to grow as the car population ages.

While there are various factors that may influence replacement rates in a short-term basis, ultimately all of the 250 million vehicles on the road other than those scrapped should require replacement parts in our product categories. And demand for our expanding product lines will benefit as each vehicles age.

For those of you who are new to Motorcar Parts of America, I should mention that the 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 operations continues to grow now exceeding 11.5 years and continuing upwards. As vehicles get older, the need for replacement parts grow 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. Again, 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. We are proud that our service levels and the quality of our products continue to exceed expectations, which we believe, in part, has allowed us to gain market share in all 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 growing offerings of non-discretionary product parts.

In summary, the company’s growth perspectives – 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 to continue our solid growth.

I’ll now turn the call over to David to review the results for the fiscal third quarter in more detail, and then I’ll end with an update on the numerous initiatives and progress the company has made. We’ll then open the call for questions. David will now discuss our financials..

Thank you, Selwyn. I will now review the financial highlights for the third quarter, reflecting a record profitability as Selwyn mentioned on both a reported and adjusted basis.

Before I begin, I encourage everyone to read the 8-K filed this morning with respect to our December 31, 2016 earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10-Q, which will be filed later today.

Net sales were $112.6 million for the third quarter, compared with $94 million for the prior year third quarter. The $18.6 million increase in our net sales was attributable to higher sales of rotating electrical products, brake master cylinders, and introduction of brake power boosters.

$9.3 million of this increase is due to the change in estimate in our accrual for anticipated stock adjustment returns, which we’ll further discuss later on this call. Adjusted net sales were $112.9 million for the third quarter, compared with $94 million of net sales for the prior year.

The adjusted net sales increase of $18.8 million was due to the following. Rotating electrical net sales increased $17.9 million, or 24.3% to $91.5 million for the third quarter, compared with $73.6 million for the prior year, including $9.3 million increase due to the change in estimate in our accrual for anticipated stock adjustment returns.

Net sales of wheel hub assemblies and bearings decreased $1.1 million or 6.4% to $16.7 million of the third quarter, compared with $17.8 million a year earlier, impacted by the timing of update orders.

It should be noted that for the nine months ended December 31st 2016, net sales of wheel hub increased $6.9 million or 13.8% to $57.2 million compared with $50.3 million for the prior year nine-month period.

And net sales of brake and master cylinders increased approximately $470,000 or 17.9% to $3.1 million for the third quarter, compared with $2.6 million a year ago.

Additionally, the combined adjustment net sales for the third quarter for brake power boosters, which we started shipping in August last year and for turbochargers starting in July last year was $1.6 million. Gross profit for the third quarter was $32.4 million compared with $28.9 million a year earlier.

Gross profit as a percentage of net sales for the third quarter was 28.7% compared with 30.7% a year earlier, impacted by volume and stock update discounts for rotating electrical products, customer allowances related to new business and lower of cost or market revaluation of cores that are parts – that are part of finished goods on the customer shelves.

Adjusted gross profit for the third quarter was $33.9 million compared with $29.7 million a year earlier. Adjusted gross profit as a percentage of adjusted net sales for the third quarter was 30.1%, compared with 31.5% for the prior year third quarter. Total operating expenses of both the current and prior year third quarter was $12.2 million.

Adjusted operating expenses increased $476,000 to $11.3 million support our growth. Operating income was $20.1 million for the fiscal 2017 third quarter compared with operating income of $16.7 million for the prior year third quarter. Adjusted EBITDA for the third quarter was $23.6 million compared with $19.6 million for the period a year ago.

Depreciation and amortization expense was $948,000 for the third quarter. Interest expense was $3.4 million for the third quarter compared with $2.5 million last year.

The increase in interest expense was due primarily to higher interest rates on our accounts receivable discount programs, and higher average outstanding balances on our revolving facility.

Income tax expense rate was approximately 33.8% for the third quarter, which was positively impacted by a non-capital gain in connection with the fair value adjustments on outstanding warrants. Net income for the third quarter was $11.1 million or $0.57 per diluted share compared with $7.7 million or $0.41 per share a year ago.

Adjusted net income for the third quarter was $11.7 million or $0.60 per diluted share compared with $9.9 million or $0.52 per diluted share last year. We will now discuss the results of the nine months ended December 31, 2016. Net sales were $306.8 million compared with net sales of $271.5 million for the prior year nine-months.

Adjusted net sales for the nine months reached a record high of $319.1 million compared with adjusted net sales of $282.4 million for last year. Net income for the nine month period was $27.8 million compared with $8.3 million for the prior year and earnings per share for the nine months was $1.43 compared with $0.44 a year ago.

Adjusted net income for the nine months was $34.3 million compared with $30.1 million for the prior year nine months and adjusted earnings per share were $1.77 compared with $1.59 last year. Adjusted EBITDA was $68.2 million for the nine-month period, compared with $60 million a year earlier.

As many of you know, return on invested capital on a pre-tax basis is an important metric in our business. Our method of calculating ROIC is to divide trailing 12-month adjusted EBITDA by the average equity and net debt balance for the 12-month period.

So as of December 31, 2016, trailing 12 months adjusted EBITDA was $87.3 million and the average equity and net debt balance was $249.8 million, resulting in a 35% return on invested capital on a pre-tax basis.

At December 31, 2016, we had $21.1 million term loan, borrowings of $18 million on the revolving credit facility, and approximately $3.9 million in cash, resulting in net bank debt of approximately $35.2 million.

There was availability of approximately $101 million under $120 million revolving credit facility after reflecting approximately $1 million of outstanding letters of credit. Total cash and availability under revolver credit facility was approximately $105 million at December 31, 2016.

Currently, loans outstanding under the $120 million revolver facility and our $21 million term loan bear interest currently at 3.27% consisting of LIBOR of 0.77% plus a margin of 2.5%. At December 31, 2016, the company had approximately $443 million in total assets. Current assets were $147 million and current liabilities were at $143 million.

Net cash provided by operating activities during the three months ended December 31, 2016 was approximately $1.5 million.

The $1.5 million cash provided by operating activities reflects net income during the quarter, partially offset by an increase in accounts receivable as a result of higher sales during the third fiscal quarter and increased inventories in anticipation of a strong fourth quarter.

As mentioned earlier, $9.3 million of the increase in net sales during the third quarter was due to the change in estimate in our accruals for anticipated stock adjustment returns. Every quarter, the company analyzes our customers inventory to see what potential returns will be, and consequently update its return accrual.

Based on information of our stock levels, sell-through information and return rate estimates for customers obtained during this quarter, the company updated its estimates for anticipated stock adjustment returns. Due to this information received this quarter, it was determined that the returns expectation for particular customer should be reduced.

This adjustment resulted in an increase in net sales and cost of goods sold the unit value related to this inventory of $9.3 million and $5.2 million, respectively. During the three months ended December 31, 2016, the impact on operating income from this change in estimate was $4.1 million for the three and nine months ended December 31, 2016.

The impact on net income was $2.55 million, which represent an increase in basic net income per share of $0.14 and diluted net income per share of $0.13 for both the three and nine months ended December 31, 2016. The change in estimate also had a 1.3% and 0.5% gross margin impact for the three and nine months ended December 31, 2016, respectively.

For the reconciliation of non-GAAP financial measures, please refer to the Exhibits one through seven in this morning’s earnings press release. At this time, I’d like to detail the components of the $257.2 million long-term for inventory balance on our balance sheet.

As disclosed in the company’s filings, long-term core inventory consist of four categories, including used cores held at the company’s facilities of $42 million; used core is expected to be returned by customers of $12.1 million, remanufactured cores held in finished goods of $25.7 million, and remanufactured cores held at customers locations of $178.6 million, which represent a core portion of the company’s customers finished goods at the company’s customers locations.

Of these four categories of long-term core inventory, it should be noted that the company managers only to s um up used cars of 42 million and remanufactured cars of $25.7 million at the company’s facility, that’s allowance for excess and obsolete inventory of $1.2 million, totaling $66.5 million, or 26% of the total balance.

The remaining balance of $190.7 million, or 74% represents the core portion of finished goods at the customers locations. And is tracked by the company to ensure that we either get a core back or receive payment for the core as a result of a non-return core. But the company is not in control of if or when that core will be returned.

I will now turn the call back to Selwyn..

Okay. Thank you, David. As you can tell, we’re excited by the multi-product growth in our business and look forward to continued success. I thought it would be useful to identify some of our recently completed key initiatives we have either added or in the process of adding the following facilities.

A new wheel hub factory in Malaysia has begun producing units and will continue to ramp, an additional alternator and starter factory is up and running in Malaysia. We have opened our Chinese Quality Control and Distribution Center in Shanghai. We have commissioned the build-to-suit additional facility, which is under construction in Tijuana, Mexico.

We have opened our Training and Technology Center in Tarrant. We’ve also made inroads in a number of new product categories. As I’ve previously discussed, our turbocharger new product line is getting ready to be ramped up. We have other new product opportunities being evaluated.

We launched brake boosters in August and we are going ahead of 2016 and we are gaining market share. This complements our wheel hubs and master cylinders launched in 2013 and 2014. In addition, we have recently completed the following tuck-in acquisitions. The ZOR turbochargers in 2016 and the OE plus rotating electrical in 2015.

Last but not least, we have a number of new business wins. All of this has been executing well accomplishing a 35% pre-tax return on invested capital. We achieved positive free cash flow for this quarter and expect this momentum to accelerate in the current fiscal fourth quarter. In addition, we have strong inventory management.

For the nine months ended December 31, 2016, finished goods turnover on an annualized basis is 6.4 turns.

Annualized finished goods turnover for the nine months is calculated by multiplying cost of goods sold for the period by 1.33 to annualize the cost of goods number and dividing the result by the average between beginning and ending non-core finished goods inventory values for the period.

For this year ending March 31, 2017, we are confirming our revenue guidance of between $420 million and $440 million. We are focused on gaining market share in our existing product lines. In addition, we are focused on efficient deployment of capital, which may include stock buybacks, acquisitions, and new product line launches among other things.

We remain dedicated to manage growth and continue to focus on enhancements to our infrastructure and making investments in resources to support our customers and grow value for our shareholders. The company continues to focus on its award-winning customer service programs. We are busy and working on a number of exciting initiatives.

Our financial position remains strong and our capacity for further accretive growth is excellent. We are waiting clarification on U.S. government trade policy, so we can take the appropriate actions. We don’t believe we have any challenges that our existing competitive base won’t be subject to.

At this point, the expansion of our Mexican distribution footprint, which I discussed last quarter, is proceeding as planned.

Once completes, this facility will position us with great operating flexibility and leverage, as we grow our business, including expansion related to the brake power booster and turbocharger business, as well as other future products and other automotive aftermarket opportunities in Mexico.

In summary, when assessing our outlook, we are focused on gaining market share with our existing customers and adding new customers. We’re experiencing success in that we have growth in our customer base.

The opportunities for our existing product lines continue to provide upside, and we remain encouraged by customer interest in all of our product lines and our initiatives. We continue to evaluate the most effective deployment of capital to add value to our customer.

For those who are interested in learning more, we encourage you to visit our website to see an updated investor presentation. In short, we are well positioned and excited about our future.

As always, I want to thank all our team members for their commitments 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 MPA, Motorcar Parts of America and welcome our questions..

[Operator Instructions] Our first question comes from the line of Scott Timber from C. L. King. Your line is now open..

Good afternoon, guys..

Hi, Scott..

If you were to back up $9.3 million benefit in the quarter, sales were up slightly and then earnings were obviously down a bit and I know that you guys had telegraphed last quarter that the third quarter would be in investment phase, for the fourth quarter some significant product updates and some new stuff coming out.

Can you maybe just talk about some of the things that happened in the third quarter, maybe on the gross margin side that might have impacted from a startup perspective? And then maybe talk about the fourth quarter now that we have all these product lines that are coming through, maybe talk about from the sales perspective and the gross margins, how you expect things to finish out for the year?.

Okay, so let me try and break it down. First thing, that is correct, I think your assessment is correct. The two items affecting gross margins, firstly, we had some big volume rebates that we gave and incentives for stock adjustment, a stock update order. So that was something that came through in the third quarter and that impacted our margins.

I think we had greater than expected sales in the third quarter quite frankly due to nice good sort of winter weather in December. We saw a little of reversal of that in January, but we expect to see strong February and March, I mean it looks like you’re seeing cold weather rolling to the rest of the country right now.

So, I mean, that’s the gross margins, there is no fundamental changes in our gross margins. And the other part of – that affected our gross margins are the ramp up for fairly significant stock adjustment – stock update orders that are going to go out in the fourth quarter, this current quarter.

And so you could see our inventory ramped and we did incur some extra labor cost ramping that inventory for the fourth quarter along with some startup costs, which really in our new product line, which we’re experiencing a lot for demand for and still going through those startup phase until we get to the maximum efficiency.

So, the outlook for our gross margins hasn’t changed. Our outlook for sales for this quarter continues to be strong, we believe we’ll hit our guidance and then we’re very comfortable on that. And things continue to be quite positive quite frankly. I think on the – go ahead..

Could you just remind us what the guidance for gross margin was again for the year?.

It was 27.5% to 30.5%. So we’ve always been at the top end of that..

Okay, and maybe just….

…and some product mix as well, but we’re comfortable on the top end of that..

Okay, so basically you guys are telling us that the fourth quarter we should see strong sales growth and margins, I would suspect were probably a little bit closer to what you have been doing. Before, if you were to back out the benefit in the third quarter, obviously the 30.9% is a little bit lower than that, but….

Yeah..

It sounds that things should firm up a little bit in the fourth quarter..

Correct..

Okay. And I know obviously, there is so much rhetoric in Washington right now, but all the different potential things that could impact your business. And obviously, nobody knows what’s going to happen from a production standpoint.

But if you could just remind us that – your flexibility if you have to if there was some kind of adverse ruling that would hurt your business? How could you ship production back to the United States, if at all, and what – what’s the the timeliness of that could be if you have to do that?.

Yes. So I mean, I think the first thing to remember is, no matter what the rulings will be. I don’t believe that there’s going to be anything different for us than it is for any of our major competitors.

So I believe, we’re no worse off than anybody and whether we have a price inflation in our offering, or relocation of production means, it’s still hard to tell. I would doubt that we’re going to need relocation. But if we do we have a very, very flexible footprint. We have capacity, I mean, of course, we have capacity in Mexico for expansion.

We have capacity in Malaysia for expansion and reallocation. And we actually have a facility in the United States, which could be ramped up. So I mean, we do have a fair amount of flexibility and know-how and our capabilities for old parts in rotating electrical that we manufacture in Mexico.

We have that know-how – full know-how and an expert management team for full parts offering in both the United States and Malaysia, and quite frankly even in China. So we’re sitting with a pretty flexible footprint.

And we’re yes, we tuned in to see what the latest is and until we know what it is, it’s just difficult to react and respond to questions..

Got it. That’s fair enough. Thanks for answering my questions, and I’ll get back in the queue. Thanks..

Thank you..

Thank you..

Thank you. Our next question comes from the line of Matt Koranda of ROTH Capital. Your line is now open..

Hey, guys, thanks. I think vendor finance inventory or your DIY customers you talk about that, interest rates being up since the election in kind of a rising rate environment.

How are you guys approaching that conversation with your key customers? And essentially, if there’s no pricing inflation right now at the moment, how does that kind of impacts your net margins and your outlook for the next quarter and fiscal 2018?.

I think, while the interest rate increases in aggregate are not that material. I don’t believe, we’ll be able to see price inflation in that from our customers. I mean, we’ve experienced some of the benefit from where it’s going down. I think if you see a material jump in interest rates then the industry certainly will have to reevaluate pricing.

And again that we’re not unique in this scenario, I think substantially all suppliers to the major retailers and major and traditional players do have factoring arrangements. So we’re not factoring, but the vendor supply chain receivable programs, which they sell their payable.

But there are provisions in our contracts in general that if interest rates go up and it depends on the customer by certain amount that we would be entitled to some price adjustments..

Okay, that’s helpful. And then I think on the last call and even in some of your earlier commentary, Selwyn, you were alluding to some update orders that you’re expecting in fiscal Q4.

So about halfway through the quarter now, have those mostly shipped, or do you have visibility into all of those update orders shipping by the end of the fiscal year? Just help us understand kind of the visibility you have into those?.

They ship across the whole quarter. I mean, they have certainly a number of them have already shipped and there’s still plenty to go. We have pretty clear visibility on the update orders for the quarter. Yes, we know exactly what they are. We just got to make sure we get them out of the door on time.

But the variable in the fourth quarter is really replenishment. And replenishment is driven in the winter by the weather. And so January was a little bit softer in terms of replenishment, but we still had a strong January.

And we expect based on what I’m hearing and seeing in the weather and listening to customers earnings calls as well, and I think the – and understanding, our movements, I mean, I think, that the – hopefully, we should see a strong end to this quarter, looks – certainly looks that way..

Got it. And then wheel hub, I noticed was down year-over-year, and I think David had alluded to an update order there as well that that was delayed.

Has that shipped and sort of should we expect that that growth rate and wheel hubs to spike a bit in Q4 to kind of make up for the down quarter we’ve had this…?.

Yes. So it wasn’t delayed. But year-over-year you don’t necessarily get the update orders in the same month. And customer has to deal with their planograms when they’re going to take that from update orders for different categories. This year, that update order will go out in the fourth quarter, not in the quarter.

And so that’s part of what we’ve been alluding to..

Got it..

So it’s not delayed, I mean, it’s just scheduled later than it was last year..

Got it. Maybe just one more on kind of the Mexico production footprint and a little bit more detail there if we could. I would assume just given the high percentage of your cost of goods that is labor in a remanufactured starter or alternator that it would take a pretty substantial tariff to sort of change your production footprint decisions.

Could you remind everybody sort of what percent of your COGS is labor, and sort of how that kind of impacts your decision-making around it?.

Yes. And that depends, I mean, just to address the first part of your comment, it depends on what the tariffs are based on. There’s been suggestion that cost of goods would be nondeductible if it was from an imported product. There’s has been suggestion that they don’t want the tax on the value-added and it’s all over the place.

So to be honest with you, we don’t know. I mean labor today because of our footprint is a much lesser component of our cost of goods material was essentially the greatest part of our customers..

Sorry. You’re saying it’s the greatest part, or it is a much lower….

No, material is the greatest part, labor is by far the smallest part of COGS at this point..

Got it.

Do you have a rough split that you can provide just a rule of thumb for?.

No, we don’t break that out publicly. So I’m not….

Okay, got it. I think, lastly, maybe just one topical one. Everybody I think has seen the article on Amazon moving into aftermarket parts. I don’t think it’s new to you guys at all.

But just help us understand kind of the importance of them and then put into context if you could kind of your positioning as a remanufactured parts provider and sort of the importance of the core deposit and that sort of thing to how that may impact their move into the aftermarket?.

They’ve moved into the aftermarket for a long time. I mean, this is – the New York Post article seems to get incredible airtime. But it’s really nothing new. We sell everybody pretty much in the marketplace. From our perspective, I’m not willing to comment on any particular customers growth plans where they end up.

But I don’t believe that there will be any more disruptive than they have been to those points. And at this point, it’s been pretty nominal for the traditional retailers. I think the best information or best perspectives to listen to Riley’s quotes and Amazon, listen to some of the other retailers quotes on Amazon.

And while we see Amazon as a great customer, as we do all of our customers, there’s certain challenges of the online business for hard parts. And customers need a lot of advice and sometimes help through a much more complex or repair process in the vehicle.

And so those are certainly things that online players would need to deal with, which is the sort of bricks-and-mortar seem to have a benefit on. So I mean, for us, we’re agnostic to it. But again, I don’t see it being a major disrupt anywhere in the near-term..

Got it. And I was alluding to essentially the fact that the customer brings in or is looking to buy a remanufactured starter or alternator, they typically would have to bring in an old core and the challenges that may present themselves around that if you’re doing it in an online transaction. So maybe….

That is a challenge..

Yes, okay. I got it. I’ll jump back in the queue. Thank you, guys..

Thanks, Matt..

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

Thank you. Good afternoon..

Hey, Steve, good afternoon..

Hi..

A lot of the growth over the last year or two has been driven by rotating electrical share gains. And that’s also ultimately been a big kind of user of cash as you grow.

How should I think about, I guess, overall growth as you look in the next year, now that I’m assuming most of the low-hanging fruit in rotating electrical is just behind us? And then I mean, it’s theoretically that should improve cash flows pretty significantly as well, or am I missing something?.

I think you’re correct. I mean, two things. First of all, we think we’ll continue to grow in all of our categories, including rotating electrical. I think the biggest drain on cash is coming closer to an end. And that we’ve repurchased a number of cores in the customer shelves.

There was a complete realignment of who would carry the core inventory, whether it would be the customer or the supplier in the industry. And so in order to do business with the large players, you have to realign their core inventory from their balance sheet to your balance sheets, and we substantially completed that.

I mean, if you look at the asset, long-term inventory with cores on customers’ shelves, we’ve bought back most of everything there is the buyback and we still have a little bit more to go. But we anticipate, again, in a stable environment for us with just normal sort of low double-digit growth, we should produce significant cash.

Our cash has gone into working capital and core buybacks. Our cash has also gone into the number of initiatives and that we’ve accomplished that are now ready to roll out. But you’ll see more cash flow – positive cash flow this quarter. And we expect to return the positive cash flows going forward. Our challenge is that, we have a very little leverage.

We feel like we can deploy more capital to get the – and get significantly higher return on cash – invested capital rates than our cost of capital is. And so, our challenge is to deploy capital accretively for the future.

And so, I expect double-digit growth rates for next year and I expect to generate cash and all things being equal and we’re optimistic about our business..

That’s very helpful. You mentioned that you have a buyback in place. It doesn’t look like you’ve executed any of that so far.

How do you, I mean, in terms of deploying capital with the stock at five times EBITDA? How do you sort of think about that in the big picture of capital allocation? Should – I mean, are there acquisitions that are interesting? Just any sort of updated color on capital allocation?.

Yes I mean, as we continue to evaluate that, I mean, it gets more and more enticing the stock buyback. And I think I mentioned two or three times in the script, that’s certainly top of mind for us. We are actively looking at acquisitions.

I mean, we have not done one yet of any substantial size, or continue to do the bolt-ons, and new – a new customer acquisition in our cost as well and new market share acquisition cost. So we will deploy capital at the right time. I mean, we’re not going to deploy capital for the sake of a short-term swing.

I mean, we’re interested in building a real business with a real backbone that has real good reason – a legitimate reasons for deploying capital. And so we evaluate that. We think MPAA is good value today on a capital – return on capital basis to our shareholders on the stock buyback. But we’re looking at all alternatives.

So, I think you’ll – it will become more apparent as we move down the road..

Got it. I’ll hop back in the queue. Thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Jimmy Baker of B. Riley and Company. Your line is now open..

Hi, Jimmy..

Hi, Selwyn, good morning. I just had a few questions on the stock adjustment accrual benefit. So if our notes are correct, it looks like going back through, let’s say fiscal 2014, you added back about $5 million in return in stock adjustment accruals to the adjusted revenue.

Was any portion of the $9.3 million accrual adjustment recorded this quarter, previously added back to adjusted sales at the time of the original accrual?.

Absolutely zero. The only add backs that we would do – stock adjustments in relating to getting a new customer list in inventory, we have perpetual hits from stock adjustment accruals every quarter, we never adjust for those. And so this just happened to be a quarter with the other way and it was a pretty substantial move the other way.

But these are all – this is all– there’s never been adjustment for on the downside..

Okay, understood. And then I guess just more qualitatively, can you speak to what specifically led to that change in estimate? I mean, I know, for example, your customers often talk about most of the product returns that basically, simply being the – because it’s a wrong part, not that anything is effective, which is the wrong part for the job.

Are you able to, I guess, take any credit for this in terms of your selling in training tools? Is it reasonable to think that you and your customers had become, or you and this large customer had become sustainably more efficient?.

Absolutely. I mean, I’d like to say that we played a part of it. I mean, all of the work at the end of the day is the credit of the customer. I mean, we try to our category management and through our category reviews to suggest the right inventory levels, way inventory should be placed. And so, we have an ongoing commitment to that.

So that our customers can operate more efficiently, and that’s part of the value-add we offer. So I’d like to think, again, while I give kind of credit to the customer. And so I’d like to think we certainly play a part in helping our customers be more efficient and on an ongoing basis.

And so for us, on an ongoing basis, we expect this customer to return less, which will help our revenues going forward, because we take that out of gross to net. So all of us really don’t see, because it goes from gross sales to net sales. So, you don’t see the hits that we’re taking there, because we’ll only report from that..

Sure. Sure understood. Okay, that’s helpful.

A couple of your – and just kind of saying on that trend, a couple of your large customers that I think make up about two-thirds of your sales have indicated they’ll be increasing their per store inventory this year, they’re working to improve hard parts availability? I guess, do you have any visibility that you can speak to in terms of what that might be for you during this calendar year in terms of the revenue benefit beyond what you’re seeing in terms of reduce your sales? And then, ultimately, how might that improve your customer’s share and in turn your stare in your product lines?.

That’s a great question. I mean, we play a role directly and indirectly in determining those inventory levels. I mean, we work hand in hand kind of [indiscernible] pretty much for all the major customers that you’re referring to. And so we help with the category management. We help with the analysis of where the inventory should be.

And certainly, I believe the trend and I think in accurate trends, all of the major players is to have the right inventory at the right place to right price and we’re part of that. So we benefit from it. We also are not – we’re very proactive in making sure that I’m trying to make sure that our customer doesn’t buy what they don’t need.

So, I’m hopeful that we’ve done a good job of that over the years And so that these massive swings, I don’t think we’ll see. I think it’s all a benefit to us and to all of the suppliers in the industry that the major players are carrying more inventory, so they can have less knows when the customer requests a part.

But I think it’s upsides to me, but I couldn’t quantify it for you. But we’re actively involved in that process as being category kept across the board..

Okay. And just want to follow-up on some of the comments about Q4 and as it relates to the guidance. So it sounds like you’re well on track to have this very strong fourth quarter that you had sort of expected and mentioned on prior calls.

I just want to make sure that your guidance the full-year sales guidance of $420 million to $440 million, it’s not including this accrual adjustment since you didn’t know about that until more recently.

Can you just confirm that? And then I guess, lastly, with seven weeks or so less in the quarter, is there something unusual that’s constraining your visibility, such that you’re maintaining kind of a $20 million range for just a very short period of time?.

We went – I’ll answer the last piece first. I mean, last year, we had the same questions. I mean, we’ve given – we gave the guidance early in the year and we hit the upper-end, I believe of the guidance and then we gave this guidance solely in the year. We just don’t want to get into more granular guidance.

I mean, we have so many variables in our business. I mean, we do see this as a strong fourth quarter getting back to your fourth quarter comments. Generally January on the replenishment rates for the quarter was lower than we would have hoped. I mean, again, the industry believes, it’s a mild weather. But there’s a long way to go.

February and March is still vibrant and weather fluctuations will be good. And regardless of the weather, we’re going to have a good fourth quarter. I mean, we’re confident of that. But depending on how the weather pans out, it could be better even better if we have the right weather.

So I mean, our reluctance to change the guidance is not based on anything, I wouldn’t read into that. I mean, it is what we’ve given and we’re comfortable we’re going to hit it. The guidance is for adjusted revenue. So the $9 million or whatever it is of gain is in the guidance. But people kind of justice like that.

I’m still comfortable we’re going to have a great – comfortably hit our guidance. So I think with or without it should be fine..

Okay, perfect. Thanks very much for the time..

Thanks..

Thank you. [Operator Instructions] And I’m showing no further questions at this time..

Great. Well, we appreciate everybody’s continued support and we thank you again for joining us on the call. We look forward to speaking with you when we host our fiscal 2017 fourth quarter and year-end call in June. And we hope to be at various conferences in the interim.

And I’ll reiterate that, we do have an updated Investor Presentation on our website for people to review perhaps more granular information. Thank you, everybody..

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