Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America Fiscal 2019 Third Quarter 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 maybe recorded.

I will now turn the conference over to your host Mr. Gary Maier. Sir, you may begin..

Thank you, Valerie. Thank you everyone for joining us for the call today. Before we begin and I turn the call over 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.

Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements, including statements made during 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 now like to begin the call and turn it over to Selwyn..

Thank you, Gary. I appreciate everyone joining us today. Our record sales for the quarter highlight the Company’s continued success and growing position within estimated $125 billion automotive hard parts aftermarket.

While the quarter end gross margin were impacted by several items, of which approximately 40% was non-cash as highlighted in today’s press release, we expect adjusted gross margin improvement in the next fiscal year. We’re excited by the opportunities, our business and product lines are growing. Our footprint is expanding to support this growth.

We are at an important inflection point.

As I highlighted during our call last quarter, we are ramping our production for new business wins, expanding our infrastructure to bolster our industry leading customer support programs for our new business and products, launching our new brake program, increasing our diagnostic business for both internal combustion and electric vehicle applications, which has recently been enhanced by our recent acquisitions of E&M Power, and we are expanding our foot print in both our Mexican and Malaysian facilities.

In addition to our new 400,000 square foot distribution center in Mexico, we are in the process of expanding our global facilities with an additional 350,000 square feet. This expansion addresses a number of strategic initiatives.

Number one, it enables us to support existing as well as new business commitments, commencing in the upcoming fiscal year and expand our capacity to support future sales growth. Number two, the customers buying experience will be enhanced by consolidating shipments from multiple product lines from a single point of origin.

Number three, it will facilitate a more effective cost structure resulting in enhanced gross margins. I should also mention the growth opportunities that will be realized through our recent acquisition of the heavy-duty company, Dixie Electric.

It has a solid customer base, innovative products, enhanced heavy-duty expertise and a dedicated team of professionals. The acquisition also provides additional light-duty rotating electrical sales expansion opportunities as well as growth from our current brake offerings, diagnostic testers and future product lines.

In addition, we gain capacity and manufacturing capabilities in India, which could overtime supplement our current Chinese sources while also providing a strong hedge against inflation in China and recently announced trade tariffs.

To highlight our positive overall outlook, I refer you to our investor presentation on our website, which shows some macro industry charts including a chart related to the expansion of the car park, sweet spot for repairs. We are now seeing the back end of lower new cost sales from recession years in the prime parts replacement timeframe.

Essentially, the number of prime replacement age vehicles is growing. These statistics further support our company and our industries optimism for growth over the next several years. I will now turn the call over to David, to review the results for the fiscal third quarter..

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning, with respect to our December 31, 2018 earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and a 10-Q, which we filed later today.

Let me take a moment to review the financial highlight for the fiscal 2019 third quarter, reflecting record sales for both the quarter and nine months on a reported and an adjusted basis. The results for the quarter and gross margin were impacted by five items totaling 9.7 million as follows.

Consumer allowances and stock adjustment costs of $2.7 million, related to new business and product line expansion, including upfront costs and core buy back premium amortization expense.

Core sales of 7,753,000 less related cost of goods sold of 7,750,000, which had no effect on cash or net income for the quarter, but did negatively affects our gross margin percentage for the quarter and a fixed cost of 767,000, all in connection with the cancellation of a customer contract.

A non-cash write-down of 2.6 million associated with the quarterly revaluation for cores on customers' shelves. This does not affect the reimbursement amount for the full value of cores on the customers' shelves, should business with the customer be discontinued.

Net tariff costs of 1.5 million paid for products sold before price increases were effective. And transition cost of 2.1 million associated with the expansion of remanufacturing and distribution capacity to support increased demand for our products including new brake product lines.

Net sales for the fiscal 2019 third quarter increased 20.6% to $124.1 million, from $102.9 million for the same period a year earlier. Adjusted net sales for the fiscal 2019 third quarter increased 14.4% to $119.6 million, from $104.5 million a year earlier. The adjusted net sales increase of approximately $15.1 million consisted the following.

Rotating electrical net sales increased $14.5 million to $95.2 million for the third quarter from $80.7 million for the prior year. Wheel hub assemblies and bearings net sales decreased $839,000 to $18.3 million for the third quarter from $19.1 million a year earlier, due in part to lower demand.

As in the slides, we expect the recent extreme cold weather conditions to positively impact wheel hub sales. Brake master cylinder net sales decreased $246,000 to $1.6 million from $1.8 million for the prior year, substantially due to unusual inventory adjustments by the customers.

We anticipate increase momentum as we launch our four brake line program. Additionally, the combined net sales in the third quarter for brake power boosters, turbochargers and testers increased $1.7 million to $4.6 million, from $2.9 million in the prior year. We expect exciting growth in each of these product lines.

Gross profit for the third quarter was $21.2 million, compared with $26.1 million a year earlier. Gross profit as a percentage of net sales for the third quarter was 17%, compared with 22.3% a year earlier, which was impacted by the five items previously highlighted.

Adjusted gross profit for the third quarter was $30.9 million, compared with $30.7 million a year earlier. Adjusted gross profit as a percentage of adjusted net sales for the third quarter was 25.8%, compared with 29.4% for the prior year third quarter.

Adjusted gross margin for the quarter was impacted by several factors including higher freight and wage costs, higher returns, the introduction of electric vehicle and test systems, overtime and other costs related to the increase in new business and other strategic initiatives for long-term growth.

Total operating expenses increased by $1.9 million to $19.5 million for the third quarter from $17.6 million for the prior year. Adjusted operating expenses increased by $1.5 million to $16.2 million for the third quarter from $14.7 million for the prior year.

The increase in adjusted operating expenses was primarily due to personnel and related expenses to support our value-added customer service programs and growth, including sales in both, our hard parts and diagnostic businesses, merchandising, marketing and engineering, commissions due to increased sales, Mexico related expansion expenses and overall expense increases related to growth.

As mentioned previously, due primarily to the several items impacting gross margin, operating income was 1.6 million for the fiscal 2019 third quarter compared with 8.4 million for the prior year third quarter. Adjusted operating income was $14.7 million for the third quarter, compared with $16 million for the prior year.

Adjusted EBITDA was $16.2 million for the third quarter, compared with $17.2 million for the period a year ago. Depreciation and amortization expense was $1.7 million for the third quarter. Interest expense was 5.8 million for the third quarter compared with 4 million last year.

The increase in interest expense was due primarily to an increase in the utilization of our accounts receivable discount programs, increased average outstanding borrowings as we build our inventory levels to support higher sales, and higher interest rates on our average outstanding borrowings under our credit facility and our accounts receivable discount programs.

Income tax expense benefit for the third quarter was $1 million, compared with income tax expense of $7 million for the prior year period. The new tax law resulted in lowering our total blended corporate tax rate of 39% to 25% effective January 1, 2018.

Net income expense for the prior year third quarter of $7 million includes a $4.8 million tax charge of which 4.3 million as a one-time non-cash book tax charge for the revaluation of differed tax assets and liabilities related to the December 2017 enacted Tax Reform Act, and a one-time tax charge of 545,000 due to the transition tax undimmed repatriation of accumulated foreign income.

Net loss for the third quarter was $3.1 million or $0.16 per share, compared with net loss of $2.5 million or $0.13 per share a year ago. Adjusted net income was $6.7 million or $0.35 per diluted share for the third quarter compared with $7.9 million or $0.41 per diluted share for the prior year.

Let me now discuss the results for the nine months ended December 31, 2018. Net sales increased 11.7% to $343.7 from $307.8 million for the prior year nine months. Adjusted net sales for the nine months increased 9.5% to $343.6 million from $313.7 million for last year.

Net loss for the nine month period was $5.1 million or $0.27 per share, compared with net income of $10.9 million or $0.56 a year ago. Adjusted net income for the nine months was $21.2 million, compared with $26.5 million for the prior year nine months, and adjusted diluted earnings per share were $1.10, compared with $1.37 last year.

Adjusted EBITDA was $49 million for the nine month period, compared with $55 million a year earlier. As of December 31, 2018, trailing 12 months adjusted EBITDA was $71.7 million, and the average equity and net debt balance was $349 million, resulting in a 20.6% return on invested capital on a pre-tax basis.

Our method of calculating ROIC is to divide trailing 12 months adjusted EBITDA by the average equity and net debt balance for the 12-month period.

At December 31, 2018, we had a net bank debt of approximately $98.6 million, total cash availability on the revolving credit facility was approximately $129 million at December 31, 2018, based on a total 200 million revolving credit facility and subject to certain limitations.

At December 31, 2018, the Company had approximately $606 million in total assets, current assets worth $330 million and current liabilities were $251 million.

Under the authorized share repurchase program, as of December 31, 2018, $15.7 million of the $37 million common stock authorization has been utilized and $21.3 million is available to repurchase shares.

Net cash used in operating activity during three months ended December 31, 2018 was 13.9 million primary due to a 6.9 million increase in inventory, net of accounts payable for new business and growth, and 6.3 million refundable payments for court purchases relating to new business.

When further analyzing the 13.9 million cash used in operating activities, please note that we have three significant categories of cash expenditures for the quarter totaling 19.7 million comprised of.

First, 11.8 million spent of items that relate to growing our business which include expenditures for growth inventory, transition cost relating to moving to a larger facilities, customers allowance and returns from new business, new product development costs and expenses related to two new acquisitions.

Second, 6.3 million spend for core buyback payments related to new business. And third, 1.5 million spend for net tariff costs before price increase. For the reconciliation of non-GAAP financial measures, please refer to Exhibits 1 through 7 in this morning's earnings press release.

Effective April 1, 2018, the Company adopted Accounting Standard Quantification Topic 606 revenue from contracts with customers using the full retrospective transition method. The Company believes the effect on our income statement is not material. The effect on the balance sheet is to be classified certain account.

Additional information is available in the Company's form 10-Q filing later today. I will now turn the call back to Selwyn..

Thanks, David. As you can see, we have a clear path ahead for growth with multiple opportunities.

First, we have a significant array of non-discretionary hard part product lines including rotating electrical, which is alternators and starters, brake related products which we defined as real hubs and bearings, brake rotors, pads, master cylinders and boosters, and we have turbochargers.

With the new Dixie acquisition, we've extended our rotating electrical offering and channel to the heavy-duty market, and we now have additional opportunities to sell our full broad range of products in the heavy-duty channel. In addition, we will now be able to apply heavy-duty products to our current customers.

We have a strong offering of diagnostic products to complement these nondiscretionary higher parts. Beginning with our rotating electrical testing and following up with the possibility of launching diagnostics for all of our hard products. Second, we have a strong offering for our diagnostic products for electric vehicles.

We’re aggressively pursuing integrating the technology and management of our new E&M Power acquisition into D&V, which will have a global footprint and an exceptional management team enhanced by E&M.

The combined offering will make the D&V product more important in the electric vehicles space and complements the demand and growth for electric vehicle diagnostic testers for both pre and postproduction application. In summary, as you've heard, we have many growth opportunities and the new business commitments are continuing.

Our position in our base product line and new product line is robust, and we anticipate accelerated double digits sales growth and margin enhancement as we progress through our inflection for fiscal 2020 and forward.

The Company in a whole as a whole is very well positioned to create value, and we look forward to updating you on the significant opportunities as they evolve. We will now open the call for questions..

[Operator instructions] Our first question comes from Chris Van Horn of B. Riley. Your line is open..

Just to follow up on your comments. Just at the end of selling just make sure I heard you correctly.

Did you say a goal of double digit top line growth for fiscal year 2020?.

Yes, I mean I said, accelerated double digit. So, I think we feel we can sustain the growth rates we have now for the next couple of years..

And would you be able to -- I know, you said, margin expansion from current levels.

Would you able to give any more detail there around maybe some ranges of what we might expect in 2020?.

Yes, I think the big thing to understand today is. We have so much growth on our hands and there's so much happening in terms of embellishing all of our capacity around the world.

But certain parts of our operation are not as efficient as I could be, because they've been delayed from moving into the new footprints to stay on demand fold for new products. So, I think at a minimum, the fundamentals of our margins will return. And quite honestly, as we get into the new footprints, we should have incremental savings.

But I think we're storing our margins back to the high end of our range of guidance, we believe is very realistic. Now, the one thing I will just want to point out is that, a lot of different product lines are going to be growing in different rates.

So, as these product lines grows, there could be differentiation in the margin just because of product mix, but the fundamentals of the gross margin key elements by product line, we believe are very much are very sound and will improve as time goes on, as we get through the transition into our new space..

And then kind on that front, I know you had -- you had talked about some cost efficiency opportunities other than Mexican distribution plan. And I'm wondering where you are on that front? And then this 350,000 additional, I think you've mentioned there's some opportunity for cost savings as you open that new footprint.

What's your timing on that as well?.

Yes, so the new 400,000 square foot distribution center is up and running and it's fully handling all of rotating electrical. It's also ramping up for the new brake product lines. It's also handling some of our under car items, but not fully yet. In conjunction with that, this is in Mexico -- we have two new buildings going up there.

I would say that those buildings should be complete. One is further ahead than the other, but by the end of this calendar year and we should see new revenue from new product lines that start to shipping in the July timeframe and our commitments are significant.

Again, that will give further guidance in the next quarter hopefully, but our commitments are significant..

And then, last one for me. Just from a macro perspective, you've seen some of your customers report, really good comp sales growth, and they're identifying whether as a good trend obviously this winter especially for us here on the East Coast.

Just wondering, what you're hearing on that front in terms of customer order trends? And I imagine, there probably the destocking is well behind us now and just some update there..

I think, again, I am listening to the same information that you're and I think overall, our industry is optimistic on where we are. The car park is aging and is moving back into prime metric opportunities. The weather with the polar vortex certainly is going to help. We hope we have some continued extreme weather.

I saw a few guys on the East Coast and the Midwest, but certainly we hope that continues a little bit longer. But the outlook is very positive from the fundamentals, I'll point out that December what you've heard publicly sort of December, January, we're a little bit softer but that happens every now and again, but it's fact.

So, the fundamentals of our industry, I believe, if you look at the statistics and you see what our customers are doing that the fundamentals are very sound and the next three years, we are going to show some nice growth in just fundamental replacement..

Our next question comes from Scott Stember of CL King. Your line is open..

Can you maybe talk about last quarter you had updated your guidance for the full year, that you have said that, you expected it to be at the high end of your sales range of 465 to 475, and I guess the gross margins at the lower end of 27 to 30, 31.

Just with little estimate quarter to grow here, what you are thinking for the full year? And this will give us a better idea of what kind of base we look forward towards 2020 where the margins similarly are going to improve?.

So, I mean, we don’t want to give quarterly guidance Scott, but we're not revoking our bulking our annual guidance. And clearly, you can see we have got some strong revenues. So our guidance remains, but you can see the strength in the revenue base.

So, now fundamentals are positive and we are making great progress, and I think next year, we are going to see better margins. And probably, the guidance will be -- we are hoping that for next fiscal year, we will give you some more guidance in the next quarter at the yearend report..

So what you said last quarter I guess is still stands as of now for the rest of the year or for the full year?.

Correct. But again, just looking at it, the revenue is a little stronger than we thought I mean so which is good and so we will see..

And as far as I know price increases, I know, some of these items that you talked about will be a little bit stickier and tougher to go away whether its labor and just given the work environment here and the shortage of workers and some other items.

Maybe just talk about your ability or what you are seeing on the price increase side? What you have been able to do so far to counteract that? And if not, what will be the ways of fighting that in next year whether it's just getting some streamlining and cost cutting and things like that?.

Well, again firstly, the tariff pricing is now fully in effect. So, we're able to compensate for the increased tariffs out of China, and obviously, we continue to monitor very carefully with others.

I think the headwinds and costs are clearly in labor rates around the world and freight rates, I mean we hope the freight will reverse itself, I mean we believe that with our new moves, with our new footprint our freight will become more efficient because of our consolidated shipping points.

So the ability to a eliminate as much LTL less than full truckloads is going to be enhanced dramatically by having multiple product lines come out of one distribution point. Productivity is always a focus of us. We believe we have some of the most productive plants in the world.

We have a fabulous continuous improvement team and we continue to work to make our facilities more efficient. But at the end of the day if pricing -- if cost inflation is growing faster than we can get productivity, I mean at some point someone is going to pay for that. And so that’s kind of will come through price increases.

We intend to be very rational and operating, we intend to make sure that we don't have waste in our system. So we are not charging the customer for waste, but if they are true costs and they are going up, we truly believe that needs to be passed through and ultimately paid for by the entire process, which is ultimately the consumer..

And just a last question here before I jump back in the queue.

What are the adjustments to sales for $6.9 million $7 million I guess in connection to cancelled contract, was this business that was lost and I guess money coming back to you to compensate to or is that something else?.

We lost -- we did lose the customer and this is basically a reversal of the deferred asset and liability accounts that relate to that customer’ non-cash, in those quarters at some point it was cash way back when but it's non-cash and the loss of those customers is not affecting any of our guidance at this point..

And this is -- we will expect further -- or this covers everything related to that customer?.

Yes, I mean we've still got to clean-up the last bit of the receivables from that, but we expect that this is the end of that..

Our next question comes from Matt Koranda of ROTH Capital Partner. You line is open..

Just maybe to drill down a bit more on the fiscal year '19 outlook.

I guess it looks like it's well ahead of the range you guys provided, but to get back to sort of the low-end of your gross margin guidance I guess that it looks like when I run for my model it require at least 30% gross margins in Q4, but with the wage and freight pressure that you are sighting I guess, what are the puts and takes that sort of allow you to get back to that level in a relatively quick time period?.

Yes, the fundamentals are in place I think Matt what we are suffering from is a lot of growth costs, not everything can be captured and adjusted and we are cognizant of the size of the adjustments which we don't like, but we’re trying to show what the underlying factors are I mean I believe we can hit the low-end of our guidance of around 29% gross margins for the fourth quarter.

So we do expect the recovery in our margins soon and as time goes on it will get better. I mean there is some I would say the conservative on the margins at this point because we are in a heavy growth mode and there are variables relating to that.

But again I've said there’s a lot of time it doesn't seem not clear in the numbers because of the noise in the numbers, but the fundamentals of our margins once this transition completes are very much intact and the footprint is efficient and I think the environment we are in today in the market and I hope that this is an accurate statement rational in terms of pricing.

So there is escalating cost coming from all directions and we've done a great job in my opinion of managing that, again other than the noise factor in the numbers.

And so we don't believe that we were anywhere soft from a cost structure than anybody else in the industry and that everybody's going to be making appropriate moves for some cost inflation..

And just to clarify on the pricing commentary you made earlier, have you guys actually put through price increases to address passing through the tariffs.

Is that what you were saying, and you haven't put there any further price increases, just wanted to getting that down?.

That is correct..

Maybe you could talk about on a go forward basis, I mean there's obviously been some competitive changes in your environment. And it does seem like your customers at least in the DIY retailer and DIFM retailer channel are at least somewhat amenable to passing through sort of like-for-like SKU inflation to their customers.

So could you talk a little bit about what's happened with the pricing environment that’s changed at all in the last couple months in terms of that discussion?.

I don’t know if it’s changed in the last couple of months, because I mean maybe it’s evolved but if you think about the customer base, I mean they need sound supply, they need viable suppliers, they need reliable suppliers.

So it’s critical to these customers if they don’t have inventory, they certainly are not going to be able to sustain their revenue growth numbers.

And so at the end of the day, while the customers are extremely tough and challenging in terms of monitoring their costs, I think when they understand the realities of inflation, and I think the competitive base, if everybody's saying the same thing and they start doing their homework, I think just gravity takes effect.

I mean we are in a phase that inflationary costs and inflationary global wage rates, I mean forget about tariffs even, wage rates through all of Southeast Asia, Northern Asia, African states, we do global surveys all the time and when there is an inflationary, we’re in an inflationary wage rate environment.

And so I think our competitors are rational and our customers are ultimately as much as they don't want that, all rational.

And I think at the end of the day if they have solid suppliers and they are able to get appropriate inflation in their pricing, the consumer needs to pay a fair price for the product they are receiving, they are getting a very fair price today and they will continue to get a fair price.

I mean no one is going to paying for waste but if there is fundamental inflation someone has to pay for it. I mean they all deal with that unfortunately or fortunately, I don’t know. So I think at the end of the day, while it's not an easy challenge, I do think that if we continue on this trend that there has to be those conversations..

Maybe on the wage inflation front, is there a way to quantify the headwind that you're facing in hourly wages in your Mexico facility, any help there would be appreciated? And then also, just in terms of the percentage of your cost of goods it’s represented by direct labor, something mentioning there would be helpful as well?.

I think it’s even worst but it’s over now in terms of we had a base, the Mexican -- New Mexican government had implemented a base increase in the minimum wage, I mean we've absorbed that, we've adjusted our wage rates across the board. So it's -- to me while it’s not been fair at this point, it’s not material going forward.

I would tell you that freight is a bigger -- is probably a much bigger drag right now, I believe that and I think in an American way there's a shortage of capacity that the freight industry is not going to sit back and let a shortage of capacity continue on, people are going to want to get more share and there's going to be more capacity that's going to come on board.

And so I think there’s going to correct itself at the end of the day because we're in a very competitive freight environment. So I don't know when that happens, also they can’t predict fuel prices but the only thing I read is that they should be at least stable, not much inflationary at this point, if not coming down.

So I think freight should reverse itself out. And then I can tell you just a mix of how we produce and where we produce. We don't save a lot of money when we get through this transition. And we're going to go to a whole new inflection point in terms of revenue. So it's a little bit of a noisy time for us, but it's going to change..

Okay, that's helpful. Just last one to follow-up on the cancellation of the customer contract. I guess I was under the impression that there would be a cash inflow with certain cancellations if you're getting -- if you're essentially getting rid of course of long-term core inventory to fund your balance sheet.

So is there a future cash implication of this or why wouldn't there be a cash inflow associated with the cancellation?.

Yes, so in the case where you -- there are two types of programs we have with customers, we have full core programs and penny core programs. Those particular customers on a full core program, which means when they get a core they pay for it, when they return they get credit.

So all of this is a reversal of accruals really on the balance sheet, and that's all this is. So there's no cash implication at all in this one. The cash happened when the transactions happened, these are reversal of accruals for future business and future returns. And so that all just goes away.

So really that you have a significant effect on the gross margin percentage, no cash effect and very little P&L in that bottom line effect..

What percentage of your long-term core inventory would you estimate as on the full core versus the penny core sort of arrangements, you described?.

I don't know the answer of that, David, do you know the answer?.

More than half of our programs are on zero core penny core basis..

Okay, so 50/50 or a little over 50, like 60/40..

More than 50..

Thank you. [Operator instructions]. Our next question comes from Steve Dyer of Craig Hallum. Your line is open..

Just a quick question on any revenue contribution that you can sort of quantify on the most recent two acquisitions E&M and Dixie, is that something either in the March quarter or next year that you sort of can attribute or ascribe significant revenue to or material anyway?.

Well I think the combined base that we bought is about 25 million plus in revenue, but what we’re going to do with it is, I mean, we have big plans for both of those companies. So we think that first I’ll talk about the heavy duty, that heavy duty opportunity for us is one we’ve never really played in.

I think now we feel comfortable we have got the right expertise and right structure. We put a great -- we think we have a great program that we will come with that and there is going to be a lot of revenue growth coming out of that but that’s not overnight because it takes a little bit of time obviously to cultivate and get going.

But it’s definitely going to help us in terms of growth and to me that’s even that’s all over the gravy of what we have committed today when we talk about the optimism in our growth.

And then on E&M their emulation technology for the electrical vehicle space is significant, I mean they are able to test the rotors and electronic powertrains and the full chassis of the full complement of the electric vehicle.

And that emulation technology I think is leading edge and now technology things change quickly that we think we've got something that’s going to put us -- that will accelerate our growth pretty dramatically. And so we are committed to that. We think there is a very fast evolving market that needs us. And so we think that’s going to happen.

And then I think the other thing that we are hopeful for and certainly making great progress towards is our alternator and starter testing diagnostic business and there you see some doubles already in revenue. We hope that we continue to -- that should grow exponentially over the next two years.

And then you look at our turbocharger line, I mean turbochargers are evolving. We have now started to make progress there. Although the brake lines we think we have got all big opportunities to grow. We are constantly optimistic about continuing to grow rotating electrical in a very rational manner.

And so, I mean it’s a really lot of growth prongs in play right now..

And then just again as it relates to gross margin both in the current quarter we are in and then in the next year, a lot of commentary would suggest that a lot of these things are sort of persistent whether it's wage increases or freight or different sort of things like that but the new miracle guidance would suggest a pretty quick bounce back to the top ends of some of your historical ranges.

What are you sort of doing that's able to overcome all of the headwinds in a way that you can get back up to the 29 million, 30 million relatively quickly?.

So I would like the say we have a magic formula that we don’t -- I mean we are always watching our cost and our productivity. I think our operations team is excellent.

But I think the biggest contributor to that is kind of the return rates are really -- have been significant for us and then as people have adjusted their inventory and hopefully -- not hopefully we certainly expect that those return rates will become more rational and as demand from our customers ramps up they are going to need more product, I think there has been some de-inventorization of the channel.

So I think there will be more ramp-up coming. The weather affects our business, so I listen to -- certainly we're involved day-to-day and tracking our demand that from a public perspective, you just got to listen to the reports that are coming out from the various retailers and distributors, et cetera products and they are more and more optimistic.

So as returns come down margins go up pretty dramatically. We have had a disproportionate hit from returns..

Last one from me. The reported inventory breakdown seem to be a pretty regular event lately.

Can you just remind me what those are related to?.

Well I mean it's actually that's one that I keep asking the same question you are asking about that just basically the value of the core inventory and the customers show, and so what’s happened is -- we've had probably in the last two years, consistent devaluation of that core and I think that's because we -- scrap values that come down pretty dramatically I mean with the Chinese tensions with the US and somewhat embargoes taking scrap in and so core values have come down as I question how much further down they can go, but we've been riding it down.

Again it's non-cash and that doesn’t affect our contractual refundability of those cores at all. But there's going to be a time when they will start coming back up.

I don’t think it's permanent and -- but it has been a quite a long run and it's I think probably a longer run of deflation in core prices than we expect it or than anyone where we would expect. But I think that's our goals sits and so far again it's non-cash..

And so to be clear that doesn’t change if you'd lose a penny core of a customer, does we get all amount back?.

Whatever the contractual buyback was, whatever you paid for the core, you get back..

I'm showing no further questions at this time. I like to turn the conference back over to Selwyn Joffe for any closing remarks..

Great, as always I just want to thank all of our team members for their commitments and again customer-centric focus on service and for their exceptional pride in all the products we sell and the customer services we provide, their commitments to quality and service is also reflected in the incredible contributions they’ve made to their communities in our society.

We value our integrity, we value our core principles of the company. I think one of the greatest assets we have is our people and the trust that our customers have in our people and the faith in MPA to deliver projects and programs that sometimes we are not even involved in to start with.

So that continues to be our feeling in the industry and I attribute that to the incredible team of people that we have.

Also I want to appreciate everybody's continued support and I thank again for joining us for the call .Look forward to speaking with you soon when we host our fiscal [2009] fourth quarter and year end conferences call in June and hopefully we will be at a number of conferences where we can see you again.

So very excited about where we are and we look forward to reporting our progress. Thank you..

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..