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Motorcar Parts of America Inc (NASDAQ:MPAA)
Q3 2020 Earnings Call
Feb 10, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Motorcar Parts of America Third Quarter Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker for today, Mr. Gary Maier. Thank you. Please go ahead, sir.

Gary S. Maier -- Investor Relations

Thank you, Skyler. Thanks everyone for joining us today for our call. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the company's Chief Financial Officer. I'd like to remind everyone of the Safe Harbor statements 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 conference call.

Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in these forward-looking statements. 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 these ongoing risks and uncertainties of the company's business, I refer you to the various filings with the Securities and Exchange Commission.

I'd like now to begin the call and turn the call over to Selwyn.

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Thank you, Gary. I appreciate everyone joining us today. As stated in the press release issued this morning, the generation of cash flow from operations and profitability and margin improvements were important highlights for the quarter. Notwithstanding sales softness late in the quarter, primarily related to the timing of certain product orders and mild weather, we are making excellent progress and execution of our strategic investments. These investments are rapidly creating a transformative platform for growth and profitability, allowing us to leverage our strengths within the growing $125 billion aftermarket hard parts industry and benefit from the changing competitive landscape.

In summary, our footprint of the future initiatives are rapidly advancing. We have substantially completed our transition into a new consolidated distribution facility in Mexico and the final phase of our new facilities build out is expected to be completed by the end of our fiscal 2021 second quarter. All of this will further enhance our scalability and our financial performance. Particularly as we realize the benefits of our state-of-the-art production of calipers, the relocation of certain additional product lines to operations in Mexico from higher costs domestic production and other related overhead absorption initiatives.

As I mentioned last quarter, our facility expansion in Malaysia is substantially complete. This will allow us to increase capacity and productivity for our existing product lines, and allow us to utilize the additional capacity to reduce dependence on outsourcing certain products or components. I want to emphasize that MPAA has established itself as a leader in the supply of internal combustion vehicle hard parts to our industry. The market size for our current category is multi-billions of dollars.

According to land marketing research, internal combustion engine vehicles in operation in the United States will increase by $36 million from 2020 through 2030, up from $282 million in operation last year. These vehicles will continue to age, fueling significant growth in the aftermarket parts replacement industry, well beyond 2030. In fact, these statistics should further benefit from vehicles in the peak size years, entering the prime replace -- prime parts replacement age. In short, our strategy is to leverage our significant channel relationships for aftermarket parts and offer superior parts and solutions to our customers and consumers. Today, we are relentlessly focused on maintaining our growth rates for the hard parts categories that we offer, as well as launching and establishing ourselves within the multi-billion dollar brake parts category.

As we approach the end of fiscal 2020, we are well positioned to benefit from investments for continued growth in fiscal 2021. Our global footprint to exports -- expansion across multiple non-discretionary aftermarket hard parts categories is nearing completion, further solidifying our position as a valued premier supplier in North America. In addition, our cutting edge diagnostic and testing equipment for alternators and starters is industry leading. In particular, demand for our benchtop tester, which is critical to determining the root cause of issues related to the vehicle starting and charging system is gaining traction. While sales in the fiscal third quarter were soft, we expect sales volume for these testers to gain momentum in the quarters ahead, particularly in our new fiscal year as customers upgrade existing testers to meet the latest protocols, which supports the integrity of the advice they provide to consumers.

To complement our internal combustion business, we've also embraced the advancement of the fast growing world of electrified transportation. Consequently, we have made significant investments in a rapidly advancing diagnostics for automotive electric vehicles and the electrification of the aerospace markets. Our offering of complete solutions with simulation, emulation, and production testing for the electric drive train is gaining traction. Sales activity is gaining momentum, and we have received orders from key blue-chip global companies in both the automotive and aerospace industries.

Our strategic partnership within the space are getting stronger, including our strategic relationship with OPAL-RT, which we announced last quarter. Recently, we announced the appointment of Uday Deshpande as Chief Technology Officer of D&V electronics. We look forward to benefiting from his background and experience working for some of the leading global suppliers, providers of electric transportation systems and the increasing global demand for electronic testing, products and services. All of this represents significant value creation opportunities. In short, our entire company is well positioned for sustainable growth, enhanced profitability, and positive cash flow from operations.

We remain encouraged by the outlook for our current and expanding product lines, and the transformative impact of our investments to support our current and future growth. Let me reiterate what we expect for the full 2020 fiscal year, based on a timing and completion of various initiatives and the ramp up of our new caliper business. One, continued year-over-year sales increases. Two, higher adjusted gross margins and operating income. And three, we expect to generate positive cash flow from operations in this fiscal year compared to $40 million of cash used in operating activities in the prior year.

However, due to the factors impacting the fiscal third quarter, particularly sales softness late in this quarter, as well as the recent coronavirus outbreak, and its potential impact on supply chain, we now believe net sales for fiscal 2020, ending March 31, should be approximately $534 million and adjusted net sales for fiscal 2020 should be approximately $539 million representing 13% growth year-over-year, on both a GAAP and non-GAAP basis, with sales momentum improving in the current fiscal fourth quarter. Adjusted gross margin for fiscal 2020 is still expected to be approximately 27% impacted by product mix. As we discussed profitability and operating cash flow are expected to improve on a year-over-year basis.

To highlight our overall positive outlook despite some short-term softer demand, due to mild weather and deferred orders. I refer you to an investor presentation on our website, which shows some macro industry charts, including a chart related to the expansion of the car parts sweet spot for repairs. As I mentioned earlier, the number of prime replacement age vehicles is growing. These statistics along with our aggressive commitment to launch our brake line, further support our company's optimism for growth over the next several years.

I'll now turn the call over to David to review the results for the fiscal third quarter.

David Lee -- Chief Financial Officer

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect to our December 31, 2019 earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10-Q.

Let me take a moment to review the financial highlights for the fiscal 2020 third quarter, reflecting record sales for the third quarter and record nine months on a reported and adjusted basis. Net sales for the fiscal 2020 third quarter increased to $125.6 million from $124.1 million for the same period a year earlier. Prior year fiscal third quarter results included approximately net $7 million core revenue in connection with the cancellation of a customer contract. Adjusted net sales for the fiscal year 2020 third quarter increased to $127.7 million from $119.6 million a year earlier.

Gross profit for the fiscal 2020 third quarter was $27.7 million compared with $21.2 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2020 third quarter was 22% compared with 17% a year earlier. Adjusted gross profit for the fiscal 2020 third quarter was $34.3 million compared with $30.9 million a year ago. Adjusted gross profit as a percentage of adjusted net sales for the three months was 26.9% compared with 25.8% a year earlier. The results for the fiscal 2020 third quarter gross margin were primarily impacted by two items totaling $5.8 million.

First, non-cash expenses of $3.7 million, including a writedown of $2.4 million associated with a quarterly revaluation for cores on customer shelves and $1.3 million of amortization related to the premium for core buybacks. It is important to recognize that even though the core value or cores on customer shelves maybe written down on our balance sheet. We are entitled to a full contractual price refund in the event that the relationship with our customer is terminated. Second, transition costs of $2.1 million associated with a move into the new facilities in Mexico to support the company's anticipated growth.

Total operating expenses decreased by $1.1 million to $18.4 million for the third quarter from $19.5 million for the prior year. This decrease was impacted by a non-cash $1.6 million gain for the quarter compared with a non-cash loss of $860,000 for the prior year, recorded due to the change in the fair value of the forward foreign currency exchange contract, a non-cash gain of $2.1 million due to the remeasurement of foreign currency denominated lease liabilities, partially offset by $1.8 million of operating expenses attributable to our fiscal '19 acquisitions and other cost expense explained further below.

Adjusted operating expenses increased by $3.9 million to $20.1 million for the fiscal third quarter from $16.2 million for the prior year. This increase in adjusted operating expenses was due in part to $1.5 million expenses attributable to our fiscal 2019 acquisitions, $476,000 of expenses in connection with our internal control remediation efforts and approximately $334,000 of increased depreciation and amortization. Additionally, approximately $500,000 is related to additional professional fee and approximately $400,000 is related to increases in both personnel and infrastructure expenditures to accommodate our anticipated growth. Operating income was $9.2 million for the fiscal 2020 third quarter, compared with operating income of $1.6 million for the prior year third quarter. Adjusted operating income was $14.2 million for the third quarter, compared with $14.7 million for the prior year. Adjusted EBITDA was $16.5 million for the third quarter, compared with $16.2 million for the period a year ago.

Depreciation and amortization expense was $2.3 million for the third quarter. Interest expense was $6.9 million for the third quarter, compared with $5.8 million last year. The increase in interest expense was due primarily to increased average outstanding borrowings in connection with our growth initiatives. In addition, interest expense for the third quarter was higher due to increased utilization of our customers' accounts receivable discount program.

Income tax expense for the third quarter was $1.5 million, compared with income benefit of $1 million for the prior year period. The effective tax rate was 63.5% for the quarter, which reflects the impact of not being able to recognize a tax benefit of a pre-tax loss in a specific jurisdiction. Net income for fiscal 2020 third quarter was $865,000 or $0.04 per diluted share, compared to with net loss of $3.1 million or $0.16 per share a year ago. Our adjusted net income for fiscal 2020 third quarter was $5.5 million or $0.28 per diluted share, compared with $6.7 million or $0.35 per share a year earlier. Let me now discuss results for the nine months ended December 31, 2019. Net sales for the fiscal 2020 nine months period increased 12% to $385.1 million, compared with net sales of $343.7 million for the prior year nine months. Adjusted net sales for the nine months increased 12.8% to $387.7 million compared with $343.6 million for last year. Gross profit for the fiscal 2020 nine months period was $81.8 million, compared with $63.2 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2020 nine months was 21.2%, compared with 18.4% a year earlier.

Adjusted gross profit for the fiscal 2020 nine-month period was $103.4 million, compared with $89.8 million a year ago. Adjusted gross profit percentage of adjusted net sales for the nine months was 26.7%, compared with 26.1% a year earlier. Net income for the nine-month period was $903,000 or $0.05 per diluted share, compared with net loss of $5.1 million or $0.20 per share a year ago. Adjusted net income for the nine months was $20.1 million, compared with $21.2 million for the prior year nine months and adjusted diluted earnings per share were $1.05, compared with $1.10 per diluted share last year. Adjusted EBITDA was $53.2 million for the nine months period, compared with $49 million a year earlier.

As of December 31, 2019, our adjusted EBITDA for the trailing 12 months was $78.1 million and the average equity and net debt balance was $409 million, resulting in a 19.1% 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. I should point out that, we have just begun to realize the benefits of expanding our Mexico operations and the launch of our new brake categories, with the expectation of significant revenue growth from both new and existing product lines.

At December 31, 2019, we had a net bank debt of approximately $145.6 million. Total cash and availability on the revolver credit facility was approximately $83.2 million at December 31, 2019, based on a total $239 million revolver credit facility and subject to certain limitations. At December 31, 2019, the company had approximately $727 million in total assets. Current assets were $373 million and current liabilities were $298 million. This reflects the adoption of a new lease accounting pronouncement, which requires balance sheet recognition of a lease asset and liability for all leases.

Net cash provided by operating activities during fiscal year 2020 third quarter was $22.3 million due in part to a $16 million decrease in accounts receivable. For the nine months ended December 31, 2019, cash used in operating activities was $4.4 million. Depending on the timing of shipments, we expect to generate positive cash flows from operations during the current fiscal fourth quarter and breakeven to modest positive overall cash flow from operating activities for the full fiscal year 2020 compared with cash used in operating activities of $40 million for the prior year fiscal 2019. For the reconciliation of non-GAAP financial measures, please refer to exhibits one through seven in this morning's earnings press release.

I will now open the call for questions and Selwyn will then provide some closing remarks.

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

In summary, our investment are bearing fruit, despite some deferral of revenue for this last quarter. We have many growth opportunities ahead and new business commitments are continued, supported by our expanding line of products in both hard parts and diagnostics. We're proud of our more than 50 year history in the aftermarket industry, and all of us are committed to our vision of being the global leader for parts and solutions to move our world today and tomorrow.

I think at this point, we should open up the line for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And we have a question from Chris Van Horn with B. Riley FBR. Your line is now open.

Chris Van Horn -- B. Riley FBR -- Analyst

Good morning, everyone. Thanks for taking my call.

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Good morning, Chris.

David Lee -- Chief Financial Officer

Good morning.

Chris Van Horn -- B. Riley FBR -- Analyst

Obviously, you had solid execution despite some of those revenue headwinds during the quarter. Could you maybe give a little more detail on specifics driving that mix anything else that there was a main driver there?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Yeah. I think we underperformed our expectations and I think that almost 100% or 100% of it relates to deferral of certain product orders. We had a deferral of a little over $12 million of orders, which will hit in the fourth and in future quarters coming in the New Year. So, that was disappointing to us. Had we got those orders, we would have had a very solid quarter. Having said that the fundamentals of the business are somewhat intact, I would be cautious on the sort of the mild weather, the December month seems to be, I mean, we have a large customer indicate publicly that it was a tough month for them. So, I'm not speaking out of school. So a little bit of softness due to mild weather, but the fundamentals and our outlook, we continue to be excited about them.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Got it. Yeah. In the past, you've had order deferrals and you seem to be able to make them up within the one or two quarters following. Do these feel different or are they kind of the similar to what you've seen in the past?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

No, I think we expect that. I mean we did update our guidance. So, we expect around a $150 million in revenue for the fourth quarter. I did the arithmetic for everybody. I think it's real simple to compute from what we said. We think that some of that revenue will spill into the first quarter. We are a little bit concerned with the coronavirus in China. Just in that, there's a huge -- there will be a huge backup of shipments. A lot of factories have been deferred from being reopened. We are less dependent on China than most, but that may affect us a little bit. But that's included in our best thinking for this guidance, for those guidance.

So, we do think that there will be some spillover in the first quarter from this deferrals. But we feel pretty comfortable with our guidance and that's our best thinking right now in the fourth quarter. We think margins will improve as well in the fourth quarter and the outlook for cash flow looks positive. So, production and development in the new spaces is looking very positive. We're remanufacturing calipers as we speak, our capacity in Malaysia has increased as we speak, and our dependence quite frankly on China is less although we still do depend on them for some parts and finished goods.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Got it. Thanks for the color. And then, you've mentioned fiscal 2021, you expect continued growth. Would you be able to give any other details around how you might see that playing out for 2021?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Yeah. So, we haven't given guidance and we're not going to give former guidance 2021 until next quarter. But having said that, I mean, there's no secret in our strategy. Our strategy is to increase market share for all of our product lines. And now we have new product lines that we intend to gain share in and have lots of opportunity that we need to close on. So, I think we've now -- we've set our capacity capability to move through the next four years toward the billion dollar revenue mark. And I think I would be remiss in saying that, really -- our plan really for the next four to five years is pretty simple.

It's grow existing product lines. Stabilize as move to Mexico with a new launch at the brake product lines and expand our -- when I say existing product lines, I'm including our electric vehicle capability, which we think is a big added opportunity for growth during the -- certainly, what we see as fast growth in the development of electrification of transportation vehicles. I mean, whether it be automotive, heavy duty and aerospace. So, we've got a lot of growth factors but they're all set in place, and we don't need anything new right now.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Yeah. That was going to be my next question. How do you feel about capacity and capex needs? And it sounds like, you guys are pretty well set up to kind of handle the growth that you expect?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Yeah. We've got it complete. The capex will come down dramatically as we complete our facilities. We think that our facility should be complete by the end of the second quarter of this fiscal year and capex should drop dramatically. Our capacity will skyrocket from there and even though we seem to be gaining a lot of momentum in taking up that capacity, so we're excited about that.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Got it. And then last for me. Have lead times changed a little bit with your product mix changing or do you think you have a handle on the visibility of some of the new products coming online?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

I think we have a handle on them. No, I don't think lead times have changed. I think our core competencies in remanufacturing. Our supply chain is very strong. Our facilities and manufacturing capabilities in Malaysia are very predictable and very strong. And so barring effects of the coronavirus, I mean, we feel very much in control of where we are and with our lead times and ongoing opportunities.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Got it. Thanks so much for the time.

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Thank you, Chris.

Operator

And our next question comes from Steve Dyer with Craig-Hallum Capital. Your line is now open.

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

Hey, guys. It's Ryan Sigdahl on for Steve.

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Hey, Ryan.

David Lee -- Chief Financial Officer

Hi.

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

As it relates to the coronavirus in China, have you guys seen any impact on supply chains or product coming in thus far or is that just a potential expectation going forward? And then secondly, on that topic, as I look at inventory on the balance sheet, it seems like you have plenty of inventory for at least the next quarter, if not a little further. So, I guess, is there a specific product categories that you're worried about, or how do you think about potential disruptions there?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Okay. So let me divide it. There's absolutely no effect as of right now from the coronavirus. We do have good inventory levels going forward. The areas where you get hit this in the fringe demand, so we have unique update orders that you need to supplement with supply out of China. There's risk there. Some componentry that we use in our manufacturing comes out of China, there's risk there. And we do have some inventories in China and a consignment warehouse and so depending on backlog of shipping, there's a little bit of risk there.

But having said that, the risk for us is fringe, it's not it's not which we take very seriously, but it's not we have good inventory levels and good capability outside of the risk of coronavirus. It's not a panic situation, but it certainly affects -- may affect your future guidance or do you make all your shipments exactly on time for the finished part numbers that you rely on China for.

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

Great. So then, if we think about guidance, I mean at the midpoint, revenue guidance was cut by $18 million. You called out $12 million of deferral of orders, some of that will be picked up in Q4. And it doesn't sound like the coronavirus will be too impactful I guess this quarter. So, I guess, what's the remaining delta there?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Yeah. I think you have the softness in our base product lines really in December, and so we had -- we saw a reduction in orders and replenishment there. And so, we have seen some softness in demand. Certainly, we have no market share change and if anything, our market share continues to increase. But again, I think if you listen to the to the retailers calls, I think they'll give more color on it. Certainly, there's been one that's been reported already that I would listen to, but the expectation is mild weather in the northeast has slowed down demand for products that are dependent on cold weather. And products that are dependent on cold weather for us is the charging system, which is alternators and starters. So that was unusual for us to have soft demand in our cold product line. Again, that's just a matter of that's very temporary and we expect that to return.

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

And then last question for me, as it relates to the brake calipers, new line, Previously, I think you've had said $30 million of contribution this fiscal year. Is that still the right expectation? And then, any commentary on potential new customer awards in that category?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Just give me one second. I'll give you a little more flavor on that. Just give me one second. Yeah. I mean, I think we're going to be closer in the $25 million to $30 million of revenue from calipers depending on, again, a lot of that depends on the timing of the orders.

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

And then, any new potential customer awards in that category or the pipeline there?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Well, I mean, I don't want to comment on specific categories just because it's a probably not prudent to do that. But overall we have a lot of opportunities that are pending.

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

Great. That's it from me. Good luck, guys.

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Thank you.

David Lee -- Chief Financial Officer

Thank you.

Operator

And our next question comes from Justin Clare with Roth Capital Partners. Your line is now open.

Justin Clare -- Roth Capital Partners -- Analyst

Hi, everyone.

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Hi, Justin.

Justin Clare -- Roth Capital Partners -- Analyst

So I guess first off your guidance on the adjusted gross margin suggests that FQ4 margins could be around 28%. So I'm just thinking, as you ramp up your facilities in Mexico and Malaysia, and as we move into fiscal '21, could we see margins improve upon that 28% level?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Look, once we get into Mexico, the margin should improve absolutely. As long as we don't suffer any losses, which we don't anticipate, so don't read anything into that. If we can continue to grow as we expect to grow and settle into that new footprint of the economics of business gets substantially better.

Justin Clare -- Roth Capital Partners -- Analyst

Okay. Thanks. Then I guess related to that, could you provide a little bit more detail on where you are in the process of relocating manufacturing from higher cost locations to Mexico? How much longer do you have before you're comfortable with, where you're manufacturing all your different product lines?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

So we -- I mean, just as a preface to my answer on that is that we are a company that is focused on continuous improvement. So, the first phase is just getting down there and that that certainly will happen again by the second quarter of this current fiscal -- the 2021 fiscal year ends, the next fiscal year. We then believe that will increase margins. We should have substantially everything down there. There still will be some items that need to be moved, but that'll be substantial. And from there we'll see -- at that point you should see a big reflection in our margins. And, from there, hopefully it continues to get better, as we can implement continuous improvements.

And then obviously, we've got all the external variables of competitive, the competitive environment and then we'll have to see, how the competitive environment shakes out. I said today, and I don't want to be arrogant about this, but I think we're sitting in a very strong competitive space for the opportunities that are ahead for us. So, we've got to prove it to everybody and certainly that's our intent, but we feel like we've got a good handle on the margins and a good handle on the savings as we get through this process. And the opportunity for growth at these savings rates, which is most exciting part of it.

Justin Clare -- Roth Capital Partners -- Analyst

Okay. Great. And then I guess just shifting to capex, you've talked a bit about it already. But can you share how much you've spent in capex in FQ3? And what your expectations are for the fourth quarter? And then, should we expect a year-over-year decline in fiscal '21 relative to the fiscal '20?

David Lee -- Chief Financial Officer

So, I can give you the guidance for the full fiscal 2020. We're probably looking at $6 million to $7 million of maintenance capex, probably about $12 million plus for the growth capex for our facilities in Mexico. When we come back for our fourth quarter, we can give further guidance on fiscal '21. But again, those are most of it. So there's just a little bit more left to go for fiscal '21.

Justin Clare -- Roth Capital Partners -- Analyst

Okay. Got it. And then, I'll just sneak one more in here. You've repaid $14 million, I believe on your revolver. Net leverage was down to 1.9. Can you just talk about your plans for debt repayment as we move forward here? Should we anticipate the debt levels declining further?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Well, as we proved to you and to our shareholder base and as we generated additional cash flow, we will look at, the most opportune way to deploy that cash flow. I mean, I think with the interest rates where they are today, I mean, there is a not an immediate rush to pay down debt, assuming that we're generating cash and so there is opportunity to perhaps return some capital to shareholders as we get stabilized and get through. But as of this point in time, our focus is to minimize the outstanding debt from our revolver as we go through implementing the move. And then once we get the move done and we have proven, stable, positive cash flows, which we certainly expect. We will look at allocation of capital in the most opportune way to build shareholder value.

Justin Clare -- Roth Capital Partners -- Analyst

Okay. Thanks, guys. I'll pass it on.

Operator

[Operator Instructions] Our next question comes from Robert Beauregard with Global Alpha Capital. Your line is now open.

Robert Beauregard -- Global Alpha Capital -- Analyst

Yes. Good afternoon and good quarter. Just one question sticking on the debt question. I'm trying to understand what the interest line is based on and trying to figure out what is the interest-bearing debt on your balance sheet that adds up to almost $7 million in interest for the quarter unless there is something I don't quite understand?

David Lee -- Chief Financial Officer

Yes. So, the majority of the interest expense is related to our accounts receivable -- to our customers and accounts receivable discount program. So, with major retail customers that we sell to, we go to the supply chain, account receivable discount program, and we get paid in about a month. So, when we get paid, we pay a small discount fee. So, in our 10-Q disclosure, we do disclose how much of the sellers have gone through that discount program. And the interest rate of the -- majority of that is related to that program.

Robert Beauregard -- Global Alpha Capital -- Analyst

Okay. Just a question then, what is the interest rate on your revolver?

David Lee -- Chief Financial Officer

It's about 4.6%.

Robert Beauregard -- Global Alpha Capital -- Analyst

Okay. And that, in terms of real debt, this would be the only interest bearing debt?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Yes, it's a revolver and there's a term loan, and they both at about 4.6%.

Robert Beauregard -- Global Alpha Capital -- Analyst

The term loan is very, is not very. Okay, thank you very much.

David Lee -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Bill Dezellem with Tieton Capital. Your line is now open.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you. I'd like to circle back to one of the previous questions you were answering relative to use of capital. If you get to the point that, that you do have free cash that you are looking to return to shareholders. Is your preference through buybacks or dividends? And what's the thought process or logic there?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Yes, I mean, that's a question that we haven't concluded on. We'll have to look at that at the right time. So, I can't give you an answer, but the logic will be carefully scrutinized to make sure that the allocation and how we use that capital to return to shareholders is best utilized, that may be a combination. And it may be a continuation of our stock buyback program. That's certainly something that the finance group internally and the board will be roll over. But we need to get there in the next -- we think we can get there in the next six months and 180 days. And so, I think you'll be hearing more about that in the new fiscal year.

Bill Dezellem -- Tieton Capital -- Analyst

Great. Thank you, Selwyn. And then, you mentioned the mild winter weather, there have been some bouts of cold weather that did hit at least in the Midwest. Do you see that having a benefit to the business or is that just overwhelmed as you're here in the March quarter with the bouts of warm weather that you can had?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Well, I mean, I'm going to quote the O'Reilly, CEO who basically said, it's still early in the quarter and severe winter certainly is an opportunity. And so, I don't know how quickly it translates to us, it's probably much more of an influence by our first quarter as customers work through their inventory. But if there's cold weather going forward it's always very helpful to us, I mean in many categories.

So, we do see some cold weather this week, and we're just going to have to see. But in general, I would tell you that in almost all situations where there is extreme weather, whether it be hot or cold, it's very helpful to accelerate car failures. Having said that, all these cars are going to fail anyhow, just not in this quarter, they'll fail in future quarters.

Bill Dezellem -- Tieton Capital -- Analyst

Thanks. And then, how much of your wheel hub manufacturing moved out of China by the end of December?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

We could supply more than 80% of our production needs right now out of our own facilities in Malaysia. We're still working through inventory levels, but yes.

Bill Dezellem -- Tieton Capital -- Analyst

When do we given as you're working through inventory? When do we have the financial benefit of lower costs production coming out of Malaysia rather than the higher cost that's flowing through the P&L today?

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

It's difficult to tell depending on the volumes, but that's a very competitive category. So, I don't want to count on higher margins because of that the most important there is, is to be free of -- of any of the tariffs and to be, have a better quality product than anybody else which we believe we will have from our own facilities. And so, the margin opportunity certainly exists. I think its four months to six months out at least but I would not be -- let us give you further guidance as we get into the new fiscal year the way we are with the margins.

Bill Dezellem -- Tieton Capital -- Analyst

Great. Thank you.

Operator

And at this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Selwyn Joffe for any closing remarks.

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

Thank you. And I want to thank all our team members for their commitment and their customer-centric focus on service and for their exceptional pride in all the products we sell and the customer services we provide. Their commitment to quality and service is also reflected and the wonderful contributions they make to their communities and to our society. They are terrific and I'm proud to work with them. Our company is blessed with a positive outlook and excellent opportunities for continued growth and profitability.

I would also like to wish all the people in China and anyone around the world affected by the coronavirus, a speedy recovery. We appreciate your continued support and we thank you again for joining us for this call. And we look forward to speaking with you when we host our fiscal 2020 fourth quarter conference call in June and at the various conferences that we intend to participate in. Thank you.

Duration: 43 minutes

Call participants:

Gary S. Maier -- Investor Relations

Selwyn H. Joffe -- Chairman, President and Chief Executive Officer

David Lee -- Chief Financial Officer

Chris Van Horn -- B. Riley FBR -- Analyst

Ryan Sigdahl -- Craig-Hallum Capital -- Analyst

Justin Clare -- Roth Capital Partners -- Analyst

Robert Beauregard -- Global Alpha Capital -- Analyst

Bill Dezellem -- Tieton Capital -- Analyst

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