Motorcar Parts of America (MPAA) Q2 2022 Earnings Call Transcript

Motorcar Parts of America (MPAA)
Q2 2022 Earnings Call
Nov 09, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to Motorcar Parts of America's fiscal 2022 second quarter conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your first speaker today, Mr.

Gary Maier, investor relations. Sir, please go ahead.

Gary Maier -- Investor Relations

Thank you. Thank you, Rachel, and thanks, everyone, for joining us today. Welcome to our fiscal Q2 2022 conference call, second quarter. Before we begin, I want to turn -- and I turn the call over to Selwyn Joffe, chairman, president, and chief executive officer; and David Lee, the company's chief financial officer, I'd like to remind everyone of the safe harbor statement included in today's press release.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during today's conference call. Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in the forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based upon various factors. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's various filings with the Securities and Exchange Commission. With that said, I would now like to begin the call and turn it over to Selwyn Joffe.

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

Thank you, Gary. I appreciate everyone joining us today. I hope everyone is staying safe and healthy. As noted in this morning's press release, let me highlight our results.

Record net sales for the quarter and six-month period. Net sales for the quarter are up 13.5% and 29.8% for the six months and 25.1% from the pre-COVID fiscal 2020 quarter. Net income before impacting items for the second quarter was $13.3 million or $0.68 per diluted share versus $14.3 million or $0.74 per diluted share for the last year and $13.1 million or $0.68 per diluted share for the pre-COVID fiscal 2020 quarter. Net income before impacting items for the first half was $21.8 million or $1.11 per diluted share versus $15.1 million or $0.78 per diluted share for last year and $14.5 million or $0.75 per diluted share for the pre-COVID fiscal 2020 period.

Pretax ROIC was 21.1% at September 30th, 2021, versus 17.5% for the prior year. Let me provide some color about the automotive aftermarket and our solid position within the hard parts business. Then I will briefly discuss our emerging presence within the electric vehicle market. The outlook for high parts replacements continues to accelerate despite global issues related to new COVID-19 variants and challenges impacting the supply chain.

Both of which don't really require much explanation given the extensive daily news coverage of the situation. Let's just say the challenges are real from a social and business standpoint, and we are doing our part to keep our employees safe and our customers prepared for continued strong demand for automotive replacement parts. I can proudly say we demonstrated our capabilities in meeting the strong consumer demand by a record second quarter performance. Our team has done an amazing job meeting customer orders.

These orders continue to be driven by strong consumer demand in both the do-it-yourself and do-it-me markets as drivers return to the roads and the used car sales continue to climb to record levels. Our investments from multi-growth platforms and our hard parts business contributed to our strong second quarter performance. This momentum is expected to continue. And moving forward, operational efficiencies will be enhanced as new production facilities mature and supply chain challenges normalize.

It is important to note that the country of Malaysia was shut down for most of the second quarter due to COVID, which impacted our operations in that country, with significantly reduced capacity and required us to outsource production to meet customer demand. This unfortunately resulted in additional costs, both of which negatively impacted gross margins. Our team in Malaysia did an exceptional job during this period in addressing these challenges. And fortunately, we are now back at work and operations are ramping up again.

As I noted last quarter, our facility expansion in Malaysia is now complete, and we are focused on utilizing this increased capacity and productivity across multiple product lines to reduce dependence on outsourcing and to support our customers. Demand for our product lines across the board continues to grow, especially for our brake-related products. To put this growth in perspective, our brake-related products as a percentage of overall sales doubled to 14% for the quarter from 7% for the same year period a year ago. At the same time, rotating electrical sales have also increased.

The ramp-up momentum of our state-of-the-art brake caliper remanufacturing facilities and infrastructure, including core sorting and distribution, is proceeding as planned, notwithstanding supply chain challenges. Manufacturing efficiencies will improve as this operation matures. The market for our current hard parts categories represents more than $6 billion at the retail level. There are approximately 287 million vehicles on the road, with an average age of 12.1 years in the United States alone, which fuels our optimism about the growth opportunities in our aftermarket hard parts business.

This will fuel growth in aftermarket hard parts replacement industry well beyond electric vehicles becoming mainstream. Industry reports continue to show that people are keeping their vehicles longer. Used car sales continue to climb to record levels, resulting in increased miles driven by OKVs or our kind of vehicle. It is interesting to note that car lease residuals relative to the value of the vehicle at lease end are now sharply lower than the value of the vehicle.

As a result, consumers are buying out their leases rather than leasing a new vehicle, contributing to an increased aging of the vehicle population. Obviously, this bodes well for the aftermarket parts replacement industry and our nondiscretionary product offerings. As I've said before, the rate of replacement of parts increases substantially as vehicles age. Cars in the zero to three-year age group have a replacement rate for alternators of 2.48% compared with 5.98% in the 12-year and above age group.

I should note that the replacement rate for start-ups for the same period is 0.7% for the zero to three age group and 3.34% in the 12-year and above age group. The replacement rate for brake calipers is currently 2.2% for the zero to three age group and 5.75% for the 12-year and above age group. As a complement to our solid position within the internal combustion engine aftermarket, our diagnostic business for alternators and starters is fast emerging, supported by strong orders from our retail customers as deferred spending due to the pandemic resumes. As many of you know, we acquired the D&V Electronics business in 2017, in part to complement our rotating electrical business and offer our retail customers a superior testing product for alternators and starters.

In addition, our presence for electric vehicle testing applications in the areas of development and production continues to gain traction. We remain enthusiastic about the outlook, encouraged by new strategic partnerships, engineering strength, industry-leading technology and the significant opportunities as driving options evolve. While we don't segment report, let me just take a few moments to comment about this exciting business. Demand for test equipment related to performance endurance of production of electric motors, inverters and batteries for electric vehicles, as well as belt starter generators for hybrid vehicles is gaining momentum.

We are honored, as we announced earlier today that D&V's electric motor emulator was selected to support the development of the rotor motor controllers for NASA's Dragonfly mission to Saturn's moon, Titan, which is a testament to our technology and its exciting applications. All of these opportunities have required investments. But given the $5.4 billion estimated global automotive testing market, we believe the investments will generate solid results. In addition, our vision is to offer EV manufacturers contract testing services via our newly established Detroit Technical Center.

This also offers significant growth opportunities, and we look forward to announcing developments in this area. In short, our strategy before and since the pandemic has been to leverage our significant channel relationships for aftermarket parts and offer superior parts and solutions to our customers and consumers. Certainly, there are challenges facing the aftermarket industry today, including supply chain, freight, raw materials and other pandemic related headwinds. We continue to experience supply chain challenges for freight steel, semiconductors and packaging, to mention a few items.

We believe these are short-term issues, that there's still much uncertainty in the supply chain. We are working hard on a daily basis with our global team to manage production while working with our suppliers and logistic providers to address the challenges. Market dynamics and rational economics, including price increases, will contribute to overcoming these challenges as we continue to focus on taking full advantage of our competitive strengths. I should point out that gross margins for the quarter only reflect a small portion of the first round of price increases and will be fully reflected in our current third quarter.

While our second round of price increases becomes effective during the third quarter, they will be fully reflected in our fiscal fourth quarter. In summary, despite the challenges, our entire company is well positioned for sustainable top and bottom line growth for parts and solutions that move our world today and tomorrow. Our footprint for the future is now the footprint of today, and we are encouraged by the strong demand for automotive replacement parts despite global COVID dynamics. I can assure you, we remain focused on benefiting from our multiyear strategic expansion initiatives.

Based on our results for the first half of fiscal 2022, we anticipated solid year-over-year sales growth. In short, demand is strong and capacity is available. We remain focused on enhancing gross margins due to economies of scale from the consolidation of operations, as well as further expansion of brake caliper production, pricing initiatives and other product line activities. I will now turn the call over to David to review the results of the fiscal 2022 second 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 September 30th, 2021 earnings press release for more detailed explanations of the results. For information about the items that impacted the results, see Exhibits one through five of the press release. Let me take a moment to review the financial highlights, including record sales for a quarter and six-month period.

Net sales for the fiscal '22 second quarter increased 13.5% to $175.5 million from $154.7 million a year ago and 16.7% from the pre-COVID-19 fiscal second quarter two years ago. Net sales for the three months ended September 30, '21, included $13.7 million in core revenue compared with $12.8 million in the prior-year second quarter period due to a realignment of inventory at customer distribution centers with expected future sales benefits as product mix changes. Gross profit for the fiscal '22 second quarter was $36 million compared with $39.7 million a year earlier. Gross profit as a percentage of net sales for the fiscal '22 second quarter was 20.5% compared with 25.7% a year earlier.

The quarter's gross margin was negatively impacted by an aggregate of 5.1%, comprised of the following: 3.1% due to higher freight costs and other expenses related to COVID, 0.5% for brake caliper start-up costs and relocation transition expenses; and 1.8% noncash core and finished foot premium amortization impacting sales, partially offset by a net 0.3% favorable impact for noncash revaluation of cores on customer shelves and gain from core revenue. Let me provide a little more color to the factors impacting gross margin. Brake caliper start-up costs and relocation transition expenses are part of our footprint expansion in Mexico. As you may recall, we completed the construction of our buildings in Mexico this past fiscal year and are focused on increasing production of brake calipers, including core sorting and related activities to meet current and future demand.

Second quarter ramp up and transition expenses were significantly reduced by approximately 80% to $797,000 on a year-over-year basis. We also incurred higher freight and other costs of approximately $5.1 million for the fiscal '22 second quarter due to a shortage of freight and supply chain inefficiencies caused by COVID, as someone noted earlier. With regard to additional COVID-related expenses, we have addressed health and safety initiatives that also impacted gross margins. Fortunately, these corporate-related expenses decreased.

As a point of reference, fiscal second quarter expenses were approximately $382,000 versus $1.5 million in the prior year second quarter. Core premium amortization and revaluation of cores on customer shelves that impacted gross margins are noncash and noneconomic. For a complete summary of items impacting gross profit, please see Exhibit three in this morning's earnings press release. In addition to the above items, gross profit was further impacted by growth initiatives in connection with the expansion of our new product lines and product mix and inflationary costs related to the global pandemic, especially disruptions with worldwide supply chain and logistics services.

This includes higher costs for raw materials and supplies. I should also mention that we recently experienced offshore wage inflation, which further impacted results. We are focused on mitigating these expenses, including higher freight costs, with price increases that have been implemented. We only realized a small price increase impact during the second quarter, primarily effective for the month of September.

Total operating expenses increased to $26.4 million for the fiscal second quarter from $14.8 million for the prior-year period. The increase was primarily due to a $3.9 million noncash loss compared with the prior-year period gain of $4 million for the foreign exchange impact of lease liabilities and forward contracts. The remaining $3.7 million increase on a year-over-year basis was primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, increased share-based compensation and increased commissions, marketing and advertising related and travel expenses. Interest expense was $3.6 million for the fiscal second quarter, which was the same as last year.

Income tax expense for the second quarter was $2.3 million compared with $6.1 million for the prior-year period, which was due to lower pre-tax income. Net income for the fiscal '22 second quarter was $3.7 million or $0.19 per diluted share compared with a net income of $15.2 million or $0.78 per share a year ago. In addition to the items impacting gross margin discussed previously, I should emphasize the noncash, noneconomic foreign exchange impact of lease liabilities and forward contracts totaled $7.9 million on a pre-tax basis or $0.30 per diluted share on a tax effective basis for the quarter compared to the prior year. Details of items impacting net income, totaling $0.49 per diluted share are in Exhibit one in this morning's earnings press release.

Net sales for the fiscal '22 six-month period increased 29.8% to $324.6 million from $250.1 million a year earlier and 25.1% from the pre-COVID-19 fiscal six-month period two years ago. Net sales for the six months ended September 30th, 2021, included $13.7 million in core revenue compared with $12.8 million for the prior-year period, as I discussed. Gross profit for the fiscal '22 six-month period was $59.5 million compared with $53.1 million a year earlier. Gross profit as a percentage of net sales for the fiscal '22 six-month period was 18.3% compared with 21.2% a year earlier.

Gross margin for the six-month period was negatively impacted by 5.9% comprised of the following: higher costs related to COVID-19, including higher freight costs, for which we have implemented price increases, and these will become effective during the third quarter, brake caliper setup costs, relocation transition expenses and other items, including noncash expenses, as I previously discussed. A summary of factors impacting gross profit as a percentage of net sales totaling 5.9% are in Exhibit four in this morning's earnings press release. Net income for the fiscal '22 six-month period was $4.5 million or $0.23 per diluted share compared with net income of $12.2 million or $0.63 per share a year ago. I should emphasize the noncash, noneconomic foreign exchange impact of lease liabilities and forward contracts totaled $10.2 million on a pre-tax basis or $0.39 per share on a tax effective basis for the six-month period compared with the prior year.

Items impacting net income totaling $0.88 per diluted share are in Exhibit two in this morning's earnings press release. Net cash used in operating activities during the fiscal year '22 second quarter was $19.6 million, and during the fiscal year '22 six-month period was $24.3 million, reflecting working capital requirements to support the company's record sales and anticipated growth while considering supply chain challenges due to COVID and the upcoming impact on the industry of the Chinese New Year holiday shutdown. This compares with cash provided by operating activities of $16.9 million for the prior year fiscal second quarter and $39.3 million for the prior year six-month period. Net debt was $120.6 million at September 30th, 2021, compared with $88.9 million at March 31st, 2021, reflecting the required inventory increases for anticipated growth, as I just mentioned.

As you know, there are various methods to calculate return on invested capital. For our purposes, we calculate ROIC by taking operating income and adding back non-cash expenses and certain one-time expenses. We believe this metric, considered together with GAAP measures, provides useful information to investors and to management regarding the company's return on invested capital. In short, we take this metric, which was approximately $87.3 million for the 12 months ended September 30, 2021, divided by the average equity and net debt balance of $414 million, resulting in a 21.1% pre-tax return on invested capital compared with 17.5% a year earlier.

We are continuing to realize the benefits of expanding our Mexican operations and the launch of our new brake category, with expectations of increased returns from both new and existing product lines as the benefits of our strategic expansion are more fully realized. As I mentioned, at September 30, 2021, our net debt was approximately $120.6 million. Total cash and availability on the revolver credit facility was approximately $109 million at September 30, 2021, based on a total $238.6 million revolver credit facility and subject to certain limitations. At September 30, 2021, the company had approximately $927 million total assets.

Current assets were $456 million, and current liabilities were $349 million. During the fiscal first quarter, the company extended its credit facility with PNC Bank for five years through May of 2026, including amendments, which further increased the company's strong liquidity base. For the reconciliation of items that impact results and non-GAAP financial measures, please refer to Exhibits one through five in this morning's earnings press release. I will now open the call for questions, and Selwyn will then provide some closing remarks.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Sarkis Sherbetchyan with B. Riley Securities. Please proceed with your question.

Sarkis Sherbetchyan -- B. Riley SecuritiesAnalyst

Hi. Thank you for taking my question here. I just wanted to start off on the item called out, the $13.7 million in the quarter for core revenue. Aside from that, were there any pull forwards for sales that impacted this quarter?

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

No. No. It's a vibrant quarter and demand continues to be very strong, Sarkis.

Sarkis Sherbetchyan -- B. Riley SecuritiesAnalyst

And would you care to frame up kind of what you're seeing for the back half of your fiscal year? It still sounds like demand is pretty robust for the sector and just want to kind of get a sense for -- are you able to work through some of the supply chain situations in order to deliver to your customers?

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

We're quite successful doing that so far. I expect this to continue into the third quarter. There are a lot of update orders scheduled in the fourth quarter. And so that's a little bit of a no about demand, we know is very, very strong as to whether our shipments will arrive and clear the port on time.

So fourth quarter -- first quarter, but that revenue is already -- those orders have already been committed to. And so the fourth quarter will either have them or it will be in the -- early in the first quarter.

Sarkis Sherbetchyan -- B. Riley SecuritiesAnalyst

And I want to come back to the Malaysia facility. I think you mentioned it was shut down for most of the second quarter because of their situation there, and that reduced your capacity. It sounds like you're running again -- any sense for what that's going to contribute here at least in the near term? And then separately in kind of the midterm?

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

Well, I'll let David talk a little more specifically, but the implications that are being closed or where we outsource -- a lot of the outsource came from Chinese companies, which means we have to pay incremental tariffs. Our pricing was more efficient when we produce it in Malaysia. We had some of those sunk expenses with a factory that's not open even though -- and a workforce that we continue to pay well and not operating. And so those were headwinds that will change.

It will take us another 60 to 90 days to get it reramped up to the levels that it was at. But certainly, those are -- on next fiscal year, we should see some significant margin enhancements as that comes back online.

Sarkis Sherbetchyan -- B. Riley SecuritiesAnalyst

And David, any more quantitative color that you could provide on how it impacted the quarter?

David Lee -- Chief Financial Officer

In our table as an Exhibit 3, we have the total increased expenses related to COVID. It's all part of that $5.5 million, which impacted the quarter 3.1% on the gross margin percentage.

Sarkis Sherbetchyan -- B. Riley SecuritiesAnalyst

Thank you. I'll hop back in the queue.

Operator

Thank you. The next question comes from the line of Matt Koranda with ROTH Capital. Please proceed with your question.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey, guys. Thanks. Just really quickly, housekeeping one. David, maybe could you run through the revenue breakdown between rotating electrical, wheel hub, brake and other?

David Lee -- Chief Financial Officer

Yes. So for the second quarter, rotating electrical was 73% of sales, wheel hub 11%, brake-related products was 14% and other is 2%.

Matt Koranda -- ROTH Capital Partners -- Analyst

And then you mentioned some additional price take sell-in that goes into effect and I think you said the third quarter, the full impact of which would be felt in the fourth quarter and then some prior pricing action that went into effect in the second quarter or you get the full impact in the third quarter. Maybe you could just frame up for us what that means in terms of the implications for revenue growth as we look into the back half of this year, any gating items that you can help provide to kind of gauge the size of the price increases or at least just how it impacts revenue, that would be helpful. And then maybe also on the gross margin front. You mentioned it's basically in reaction to some of the supply chain headwinds that you faced.

And so does that mean we just essentially recovered toward the kind of mid-20s, like 26-plus percent gross margin rate that we were at pre-COVID? How should we be thinking about revenue growth and gross margins for the next couple of quarters?

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

Yes. So I'll start with the gross margins. I mean, you comment on the 26-plus percent margin should -- we should be back at that. And having said that, I think there's more margin upside as we go into the next fiscal year based on utilization, more effective utilization of the operating facilities, both in Malaysia and Mexico, especially with regards to our ramp-up of our brake caliper business.

And we expect further rationalizations based on the move into the new footprint, which is in place now. And so we should see margin -- gross margin increase -- I think fairly decent gross margin increase in the next fiscal year. And then the second part that you asked is -- it's hard -- the price increases should contribute an incremental 5% plus to revenues. And -- but as I say that, we're launching new products and new customers.

And so it's hard to say that you're not going to be able to extrapolate just the price increases just to our revenue growth. Our revenue growth should exceed -- comfortably exceed the pricing increases.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK. Great. And then just any commentary you can provide on the rotating electrical growth rate and just sort of what you're seeing in terms of order rates from some of your customers. And it looks like it did decelerate a bit on a year-over-year basis.

Maybe is there just a pause in terms of order flow or fewer update orders during the quarter? How should we expect sort of things to trend in rotating electrical, I guess, maybe a comment in the quarter and then kind of how to think about it for the next few quarters as well?

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

Yes. So I think you see the percentages of the total come down for rotating electrical, but rotating electrical is up. It's just that we have such fantastic growth in the brake related products. You can see that the percentage of revenue has gone from 7% to 14%, but that's despite rotating electrical increases as well.

So we expect rotating electrical to continue to grow. We have almost 50% market share there. So it's going to be a more moderate growth rate, but the demand for the product is definitely up through the register. You've got a lot of deferred maintenance on used cars that are on the vehicle.

And so there's plenty of tailwinds relating to rotating electrical. And I expect that to continue. I also expect all of our product lines to continue to grow, including the diagnostics business, which has been -- I mean, we suffered actually the revenue. If you think about the revenue for this quarter, we had a fairly significant amount of demand that we were unable to ship despite the fact that having record sales.

And then in addition to that, I think the diagnostic business got disproportionately hit because of supply chain challenges. And that relates to not only us on the diagnostics side, but our customers -- production assembly lines have to be in place before you can put in our diagnostic equipment. So a lot of their hold ups -- hold us up. So I have a little bit of rambling then Matt, hopefully, I got your question.

Matt Koranda -- ROTH Capital Partners -- Analyst

Yes. I think you addressed it in there. So just wondered on the supply chain front, obviously, the topic has probably been beaten to death this earning season with a number of companies, but you mentioned sort of some of the bigger pain points for you guys, freight, steel, semis and packaging. And just wondering if you could provide a little bit more color on sort of how the -- how those items progressed through the quarter in 2Q for you guys? Did things get better month by month? And then how have we trended, I guess, since the quarter ended in kind of through October and the early part of November here? Would you kind of characterize things getting better or worse or about the same?

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

Well, I would say things got better. Fill-rates got better and supply chain got better having -- and continue to get better. Having said that, our demand is also growing probably faster than normal. And maybe this is the normal.

I'm not sure anymore. But -- so the supply chain, while we're getting better and better, the dollar effect of that -- those delays are pretty significant. I mean, this is not a completely quantitative number of it, but just a sort of a -- we could have done -- had there been no supply chain challenges. Or will let me restate that, have we gone back to normal supply chain environment, there's probably $15 million to $20 million in incremental revenue and demand for the quarter that we could have probably shipped.

So -- and that's taken with a little bit of a grain cell because some orders are shipped and cancelled. It's very hard to get the exact number of what gets deferred. But having said that, so the deferral remains fairly constant, but the actual fill-rates are going up and the demand is going up. So I think getting better -- we're also making pretty significant investments pre-Chinese New Year to try and get -- to bolster our inventory and a lot of that -- the effectiveness of that will depend on whether we can get the inventory out of the ports, as you probably can see from the office.

There's, I think, 100 ships in -- outside of Long Beach waiting to get in. But I don't know where that is. And we look -- and I'll give you some -- this is sort of broad feel for where we are. But my expectation is we have about $100 million of new business coming on board in the next -- as quick as we can get to it, but it's at least a year.

So lots of new demand for us coming.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK. Very helpful Selwyn. I'll jump back in queue here.

Operator

Thank you. The next question comes from the line of Scott Stember from C.L. King. Please proceed with your question.

Scott Stember -- C.L. King and Associates -- Analyst

Good afternoon. David, I heard you correct, you said that the -- I guess, the extraneous costs out of Malaysia was in that, I guess, that $6 plus million of COVID line in Exhibit 1. But if you look at the footnote, it says that basically, all of it was just related to increased freight costs. So I'm just trying to get a sense of -- are you assuming that -- are you including the Malaysia cost or the extra cost there within that freight cost? Or is it just a smaller piece of that $6 million, much smaller piece?

David Lee -- Chief Financial Officer

It's the latter. So that number is mostly freight, and you got about $1 million related to Malaysia.

Scott Stember -- C.L. King and Associates -- Analyst

So obviously, we have a round of price increases that went through a small piece, I guess, you could say 1/3 of it there probably in the -- throughout the quarter at best. Can you quantify how much that was? Or was it just really de minimis?

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

It's pretty small. And it's hard for us to quantify a lot of this proprietary. So it's hard to quantify that, but it's pretty small for the quarter. You'll see it for the full quarter this quarter.

Scott Stember -- C.L. King and Associates -- Analyst

All right. So as we get into the back half of the year and the offsetting benefit or relief, so to speak, starts to come through. And assuming that we're in a more -- the supply chain issues are going to be with us for a while. Will you, in your Exhibit one in the quarters coming up, have a line, I guess, adjusting for the price increases since you already backed out the costs related to those ...

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

We'll take out any adjustments that are going to be compensating us from the price increases. So to the extent that we have a freight surcharge, for example, we would not put freight in the material item anymore.

David Lee -- Chief Financial Officer

That's correct.

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

So the adjustment should come down pretty significantly as we move forward.

Scott Stember -- C.L. King and Associates -- Analyst

And I guess just lastly, on the rotating electric, again, this is one of the hottest summers we've had and extension of a few deliveries into the fall. Could you talk about how that benefited rotating electric and where, I guess, customer inventory for rotating electric must be as low as it's been in years?

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

Well, I mean, definitely, the summer -- hot weather helps. It's very difficult to quantify exactly how much it helps. And customers want more inventory. I can tell you customers are selling the product.

It's going through the register. They're experiencing positive sales to the register. And we are filling. Our fill-rates in rotating electrical are quite good, and I want to compliment our team in terms of how they've handled them.

We do have what we think is the state-of-the-art manufacturing facilities and global footprint in terms -- probably the most efficient global footprint in terms of our sourcing capabilities. So having said so -- so rotating electrical continues to be very strong. Having said that, we have new product lines that are even stronger. So as they ramp up, not only because of demand through the register, but because of market share gains.

Scott Stember -- C.L. King and Associates -- Analyst

Got it. That's all I have. Thank you.

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

Thank you.

David Lee -- Chief Financial Officer

Thanks, Scott.

Operator

Thank you. Your next question comes from the line of Brian Nagel from Oppenheimer. Your line is open.

Brian Nagel -- Oppenheimer and Company -- Analyst

Hi, guys. Good afternoon. So, a couple of questions. And some follow-ups to the prior questions.

But first off, with regard to supply chain, we talked a lot about just what you're seeing. I guess, is there a way for you -- given the perspective you have now and kind of the conversations you're having with your various partners? I mean, is there a way for you to say -- at what point you think the supply chain could potentially get significantly better to the point where it's not the type of drag it's been on your business?

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

I -- the answer, I mean, if I had to say yes or no answer, I would say no. Having said that, because, I mean, we just don't know -- if they would just catch the ports up here, that would make an enormous difference. The capacity for our product is available. Our product is available.

We just can't get it here. And so to the extent the Long Beach port authorities talking about 24/7 and the shortage of axles. I wish I could say that it's a short-term problem, but I think that that's going to go on. I don't see it.

I think in the next 12 months, we're going to be talking about this. Having said that, it's much, much better for us right now. Although we have a lot of product on water for anticipated needs in inventory. The good news for us is that we were able to bulk up inventory when we can get it because we don't have perishable inventory.

And then the useful life of this inventory is 10 to 20 years. So there's no risk of obsolescence -- real obsolescence. And so we do whatever we can to mitigate it. I think that our fill-rates will continue to get better quarter-over-quarter.

And I think we'll eat into that backlog of that backlog over the next 12 months. But I really have not -- and I just got back from the APAC show, and I don't think anyone feels like this is a short-term -- this is a short-term solution in place. And then I think everyone is looking at around 12 months out.

Brian Nagel -- Oppenheimer and Company -- Analyst

And then the second question I have, just with regard to demand, I'll frame it similarly. You talk about just -- what you and others have talked about this, which seems to be is an extraordinarily solid demand backdrop for your space right now and for MPAA. How do you view just the underlying sustainability, particularly as, hopefully, the U.S. economy continues to pull away from the COVID crisis?

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

I think that question came up and it was discussed in lot of the trade show as well. Look, my hypothesis, and I've been saying this for a long time and have been wrong for a fair amount of time is that the fundamental statistics of the aftermarket are tailwinds for us. I mean the number of vehicles on the road continues to go up. The average age continues to go up.

And I think now, as you see, COVID came into effect that -- and the number of vehicles and prime replacement age has gone up. COVID came into effect. We had a hot weather. And all of a sudden, you had this massive spike, which, for some reason, people are saying, well, that is temporary.

But I don't see that as -- I think the fundamentals for nondiscretionary hard parts, which is what we're in. I just think there's just good fundamental statistics that support a tailwind growth for a number of years. I don't see this changing. Having said that, for discretionary items, you may want to look it differently, but we don't -- people don't go to -- I got extra money, I'm going to go and replace my alternator.

I mean they make it a pink job and spikes up their wheels or whatever they do, but they're certainly not buying a new alternative for fun. So for our business, I think the fundamentals are in the statistics. And again, you look at $241 million or whatever that number is now, it keeps growing every quarter. I used to be able to say the same number quarter over to quarter, now it keeps going up every quarter.

And average age has just gone up. And then miles driven even hasn't fully recovered, but we'll continue to do better and better. I mean, as looking at RV numbers, I mean, people are more dependent on their vehicle. RV sales are up.

And I think it's just indicative of what's going on. I think used car lots are emptying, residuals and leases I mentioned, it makes it much more beneficial to exercise that the purchase option and the lease. And with the shortage of new cars, those cars are just staying on the road, not that they would go off the road, but it's just less new cars are being sold. So in some ways, I hope that new car sales come back soon because in seven, eight or nine years from now, I want to be able to replace their alternatives.

It's valid. So, we want both.

Brian Nagel -- Oppenheimer and Company -- Analyst

OK, very helpful as always. Thank you.

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

Thanks, Brian.

Operator

[Operator instructions] Our next question comes from the line of Bill Dezellem from Tieton Capital. Your line is open.

Bill Dezellem -- Tieton Capital Management -- Analyst

Thank you. The price increase that you have put in place the first one. Will that be enough to offset the $6 million of logistics and freight costs that you called out this quarter?

David Lee -- Chief Financial Officer

No. Because we have two rounds of price increases. So as someone mentioned on the remarks, we have, the first round that went to effect during the second quarter, be fully reflected in our third quarter. The second round becomes effective in our third quarter will be fully reflected in the fourth quarter.

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

Which would then offset all the freighting increases, assuming that freight doesn't go further, but we'll continue to index rate on price increases.

David Lee -- Chief Financial Officer

That's correct.

Bill Dezellem -- Tieton Capital Management -- Analyst

And then secondarily, longer term, I'm not asking about any individual quarter or year for that matter. But just thinking about this business, what gross margin should it generate?

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

That's a tough question because we've been under a lot of pressure on gross margins, but our fundamental gross margin by product line has not declined at all, but our product mix has declined. And so to the extent that you have start-up costs in new product lines, as margins are a little lower to start, but they should normalize. And then to the extent that you have products that you're not manufacturing that you're buying out, you're going to have a lower gross margin, but you're going to have higher return on invested capital. So Bill, I don't know where the mix tops out at over a period of time.

But certainly, in the high 20s shouldn't be -- should be as realistic. And our return on invested capital pushing on 30-plus percent should not be unrealistic. And then I will add one thing, Bill, that when I address that question, only I'm addressing hard parts. Now obviously, in the electric vehicle space, it's a very different model because as we start selling software as a solution, and that starts, I mean, will be pretty small, but it starts in January and our vehicle solutions, the margins are higher.

The R&D expenses is a bigger number that should -- that could be a significant thing for us. And I will say as well that as we ramped up on our new, we won vendor of the year at one of the largest retailers for our new product initiatives. So we actually wanted two of the three large retailers this year for new product initiatives. So that was pretty significant for us.

Bill Dezellem -- Tieton Capital Management -- Analyst

Well, congratulations on that. And I do want to ask a theoretical question building off what you just said. So once the business achieves its, let's say, normalized gross margin, pick the number, whatever that is in the high 20s, then if you are successful with your software initiative over time, the implication would be that you would have a generally upward trending margin from that point forward. Are we thinking about what you just said correctly?

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

Yes, absolutely. It's very simple. And if you look at our strategy, I always have the analogy of backgammon. And if you play -- I like to block the back, the back quarter, OK? And then I'll worry about the front game.

And so when I say block the back quarter, let's get the market share, let's take out the categories that we think are important, and then we'll grow into that margin. And we're not -- we look out, and the board is very active in this is that we've always got rolling five-year estimates going on. And we -- I believe very, very well positioned for strategic growth over the next five years, as well as significant growth in our profitability.

Bill Dezellem -- Tieton Capital Management -- Analyst

Great. And I would like to ask one additional question, if I may. Relative to your comment in the press release, and I think you've alluded to it here in the -- on this call. You have increased inventory for anticipated business growth.

Would you talk in more detail around that? Because that sounds like that increased inventory is distinctly separate from the increased inventory, trying to navigate the supply chain issues.

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

It's both. I mean, we'd like -- again, we -- I think I mentioned both. I mean, I see new business coming to us of -- and this is a pretty round number as well, but about $100 million. And so we certainly are gearing up for that, but that's in -- a lot of that's in our existing product lines.

And we're trying to build inventory. I'm just concerned that if you have another COVID shutdown somewhere, and so we are operating on the model today of carrying incremental inventory levels from what would be our norm. Our cost of capital is fairly low, albeit that the stock price performance slide -- set up a little bit. But overall, our cost of debt is efficient and carrying inventory and having it available in the market the way it is today, I think will reward us handsomely.

So it's a combination, but it's not all new.

Bill Dezellem -- Tieton Capital Management -- Analyst

Thank you. Appreciate both your comments.

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

Thank you.

David Lee -- Chief Financial Officer

Thank you, Bill.

Operator

Thank you. There are no further questions on queue. I will now turn the call back to Mr. Selwyn Joffe.

Sir, please go ahead.

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

Thank you. I'd like to conclude our call today with a brief recap of our business. And I mean, obviously, there are many variables in the world that we cannot control, but we do control our strategy and our record performance for the first half of fiscal '22 underscores this point. Our added capacity supports growth today, as well as our strategic sales objectives.

To accomplish our goals, we are extremely focused on our whole hard parts aftermarket business and expect to continue to grow this business organically for each product line. In addition, we are expanding our brake-related product lines, and we're excited about the opportunities, which will even further accelerate our growth. Also, as our new production facilities mature, we will realize increased productivity, which will lead to enhanced gross margins. While there are many variables in cost today, we expect this to stabilize.

And through a combination of appropriate pricing and enhanced efficiencies that I mentioned, our margins will improve. This, in conjunction with our accelerated revenue growth, bodes well for increased earnings and shareholder returns. In addition to our hard parts business, our diagnostic business in both internal combustion engines and electric vehicles continues to pick up momentum. Along with this diagnostic business, we are focused on adding contract testing at year-end, which it well -- it will start in January, which would further enhance our revenue and our contribution margins.

It allows us to scale revenues without linear scaling of capital expenditures and enables our customer base to get quicker and more efficient results and feedback with less capital outlay. Our vision group is also working diligently on numerous technologies that position us to take advantage of EV power systems, either a software or licensed intellectual property. While the world of electrification is fast evolving, we have a strong opportunity to be a significant player in the space. These strategies when implemented will serve to grow shareholder value and increase the growth rates in our business.

In closing, I want to thank all our team members for their ongoing commitment and customer-centric focus and service during these challenging times. Their health and safety are top priority, and they've done a fantastic job. We remain extremely vigilant to protect our global team from this horrible virus, and we're working diligently to get even more of our employees and their family members vaccinated. I might add that we are currently more than 91% vaccinated worldwide.

For the most part, our corporate team is continuing to work remotely, though we remain committed to gradually and safely returning our team back to the office as conditions permit, most likely beginning in January. As a result of everyone's contributions, our operations have continued largely uninterrupted, and I'm extremely proud of our company. In summary, our investments are bearing fruit, and we have meaningful opportunities to enhance shareholder value in the dynamic $130 billion automotive aftermarket in the United States and the emerging electric vehicle industry. We are proud of our more than 50-year history in the aftermarket industry and are excited about our emerging presence in the electric vehicle space, and all of us are committed to our vision of being the global leader for parts and solutions that move our world today and tomorrow.

We appreciate your continued support, and we thank you again for joining us for this call. We look forward to speaking with you when we host our fiscal 2022 third quarter conference call in February and at future investor conferences.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Gary Maier -- Investor Relations

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

David Lee -- Chief Financial Officer

Sarkis Sherbetchyan -- B. Riley SecuritiesAnalyst

Matt Koranda -- ROTH Capital Partners -- Analyst

Scott Stember -- C.L. King and Associates -- Analyst

Brian Nagel -- Oppenheimer and Company -- Analyst

Bill Dezellem -- Tieton Capital Management -- Analyst

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