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Motorcar Parts of America Inc (MPAA) Q2 2023 Earnings Call Transcript

Motorcar Parts of America Inc Earnings Call - Final Transcript

Motorcar Parts of America Inc (NASDAQ:MPAA) Q2 2023 Earnings Call dated Nov. 09, 2022.

Corporate Participants:

Gary Maier — Vice President, Investor Relations

Selwyn Joffe — Chairman, President and Chief Executive Officer

David Lee — Chief Financial Officer

Analysts:

Matthew Koranda — ROTH Capital — Analyst

Carolina Jolly — Gabelli — Analyst

Bill Dezellem — Tieton Capital Management — Analyst

Presentation:

Operator

Ladies and gentlemen. Thank you for standing by. My name is Brent and I will be your conference operator today. At this time. I would like to welcome everyone to the Motorcar Parts of America’s Fiscal 2023 Second Quarter Results Conference Call.[Operator Instructions]. Thank you. It is now my pleasure to turn today’s call over to Mr. Gary Maier, Vice-President of Investor Relations. Sir, please go ahead.

Gary Maier — Vice President, Investor Relations

Thank you, and thanks everyone for joining us today for our call. Before I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer, and David Lee, the Company’s Chief Financial Officer, I would like to remind everyone of the Safe-Harbor statement included in today’s press release. 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 the company. 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. In particular, expectations about anticipated future growth and opportunities with customers may not be achieved. 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 our various filings with the Securities and Exchange Commission. With that, I’d like to begin the call and turn it over to Selwyn for his prepared remarks.

Selwyn Joffe — Chairman, President and Chief Executive Officer

Thank you Gary. I appreciate everyone joining us today. I hope everyone is safe and healthy. While we had a less than satisfactory quarter, we remain optimistic about the second-half and have been diligently focused on achieving solid Year-over-Year results and we are reaffirming our previously issued 2023 guidance. Let me begin by discussing the challenges impacting each segment of our financials for the fiscal second quarter, some of which were company-specific and others which were macro-related issues.

Before I dive into the specific drivers to support this optimism, let me briefly touch on the challenges for the quarter. First, despite sales being strong for the quarter, which was in fact an all time record if you exclude core revenue from the same period a year-ago, we continue to experience supply-chain challenges, primarily due to shortages of components and temporary customer order delays, driven by specific customer dynamics. It is important to note that sales for our heavy-duty and diagnostic businesses were significantly lower than anticipated, which negatively affected gross margins and resulted in disproportionate license for the quarter.

We believe these sales were primarily delayed. And, we are already seeing a pickup, which will help mitigate the impact on gross margin and on losses. Second, with respect to gross margins, as I just said, we experienced headwinds from our heavy-duty and diagnostic products. Additionally, we also experienced headwinds due to the continued impact of inflationary costs, which include higher labor and higher component costs, and higher production supplies. While we incurred increased costs, the prices did not take effect until the beginning of our third quarter, our price increases. An additional round of price increases will go into effect at the beginning of the fiscal fourth quarter. The total price increases will immediately help to enhance margins, followed by the additional price increases in January, which will further improve margins. In addition, operating efficiencies will also enhance margins moving forward.

Third, our profitability was impacted by higher interest expense, primarily from a significant rise of market condition, interest rates related to customers, supply chain finance programs and interest rates related to the company’s average debt balance. We have implemented price increases to partially offset inflationary cost including some increases in interest rates and other items that David will discuss.

Now, let me highlight several items that support our optimism, included in this morning’s press release. Number one, we expect sales to be in the range of $680 million and $700 million for the fiscal year, representing between 4.6% and 7.6% Year-over-Year growth, reaffirming our annual guidance. We also anticipate margin improvement with a full benefit of the latest price increases expected in the second-half of the fiscal year, as well as further operational efficiencies and cost reductions.

Three, we expect cash flow improvement from enhanced profitability across all product lines. With regard to this last item, I should mention we have been working diligently to adjust investments and inventory levels, which have been higher than normal to mitigate supply chain disruptions and are now stabilizing. This supports our goal of improving cash flow from operations. As a result of these initiatives, the company is well-positioned for sustainable top and bottom-line growth for parts and solutions in future periods.

Now, let me expand a bit further and discuss the other drivers to support our ability to achieve second-half and longer-term financial targets. Our brake pad line, utilizing an exclusively licensed industry-leading formulation, continues to gain traction as are brake rotors. Orders for both product lines are growing, particularly since the beginning of the second-quarter. We expect this momentum to continue to increase in the second half of this fiscal year and moving forward.

Our brake caliper product line continues to gain momentum, with expected operating efficiency improvements as volume increases with further fixed-cost absorption opportunities. We believe our brake related business will exceed $300 million in annual sales above our fiscal 2002 reported results in the next three to five years. We are continuing to expand sales in Mexico with multiple product lines, as our customers experience increased demand for aftermarket parts, including currently rotating electrical wheel hubs and master cylinders.

All major automotive retailers are continuing the rollout of our rotating electrical benchtop tester, and we expect sales from this opportunity to reach a cumulative of $80 million in the next five years. We also expect additional revenue from maintenance and add on services. Our electric vehicle contract testing center in Detroit, Michigan continues to attract customers, including a leading agricultural and construction equipment provider and leading EV automotive manufacturers to support their design and development of electric vehicles.

This contract testing is initial entry into our software as a solution business. We were encouraged by the response from customers of last week’s AApex trade show in Las Vegas and we are excited about all our multi-year new business commitments and expect these numerous opportunities to continue to fuel our growth. In short, we are well-positioned to address both internal combustion engine market and the emerging electric vehicle market with product functionality and applications across both markets. We expect continued strong demand for internal combustion engine applications for decades, notwithstanding electric vehicle growth, which still represents a small percentage of the overall car park.

In summary, with a broad line of nondiscretionary aftermarket parts necessary to service the internal combustion engine car population and approximately 280 million vehicles on the road, we remain excited by opportunities. Our benchtop tester and alternators and starters is continuing to rollout at retail customer store locations across the country. These benchtop testers enable retailers to offer accurate advice with the latest protocols to diagnose problems for consumers and reduce unnecessary returns. This provides a value-added benefit for the retailer, while strengthening their consumer relationships.

Notwithstanding the continued domestic and global challenges, we are working diligently every day with our customers and suppliers to meet the demand for our products, as well as the inflationary pressures we are all facing. I’ll now turn the call over to David to review our results in greater detail.

David Lee — Chief Financial Officer

Thank you, Sel, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning, as well as the 10-Q that will be filed later today. Let me now provide a review of our fiscal second quarter and six-month financial results. Net sales for the fiscal 2023 second quarter were $172.5 million, representing a 6.6% increase compared with $161.8 million in the prior year, which excludes a $13.7 million of core revenue due to a realignment of inventory at customer distribution centers with sales benefits evolving as product mix changes.

Gross profit for the fiscal 2023 second quarter was $26.5 million compared with $36 million a year earlier. Gross profit for the quarter was impacted by noncash items, as well as cash items. Let me provide details for each and then I will provide further details on the impact on each additional line item that you can further understand underlying fundamentals between periods and the opportunities to enhance profitability.

The noncash items reflect core and finished good premium amortization and revaluation of course on customer shelves, which are unique to certain of our products and required by GAAP. The total of these non-cash items in the quarter was approximately $4.3 million. A more detailed explanation of core accounting is available on our website and I would encourage anyone with questions about this topic to review the video.

In terms of cash items, we incurred higher freight costs in excess of customer freight surcharges that we already implemented. In addition, there were remaining higher tariffs due to the shutdown of Malaysia that impacted our facilities and other related supply chain disruption costs. The total cash impact of these transitory costs, including freight tariffs and other related costs related to supply-chain disruptions on gross profit was $3.7 million compared with $5.5 million a year-ago as referenced in Exhibit three of this morning’s earnings press release.

We are encouraged that these costs are decreasing. Before moving on, I should note, there were no ramp-up in transition expenses related to our Mexico expansion this quarter compared with 797,000 in the prior year’s second-quarter. We are pleased that brake caliper populations are increasing nicely and we expect greater sales volume and related benefits with enhanced financial performance as Selwyn previously referenced.

Non-adjusted second-quarter gross profit as a percentage of net sales was 15.4% compared with 20.5% a year earlier. Gross margin was impacted by 2.5% in the previously mentioned non-cash items, as well as 2.1% in the previously mentioned cash items from transitory costs related to supply-chain disruptions. Additionally, gross margin for the quarter, was impacted by unusual supply-chain shortages of critical semiconductor chips for the company’s diagnostic products and critical components for heavy-duty products. We continue to experience extraordinary global supply-chain challenges and inflationary costs, while our most recent price increases were not fully in effect.

In summary, gross margin for the fiscal 2023 second quarter compared with the prior year was impacted by higher inflationary costs, unusual supply-chain shortages for critical components for the company’s diagnostic and heavy-duty products. Changes in product mix and the benefit of core revenue in the prior year due to a realignment of inventory at certain customer distribution centers. Gross margin is expected to benefit from certain price increases that went into effect at the end of the current fiscal quarter, as well as anticipated future price increases discussed earlier.

Moving on, operating expenses were down $1.7 million for the quarter to $24.7 million from $26.4 million in the prior year period. This includes a lower non-cash expense of $2.8 million for the mark-to-market foreign-exchange impact of lease liabilities and forward contracts compared with the prior year and $900,000 of increased non-cash expense due to foreign currency transactions. We reported a net loss of $6.5 million or $0.34 per share. Results were impacted by items that totaled $8.9 million or $0.46 per share as detailed in Exhibit one of this morning’s earnings press release. Results reflect the impact of non-cash items totaling $5 million or $0.26 per share, including core and finished goods premium amortization and revaluation of cores on customer shelves totaling 4.3 million as previously explained. Noncash items also included a loss of $1.1 million with a foreign-exchange impact of lease liability in the forward contracts. Cash items that impacted results include transitory costs related to supply chain disruptions totaling $3.9 million or $0.20 per share.

In addition to the above items, results for the quarter were primarily impacted by unusual supply chain shortages of critical components for the company’s diagnostic products and heavy-duty products as referenced previously. I should note that we have implemented cost reduction initiatives throughout the company, including travel, outside services, labor costs, and overall cost saving opportunities, which are expected to enhance profitability. Additionally, results for the fiscal second quarter were also impacted by higher interest expenses, primarily due to higher interest rate compared with the prior year. Interest expense was $9.3 million compared with $3.6 million last year, specifically due to higher interest rates on the accounts receivable discount programs offered by our customers. I should emphasize that the large interest expense incurred in the second quarter was primarily driven by a sharp rise in interest rates of 3.3% compared with the prior year by the accounts receivable discount program offered by our customers. This increase is nearly tripled the discount rate the company paid in interest expense in the prior year period.

In order to address the significant rise in interest rates, we are implementing price increases, which are expected to help offset these higher rates and certain costs as noted previously. We’re also focused on improving cash-flow to pay down borrowings. Additionally, income tax benefit was $914,000, compared with $2.3 million income tax expense for the prior year period. As also mentioned that the effective tax-rate was affected in part due to specific foreign jurisdictions from which we did not expect to recognize the benefit of losses. However, we expect these assets will be utilized against future profits, which will benefit future tax rate.

Net income was $3.7 million or $0.19 per diluted share in the year ago period. Results a year earlier were impacted by a total of $9.6 million or $0.49 per diluted share. These include non-cash items totaling $8.1 million or $0.41 per diluted share including a non-cash loss of $3.9 million or $0.20 per diluted share on a pre-tax basis for the foreign-exchange impact of lease liabilities and forward contracts. And cash items totaling $1.5 million or $0.08 per diluted share, primarily transitory costs related to supply chain disruptions. EBITDA for the second-quarter was $4.9 million. EBITDA was impacted by $6.7 million of non-cash items as well as $5.1 million in cash items, primarily due to the transitory costs related to supply chain disruptions.

EBITDA before the impact of non-cash and cash items mentioned above was $60.7 million for the second quarter. In addition to the above items, EBITDA for the quarter was impacted by unusual supply chain shortages of critical components for the company’s diagnostic products and heavy-duty products as referenced previously. EBITDA for the prior year second-quarter was $12.8 million. EBITDA year ago was impacted by $10.8 million of non-cash items, as well as $2 million of cash expenses, primarily transitory costs related to supply chain disruptions. EBITDA before the impact of non-cash and cash items mentioned above was $25.5 million for the prior year second quarter.

Now let me discuss the six months results. Net sales for the fiscal 2023 six-month period were $336.5 million, representing an 8.3% increase compared with $310.8 million in the prior year, which excludes $13.7 million in core revenue due to a realignment of inventory at customer distribution centers with sales benefits evolving as product mix changes. Gross profit for the fiscal 2023 sx-month period was $56.8 million compared with $59.5 million a year-earlier. Gross profit as a percentage of net sales for the fiscal 2003 six-month period was 16.9% compared with 18.3% a year-earlier. Gross margin for fiscal 2023 six-month period was impacted by 2.4% of non-cash items and 1.8% primarily by transitory supply chain disruptions as detailed in Exhibit four in this morning’s earnings press release.

Gross margin for the fiscal 2023 six-month period compared with the prior year was impacted by various items discussed previously for the quarter. Net loss for the fiscal 2023 six-month period was $6.7 million or $0.35 per share compared with net income of $4.5 million or $0.23 per diluted share a year ago. Results were impacted by a total of $15.8 million or $0.83 per share. These include non-cash items totaling $9.2 million or $0.48 per share. And cash items totaling $6.6 million or $0.35 per share, primarily transitory costs related to supply-chain disruption as detailed in Exhibit two.

In addition to the above items, results for the six-month period were primarily impacted by unusual supply chain shortages of critical components for the company’s diagnostic products and heavy-duty products as referenced previously. EBITDA for the fiscal 2023 six-month period was $15.4 million. EBITDA was impacted by $12.2 million of non-cash items, as well as $8.9 million in cash items, primarily due to transitory cost pressures related to supply chain disruption. EBITDA before the impact of non-cash and cash items mentioned above was $36.5 million for the current period.

In addition to the above items, EBITDA for the six-month period was impacted by unusual supply chain shortages of critical components for the company’s diagnostic products and heavy-duty products as previously — as referenced previously. EBITDA for the prior year fiscal 2022 to six-month period was $21.7 million. EBITDA was impacted by $13.4 million of non-cash items, as well as $9.3 million in cash items, primarily due to transitory cost pressures related to supply chain disruptions. EBITDA before the impact of non-cash and cash items mentioned above was $44.4 million for the prior year period.

Now, we will move on to cash-flow and key corporate items. Net cash used in operating activities during the fiscal second quarter was $16 million versus $19.6 million cash used in operating activities in the prior year period. This reflects working capital requirements to support solid sales growth, including increases in accounts receivable. We do expect to generate cash from operating activities for fiscal 2023. We expect to generate an increase in operating profit on a Year-over-Year basis supported by organic growth from customer demand, introduction of the new product categories, price increases and operating efficiencies from our footprint expansion. Our return on invested capital on a pre-tax basis at September 30, 2022, was 16.1%, compared with 21.1% a year earlier. As our investments bear fruit, we expect to realize further benefit from the expansion of our Mexican operations and the launch of our new brake categories with expectations of increased returns from both new and existing product lines.

Our net-debt at the end-of-the quarter was approximately $170.2 million while total cash availability under revolving credit facility was approximately $76.9 million. Lastly, we recently entered into a fourth amendment to our credit facility to modify the covenants to match the timing of implementing price increases to address inflationary costs and nearly tripling of interest rates. For further explanation on the reconciliation of items that impacted results and non-GAAP financial measures, please refer to exhibits one through five in this morning’s earnings press release. I would now like to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from Matt Koranda with ROTH Capital. Your line is open.

Matthew Koranda — ROTH Capital — Analyst

Hey, guys good morning. I guess I’ll ask the usual question first. David, can you just give a breakdown by products revenue in the quarter?

David Lee — Chief Financial Officer

Yes, for the second quarter, rotating electrical was 67%, wheel hubs was 11%. Brake related products was 20% and others was 2%.

Matthew Koranda — ROTH Capital — Analyst

Okay, great. I appreciate that. And then. I guess the top of my question here is, you put through a couple of rounds of pricing earlier in the year. Can you just remind us how many around the pricing have you done prior to the October price increase that you just mentioned in the prepared remarks and why is that not filtering through into margin improvements thus far. Just curious like what the big headwinds are? Because if I look at gross margin on a Year-over-Year basis, it’s still even after the adjustments were down north of 500 bps Year-over-Year, is there something happening adversely with mix. It doesn’t seem like volumes impacting because revenue is still healthy but maybe just help us unpack sort of what pricing has gone into place thus far and then why that’s not kind of fully translating into margin improvement in the quarter.

David Lee — Chief Financial Officer

Okay, thanks for that. So previously, we had three rounds of price increases. And as we mentioned, there was another price increase that went in at the end of the second quarter going into the third quarter. And there is one more went at the end of the third quarter going into the fourth quarter. Those price increases are further addressing the inflationary costs. We have seen further cost increases in materials, components, supplies. So these latest rounds further address the increasing inflationary costs. So we do expect as we pointed out in our prepared remarks that gross margins will be enhanced in the second half.

Selwyn Joffe — Chairman, President and Chief Executive Officer

And I think one thing else to add for this last quarter — this last reported quarter is the unusual effect from the two product lines from a diagnostic product line and from heavy-duty. I mean that was a big disproportionate of loss for us, very little capacity utilization because of the deferred sales or delayed sales and obviously less overhead absorption and so that really had a big impact — significant impact on the losses for the quarter.

Matthew Koranda — ROTH Capital — Analyst

Okay and can you highlight exactly where the material costs are sort of really inflating on a Year-over-Year basis. I’m just trying to get a sense for what are the pain points for you guys in particular on the component side, especially when it comes to I guess the rotating electrical core business there.

Selwyn Joffe — Chairman, President and Chief Executive Officer

Yeah, I think, look, the biggest issue right now — I mean in general it’s easing, but the semiconductor shortages is costing us, causing us some heartache right now and in particular when it comes to power modules, whether it be for Emulation and diagnostic business, in particular for certain alternative shortages of semiconductor chips. And so, we’re bidding that up pretty significantly to try and make sure we hit the fill rates that we have. So, we expect that to mitigate. We certainly are seeing a little bit of that mitigating. We expect we have some significant price increases that are scheduled to go into effect — that are in effect now for this quarter and that an additional ones that will go into effect at the beginning of the next quarter. But mostly related to chips and power supplies.

Matthew Koranda — ROTH Capital — Analyst

And then I noticed brake products revenue is a bigger percentage of the mix. Just curious, is that running below kind of where your mature lines are in terms of gross margin. It just seems like maybe there some adverse mix effects potentially from brake products, but maybe speak to that a little more if you could.

Selwyn Joffe — Chairman, President and Chief Executive Officer

Yeah, I think definitely are lower than some of the legacy products, although they’re beating our expectation. So, no negative surprises on the margins there. That is a business that’s growing fast and those margins will be — will continue to get better as it grows and be accretive to gross profit contribution. And I think in general, all of the hard parts — the hard parts categories are living somewhat up to expectation or exceeding expectations.

Matthew Koranda — ROTH Capital — Analyst

Okay, got it. Maybe just one more on the reiteration of the guidance and sort of what it implies for the back-half of this year. Curious one, do you have enough visibility — It seems like you do — to sort of indicate that back-half topline growth rate is going to be approaching double digits. How much I guess in terms of shipments that were missed in the quarter is baked into that implied outlook for the second half and maybe speak to sort of whether a customer like — why your confident customers are ready to take those shipments just given that they’ve been a little bit challenged in receiving stuff.

And then two on the margin front, I guess it just seems like we’re counting on a pretty big snapback in EBITDA margin to kind of get to the full-year guide for 2023, so just maybe speak to how the pricing around that you’re putting out are going to help you get there. It’s like a 500 [Indecipherable] I think step-up in cash.

Selwyn Joffe — Chairman, President and Chief Executive Officer

I’ll hit the headlines and then David can take any more details But, we’ve certainly received — we have some delays from a large customer and we received some orders, to catch up some of those delays. So that’s pretty significant in visibility for the quarters. Update orders that are scheduled for the fourth quarter already, already in. And so the visibility on the hard parts lines is pretty good. And we feel comfortable there. We do have some OE customers that are in the electrification business that have delayed taking supply and making supply on both sides of that and there’s a little bit of risk there. But I — we feel like we’re really seeing a pickup. So, that’s on the revenue side.

So, I think we see a pretty clear — pretty clear path to hitting the top line guidance on the revenue side. On the margin side, clearly we have the price increases. And we know what they are and again as we ramp up for this increased volume in the back-half, not only will we have the benefit of price increases, but we should have the accretive effect on production efficiencies, as well as we go through that. And we see SG&A coming down as well from number of the cost-cutting initiatives that we’ve taken. And so, this target of 93 to 97 of adjusted EBITDA, if you do all the math, we think is still reachable.

Matthew Koranda — ROTH Capital — Analyst

Alright.

Operator

Your next question is from the line of Carolina Jolly with Gabelli. Your line is open.

Carolina Jolly — Gabelli — Analyst

Thank you for taking my question. My first one is a quick clarification question from your comments and your answers. The delay in customer purchases, is that a 100% from the heavy-duty and the diagnostics or is any part of that in a more traditional after aftermarket late vehicle categories that you have.

Selwyn Joffe — Chairman, President and Chief Executive Officer

It’s both. I mean I think the more surprising one for us for the quarter was in the OE electric vehicle space. The other, we anticipated and so — but it is in both. I think, does that answer your question, Carolina?

Carolina Jolly — Gabelli — Analyst

Yeah, thank you. And then in terms of the non OE, do you draw this as an industry or kind of customer-specific delay, if you could answer that

Selwyn Joffe — Chairman, President and Chief Executive Officer

I think it’s very customer-specific, very much customer specific. Thanks and then other, can you just expand on the core alignment differences from last year and this year, is that non-cash or cash and can you just explain to us what that is and what kind of factors drive those changes over time? Okay. Are you referring to the core revenue from the last quarter that we referred to?

Carolina Jolly — Gabelli — Analyst

Yeah.

Selwyn Joffe — Chairman, President and Chief Executive Officer

Okay. So what happens is we own the core portion of the inventory on the shelf for the customer and so when we have a realignment, if we lose some of that business, that customer repays us for that calls around their shelf. They are reimbursed by the new suppliers. So, we went from a mix of — a SKU mix to warehouse mix. So one customer went from SKU specific mix of suppliers to aligning warehouses. And so the net-net result for us there was we had to pay for some, we received some and the net result that we got an extra I think $13.7 million is the amount?

David Lee — Chief Financial Officer

That’s correct.

Selwyn Joffe — Chairman, President and Chief Executive Officer

$13.7 million in revenue. It’s unusual revenue. We normally — we only account for core revenue if we know for sure that it’s actually received –so it’s unusual — it’s real revenue and it’s real cash for sure. But it’s not our normal-course of business.

Carolina Jolly — Gabelli — Analyst

Great. Thank you very much.

Selwyn Joffe — Chairman, President and Chief Executive Officer

Thanks, Carolina.

Operator

Your next question is from the line of Bill Dezellem with Tieton Capital Management. Your line is open.

Bill Dezellem — Tieton Capital Management — Analyst

Great, thank you. First of all, relative to the price increases, what’s the volume or dollar amount I should say that you expect to flow-through fiscal Q3?

Selwyn Joffe — Chairman, President and Chief Executive Officer

Yeah, that’s that’s a question that we can’t really answer because it’s really confidential to announce on the customers in terms of what price increases are. It is significant. It is significant. We’ve been in a product line that we had a price lock on for two years. And we’ve now come though those two years. So, we’ve implemented a catch-up for really for two years of inflation on that product-line. So there is significant but I can’t give you the exact numbers, Bill.

Bill Dezellem — Tieton Capital Management — Analyst

Maybe I’ll try slightly different. The size of the price increase that you anticipate in January, how does it compare company-wide compared to the price increase that you just received in October.

Selwyn Joffe — Chairman, President and Chief Executive Officer

It will be bigger. It will be more dollars.

Bill Dezellem — Tieton Capital Management — Analyst

And you did say that the October price increase is significant. So, the January price increase is significant plus.

Selwyn Joffe — Chairman, President and Chief Executive Officer

Correct.

Bill Dezellem — Tieton Capital Management — Analyst

And would you like to share a magnitude to [Speech Overlap] the increase in that?

Selwyn Joffe — Chairman, President and Chief Executive Officer

I just can’t. I mean it’s just — the price increases are so sensitive for our customers and why we get them and who we get them from that, that’s just something I cannot go into at this point.

Bill Dezellem — Tieton Capital Management — Analyst

Okay that’s fine And I think you addressed this in response to a prior question, but you said a couple of things that seem a little bit in conflict. I think it’s just more in not listening well. You’ve talked about the easing supply-chain conditions but that seems counter to the semiconductor and power module challenges that you’re having. Would you try to tie all those together for those of us who are a little slower in the room.

Selwyn Joffe — Chairman, President and Chief Executive Officer

Yeah, no. I think that’s my references that in general acrossthe-board, other than the semiconductor, power supply arena, although the other supply-chain seems to be easing. Freight seems to be easing. Certainly, there is less freight caught up in the docs. And so, in general I see easing on the semiconductor side and the specialty power supply side, which is very significant for our OE customers and diagnostics business in total and our specialty alternators. The semiconductors shortage and inflationary prices are still a significant headwind. So does that clarified for you hopefully.

Bill Dezellem — Tieton Capital Management — Analyst

Absolutely, no, that’s very helpful, Thank you. And lastly. David, in your opening remarks, you referenced cost reductions that are being implemented across the company. Would you talk about the magnitude of those in from a couple of reference points. Number one, the impact that you expect in the December quarter and then secondarily the ultimate impact when fully implemented, please.

David Lee — Chief Financial Officer

So that’s a good question. If you look at priors, historically there is sequential increase in operating expenses from the first to the fourth quarter. So at a minimum, we believe sequentially, it’s not going to increase, So we’re working very closely with all the department managers company-wide and looking at our spending, as I mentioned in my prepared remarks, travel, outside services and overall cost-reduction opportunities.

Selwyn Joffe — Chairman, President and Chief Executive Officer

And there’s been a big reduction in labor cost as well as we moved into new footprint in Mexico. So, there’s some efficiencies in labor as well.

Bill Dezellem — Tieton Capital Management — Analyst

Thank you both.

Selwyn Joffe — Chairman, President and Chief Executive Officer

No problem.

Operator

There are no further questions at this time. I will now turn the call-back to Mr. Selwyn Joffe.

Selwyn Joffe — Chairman, President and Chief Executive Officer

Okay, thank you very much. I appreciate that. And I just want to reiterate a couple of things. I just say we’re excited about our future. I mean — it’s a tough — we had a tough quarter and we feel that this management team as much as our shareholders do and we’re very much focused on continuing to strive to hit the guidance and feel like we can, notwithstanding the headwinds that impacted our performance for the quarter. We have built a solid foundation for both the top-line and bottom-line growth from our existing product lines, supported by strong demand for replacement parts, tailwinds from hedging car park. We look-forward to a strong second-half based on these factors and all the other considerations we discussed during this morning’s call. And in closing, I want to thank all our team members for their ongoing commitment and their extreme customer-centric focus on service and just being at AAPEX and being in the customer meetings and the number of compliments we received as supplier is extraordinary. And I’m extremely proud of our team members and our company. We appreciate your continued support and thank you again for joining us for the call. We look forward to speaking with you when we host our fiscal 2023 third quarter conference call in February and at future investor conferences. Thank you.

Operator

[Operator Closing Remarks]

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