Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Motorcar Parts of America's Fiscal 2013 First Quarter Results Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It's now my pleasure to turn the call over to Investor Relations, Gary Maier. Please go ahead.

Thank you. Thank you all for joining us for Motorcar Parts of America's Fiscal 2013 First Quarter 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 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 the course of 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 publically update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's various filings with the Securities and Exchange Commission. With that said, I would now like to begin the call and turn it over to Selwyn Joffe.

Thanks, Gary. Appreciate you joining us today for our fiscal 2013 first quarter conference call. I especially want to thank you for your continued patience and support with regard to our delayed financial reporting. On a positive note, we expect to file our results for the September quarter next month, which will bring us current on our financial reporting. In the beginning of October, we transitioned the legacy ERP and accounting systems of Fenco to the Motorcar Parts platform, which will now enable us to file our required financial reports on a timely basis moving forward. In addition, we've implemented an entire new warehouse management and ERP system, which provides timely internal reporting and facilitates enhanced controls and realtime operating information for the undercar business segments. Due to the dynamic number of events that have taken place since the June quarter, we will structure this call as we did for our year-end call to address the reported results and also to bring you up to date on our post-June transition progress in the state of our current business. Let me start by giving you a review of our June first quarter results. For our rotating electrical business, we experienced continued growth, with sales climbing 17.6% to $46.8 million for the first quarter from $39.8 million from the prior year first quarter. EBITDA for rotating electrical for the quarter was $7.8 million, a record for a first quarter, adjusted for certain items as noted in the press release and which David will discuss later in this call. Let me take a moment to give you some insight into our anticipated performance for our rotating electrical business for the 6-month period ended September 30, 2012, which as I mentioned earlier, we expect to report before the holidays. We expect all-time record rotating…

Thank you, Selwyn. Thank you, again. While we are still in the integration process for Fenco, the undercar product line segment, MPA's base business in the rotating electrical segment continues to be strong. Net sales for the first quarter ended June 30, 2012, was $46.8 million, representing a $7 million or 17.6% increase compared to the prior year first quarter, and adjusted EBITDA was approximately $8 million. Trailing 12 months ended June 30, 2012, net sales for the rotating electrical segment increased to $186 million and adjusted EBITDA to $34 million. As mentioned in our fiscal 2013 first quarter earnings release this morning, operating results for the period ended June 30, 2012, were impacted by Fenco, which again, is the undercar product line segment, as the integration strategy progresses. The net loss for Fenco was a result of an inefficient operating structure, unprofitable product lines, inadequate legacy pricing and transition costs. As we integrate the Fenco business, we continue to address pricing and the efficiency of all of our operations, including production, warehousing and logistics as part of the turnaround strategy for Fenco, as Selwyn noted earlier. We have already made progress in each of these areas, including exiting unprofitable customer accounts. In addition to the overall negative contribution from undercar product line sales, our gross profit was also impacted by discontinued product lines. The negative gross profit impact of discontinued undercar product lines was $711,000 for the first quarter of fiscal 2013. Additionally, we will further discuss the impact of contractual customer penalties, unique customer allowances and rebates and nonrecurring professional fees related to the integration. We will now review the financial results for the period ended June 30, 2012. Net sales for the fiscal 2013 first quarter ended June 30, 2012, were $89 million compared with $70.5 million…

Thanks, David. Despite some complicated numbers, our proposition for our business remains exciting. Our rotating electrical business is strong, and the visibility we have with regard to completing the transition plan is clear. We are close to being back on track with regard to our financial reporting, and we feel that the operating -- that operating the undercar business will be far more efficient with the implementation of the MPA ERP for Fenco. While the numbers are very noisy, we expect to see the results of our efforts more clearly starting in the fourth quarter of this fiscal year. While there are always challenges, we continue to believe that we are on the right track. We are committed to the highest levels of customer service throughout our organization and are excited about the future opportunities for Motorcar Parts of America, both in terms of the continued strength of our rotating electrical business and the exceptional opportunities we expect for the undercar segment. In summary, the long-term market statistics for our industry remain favorable, and we're excited about our opportunities and the opportunities presented to us with our new acquisition. We appreciate your interest in Motorcar Parts, and we are happy to answer any questions that you may have.

[Operator Instructions] Our first question comes from the line of Jimmy Baker with B. Riley & Co.

So even though working capital as a net consumer of cash here in the quarter, you're still making considerable progress in reducing inventory. I'm just wondering if you can talk a little bit about any inventory seasonality and inventory associated with the Fenco business. And maybe just more broadly, about your kind of latest expectations for the trajectory of working capital needs.

Yes, let me talk and address it in more general terms and maybe David will look at it more specific. But in general, I mean, first, dealing with rotating electrical and then I'll deal with undercar. On the rotating electrical side, we've experienced significant volume increases, and so we've built inventory a little bit. We anticipate to bring it down as we get more stable on our revenue trajectory. I mean we're a level -- we very much do level-loading manufacturing, so it should fluctuate but even out as the year goes on. So in general, I see -- we've had a short-term build in inventory in rotating electrical, we'll see that come down. And obviously, that will generate additional cash flow. On the under-the-car product lines, we've downsized that company dramatically. We've eliminated a number of product lines. We've eliminated customer relationships that were not advantageous to Fenco. And so the inventory levels have come down pretty significantly. I think there's still opportunity. But we are going to invest and make sure that we have the right inventory and really are committed to making sure -- we see imminent changes really in our fill rate performance on the undercar segments at this point. So we're excited about where we are. We do think we have some opportunity in the inventory for additional liquidity. But the other factor is to -- we have a tremendous amount of opportunity for growth. And when the model is right, we expect to start taking advantage of that. And that, too, at this point, is a little bit -- will have -- if we take advantage of new business, obviously, inventory is going to grow a little bit. So I don't know if that answers your question, but that's sort of the general picture. And David, you want to add anything to that?

I think you've explained that well, yes.

Okay, that's helpful. And earlier, Selwyn, I think you talked about being able to demonstrate some more significant progress in the fourth quarter of your fiscal year. But you've already made some strides in terms of shutting down unprofitable product lines and in-housing sales reps and so forth. So can you maybe just help us kind of manage expectations for progress in the under-the-car line in the September and December quarters?

Yes. So I think -- I'll try. It's tricky, again, because there's a lot of moving parts to the transition. We certainly expect to see improved numbers in the September quarter. And a lot of the effect of, in particular, our logistics and warehousing agreement, we'll see that kicking in the December quarter. And that's really where the big money is. As of today, we are probably about 80% complete in the savings in that area. We've eliminated all the business we want to eliminate. Hopefully, we'll be able to keep the rest of the business we have, and we've had workforce reductions that are substantially complete. So I would say you'll see a little bit of it happening in September, you'll see a much more significant part in the December quarter. And we clearly feel very optimistic that we'll be done with the transition by May as we originally anticipated.

Okay. And then just kind of longer term, I think you talked again about ending the year with roughly $120 million in net debt, which would be the peak. I guess, first, is that at calendar or fiscal year end? And then how aggressively would you expect to be able to reduce that net debt position by the end of your fiscal year '14?

Well, I think 2 things. I think, first of all, we're looking at our fiscal year. Hopefully, we'll be able to beat those numbers, but that's the maximum that I think we'll be out. At that point in time, we should be generating sort of in the low 50s EBITDA is what we anticipate. We -- the big challenge or the biggest cash drain for us at that point in time will be interest expense. Fenco will have no tax liability on their earnings because of the net operating loss carryforwards. MPA still has tax liability because it's separate and cash tax. And so we think that we'll have -- the first thing would be to refinance or renegotiate the interest levels that we're at on our debt, and the savings there will be significant. So taking that into account, that will enhance our free cash flow, and we'll aggressively be looking to pay down debt at that point. So we think we can pay down the debt quite expeditiously on a stable scenario. Now if we're growing and we start seeing exceptional growth opportunities that again are profitable and are rational, then that may affect the free cash flow because of the inventory levels that we may require. But that will be a good problem for us to deal with.

Our next question comes from the line of Jacob Muller with AYM Capital.

The G&A numbers, they've risen rather -- they've been rising rather precipitously over the last year at rotating electrical as well as quarter-over-quarter, the last 2 quarters reported. Can you kind of explain what that's about and what's the outlook for that line item going forward?

So as explained, there'll be further discussions in the 10-Q that will be filed later today. It's primarily going to be due to professional fees. And we expect that level to be at the higher level, but we're always looking at opportunities to reduce costs and be even more efficient.

The idea is once we get through the transition and we stabilize the business, the amount of professional fees and outside consultants that we use will drop dramatically. So I expect on a consolidated basis combined G&A to come down pretty significantly. I think we've reduced the Fenwick -- to date, the Fenwick-Fenco G&A by 41%. So -- and that's adjusted for all the consultants and workout people that we've been using and getting -- in particular, audit fees and getting caught up on the financial reporting, certainly, very messy and very expensive relative to the professional fees. But I think, again, you'll start seeing that come down as we get into the March quarter, and the June quarter we'll see a tremendous reduction in those fees.

The question was more about the rotating electrical side of it actually, where it went from $4 million a year ago to $5.5 million or so right now. And where would the professionals fees be applied to that part of the business?

So there's going to be opportunity in reducing cost, for example, in the integrated audit at both the undercar and the rotating electrical. There's opportunities to reduce legal costs. So right now, it's at its height. So we are working towards reducing those professional fees to make it more efficient.

Yes. And I think you'll see more and more as we take advantage of synergistic opportunities. You would have to look at the G&A on a combined basis as we get to completing the transition. So again, I think on an apples-to-apples basis, that the G&A has been negatively affected at MPA because of the amount of professional fees, even in the audits, relative to the Fenco acquisition valuations, all sorts of things that are continuously have to be done. Sarbanes-Oxley compliance, which is at the parent company level as opposed to the subsidiary level. So there are enormous number of fees that overlap. But on a consolidated basis, once that these synergistic opportunities are taken advantage of, I think you'll see a net decrease overall.

And the NOL number that you mentioned, what is the size of the NOL of Fenco currently?

It's in the 40-plus range -- $40 million-plus range. I don't have that number right in my fingertips. We've not been able to book that because of -- until you show profitability, so you can't show the value of that on your books yet. As soon as we complete the transition and we start showing profitability, I think then it will start to reflect in the numbers. So there's at least $40 million of NOLs there.

Finally on the interest expense, obviously, you've mentioned in the past and currently the hope to bring that number down. But as things are right now, what would you expect interest expense to be for the coming year or without any change?

Without any change.

Yes.

So interest expense will be in -- about the $20 million range for the combined consolidated company.

That's reflective of what average coupon you would say?

Annually, excuse me, $20 million annually.

That's including the factoring or...

Yes, including the factoring as well as the credit facilities for both the undercar and rotating electrical segment.

And what's the rate on average you're paying for those -- for that in total on average?

To be very specific, on the rotating electrical, the debt facility is at 10.5%. For the undercar, it's in the mid-5% range.

Then the factoring is in the 3.5% to 4% range.

Our next question comes from Mark Tobin with Roth Capital Partners.

First, just to rehash, I couldn't write quickly enough, you talked about the targets for rotating electrical for the September quarter, and I heard revenue is expected to be an all-time record. What was the EBITDA expectation?

We expect to exceed $20 million in EBITDA for the first 6 months.

Okay, that's helpful. And as far as the downsizing of Fenco with the major eliminations on the revenue line, is that something we'll see in the September quarter or does that kick in, in December from a run-rate basis? I guess, in other words, is September revenue going to look something similar to June or kind of with the full Fenco or is it going to reflect the downsized portion?

So for the undercar segment, the June and September quarter reflect the full business. Back half of the fiscal year, in the December and March quarter, will reflect the downsized business.

Okay, that's helpful. And then shifting -- I guess also on under-the-car, we had talked a little bit previously about the trajectory of the recovery and you're still confident in the expectations for a $15 million EBITDA run rate starting in May. Can you give us a sense of where you -- when you expect to hit EBITDA profitability at Fenco? Is that something that's achievable by the December quarter or you think it's further out in the fiscal year?

I think the December, March quarter, March quarter is probably a safer bet and comfortably more conservative, but December is a possibility.

And is that in terms of run rate or in terms of the full quarter?

In terms of the full quarter.

Okay, okay. And then...

And those are adjusted numbers, I mean, because there's severance and there's all sorts of again noise in those numbers. I think you'll start seeing it less noisy as we get through to the June quarter, which is that May, June period.

Sure. And finally, when we look at the cash balances, it looks like you've got some room to operate. Can you address the flexibility you have at the Fenco level? Are you comfortable with your cash situation there given the constraints with down-streaming and so forth?

Yes. I mean we believe that the Fenco facility gives us adequate capital to execute completely the transition plan, yes. And certainly, on the rotating electrical side, we have significant access liquidity. So in terms of being able to refinance the debt and restructure the debt, there's tremendous upside in the interest opportunity there. I was just saying we're sitting with a significant amount of cash and a very high debt level where we can't -- there's no reason to have the debt levels we have with the cash that we have. So as we have more stability, we hope to work with our lenders to change that.

Our next question comes from George Berman with J.P. Turner & Company.

A lot of work has been done already, and I guess we have a little bit more to do, huh?

Yes, a significant amount has been done.

Yes, the previous caller talked about the sales. If you were to look at next year, what would you expect the undercar product line to look like in terms of revenues for the quarter from the current $44.2 million, if you take all the things you've closed down and sold?

Yes. So, again, it's hard right now, George, because we -- it's a question of how much new business we take on, I mean, after eliminating the business. And the intent is to make sure that the model is completely profitable before we take on business and grow. But I think the comfortable level is in $140 million range as a base, as a start. Then I think the growth opportunities, again, depending on the timing of when they hit, are pretty significant.

Okay. And the current refinancing opportunities, you mentioned that you're looking to maybe once you're rightsized and profitable, you have possibilities to redo your funding sources a little bit.

Yes, we do. And I mean, obviously, we have the existing lenders that we would hope to work with us. But in the event that, again, that we're profitable, we think we can fund debt at significantly reduced rates and use less debt. So I think that the interest expense line is going to be reduced dramatically.

And now you mentioned the NOL carryforward in Canada. Can that only be offset with profits generated from Fenco?

Correct. It has -- can only be -- yes, it cannot be used in the consolidated.

So therefore, you paid -- even this quarter, you paid $1.2 million...

Yes. So we are paying tax even though we've got losses, yes.

[Operator Instructions] The next question comes from the line of Matt Sherwood with Cooper Creek Partners.

Congrats on a really strong quarter in the rotating electrical and [indiscernible] undercar.

Yes. Now we're very excited about that segment. And then I think when you see the 6-month numbers, that we've given you the guidance of an excess of $20 million, that's a really big bump for us.

That's what I was saying. I mean, so it looks like the second quarter, there's an almost 40% increase in the numbers. I mean if you actually carried forward your 6-month increase of 30% for the year, you could do $40 million in that segment. I know you're not trying to overpromise, but is there any potential for that sort of growth in a bullish scenario?

There's potential, but I think we've got to look at seasonality. And so we'll have to see how it unfolds. I would be, again, just be more conservative in that approach. And I think the high 30s are -- we're comfortable with that. But there's always opportunity to do better, but we're certainly not giving that kind of guidance.

No. But it sounds like that level should be very achievable given $20 million in the first 6 months.

Yes.

That's great. Then on the Fenco side, I know you talked about how some of the noise could be reduced over the coming quarters. Can you sort of walk through just how you expect -- should we start to see these customer penalties decreasing materially now that you've put in your ERP and you've gotten the Wang Chung [ph] line and should be current with your suppliers?

Yes. So right now, I would say that starting in this quarter, really effective now, we should see those penalties come down fairly significantly going forward. So that is exciting. We are very excited that so far -- and I knock on wood while I say that, not too hard, but the success of the implementation of the ERP and really reformulating the entire accounting group really is now located in -- the Fenco accounting is now located in Torrance. And so we just think that just the overall infrastructure and daily management challenges are much enhanced -- are much easier to manage now that we have the new systems and new people in place.

And presenters, at this time, that does conclude our time for questions. I'd like to turn the program back over to management for any additional or closing remarks.

Well, again, I want to thank everybody for their patience. It certainly is a tough challenge getting a transition and turnaround completed like this. I do again want to say one more time that I feel like we've made tremendous progress in the transition, and we're excited about the future. And I appreciate everybody's time. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.