Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America's Fiscal 2013 Third Quarter Results Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to your host today, Gary Maier, Investor Relations for Motorcar Parts of America.

Thank you, Ben. Thank you, everyone, for joining us. 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. I would now like to begin the call and turn it over to Selwyn Joffe.

Thank you, Gary. I appreciate everyone joining us today for our fiscal 2013 third quarter conference call. Let me start out by discussing our rotating electrical business. This business continues to be strong, posting record sales for a third quarter, of $50.7 million and a record $155.1 million for the 9-month period. Adjusted EBITDA for this segment for the quarter increased 38% to a record $9 million from $6.5 million a year ago. And for the 9-month period, it climbed 40.8% to a record $30.8 million. As a result, we are raising our adjusted EBITDA target for the rotating electrical segment to be at least $40 million for the fiscal 2013 year end, from our previous target of $38 million. The undercar segment, however, remains challenging, despite continued progress in the transition. To date, we are making good progress of the final stages of our operating transition plan. Most significantly, we have recently begun shipping our undercar products out of our Torrance, California facility. This is a major step in our plan to consolidate logistics and take control from a third-party provider, and to streamline our multiple Pennsylvania locations into one. Prior to this, we successfully exited unprofitable businesses, as I will discuss in more detail in a minute. Along with implementing a new ERP system for the undercar segment, we relocated the accounting function to Torrance from Toronto. The integration of the undercar business accounting system into our companywide ERP system in October, along with the implementation and integration of a new warehouse management system, has enabled us to obtain more accurate and timely information for strategic decision making. Last year, we closed the CV axle business because it was not cost-efficient. During the third quarter, we exited certain undercar product business with one of our major customers, because…

Thank you, Selwyn. Our rotating electrical segment had strong results for the third quarter ended December 31, 2012. Net sales for the third quarter were $50.7 million, resulting -- representing an $8.5 million or 20.2% increase compared with the prior year third quarter, and adjusted EBITDA was approximately $9 million, representing a $2.5 million or a 38% increase compared with the same period a year ago. As mentioned in our fiscal 2013 third quarter earnings release this morning, operating results for the period ended December 31, 2012, were impacted by the undercar product line segment as the integration strategy progresses, including reducing costs in many areas. We will now review the financial results for the period ended December 31, 2012. Consolidated net sales for the fiscal 2013 third quarter ended December 31, 2012, were $116.3 million compared with $84.1 million for the same period last year, an increase of $32.2 million or 38%. The net sales in our rotating electrical product line segment increased by $8.5 million or 20.2% to $50.7 million for the 3 months ended December 31, 2012, compared with net sales of $42.1 million for the prior year third quarter. The increase in net sales in our rotating electrical product line segment was due primarily to increased sales to our existing customers. The net sales in our undercar product line segment increased by $23.4 million to $65.6 million for the 3 months ended December 31, 2012 compared with net sales of $42.2 million for the prior year third quarter. Results for the quarter include revenue of approximately $50.8 million that was recognized as a result of the elimination of the company's obligation to accept core returns from a customer, previously accrued for in the undercar segment. Separately, sales were reduced by an accrual of $7.9 million for…

[Operator Instructions] Our first question comes from the line of Joe Bess from Roth Capital Partners.

Selwyn, I was hoping you could touch on, I think you said earlier on, that you're now going to be exiting the clutch business. Is that correct?

We have already exited the clutch business. That's one of the business option [ph] .

Okay. Just making sure on that. And then, I guess, I was just hoping to get a little bit of an update on the undercar business and what you guys are seeing in terms of the brakes business as opposed to steering?

I think, in general, our outlook on the undercar business is still very favorable. We think that there's lots of opportunities in all the categories that we're in, in particular in the remanufacturing side. Sales have been softer. I mean, we're looking to come into our season now, certainly on the driveline products. Winter seems to be a little bit less mild than last year, so we'll see where that ends up. But overall, we think the outlook for those product lines is good. We've downsized dramatically. And as announced, the next phase of the plan, I think, operationally, we're through the transition -- we're not through it, but we are very much on track to get through it. That is not my worry right now. The next step really on the plan is to rebuild the revenue base.

Okay, and then thinking about that, is this the base level now for us to start thinking about this business?

Correct. I think it's a conservative base, but it is the base, yes.

Okay, and then thinking about the rotating electrical business, can you talk a little bit about what you guys are seeing in that marketplace? And then any opportunities to gain new customers? Or is it really still just a matter of gaining markets through using your current customers?

I think, it's both. Let's just talk about our current customers. I think we have a cross-section of customers that are industry leaders. I think these customers are gaining share in the commercial do-it-for-me market, and so we're enjoying some of the benefit there. I think, the customers that we service are growing. We see positive momentum within our customer base, so we think the fourth quarter will be a very solid fourth quarter. And the outlook for next year is we expect to continue to grow that business. We think there's still some nice upside left there. So we expect a good year next year as well.

Okay, great. And then thinking about undercar in terms of an EBITDA. I know that you don't want to give any guidance right now as to what we were previously discussing from May. But just curious as to getting a little bit of an idea of what you think the longer-term margin potential could be out of this business?

Right, I think that's a great question. And so I think the reason that we are where we are is we're at an inflection point right now in that undercar business. I think we've done the key things to reduce costs. We are on track to complete the transition plan on time. We think we've identified opportunity that is significant. But we've got a new ERP system. We have a lot more visibility now. The speed of the ability to ramp up, the capital requirements of the ability to ramp up, all of that's being evaluated. And I think as we get our arms around it, we'll be back with guidance. I think long-term, those businesses are excellent businesses, all 3 of them. I, particularly, am a big proponent of the remanufacturing businesses, because I think you add significant value to your customer base from that perspective. We have set up direct import capabilities out of China at this point in time, we do have a new Chinese warehouse. And we think that the ability to play in the new products out of China will continue to enhance. But having said that, we just want to make sure -- I'm very comfortable with the amount of costs that we've taken out. Just want to make sure now on the timing of new business and capital structure going forward.

Okay, and then last question. What's your sort of timing that you think that you could have enough clarity to provide us with some guidance as to what this EBITDA number could look like in the future?

We're coming up with the Roth conference. Hopefully, we'll have something by then. But we don't -- I just -- we want to make sure -- we have a lot of things going on right now. I think, fundamentally, there's a lot of positive activity around us, but we've also got to look at our structure and our capability to take advantage of that, and whether we're capable. And once we get to that point, we'll be able to give clearer guidance.

Our next question comes from the line of Jimmy Baker from B. Riley & Co.

It's Marcelo Choi, in for Jimmy Baker. First question, can you talk about the impact of higher gas prices on your under-the-car offerings, and if we should be thinking about any of those differently than your legacy business?

Higher gas price is not a good thing. Obviously, I think the statistic I read was for every $0.01 of increased gas prices, there's over $1 billion dollars of disposable income that's taken out of the market. So I think, as an industry headwind, that's certainly one that's there. Despite that, I will say that our businesses look like the outlook continues to be strong. The fundamental carpark [ph] is still very much in favor, I believe, of the product lines that we're in, with the aging and the replacement rates at the enhanced aging levels. But I anxiously track gas prices. I mean, people will compromise on anything discretionary when disposable income comes down, and hopefully, the nondiscretionary will be a little less affected. But gas prices, as you know, has always been a hot topic in our industry. So we'll see where that all ends up. I mean, I'm not smart enough to forecast where gas prices are going.

Okay. And just shifting over to debt. Are there certain milestones you'd like to hit in terms of profitability before you look to refinance your Cerberus debts?

Yes, I think, the key milestone is, I think, just from a practical perspective, whether it be refinancing Cerberus or bringing down interest rates in total, is to get the undercar business stable. And we didn't do it this quarter, okay. I believe, I personally believe, that pro forma, we are profitable, when -- once the transition is completed. But we need to show the market, and in particular, the banking market that, that business is stable. And at that point in time, I think, there's a lot of opportunity to refinance.

Okay, great. And just last question. Some of your largest customers have been working to get more hard parts coverage in their store fronts. Can you talk about what level of strategic input you had during that process, and if you think you can make a case for other customers of yours to build out more inventory in your products?

Well, I think, we -- I'd like to think, and I hope our customers agree with us, that we play a big part of their category management processes. I think -- I believe that we're one of the strongest in the industry in category management and forecasting demand trends and our internal systems really developed on the rotating electrical side, and now being implemented in our key categories going forward. So I think we play a big part in that. I mean, I hope our customers feel that way. We believe that having inventory at the right place, at the right time, at the right price is critical. And the consumers' car is down, essentially, when our products fail. And those that have the inventory available will make the sale. And so we think we're there, we think we're a leader in tracking where failures are coming. We think we are a leader in tracking what applications are going to be, failure -- good failure applications. We think we're a leader at being able to understand the entire competitive landscape and so we're able to give our customers great intelligence.

Our next question comes from the line of Patrick Tenney from Emrose Capital.

I have a question about the top line in Fenco, in particular. I think, prior discussions led me to believe that the previous run rate of Fenco is about $135 million. Now it looks like it's around $100 million. Can you talk about that sort of significant reduction and where it came from? Is it from brakes and steering, or is it from wheel hubs?

I think, we've referred to $130 million to $140 million as our target sales level for Fenco the next fiscal year. And at this point, I don't think we're changing anything there. We do see softer wheel hub revenues in this last quarter. We've seen a little bit of softness across-the-board quite frankly in undercar. We do have some new business in the brakes that we're rolling out right now, and we're still optimistic that we should be targeting that level. But again, we have a lot of things going on right now, and so we'll give updated guidance soon.

Could you talk about the opportunities, specifically in brake calipers, kind of talk about what your current revenue run rate is there and what the land looks like and what that opportunity set looks like?

I think the -- again, brake calipers is a great category. The number of calipers on the road has doubled. There used to be 2 on the vehicle, now they're 4 on the vehicle. Rear calipers are starting to fail. We have unique, excellent skills of producing brake calipers, and so we're optimistic about our brake caliper business.

How about steering?

I think, steering opportunities are big as well. We're relatively small in steering. We certainly expect to continue to grow that business.

And when do you think you can achieve the growth that's out there?

Again, I think, if you look at my comments that I just made, is we're about $100 million run rate, and we gave guidance that we're looking to be at $130 million, $140 million for the fiscal year, so we're hoping to land some new business. Instead of the -- we've now got a platform that we think is a viable platform as we complete the transition, and we'll adopt the financing to match the business opportunity. And we expect to start seeing some new business come on.

Fair enough. So I'm still -- I have to say, I'm confused about this quarter and sort of -- I think, in the last quarter, you talked about a reasonably linear progression in margin expansion at Fenco. I think, adjusted gross margin at Fenco last quarter was 1%. This quarter, adjusted gross margin is minus 12%. Help me understand what happened.

Yes, I will clarify that. I did say it was going to be choppy. I think, there is a significant amount of accruals and repositioning of product lines, and that there's a lot of things going on in the numbers. And that's why it's very difficult to understand from this quarter where we think that -- where we will go forward. And that's why we want to take a step back, regroup, reanalyze. We've got a new system that's far more efficient right now, we have a lot of new business opportunities, we have challenges in some businesses. And so we'll be out there giving you guidance just as soon as we can get our arms around it.

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

I'd just like to follow-up on the last line of questioning. I mean, there seems to be a lot of confusion on the quarter-over-quarter numbers. If I'm not mistaken, the idea of letting go of the clutch business, is that something that was contemplated previously or is that something that's changed over the last 2 months?

No, no, no, we've been out of the clutch business now. David, when did we, actually, finally, get out of that? It's been a long time. Yes, so that was contemplated.

Because in the most recent quarter, we talked about letting go of around $60 million of business and now we're talking about $100 million. So where is that $40 million delta compared to, I guess, what we heard maybe several weeks ago? And when did that change?

I'm not sure that it's changed but, essentially, the 3 major categories of reduction in sales would be the CV axle business, the clutch business and then our unprofitable customer that we exited. So those are the 3 pieces.

And if I heard you before, you mentioned pro forma profitability in the Fenco side. Is that even at the current run rate of $100 million? Or would we require to see some extra new business to reach that level?

I believe that it's marginally profitable at this run rate.

So -- and looking at the quarter we're in right now, I mean, directionally, what would you expect to -- have we seen the bottom for the revenue in Fenco in your view? Or are we looking at, probably, a couple of difficult quarters here, where revenue may still dip below current levels?

Again, I can't tell what's going to happen in the undercar segment based on just organic demand. I think that the demand for these base products should pick up over the next 2 months, as we get through the winter and we come into the season. My expectation is that would happen. And the last piece is just how fast we'd be able to bring on some additional business.

And right now, the way you see things, when do you contemplate seeing the additional business start to kick in?

That's the difficult thing to comment. I mean, until you have it, you don't have it. So I just don't want to get ahead of myself right now. But again, I think I made a comment earlier, we expect that with the new business, that we should be able to reach this $130 million revenue for the year.

And one final question. In light of all the challenges that the company's encountered vis-à-vis the Fenco acquisition, I mean, obviously, in hindsight, probably, we'd be looking at a much higher stock price if not for the acquisition. At what point do you say this is not working? I mean, and just say, maybe this can't carry the debt load that's standing on it and we move on. I mean, at what point do we finally admit that this is not working out and just move on?

I continuously evaluate that. I would tell you that's an everyday analysis, to make sure that, in fact, that we have something that's viable. We think the categories are viable, but we've definitely struggled in terms of getting it profitable as quick as we had hoped. But again, I think the cost savings that we identified are all about to happen or happened. And now the question is, can we rebuild it effectively with our anticipated build in the space. So it's something that is continuously being evaluated.

I just say that because, obviously, the other business is going incredibly well and -- except for the dilution that we've encountered because of this acquisition. I mean, it's just impacting results to a level that, at some point, if it doesn't get better over the next few periods, I would think that simply we've just got to admit to ourselves that this is not working. So I just wanted to pass it on.

Okay, appreciate that.

[Operator Instructions] Our next question comes from the line of Bob Sales [ph] from LMK Capital Management.

Selwyn and David, I know you may not have all the numbers you want to have at your fingertips. But can you -- in making the broad statement that the undercar segment is pro forma profitable on kind of a current run-rate basis, can you talk a little bit about a few more [ph] line items that are impacting the apparent profitability and then, perhaps, rank order which of those are creating a distortion between the profitability level you're printing [ph] and the underlying profitability of the business?

Without getting too granular, I think, the big changes, necessarily, and challenges, but changes that we're going through right now are adjusted in the overhead absorption to the lower production levels and the lower sales levels. So there are a number of policies that take time to work themselves through, from a GAAP perspective, and as we adjust to these levels and the new growth levels, the numbers become much more, perhaps, understandable, I mean, for lack of a better word.

And Selwyn, when you talk about that absorption, is it primarily with the accruals that are made for warranty returns? Or is there still overhead in your manufacturing and distribution cost structure that needs to be taken out of the business? In other words, I'm trying to understand if it's really a matter of cost accounting starting -- having to bleed through all the way? Or whether there are still big items, from a cost structure standpoint, that you have to go through?

I guess, let me divide that, that's a good question. There are 2 pieces. I mean, we still got to finish our transition plan. I mean, so let's not jump through that yet. We're still going through having double expenses and higher inventory levels because we're consolidating warehouses. So while we started shipping from Torrance our new units and that will continue to grow, I mean, that still is in progress. So there's still a lot of noise in the numbers from the transition. And again, we said by May, we're through that, we're on track on getting through that. The next big challenges, or not just challenges, again, things that will make the numbers easier to understand, are as the accounting starts matching the ongoing run rate, the accrual levels and all the types of things that we do, we're helping to readjust customer mixes on the shelf right now, which results in larger provisions for returns. And so a lot of things that we're going through right now that create a little bit of difficulty in being able to give you detailed guidance, and that's why we think we'll be through soon, and that's why we'll get back to the market in terms of sort of identifying. But it's twofold. I think it's critical to understand that, while I keep saying that the transitional plan is going to -- is essentially over, it's not over. It's over in my mind, because I think we have complete control of it and is going to happen and those costs are going to be saved and the identified costs that we thought we are going to save, we believe we are going to save. Nothing is changed there. The next step is how fast is this new business going to come on, if it comes on. Again, we're optimistic, but we need to start shipping before we can count that, and the new accounting systems and the new accounting teams and the new warehousing systems. The company's vastly improved, but it has a lot more data that needs to be analyzed before we can get out with a little more definitive information.

And then my last question on the same subject, Selwyn. Do you believe at the current run rate of the undercar business, that the business tuned to -- the share infrastructure of the rotating business can be managed to a breakeven level on a bottom line basis not just on the EBITDA basis?

The challenge is the debt coverage, at this level. And so I think that it could be close, but I'm not sure that this level can get you to profitability, without adding what we think we can add, will cover your debt -- will be adequate to cover the debt coverage. So that is something that we have to look at.

And this does conclude our Q&A session. I'd like to turn the conference back over to Mr. Gary Maier for any closing remarks.

I thank -- on behalf of Selwyn and David, thank you for your joining us, and we look forward to speaking with you again soon. Thanks, everyone. Thank you.

Have a great weekend.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.