Hello, and welcome to the Motorcar Parts of America Fiscal 2020 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.I would now like to introduce your host for today’s call, Gary Maier. You may begin.

Thank you, Yolanda, and thanks, everyone, for joining us for the call today. Before I begin, 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 the Safe Harbor for certain forward-looking statements, including statements made during today’s conference call. Such forward-looking statements are based on the company’s current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in these forward-looking statements.These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company, and are subject to change based upon various factors. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For more detailed discussion of some of the ongoing risks and uncertainties of the company’s business, please refer to the various filings with the Securities and Exchange Commission.With that said, I’d like to begin the call and turn it over to Selwyn Joffe.

Okay. Thanks, Gary. I appreciate everyone joining us today. As I stated in our fiscal yearend call, we are reaching an exciting inflection point. Our business has grown, our product lines are expanding and our global footprint is rapidly evolving to support strategic growth.The financial results for the quarter, while disappointing on the bottom line, were in line with our expectations. We now expect to start seeing sequential improvement in margins, profits and cash flow. We are focused on the future with clear visibility for tangible value creation. While the company has grown, we have incurred front-loaded expenditures to pave the way for an exciting future. We have invested upfront in adding human and capital infrastructure to support growth and to facilitate transformational value creation.We have strategically invested to expand our current product capacity and to launch a full brake products offering, which will begin shipping this quarter. The market for our complete product portfolio is substantial and we expect to gain our fair share. The footprint we have created will be extremely efficient and this along with our expanded team of professionals will allow us to continue our leading position in the industry, in particular as a remanufacturer.Before I continue and discuss our diagnostics business, let me summarize three key steps we are taking and the progress we are making to increase profitability in the near term. Number one, we will increase the absorption of overhead that has resulted from our new expanded capacity.We have new business that starts shipping this quarter and continued growth in our existing business, along with visibility for additional new business that will result in substantial increased sales to support the incremental overhead absorption.Number two, we are making significant progress to relocate operations from high-cost locations to lower-cost locations, leveraging our expanded Mexico and…

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning, with respect to our June 30, 2019 earnings press release for more detailed explanation of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10-Q. Let me take a moment to review the financial highlights for the fiscal 2020 first quarter, reflecting record sales for the first quarter on a reported and adjusted basis. The results for the quarter and gross margin were primarily impacted by four items totaling $8.5 million.First, non-cash expenses of $5.7 million, including a write-down of $4.6 million associated with the quarterly revaluation for cores on customer shelves, and $1.1 million of amortization related to the premium for core buybacks. It is important to recognize that even though the core value for cores and customer shelves may be written down on our balance sheet, we are entitled to a full contractual price refund in the event that the relationship with our customer is terminated.Second, transition costs of $1.4 million associated with the move into the New Mexico facilities to support the company’s anticipated growth. Third, net tariff cost of $1.1 million for products sold before cost increases were passed through to customers. And fourth, cost accrual of $426,000 related to a pending resolution of a previously canceled customer contract.Net sales for fiscal 2020 first quarter increased 19.1% to $109.1 million from $91.7 million for the same period a year earlier, reflecting sales increases of both hard parts and diagnostic products. Adjusted net sales for the fiscal 2020 first quarter increased 15.7% to $108.6 million from $93.8 million a year earlier. Gross profit for the fiscal 2020 first quarter was $17.6 million compared with $16.4 million a year earlier. Gross profit as a percentage of net sales for the…

[Operator Instructions] Our first question comes from the line of Chris Van Horn with B. Riley. Your line is open.

Good morning. Thanks for taking my call.

Thanks, Chris.

You cited record sales in the hard parts category and I think you said despite relative softness throughout the industry. Could you just give us a little bit – it sounds like you’re probably taking share. And is there any specific product line that jumps out of you or anything to maybe cite from the term softness?

Yes. I think, let me just talk about the softness first. I mean, I think that listening to all the different public statements from our customers and other suppliers, I think that we’ve had some headwinds in the DIY business. I think most of it is driven by – well, the feeling is, most of it is driven by rainy weekends, sequential rainy weekends that have been pretty tough.We think it’s – again, we – I continue to say that the fundamental metrics of our industry is strong. And we think that’s a temporary phenomenon, and we are seeing some of that change as I speak. Our growth is driven in – certainly from, this is all existing product lines, none of the new product line revenue is reflected yet in this growth.I think it’s reflected of market share gains that we’ve made through the end of last year. And our customers perhaps performing, while still weaker than what could be if the industry was stronger, still outperforming our competitors’ customers. So I think that’s what it really boils down to.We expected this type of revenue. We also expected the net income numbers for the quarter. I will tell you that just forgetting about new business for a second that the existing business we expect to continue to scale as the year goes on. And then, we’re going to see some further growth from the addition of the new business. And timing is a little unpredictable, Chris, right now. But the fundamentals, the outlook and the momentum are very positive for us right now.

Got it. Okay. And it sounds like the momentum is going to kind of translate into the gross margin throughout the year. Can you give us a perspective on what you might be able to finish the year in terms of a run rate? Would it be something north of that 27% or is that kind of your target that you think you might hit by the end of the year?

Yes. A lot of it depends on the product mix, but if you looked at what happened in the fourth quarter of last year, as we get to these higher revenue rates, we’re certainly around that 29% gross margin range. We’ve got a lot of moving parts still. And while we already see the inflection beginning now, I think you won’t see the – I think you can see those marginal levels, but you won’t see the effect of all the initiatives we’ve undertaken until we get through till the end of March.I mean, having said that, please don’t read into the fact that I think things are going to get worse. They are going to get much better through the end of March, but we won’t be 100% complete with all of the restructuring of our cust centers, logistic centers, production centers, our model in terms of Chinese versus Malaysia versus Mexico sourcing, that all sort of comes through. The majority of that will be done by the end of March. A little bit left in the small part after that, but the significant majority will be done by that.So I will say that run rates, as we get to the end of the year, should reflect what they were last year. Just barring product mix, we have a lot of initiatives going on in a lot of different product lines, all existing now, that can affect it likely one way or another.

Got it. Thank you for that color. One more for me, and I’ll jump back in the queue. On the brake caliper program, could you maybe describe, is it multiple customers, is it private label, or do you have a specific brand? And then, anything you can give us in terms of margin profile for that?

Yeah, we would like to be a little – I mean, I don’t mean to be evasive, but I think it’s a little early, so I don’t want to get too granular. We have significant revenue commitments. I’ll leave it at that. As far as identifying how many customers, I’ll leave that out for now. It is scaling.We actually, in fact, started shipping today. So certainly not planned to be today, but first shipments went out the door today or going out the door today. It is going to be a ramp-up. It’s not instant, where you have all those volume right in day one. But the outlook for that category is extremely positive for us based on existing commitments and a lot of the initiatives going on.I also would say that the margin profile is potentially the same as the rotating electrical margin profile. It’s a remanufacturing profile. The cost of getting into that business are little higher upfront. We’re experiencing that, but the margin profile is positive.And we think that it will not be – when it ramps, will not be dilutive to our gross margins. And then, we think it hopefully will be accretive. And so we think it’s good category. It also is the first step. I think we’ve previously announced rotors and friction. And we’ve been quite calculated in how we’re launching those other categories. But now that we have a full line offering, I think our sales offering is going to be very powerful.We will offer both private label and the private brand. At this point, I prefer not to talk about the private brand, but there are customers in both arenas that we will be servicing.

Great. Thank you so much for the time.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Scott Stember with CL King. Your line is open.

Good morning and thanks for taking my questions.

Good morning.

Good morning, Scott.

So maybe just a little about the market, again. You talked about some softness, but it sounds like, at least your experience is more on the – again on the Do-It-Yourself side. If you look at the I guess what’s more key to your business, the do-it-for-me side, maybe just talk about what you’re seeing there? And maybe just retail versus the wholesale channel, have you seen any material changes or differences over the last quarter or two?

Yeah, look, I think, Scott, I leave that sort of an analysis to the retailers and the traditional people to answer. I’m not going to answer for my customers in terms of what they see. But I will tell you, general in the industry, I believe, and I only believe those based on factual statistics, that the market will continue to get stronger.Number of cars on the road continues to grow. And I’m talking about combustion engine cars. Replacement rates are stable, it’s not getting better. Average age continues to go up. Miles driven remains stable or positive. And so it’s only a question of timing. And so the entire market, the entire market should go up unless statistics are lying. And I don’t believe anyone in our industry believes that. It’s a little tumultuous right now. There’s a lot of activity with Chinese supply and tariffs. And I think that may have a short-term effect on the DIY relative to the discretionary purchases. But non-discretionary, while they may want to put it off, [indiscernible] certainly it’s nondiscretionary.And we believe that there’s necessary price inflation in the category. And that it will not affect volume of replacements from nondiscretionary parts at all. So I mean in terms of the breakdown between professional and DIY, I mean, the cars are getting more complicated. All of the customers believe that professional market is probably outgrowing the DIY as a percentage, but having said that, no one believes DIY is going away. That’s for sure.

Okay. Great. And this – the ducktailing of your comments on tariffs. The implementation of List 4 at 10%, does that have any impact on your business? And if so, has that been accounted for the price increases you’ve put through already?

Yeah. The line is not very clear, but I think the question was the latest round of 10%, is that what you were referring to, Scott?

Yeah, yeah. I’m talking about List 4.

Okay. Yeah. Okay. So that has no effect. I mean we have had increased all of our products to subject to the first rounds of tariff increases on us. And I will tell you that we have passed through 100% of the tariff increases to the marketplace. And so that is happening – that has happened and that is happening. We have no idea what’s going to happen next on the tariffs, but it certainly looks like they’re here to stay for a little bit. So we’ll have to see. I think at the end of the day for us, quite frankly, we’re in a good position to adjust to the tariff headwinds created by China, just based on our significant footprints in Mexico and Malaysia.

Got it. And just lastly, I appreciate all the details on guidance. You alluded to a little bit, I guess, the ramp-up in the back half of the year. But just give us a little bit better idea maybe for the second quarter. It looks like sales, obviously, should be accelerating and the gross margin should be improving, but just trying to figure out how much of a step up there really will be from the second quarter into the back half of the year? Could you just give a little more granularity? That will be great. Thanks.

Yeah. I don’t want to get into sort of the quarterly guidance. But – I mean there’s going to be a significant increase in revenue. I mean, it’s right on track with the way we think our revenue guidance is on an annual basis. It will accelerate even faster in the third and fourth quarter. I mean, clearly, you see that we’ve announced a new product line and that takes a little time to ramp-up. We also have some other initiatives that are ramping up through the start more significantly in the third and fourth, but we will see that increases in the second and this current quarter that we’re in right now.So I think that the worst of the heavy lifting and I hope I don’t keep my words here, but I think the worst of the heavy lifting is behind us. And I think that as we go through the year, we will give you more guidance. I mean, we are a little cautious because of the slowness in the start for the industry, which I mentioned earlier. And so hopefully if we see a turn in that, we may have some upside. So hopefully that answers your question without getting into quarterly numbers.

No. That’s fine. That’s perfect. That’s all I have. Thank you.

Thank you.

Our next question comes from the line of Steve Dyer with Craig-Hallum.

Thank you. Most of mine have been asked and answered. Just a couple of questions, I want to clarify on cash flow. I think, you’ve talked about the second half of the year being positive from a cash flow from operations perspective. What kind of CapEx are you anticipating for this fiscal year?

We are anticipating about $20 million for fiscal 2020.

And so then I guess...

I will say, Steven, is that the positive cash flow will pay for that.

So you anticipate as an entire company being free cash flow as defined by cash from ops less CapEx, free cash flow positive for the year or just the second half?

We expect that this will be for the year from ops.

Okay. So, obviously, the leverage ratio has crept up quite a bit here in the last couple of years to around 2 times net leverage. I guess, that’s probably a safe number, if you anticipate bringing down debt as the year progresses? Or should we think differently?

Yeah. We believe that we – through the end of this quarter, we will see some peeking and then everything will start coming down. We’ll fund CapEx and start paying down debt and certainly, expect that positive cash flow will reduce debt as we go forward once we get completed with this CapEx and as a slight CapEx initiative.

Got it. Okay. That’s all I have.

I think the other thing, Steve, I just want to add on if you don’t mind, and I think this is important. I think we’ve now with the product lines that we have available to us right now. There is a huge amount of growth that’s available to us to take advantage of. So the things I want to reiterate is that the base cash spend is get these last buildings completed. And once that’s done then it’s a matter of now starting to test the pipeline. And so the categories that we are in are billions of dollars.And so we think we’ve got a number of years of very strong growth, if we can do a good job within the categories that we have right now. We don’t need to really look for other, not just like everyone, but we certainly don’t need other categories and I’m not focused on other categories in order to grow our business. I mean, we’ve gone through a big transformation. We’re getting towards the end of it. And we’re now in the process once we get through that, to start milking the benefits from that, paying down debt and creating value and profit.

Got it. Okay. Thank you.

Thank you. I’m showing no further questions at this time. I will now like to turn the call back over to Selwyn Joffe for closing remarks.

Well, thank you. I appreciate everybody. In summary, I just want to say, our investments we believe are now starting to bear fruit. We have many growth opportunities ahead of us. New business commitments are continuing, supported by an expanding line of products, in both our nondiscretionary hard parts business and diagnostics. We are proud of our more than 50-year history in the aftermarket industry. And all of us are committed to have vision of being global leader for parts and solutions that move our world today and tomorrow.And as always, I want to thank all of our team members for their commitment and customer-centric focus on service and for their exceptional pride in all the products we sell and the customer service we provide. Their commitment to quality and service is also reflected in the wonderful contributions they made to their communities and our society. They are terrific and I’m proud to work with all of you. We appreciate your continued support and thank you again for joining us for the call. And we look forward to speaking with you when we host our fiscal 2020 second quarter conference call in November and at various conferences in the interim. Thank you.

Ladies and gentlemen, that concludes today’s call. Thank you for participating. You may now disconnect. Everyone have a wonderful day.