Ladies and gentlemen, thank you for standing by and welcome to the Motorcar Parts of America’s Fiscal 2020 Fourth Quarter and Year End Conference Call. At this time, all participant are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Gary Maier, Investor Relations of Motor Car Parts of America. Please go ahead, sir.

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

Thanks, Gary. I appreciate everyone joining us today. I am going to start off first off, I want to thank all our team members for their commitments and customer-centric focus on service and for their exceptional pride in all the products we sell and the customer service we provide. We are particularly grateful to our team during these unprecedented times. Their health and safety remains the top priority. Since the very beginning of this pandemic, we enhanced our already vigorous disinfection procedures. In addition, we implemented stringent social distancing and health safety policies, including the use of protective equipment at our facilities around the globe. For the most part, our corporate team is continuing to work remotely as much as possible. Though we are taking steps to gradually and safely return our team back to the office. During this challenging period, our IT team has been exceptional and laser-focused on maintaining around the clock uninterrupted service to our global operations. As a result of everyone’s contributions, our operations have continued largely uninterrupted. I am extremely proud of all the working of our company. Our ongoing commitment to being socially responsible, particularly during this challenging period is also noteworthy. One of the company’s many initiatives includes food programs for employees and members of the community. Let me restate what I said in today’s press release. We should never lose sight of our individual and collective responsibilities, particularly in times of crisis, and we, as a company, always strive to nurture this spirit in our day-to-day activities. Clearly the past few months have been challenging for all of us. From our vantage point, we see light at the end of the tunnel. While the month of April was strongly impacted across the automotive aftermarket, consumer demand has picked up over the past…

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect to our March 31, 2020 earnings press release for more detailed explanations of the results. As noted in today’s press release, the company has decided to eliminate its reporting of certain non-GAAP financial measures or information about the items that impacted the results, see Exhibits 1 through 5 of the press release. Let me take a moment to review the financial highlights for the fiscal 2020 fourth quarter and fiscal year, both periods reflecting record sales. Net sales for the fiscal 2020 increased 16.8% to a record $150.7 million from $129.1 million for the same period a year earlier. Gross profit for the fiscal 2020 fourth quarter was $36.6 million compared with $26 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2020 fourth quarter was 24.3% compared with 20.1% a year earlier. Adjusted gross profit for the fiscal 2020 fourth quarter was $40.2 million compared with $36.6 million a year ago. Adjusted gross profit as a percentage of net sales for the three months was 26.7% compared with 28.3% a year earlier, as detailed in Exhibit 3 in this morning’s earnings press release. Gross profit and adjusted gross profit for the fiscal 2020 fourth quarter were negatively impacted by 0.6% due to core buyback premium amortization which is not adjusted for in the adjusted gross margin of 26.7%, which I just mentioned. Gross profit and adjusted gross profit for the prior-year period were also impacted by several items as detailed in Exhibit 3, totaling 2.4%. Total operating expenses increased by $21.6 million to $42.1 million for the fourth quarter from $20.5 million for the prior year. This increase was primarily due to a non-cash loss of…

[Operator Instructions] And your first question here comes from the line of Brian Nagel with Oppenheimer. Please go ahead. Your line is now open.

Hi, good morning.

Morning, Brian. Sorry, I hope the audio may have been in and out a little bit. But, hopefully, people could get to hear us. But, anyhow, I’m happy to answer all your questions. Thanks.

I heard you fine. So, I don’t know – any setbacks. So, I guess the first question I wanted to ask, in your prepared comments you talked about the rebound in the business in May and then into June, as well. Could you just help us size that better and you particularly revised that the slowdown in business that occurred during in April as the shelter-in-place orders were put into place?

Yes. I think that’s good. I normally wouldn’t do that, but I do think it’s good for the industry and our competitors and probably have customers listening. But April was probably a 40% to 50% decline and May is probably a 4% to 10% decline depending on how you measure it and we are hoping to, I mean, June is still early, but we hope that would be ahead of last year in June. But we don’t know. I mean, I just want to preface that that June is pretty forward-looking. Things are moving around pretty quickly. But from what I can tell right now, Brian and this is for everybody, I think it’s a great question. I mean, fortunately, for our industry, it looks like it’s a V curve of recovery. That’s going to be subject to all sorts of variables as this pandemic evolves.

That’s really helpful. And then, a follow-up question to that I have is, we see in the past where particularly during periods of disruption your retail partners worked down inventories and such. I mean, so as you look at that rebound that you are seeing in your business, how much do you think that reflects actual end-demand versus some type of inventory adjustments happening to retail partners?

Well, I got to tell you, I mean – and I’ll just refer to the retailers that have announced the earnings publicly. I mean, I don’t want to give out their individual information, but based on public information, their sales have recovered dramatically. So I don’t believe much of it is inventory. I think most of this is actual demand, because if you think about going through March we had record sales and shipments. And so inventory levels at our customers were probably very good and then April, you have these massive declines where they don’t order, but they are still sitting on pretty good inventory. And so, I don’t believe that that it is disproportionately skewed by inventory, not to say that someone isn’t building some inventory. I think that the outlook is that we have the spring demand and the summer demand compressed into one. And so, hopefully, again as we see people driving more, which hope they will continue, the choice of vacations, the choice of transportation being in personal vehicles as opposed to public vehicles, and the decline of right sharing, I mean, I think even cop ruling is affected - will be affected by it. So, and with the weather, we have come off a very – all the conditions we had come off of being pretty adverse. I mean, we’ve had mild weather coming out of a mild winter. If we get increased miles driven, I think people are going to be more concerned about making sure their vehicles are in working condition and we have a hard time. I mean, the outlook could be good.

Okay. I appreciate all the color. Thank you.

Thanks, Brian.

Your next question comes from the line of Steve Dyer with Craig-Hallum Capital Group. Please go ahead. Your line is now open.

Hi guys. It’s Ryan on for Steve.

Hi.

Hi.

Maybe just to start to piggyback of that last question, but it sounds like some inventory destocking in April and May from your key customers based on kind of their sales and what you just mentioned in those months for you guys. Is that reasonable to assume then that there could be some pent-up demand later this calendar year to refill and restock that channel in addition to the end-customer demand rebounding? Or is it now kind of getting to more of a right size position?

Look, I think, the one thing we know for certain is that we don’t know anything for certain. I mean, that’s the one thing that we know. Again, if you sort of extrapolate where we are today, I think that the theory of pent-up demand is a pretty strong one. I think, again, it’s going to be the priority for people is going to be to make sure that vehicle is in good operating condition. And I do think that, while we are seeing a pop now, the professional is still the market is just rebounding. It’s been late to the rebound. That will pick-up some momentum. And I am personally and a static vision. I am fairly optimistic. But I am also cautious to be too optimistic, because there is a lot of uncertainty.

Yes. Now it’s fair. Maybe just on brake calipers specifically, you had a nice big award, kind of initial award that was this year, any traction there, any new awards, no?

Look, we expect the brake caliper business to be at a runrate of at least $50 million by the end of this fiscal year. We’ve got lots of traction.

And then, as it relates to free cash flow, so, free cash flow in the quarter and for the year which was nice. How do you see that? Do you think you can remain free cash flow positive and then improve throughout the year?

Well, I think what it shows that in a relatively static environment, the company generates a lot of cash. I believe we are going to be deploying cash to complete our buildings in Mexico. We are going to be deploying some cash to complete the ramp up of the caliper facilities. We are going to be deploying cash to get through the final stages of that transition. So I think we are going to have some use of cash. Liquidity continues to be strong and we’ve got some nice opportunities that we are looking at and those type of cash. But in a stable environment and we are getting there as we get through the end of this calendar year as we get into our new facilities, we should see again the back-end of the year should be much stronger in terms of cash flow than the early part of this year.

Got it. And then, last one just kind of a housekeeping item. So we are all in the same page here, but you are eliminating certain non-GAAP financial measures. It appears like the only difference this quarter was you gave the non-GAAP adjustments. You broke those out. But you didn’t explicitly state adjusted EPS and adjusted EBITDA. Is this the way you guys plan to report going forward? And I guess, what’s the rationale to change kind of this hybrid approach?

Yes, I mean, this is the way we intent to report going forward, I mean, subject to our thinking is a better way. But the rationale is, under the new 606 recognition, revenue recognition; there is some debate as to whether you can have adjustments that relate to revenue. And so, if you eliminate those adjustments because, unfortunately in our business, these expenses that we think are very adjustable to affect revenue which means that they are not adjustable. So - and we are moving towards relying on GAAP numbers as we get through December and our transition is over, we think that the GAAP numbers are going to speak for themselves. So, this is the beginning of a transition to be more GAAP-oriented. We’ve gone through significant growth and really significant change in the way we operate. And so we felt it’s been very necessary to show that and we are still showing it. But as we get through towards the end of the year, we think that will become less important. Although we do – and I might point out and I appreciate this question actually, the Mexican currency mark-to-market is something that we don’t adjust for, just because we want to move to GAAP numbers. But we have our – the Mexican leases on our Mexico subsidiary books and so, and they are dollar leases. So to the extent that those leases and for Mexican peso declines are valued those are U.S. dollar, the amount of Mexican peso liability on the balance sheet and Mexico has increased, the asset now increases. And so, when you consolidate, you have to take that loss and that’s what, we are going to have some big variations. I mean, I expect to see big gains, big losses as the year goes along. But we are going to have those that are going to superficially affect our numbers. And the amortization, core write-downs and customer shelves show among the cash, we are going to continue to have those fluctuations and so we will call those out.

Got it. Thanks guys. Good luck.

Thank you.

Your next question comes from the line of Scott Stember with CL King. Please go ahead. Your line is now open.

Good afternoon. Thanks for taking my questions.

Hey, Scott.

Selwyn, you had said that you gave the numbers for April and May. I think you said it’s down 4% to 10%. For the month of May, that was year-over-year, but was that was for the whole month? And if it was, what was the exit runrate heading into June? So, if you just kind of get a sense of what to potentially look for in June?

June, again, it looks like June is, will match last year or even beyond. And so, I just want to caution one thing with this. Our revenue recognition policies only allow us to recognize revenue when the customer takes ownership. So we may have – from our perspective, we may have some cut-off in terms of revenue. But unit volume is very, very strong.

Okay. And, just going back over to the decision to report formally on a GAAP basis. In the past, one of the major differences was, I guess, related to the buybacks from cores of the customer shelves, for new business, where are with that? Are we going to be seeing charges like that in the future? Or is that one of the reasons since that – some of those arrangements I believe have ended is that just indicative of the fact that you expect the earnings to stand on its own merit without having to add anything back?

Well, I think, Scott, we now amortize the difference in the – the book value versus the core, the core repurchase price over May, June period. And so, that’s in an amortization number. And as far as core buybacks continuing, I mean, clearly, we have bought back an enormous amount of cores and relative to the business that we have right now, that is coming towards an end. But I don’t know if we are going to get more business or not, that requires core buyback. We are going to have to evaluate that as we go down. But, I think our industry, on the supply side, would prefer not to be paying cash out from core buybacks and I think maybe this event will make people more rational. But I will tell you, we are committed to keeping ahead of the industry.

Okay. And, just in general, from a profitability standpoint, I know we are not giving guidance here, but assuming that these trends continue and that we get back to normal, what can you say about your expectations about profit – just give us any guidance or informal guidance whether it’s from an adjusted standpoint or even a non-adjusted, whether it’s gross margin, or – and at the bottom-line?

Yes, I mean, unfortunately, Scott, once we start that means we are giving guidance and then there is so much uncertainty, I think the rule of thumb is historical adjusted margins have been – or should remain stable and – but we have the incremental cost that relate to COVID. I mean, we are spending money to make sure our employees remain safe. Fill rates our products is excellent despite social distancing in our factories, special meal programs in our factories. Separation of functions and duties. We take turns right now in terms of scheduling people who come into the office, so we kind of have equivalent and appropriate social distancing. So, while this pandemic continues, there are going to be some incremental expenses. We will try and capture those. I will say that we have not taken, nor do we qualify for any help from the government. We have not needed any of that. And we have had no covenant issues at all about bank debt. In fact have extremely strong cash flow. So, we are proud of where we are and we are ready to buckle down and make sure this thing works. We’ve cut costs significantly throughout our organization while there is decline in revenue and the revenues pickup, I think we are going to have to scale up a little bit to manage that. But as of now, I think an assumption of sort of status quo margins subject to COVID expenses and it’s probably is safe one.

All right. The last question, David. I missed the cash flow numbers for the year and for the quarter. Could you just give that one more time?

Yes. For the fourth quarter, we generated $23.2 million in cash from operating activities. For the full year, we generated $18.8 million cash from operating activities.

And what were capital expenditures for the year?

$19 million, so the majority of that is growth CapEx as we are expanding our Mexico footprint.

Okay. Got it. All right.

So we should recommend towards the end of that CapEx expenditures as we get through this calendar year and maintenance CapEx will be less than half of that.

Okay.

Correct.

Got it. Thank you.

Thank you.

Your next question here comes from the line of Sarkis Sherbetchyan with B. Riley. Please go ahead. Your line is now open.

Hey. Good morning, and thanks for taking my question here.

Good morning, Sarkis.

So, just wanted to actually touch on deploying additional cash to complete the building in Mexico and also the calipers. Have you ever kind of let us know how much that use of cash is going to be. So, essentially, what’s left?

So, the 10-K will be filed later today and we will have in there $11 million of CapEx for fiscal 2021 that we just started for completing majority of the Mexico footprint.

Got it. And is that $11 million number the total?

On top of that, there will be about $6 million of maintenance CapEx. So, you are looking at a total of about $17 million.

Okay. Great. Thanks for that. I mean, and would that include the cash for the expansion in the calipers, as well?

Yes.

Okay. Perfect. And then just kind of, I know some of the others asked about some of the changes in the non-GAAP presentation. Maybe can you remind us what key metrics management is using as part of its planning purposes and kind of judging the health of the business on a go-forward basis? Just kind of help us understand what we should also be paying attention to closely?

Yes, what we talked about on return on invested capital, how we look at that and we eliminate the non-cash expenses, I mean, the mark-to-market on lease revaluation is non-economic. We feel like, almost all the non-cash expenses that we have non-economic, I mean depreciation and amortization obviously, we have maintenance CapEx in line with that. But – so – and really the cores or sort of the separate in some ways there and I don’t like to use this word, but there – a separate segment. But I don’t want to get into that as in terms of segment for GAAP purposes. But if you do the analysis of looking at the core portion of that business, that’s a little separate from the fundamentals of the finished goods sales - on the margins on the finished goods sales. So, return on invested capital, margins will fluctuate by product group. None of the product groups have the same margins. They all fluctuate a little bit based on that. But generally, lower margin product has a higher return on invested capital. Usually, this less CapEx related to the high margin business like brake calipers, rotating electrical require significant more capital expenditures to get to those. And so, net-net, it’s a return on invested capital. We’ve been operating in the mid-teens right now – mid to high teens in terms of return on invested capital. Once we get through with initiatives of completing our facilities and getting moved, I mean, I expect those to go up by double-digits. So, I don’t know that answers your question. Sarkis, anything else?

Yes, it does. Have you communicated a target so, go up double-digits, I mean, is that, any target in mind that you’d like to aspire to?

Yes. I mean, I think I’ve said this before. We’ve historically said we’d like to hit a 35% pretax return on invested capital. We’ve got to get through – we are spending a lot of capital right now in transition. We have tripled the size of our Mexico facility, almost doubled the size of the Malaysian facility. We have expanded our Indian capacity. And so, a lot of investment spending for our future right now.

Great. That’s all for me. I’ll hop back in the queue.

[Operator Instructions] Your next question here comes from Bill Desellum with Titan Capital. Please go ahead. Your line is now open.

Good morning. First of all, the brake caliper business would you please give us an update on the move to Mexico and where you are at in that transition?

Yes, so, the brake caliper factory is up and running. The remanufacturing facility is up and running. Core sorting is up and running in a temporary facility right now as we complete – we have taken delivery now of the real estate. We have three new buildings we call them A, B and C as we complete. A is our new distribution center building. B is our brake caliper remanufacturing facility. Building C is a additional logistics and core sorting facility. They are all complete. We’ve taken – we’ve not taken possession of all of them. Build outs are – and building B are reaching final stages and building Cs are beginning. So, great progress. It’s been tricky during the COVID outbreaks in Mexico and Mexico is still experiencing some tough times. So – but we remain, for the most part, on track. I mean, the team there has done an amazing job of keeping it going despite a lot of handicaps.

Thank you. And are you still producing brake calipers in California? Or has that all moved now to Mexico?

We still produce brake boosters, I believe you are probably referring to in California. About half of that has moved to Mexico and over the next six months we expect the other half to go.

Okay. So, Selwyn, I am apologizing for the ignorance here. But I thought both the calipers and the boosters were starting in California and then moving to Mexico.

No, no. Our engineering capabilities for calipers and boosters are both in California. So, quality assurance, engineering, cataloging, all of that stuff is still in the USA. But calipers is in Mexico, directly in Mexico.

Great. Thank you.

And I am not showing any further questions that are in the queue at this time. I would now turn the call back over to Selwyn Joffe for closing comments.

Okay. Well, first of all, I appreciate everybody’s time and I hope everybody is doing well. I think just to summarize and we’ve had some good questions. I mean, our investments are starting to bear fruits. We remain confident that this is the right way to go for the future. We have solid new business commitments for brake calipers. We expect strong business growth as we ramp up our production notwithstanding the many challenges that we have in the world today, new business commitments and business is continuing. It’s supported by an expanding line of products in both hard parts and diagnostics. The near-term outlook appears positive. We are proud of our more than 50 year history in the aftermarket industry and all of us are committed to our vision of being the global leader for parts and solutions that move our world today and tomorrow with the electric vehicle initiatives. We appreciate your continued support and we thank you again for joining us for the call. And we look forward to speaking with you when we host our fiscal 2021 first quarter conference call in August and I hopefully soon at investor conferences sometime in the future. Thank you so much.

And ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.