Good morning, and welcome to the Motorcar Parts of America Fiscal 2023 Fourth Quarter and Year-End Conference Call. All participants are in a listen only mode. After the speakers presentation we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Gary Maier, Vice President of Communications and Investor Relations. Thank you. Please go ahead.

Thank you, Julian. Thanks, 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, our 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 a safe harbor for certain forward-looking statements, including statements made during today's conference call. Such forward-looking statements are based on the company's current expectations and belief concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by the company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of Motorcar Parts of America and are subject to change based upon various factors, in particular, our expectations about future -- anticipated future growth and opportunities with customers may not be achieved. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's various filings with the Securities and Exchange Commission. With that said, I'd like to begin the call and turn it over to Sel.

Thank you, Gary. I appreciate everyone joining us today. We achieved record sales levels for the fourth quarter and fiscal year, reflecting the resumption of more normalized ordering patterns by certain customers as well as continuing favorable industry demand for our nondiscretionary automotive aftermarket parts. The outlook for our product demand is positive as we enter our new fiscal year. Equally important, I must recognize the contributions of all of our team members who are focused every day on providing the highest level of service to our customers. With regard to gross margins, we expect improvement as fiscal 2024 evolves. As sales and production volume increases we expect incremental benefit from increased overhead absorption. Due to the increased demand for our products and the easing of our inventory reduction initiatives we are starting to increase our production levels. In addition, we will realize the full benefit of price increases that have already been approved, which will roll-out throughout this fiscal year and enhance our gross margins. We anticipate benefits from order volume improvement, operating efficiencies and cost-reduction initiatives that we continue to implement across the entire organization. These initiatives include an ongoing company-wide strategic analysis of opportunities to realign our resources and cost structure to enhance profitability and cash-flow, both key areas of particular focus for our team and Board in fiscal 2020. High-interest rates continue to have a significant impact on profitability. Primarily due to rates related to long-established customer supply-chain finance programs. Fortunately, we have made progress in getting relief from our customers and we expect to realize benefits as fiscal 2024 evolves. We are a major supplier of critical nondiscretionary automotive aftermarket parts and we are working with our customers to address the sharply high interest-rate environment which impacts both MPA and our customers, as well as…

Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning as well as the 10-K that will be filed. Let me now provide a review of our fiscal fourth quarter and 12 month financial results. Net sales for the fiscal 2023 fourth quarter increased 18.8% to a record $194.7 million from $163.9 million in the prior year. Fiscal fourth quarter results benefited from increasing product demand for the spring and summer seasons and recently implemented price increases. Gross profit for the fiscal 2023 fourth quarter increased by 40.3% to $36.2 million compared with $25.8 million a year earlier. Gross profit for the quarter was impacted by non-cash items as well as cash items. Let me provide details for each and then I'll provide further details on the impact on each additional line-item so that you can further understand the underlying fundamentals between periods and the opportunities to enhance profitability. The non-cash items reflect core and finished good premium amortization and revaluation of cores on customer shelves, which are unique to certain of our products and required by GAAP. The total for these non-cash items in the quarter was approximately $3.6 million. A more detailed explanation of core accounting is available on our website and I would encourage anyone with questions about this topic to review the video. We also incurred transitory supply-chain disruption cost of $2.9 million as referenced in Exhibit 3 of this morning's earnings press release. Fourth quarter gross profit as a percentage of net sales was 18.6% compared with 15.7% a year-earlier. Gross margin was impacted by 1.9% from the previously mentioned non-cash items, as well as 0.5% from the previously mentioned cash items, partially offset by employee retention credit. While the global supply chain situation is improving,…

[Operator Instructions] Our first question comes from Bill Dezellem from Tieton Capital. Please go ahead. Your line is open.

Thank you. A couple of questions to begin with here. Relative to your commentary about the cost reductions that have taken place since the pandemic ended presumably that is -- those are cost reductions that have been implemented since early May. And if that is correct, would you talk in more detail about those and how they came about and if there's any more color surrounding the $5 million annualized benefit, please?

Yes, this is David. So the largest part of that reduction is going to be reduced labor and related costs. So, as part of efficiencies and including expanding gross margins, we reduced payroll and related expenses as well as other costs, as well as I mentioned in my prepared remarks, outside services, travel and et cetera, throughout the organization.

Yes. I think also the second part of the question is, is this $5 million run rate. I mean we have an additional $5 million that has not been reflected yet in the numbers for the future. So while we adjusted out the employee retention credit, we do expect that $5 million reflects -- that $5 million gain reflects the annualized run rate going forward.

That's right.

All right. Thank you. Do you see additional cost reduction opportunities similar to what you have implemented here in May and June?

Well, I think that's what I'm referring to when I say there's an additional $5 million of cost reductions on an annualized basis going forward. So yes, I mean, we do see some of that opportunity.

Thank you. And then let's talk a little bit about the supply chain if you will, please. What product lines are still impacted by the supply chain issues? And we've heard a number of companies reference that the supply chain is largely back to normal. And so, what are you experiencing that is different than those companies that are feeling like it's more normal again?

Yes. So I would say that I echo that, that I think that supply chain is coming back to normal. We've had a -- we still have a few headwinds. I mean we've still got the leftover of distributing Chinese tariff wheel hubs that we had when Malaysia got shut down. I mean, there's delays in shipping. We're seeing an interesting phenomenon where freight is actually no longer in excess demand. In fact, there's overcapacity, and we're seeing delays in shipments coming in because of carriers making unplanned stops to fill up their capacity. So that's affecting our ability to get to the sales levels that we normally would have been able to do. We see that significant reduction in supply chain expenses though. I mean, so we do see an end to this. The semiconductors on the electric vehicle side has been a challenge, power supplies in the electric vehicle and diagnostics side has been a challenge, but appears to be getting better as we -- day by day.

And so, my interpretation with your comments relative to the Chinese tariffs is it, you still have product in inventory that has the Chinese tariffs on it, but you will soon be working your way or finished working your way through that, and will be back to the Malaysian product that will then be lower cost. And at that point, the supply chain cost, which I think were roughly $3 million this quarter will be significantly reduced, if not essentially eliminated.

Correct.

And what quarter are you currently anticipating that you will finish working your way through that inventory?

I think we're substantially through it now in this quarter.

Great. Congratulations on that. And then, would you please talk through the price increases that were implemented in the fiscal fourth quarter and then what you have planned here in fiscal 2024, and maybe dissect that, whether it's by customer or product line or whether it's across the board increases?

Yes. So all increases across the board and very difficult, Bill, to get into too much granular detail on that for a number of different reasons, including proprietary information by customer and competitive reasons. But overall, we expect to have over $20 million of price increases recognized in this fiscal year, plus more that will on an annualized basis, come into effect the following year. I think for now, as David said, I think it more than covers the interest rate increase and the discount rate. So we expect to start seeing that through this year. And clearly, I think the other side that gross margin story there is that, assuming supply demand continues the way, it looks right now we can get our plants back up and running and get back to more regular overhead absorption numbers.

Thank you. And so, maybe that's a great segue into the vendor finance programs and what progress have you made on that front? Or is it really just being addressed through price increases?

Yes. I think all of that is addressed in the price increases between interest and costs and inflationary costs. The price increases get so complicated because we've had so many rounds of them. It's hard to now start breaking down witches for witch anymore. But as I said, we're north of $20 million of incremental price increases that will be recognized in this fiscal year and then additional going forward. I think I answers your question. I'm not sure. I'm sorry. Did I hit everything you asked?

That was and that covers it. So, thank you for the time.

Thank you very much. Appreciate the questions.

Our next question comes from Jeff Bronchick from CSC. Please go ahead. Your line is open.

Good morning, gents. Just a good new shareholders. A quick question. I don't think you really have to spend 25 minutes reading the press release, which was excellent and detailed, and you can go right to questions by $0.02 for next time. But Selwyn, maybe -- you talked about a couple of times bigger changes for the company or I don't know if you used the word historic, but inflection point. What sorts of things are you referring to as far as maybe how the company might be run in the next five to seven years vis-a-vis the past? And then you made a reference to in addition to the gentleman with the convertible at the company, like what other -- what help is he doing on the Board to help changes you're referencing.

Okay. So let's break that up, and let's talk about inflection. I think we pre-COVID embarked on pretty significant initiatives to launch a brake category, [breakfast] (ph) category. And I think now we're pretty much almost a full line brake supplier. In conjunction with that, we expanded our facilities from 300,000 square feet to 1 million square feet. Added thousands of new employees, added the opportunity to reach what we believe is another $300 million of break related revenue. And so, as we go through the next couple of years, it's not a matter of searching for new product lines, it's a matter of maturing the existing product lines, leveraging our new facilities into greater operating efficiencies, generating the significant cash flow that we believe that it will come with us enhancing margins in some of the newer product lines as we get more mature and volume increases through these facilities and really just leveraging that opportunity for capacity. I mean, that should enable us -- now we haven't given a finite term, but to move us to over $1 billion in revenue. I think the other side of it is that, the industry is interesting right now on the supply side. I think we're in a great position to take advantage of opportunities that may exist in the inventory -- in the industry as the supply chain has generally gone through some hardships, and that leverages -- my answer to the second part of your question is, we've had Doug Trussle to the Board. And I think Doug brings with him significant industry knowledge and a group behind him that is able to continuously stay focused on that industry knowledge and keep us abreast from a different perspective, more of a sort of a private equity perspective of market opportunities and pros and cons of different things. So while I think we've had a very strong and continue to have a very strong diverse board, I think this strong private equity and industry-related knowledge enables us to really hunker down on really building value. We've, I think, done a good job in a lot of areas, but we certainly have not done a good job of building value in our share price. And we want to be focused on delivering results that shareholders can relate to and that will drive our value in the marketplace. And so, I think all of that sort of bodes well for our future. I mean we have spreads now to tackle what we need to tackle. And I believe we've got a very exciting opportunity ahead of us.

What -- so with -- what is the proper inventory number that you think you can comfortably run to balance the desires of the customer base with your interest in reducing interest expense and creating value for shareholders. Like what do you think that number is [indiscernible] indeterminate period going forward?

Yes. So I'm not going to talk about a number, but I will say that I'll give you an inventory turn ratio that I think is much more indicative because we're growing and I think if you look back historically -- well, first of all, before I start talking about that, the number of SKUs that we have to deliver is very significant. We offer over 30,000 SKUs and our fill rate expectations are significant, mostly in the mid-90s and up. And the lead times from our customers are pretty short. So having said that and being an all make all model supplier, we think that the historic turn rate of 4 times a year for finished goods inventory is a level that we should be at. And we've been there and that -- when we were there, we had very significant fill rates, industry-leading fill rates for that matter and as a result, had incredible support from our customer base. I think we've dropped that down to three and change, and now we're heading back up to these four turns. And I think for a near-term goal for us that four turns is a realistic one. I mean that doesn't mean it stops there. But I think that's the next level for inventory.

And have you seen -- I mean, what has been -- my last question. Just in general, because in some ways, one could argue the shareholders have supported the desires and needs of your customers for quite some time. What sort of feedback or -- I mean, from either a competitive stance as you raise prices and try to extract inventory back up the customer. What sort of -- what things are different, let's say, today than maybe six or nine months ago when you were sort of in the opposite mode. How has the industry changed or the reaction to your moves different than maybe your thought.

I don't know if they're different to what I thought. I can't really -- my thoughts evolve quickly on this. I think, look, anytime you're looking for price increases with large retailers, and I mean, there's always pushback, I think the opportunity to get fairer prices is better today than it was a year ago or two years ago. I think that in part depends on really the rationality of our competitors, which I think will have similar challenges with financing the inventory and the payables of our main customers. A lot of it will depend on alternatives. I mean they're driven, obviously, to drive the working -- negative working capital. And a lot of it will depend on their ability to get fair pricing in the marketplace for their products. And rational competitors, including Chinese, including the Chinese, which have always been a wild caught. But look, I think the industry realizes that the amount of financing being supplied by the supply chain is significant, and that at some point, the consumer has to pay for that. I mean, our customers are not going to pay for it, but they should pass it on. And so hopefully, we get back to a rational equilibrium, which I think we're getting close to.

Thank you very much.

We have no further questions in queue. I'd like to turn the call back over to Selwyn Joffe for closing remarks.

Great. And thanks for the great questions. And in summary, notwithstanding the headwinds I discussed this morning, we're excited about our future as I just had mentioned. We've built a solid foundation both to -- both top and bottom line growth from our existing product lines, supported by strong demand for replacement parts and clearly an aging car park in the sort of recessionary environment we're in. We are committed to enhancing cash flow and profitability as our strategic initiatives evolve. In closing, one more time. We have a great -- we have great team members, and I appreciate their dedication to the company and our customers. We appreciate all 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 2024 first quarter call in August and at upcoming investor conferences. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.