Thank you for standing by. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America – I would like to welcome everyone to the Motorcar Parts of America Fiscal 2024 First Quarter Conference Call and Webcast. [Operator Instructions] Thank you. Gary Maier, Vice President, Corporate Communications and Investor Relations, you may begin your conference.

Thank you, Brian. Thanks, everyone, for joining us. Before 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 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 other car 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. In particular, expectations about 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 our various filings with the Securities and Exchange Commission. With that, I’d like to begin our call and turn it over to Selwyn.

Thank you, Gary. I appreciate everyone joining us today. We are still on track to achieve our year-over-year targets, notwithstanding the timing of orders and softness in April due to a very rainy and cooler March, as reported by the retailers. We saw a strong recovery in the May, June months and sales continue to be robust. Also, I may note the fiscal second quarter is off to an excellent start based on record sales for a July month. Industry trends and extreme hard weather across the country support our optimism. Equally important, we are seeing improved operational efficiencies starting to materialize, enhanced by increasing sales volume, particularly from our emerging brick-related product lines. These operating efficiency improvements, along with increased overhead absorption from higher sales and production and price increases all bode well for margin expansion. I might add that following the completion of the second quarter, on a run-rate basis, all price increases will be recognized. We remain focused on leveraging our strengths, including our solid customer relationships, highly regarded product quality, range of applications and performance, not to mention our value-added merchandising and marketing support. With respect to gross margins, we expect improvement as fiscal 2024 evolves. We anticipate benefits from current order volume improvement, operating efficiencies and cost reduction initiatives that we continue to implement across the entire organization. It is important to understand that product mix affects our gross margin, but that gross profit dollars should increase from all categories as a result of our initiatives. Also noteworthy, margins on our newly launched product lines tend to be lower than mature products until we grow into our capacity and develop the efficiencies that come with time. In addition, we are exploring potential strategic partnerships for our electric vehicle operation. High-interest rates continue to have a…

Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning as well as the 10-Q that will be filed later today. Let me now provide a review of our fiscal first quarter financial results. Net sales for the fiscal ‘24 first quarter were $159.7 million compared with $164 million in the prior year, primarily reflecting timing of orders. Gross profit for the fiscal ‘24 first quarter was $26.6 million compared with $30.3 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 will provide further details on the impact on each additional line item so you can further understand the underlying fundamentals between periods and the opportunities to enhance profitability. The non-cash items reflects 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 noncash items in the quarter was approximately $3.4 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. First quarter gross margin was 16.6% compared with 18.5% a year earlier. Gross margin was impacted by 2.2% from the previously mentioned non-cash items as well as 1% from cash items. In summary, in addition to the non-cash and cash items explained previously, gross margin for the fiscal ‘24 first quarter were impacted by inflationary costs not yet covered by price increases, higher per unit costs resulting from less absorption of overhead costs due to lower production volume, higher returns as a percentage of sales and changes in product mix. Let me emphasize that price increases will enhance gross margins. Furthermore, gross margins will be enhanced by higher sales volume, which we are experiencing, and that will increase over the absorption, lower the returns as a percentage of sales and further enhanced operating efficiencies. Operating expenses were down $6.8 million for the quarter to $16.1 million from $23 million in the prior year period. This included a non-cash gain of $4.3 million with the foreign exchange impact of lease liabilities and Florida contracts compared with a prior year non-cash loss of $678,000. The remaining $1.9 million of operating expense decreases included cost reduction initiatives.

Results for the fiscal first quarter were impacted by $4.8 million or $0.18 per share of higher interest expenses, primarily due to higher market interest rates. Interest expense was $11.7 million compared with $6.9 million for last year. We have received meaningful annualized price increases, which will contribute to net income enhancement. Income tax benefit was $9,000 compared with income tax expense of $589,000 for the same period a year ago. I should mention that the effective tax rate for the fiscal first quarter was affected in part due to the inability to recognize the benefit of losses at specific foreign jurisdictions. However, we expect these losses will be utilized against future profits, which will benefit future tax rates. In short, there are various factors impacting the tax effect. EBITDA for the first quarter was $13.3 million, EBITDA was impacted by $615,000 of non-cash items and impacted by $2.3 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above, was $16.3 million for the first quarter. In addition to the above non-cash and cash items, EBITDA for the first quarter was impacted by the items impacting gross margin previously explained. In summary, further EBITDA improvement for fiscal ‘24 is expected as the full benefit of certain price increases is realized and with higher sales volume in addition to cost reduction initiatives. Now we will move on to cash flow and key corporate items. Notwithstanding the use of cash for the quarter of $20.5 million to support operating activities, the company expects a positive reversal in the fiscal second quarter. As we noted in our press release this morning, we strategically elected to lower collections of receivables by approximately $20 million paid through our customer offer and supply chain finance programs during the fiscal first quarter.…

[Operator Instructions] Your first question comes from the line of Matthew Koranda from ROTH MKM. Your line is open.

Hi, guys good morning. So, just – I will start with the traditional question, which is for David. What – can you give the product breakdown within the quarter between rotating electrical, wheel hubs and brake products?

Yes, Matt, for the first quarter, rotating electrical was 64% of sales. Brakes were 22% - brake related products were 22%, wheel hubs 11% and others was 3%.

Okay. So, 64% – sorry, I am trying to do this on the fly here, 64%, what wheel hubs?

11%.

And then break hub – or sorry, break related products?

22%.

22%. Got it. Okay. Other 3%, so it seems like the bulk of the decline in the quarter comes from rotating electrical and wheel hub at least sequentially and then on a year-over-year basis, if we look at that, it looks like wheel hub is a little bit weak. Maybe just speak to the trends you saw during the quarter and sort of why the shortfall there?

Yes. So, I will start just again. When you have rainy weather and cooler weather at the retailers reported in March, the replenishment on those items slows down in the following month. And so April slowed down in those items. But we see a resurgence of that. I will say along with that, Matt, is we have got significant momentum in our break-related products. So, that will continue to grow. We do expect rotating electrical to continue to grow as well, that we have a little bit of a softness going into the first quarter. Now, for hot weather, and you should see rotating electrical sales in extreme hot weather, so that should be driver going forward. And I will say just on the margin perspective is that our – the margin pressure is not on the legacy products. I mean the margin pressure is just because of new and emerging product lines that are coming up. And as those volumes get better, I mean we are already starting to see improvement in operating efficiencies in those product lines. And those product lines are getting more and more momentum. So, we expect a very strong back nine months. And I think I reiterated the guidance that we have. I think a lot of this is just a little bit of timing that the sales are a little lower than what you expected. But we expect to be ahead of your numbers for the year.

Okay. Maybe in that vein and you mentioned the hotter weather sell-in more recently. Could you speak to July order trends and just the visibility that gives you into 2Q growth and how we should be thinking about the front quarter here in terms of top line growth?

Yes. I mean the July is off to – I mean July is an all-time record July for us I mean – and probably one of the higher months ever. But – so we are off to a very strong side with really good visibility for the rest of the quarter, along with good cash flow metrics. I mean we were able to pay-down our debt and maintain our availability. So, a lot of that was paid off with just the collections and so – and eliminates one covenant. So, I think overall, and certainly, we are feeling very positive about the outlook for the next nine months.

Okay. Any thoughts on seasonality? You reiterated the full year guide, so that does require a pretty pickup in growth, so maybe just speak to and level set folks on seasonality expected during the year.

Yes. I think that’s a great question. I mean I think again, I think the second quarter is going to be real strong. I mean as everyone is expecting, and we are certainly expecting that. We probably expect your third quarter numbers. We think the third quarter will be a little higher than what’s expected right now, and the fourth quarter is always good for us. So, we think the back nine months should be very strong. Now, lots of work to be done and lots of variables out there, but the indications are that the remaining nine months should be very, very strong for us.

Okay. And then just maybe one more on the pricing environment. You talked about pricing for the factoring expense. Has all of that been put into effect as of now, what was the last round of price increases that you did to factor in unintended the expense that you have got on the interest expense line?

Yes. So, most of it has been put into effect. Now, there is still another $3 million to $4 million of price increases that will be in effect soon, very soon in the next couple of weeks.

Okay. Got it. And then you mentioned the drag on gross margin is most likely related to sort of the brake products ramp up. What do you think the differential is there in gross margin between brake products versus the core rotating electrical and wheel hub product lines that you have? And when do we get to like a normalized data being here? Can we do it this year, or is it more likely next?

Yes. We can’t give you, unfortunately, granular data on the actual margins. But the only sort of thing I would tell you is that those margins continue to increase and they are all positive. And so each quarter, we are seeing sequential improvement overall. And a lot of it is overall absorption of we have now consolidated freight where things are combined, there is some consolidated operations. And so it’s very difficult to give you that number. We don’t report by product line. But I think the important thing for people to understand is that the core margins are intact and the core business is intact. We expect that to continue to grow even though you sometimes see fluctuations and some softness in rotating electrical, but it will continue to grow. And the other businesses are growing. Now, the brake-related business is growing disproportionately, it’s brand new. So, when you see that growth. And so that affects overall margins, but incremental gross profit contribution should continue to go up from all of those. And so, I think it’s important that people understand that.

Okay. Fair enough. I guess I lied, one more on just cash management and working capital. Maybe just speak to where should inventory balance or days on hand be for the remainder of the year? I know last year, it peaked in Q1 and then kind of came down slowly on the inventory balance. Is that the same sort of seasonality we should expect this year? And then on AR, I mean it continues to tick up. Is there a point at which we just hit the collection button on sort of – on some of the receivables and that balance drops, or should we continue to expect the DSOs to kind of tick higher for the rest of the year?

Yes. No. So, I will address receivables, I will give, David the hard one, which is inventory. The receivables, we have the option of generally retail days outstanding of 30 days because of the factoring. And so receivables tick up there is only directly related to one of two things. I mean that sales are growing and the timing of the sales – the timing of sales for our first quarter, this one we were reporting on got very strong as we got through the quarter, so you see receivables going up and we elected not to collect 20 – $20-plus million of cash because we could save the interest expense. We expect receivable – I mean again, we expect to – as these prices go in, not to defer receivable collections because that’s not what we want to do. I mean we are always looking at minimizing interest. But the last three quarters of this year are all expected to be very strong. And so I think you will start seeing a normalized receivable balance as we get through the end of this quarter. And that’s – again, I think days outstanding, now I will also mention that while we don’t sell receivables to the professional installer market doesn’t have that program, and we continue to grow pretty significantly there. So, those receivables days outstanding are a little bit longer, but there is no interest rate, external interest rate. So, as that – that number also effects the days outstanding on the receivables. And we have had some success really significant success in the rotors and pads business as well continues to grow pretty significantly. But both parts of that business, both – all of our business is growing, I am happy to say that. And so I think overall, with a lot of mumbo jumbo I am going through here, but I am thinking a lot. Overall, I would say that receivables should stabilize as we get to the end of this quarter because the remaining three quarters all will be strong, should be strong.

Okay. And then maybe, David, on…

Yes.

Thanks for that question. Yes. You will recall, we increased inventory for three reasons. To support the demand in new business, address supply chain disruptions and support expansion of our brake-related products. We are seeing increased demand for all of our product lines. So, going forward, you are going to see that inventory as a percentage of sales coming down. So, as our sales momentum keeps growing, that inventory as a percentage of that growth will be coming down.

Okay. Fair enough. Thanks.

[Operator Instructions] There are no further questions at this time. Selwyn Joffe, I will turn the call back over to you.

Okay. In summary, we are excited about the quarters ahead. As I have mentioned, supported by strong demand for replacement parts and aging car park as well and opportunities for multiple replacements as cost down the road longer, equally relevant is the miles-driven growth rate for the first six months of 2023, which was 2.3%. Industry observers expect that we will surpass the pre-pandemic growth rate of 1.6%, reached in the 2017-2019, 3-year period. In short, we have a built-in solid platform for growth, and our non-discretionary aftermarket products have a critical need for customers and consumers. And in closing, I must recognize the contributions of all of our team members who are focused every day on providing the highest level of service. We are all committed to being the industry leader for parts and solutions that move our world today and in the future. We appreciate your continued support and we thank you again for joining us for this call. We look forward to speaking with you when we host our fiscal 2024 second quarter call in November and at future investor conferences. Thank you.

This concludes today’s conference call. You may now disconnect.