Welcome to the U.S. Auto Parts fourth quarter 2018 conference call. On the call from the company are Lev Peker, Chief Executive Officer and Neil Watanabe, Chief Financial Officer. By now, everyone should have access to the fourth quarter 2018 earnings release, which went out today at approximately 4:00 PM Eastern Time. If you have not received your release, it is available on the Investor Relations portion of the U.S. Auto Parts website at usautoparts.net by clicking on the U.S. Auto Parts Investor Relations tab. This call is being webcast and a replay will be available on the company's website through March 21, 2019. Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements within the meaning of the federal security laws and management may make additional forward-looking statements in response to your questions. The forward-looking statements include but are not limited to, statements regarding future events, our future operating and financial results, financial expectations, expected growth and strategies, key operating metrics and current business indicators, capital needs and deployment, liquidity, product offerings, customers and suppliers and competition. The forward-looking statements are based on current information and expectations are subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance. The forward-looking statements involve a number of factors that could cause actual results to differ materially from those statements. We refer all of you to the Risk Factors contained in the U.S. Auto Parts Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for a detailed discussion on the factors that could cause actual results to differ materially from those projected in any forward-looking statement. U.S. Auto Parts assumes no obligation to nor does it intend to update or revise…

Thank you operator and good afternoon, It's an honor and privilege to rejoin U.S. Auto Parts team as CEO after spending several years with the company between 2008 and 2014. In just five short years since my departure, the company and industry at large has seen considerable changes. Consumers continue to shift their shopping habits online. Since 2014, offline DIY aftermarket auto parts sales have only grown at about 1% CAGR while online auto parts sales have grown at an approximately 20% CAGR. Further, the online auto parts category is expected to more than double by 2023 to $29 billion, signifying its continued momentum. Over the years, U.S. Auto Parts has established itself as one of the premier online providers of aftermarket auto parts with some of its brands like JC Whitney dating back more than 100 years, when aftermarket parts were being sold through catalogs. Today, U.S. Auto Parts serves its customer through a variety of sales channels, including several owned and operated e-commerce websites, as well as multiple third-party online marketplaces. Over the last 18 months, the company has certainly not performed to its full potential and its financial results have been disappointing to everyone. 2018 was struck with various setbacks, some of which were largely out of the company's control such as the customs issue encountered at the Port of Norfolk. On the other hand, the company has struggled to revitalize its e-commerce business, as reflected by the continued e-com traffic declines since Q4 2017. I believe the struggle from our e-commerce channel have largely been internally driven issues as opposed to also structural business challenges. In fact, in just over two months since rejoining the joining the company, we have already identified multiple opportunities designed to revitalize our e-commerce channel and return U.S. Auto Parts to profitable revenue growth. This will require reallocation of resources and incremental investments in personnel, technology and new marketing strategies in 2019. Although there is much work to be done and near-term results will continue to be impacted by some of the setbacks from last year, we are committed to making the changes necessary to return U.S. Auto Parts to revenue growth in 2019. We have a solid foundation from which to build with talented and engaged associates, strong industry expertise specifically in private label products, a highly efficient supply chain and more than 1.5 million private label and branded products to serve a large and growing consumer base for auto parts. But before commenting further on our plans, I would like to turn the call over to Neil to walk us through the details of our Q4 and full year results for 2018. Neil?

Thank you Lev and good afternoon everyone. I would like provide a summary of the financials reported in our press release today as well as an overview of key business metrics. Unless specifically noted, I would like to remind listeners that all metrics exclude the AutoMD operating segment, which is being reported as discontinued operations following the dissolution of the AutoMD subsidiary in the second quarter of 2017. Moving on to our fourth quarter results. Net sales in the fourth quarter were $64.6 million compared to $68.5 million in the year ago quarter, representing a 5.7% decline. This was primarily driven by a decrease in marketplace sales with one of our channel partners and a 5% decrease in e-commerce sales attributable to a reduction of traffic and lower in-stock rates resulting from our customs issue. Private label sales were down 1% in Q4 and accounted for 76% of the net sales compared to 73% in the year ago period. Gross margin in the fourth quarter was 25.6% compared to 30.3% in the year ago period. The decrease was primarily driven by costs associated with port and excess carrier fees from the customs issue discussed on previous calls as well as an increased freight cost. Please note that we are now recognizing all port and carrier fees that were incurred in 2018 as period expense due to the one-time nature of these costs as opposed to amortizing them as part of cost of goods and have restated the prior quarters in fiscal 2018 to reflect that change. The auto parts industry has gotten more competitive both from a branded and private label perspective. At the same time, freight costs have continued to rise and we don't anticipate a change to that in the near-term. We expect both freight and competitive pressures…

Thank you Neil. As I mentioned earlier, since joining the company we have identified several opportunities designed to return U.S. Auto Parts to growth. Our company mission is simple, to deliver the right part at the right time through any device or any channel. To deliver the right parts, we need to enhance our backend architecture, restructure our data and catalog and deliver a best-in-class user experience on any channel we sell through. One of the first actions I have taken to deliver on our company mission has been to start to rebuild and strengthen our team to help us navigate the evolving the e-commerce landscape. In the last month, we have hired a new Chief Marketing Officer who has begun to build a world-class marketing team. We have also started building a user experience and analytics team to support both marketing and UX. Both of these teams are supported by our technology team, which is undergoing tremendous growth, both in the U.S. and Manila. These expanded marketing, UX and technology teams are critical additions that will look to execute on our new growth strategy. Following my review of our operations, it was clear that part of our internal missteps were driven by a lack of focus, which resulted from spreading our resources too thin. In order to focus the team and to deploy our assets most efficiently, we are in the process of reducing the number of websites we operate. This will allow for a more simplified development approach, more focused marketing and real attention to user experience. We plan to take a similar approach with our marketplace channel. The reality is that our marketplace business has grown at a strong trajectory these last two years and now takes up a greater share of total revenue than it did…

[Operator Instructions]. Our first question comes from the line of Eric Beder from SCC Research. Please proceed with your question.

Good afternoon.

Good afternoon Eric

Hi. Could you talk a little bit about when we look at some of these, what should be correct mix here in terms of private label? Actually, where did private-label end up for the year? And where do you think it can go? And where do you think it can take margins here?

Well, I think on the mix for the year, private label ended up around 73%. I think it still have quite a bit of room to grow. We re focusing our strategy on fewer sites and that will allow to also focus our strategy around merchandising higher gross margin products. So the thinking that we have now is that one of our sites will be tailored to private label products where we will fill all the gaps that we have. There are some part names where we don't have any private label at all today. Breaks, starters and alternators are just some examples. So we are going to fill out all the parts names. We also want to bring in private label products that are hard to find. Some of the examples that we recently brought in are dash covers for trucks. Those are higher AOV items. They are a little bit harder to find. And they allow us to enjoy a competitive advantage. And then we want to focus our branded strategy around performance and accessories, which are also MAP items that sell at higher margins. But our private-label mix will continue to stay at around 75%. Now what it will do to our margins, we don't really know as we mix shift into higher margin branded products, as well as more private label products. So we are not really sure what it will do to margins because there is also some freight headwinds that we are experiencing. So as we bring in larger parts, whether they are plastic or metal, it's more expensive to ship them. So we are not quite sure of the margin profile yet, but there a lot of opportunity in private label still.

Great. And when you look at the third parties you have right now, is the goal to shrink the amount of products they are offering or just to have less third parties, period.

So I think from a dropship perspective, what you may see is you may actually see us carry fewer SKUs. We still want to make sure that for every specific vehicles, very specific year, make, model, we are carrying a full assortment of parts that. But we may reduce the choices that the customer has to make. So instead of carrying 20 brands, we may carry five or seven. So we are going through that evaluation right now at a part name level and at a vehicle level. So you may see us reduce the number of SKUs, which will in turn reduce the number of dropshippers we have. But we are focusing on the customer and making sure that the customer can make the right choice when they are picking the parts.

Last question. I assume, given the accounting changes you did for the cost for the customs issue, that that will be, so what should we expect the impact to be in Q1 of the remaining customs issues that you have here?

Well, in Q1, Eric, we will be expensing anything that we incurred relative to the customs issue and really, there is just a trailing piece of some transload cost that will be expensed in the first quarter, approximately $300,000 range. Everything else that we incurred in 2018, as we stated, has been moved back as period expense into the appropriate quarter. So to your question for Q1, that's the remaining expense relative to the customs matter for the freight and the carrier costs that we incurred which is what we anticipate for Q1.

And just to add to that, Eric, I think as far as the costs in U.S. correct, however the customs issue caused a disruption in our supply chain and so what happened as the SKUs were being held up at the customs, we have to make different decisions about sourcing product domestically. And so it extended our lead times. So even though the customs issue, for the most part, is sort of dealt with, the supply chain still kind of bled into Q1. And so some of our out of stock issues that we are seeing in some part names is caused by that disruption to the supply chain. So while the real cost is mostly in 2018 and only a little bit in 2019, there is an opportunity cost that we are not really capturing and that we are seeing in the numbers today because we are seeing higher out of stock.

So you expect that to end by Q2 2019?

Correct.

Okay. Well, good luck guys for 2019.

Our next question comes from the line of Gary Prestopino from Barrington Research. Please proceed with your question.

Hi. Good afternoon. A couple of questions here. Neil, just some number questions. Can you give me what the average order value was for e-commerce and marketplace orders in the quarter?

Yes. We had combined the number we gave for consolidated. We will get the income number for you in one second. Do you have another question, Gary? We are getting that number.

Yes. And then what are your CapEx assumptions for this year? And with all of that what you are doing, which I want to get into a little bit more in terms of trying to lift your growth and the fact that the EBITDA is probably going to be down based on what you are saying, will you be having to tap your revolving line of credit this year?

Let me the answer the CapEx question for you. We are planning and forecasting our CapEx for 2019 to be around approximately $7 million. That's up from $5.5 million in 2018. As mentioned, we have various investments that we will be making that will run both through the P&L as well as through capital, but that will be something that will definitely get increased over prior years as we are investing in a lot of our IT infrastructure and systems and sites to reconfigure the platforms. Relative to the revolver, we have historically, at each quarter-end been at zero on the revolvers. But we have always utilized the credit facility throughout the year based on seasonality and based on our purchases. We are anticipating that there will be some quarters in 2019 that we may have a balance at quarter-end on the credit facility where in the past it's been zero. So I think that hopefully gives you some flavor that we have always used the revolver. It's just at quarter-end we have been able to clean that down to zero, but based on timing of some of these investments and inventory purchases, et cetera, there could be some quarters in 2019 that we will have some level of balance.

Okay. And then Lev, in terms of what you talked about, you went through a lot of things there in terms of what you saw, what you are going to try and do, et cetera to rightsize this company. If you could maybe just summarize it very simply, give us what you see are the key issues that you have got to turn around at the company to get to growth back? And how long is it going to take you to do it? Is this going to be all of 2019? Is this going to be a two-year ramp? You are talking about adding technology or architecturing the technology, adding people, et cetera, et cetera. So I would appreciate that, just so we know where you are coming from.

Yes. So I think, to put it simply, the way we are thinking about it is, our mission is to get you the right parts at the right time at the right place. And what we mean by that is, we want to make sure that you buy the right parts for your vehicle. We want to make sure that it fits. So we have got to show them our catalog and data. We have got to show you fewer choices so that it becomes easier for you to pick. The right time is we have got to be able to ship it to you quickly. So we have to make sure that our inventory is in the right position. We have to make sure we are close to the customer. And the right place is, it's regardless of device which you are shopping on and we also want to start tapping into the do-it-for-me market. Meaning, that it doesn't matter how you want to install the part, whether you are going to do it yourself or whether you are going to have somebody else install it for you, we want to be able to deliver the part for you. So that's the strategy simplified. Now, in order to execute on that, we are going to need to shore up three areas that I have identified. One is marketing. The other one is technology. And the third one is user experience. So all the investment that you will see this year and throughout this year will be into those three areas and towards the three things I just identified. Right part, right time, right place. So that's kind of how we are thinking about it. As far as the timing, you know, you can't really rush it to much and we are trying to spread out the investment so that it's kind of timed well with our quarters but we expect to see some benefits towards the end of this year, but it will definitely spill over into next year.

Okay. Thank you.

So Gary, the average order value for e-com for the fourth quarter was $95 versus the prior year was $100. The marketplace was $73 versus $67 prior year. So we had a little bit of a decline on the e-com side as we got more aggressive in pricing and marketplace was higher than the prior year based on the mix changes that we have had on product in that category. The total, as we stated, was $85 for both versus $82. So in total Internet, our average order value went $3.

Can I just ask one more question in terms of what you are doing, Lev? Are you going to be putting more of an emphasis on driving the e-commerce site growth, revenues through the e-commerce sites versus the marketplaces? Is that the end result here of what you want to try and establish?

Yes. So the goal is to adhere to best practices in the marketplaces and to allow the marketplaces to grow at the same rate that the marketplaces themselves will be growing and to really grow our e-commerce business to focus on discovery, to focus on pre and post purchase customer experience and to really grow the e-commerce business.

Okay. Thank you.

We have reached the end of the question-and-answer session. And now I will return the call over to management for closing remarks.

Thank you all for joining the call today. We look forward to meeting with some of you at the Morgan Stanley Aftermarket Symposium later this month as well as the Cowen Future Of The Consumer Conference. in April. I couldn't chat then. We look forward to speaking with you next when we report our first quarter results in May.

This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.