Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America Fiscal 2012 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like introduce our host today, Mr. Gary Maier of Investor Relations. Sir, please go ahead.

Thank you, Karen, and thanks, everyone, for joining us for the call today. 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 a safe harbor for certain forward-looking statements, including statements made during the course of 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 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 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 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. I would now like to begin the call and turn it over to Selwyn Joffe.

Thank you, Gary. I appreciate you joining us today for our fiscal 2012 third quarter conference call. I especially want to thank you for your continued patience and support as we completed the company's fiscal 2012 third quarter 10-Q, which will be filed this afternoon. We are now caught up with our quarterly reporting and look forward to issuing on schedule our results for our fiscal year end March 31 by mid-June. Notwithstanding results for the quarter and 9 months, our transition initiatives related to the Fenco acquisition are progress -- are progressing. Given the delay in filing our first fiscal third quarter results, it's important to recognize that our progress with regard to the Fenco transition is not really reflected in today's financial results. As of today, we have already instituted changes to the Fenco model, which will result in enhancing profitability by $16 million. A portion of these benefits started in February and will be phased in to the end of the third quarter of fiscal 2013. Majority of the costs related to these initiatives have already been expensed as of December 31, 2011. In addition to these costs identified, there will be initiatives undertaken that will further reduce costs. These expenses related to these initiatives will be recognized when these initiatives are implemented. As of today, we have vastly improved product fill rates for the under-the-car product line. We have closed and restructured various product lines for this business segment and are selling down remaining inventory in these lines. We have made significant progress in restructuring our warehouse and freight arrangements. We have started to effectively move the selling price point up in key categories, which will start to be reflected in the third quarter of this fiscal year. We are diligently working in this regard on…

Thank you, Selwyn. As mentioned in MPA's fiscal 2012 third quarter earnings release this morning, results of operations for the period ended December 31, 2011, were impacted by the operations of Fenco, which is the under-the-car product line segment, as the integration strategy progresses. The negative gross profit for Fenco was primarily a result of higher returns as a percentage of sales following strong sales in the second fiscal quarter, legacy aggressive product pricing, higher customer allowances being provided and high manufacturing cost due in part to the under-absorption of overhead on lower production levels. As we integrate the Fenco business, we are addressing pricing and the efficiency of all of our operations, including production, warehousing and logistics as part of the turnaround strategy for Fenco. We have already made progress in each of these areas. In addition to the overall negative contribution on our under-the-car product line sales, our gross profit was also significantly impacted by our decision to close the production facility related to the CV axle product line in December 2011. The negative gross profit impact of the closure was $5.5 million for the third quarter. Of course, this closure will result in enhanced overall margins moving forward. We will further discuss below the impact of the gross profit for the under-the-car product line segment of prioritizing customer fill rates, including premium inventory purchases and freight expenses. Additionally, we'll further discuss the impact of a loss on other product lines not supported, additional product production cost, contractual customer penalties, unique current period customer allowances and rebates, noncash purchase accounting, inventory step-up adjustment and nonrecurring professional fees related to the integration. While in the middle of the integration process for Fenco and the under-the-car product line segment, and as Selwyn mentioned earlier, MPA's base business in the rotating…

Thank you, David. We believe our proposition for our business remains exciting. We've increased inventory levels to meet increased demand for our products and for new business, which continues to gain momentum. We continue to experience steady growth in both of our business segments. And we are committed to the highest levels of customer service in line with our MPA standards. We are still very excited about the future opportunities for Motorcar Parts, both in terms of the continued strength of our base business and the opportunities we expect to realize through the Fenco acquisition by leveraging our strong customer relationships, with a solid revenue base and a great selection of nondiscretionary under-car-parts. Our Quality-Built brand name serving the professional installer segment continues to expand, and we remain focused on further leveraging key production advantages to expand our business further. The Fenco acquisition and other potential complementary future transactions underscore managements commitment to growth and enhancing shareholder value. We expect to more than double our sales for this fiscal year, and we are working hard to complete the Fenco transition plan to grow earnings. In summary, the long-term market statistics for our industry remain favorable, and we are still excited about the opportunities. I appreciate your interest in Motorcar Parts, and I'm happy to answer any questions that you may have.

[Operator Instructions] Our first question comes from the line of Jimmy Baker from B. Riley & Co.

First, the $16 million in improved profitability at Fenco that you expect, first, can you just repeat the timing of that recognition? I just missed it. And I assume that includes the $6 million in savings from terminating the CV axle business? But could you maybe elaborate a little on how you intend to get to that $16 million number just in terms of cost reduction versus, let say, improvements in pricing of your customers? And maybe within the framework of that you could just talk about the response from your customers on product line terminations and your product -- your pricing efforts?

Let me let David address the cost savings first and then I'll talk about the customers.

Well, the $16 million savings includes what we believe will be future savings realized from February through the end of the first quarter of this current fiscal year. And you wanted to know if that included the discontinued product lines? That does not include the discontinued product lines.

So the $16 million is incremental to the $6 million that you discussed on the last call from -- that you would save by terminating the CV axle business?

So going forward, that would be $16 million.

Right. So an additional $10 million in other, let's say, categories or ways that you've found to extract cost?

No, the $16 million additional.

Okay. Understood. And the response from customers?

Well, essentially, we've eliminated the CV axle business. So we certainly will not ever let our customers down. Our #1 priority at MPA is to make sure we don't let our customers down. So we communicated the transition. We made sure that there was supply all the way through the customers finding alternative suppliers. And so the response actually went quite well with the customers and they have successfully transitioned to new supply.

Well -- and maybe you could just close that with any pricing efforts on your behalf to kind of raise prices, or more appropriately, price some of the continuing Fenco line?

Yes. I think, to be honest, in certain areas there's -- certainly the customers have been responsive to that. We believe that we'll be able to take prices up. We have secured price increases for a number of our product lines across the board. And of course, getting price increases is never easy, but I think if you have rational pricing and competitive pricing, you can accomplish it. I mean, I think the legacy pricing of the business has been just too aggressive. And so we intend to, while remaining extremely competitive, we intend to normalize the pricing in the marketplace.

Okay. And Selwyn, I think you mentioned that you have the ability to downstream another $20 million or so to Fenco, but then I think you also noted that you already expensed the charges or the overwhelming majority of the charges needed to achieve your incremental profitability targets? Can you just maybe help me reconcile that and...

I think from the $16.2 million plus the loss of the discontinued operations on CV axles, almost all of that has been expensed already in -- through the end of the December period. We intend to take out at least another $10 million of cost, so those expenses related to that will have to be expensed as we take those costs out. So we should see, starting in the June quarter, we should see improvement in our numbers. And I think as we get through the end of October, where more of these things will have been more fully baked in, at that point, we should see significant improvement in the numbers and then we feel like we're still on track to get to our May target.

Okay. I just have a couple of more and I'll back out and let someone else ask questions. I guess, could you just help maybe -- in fiscal year '13, what level of cash costs or, let's say -- and combine that with maybe necessary investments in working capital that we should be expecting as kind of onetime charges here?

Onetime charges? I'm not sure I understand the question, but let me try and paint a picture and see if this answers your question. We expect an additional working capital requirement in Fenco of around $20 million, and we expect to continue to grow EBITDA and cash flow on the base business at MPA. I don't know if that answers your question. I wasn't totally sure exactly what you're asking.

So we still have the $20 million in inventory build or working capital build, but any additional just cash cost, that would be kind of onetime items that we should...

They will be. I mean, because there's -- obviously as we rationalize the expense structure, I mean, there's going to be some onetime cost -- cash costs of doing that.

But there's no estimate for that at this time, or that you are willing to share?

No. I think in the full -- in that $20 million of capital, we were hoping that that $20 million in capital would include any working capital adjustment and the onetime cost.

Okay. And then lastly, I think David mentioned a negative impact in the quarter from aggressive pricing in the rotating electrical business? Could you just...

No, no, no. Not at all in rotating electrical. That's strictly applied to Fenco. We have not -- the pricing structure in rotating electrical has not changed at all, and we expect our margins again to normalize around the 32% level and expect to continue sales growth. Go ahead. David has a comment.

And Jimmy, if I can clarify once again, the $16 million of enhanced profitability mentioned earlier in the call, just to confirm again, that does not include the savings from the discontinued product lines.

And our next question comes from the line of Mark Tobin from Roth Capital partners.

You had mentioned your target. Selwyn, can you provide some color on, I guess, the targets in -- if there's been any changes as far as the trajectory of how you're seeing yourself get there?

Well, I'll tell you, certainly this quarter was somewhat of a setback in terms of understanding the cost structure. We knew that we had a soft quarter. I think as the Fenco numbers are softer than we anticipated, I think a lot of that differential in our expectation came from -- we just came off a very strong sales quarter with Fenco. And generally when you have returns of product, and you come off with strong sales quarter and then you going to weak sales quarter, the returns as a percentage of the current quarter get higher. So we think we're experiencing a sort of the perfect storm in this quarter. But I could tell you that our expectations continue to be that we will be able to hit the targets that we've announced before, which is we expect the $35 million base EBITDA results for our base business and we expect to hit by May of next fiscal year approximately $20 million in EBITDA in the Fenco business.

Okay, that's helpful. And as far as the reporting, David, you had mentioned reporting your year end by a month out, which implies that it is on time. Is the review complete at this point, or can you give us an update on the accounting side?

Yes. So subsequent to the March 31 fiscal year end, the rotating electrical segment has already taken place. And since we have this finished, the reporting for the under-the-car product line segment -- we have already begun working with our auditors to review the year end numbers and plan to file by the due date of June 14.

And our next question comes from the line of Matt Sherwood from Cooper Creek Partners.

Just wanted to dig in to that $16 million a little bit deeper. The question was asked, but what's the baseline Fenco earnings? Is it 0 EBITDA or is it the last 9 months' loss of, say, $6 million or EBITDA before...

That is the question that we're still trying to come up with a fundamental answer. I mean, right -- and my comments a little earlier is that this quarter loss was greater than we expected on the Fenco profit line. We need to dig in and understand just where we are from a normalized perspective. And that -- certainly as soon as we get comfortable with that, we'll give the public more guidance. By that is a very significant question. I don't think it's a question we're capable of answering accurately right now. And that certainly will affect the target EBITDA for me. We -- as we transition our accounting systems onto the new -- our new platforms we'll be in a far better position to give you -- to give more effective immediate guidance. I mean, it is very disappointing and -- that we were not able to get the data as fast as we need and as accurately as we need on a timely basis so that we can understand what that exact base business is. From our diligence process, we -- certainly, when we completed the diligence, we assumed between a 0 and $5 million EBITDA base business, and we certainly hope that that's still the case, although this quarter does not reflect that.

What do you think a worst case scenario would be for the Fenco profitability before cost improvements?

I think that worst case scenario is assuming the 9 months starting point. I don't think -- we certainly believe the numbers will get better in this quarter and so we think that's the worst case scenario. But I think it's a little early for us to comment, but that's certainly what we think the worst case scenario is.

Then, and just -- I know the question was asked, but just to go ahead at it differently. In terms of the phase-in of the cost cuts, the $16 million, is half of it done through this February cost-cutting and termination of the CV axle line? Or, just can you give a little color on the phase-in. You said between February and the third quarter, but that's a big period.

All right. So, yes, we can give you a little bit of an idea. I mean, it's not all -- at least 25% to 30% of that and I'll let David take it in more detail, but 25% to 38% of it will occur in the third quarter, in that September, October timeframe. David, do want to -- can you offer more?

We had talked about those savings coming from February 2012 through the third quarter of fiscal '13. So I would say it will be spread out. It's not going to be...

It looks fairly consistent.

Yes. Yes.

So yes, a fairly consistent build starting February 1 through October.

So about a third, a third, a third, it sounds like, sort of quarter-by-quarter.

That's probably a good assumption, yes.

All right. And then last question, just on this right of first refusal to buy back Mel Marks' [ph] shares, can you talk about that?

Yes. I think Mel is in, certainly in later stages of life and he's in the process of planning his estate. And we want to make sure that to the extent that any shares are put on the market from him, that the company has first right of refusal so that there's not this perpetual overhang [ph]. We don't have a blanket authority to buy back shares from our lender, but our lender has agreed to evaluate buybacks as we request as we go down the road.

And you have $50 million in liquidity?

Yes. We have $50 million plus in liquidity right now.

[Operator Instructions] Our next question comes from the line of Jay Kumar [ph] from Midsao.

What's the line item called customer core return accrual? You had a lot of returns?

The customer core return accrual is for the remanufacturing business when the company sales a core and they value add a unit portion or a complete finished good to a customer, and you charge that customer, the customer has a right of -- right to return that core for a credit in the future. So on our balance sheet, we established an accrual for that liability that we would pay the customer when they return the core portion of the finished good in the future.

That core portion relates -- that's the inventory that we need as component inventory to rebuild those items.

Okay. It's not something that you sold, then you would return -- going to come back and you're holding it [indiscernible] something like that?

No, no. It's part of our exchange program. So the whole concept of remanufacturing is you sell the unit, and what you do is you offer the customer incentive to get the ultimate consumer to return the old unit so that you can remanufacture that. And that's part of your inventory. So you want as high a possible return number there as possible.

Okay. And $16 million, is it a combined Fenco and the other business? Or is just the Fenco business?

Fenco alone.

And we also have a question from the line of George Berman from JP Turner Incorporated.

Can you maybe comment a little bit on what things have gone right in your view and what kind of synergies that you had expected have come to pass or you feel are coming to pass shortly in terms of adding customers to your MPA line versus Fenco and vice versa?

You know what? I'm glad you asked that question because we're getting mired in the detail of some poor numbers and I appreciate that question. I would tell you that most excitedly, and I mentioned it a little bit in my presentation is that there are product lines within the Fenco acquisition that are doing fantastic. We're experiencing tremendous growth in our brake offerings. We're experiencing tremendous growth in our driveline business. We expect to see high double digits and I mean 10% to 20% growth in these businesses. And we are profitable in those businesses today, and expect to make them more profitable. So as far as the strategic value of what's happened, I mean, strategically it's been -- despite a lot of complications and the integration, the strategic value of having these product lines has been tremendous for the company. Just left in the profitable product lines that we have, I mean, we're still in a position to double revenue and to have existing profitable product lines. We hope to convert the others to being profitable. And the demand for that product, not only on an existing, same customer basis, because we are seeing our customers, as we have enhanced flow rates and our quality levels have improved dramatically and service levels and our category management is improved dramatically, our customers are starting to see tremendous market share gains, which is excellent, and that's what we're looking for. And we haven't really begun marketing our products for new sales opportunities. I think this week, we are launching -- we have our big sales meeting and we'll be launching strategies to take these profitable lines and expand them further to the rest of our customer base. And we're excited about that opportunity. I mean, we've got a lot of work to do to fix some of the metrics in the nonprofitable lines, but the profitable lines are very -- are a breath of fresh air. And we think that's -- certainly on a worst case scenario, those profitable lines are -- alone, will make this worthwhile.

Great. So while slow, it does seem to all come together for you?

Yes. I think the premise of acquisition continues to be a sound one. We certainly are not happy with the results. We find them unacceptable. And we are moving rapidly to make the changes to accelerate seeing results like this repeat. So we think that the ability and the flexibility that the new financing has given us has deleveraged us fairly nicely and a positive cash flow in our base business and the banking relationship that the Fenco bank has been tremendous in working with us. And we believe that we can execute and get the transition completed.

And we also have a question from the line of Jacob Muller from AYM Capital.

Can you just comment about the most recently completed results at the Fenco subsidiary compared to the currently reported quarter?

Yes. Unfortunately, we're not in a position to give you any guidance on those numbers because of the delay in the quarter. As you can imagine, we are still now going through the review process of the final quarter. The guidance that we are giving as we expect sales to, certainly on a combined basis, to be north of $90 million for this quarter and are seeing, certainly seeing a rebound in the business. We expect the numbers -- and again, this is preliminary, but we expect the numbers to be better than this quarter.

What kind of normalized gross margins are you're targeting at the Fenco subsidiary?

20%.

And on the financing side -- and the recent financing was obviously quite dilutive and hit the stock pretty hard. What are your thoughts about financing these going forward? Will letting [ph] more capital raises be necessary or do you believe that you have enough to get you to where you want to go?

Yes. We believe we have enough. We expect to -- we do have a commitment from our lender to increase the term loan by another $10 million should we decide to do that. And so we believe that -- we believe that there's more than adequate liquidity.

And we also have a question from Justin Putnam from Talanta Investment.

I just wanted to follow on that last question and see -- maybe you can give a little more detail about the circumstances around the private placement [indiscernible].

Yes. I think the key strategy for us around the private placement was to try and limit the amount of debt and just -- we felt like the amount of debt levels -- we're just so resistant to taking on additional debt and to be more conservative in taking on equity. Certainly, it was dilutive, but we feel like the cost benefit of having the equity in the near term will certainly far surpass the dilutive nature of the raise. And when you look at the cost of the debt capital in comparison, and you look at the relative dilution compared to raising additional debts and the interest expenses that we would have to pay relative to the equity, we felt like that certainly that the risk reward in the equity was a far better decision.

How did you come up with that amount? And also, what was the process involved in picking people to participate in that offering?

Well, the amount was -- we had a requirement in our existing loan agreement that we need them to raise $15 million of junior capital to the senior lender. And in return for that, we would be able to downstream $20 million of capital into Fenco.

Okay. And the second part of the question?

I'm not sure I understand, what's the second part of the question?

What was the process involved in picking the participants in that private placement?

We hired an underwriter and they did the offering for us.

And this concludes our question-and-answer session for today. I would like to turn the conference back to Selwyn Joffe for any final remarks.

I just want to thank everybody, appreciate everybody's patience. We're certainly working diligently and expeditiously to complete this turnaround and we look forward to better results and more timely filings. I appreciate everybody's patience and commitment. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.