Good day, ladies and gentlemen. And welcome to the Motorcar Parts of America Fiscal 2018 Fourth Quarter Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time [Operator Instructions]. As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Gary Maier, Investor Relations. Please go ahead.

Thank you, Jonathan, and thanks everyone for joining us. Before we begin and I turn the call over so Selwyn Joffe, Chairman, President and Chief Executive Officer, and David Lee the company's Chief Financial Officer. Let me remind everyone of the Safe Harbor statement included in today's press release. Private Securities and Litigation Reform Act of 1995 provides the 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 Motorcar Parts of America. Actual results may differ from those projected in these 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, I refer you to the various filings with the Securities and Exchange Commission. With that said, I would like to begin the call and turn it over to Selwyn Joffe to begin.

Thank you, Gary. I appreciate everyone joining us today. Let me begin by highlighting that we achieved record sales for the fiscal fourth quarter and the full year. Despite industry softness and a disappointing fiscal third quarter, which was due to factors explained during last quarter’s call, and commentary provided by industry followers. Let me be clear, while we are encouraged by the results for the fourth quarter, we are not satisfied with our year end profitability. While our results have suffered this last year from events, which we believe are predominantly industry driven, we have been focused on continuing our philosophy of aggressive, but controlled growth. I can assure you that the statistics for our business indicate reason for optimism, and we as a company, are embracing every opportunity to be ready for additional top and bottom line growth, both organically and through acquisitions. To mention a few notable accomplishments during the past fiscal year, we increased market share in all of our product lines, including our rotating electrical market share to an industry-leading 45%. We opened a new state-of-the-art 410,000 square-foot distribution facility to consolidate shipping and enhanced capacity to handle our new business wins, which bodes well for operating efficiencies as we transition over the next nine months. We scaled our Chinese and Malaysian operations for similar reasons, and continue to increase utilization of Torrance Technology Center to support education, innovation, data management and quality control systems. We completed our acquisition of D&V Electronics, which got us into the rotating electrical and electric vehicle diagnostics business. And we increased our operating personnel to support our ongoing growth, including the launch of new product lines. All of these efforts have contributed to our ongoing success of maintaining existing share and in gaining new market share, adding at least…

That you, Selwyn. I will now review the financial highlights for the fiscal 2018 fourth quarter. Before I begin, I encourage everyone to read the 8-K filed this morning with respect to our March 31, 2018 earnings press release for a more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10-K, which will be filed later today. Net sales increased 5.9% to a record high $121.1 million for the fourth quarter from $114.4 million for the prior year fiscal fourth quarter. Adjusted net sales increased 7.8% to a record high $123.8 million for the fourth quarter from $114.9 million net sales for the prior year. The adjusted net sales increase of approximately $8.9 million was due to the following; rotating electrical net sales increased $7.6 million to $99.8 million for the fourth quarter from $92.2 million for the prior year. Wheel hub assemblies and bearings net sales decreased $3.7 million to $17 million for the fourth quarter from $20.7 million a year earlier, impacted by lower update orders in the current quarter. Brake master cylinder net sales increased $1.7 million to $2.2 million for the fourth quarter from $516,000 a year ago. Additionally, the combined net sales for the fourth quarter for brake power boosters, turbochargers and testers, increased $3.3 million to $4.8 million from $1.5 million in the prior year. The prior year had no tester sales. Gross profit for the fourth quarter was $30.3 million compared with $31.6 million a year earlier. Gross profit as a percentage of net sales for the fourth quarter was 25% compared with 27.6% a year earlier. Gross margin was impacted by customer allowances and initial return and stock position accruals related to new business, transition expenses in connection with the expansion of our operations in…

[Operator Instructions] Our first question comes from the line of Brian Nagel from Oppenheimer. Your question please.

So first question I have, I guess, for Selwyn. In last quarterly conference call, you spent a lot of time discussing the headwinds to sales, the inventory destocking and whether. Clearly, sales improved nicely here in the fiscal fourth quarter. So question I have is, if you look at the factors that we discussed last quarter, did those completely abate? Did we get all the sales back as expected?

That’s a great question, I’m not sure I can answer it with 100% facts. But we have a lot of that on our categories. We generally are category managers for most of our customers. We believe from what we’re seeing that the industry, actual demand that the industry registers is definitely going through an inflection point. And that we think that the market is starting to recover. Having said that, the April month and I think it's been published before us by others, was a very weak month in the industry. I believe going forward that the majority of the industry has recognized, and been through their inventory retrenchment. And that as demand grows, which we believe it will grow, that we are going to see a transformation starting in the second quarter of this year. We usually see registered transactions affect us usually two to three weeks, maybe four weeks in [indiscernible] and we believe that there is a change coming. So while we’re cautious, because I’ve been “ahead of the market before” I really am a big believer in statistics. The statistics haven’t changed. The statistics shows that the future will be -- there will be an uptick in the future demand for these products. I think it’s shared by most of our leadership of our customer base. And quite frankly, we’ve had a tough year. But I think we're coming through an inflection point and with all market share gains and the recovery in the industry, we should be recovering those types of sales. I don’t know how you recover them, because ultimately whether it’s in this year or the next year, all these vehicles are going to fail. We’ve got a sweet spot that will now start growing again based on the fact that the eight to 11-year-old vehicles are now -- from eight to 11 years ago, are now starting to phase out of that category, and getting more vehicles into that category. Demand -- fuel prices are relatively moderate still, even though we’ve seen an increase, miles driven are up, number of new products coming on the road. So I think the next three to five years for our industry are extremely solid. I think there is going to be some shift between the DIY and DIFM, but at the end of the day, both I think will continue to be strong. And our product lines are not going away, they will continue to be strong and they’ll continue to grow. And sorry to give you such a long winded answer, but we are ready and we believe that we’re going to be big benefactors from this growth, as it comes forward.

One follow-up question, if I could. I guess also somewhat longer term in nature, but if you look at the components sales growth of your business and then obviously what's happening to your customers. Has the dynamic between units and price shifted? In other words, are you seeing it -- you're selling fewer products at higher prices now or there’s some type of shift like that happening?

I think, that’s a great question, and the answer is yes. We are -- the volume of units is not as robust as it was. But the average price of the unit sold is going up. And the reason I believe for that is not so much that demand has changed, is that the professional installer market is being penetrated more by the channels that we supply in the aftermarket. And so the professional installer market generally has a later model vehicle, and as the vehicles have more technology on them, the average price point of those -- of that repair goes up. We see more longevity in the quality of parts coming of the OE, so the sweet spots move back a little bit. We think that medium term and longer-term has a positive thing, short-term you go through a little bit of a swing, because your first replacement is deferred, but vehicle stays on the road longer. And replacements should go up as a percentage of the number of replacements for vehicle on the road. And as this car pool gets more of this new technology that's coming on the road, hopefully, we’ll see units go up in terms of failure and prices will continue to go up.

Thank you. Our next question comes from the line of Matt Koranda from ROTH Capital. Your question please.

Just wanted to get a better sense for what precisely was the excess customer freight surcharge allowance that you guys referenced in the release and the prepared remarks?

So in general, I would say and I don’t know if this ratio is right. But approximately 50% of our freight is handled by our customers on an allowance basis, and the other portion is handled by us. There are percentages that we pay as allowances when the customer handles freights. Very rarely and certainly in this case, there were surcharges that came in for freight that were unusual, I mean, that should -- that would not be normal. I mean, usually the freight rates go up and you start paying them. In this case, we’ve not only paid incremental freight but we had a catch up in some freight.

But why would they be charging you excess freight. I mean is it just the driver shortage, the general freight issues that we've been hearing across the board for everybody, or was there weather related issues that they charge you a surcharge for?

No, I think it's just the same -- the former what you said. There’s driver issues, there’s capacity issues. I mean, freight has been a pretty vibrant area of the cost structure right now. I mean, right now we’re heavily focused on keeping that under control, but that's what's it's been. I mean other than that -- I mean the numbers reflect new freight costs already.

And what percent of your cost of goods is freight if you can remind us what that is. And on a go forward basis, how should we be thinking about how that impacts gross margins?

It's fairly small. I think you saw -- I mean, our guidance is -- we pulled back gross margins by 0.5 point. I mean, that's predominantly where it’s freight related. So I mean, I think at the end of the day, about 0.5 point in the margin.

Wanted to get a sense, I know you guys provided some good color just in terms of just the $40 million in new business and that coming on in the back half of your fiscal year. But could you give us a sense for the cadence of year-over-year revenue increases during fiscal '19? I mean, what should we expect for Q1 and Q2? I mean, I know you referenced April being relatively tepid month for the industry. So I guess what we should be expecting as acceleration in revenue growth as we go through the year, or just little bit more color on how to think about cadence?

Clearly, we are starting already to ramp up new business, and it’s going to come as it comes and unfortunately, that for us is very difficult to predict. I mean a lot of that is driven by events at our customers that have given us the new business, how long they’re willing to wait, how long they want to take for transition. But in general, I would say that, and going back to the quarters is that, I think that first quarter of our fiscal year was relatively flat. And I think you'll see exponential growth each quarter thereafter sequentially. We also expect to launch new products and that will come at the latter part of the year as well. The guidance we've given by the way does not include any estimate for new product launches at this point.

And then just staying on cadence for a second, I know that -- so April was relatively slow. But I mean could you talk a little bit about May and what you saw I guess since you guys see all the POS data. Would it be -- it'd be helpful to hear what you observed as Spring wore on, and we kind get into the early part of the summer here?

Certainly we see POS data and in general for the industry picking up. So that’s -- it's been a long time since we’ve seen that, and so that’s very significant indicator. Of course it’s still is not -- we don’t have a long history of that yet. April was definitely was a tough month for the industry. I think when you look at May and June, sequentially it picked up. And more important to us is understanding the data and why we can't disclose any one category or anyone customer, we certainly see a pickup in registered transactions. So in some cases now, outpacing where the prior years were, and which has been -- we've not have that for long time. We’ve had significant reductions in that for a long time now, last year, year and half. I’ve been accused of getting ahead and sometimes of losing integrity by predicting turnarounds. I mean, I continue to be probably more outspoken than I should be. But I am big believer that we are about to see a turn in demand for our product lines. Again, I think the first quarter, just to reiterate, flat and then I see sequential momentum building. And with that regard to our new business, with regards to our additional market share on all of our product lines, and then obviously late in the, which again we haven't given guidance for we don't know the exact dates, but we expect to launch some new product lines or any new product line by then. So I can't give you more color on the quarters, but I definitely expect to see a turn -- beginning of the term of this industry.

I’ll just ask one more than, and then I’ll jump back in queue. What’s the pricing discussion like on your existing contracts that are coming up for renewal? Just curious to get your sense for how aggressive are your customers being in terms of the price down asks, just given that they're dealing with their own margin pressures. Are they coming at to you guys and looking for any give backs on the pricing fronts, or are things relatively steady?

Well, first of all, I'd say I'm sure our customers are listening to this answer. So they probably get a smile on their face when I’d say that they have never -- not been aggressive. They are always looking for opportunities to reduce their costs, they are extremely aggressive. I would say that hasn't changed. Even in good times, they are aggressive. So we live in that environment. I think we are good at managing that environment. So I think at the end of the day, our customers understand our value. And that while they're extremely aggressive in getting things that they need for their initiatives, they are also cognizant of supporting us in our quest for growth and for profitability. And I believe that the performance that we have with them enables us to be able to cut fair deals for the most part, going forward. Although, sometimes you always feel like you did get a little bit whacked, but that's the nature of dealing with our big customers, and our small ones for that matter.

Thank you. Our next question comes from the line of Steve Dyer from Craig Hallum. Your question please.

With respect to the $40 million of new business, can you help us segment a little bit what segments or what product lines those might be in?

Steve, unfortunately, I can't give you any more color on that. I mean, other than I would say they're in all of them are existing -- all of these gains are in existing product lines, some of them may or may not have been announced by others. So at this point, I can’t really give you any more color on that.

Can you narrow it down to primarily re-man versus distribution?

No. It's not fair to our customers and our competitors and on and on. But I just cannot do that.

But presumably that mix is in your margin guidance for the year?

Correct.

It doesn't sound as there's any anticipation of new product launches this next year. Is it just not in the guidance, or we're probably just not going to have anything in the next 12 months?

No, I think you're going to have something in the next 12 months. I mean, we're active and we are going to have some -- we're not giving guidance on those numbers yet, because we're not sure exactly of the timing of all of that. But we're very excited about new product launches, but the guidance does not include them at this point. We'd be very disappointed if we weren't able to get to some significant launches this year.

And then it sounds like, I think you have said, Q1 is going to start a little bit soft. And I think did you say flattish revenue year-over-year and then growing from there?

Yes, and I think we've given you the 6.5 to 8.5. We don't want to get ahead of our skis -- we internally are very excited about the growth opportunities. We certainly will be pushing to try and beat those numbers. But we want to make sure that we don't get ahead of our skis.

And then as it relates to interest expense, obviously, with interest rates going up, should that. Should interest expense as a percentage of revenue be any different than it has been? I mean, obviously, it tracks revenue higher. But from a factoring perspective, would you anticipate that as a percentage of revenue we should be modeling more than we have?

It will be higher. With the increasing rates and also because we have more draws on the revolver to support the inventory growth for this new business. So I would say going forward, it would be closer to about 4.5% of sales, you have factoring, you have borrowing interest, as well as low fee amortization. When you add it all up, it’s going to be close to 4.5% of sales.

Thank you. Our next question comes from the line of Chris Van Horn from B. Riley FBR. Your question please.

I was wondering if you -- when you look at the product portfolio, are there white spaces or new products, categories that are complementary to what you’re doing now that you’re looking to get into. Or is it just the share gains that you’ve been able to get momentum you’re just going to follow going forward?

I’m not sure I understand the question. Chris, can you restate that -- I missed that?

I am just wondering if there is other product categories outside of where you are now. So anything that complements maybe a wheel hub or complements what you’re doing on the brake side. Are there new product categories you want to get into that expands the SKUs, if you will? Or do you -- or you’re going to continue down the path of just taking share in these existing product lines, because that’s worked pretty well?

No, we are going to -- continue to take share in interesting product lines and we are going to extend our product lines. Absolutely, we’ll do both. There’s many opportunities in the marketplace and there’s 125 plus of billion dollars of products opportunity in North America. And we think we’re tapping about 4.5 billion to 5 billion of opportunity right now, and we’re going to expand that. We think our customer level support and the relationships and integrity of our performance, historically, will enable us to get ongoing business in more categories and in our existing categories.

So if we think about like two years out, the product portfolio might look -- is going to look different?

It will, yes.

And then what is -- you talked about share gains just quarter-after-quarter. And what dynamics are going on in the marketplace that allows you to continue to take share, because it’s just continuing to happen.

I think the most fundamental dynamic is that we are a consistent supplier and a trusted supplier. We offer a program and we look by what we say we’re going to do. Our products perform. Our customer support levels are excellent. Our fill rates are excellent. And the integrity of just the whole process is excellent. You place an order and you get your order, and then -- and you get it on time with the product that works. And we think we are at the top of all of these metrics in the industry. And so there’s no one thing that’s winning business for us. I think I’ve said it before, it’s a thousand little things that we do but we do it more, and that’s our philosophy.

And then last one from me is, if you think about the inventory reductions that we saw and some of the softness from a consumer demand standpoint. I imagine that there’re some smaller players out there that that have struggled, and might be -- entertaining the acquisition market. I was just wondering if you're seeing that in the marketplace, if you’re -- you’ve always looked at acquisitions. And just what you're seeing out there in terms of potential candidates for you guys?

I think the market has been tough for a lot of people, and there’s a lot of inventory out there for sale. We are not looking -- we’re looking for quality opportunities. We’re not desperate to make an acquisition to maintain our growth rates. We think our growth rates are going to be significant. Our run rate at the end of this year could push up to significant double-digit from all the new activities that we have going. So we see a lot of inventory. I mean what's interesting to us, for those who are listening to this call that want to call us, we’re all ears, is we’re looking for bolt-on acquisitions that can bolster what we offer today, and we are looking for companies that have proven track records of success in other categories that we believe have longevity. And we will continue to look at that. We have a banking syndicate that we feel is very strong, and is very supportive. And that the ability to finance the acquisitions, whether it’d be small or large, is easily available for us.

Thank you. And this does conclude the question-and-answer session of today's program. I’d like to hand the program back to Selwyn Joffe for any further remarks.

Once again, I appreciate everybody's support. I know it’s been bit of a wavy year for us and certainly we’re coming through this, and all the proof will be in the putting. And we certainly, I can assure you, management team is working vigorously to ensure that we accomplish our goals and successes. And I want to thank the management team to watch them in action has been purely a pleasure, and for their dedication and commitment, the transition team into our new warehouses, expansion of all our facilities around the world, the sales team, category management, cataloging teams, and that all operating on all cylinders. I think we have the best team in the industry, and I have no doubt that, to the extent of this opportunity, we will be able to take advantage of it. So thank you everybody, and look forward to future correspondence. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.