Ladies and gentlemen, thank you for standing by and welcome to the Motorcar Parts of America Third Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]I will now like to hand the conference over to your speaker today, Mr. Gary Maier. Thank you. Please go ahead, sir.

Thank you, Skylar. Thanks everyone for joining us today for our call. Before we begin, 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. Private Securities 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.I'd now like to begin the call and turn the call over to Selwyn.

Thank you, Gary. I appreciate everyone joining us today. As stated in the press release issued this morning, the generation of cash flow from operations and profitability and margin improvements were important highlights for the quarter. Notwithstanding sales softness late in the quarter, primarily related to the timing of certain product orders and mild weather, we are making excellent progress and execution of our strategic investments.These investments are rapidly creating a transformative platform for growth and profitability, allowing us to leverage our strengths within the growing $125 billion aftermarket hard parts industry and benefit from the changing competitive landscape.In summary, our footprint of the future initiatives are rapidly advancing, we have substantially completed our transition into a new consolidated distribution facility in Mexico and the final phase of our new facilities build out is expected be completed by the end of our fiscal 2021 second quarter. All of this will further enhance our scalability and our financial performance.Particularly as we realize the benefits of our state-of-the-art production of calipers, the relocation of certain additional product lines to operations in Mexico from higher costs domestic production and other related overhead absorption initiatives.As I mentioned last quarter, our facility expansion in Malaysia is substantially complete. This will allow us to increase capacity and productivity for our existing product lines, and allow us to utilize the additional capacity to reduce dependence on outsourcing certain products or components.I want to emphasize that MPAA has established itself as a leader in the supply of internal combustion vehicle hard parts to our industry. The market size for our current category is multi billions of dollars. According to Lang Marketing Research internal combustion engine vehicles and operation in the United States will increase by 36 million from 2020 to 2030, up from 282 million in operation last…

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect to our December 31, 2019 earnings press release for more detailed explanations of the results, including reconciliation of GAAP to non-GAAP financial measures and the 10 Q. Let me take a moment to review the financial highlights for the fiscal 2020 third quarter, reflecting record sales for the third quarter and record nine months on a reported and adjusted basis.Net sales for the fiscal 2020 third quarter increased to 125.6 million from 124.1 million for the same period a year earlier. Prior year, fiscal third quarter results included approximately net 7 million core revenue in connection with the cancellation of a customer contract. Adjusting net sales for the fiscal year 2020 third quarter increased to 127.7 million from 119.6 million a year earlier.Gross profit for the fiscal 2020 third quarter was 27.7 million compared with 21.2 million a year earlier. Gross profit as a percentage of net sales at fiscal 2020 third quarter was 22% compared with 17% a year earlier. Adjusted gross profit for the fiscal 2020 third quarter was 34.3 million compared with 30.9 million a year ago. Adjusted gross profit as a percentage of adjusted net sales for the three months was 26.9% compared with 25.8% a year earlier.The results for the fiscal 2020 third quarter gross margin were primarily impacted by two items totaling 5.8 million. First non-cash expenses of 3.7 million including a write-down of a 2.4 million associated with a quarterly revaluation for cores on customer shelves and 1.3 million of amortization related to the premium for core buybacks.It is important to recognize that even though the core value or cores on customers' shelves maybe written down on our balance sheet, we are entitled to a full…

In summary, our investment of bearing fruit, despite some deferral of revenue for this last quarter, we have many growth opportunities ahead and new business commitments are continued, supported by our expanding line of products in both hard parts and diagnostics. We're proud of our more than 50 year history in the aftermarket industry, and all of us are committed to our vision of being the global leader for parts and solutions to move our world today and tomorrow.I think at this point, we should open up the line for Q&A.

[Operator Instructions] And we have a question from Chris Van Horn with B. Riley FBR. Your line is now open.

Obviously, you had solid execution despite some of those revenue headwinds during the quarter. Could you maybe give a little more detail on specifics driving that mix anything else that there was a main driver there?

Yes, I think we underperformed our expectations and I think that almost 100% or 100% of it relates to deferral of certain product orders. We had a deferral of a little over $12 million of orders, which will hit in the fourth and in future quarters coming in the New Year. So, that was disappointing to us. Had we got those orders, we would have had a very solid quarter.Having said that the fundamentals of the business are somewhat intact, I would be cautious on the sort of the mild weather, the December month seems to be, I mean, we have a large customer indicate publicly that it was a tough month for them. So, I'm not speaking out of school. So a little bit of softness is a mild weather, but the fundamentals and our outlook, we continue to be excited about them.

In the past, you've had order deferrals and you seem to be able to make them up within the one or two quarters following. Do these feel different? Or are they kind of the similar to what you've seen in the past?

No, I think we expect that. I mean we did update our guidance. So, we expect around a 150 million in revenue for the fourth quarter. I did the arithmetic for everybody. I think it's real simple to compute from what we said. We think that some of that revenue will spill into the first quarter. We are a little bit concerned with the coronavirus in China. Just in that, there's a huge -- they will be a huge backup of shipments. A lot of factories have been deferred from being reopened.We are less dependent on China than most, but that may affect us a little bit. But that's included in our best thinking for this guidance, for those guidance. So, we do think that there will be some spillover into the first quarter from those deferrals, but we feel pretty comfortable with our guidance and that's our best thinking right now in the fourth quarter.We think margins will improve as well in the fourth quarter and the outlook for cash flow looks positive. So, production and development in the new spaces is looking very positive. We're remanufacturing calipers as we speak, our capacity in Malaysia has increased as we speak, and our dependence quite frankly on China is less although we still do depend on them for some parts and finished goods.

And then, you've mentioned fiscal 2021, you expect continued growth. Would you be able to give any other details around how you might see that playing out for 2021?

Yes. So, we haven't given guidance and we're not going to give former guidance 2021 until next quarter. But having said that, I mean, there's no secret in our strategy. Our strategy is to increase market share for all of our product lines. And now we have new product lines that we intend to gain share in and have lots of opportunity that we need to close on. So, I think we've set our capacity capability to move through the next four years towards the billion dollar revenue mark. And I think I would be remiss in saying that, really, our plan really for the next four to five years is pretty simple.It's grow existing product lines, stabilize this move to Mexico with a new launch at the brake product lines and expand our -- when I say existing product lines, I'm including our electric vehicle capability, which we think is a big added opportunity for growth during the -- certainly, we see as fast growth in the development of electrification of transportation vehicles. I mean, whether it be automotive, heavy duty and aerospace. So, we've got a lot of growth factors but they're all set in place, and we don't need anything new right now.

Yes, that was going to be my next question. How do you feel about capacity and CapEx needs? And it sounds like, you guys are pretty well set up to kind of handle the growth that you expect?

Yes, we've got it complete. The CapEx will come down dramatically as we complete our facilities. We think that our facility should be complete by the end of the second quarter of this fiscal year and CapEx should drop dramatically. Our capacity will skyrocket from there and even though we seem to be gaining a lot of momentum in taking up that capacity, so we're excited about that.

Okay, got it. And then last for me. Have lead times changed a little bit with your product mix changing? Or do you think you have a handle on the visibility of some of the new products coming online?

I think we have a handle on them. No, I don't think lead times have changed. I think our core competencies in remanufacturing. Our supply chain is very strong. Our facilities and manufacturing capabilities in Malaysia are very predictable and very strong. And so barring effects of the coronavirus, I mean, we feel very much in control of where we are and with our lead times and ongoing opportunities.

Next question comes from Steve Dyer with Craig-Hallum Capital. Your line is now open.

It's Ryan Sigdahl on for Steve. As it relates to the coronavirus in China, have you guys seen any impact on supply chains of product coming in thus far? Or is that just a potential expectation going forward? And then secondly, on that topic, as I look at inventory on the balance sheet, it seems like you have plenty of inventory for at least the next quarter, if not a little farther. So, I guess, is there a specific product categories that you're worried about, or how do you think about potential disruptions there?

Okay, so let me divide it. There's absolutely no effect as of right now from the coronavirus. We do have good inventory levels going forward. The areas where you get hit this in the fringe demand, so we have unique update orders that you need to supplement with supply out of China. There's risk there. Some componentry that we use in our manufacturing comes out of China, there's risk there. And we do have some inventories in China and a consignment warehouse and so depending on backlog of shipping, there's a little bit of risk there.But having said that, the risk for us is fringe, it's not it's not which we take very seriously, but it's not we have we have good inventory levels and good capability outside of the risk of coronavirus. It's not a panic situation, but it certainly affects -- may affect your future guidance or do you make all your shipments exactly on time for the finished part numbers that you rely on China for.

If we think about guidance, I mean at the midpoint, revenue guidance was cut by 18 million. You called out 12 million of deferral of orders, some of that will be picked up in Q4. And it doesn't sound like the coronavirus will be too impactful I guess this quarter. So, I guess, what's the remaining delta there?

I think you have the softness in our base product lines really in December, and we saw a reduction in orders and replenishment there. And so, we have seen some softness in demand. Certainly, we have no market share change and if anything, our market share continues to increase. But again, I think if you listen to the to the retailers calls, I think they'll give more color on it.Certainly there's been one that's been reported already that I would listen to, but the expectation is mild weather in the northeast has slowed down demand for products that are dependent on cold weather. And products that are dependent on cold weather for us is the charging system, which is alternators and starters. So that was unusual for us to have soft demand in our cold product line. Again, that's just a matter of that's very temporary and we expect that to return.

And then last question for me as it relates to the brake calipers, new line, Previously, I think you've had said 30 million of contribution this fiscal year. Is that still the right expectation? And then, any commentary on potential new customer awards in that category?

Just give me one second. I'll give you a little more flavor on that. Just give me one second. Yes, I mean, I think we're going to be closer in the $25 million to $30 million of revenue from calipers depending on, again, a lot of that depends on the timing of the orders.

And then, any new potential customer awards in that category or the pipeline there?

Well, I mean, I don't want to comment on specific categories just because it's a probably not prudent to do that. But overall we have a lot of opportunities that are pending.

Our next question comes from Justin Clare with Roth Capital Partners. Your line is now open.

So I guess first off your guidance on the adjusted gross margin suggests that FQ4 margins could be, around 28%. So I'm just thinking, as you ramp up your facilities in Mexico and Malaysia, and as we move into fiscal '21, could we see margins improve upon that 28% level?

Look, once we get into Mexico, the margin should improve absolutely. As long as we don't suffer any losses, which we don't anticipate, so don't read anything into that. If we can continue to grow as we expect to grow and settle into that new footprint of the economics of business gets substantially better.

Okay, thanks. Then I guess related to that, could you provide a little bit more detail on where you are in the process of relocating manufacturing from higher cost locations to Mexico? How much longer do you have before you're comfortable with, where you're manufacturing all your different product lines?

So we, I mean, just as a preface to my answer on that is that we are a company that is focused on continuous improvement. So, the first phase is just getting down there and that that certainly will happen again by the second quarter of this current, the 2021 fiscal year ends the next fiscal year. We then believe that will increase margins. We should have substantially everything down there. There still will be some items that need to need to be moved, but that'll be substantial. And from there we'll see at that point you should see a big reflection in our margins. And, from there, hopefully it continues to get better as we can implement continuous improvements.And then obviously we've got all the external variables of competitive, the competitive environment and then we'll have to see, how the competitive environment shakes out. I said today, and I don't want to be arrogant about this, but I think we're sitting in a very strong competitive space for the opportunities that are ahead for us. So, we've got to prove it to everybody and certainly that's our intent, but we feel like we've got a good handle on the margins and a good handle on the savings as we get through this process. And the opportunity for growth at these savings rates, which is most exciting part of it.

And then I guess just shifting to CapEx, you've talked a bit about it already. But can you share how much you've spent in CapEx in FQ3? And what your expectations are for the fourth quarter? And then, should we expect a year-over-year decline in fiscal '21 relative to the fiscal '20?

So, I can give you the guidance for the full fiscal 2020. We're probably looking at $6 million to $7 million of maintenance CapEx, probably about 12 plus million for the growth CapEx for our facilities in Mexico. When we come back for our fourth quarter, we can give further guidance on fiscal '21. But again, we those are most of it, so this is a bit of more time to go for fiscal '21.

And then I'll just sneak one more in here. You've repaid $14 million, I believe on your revolver. Net leverage was down to 1.9. Can you just talk about your plans for debt repayment as we move forward here? Should we anticipate the debt levels declining further?

Well, as we proved to you and to our shareholder base and as we generated additional cash flow, we will look at, the most opportune way to deploy that cash flow. I mean, I think with the interest rates where they are today, I mean, there is a not an immediate rush to pay down debt, assuming that we're generating cash and so there is opportunity to perhaps return some capital to shareholders as we get stabilized and get through.But as of this point in time, our focus is to minimize the outstanding debt from our revolver as we go through implementing the move. And then once we get the move done and we have proven, stable, positive cash flows, which we certainly expect, we will look at allocation of capital in the most opportune way to build shareholder value.

[Operator Instructions] Our next question comes from Robert Beauregard with Global Alpha Capital. Your line is now open.

Yes. Good afternoon and good quarter. Just one question sticking on debt question. I'm trying to understand what the interest line is based on and trying to figure out what is the interest-bearing debt on your balance sheet that adds up to almost $7 million in interest for the quarter unless there is something I don't quite understand?

Yes. So, the majority of the interest expense is related to our customers and accounts receivable discount program. So, with major retail customers that we sell to, we go to the supply chain, account receivable discount program, and we get paid in about a month. So, when we get paid, we pay a small discount fee. So, in our 10-Q disclosure, we do disclose how much of the sellers have gone through that discount program. And the interest rate of the -- majority of that is related to that program.

Okay. Just a question then, what is the interest rate on your revolver?

It's about 4.5%.

And that, in terms of real debt, this would be the only interest bearing debt?

Yes, it's a revolver and there's a term loan, and they both at about 4.6%.

Yes, the term loan is very, is not very. Okay, thank you very much.

Our next question comes from Bill Dezellem with Tieton Capital. Your line is now open.

Thank you. I'd like to circle back to one of the previous questions you were answering relative to use of capital. If you get to the point that, that you do have free cash that you are looking to return to shareholders. Is your preference through buybacks or dividends? And what's the thought process or logic there?

Yes, I mean, that's a question that we haven't concluded on. We'll have to look at that at the right time. So, I can't give you an answer, but the logic will be carefully scrutinized. So make sure that the allocation and how we use that capital to return to shareholders is best utilized, that may be a combination. And it may be a continuation of our stock buyback program. That's certainly something that the finance group internally and the board will be roll over. But we need to get there in the next -- we think we can get there in the next six months and 180 days. And so, I think you'll be hearing more about that in the new fiscal year.

Thank you, Selwyn. And then, you mentioned the mild winter weather, there have been some bouts of cold weather that did hit at least in the Midwest. Do you see that having a benefit to the business? Or is that just overwhelmed as you're here in the March quarter with the bouts of warm weather that you can had?

Well, I mean, I'm going to quote the O'Reilly, CEO who basically said, it's still early in the quarter and severe winter certainly is an opportunity. And so, I don't know how quickly it translates to us, it's probably much more of an influence by our first quarter as customers work through their inventory. But if there's cold weather going forward it's always very helpful to us, I mean in many categories.So, we do see some cold weather this week, and we're just going to have to see. But in general, I would tell you that in almost all situations where there is extreme weather, whether it be hot or cold, it's very helpful to accelerate car failures. Having said that, all these cars are going to fail anyhow, just not in this quarter, they'll fail in future quarters.

And then, how much of your wheel hub manufacturing moved out of China by the end of December?

We could supply more than 80% of our production needs right now out of our own facilities in Malaysia. We're still working through inventory levels, but yes.

When do we given as you're working through inventory? When do we have the financial benefit of lower costs production coming out of Malaysia rather than the higher cost that's flowing through the P&L today?

It's difficult to tell depending on the volumes, but that's a very competitive category. So, I don't want to count on higher margins because of that the most important there is, is to be free of any of the tariffs and to be, have a better quality product than anybody else which we believe we will have from our own facilities. And so, the margin opportunity certainly exists. I think its four to six months out at least but I would not be. Let us give you further guidance as we get into the new fiscal year the way we are with the margins.

And at this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Selwyn Joffe for any closing remarks.

Thank you. I want to thank all our team members for their commitment and their customer-centric focus on service and for their exceptional pride in all the products we sell and the customer services we provide. Their commitment to quality and service is also reflected and the wonderful contributions they make to their communities and to our society. They are terrific and I'm proud to work with them. A company is blessed with a positive outlook and excellent opportunities for continued growth and profitability.I would also like to wish all the people in China and anyone around the world affected by the coronavirus, a speedy recovery. We appreciate your continued support and we thank you again for joining us for this call. And we look forward to speaking with you when we host our fiscal 2020 fourth quarter conference call in June and at the various conferences that we intend to participate in. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for participating and you may now disconnect.