Ladies and gentlemen, thank you for standing by and welcome to the Motorcar Parts of America, Inc. Fiscal 2021 First Quarter Conference Call. At this time, all participant are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Gary Maier. Please go ahead.

Thank you, Josh. Thanks everyone for joining us for our first quarter fiscal 2021 conference call. 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, let me remind everyone of the Safe Harbor statement included in today's press release. The 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 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 various filings with the Securities and Exchange Commission. With that, we'd like to begin the call and I'll turn it over to Selwyn.

Thank you, Gary. I appreciate everyone joining us today. First off, I want to thank all our team members for their ongoing commitment and customer-centric focus and service during these challenging times. Their health and safety remain our top priority. And our proactive initiatives during the past several months to protect our global team have proven to be highly effective in helping to mitigate this horrible virus. Equally important, these initiatives have enabled us to continue to provide essential products for transportation across the board, including consumers, fleet and emergency response vehicles. For the most part, our corporate team is continuing to work remotely as much as possible, though we remain committed to gradually and safely returning our team back to the office as conditions permit. As a result of everyone's contributions, our operations have continued largely uninterrupted. I'm extremely proud of our Company. Clearly this remains a challenging period for all of us. As you know, the month of April was strongly impacted across the automotive sector. Our sales in April were down by approximately 50% on a year-over-year basis. We were encouraged, however, that drivers started to return to the roads in May, and sales for non-discretionary automotive parts were up strongly in June, continuing into July, preliminarily indicating a V curve recovery. I should point out that sales in June were up on a year-over-year basis. Notwithstanding the challenges related to the global pandemic, we are making excellent progress in the execution of strategic plans and investments for the future. We remain essentially on target to complete our strategic build out in Mexico. By the end of the fiscal second quarter. In short, we have a scalable infrastructure and our growth opportunities are exciting. The competitive landscape continues to change, and customers are placing even more importance…

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect to our June 30, 2020 earnings press release for a more detailed explanation of the results. For information about the items that impacted the results, see Exhibits 1 through 3 of the press release. Let me take a moment to review the financial highlights for the fiscal '21 first quarter. Net sales for the fiscal '21 first quarter were $95.4 million, compared with $109.1 million the same period a year earlier. As Selwyn indicated, following extremely weak April, sales rebounded for the remainder of the quarter and were better than expected. Gross profit for the fiscal '21 quarter was $13.4 million, compared with $17.6 million a year earlier. Gross profit as a percentage of net sales for the fiscal '21 first quarter was 14%, compared with 16.1% a year earlier. [Technical Difficulty] for the fiscal '21 first quarter was $17.5 million, compared with $22.6 million a year ago. Adjusted gross profit as a percentage of net sales for three months was 18.4% compared with 20.7%, a year earlier, as detailed in Exhibit 2 in this morning's earnings press release. Gross profit and adjusted gross profit as a percentage of net sales for the fiscal '21 first quarter was further negatively impacted by 3.5%. This 3.5% is comprised of COVID-19-related expenses impacting cost of goods sold of $1.8 million or 1.9% and 1.6% due to core buyback premium amortization and return accruals related to new business. This 3.5% is not adjusted for in the adjusted gross margin of 18.4%, which I just mentioned. Gross profit and adjusted gross profit as a percentage of net sales to the prior year period were also impacted by several items, as detailed in Exhibit 2, totaling 2.5%. Results…

[Operator Instructions] Your first question comes from Matt Koranda with Roth Capital. Please go ahead.

Hey, guys. Thanks for taking the questions. So, I just wanted a little help with the monthly sequential cadence within the quarter, if possible. I know you guys mentioned April was down, I think, about 50% year-over-year. It sounds like May, you may have seen a little bit of growth. But, any help with sort of the magnitude of growth year-over-year in May and June. It sounds like things may have accelerated through the quarter? Any assistance on that front?

Yes. So, again, April down 50%, May was probably down about 9% year-over-year and June was probably up 25%.

Okay, got it. All right. Yes. it sounds like -- and then maybe -- I know you guys do get to see the POS trends sell in, so maybe you could kind of help us with how much of that was sort of catch up on restocking and that up 25% in June versus kind of POS and how's that trending through July?

So, the gains are moving -- continuing into July, POS definitely trended up through June. Again, for our products, they -- it's stable, sort of the June levels. But every day is a new day with this COVID situation. So, we keep watching it. But, so far, we're cautiously optimistic but we're -- we want to be conservative. We are busy.

Okay. Got it. That's helpful. And then, David, I don't think I heard you guys break out sort of just the breakout between rotating electrical, brake master cylinder, some of the other products, wheel hub, whatnot. Could you provide a breakout for us on the call here?

Sure. So, we're going to be filing our 10-Q later today. In the 10-Q we disclose -- we breakdown rotating electrical products for about 72% of sales, wheel hub products were 18% and brake related products are 9% and others 1%.

Got it. Okay. That's helpful. And then, let's just talk through the COVID-related expense in the quarter. I want to get a sense for what the right level of ongoing COVID headwind that we should be factoring in, on a go forward basis, loud and clear on the 1.8 or so in gross profit this quarter, and then I think another 400 to 500 in OpEx. How much of that should we kind of continue to carry forward for the next several quarters during the pandemic?

So, I just said, it was $1.8 million in grand total, $2.3 million for the entire quarter, including operating expenses. So, we're projecting for the remaining nine months, about $2 million in total. As you know, it depends on -- we don't know. That's our current estimate.

So, a lot of it is upfront spending to get all the safety requirements in place. But, it should -- it will come down pretty dramatically through the rest of the year.

Okay. Got it. That's helpful. And then, just on the cash flow front, generated cash from operations, it does look like some working capital flush there. But, help us with sort of sources there. I did notice payables looked like it was -- had a relatively large balance at the end of the quarter. Anything to call out there on that front?

The largest item was collection of AR that was existing as of the year-end. But, we did put in measures to reduce our costs. So, those also helped. But, the biggest item was the reduction of AR.

And then, lastly, just on the CapEx front, help us with capital expense in the quarter. And how much of that went to the Mexico build out, and then how much is remaining that’s slotted for the Mexico build out for the remainder of this year?

So, the first quarter CapEx was $5 million, $3 million was related to expansion of our Mexico footprint and $2 million was just maintenance CapEx. So for the full year, we're estimating total $11 million for expansion, Mexico expansion CapEx, and about $6 million for maintenance. So, grand total of $17 million for the full year.

So 12 million left to spend for the rest of the year too. Okay, got it. I'll get back in queue, guys. Thank you.

Your next question comes from Steve Dyer with Craig-Hallum Capital. Please go ahead.

Good afternoon, guys. Ryan Sigdahl in for Steve. You mentioned a lot of costs, kind of some temporary, some of went away. But, can you just sum it all up within OpEx? How much of the cost cuts were permanent versus temporary cuts? And then, what's the timeline to bring back those temporary ones?

Let me talk in more general and then David can address this perhaps more specifically. Look, we're trying to be as frugal as possible going forward. And so, we're not in a rush to reinstate cost to our infrastructure to the extent we don't have to. At some point, people need to get a fair wage and that -- I would tell you that the executive group, including myself, is very committed to making sure that we're back on track and stable before any resumption of those expenses. Our model has changed somewhat, I mean, trade shows, travel, just a lot of the -- sort of what was normal day to day expenses have changed. We don't expect to see that coming back this year at all. I'm not sure what the new model will look like going forward. But, understanding that the opportunity to use technology and leverage some of the efficiencies we're learning about today, we will continue. And so, I mean, we're not looking to reinstitute a lot of expense, unnecessary expense or any expense that we cannot, if we can help it, but we are going to be looking at it quarter to quarter. So, that's sort of the big picture. David, do you want to add to that?

So, we mentioned that since May 4th, we had about a $900,000 reduction related to wage costs. So, a small portion of that was permanent, but the majority of that wage reduction.

I do want to point out that we've got pretty significant new business commitments that are coming on board. And so, we're a business as normal and we're growing and the demand hopefully will continue. But again, it's uncertainty. So, we're active, very active, and some of that requires expenditure to continue to fuel the growth that we're on, growth rates that we're on.

Then, just on free cash flow, just following up on that, sounds like favorable working capital is the biggest driver this quarter. But, do you think you can maintain positive free cash flow in Q2 and then the back half of this year?

As we're growing our top-line, we're going to need additional inventory to support the customers’ demands. So, we are planning to add inventory working capital.

Yes. We have a substantial new contract for new business that begins October 1st. So, we're in the process of ramping up for that. So, there will be some inventory build and then demand from what was a very tempered environment for demand. Demand has accelerated dramatically. So, we need to invest in inventory and production -- increase production levels to keep up with the demand.

Can you elaborate on that new -- significant new contract? What product category it’s in?

Yes, in brake calipers.

And then, just switching over to -- you talked about -- I appreciate the cadence kind of within the quarter for top-line sales. To be clear, I think you said June was up 25% year-over-year that had remained steady in July. So, I guess, does that imply July and early August sales are tracking plus 25% for you guys?

Yes. I think -- let me put out some caution there, because -- and sort of paint the picture just to rewind a little bit and look at the outlook. When COVID approached, I mean, we saw customers be more cautionary about how they place their orders. A lot of the update orders were I wouldn't say deferred but basically pushed out. And so, last year, we had a significant number of update orders, we had a record second quarter last year, a significant amount of update orders. Our replenishment rates are exceptionally strong right now. The update orders for the second quarter will probably be pushed out into the back six months. So, while I see the growth as being extremely strong, it's not the -- timing now is a little different in terms of the cadence quarter-over-quarter. And so, time will tell exactly -- first of all, is this going to sustain itself? If it does, that's fantastic. It does look very strong right now. Although, I assume there's some catch up in the marketplace. I don't know. And we don't know how much the ongoing sort of secondary effects of this virus will go to miles driven, et cetera. But, it looks to us like our target audience, and that's the key thing, is that a number of people working from home, but our target market is unable to work at home fundamentally. And the amount of driving and again the amount of public computing, amount of driving has gone up for them, because the amount of public commuting has down to them. And so, we see fundamental strength in the business today. We expect that to continue, but we don't know. If it does continue, and this is a big if, if it does, we expect customers to continue to be aggressive with update orders and inventory. And we expect resumption of big update orders. But, that's going to be pushed back. So, I think the back six months is going to be a very interesting one to see where that ends up. So far so good, strong. But, I want to be cautious to say that just as we were up 25% in June, replenishment continues to be strong but we got to make sure we don't confuse it with the update orders as well. So, again, continues to be strong, but be cautious.

Got it. So, sell in little bit stronger in the near term for June and early Q2. Last question, just kind of higher level. It seems like end customer DIY demand is shifting more online, COVID accelerating that. How are you guys positioned for that shift? I know, your big three customers come from most of your inventory. They're doing some omni-channel stuff. But, do you have any pure plays online or how are you guys thinking about that shift?

Yes. No, we rely -- we don't have a pure online play. I mean, we sell to customers that sell online. And so, we’re pretty much well-represented across the board in terms of all types of customers, and then, whether it be DIY, DIFM, those that sell through omni-channel. And so, I feel like, if there's a growth in our products online that we will get our fair share, just because of the customer base that we have. For the most part, some of our -- our rotating electrical has not been a huge online driver, but some of the other categories the consumer will use online more. And so, we’re up to see how that unfolds. But, I think we are well-positioned, whether it be online or not through our customer base.

Thanks, guys. I’ll hop back in the queue.

Your next question comes from Brian Nagel with Oppenheimer. Please go ahead.

Hi. Good afternoon, guys.

Hey Brian.

So, my first question, I think it's a bit of a follow-up to that question you just -- this is on the line. But, as you look at the rebound in sales you've seen in June and July, have you noticed any variability across markets as either the virus is back up, maybe there's been some further actions and shut things down, is there a bit greater variability across the country?

Well, we have -- it's interesting. I mean, the answer is yes and no. The yes is, is that if you look at the speed that certain places reopened up, those certainly rebounded quicker. And so, we did see that now, a lot more have rebounded. What’s been pretty strong in terms of an indicator and anyone can use this. I hate to be a promoter of the Apple website. But, you can see a correlation between their requests for directions and the pick-up in the marketplace. And so, initially, the northeast was slower, then it picked up and got much stronger. The west has been a little slower in picking up, the middle of the country seems pretty stable. And so, yes, it does reflect how the different regions are opening up or getting tighter, but again, overall, it seems to be trending in one direction, even with that sort of regional fluctuation.

That's very helpful. Then, the second question I have and maybe a bit longer term in nature. But, I know you talked a lot about this shift into Mexico, and it seems like we're getting closer now to the completion of that. As we think about your financials, this shift happening, understanding there's a lot of other noise going on right now. But how -- where should we see the benefit, how would you think about the financials flexing, as that shift happens?

Yes. So, what's happening, we got to get through December, I mean, the December -- end of the December quarter, we’re around the corner from there now. That will be a big inflection point for us. Getting the new footprint up and running and operational, which is happening now. It's in process. The new brake businesses that starts in October. Again, while there is some startup expenses and all of that, but as that settles down, the company sort of has gone through a complete inflection point. And Malaysia's expansion makes us a little less dependent on -- less dependent on Chinese goods, which we feel what the political -- so the geopolitical situation today, we think it's good to do the hedge out there. So, we feel pretty good that we're on track. We've got this sort of variable COVID issue where nothing is happening as fast as -- other than business demand right now, happening faster than we thought it would. But other than that, things happened a little bit slower. People are not in their offices, takes longer to get a permit, takes longer to get such and such done. So, that's a little bit of the overhang. But, right now, we don't see much substantial variation in our progress. And we feel like we're still in pretty good shape to hit our deadlines and target. And that'll change business pretty significantly.

Your next question comes from Scott Stember with CL King. Please go ahead.

Could you talk about how the extreme weather is having an impact on your business? I know that it’s starters or alternators, but one of them certainly will see advanced failure rates during the heat. Can you talk about how that's playing out with your business?

It's hard to tell, Scott, because there's so much -- the demand has increased so much from such an extraordinarily low, and then I've never in my career seen a drop of 50% without a loss of a customer in demand and in any period. And I’ve been involved since 1994 in this industry, I've never seen that. And I've never seen an increase on the same customer basis of 25%. So, is it weather or is it pent up demand, is it stimulus, it’s is just hard to define what's causing these big gyrations. I listen to our customers, public presentations. And we track POS and it's hard to tell. But, I'm certainly -- extreme weather helps. It's just very hard to put our finger on it, but it definitely helps.

Okay. And I appreciate you guys aren't giving guidance at this point. But, it's clear that business is rebounding pretty significantly. How should we just bigger picture be looking at gross margins? I know that heading into the year at least we were thinking, I guess, high 20% range or something that could be achievable again. Is there any reason that you couldn't get there assuming that the worst is behind us and the industry was to return back to a normal environment?

So, by the end of the fiscal year, we should be back in that range. This first quarter also was impacted a little bit by product mix. So, a lot of variables. We did indicate that we had a little higher production cost due to lower production volume. But, as that ramped up, we’re going to be able to leverage more overhead, our cost per unit would become more favorable. But by the end of the year, we really should be back in that range we’ve be talking about, in the upper 20s.

We're talking on -- as a run rate, not for the full year obviously, right?

Right.

Okay. Got it. And just lastly, on the interest expense line, I know that's where your factoring costs reside. You talked about interest being down a lot just because the lower rates. How did factoring play into that?

So, it's also partly down, because sales were also down. But, if I look at historical trend, in fiscal '20, interest expense was about 4.6% of sales, first quarter was about 4.5% of sales. So, as interest rates come down a little bit, it should be in the low to mid-4% of sales, because the majority of our interest is that factoring of supply chain interest expense?

And just one follow-up, just to clarify when we were talking POS, I guess, clearly in June, the POS that you talked about or the sell-in of 25%, it sounds like POS was higher than that. Could you just maybe quantify how much higher the exit run rate was?

No, no, I wouldn't assume that POS is higher than that. We can't really quote our customers’ sales. So, that's a little tricky for me to do that. Our customers are strong. I mean, I would look to their guidance really as to how their register sales are doing. They are strong, but I would not equate it 25% -- higher than 25% POS. It normally sort of levels out, our growth rates normally level out with the customers’ POS sales, plus or minus a few points here and there, but depending on where they are in the phase of inventory build up on that. So, I wouldn't assume that POS is greater than 25%, no.

Your next question comes from Sarkis Sherbetchyan with B. Riley.

So, you guys mentioned the need to ramp inventory to support the demand. Just want to kind of get a sense for how much of that would be the new kind of contract or the new business that you won? And then, how much of it would just be to maybe shift gears and begin to replenish kind of the different product categories relative to what you're seeing now for demand?

I think, look, we've been ramping, even in the declining inventory levels that we've had, we've been ramping for this new business. We have a significant amount of inventory already on hand. And so, I think it's sort of spread across most all categories now. I think there's no, I think a lot of the extreme ramp up we've already been through to get ready for this new business. So, we're ready to go. We have to wait till October, unfortunately, but we're ready to go. So, I think, people -- this has been an interesting sort of rollercoaster ride. When COVID started in China, everybody anticipated that the supply was going to be a problem. We were very fortunate, we got ahead of that. And we were able to make sure that our supply channel was safe. And then, March -- middle of March hits and all of a sudden the U.S. becomes -- has its challenge with COVID, and demand just plummets. And so, now all of a sudden, we don't have a supply problem, we have a demand problem. And so, people start cutting their supply obviously to sort of readjust and make sure that there's enough adequate liquidity. And within one month and a half, all of a sudden that now becomes a -- the demand is incredible and supply becomes a challenge. So, it's been up and down, so dramatically, very unusual again times for supplies then for the retail, and then for the WDs and the mechanics and professional installers of the world. So, it’s been tricky. But, I will say that we were ahead of the curve on the supply side. So, we had excess inventory. We were sitting pretty waiting, especially with the declining demand and all of a sudden demand popped. We've been in pretty good shape, I mean, relative to most I think. Fills rates have still been pretty good. And now we've got to catch that up. Now the question is, is how much catch up do you need because what is the new norm? And the new norm is, is still, while we're, again, cautiously optimistic, we watch sales day to day, we listen to our customers carefully, we listen to the news carefully, we're cautiously optimistic, but it changes so quickly. So the question is, how much do we have to ramp up? We’re going slowly. But we're going to -- we certainly have committed to making sure our customers get goods. And so, we will have to adjust as we see things develop day-by-day. Sorry to be so evasive, but that's sort of just the new norm.

No, that's fair. And I guess, a little related to that is, if I look at the total debt position of the Company, came down nicely quarter-on-quarter. I guess, relative to the comments you just made, how are you managing liquidity kind of given this rollercoaster situation and the fact that you're kind of building working capital to meet your order commitments?

Yes. Our liquidity looks good. I mean, we’ve -- as you can tell, our leverage is -- bank leverage is about 1.6 times. So, we have got a fair amount of liquidity. We don't expect -- again unless we have a complete shutdown, we don't expect to have a liquidity challenge. We're looking at it and seeing how it stabilizes and maybe there's opportunities with liquidity levels that we have. So, we watch it day-to-day, we reforecast and we’re on a rolling 12-week forecast right now weekly. So, we just want to make sure we stay ahead of it. I mean, sales could change quickly. And so, we're very, very cautious. Our customer base has been great, they're paying their bills on time and we don't have much problem there and our supplier base is holding their terms. And so, that has been good. And we have a great bank relationship. So, we feel like we have -- not only do we have adequate liquidity but we have a real strong relationship, to provide the liquidity that we needed, if they -- in tough times. But, we don't expect that. I mean, we're in pretty good shape right now. But having said that, we’re still watching every penny. I mean, we're being as frugal as we possibly can.

Your next question comes from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. I had a couple of questions. The first one is you mentioned that June revenues were up 25% versus June of last year. And you said that July was holding steady with June. Does that imply that July was also up 25%, or maybe I should just ask directly what was July up versus July of '19?

Yes. So, I think we don't want to get into sort of a monthly financial amount. Again, I don't mean to be evasive. I mean, July was strong, I would say that, I would just stick with that for now and we set it held's up. So, I just don't want to get in a monthly reporting sequence. But again, and we expect the quarter to continue on that way. Having said that, again, I want to reiterate is that last quarter, we had huge amounts of update orders, which we think will be -- which are pushed further out in the year, this year. So, replenishment is certainly up double digits, but be cautious in terms of year-over-year total sales.

And then, have you seen a difference I think that someone else asked about geographic differences. What about between different product lines. Have you seen a difference in sales level or behaviors or point of sale, or is it pretty much very similar across product lines, depending on the COVID situation?

Again, yes, I think, when you see the Q, you'll see the numbers. But, I think that the slower comeback really has been in rotating electrical, which is our core. So that provides us some upside opportunity, hopefully as the suite gets back on the road. I mean, some of our other product lines have outperformed rotating electrical on the globe. So, we'll have to see. I mean, that's generally -- would probably be understandable because, the first thing that goes is the battery, I think the next thing is we look at the alternators and see in a way that goes from here. But that's the main kind of the other main categories -- all the other categories are basically up and rotating is a little bit softer.

And that outperformance in the other categories, does that have anything to do with new business wins, or is that really an indication of what's happen in that retail?

So, a little bit -- the brake caliper program was not in effect last year. So, that's part of it. We've had margin -- we've had growth in our share, sort of consistently over the year. But again, I think the fundamental is that the brake season got pushed out. And so, generally, March, April would be sort of your peak brake repair season. And now, it looks like it got pushed out further out, so to May, June. So, that's been a big help and that's catching up. And then, now rotating electrical is coming into it, sort of seasonal with the hot summer, and hopefully we should see some pickups there. So, I think that has more to do with it. Again, very unusual because timing -- the cadence of everything sort of got thrown off kilter.

Your next question comes from Vincent Staunton with TCW. [Ph]

I have a quick question regarding adjusted gross profit. In the previous year, it was originally reported at $26.2 million. And now, the previous year’s adjusted gross profit is stated at $22.6 million. What accounts for the discrepancy?

So, if you look at Exhibit 2 of this earnings press release, there is adjusted gross profit and there are items not adjusted for below. When you add up the adjusted gross profit plus the items not adjusted for, they will be in line with last year's adjusted gross profit.

There are no further questions at this time. I'll turn the call back to Selwyn Joffe for closing remarks.

All right. Thank you so much. And I appreciate all the good questions. I just wanted to summarize. And basically, in summary, our investments we believe are bearing fruit. We have solid new business commitments for brake calipers. We expect strong business growth as we ramp up production, notwithstanding the many challenges that we have in the world today, new business commitments customers are continuing, supported by an expanding line of products in both hard pars and diagnostics. The near-term outlook appears positive, though unpredictable. We are 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 that move our world today and tomorrow. We appreciate your continued support. And we thank you again for joining us on the call. And quite frankly, we look forward to seeing this unfold. And we look forward to speaking with you when we host our fiscal 2021 next quarter conference call. And so, again, thank you for everybody. Thanks for all the great MPA teammates for their incredible commitment.

This concludes today's conference call. Thank you for joining. You may now disconnect.