Good day. Thank you for standby. Welcome to the Motorcar Parts of America's Fiscal 2021 Fourth Quarter Year-End Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Gary Maier, Investor Relations. Please go ahead.

Thank you. Thank you, Charlie. Thanks. Thanks everyone for joining us for our 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.

Thank you, Gary. I appreciate everyone joining us today for our year-end call. I hope everyone is safe and healthy and starting to venture out as vaccinations are more readily available. We are excited to be able to resume personal interaction with our customers and team members. As noted in this morning's press release, we achieved record sales for our fiscal fourth quarter and full year, notwithstanding the sharp drop in the first quarter of fiscal 2021. Equally significant, net income was up sharply for both periods and the new fiscal year is off to a strong start with strong demand for our products. I will now address our Company's current position and outlook for our business, and then David will then address our financial results in detail. The outlook for hard parts replacement continues to be positive and we are excited about the Company's position in the market. In addition, the electric vehicle marketplace is fast evolving and our electric vehicle subsidiary should substantially benefit from the momentum. Let me provide some color to these dynamics. Demand for automotive hard parts is strong as drivers return to the roads. The availability of vaccines across the country is clearly helping, and it appears that people are getting back to more normal routines and rely on their vehicles for everyday activities and vacation travel. Overall, we are benefiting from our investments from multi-growth platforms in our hard parts business. We expect each of our product lines to grow, and we are focused on meeting the increased demand in all categories. Our newest product line, brake calipers, continues to gain traction, and we are focused on meeting the increasing demand in the brake category. The market for our current categories for internal combustion engines represents more than $6 billion at the retail level. There are approximately 287 million vehicles on the road with an average age of 12.1 years in the United States alone, which fuels our optimism about the growth opportunities in our aftermarket hard parts business. This will fuel growth in the aftermarket parts replacement industries well beyond 2030.

Thank you, Selwyn. To begin I encourage everyone to read the 8-K filed this morning with respect to our March 31, 2021 earnings press release for more detailed explanations of the result. For information about the items that impacted the results, see exhibits 1 through 5 of the press release. Let me take a moment to review the financial highlights, including record sales for both our fiscal '21 fourth quarter and fiscal year. Net sales for the fiscal '21 fourth quarter increased 11.5% to $168.1 million from $150.7 million for the same period a year earlier. Gross profit for the fiscal '21 fourth quarter was $32.1 million compared with $36.6 million a year earlier. Gross profit as a percentage of net sales for the fiscal '21 fourth quarter was 19.1% compared with 24.3% a year earlier. Gross margin for the fiscal '21 fourth quarter was negatively impacted by an aggregate of 6.4% by the following, 2.8% for brake caliper start-up costs and relocation and transition expenses, 1.4% due to higher freight costs and expenses related to COVID, 1.4% non-cash core premium amortization impacting sales, 0.6% non-cash revaluation of cores on customers' shelves and 0.2% customer allowances related to new business and the impact of tariffs. Let me provide a little more color to the factors impacting gross margin. Brake caliper start-up costs and relocation transition expenses are part of our footprint expansion in Mexico. As you may recall, we completed the construction of our buildings in Mexico this past fiscal year and are focused on increasing production of brake calipers, including core sorting and related activities to meet current and future demand. We anticipate that these costs and expenses will diminish significantly in the first half of the current fiscal year. We also incurred higher freight costs due to a freight shortage -- a shortage of freight caused by COVID as Selwyn noted earlier. With regard to additional COVID-related expenses, we have addressed health and safety initiatives that also impacted the gross margins. Fortunately, these COVID-related expenses have been slowly decreasing. Core premium amortization and revaluation of cores on customers' shelves that impacted gross margins are non-cash, non-economic. For a summary of items impacting gross profit, please see Exhibit 3 in this morning's earnings press release. We also incurred higher costs for raw materials and supplies. I should also mention that we experienced offshore wage inflation, which further impacted results. We have mitigated these expenses along with higher freight costs with price increases that have been implemented and will be realized shortly.

Your first question comes from the line of Scott Stember with CL King. Your line is now open.

Hi. Good afternoon, guys and thanks for taking my questions.

Hey, Scott.

Hi, Scott.

Coming out of the third quarter, there was a fair amount; I think it was like $17 million worth of sales that kind of got caught up because of some of the supply chain issues…

Scott, you faded out. I'm not sure if you are on…

Q4 into Q1?

Yes, you faded out. But I'll guess your question and I'll restate that. You're asking about the deferral of the revenue that we talked about.

Yes.

That deferral continues on.

Oh, okay.

That deferral continues on. I mean, there are supply chain challenges in the industry, and there are significant deferrals. So the strong revenue is despite the fact that there is still continued deferral.

Got it. Could you tell us how much is being deferred or at this point, it's just going to be an ongoing thing?

It's an ongoing thing. It's going to be an ongoing thing right now, Scott. It's unpredictable. It's hard to measure because some gets caught up and then additional deferrals come in. So, I think it's just a fundamental right now in the industry. I think the whole industry is experiencing this, but the industry needs these parts and when the supply chain catches up, we should catch that up.

Got it. And just in general, I know that we could all look at the -- your customers look at their retail sale orders. Their comparable sales numbers, they just continue to improve. Can you talk about what you're seeing do-it-for-me versus do-it-yourself? I know that miles driven have been definitely improving, continually. Just what are you seeing, the strengths -- the pockets of strength that you're seeing right now?

Yes. So, it started out as a big recovery in the DIY and a boom in the DIY, but we're now seeing it in the DIFM as well. So you've got just a lot more people relying on their vehicles. Used cars that were in parking lots that are now being driven, and the professional stores are busy. Just come off a couple of professional installers conferences, and they're doing very well. Professional installers are happy. So it's both right now.

Right. And just lastly, before I jump back in the queue, I appreciate that a lot of volatility right now, hence no guidance. But is there anything you can give us just as far as high-level expectations -- expectations of growth in 2022 just from a sales perspective, margins, earnings, just some high-level data that we can kind of run with for the trajectory of the business?

We expect our margins to be accretive as the year progresses based on the things we mentioned in the call, price increases, and hopefully we'll have more stability in the supply chain. The supply chain is very unpredictable. As you know, there’s ships stuck in ports, product is not being manufactured, there is re-outbreaks of COVID in Southeast Asia. So, very -- significant -- demand is predictably very strong. The question is, is the supply going to be strong enough to keep up with the demand. We are in a great position -- if we can get enough inventory to meet our demand, we're in a great position. But we'll have to see how it unfolds over the next few months.

Got it. Thanks a lot.

Thank you.

Your next question comes from the line -- pardon me. Your next question comes from the line of Brian Nagel with Oppenheimer. Your line is now open.

Hi. Good afternoon. Good morning, I guess. Nice quarter. Congratulations.

Thank you.

Thank you.

So my first question. I think it's a bit of a follow up to the -- to prior question, but I'm asking this, I guess, more from a color standpoint. But as the economy market by market has been opening now, and we're heading towards this hopefully post-COVID world, what are you seeing as far as demand trends? And what I'm getting at is for your business, obviously, we do see the very strong results at your retail partners, but what are you seeing that could basically help us think about the sustainability of this demand particularly relative to like pre-pandemic levels?

Yes. What's interesting is, again, without announcing specific customers, I had a cross-section of conversations with various suppliers to the professional installer market, and some of them are quoting 70% gains over prior pre-COVID revenue levels. Some of it's hard to explain, to be honest with you, but I think we've been talking about for years the statistics where the average cars are aging. This morning's newspapers were covered everywhere with average age went from 11.9 to 12.1 in the last year and a half. Number of cars are up on the road; new car sales, a little slower than they have been. But I think a lot of these used cars are getting back on the road, so cars that were perhaps in the car population that weren't being driven, so we see a resurrection of miles. It looks like the fundamentals are really strong whether the sustainability at the -- I mean, current demand levels are a record. Is that sustainable? I don't know that, but I don't anticipate it being softer than in the pre-COVID level. I do see more dependence on the vehicle and even -- and just people spending more money on their cars across the board.

That's very helpful, Selwyn.

I hope that just gives you color, Brian. I don't -- I can't give you any stats because I don't -- I haven't seen any out there. But the color wherever I turn and whatever conversation I had in the marketplace, and I'm talking much more granularly with the consumer sort of statistics, just people -- the demand is up.

Okay, that's very helpful. The second question I have, this is also bigger picture in nature, but we've talked a lot about the portion of the part of your Company turning to EV and talked a little bit more today about it. At what point does that become a real needle mover for MPAA, this EV portion?

I'll tell you, I expect 100% growth in that business this year. Again, it's not -- it doesn't move the needle. But we've got some exciting things in the works. We haven't announced them publicly. So I'll stay away from any specifics. But we think that there is an opportunity to keep that growth rate going. It's a little more unpredictable because of two reasons. Number one, on the global basis, it's a brand new market that's evolving and number two; it's brand new for us. So we are a little bit in learning mode, look-and-listen mode, but indications for what we have are very positive.

Got it. And then, just one final question for me. And I didn't catch if you talked about this in your prepared comments, but I was looking at the consumer broadly, I mean, inflation is a massive topic right now. What are you seeing in terms of your business as far as inflation either from your cost perspective or what your -- or potentially pricing changes you've made to your customers and any reaction to that?

Yes. So -- I mean, I will tell you our margins are lower than -- little bit this quarter even when you look at the various considerations that affected it. And so we've implemented price increases and we're one of everyone that's implemented price increases. Costs are up and it's my expectation there'll be some -- the consumers are going to have to pay a little more for their part. I mean, that's real cost and it's real -- it's real inflation, to be honest. And there is no choice. I mean, the industry is taking -- has taken price increases. And I think we just got to keep our eye on the Producer Price Index and see how that evolves. But for now the outlook is fairly inflationary and certainly as a company we intend to keep our eye on our pricing.

Well, thank you. And congrats, again.

Thanks so much. Appreciate the questions.

Thank you.

Your next question comes from the line of Sarkis Sherbetchyan with B. Riley. Your line is now open.

Good afternoon and thank you for taking my question here. Selwyn, it looks like you're -- it looks like you're building working capital and clearly that's -- it's going to look like a drag on operating cash flow. So -- and you're highlighting you have inventory increases for the anticipated business growth in this fiscal year. And I appreciate kind of not providing guidance here in the near term and you will reevaluate that. But help us understand the magnitude of inventory growth expected and also linked to that, if you expect the business to generate free cash flow this fiscal year.

Yes. Well, I'll start with the free cash flow. We definitely expect free cash flow this year. It will come a little later in the year. As you can see, we invested fairly significantly in inventory in the quarter. Our receivables are growing because of the increased sales. We expect bigger demand for the year. I mean, Sarkis I'd love to give guidance. I'm just concerned of the unpredictability of when this is all going to happen and how this is going to unfold. I mean, we've got, I would say, over 1 million units tied up between -- stuck in ports, whether it'd be in the United States ports, whether it'd be in Asian ports and accidents that have happened in ports, I mean, we have closures in Malaysia right now, mandatory two-week closures. So it's very unpredictable. But what is predictable is that the demand is there. What's unpredictable is how fast we can meet that demand. Having said that, we are meeting most of it and we are doing well, but we could be -- we have strong numbers, but these numbers could be even much stronger, I mean, based on demand, if we could meet all demand. So I think inventory should plateau barring some additional big ones, which we always look for and I'm confident we will generate positive cash flow for the year still. Hopefully, that gives you color. I'm not sure I was very specific, but…

Yes, no, that's helpful. I think another interesting point is, you said inventory should plateau barring some big wins. I guess, can you maybe talk about which categories you're maybe gunning to win some more business? I think your traditional kind of core business that we're aware of, right? Probably more of a market share story, but from -- the brake calipers and related products and certainly the diagnostics, it seems like there could be a little bit more of an open and larger opportunity. I guess any comments on magnitude of what you're pursuing there?

Yes. I mean, I would say that first of all, all the categories have big opportunities for growth. I think brake calipers, we're probably looking at 70%, 80% growth for this year. So a lot going on there. We are busy ramping up. There was inefficiencies in the ramp-up in the beginning, but lots of opportunity there and lots in all the other product lines. So, it's a tough market out there as always, hard to predict. But we feel, again, pretty good about demand. We just -- again, one more time, we just got to make sure we can get the supply. And so whatever we can get our hands on and inventory, we're getting our hands on. We may -- if we're going to make a mistake now, we're going to make a mistake on having more inventory than less just because the supply -- and I don't know what's going to happen. There has -- there seems to be a resurgence of the COVID issues in Asian countries and certainly India, Malaysia, Thailand, Taiwan, certain cities in China. I mean, all sort of having some type of resurgence. But we've got our eye on it closely and I expect it to be a positive year still, but giving guidance is a little difficult right now.

Okay, no worries. I'll hop back in the queue. Thank you.

Thank you.

Thank you.

Your next question comes from Matthew Koranda with ROTH Capital. Your line is now open.

Hey, guys. This is Mike Zabran on for Matt Koranda. Thanks for taking my question. First, could you guys provide some color on the revenue build-up for the quarter and maybe talk about the momentum you're seeing in the rotating electrical category specifically?

So, I can start out with the allocation of the sales by product line. This will all be available in the 10-K filed later today. For the fourth quarter about 67% was rotating electrical, wheel hubs was about 19%, brake-related products was 11% and other products was 3%.

Okay, great. And in the fourth quarter we saw new product start-up cost at $5.2 million. Assuming that the Mexico move is mostly complete, should we expect this line item to move to zero and if so how soon?

Good question. So, as I prepared in the -- as I said in the prepared remarks, in this new fiscal year they're going to be diminishing significantly. So it will definitely go down to zero a little bit later in the fiscal year.

Great, that's all. Thanks, guys.

Thank you.

Thank you.

Your question comes from the line of Matt Dhane with Tieton Capital Management. Your line is now open.

Great, thank you. That's Tieton Capital Management. So I wanted to ask -- I know you just highlighted that you expect brake calipers to grow at 60% to 70% rate this year. Just wanted to take a step back and ask if we were to look at the biggest dollar revenue growth drivers as you look at what do you expect here this fiscal year, what product lines or offerings do you expect to be the biggest dollar driver in revenue growth?

Again, that's going to be hard to predict for the year. But we certainly -- again I mentioned the brake calipers, I mentioned the 100% growth in our EV business and we expect solid growth in the other categories.

Is there any category that you're not expecting growth in at this point in time, Selwyn?

No.

Okay, that's helpful. Thank you.

And we have no further question at this time. Presenters, please continue.

Great. Well, I appreciate everybody's interest. I want to thank all our team members firstly for their ongoing commitment and customer-centric focus on incredible service during these challenging times. Their health and safety are our top priority and I'm excited about the number of people that have been vaccinated and especially as we move into some of the third-world countries that we're in. We remain extremely vigilant to protect our global team from this horrible virus and we are working diligently to get even more of our employees and their family members vaccinated. In fact, this Friday, June 18, we will be hosting a Pfizer mobile vaccine clinic, which is open to our employees, neighbors and we encourage everybody to attempt. For the most part, our corporate team is continuing to work remotely 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 and I am extremely, extremely proud of our Company. In summary, our investments are bearing fruit. We have reached important inflection points with strong positive cash flow, solid earnings performance, debt reduction and meaningful opportunities to enhance shareholder value in the dynamic $130 billion automotive aftermarket industry and the emerging electric vehicle industry. We are proud of our more than 50-year history in the aftermarket industry and are excited about our emerging presence in the electric vehicle space 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 thank you, again, for joining us on the call. We look forward to speaking with you when we host our fiscal 2022 first quarter conference call in August, and at investor conferences, and hopefully, in person, sometime in the future. Thank you.

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