Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America's Fiscal 2023 Second Quarter Results Conference Call. [Operator Instructions] It is now my pleasure to turn today's call over to Mr. Gary Maier, Vice President of Investor Relations. Sir, please go ahead.

Thank you. Thanks everyone, for joining us today for our call. Before I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the company's Chief Financial Officer. I would like to remind everyone of the safe harbor statement included in today's press release. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during today's conference call. Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by the company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company, and are subject to change based upon various factors. In particular, expectations about anticipated future growth and opportunities with customers may not be achieved. 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 our various filings with the Securities and Exchange Commission. With that, I'd like to begin the call and turn it over to Selwyn for his prepared remarks.

Thank you, Gary. I appreciate everyone joining us today. I hope everyone is safe and healthy. While we had a less than satisfactory quarter, we remain optimistic about the second half and have been diligently focused on achieving solid year-over-year results, and we are reaffirming our previously issued 2023 guidance. Let me begin by discussing the challenges impacting each segment of our financials for the fiscal second quarter, some of which were company specific, and others which were macro-related issues. Before I dive into the specific drivers to support this optimism, let me briefly touch on the challenges for the quarter. First, despite sales being strong for the quarter, which were, in fact, an all-time record, if you exclude core revenue from the same period a year ago, we continued to experience supply chain challenges, primarily due to shortages of components and temporary customer order delays, driven by specific customer dynamics. It is important to note that sales for our heavy-duty and diagnostic businesses were significantly lower than anticipated, which negatively affected gross margins and resulted in disproportionate losses for the quarter. We believe these sales were primarily delayed and we are already seeing a pickup, which will help mitigate the impact on gross margin and on losses. Second, with respect to gross margins, as I just stated, we experienced headwinds from our heavy-duty and diagnostic products. Additionally, we also experienced headwinds due to the continued impact of inflationary costs, which include higher labor, higher component costs and higher production supplies. While we incurred increased costs, the prices did not take effect until the beginning of our third quarter, our price increases. An additional round of price increases will go into effect at the beginning of the fiscal fourth quarter. The October price increases will immediately help to enhance margins,…

Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning as well as 10-Q that we filed later today. Let me now provide a review of our fiscal second quarter and 6-month financial results. Net sales for the fiscal '23 second quarter were $172.5 million representing a 6.6% increase compared with $161.8 million in the prior year, which excludes $13.7 million of core revenue due to a realignment of inventory at customer distribution centers with sales benefits evolving as product mix changes. Gross profit for the fiscal '23 second quarter was $26.5 million compared with $36 million a year earlier. Gross profit for the quarter was impacted by noncash items as well as cash items. Let me provide details for each, and then I'll provide further details on the impact on each additional line item but you can further understand the underlying fundamentals between periods and the opportunities to enhance profitability. The noncash items reflect core and finished good premium amortization, and revaluation of cores on customer shelves, which are unique to certain of our products and required by GAAP. The total of these noncash items in the quarter was approximately $4.3 million. A more detailed explanation of core accounting is available on our website, and I would encourage anyone with questions about this topic to review the video. In terms of cash items, we incurred higher freight costs in excess of customer freight surcharges that we already implemented. In addition, there were remaining higher tariffs due to the shutdown of Malaysia that impacted our facilities and other related supply chain disruption costs. The total cash impact of these [indiscernible] costs, including freight, tariffs and other related costs related to supply chain disruptions on gross profit, was $3.7 million compared with…

[Operator Instructions] Your first question comes from Matt Koranda with ROTH Capital.

I guess I'll ask the usual question first. David, can you just give a breakdown by product revenue in the quarter?

Yes. For the second quarter, rotating electrical was 67%, wheel hubs was 11%, brake-related products was 20% and others was 2%.

Okay. Great. I appreciate that. And then I guess the top of my question here is you put through a couple of rounds of pricing earlier in the year. Can you just remind us how many rounds of pricing have you done prior to the October price increase that you just met that you mentioned in the prepared remarks. And why is that not filtering through into margin improvements thus far. Just curious like what the big headwinds are because if I look at gross margin on a year-over-year basis, it's still -- even after the adjustments were down north of 500 bps year-over-year? Is there something happening adversely with mix? It doesn't seem like volume is impacting because revenue is still healthy, but maybe just help us unpack sort of what pricing has gone into place thus far? And then why that's not kind of fully translating into margin improvement in the quarter?

Okay. Thanks for that. So previously, we had 3 rounds of price increases -- and as we mentioned, there was another price increase that went in at the end of the second quarter going into the third quarter, and there's one more going in at the end of the third quarter way into the fourth quarter. Those price increases are further addressing the inflationary costs. We have seen further cost increases in materials, components, supplies. So these latest rounds further address the increasing inflationary costs. So we do expect, as we pointed out in our prepared remarks that gross margins will be enhanced in the second half.

And I think one thing else to add for this last quarter, this last reported quarter is the unusual effect from the two product lines from the diagnostic product line and from the heavy duty. I mean, that was a big disproportionate loss for us and very little capacity utilization because of the deferred sales of delayed sales and obviously, less overhead absorption. And so that really had a big impact -- significant impact on the losses for the quarter.

And can you highlight exactly where the material costs are sort of really inflating on a year-over-year basis? I'm just trying to get a sense for what are the pain points for you guys in particular on the component side, especially when it comes to, I guess, the rotating electrical core business there.

Yes. I think -- look, the biggest issue right now, I mean, in general, it's easing, but the semiconductor shortage is costing us closing out some hard at right now. And in particular, when it comes to power modules, whether it be for our emulation and diagnostic business in particular, for certain alternators shortages of semiconductor chips. And so we're bidding that up pretty significantly to try and make sure we hit the fill rates that we have. So we expect that to mitigate. We certainly are seeing a little bit of that mitigate, and we expect we have some significant price increases that are scheduled to go into effect. Well, that are in effect now for this quarter, and an additional ones that will go into effect at the beginning of the next quarter. But mostly related to chips and power supplies.

Okay. And then I noticed Brake Products revenue is a bigger percentage of the mix. Just curious, is that running below kind of where your mature lines are in terms of gross margin? It just seems like maybe there's some adverse mix effect potentially from brake products, but maybe speak to that a little more if you could.

Yes. I think definitely are lower than some of the legacy products, although they're meeting our expectations. So no negative surprise on the margins there. That is a business that's growing fast and those margins will be -- will continue to get better as it goes, and be accretive to gross profit contribution. And I think in general, all of the hard parts -- the hard parts categories are living somewhat up to expectation or exceeding expectations.

Maybe just one more on the reiteration of the guidance and sort of what it implies for the back half of this year. Curious, one, do you have enough visibility? It seems like you do to sort of indicate that the back half top line growth rate is going to be approaching double digits. How much, I guess, in terms of shipments that were missed in the quarter is baked into that implied outlook for the second half. And maybe speak to sort of whether a customer -- like why you're confident customers are ready to take those shipments just given that they've been a little bit challenged in receiving stuff. And then two, on the margin front, I guess, it just seems like we're counting on a pretty big snapback in EBITDA margin to kind of get to the full year guide for '23. So just maybe speak to how the pricing rounds that you're putting on are going to help you get there? It's like a 500 bps point, I think, step up in the back half.

I'll hit the headlines, and then David can take any more details. But we certainly received -- we had some delays from a large customer, and we've received some orders to catch up some of those delays. So that's pretty significant in visibility for the quarters. update orders that are scheduled for the fourth quarter already. And so the visibility on the hard parts lines is pretty good, and we feel comfortable there. We do have some OE customers that are in the electrification business that have delayed taking supply and making supply on both sides of that. And there's a little bit of risk there, but we feel like we're already seeing a pick up. So that's on the revenue side. So I think we see a pretty clear path to hitting the top line guidance on the revenue side. On the margin side, clearly, we have the price increases, and we know what they are. And again, as we ramp up for this increased volume in the back half, not only will we have the benefit of price increases, but we should have the accretive effect on product production efficiencies as well as we get through that. And we see SG&A coming down as well from a number of the cost-cutting initiatives that we've taken in. So this target of 93 to 97 of adjusted EBITDA, if you do all the math, we think is still reachable.

Your next question is from the line of Carolina Jolie with [indiscernible].

My first one is a quick clarification question from your comments and your answers. The delay in customer purchases is 100% from the heavy duty and the diagnostics? Or is any part of that in a more traditional aftermarket light vehicle categories that you have.

It's both. I mean, I think the more surprising one for us for the quarter was in the OE electric vehicle space. The other we anticipated. And so but it is in both, Yes. Does that answer your question, Carolyn?

Yes. And then in terms of the non-OE, do you feel as if that's an industry or kind of customer-specific delay if you can answer that.

I think it's very customer specific. Very much customer specific.

And then also, can you just expand on the core alignment differences from last year and this year, if that's noncash or cash? And can you just explain to us what that is? And what kind of factors drive those changes over time?

Okay. You're referring to the core revenue from the last quarter that we referred to.

Yes.

Yes. Okay. So what happens is we own the core portion of the inventory on the shelf of the customer. And so when we have a realignment, if we lose some of that business, that customer repays us for those cores that are on their shelf. They're reimbursed by the new supplier. So we went from a mix of a SKU mix to warehouse mix. So one customer went from SKU-specific mix of suppliers to aligning warehouses. And so the net-net result for us there was we had to pay for some and we received some of the net result as we got an extra, I think, $13.7 million is the number. $13.7 million in revenue. It's unusual revenue, we normally -- we only account for core revenue if we know for sure that it's actually received an -- so it's unusual. It's real revenue, and it's real cap for sure. But it's not our normal course of business.

Your next question is from the line of Bill Dezellem with Tieton Capital Management.

First of all, relative to the price increases, what's the value or dollar amount, I should say, that you expect to flow through fiscal Q3?

Yes. That's a question that we can't really answer because it's really confidential between us and the customers in terms of what price increases -- it is significant -- it is significant. We've been in the product line that we've had a price lock on for 2 years, and we've now come through that to you. So we've implemented a catch-up for -- really for 2 years of inflation on that product line. So they are significant, but I can't give you the exact numbers, Bill.

And maybe I'll try a slightly different way, the size of the price increase that you anticipate in January, how does it compare company-wide compared to the price increase that you just received in October.

It will be bigger. It will be bigger and be more dollars.

And you did say that the October price increase is significant. So the January price increase is significant plus.

Correct.

And would you like to share a magnitude that increase versus the increase now?

I just can't. I mean it's just -- price increases are so sensitive for our customers. And why we get them and who we get them from that, that's just something I cannot go into at this point.

And I think you addressed this in response to a prior question, but you've said a couple of things that seem a little bit in conflict, I think it's just more my not listening well. You've talked about the easing supply chain conditions, but that seems counter to the semiconductor and power module challenges that you're having, would you try to tie all those together for those of us who are a little slower in the room.

Yes. No. I think that my reference is that, in general, across the board, other than the semiconductor power supply arena. The other supply chain seems to be easing, freight seems to be easing. Certainly, there's less freight caught up in the docks. And so in general, I see easing on the semiconductor side and the specialty power supply side, which is very significant for our OE customers and Diagnostics business in total and specialty alternators. The semiconductor shortage and inflationary prices are still a significant headwind. So is that clarified for you hopefully.

Absolutely. No, that's very helpful. And lastly, David, in your opening remarks, you referenced cost reductions that are being implemented across the company. Would you talk about the magnitude of OEs from a couple of reference points. Number one, the impact that you expect in the December quarter? And then secondarily, the ultimate impact when fully implemented, please?

So that's a good question. If you look at prior years, historically, there's a sequential increase in operating expenses from the first to fourth quarter, so at a minimum, we believe, sequentially, it's not going to increase. So we're working very closely with all the department managers, company-wide and looking at our spending, as I mentioned in my prepared remarks, travel outside services and overall cost reduction opportunities.

Yes. There's been a big reduction in labor cost as well as we moved into our new footprint in Mexico. So there's some efficiencies in labor as well.

There are no further questions at this time. I will now turn the call back to Mr. Selwyn Joffe.

Okay. Thank you very much. I appreciate that. And I just want to reiterate a couple of things. I just -- we're excited about our future. I mean I'm, it's a tough -- we had a tough quarter, and we feel that as a management team as much as our shareholders do, and we're very much focused on continuing to strive to hit the guidance and feel like we can. Notwithstanding the headwinds and that impacted our performance for the quarter, we've built a solid foundation for both the top line and bottom line growth from our existing product lines supported by strong demand for replacement parts and tailwinds from hedging car park. We look forward to a strong second half based on these factors and all the other considerations we discussed during this morning's call. And in closing, I want to thank all our team members for their ongoing commitment and their extreme customer-centric focus on service. And just being at AAPEX's and being in the customer meetings and the number of compliments we receive as a supplier is extraordinary, and I'm extremely proud of our team members and our company. And we appreciate your continued support, and thank you again for joining us for the call. We look forward to speaking with you when we host our fiscal 2023 third quarter conference call in February and at future investor conferences. Thank you.

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