Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America Third Quarter 2024 webcast and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Gary Maier, vice President of Communications and Investor Relations. You may begin your conference.

Thanks. Thanks, Rob. Thanks, everyone for joining us for our 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, I'd 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 of 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 uncertainty, some of which are beyond the control of the company and are subject to change based upon various factors. In particular, expectations that 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 the various filings with the Securities and Exchange Commission. With that, I'd like to begin the call and turn it over to Selwyn.

Thank you, Gary. I appreciate everyone joining us today. We are encouraged by our operating results for the quarter, including strong sales performance, increased gross margins, increased EBITDA and significant positive cash flow and a revolver pay down of $50 million to $102.8 million of net debt. While some of this cash flow resulted from deferred collection catch up in the quarter; for the nine months, we generated $48.4 million in positive cash. I might add that these results were particularly impressive considering the industry's softness in November and December. Recent extreme weather conditions throughout the country should help bolster this industry's sales softness in future quarters. We were also pleased that gross profit for the quarter and nine months increased substantially. gross margins continued to improve and benefit from better operating efficiencies as anticipated, particularly from increased overhead absorption with higher sales and production in newer product categories. I should also add that price increases in effect, but not yet realized, will contribute an additional $10 million in annualized sales, and gross profit and EBITDA. We remain focused on three key initiatives: sales, profitability and neutralizing working capital. We are confident that our sales and profitability will grow organically and through market share gains in all of our product lines. Increased profitability along with our working capital initiatives will further enhance cash flow generation. With regard to working capital, we continue to focus on the balance sheet including extending vendor payment terms. This initiative is being supported by the launch of our vendor finance program offered to our suppliers. This enables us to extend our payment terms while facilitating a program for our suppliers to have early access to capital. We expect to increase the number of days outstanding for accounts payable, which will result in additional cash generation.…

Thank you, Selwyn and good morning, everyone. I encourage everyone to read the earnings press release issued this morning, as well as the 10-Q that will be filed later today. Let me first provide key highlights for the fiscal third quarter. net sales increased 13.2% to $171.9 million. gross margin improved by 3.7 percentage points. Gross profit increased 43.1% to $30 million. Operating income increased 170.1% to $9.5 million, and the company generated cash of approximately $53.6 million. I should mention that gross profit for the quarter was impacted by non-cash items, as well as cash items. The non-cash items reflect core and finished good premium amortization, and revaluation of cores on customers' shelves, which are unique to certain of our products and required by GAAP. The total for these non-cash items in the quarter was approximately $4.4 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. Third quarter gross margin was 17.5%, compared with 13.8% a year earlier. Gross margin was impacted by 2.6% from the previously-mentioned non-cash items, as well as 0.9% from cash items as detailed in Exhibit 3 of this morning's earnings press release. in summary, in addition to the non-cash and cash items explained previously, gross margin for the fiscal '24 third quarter reflects the partial benefit of pricing increases that went into effect during the current quarter and operating efficiencies. Additionally, we have meaningful annualized pricing increases that started in the current fourth quarter, which will further contribute to gross margin enhancements. Operating expenses were $20.5 million, compared with $17.5 million in the prior-year period. This included a non-cash gain of $3.1 million for the foreign exchange impact of lease liabilities in Florida contracts, compared with…

[Operator Instructions] Your first question comes from the line of Matt Koranda from Roth MKM. Your line is open.

Hey guys, it's Mike Zabran on for Matt. Can we just start like usual with the breakdown of product revenue by mix?

Yes. So, for the third quarter, rotating electrical was 65%, brake-related products was 21%, wheel hubs was 11% and others was 3%.

Got it. Helpful. So, the release in the -- on the call, you talked about a slowdown in November, in December. Maybe, just elaborate a little bit further on what exactly happened and what's our sense for why demand was weak in those months?

Well, we started off the quarter with a great October and I think a lot of the professional installer base got soft. I think that we had some pretty mild weather. I mean, again, it's very hard for me to really put an accurate finger on the pulse as to why things softened up. The fundamental metrics remain good, but we've seen that now that there was some extreme weather mostly in the west and east part of the country. We've seen a pickup, so while it's hard to predict. I mean, we are maintaining our guidance for the year and we are optimistic, should come back. I mean, I just don't know, I wish I could give you an exact, x, y, z explanation as to why this happens. The other issue that we have is that and I don't know if this is a fact or not, but sometimes it's our customers' fiscal calendar year ends and maybe, they're managing their working capital level, so that could have an effect as well. But really, I think that the fundamentals for November, December on a macro level across the industry, across the base, it definitely was a little softer out there in particular. I mean, I can only refer to our products, but we think that just number of vehicles and footprint research that we've shown showed it a little bit softer.

Got it. Okay. And Selwyn, you said we are sticking with the guidance through the end of the year.

Yes. So, we've had a strong start to this quarter. And we'll see, as we come towards spring, we're optimistic still about demand. We're busy and yes, we're sticking to our guidance.

Got it. Okay. okay, maybe, just help level set us on how much pricing has been put through as of today. And we talked about it a little bit on the call, but just further elaborate on how much pricing has been put through today. Should we expect to keep continuing to take price and then I have a follow-up as well. but maybe, let's just start there.

Yes. So, it's becoming harder and harder to quantify on how much is put through and how much isn't put through. I mean, we put a significant amount through, there's $10 million of annualized pricing that's already in the existing price increases that hasn't been reflected in the numbers that'll start in this quarter. And we expect to mitigate inflationary costs and hopefully including interest in pricing strategies. We also, as we pick up volume, we become more operationally efficient and we've got a lot of initiatives on continuous improvement that continue to drive profitability. So, across the board, I mean, our biggest challenge today is mitigating the interest expense. I mean the interest expenses is due -- the vast majority is due to more success with sales. And with the new loan agreement that we have, we're able to collect that cash and you can see our operating metrics, we've paid down over $40 million in debt for the nine months. I think the quarter is a little disproportionate, because of some of the deferrals, but the nine months is not. And so we -- I think, everyone is aware of the interest rates and we expect to continue to mitigate it.

Got it. Makes sense. And so then the price increases that we started in the fourth quarter, I guess, when do those fully filter through? Do we have a sense for that?

Yes. So they start in the fourth quarter, just assume in middle, middle to late fourth quarter, but they filter through going forward on an annualized basis, all those, there's another $10 million that'll be over and above what we've already got in the numbers for the next 12 months.

Got it. Okay. So, those start filtering through as soon as --

That's right.

Okay. Okay, got it. Okay. that makes sense. Last one from me, the tax valuation allowance. So, I understand, it was required by GAAP and it's a non-cash expense. We made that very clear, but maybe just why exactly did we have to recognize that allowance? Just help us get a better sense for that.

Yes. So, the first thing, let me just sort of back up and say it's -- those assets remain on our balance sheet and we are optimistic that we're going to be able to use those assets and as we get more GAAP income, we'll be able to reverse it and it'll take some time. but assuming the company performs, which we expect it to, and we'll reverse them, it doesn't affect our tax liability, it doesn't affect cash, it doesn't affect anything. And the real, the trigger is that we had a higher expectation for results in the third quarter in this past quarter that we're reporting on. And we had a soft two months out of the three months and we had to revise our -- we had to -- we did revise our forecast, internal forecast down and that results in a taxable loss in the U.S. entities. And so we had to put a reserve on the tax asset. It's unfortunate, I hate it. but it's the rules and that's what's happened. And again, while the optics of it and the rules of the rules, in no way affects us other than what the perception is out, it no way affects us in terms of anything that we're doing right now. And our focus continues to drive to drive GAAP income and all income. And so as that reverses those assets, that valuation will come off the assets.

Got it. Thanks, Selwyn. That's all from me guys.

Thank you very much.

Thank you.

[Operator Instructions] Your next question comes from the line of Matt Dane from Titan Capital Management. Your line is open.

Great. thank you. I wanted to ask about the new Malaysian facility that you referenced in the call. I was hoping you could walk through some of the benefits that you expect from that. I just wasn't certain if you were just expanding capacity or if there's other benefits or just help me understand that if you could.

Yes. So, that's a great question, Matt. That's -- it's very exciting for us. What we did there is we opened -- we've been in Malaysia, I wish I knew the exact number of years, I mean probably over three decades. And we've been able to continue to grow the old facility. What we've done is we've created a brand-new state-of-the-art facility, which allows us now to meet all the tests to ship our customers direct from Malaysia to our customers. So, it'll never be touched here. So, wheel hubs, the new wheel hub program, which we -- which is in line with what we've been doing, same thing now, has more capacity to go direct with storage for that inventory staging areas for that inventory to be shipped directly to our customers around the world, but in particular, in the United States. And that's a big deal, because our competitors are Chinese based and they have subject to tariffs, and our customers buy large orders of this and so want to take ship direct programs and we think that's going to open up some big opportunities going forward. I think short term you'll see a little bit of a dip in that product line and then in the next six months we should see some extreme -- I think we'll see some extreme gains in that product line. So, very exciting and it's a fabulous plant already had a major customer visit and he was extremely impressed with it. I mean and that's all in the CapEx. It's all paid for and done.

Okay. So, you expect this plant and the cost efficiency of shipping directly to the customer, it's basically to lead to some substantial revenue gains as you gained share from your Chinese competitors. Is that what I heard you say more or less?

Yes. Yes, I think we'll see margin gain and share gain in time.

Great, great. Glad to hear. I also did want to ask about the quality bill product line and reference that very briefly in the call as well. Just was curious, the traction that you are seeing with that product line, how is that relative to your expectations?

It's -- well, we have high expectations, I'll start there. So, although answering relative, every time I get results of how we're doing, my expectations grow. but I mean, we've growing that, we've had over 40% growth rates in that product line and that product branding name, and it's becoming a nationally recognized brand. and I'm extremely excited about how that's unfolding. We're adding many new customers to the brake line under our quality-built name, and we are just getting more and more demand for quality-built. And so that brand value and that brand equity, we are excited about that. The other side of that is there's no factoring cost, there's no supply chain cost on launching and growing that business. So that's also encouraging to us.

Okay, good to know. I appreciate it.

Thank you.

Thank you.

And there are no further questions at this time. I will now turn the call back over to Selwyn Joffe for some final closing remarks.

Okay, thank you. So, just in summary, we're excited about year-to-date accomplishments and our outlook; in particular, our strong cash flow, our pay down of debt. We expect the further benefit of additional price increases and the opportunities to further enhance shareholder value. We are encouraged by our leadership position in the industry and our solid customer partnerships. We built the platform for growth that is not easily duplicated and we expect this growth to continue on in the future, especially as the demand for our non-discretionary aftermarket products. So, the critical need for our consumers, the cars are on the road that the car population continues to grow and non-discussion parts will be there. There may be temporary ups and downs, but long-term, there's a medium-term and near-term, the demand will be there. In closing, I must recognize the contributions of all of our team members, who are continuously focused on providing the highest level of service. We are all committed to being the industry leader for parts and solutions that move our world today and in the future. We appreciate your continued support and we thank you again, for joining us the call -- on the call and we look forward to speaking with you when we host our fiscal 2024 year-end conference call in June and at the various investor conferences in the interim. Thank you.

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