Welcome to the U.S. Auto Parts First Quarter 2020 Conference Call. On the call from the company are Lev Peker, Chief Executive Officer; and David Meniane, Chief Operating Officer and Chief Financial Officer. By now, everyone should have access to the first quarter 2020 earnings release, which went out today at approximately 4:05 p.m. Eastern Time. If you have not viewed the release, it is available in the Investor Relations section of the U.S. Auto Parts website at usautoparts.com. This call will be available for replay through May 20, 2020, via the telephone dial-ins provided in the earnings release. Before we begin, let me remind everyone that today's discussion contains forward-looking statements, including key operating metrics and current business indicators, capital needs and deployment, liquidity, product offerings, customers, suppliers, competitors, the impact of tariffs and our tariff mitigation efforts and the potential impact of coronavirus on our supply chain and operating results, trends and financial outlook based on management's current assumptions and expectations and as such, does include risks and uncertainties. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-Q filed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I would now like to turn the call over to CEO, Lev Peker.

Thank you, operator, and good afternoon, everyone. The momentum we generated throughout 2019 has carried into this year. We're proud to be realizing the benefits of the initiatives we put in place last year, which have enabled us to generate record net sales in Q1, continued strong margins and increased adjusted EBITDA. Our Q1 adjusted EBITDA was almost as much as we generated in all of fiscal year '19. These results are validating our Right Part, Right Time, Right Place strategy. And it is also proving the sustainable success and resilience of our business, especially amid current COVID-19 conditions. In the outset of the pandemic, our top priority has been to ensure that our employees have a safe and healthy work environment and that our customers continue to receive the same high-quality personalized service that we have delivered over the past year. We know our customers rely on us to get their vehicles back on the road, and it is our privilege to ensure that we can safely provide what they need during this difficult time. Our three distribution centers have remained operational as they are considered an essential service. For our teams on the ground there, we have implemented strict sanitation standards, social distancing practices and provided personal protective equipment. We have also implemented programs to [indiscernible] policies and interest paid sick leave for team members for any time away to take care of themselves or support family members. On the corporate side, we're all working remotely from home. Our corporate office in Carson transitioned to work-from-home smoothly since we have a large offshore operation and many team members are used to taking calls and meetings from home. Our Manila office and specifically our call center did see some disruption in the early days of moving everyone to work-from-home.…

Thank you, Lev. Going straight to our income statement. In the first quarter, we generated the highest level of sales in our company's 25-year history. Net sales increased 18% to $87.8 million driven by a 42% increase in private label sales compared to last year. In terms of revenue mix, private label accounted for approximately 91% of sales versus 75% in the prior year period. Gross profit for the quarter increased 48% to $29.8 million versus $20.1 million last year, with gross margins up 700 basis points to 33.9% versus 26.9% last year. This is our highest level of gross profit in nearly a decade. Most of the increase was due to our strong private label sales growth as well as better inventory position. Net loss for the quarter increased to $1 million compared to a net loss of $3.6 million in the first quarter of last year. Adjusted EBITDA in Q1 increased to $4.3 million compared to negative $0.1 million in Q1 of 2019, reflecting the benefit of executing the many initiatives we have laid out over the past year to grow private label and e-commerce sales. And as Lev mentioned, we are seeing continued momentum carry into Q2. Turning to the balance sheet. At fiscal quarter end March 28, 2020, we had no revolver debt and a cash balance of $14.1 million. The increase in cash from year-end is a result of higher operating cash flow as well as temporary favorable payment terms granted by our top vendors during this period of uncertainty. The cash balance does not include the $4.1 million that we received and subsequently returned from the PPP loan. We believe it was prudent to shore up our liquidity as a precautionary measure to the new COVID environment, but since then, we have seen our…

Thank you, David. As we have stated in the past, our team is very proud of the work we have accomplished to date, but we're far from living the dream, but there is more work to be done. What you mean committed to our Right Part, Right Time, Right Place strategy, which we expect will further grow our private label and the eCommerce business and deliver significant adjusted EBITDA growth for years to come. With that, David and I will open up the call for questions. Operator? [Technical Difficulty] We're having some difficulties. We're trying to reach the operator, and we will be right back with you guys.

[Operator Instructions]. We'll take our first question from Eric Beder with SCC Research.

Congratulations on a great quarter.

Hey, Eric, can you hear us?

Yes, I can. Do you hear me?

Yes. Sorry about the technical difficulties here.

That's all right. Congrats on a great quarter. Could you talk about the supply chain and how you are working with your vendors and what should we expect going forward in terms of your ability to capitalize on that?

So we've been around for 25 years, and most of our suppliers in Asia, we've been working with them for over 2 decades. We have great relationships. Our partners in Asia had some minor disruption at the beginning of the pandemic. But most of our supply chain comes from Taiwan. So Taiwan does a really good job at managing the pandemic. As far as well as our suppliers and partners in China, they're also back to work. We had a couple of weeks of disruption, but as of today, containers are being put on water. We're receiving products and everyone is back to work.

Okay. And so basically, we're back to normal with that. How do you look at the branding of JC Whitney and now with you down to 2 online sites, how does that give you leverage going forward? What should we be thinking about now with the JC Whitney brand?

Yes. I think the JC Whitney brand is going to become a brand of our private label products, like we've mentioned before. We're also going to launch several other brands along with it. So depending on where that part goes, that's going to determine the branding of the parts. And then the site - the focus is really on carparts.com. And so that's going to be the flagship site that we're going to be left with by the end of this year. So 1 more site that we're going to interact will be JC Whitney, and we're going to make a nice experience on carparts.com for that brand.

[Operator Instructions]. We'll hear from Sarkis Sherbetchyan with B. Riley FBR.

Hopefully, you guys can hear me. So just wanted to kind of touch on the inventory position. You mentioned strong private label sales growth and pretty solid quarter-to-date trends. How do you feel about your inventory position? It seems like you might be kind of bumping up against some of the physical location capacity at the DCs, right? Can you maybe talk about that? And I have a follow-up.

So I think in terms of inventory, it's always kind of a work in progress for us. It's one of the - it's the oxygen of our business. So right now, we have a whole team focusing on inventory forecasting and we're positively looking for opportunities to make it more efficient. And we work with our partners in Taiwan and China in terms of forecasting to support the current growth. Now over the last 4 weeks, we saw really unprecedented demand. So we're working with our suppliers to get as much inventory in stock as possible to support the growth. Now to your point, the network right now in terms of the 3 distribution centers is currently operating with full steam. But we're constantly evaluating options. And as soon as we decide what we're going to do in terms of the network and the supply chain, we'll let you know.

Okay. That's helpful. And in that regard, would it be potentially mapping out the next DC - next location? Or would it be something else?

Yes. So we have - as we've talked about before, our strategy is Right Part, Right Time, Right Place. And the right time of that equation has to do with our fulfillment capabilities. It's making sure that we can get our parts for our consumers and our customers, in general, faster and so if that means getting closer to the customers or expanding our existing fulfillment capabilities, we're going to continue doing that. And so it could come in the form of expanding our existing DCs or a new DC or a combination of both.

And then in the release and in the remarks, you kind of mentioned the higher-margin e-comm businesses outpacing the marketplace business. Can you maybe give us some more context or color around either the metrics? Or just kind of something, a little bit more detail for us to kind of understand what's going on with the numbers?

Yes. So we've always stated that our goal was to grow our e-commerce business because it gives us an opportunity to own the customer. And we wanted to grow at the same pace as the marketplaces are growing. So if you look at eBay and you look at Amazon, you can kind of look at their growth and extrapolate kind of how fast we're growing there because we are growing kind of with the same base as they are. What I can tell you is that our e-commerce channel is growing significantly faster. And we're very excited about the direction that it's taking often. For competitive reasons, we decided not to release information around traffic conversion and things like that as well as e-commerce revenue and spend because a lot of our customers - a lot of our competitors, I'm sorry, are not public companies. And so we wanted to keep a lot of that information closer to the vest.

We have a follow-up from Eric Beder with SCC Research.

Two things. One is, could you talk a little bit about the marketing spend and where you - how you plan on focusing on? I know you've brought in a lot of great talent and let's know where that's going in terms of, obviously, shrunk the website. But beyond that, how are you taking those customers and bringing them more onboard environment to grow?

So I think last year, towards the end of the year, we implemented a CRM and so we've seen some really good success around utilizing the data that we have in our system. To sell customers parts that are more related to their vehicles. And so the long-term vision is that we should be able to participate in the maintenance conversation, knowing what vehicle the customer has as well as knowing kind of how older it is and how many miles the customer is driving and we should be able to build the whole garage because most of our customers, it's a household, right? It's not just 1 car. It's probably multiple cars. So we need to be able to build out a whole garage and deliver value to the consumer, not just from a perspective of selling parts to them, but when recalls happen, we want to be able to let them know. So there's a lot of work that's being done right now on how we can utilize the data to better target the customers, not just for the purposes of us selling more parts, but also for the purposes of building a long-term relationship with that customer. And positioning ourselves as the experts in the industry and as somebody that they can trust and that they can turn to and they're thinking about their repair. Because ultimately, you want to stay top of mind. When that repair comes around and when they have that need, they should be thinking of you as the first place they go to.

Great. And so we have a lot of people basically stay at home. They're not driving their cars. When they start coming back and driving, is that an opportunity for you guys? How do you look upon that potential [indiscernible] 2 months and the car will be kind of crisp.

Yes, it's actually a great opportunity. I think there are 2 things there. So miles driven nationally right now are down about 50%. So I think when that driving returns, the collisions will return as well. So that's the first opportunity. The other opportunity is mechanical parts. When a car is sitting around and it's not being driven and in some areas of the country, the temperatures are still fluctuating, right, between hot and warm, a lot of the fields and a lot of the mechanical parts are going to start failing. And so we've been busy kind of replacing our existing supply of mechanical parts. And we have partners in China that are helping us kind of build out a full product assortment on the mechanical side. So I think anything that's under the hood or in the wheelbase, that entire lineup is being sourced right now. And so as people return to driving and as those mechanical parts start failing, we see it as a big opportunity for us that we have until we tapped into.

And Eric, to add to what Lev just said, on the mechanical part side, what's really great is that historically, we did a lot of business in Taiwan. And in China, we have a lot of big suppliers that are ready to partner with us and co-invest and kind of build that business with us because we've been in business for 25 years. We're starting to look ahead over the next 10 to 20 years, how do we expand those relationships in Asia and how do we make investments in partnership with those suppliers? And we're happy to report that we've done that, and we've been working on this. So we expect some good things out of the mechanical parts business.

We'll now hear from Ryan Sigdahl with Craig-Hallum Capital Group.

Hey guys, congrats on the quarter. I apologize I didn't hear anyone else's questions. So if you have already answered these, I apologize. But I wanted to start with CAC and marketing spend. Can you talk about kind of the efficiencies and what that was in Q1? And then what the trends were in March and into April? And you guys are seeing any efficiencies from kind of the demand picture as well as spending some cheaper ad spend on Facebook, Google, et cetera?

Yes. I think I won't give you exact numbers, but I'll tell you kind of what we're seeing in the market. I think in March, there was a big pullback from most retailers on - across multiple advertising platforms. The primary one is definitely Google for us, but we saw Amazon leave a lot of depart names. And so that kind of drove lower CPC, but the demand was also lower. So the demand for parts, and you can go on Google Trends and see that as well, it fell probably 30% to 40%. And then as we kind of get used to this new normal and as most consumers get used to the stay-at-home orders and not driving, we saw the demand start coming back, and we also saw a lot of our competitors kind of seeing that demand back in the marketplace, driving CPTs back up. So I wouldn't say that the marketing spend is more efficient. I think in the market, what played out is that demand went up and CPCs went up with it, but there is more demand now. So if you compare - if you look at Google Trends over the last couple of weeks, you'll see that at the beginning of March, call it, 100%. Right now, we're sitting at somewhere like 120%, meaning that demand - there is a lot more search traffic out there. CPTs are also a little bit higher. But the marketing spend efficiency is pretty much on par with where it was in March.

And then you mentioned 40% sales growth quarter-to-date in the first 5 weeks of Q2. How does that break out between private label and branded? And then secondly, how do you feel about inventory right now at the moment, given kind of that strong demand? And do you think that could be a constraint for the remainder of Q2?

So on the private label versus branded split, right now, we're sitting at about 92%. So private label in the first 5 weeks of Q2 grew at over 70%, so that translated into growth for total sales over 40%. Branded is a small part of our business now, and we're really trying to drive the private label. Now as far as inventory, again, we have a team that's focused on that, and we do it at SKU level. I think we did a really good job last year of managing inventory. Of course, there's always some work to do. Right now, we've seen some unprecedented demand out of the inventory we have. But we're working with our partners, both domestically and in Asia to kind of get the inventory to support the growth.

Good. Well, that impresses private label. Last question for me, then I'll turn it over. So with the operational improvements that you guys made last year up until now, it really seems to be starting to pay dividends and margins and results. How do you think about pivoting from operational turnaround to growth focus? And then what are the next few initiatives kind of on your road map?

Yes. So as I mentioned before, I think we're evaluating our fulfillment and as David said, inventory is the fuel to our rocket ship. So we definitely need more inventory to drive additional growth. We're also starting - from a marketing perspective, we're starting to look at upper funnel marketing. So on the next call, we'll give you a few updates on what that looks like. But we have a few initiatives going on this quarter that we're testing into upper funnel marketing. On the retention side, we're definitely looking into how can we start playing in the maintenance space. So whether that means changing the assortment or thinking through how to communicate with the customer that they need to do preventive maintenance. And where do they do it? How do they do it? Like thinking for all of those questions. I think those are all the things that are in the works this year. I think the most important thing that we can do is this was year two and for us, what we've always said is that last year was year 0. We really took all last year to build a team, thoroughly define our strategy, come up with a project that matters, but we have a 3-year strategy that we're executing on. And a lot of that strategy hinges on doing the basics very, very well. And so we don't want to chase the next shiny object. I think we're still really focused on operational execution and operational excellence. We're focused on our core business. And now is definitely the time for us to really get focused and rally around our core business and to make sure that we don't lose focus of what we've been doing because it can - it can go bad really fast. So I think to answer your question, we have a lot of initiatives going on. But the main focus of almost everybody in the company is to continue driving the core metrics and not to chase the next shiny object.

Our next question will come from Gary Prestopino with Barrington Research.

I did not hear many of the questions. So I'm hoping that I'm not going to be repeated here. But as I look at your gross margin and it's continuing to expand, obviously, that is due to the fact that you've got more private label in there. But is there anything inherent in the mix of private label that drives that gross margin either way? I guess what I'm trying to get at, as you stay in the 90s, of course, your private label as a percentage of sales, so that gross margin pretty much stayed within a range of 33% to 34%.

Well, I think we kind of like the margin where it is. Now obviously, it will fluctuate kind of up or down based on product mix. We are working on some big initiatives around brand partnerships. We are working on kind of co-investment opportunities with our manufacturing partners in China. So we do have projects lined up. And as the mechanical plus becomes a bigger part of our business, it could kind of fluctuate up or down. But I think in terms of just like - overall, we kind of like where we are right now.

So when you say mechanical parts versus, what would that be like, maintenance parts, [indiscernible]

Yes. The collision right now is about - it's between 70% and 80% of our business. But if you look at in the industry, mechanical prices are also a huge, huge opportunity for us. So from a data perspective, supply chain perspective, core investments with the manufacturing partners, quality control sourcing as well as marketing and technology, we're built for this. So right now, it's a small part of our business, but there are opportunities in the future for us that we're working on.

Is there any difference in the gross margin between those 2 categories broadly defined?

Mechanical is actually a little bit - mechanical is actually a little bit higher in gross margin after freight because it's more standard box. So if you think about collision, we've got hoods and bumper covers and fenders. Some of it goes LTL, some of it goes in the giant box, where mechanical fits nicely into the correct system. So gross margin after freight on mechanical parts is actually a little bit better than on collision.

Okay. And then in terms of what you're seeing at least now that more people are shopping online at your website versus brick-and-mortar stores, obviously, because of what's going on with COVID, is there anything that you're working on now to try and - to get retention of these customers? Or have you actually seen some retention in terms of follow-on orders from some of these customers?

I think it's too early to see follow-on orders because they're just placing their first orders online, if you will. I think the way that we've set ourselves up is we want to be able to provide the best experience online for auto parts shoppers. Now they're benefiting from the fact that they're shopping for the first time, and we spent all of last year on things like site speed and user experience and simplifying the checkout flow and making sure that we get parts to them faster than before. So I think these first-time shoppers are benefiting from all the things we did last year. And then we believe that we'll continue benefiting from making those investments last year and making the additional investments we're going to make this year.

That will conclude today's question-and-answer session. I'll now turn the call over to Mr. Peker for any additional closing remarks.

Thank you, everyone, and we'll talk to you in August when we announce Q2.