Motorcar Parts of America, Inc.

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It is now my pleasure to turn today's call over to Mr. Gary Mayer, 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 Selin Jaffe, 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 Security of 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 Selin to for his prepared remarks.

Thank you, Jerry. 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 continue 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 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, followed by the additional price increases in January, which will further improve margins. In addition, operating efficiencies will also enhance margins moving forward. Third, our profitability was impacted by higher interest expense. primarily from a significant rise of market condition interest rates related to customers' supply chain finance programs and interest rates related to the company's average debt balance. We have implemented price increases to partially offset inflationary costs, including some increases in interest rates and other items that David will discuss. Now, let me highlight several items that support our optimism included in this morning's press release. Number one, we expect sales to be in the range of $680 million and $700 million for the fiscal year, representing between 4.6% and 7.6% year-over-year growth, reaffirming our annual guidance. We also anticipate margin improvement with a full benefit of the latest price increases expected in the second half of the fiscal year, as well as further operational efficiencies and cost reductions. Three, we expect cash flow improvement from enhanced profitability across all product lines. With regard to this last item, I should mention we have been working diligently to adjust investments in inventory levels, which have been higher than normal to mitigate supply chain disruptions and are now stabilizing. This supports our goal of improving cash flow from operations. As a result of these initiatives, the company is well positioned for sustainable top and bottom line growth for parts and solutions in future periods. Now let me expand a bit further and discuss the other drivers to support our ability to achieve second-half and longer-term financial targets. Our brake pad line, utilizing an exclusively licensed industry-leading formulation, continues to gain traction, as are our brake rotors. Orders for both product lines are growing, particularly since the beginning of the second quarter. We expect this momentum to continue to increase in the second half of this fiscal year and moving forward. Our brake caliper product line continues to gain momentum with expected operating efficiency improvements as volume increases with further fixed cost absorption opportunities. We believe our brake-related business will exceed $300 million in annual sales above our fiscal 2022 reported results in the next three to five years. We are continuing to expand sales in Mexico with multiple product lines as our customers experience increased demand for aftermarket parts, including currently rotating electrical, wheel hubs, and master cylinders. All major automotive retailers are continuing the rollout of our rotating electrical benchtop tester, and we expect sales from this opportunity to reach a cumulative $80 million in the next five years. We also expect additional revenue from maintenance and add-on services. Our electric vehicle contract testing center in Detroit, Michigan, continues to attract customers, including a leading agricultural and construction equipment provider and leading EV automotive manufacturers to support their design and development of electric vehicles. This contract testing is an initial entry into our software as a solution business. We were encouraged by the response from customers of last week's APEX trade show in Las Vegas and we're excited about all of our multi-year new business commitments and expect these numerous opportunities to continue to fuel our growth. In short, we are well positioned to address both the internal combustion engine market and the emerging electric vehicle market with product functionality and applications across both markets. We expect continued strong demand for internal combustion engine applications for decades, notwithstanding electric vehicle growth. which still represents a small percentage of the overall car park. In summary, with a broad line of non-discretionary off-the-market parts necessary to service the internal combustion engine car population and approximately 280 million vehicles on the road, we remain excited by our opportunities. Our benchtop testers for alternators and starters continue to roll out of retail customer store locations across the country. These benchtop testers enable retailers to offer accurate advice with the latest protocols to diagnose problems for consumers and reduce unnecessary returns. This provides a value-added benefit for the retailer, whilst strengthening their consumer relationships. Notwithstanding the continuing domestic and global challenges, we are working diligently every day with our customers and suppliers to meet the demand for our products, as well as the inflationary pressures we are all facing. I'll now turn the call over to David to review our results in greater detail.