Ladies and gentlemen, thank you for standing by and welcome to the Motorcar Parts of America’s Fiscal 2021 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to your speaker today, Mr. Gary Maier, Investor Relations. Please, sir, go ahead.

Thank you, and thanks everyone for your patience in joining us today for the fiscal 2021 third quarter call. Before I begin, 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. As noted in this morning's press release, we experienced solid product demand during the quarter and continue to experience solid product demand. Even though challenges due to the pandemic, including global supply chain disruptions, resulted in order delays of approximately $17 million a quarter. We believe these sales will be realized in the current fourth quarter and the first quarter of the new fiscal year. I might add that we have already experienced record January shipments. Despite these delays, we reported significant increases in profitability for the quarter and nine months, including strong positive cash flow and debt reduction. The company generated solid cash flow for the quarter of $33.2 million from operations and reduced debt by 29.1% to $67.6 million from $94.4 million at September 30. Net income was $0.44 per diluted share as discussed in today's press release. I should point out that for the trailing 12-month period, we generated $95.8 million in cash from operations. We used this cash to reduce net debt by 53.6% to $67.6 million from $145.6 million at December 31, 2019. And we deployed capital expenditures of approximately $20 million, the majority of which was used to substantially complete our footprint expansion. David will discuss additional details later in the call.

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning, with respect to our December 31, 2020 earnings press release for a more detailed explanation of the results. For information about the items that impacted the results, see Exhibits 1 to 5 of the press release. Let me take a moment to review the financial highlights for our fiscal 2021’s third quarter. Net sales for the fiscal 2021 third quarter were $122.6 million compared with $125.6 million for the same period a year earlier, impacted by order delays of approximately $17 million due to the continued COVID-19 related challenges Selwyn mentioned. Gross profit for the fiscal 2021 third quarter was $24.2 million compared with $27.7 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2021 third quarter was 19.8% compared with 22.0% a year earlier, reflecting in part the impact of supply chain challenges due to the global pandemic including higher freight and handling costs. Additional factors impacting gross profit are shown in Exhibit 3 in this morning's earnings press release. Results for the fiscal third quarter were impacted by approximately $1.6 million on a pre-tax basis or $0.06 per diluted share on a tax-effective basis for cost of goods sold and operating expenses related to safety and health initiatives associated with COVID-19. Approximately $723,000 of the $1.6 million relates to incremental bonuses and wages paid to the company's dedicated operating employees on the frontline. The balance of the costs relates to personal protection equipment and social distancing initiatives.

Your first question comes from the line of Matt Koranda from Roth Capital. Your line is open.

Hey guys, thanks. Just on the $17 million of delays. Can you provide a bit more detail on that? Because it sounds like it's more of a supply chain challenge that you're alluding to and not necessarily a demand issue. So, where are you getting the order delays, in which products? And then why do we have the visibility to say we're going to recognize the $17 million shortfall in the March and June quarter? And what's the split roughly between the two quarters do we think.

Yeah. So, that's a lot of stuff, Matt. Let me just give you some color and David can give you more detail. But the big challenge is December year -- December is the year-end for a lot of our customers -- and so we had some inventory reductions from customers pushing orders back from December into January. So that's a piece of it -- but no demand issues. The demand, quite frankly, right now is exceptionally strong -- and then on the supply chain side -- you know there's just freight challenges everywhere -- there's problems getting containers -- there's problems with delays at ports when the product leaves these ports and then there's challenges in how they are predominantly which is LA and Mexico in terms of offloading boats. You know, getting a lot of our inventory sitting on ships that are in the port that cannot be offloaded. So we have a lot of inventory on the water. We have a lot of inventory lined up. We expect to get through this and we think that as you get through to Chinese New Year, so the march -- we'll see some alleviation of the products that are stuck in the ports. And we'll just have to see how that continues on, but the fundamentals -- the demand side of our business is exceptionally strong and probably stronger than it's been in some time -- it’s the supply side -- that's a challenge -- and where it hits the products, it hits across the board, because even though you may be remanufacturing what the United States and Mexico and Malaysia, unique components, these components come from various places all over the world. So we’re hit across the board -- what I will say is that we’re catching up in most product lines and for the demand -- and hopefully we can get through this sooner rather than later. As far as the mix of what is going to happen between the fourth and the first quarter I think the majority will be in the fourth quarter but we may have some deferrals in the fourth quarter that go into the first quarter. So I mean that's an unknown. So you know, it's a little difficult. David, you want to add.

Later in the 10-Q that we will file, I just wanted to point out the product mix for the quarter is about 72% of rotating electrical, wheel hub about 14%, brake products about 12% and others about 2%. So you will see that the rotating electrical product mix was down compared to the prior year third quarter. And I will say, Matt, just to add to that is the faster the recovery is rotating electrical as well. So while it was hit the worst, it's the fastest to recover.

Okay. Got it. And then one thing that I think your answer is selling that I wanted you to unpack a little bit more because I don’t necessarily understand the dynamic, if you look at most of your customers' same-store sales running incredibly strong. And obviously that's indicative of good strong end demand. But you're saying that they're pushing orders into January from December. What is the dynamic at play and why are they waiting to take on inventory, where I would assume they might be a little bit then toward the end of the year here?

Look, I can’t speak for our customers but in general customers have COVID issues in their warehouses as well. So they can take everything in as fast as they normally could take it in. It's the end of their quarter. So I assume that they're managing inventory levels for the quarter. I know every customer has got their own -- their own QT -- excuse my whatever language that is Yiddish but, you know, it’s -- and don’t think -- I just think in general that I feel like pushing inventory a couple of weeks back doesn't hurt them and may help them. I don’t know.

Okay. All right. Fair enough. And then just one more from me, on the gross margins they move around quite a bit. And I just want to get a sense for how to forecast this stuff going forward. So I think we're down about 150 basis points year-over-year if we look at the adjusted gross margins on a consolidated basis. Maybe it'd be helpful David, if you could provide a bit of a bridge year-over-year, because I know you guys mentioned freight as a big headway and that's understandable. Is there component inflation or labor inflation in there that's causing an additional headwind or is it just sort of a mix of product that we're selling is kind of weighing on gross margins, and how should we think about how those items feed into the adjusted gross margin line for the next quarter or two? Should we be kind of expecting this mid-20% gross margin rate?

Good question. So the largest impact is going to be the supply chain challenges to higher freight and handling costs, so that’ll make the most of that differential. And as you mentioned, a small part of that is going to be the product mix. So rotating electrical with 72% of sales, again this will be in the 10-Q prior year with 75% of sales. So that product mix will have a smaller impact, but by far the largest impact is the higher freight and the supply chain challenges. And as revenues increase, we've been able to absorb costs and have overall a better margin. So with this increased demand that we're seeing subsequent to December 31, the higher sales will definitely help with margin.

Your next question comes from Brian Nagel from Oppenheimer. Sir, your line is open.

So the first question. I think just a bit of a follow-up to the prior question. You talked -- you spent some time talking about the supply chain disruptions. It sounds to me like it's primarily industry-related. But the question I have is, is that right or are there aspects here that are unique to Motorcar parts as well?

Oh, I think it's global, global supply chain challenges, Brian. I don't think it's us. I don't think it's our category. I don't think it's our industry. It's I -- I am hearing it in multiple industries. I mean, there's just a shortage of containers. There's been a number of challenges with management of freight. I mean, there's been some freight that's lost in the ocean, particularly coming from Shanghai and Singapore. It is not specific to us at all. I think this is a global issue. I think it's across all industries.

Got it. Second question I had. So when you mentioned in your prepared comments, the business strengthening further in January to the current fiscal quarter. Can you quantify that or how much better the business has actually gotten here in the last few weeks or so?

Well, I mean, it’s a decent double-digit increase. I mean, it's you know north of 10%, 15% growth. But again I don't want to -- I want to be cautious because I don't want to just assume that January is going to be flowing through forever. We think that the fundamentals of the industry are much stronger. We have some catch up in January from December. So, it's very strong. I mean again I think it's the you know we’ve just the certainly the stronger shipments we’ve added in January in our organization, but I want to be cautious because there may be some more deferrals that will come in the fourth quarter as we head into the Chinese New Year. I’m -- I'm not sure. And so it's a little difficult to predict. The demand is there. The question is you know how much product we can get out the door.

Got it. And then one final question also on demand, given that clearly the COVID situation remains quite fluid. Are you seeing -- are you -- as you look across you know I guess as your customers located throughout the United States, are you seeing a significant difference in demand depending on location and the intensity of COVID in those specific areas?

That's a good question. You know we -- we are tracking mobility trends across the country. We've seen a pickup in areas that were previously -- previously soft. So, you know I think in general, what we're seeing is the high concentration of automotive markets is up further. So, the southeast and the northeast and the west, but mostly, you know the -- the concentration of vehicles on the East Coast are up and down.

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

Yeah. So, first question relates to the current level of cash generation -- just help me understand -- is this level sustainable even when considering some of the inventory builds and order rates you're forecasting for your customers coming up?

It really depends on -- you know sales levels and growth -- we generate good cash flow for the third quarter -- starting out with a strong profitability as well as -- benefits from working capital -- but it will fluctuate -- and depending on account growth. So, I would say depending on a little bit of seasonality -- it's going to impact cash flow generation. So overall so cases that we believe that we can continue to grow the business and still generate positive cash flow.

And if we look at the -- kind of the new product startup costs and transition expenses -- when should we expect that to wind down? It seems like your facilities expenses have largely been consumed? So just trying to get a sense for when those new products startup costs and transition expenses begin to wind down from these current levels?

So as we continue to wrap up our facilities in Mexico and production volume of our new product line, that will continue through the March quarter, and starting in the new first quarter of the next fiscal year should start to come down.

Got it and would those metrics come down to zero -- or do you still expect some marginal expenses there throughout the next fiscal year?

It will come down -- and there will be a marginal amounts in the first quarter -- but it will not go down completely to zero; there would be a little bit still in the first quarter.

Okay. And just want to touch a little bit on the testing and diagnostic products and the business there. Have you been able to maybe disclose the run rate sales for that category of testing and diagnostics products?

We haven't really. I think we've talked about it in general but we haven't really quantified it. But I mean I can give you some insight. It's sort of you know we're looking at north of $20 million in revenue for that business. We're quite optimistic about our initiatives in the electric vehicle space and the battery charging space and electric powertrain space. And so we're getting quite a lot of good traction there. And so hopefully we can get to a position where we can accelerate growth in the following years. We think there is a big opportunity waiting there.

And as of today how much of that sales metric is the like bench top testers going into your customer stores versus maybe some of the simulation and emulation equipment that go into the manufacturers?

I guess we have not -- we have not really segment reporting that. But again it's not material to the numbers. But I mean maybe just in general giving you some insight is that the diagnostics for power - for combustion engine, which includes bench top tester. We expect to have assuming that capital budgets are released the way we expect them to be released from the customers we have indication significant indications of interest, more than indications of interest but indications of volume and orders that we expect. We don't have them yet, but we expect it. And so that in this next fiscal year would probably be about two thirds of the volume. And again, I'm giving you very rough numbers, but then the electric space is again fast evolving. We've had some nice wins from very prestigious customers and more to come on the electric space.

Got it. And just switching over to the new brake product category, any indication on kind of the run rate sales or the growth in that category? It sounded like in previous calls you thought this back half of the year would lay around some nice sales. So just trying to get a little bit more color there?

Yeah. Look at the brake caliper business, we -- I mean, I don't know, we booked any time in the queue or what we expect for the quarter.

So we had total brake product price up 20%.

And I would say that you're going to see significant growth in the next fiscal year on the brake products. We have a lot of new customers that we're starting to ship. We haven't started shipping yet. And the outlook for that is strong. I mean if you notice the inventory growth, a lot of that inventory growth is in anticipation of demand that we are already seeing for the brake products.

Got it. And one final one from me, I'll hop back into the queue. What was CapEx, David, inside the quarter? And then what's your expected level of capital investments for the upcoming fiscal year?

So CapEx was approximately about $5 million and most of that was for our Mexico expansion. And for the year, we're expecting little over $17 million.

What do you expect next year?

Next year, we are going to have a little bit remaining to do, to finish the Mexico expansion. But after that, it’s just going to be mostly in maintenance CapEx.

Got it. Thank you. I'll hop back in the queue.

Your next question comes from the line of Steve Dyer from Craig-Hallum Capital. Your line is open.

Good afternoon, guys. Ryan on for Steve. Just want to dig in a little bit deeper on January. I guess you mentioned record up 10%, 15% but also a bunch of deferrals that are realized in the quarter. So I guess I'm curious, was that absent those deferrals from last quarter into this quarter, would the quarter still have been a record? And then can you talk about kind of just more normalized trends.

Yeah. I believe we would have had a very strong January as well. I can't tell you exactly what was already being shipped in January versus not up until you specifically if it's a record, but it was an exceptionally strong month. January, regardless of the deferrals, there is a lot of orders, a lot of activity, again attributed to the personnel. We have to get the number of units out the door that we did in January considering all the social distancing and that. I can't quantify that specifically. I don't think we have that data available. But either way, with or without the deferrals, it was very strong.

Good. One other follow-up for me, then I'll hop back. So you mentioned, I think, so when you say $20 million of diagnostics revenue. I guess I was thinking that was all in the other products category which was 1% to 2% of sales this year. So, I guess is that included in other categories or is it all in there? And then can you talk about kind of maybe if there is deferrals there and kind of that opportunity from this year to next, maybe to get to that $20 million.

So, let me start with the deferrals and I might let David give you the details. There is a lot of deferrals there that are not even included in that $17 million. The $17 million that we quantify are actual orders that we know there is demand that we specifically have moved over. So, the delays on capital expenditure releases for those test doses are not in that $17 million. We again, until you got a purchase order, you don't have anything, but we believe that there is significant pent-up demand for those test doses. And David, so you can sorry jump in for the EBIT.

Sure. So, as Selwyn mentioned during the quarter, there was an impact on diagnostic-related sales. So, for this year we're going to be under that $20 million, but for next year we're targeting to be over $20 million.

Your next question comes from the line of David Berman from Berman Capital. Your line is open.

A question for you. Most of my questions have been answered but the one question I just want to follow up on someone else's question. I think inventories were up about 12% or 10% and they had been down in prior quarters. And you said there was like an extra category that you were adding, so obviously we should -- I mean obviously but I think how much should we -- how much do you expect that extra inventory given that the inventory of so much to add to the baseline going forward.

We’re not giving specific guidance but that new category we're ramping up is the brake calipers, a very exciting product line. We're going to continue to grow as we're producing from our Mexico facilities. So most of that inventory growth is going to be for increasing demand including brake calipers.

Yeah, and then the other thing -- David is that you've got this new category -- the new category you're going to see -- you know just in that category alone you're going to see double-digit increases -- you know -- I mean anywhere between 10% and 20% in that category of growth -- and then you've also got -- we've talked about this increasing demand -- just in our fundamental base businesses that -- you know we are -- we're anticipating again with the package that's going out …

So last time -- we saw a significant increase in demand. We're anticipating -- and we're seeing already that demand is going to go up for these products. -- so I mean those are -- you know we're fortunate to be category captains -- and so our ability to see trends is pretty good -- and I mean what we have -- supply side right now -- but the demand side looks positive -- and the inventory is going to be well used.

Right. Okay. And then -- maybe just relate to the balance sheet -- if I can follow-up this. So I’m sure you’ve discussed this, but your payables have gone up significantly. And it seems like in your industry many of your -- many of the other companies get massive terms from the vendors -- and you're up to almost a -- as of fourth months now as of yet -- and which is a dramatic change and departure from what you were doing before. And it's a great source of income so congratulations in getting there. But I just wonder -- if you can share with us -- what's going over there?

So the growth in payables is directly tied to the growth in inventory -- we are very grateful to clients and we’re working with -- so part of the inventory growth strategy is also to extend the term so we're able to achieve that during the …

Well usually it is. Usually it is directly related to the increase in inventories. But in this particular case your payables are up as I see it 51% and your inventories are only up 12%. So it's way in excess of your inventory growth which leads me to believe that you must have changed your terms. I mean you're not in financial bad strengths or can't be because you can't pay. You must be having better terms and I was just wondering what that was all about?

Yes, we continue to work with our suppliers to get better terms overall. So that's definitely part of the extension.

And is that going to continue? I mean what is the end right now - four months of payable?

I mean the net growth for us is inventory net of payables to be zero. I mean that's where we want to be. But whether we can go…

Oh, I see. Okay. Right, right. Interesting to see your payables been up, accounts payables $146 million if I'm looking correctly though we don't know from the outside how much is accrued liabilities. And your inventories are up $296 million. So if that's the case, you still have a long way to go.

That's correct.

Your next question comes from the line of Scott Stember from C.L. King. Your line is open.

Selwyn, you’ve talked about how demand is -- I guess, that as the calendar is still very strong. Can you just to give us a greater level of comfort, just give us an idea of how well your products are actually selling at point of sale, to the extent that you can give us?

Yeah. Again, I can't -- I mean, that's our customers' business, but fundamentally a point of sale data shows every category trending upwards.

Okay. And I'm just trying to get a sense of are we talking double -- like low doubles, high singles because at least up until the last couple of quarters we were kind of looking for low double-digit growth, I guess, just given some of the new product lines that were coming out and just trying to get a sense of if that narrative of demand has changed at all?

I can't -- again we're under restriction in terms of giving out that information. So I can't really tell you what they're experiencing, but we as a company at MPA, we still believe that we’re on track, despite all the challenges, I mean our run rate I had mentioned that we thought our run rate would be at $600 million by the end of this fiscal year. And we haven't changed that.

Your last question comes from the line of Bill Dezellem from Tieton Capital. Your line is open.

Great. Thank you. So I have a group of questions. The first one, you've mentioned in the press release that you expect product mix change to benefit you in the future, would you please discuss that in more detail?

So as we've been growing the brake-related products, brake caliper is going to be a growing category for us as someone mentioned before as we've been pointing out. So with that product mix, more brakes that will add to the top line.

So specifically the mix change this you’re referencing is brakes and it is specific to revenue, not a margin commentary.

It’s to sales, that's correct, to revenue.

Great. Thank you, David. And would you please discuss the electric vehicle subsidiary and the promising aspects that you are -- have and that you are seeing there?

Yeah. Well, there is interesting dynamics in the industry, automotive industry let's just deal with that first before we talk about aerospace. But in the automotive industry, you've got the continuing growth in the combustion engine car park. And you have continuing development in the EV space. And development revolves around designing vehicles, prototyping them and then building them and then keeping them on the road which is the maintenance of those vehicles, but in particular with the charging systems around them how products are proving with the strategic relationships we have and joint venture marketing relationships and sales relationships are getting significant traction with some of the top OE companies in the world and some of the top evolving electric vehicle companies in the world in both battery technology and the development of battery technology and in the development of the electric powertrain. And we have some exciting things coming that -- we haven't quite announced yet -- that we will be announcing. But the fundamentals of the development and the vibrancy of the amount of development that's going on in the electric space are significant when we look at our allocation of capital -- we think the electric space has got a lot of opportunity for us. And we think our base technology is going to have some traction that we can accelerate those applications into that electric space. And that applies to automotive -- and I will tell you that in the aerospace side and space exploration side, we’ve previously announced that -- we’re a supplier to NASA. And we are to some other very significant early aerospace companies -- there's a lot of electrification and diagnostic -- incremental diagnostic equipment that's being used in the development of the electrification of aerospace. And while that's a little further out -- we’re quite excited about how we fit into that space as well. Space being a pompous so -- excuse that -- but so I don't think you're going to see massive revenues right now -- I mean we are looking at it -- as a percentage of sales some significant growth for that business -- but -- we are actively positioning that to play a major role in that market.

Relative to the -- to the battery -- there's lots of -- a lot of development taking place on the battery front -- are you part of -- are you part of that or what role…

I think Bill, I don't want to get too granular on that. You'll be hearing more about our battery initiatives. Hopefully, we can get some with agreements or some of our partners in that arena, we can get some more public information out there. But for now, I would just say that the battery space is an important space for us and mostly on the development side of it, not on -- I think it's fairly significant cutting-edge capabilities that we add to the battery -- to the whole battery charging systems.

Great. Thank you. We'll look forward to those additional announcements and then one housekeeping question. The accounts receivable drop, is that simply a timing phenomenon or is there something structural that's changing?

It is. It is a bit of timing, but we had a great cash received during the quarter. So also depends on the timing of sales in the particular month during the quarter. So we had great collections and a lot of that is timing.

I mean you can see if you look at those receivables that October and November were very strong. And we have these big deferrals that came in December. So that's why you can see those…

Yeah. The net days outstanding on receivables are around 31 days. So you can see that a lot of the volume came in the early part of the quarter. And now, we're seeing significant volume in January, so those receivables are up pretty dramatically.

This concludes our question-and-answer session. I will now turn the call over back to our presenters for the closing remarks.

Okay. Thank you very much. In closing, I want to thank all our team members for their ongoing commitment and customer-centric focus and service during these challenging times. Great job on meeting significant demand for January and hopefully ongoing, the health and safety is our top priority and we remain extremely vigilant to protect our global team from this horrible virus. For the most part, our corporate team is continuing to work remotely as much as possible, while 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'm extremely proud of our company. In summary, our investments are bearing fruit. We are reaching important inflection points with strong positive cash flow, solid earnings performance, further debt reduction and meaningful opportunities to enhance shareholder value in the dynamic $130 billion automotive aftermarket industry in the United States alone and the emerging electric vehicle industry. This performance combined with growth opportunities from our existing and new hard parts product line as well as our evolving diagnostics businesses for both internal combustion and the electric vehicle and aerospace markets provide a meaningful path for accelerating growth and profitability, which we remain very committed to. We are proud of our more than 50-year history in this aftermarket. And we're excited about our emerging presence in the electric vehicle space. And all of us have 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 for the call. We look forward to speaking with you when we host our fiscal 2021 fourth quarter and year-end conference call in June and a virtual investor conference 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.