Good day and thank you for standing by. Welcome to Motorcar Parts of America's Fiscal 2022 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Mr. Gary Maier, Investor Relations. Sir, please go ahead.

Thank you, thank you, Rachel. Thanks everyone for joining us today, welcome to our fiscal Q2 2022 conference call -- second quarter. Before we begin, I will 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 that 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 uncertainties, some of which are beyond the control of the company, and are subject to change based upon various factors. 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 company's various filings with the Securities and Exchange Commission. With that said, I'd now like to begin the call and turn it call over to Selwyn Joffe.

Thank you, Gary. I appreciate everyone joining us today. I hope everyone is staying safe and healthy. As noted in this morning's press release, let me highlight our results. Record net sales for the quarter and six month period, net sales for the quarter up 13.5% and 29.8% for the six months and 25.1% from the pre-COVID fiscal 2020 quarter. Net income before impacting items for the second quarter was $13.3 million up $0.68 per diluted share versus $14.3 million or $0.74 per diluted share for last year and $13.1 million or $0.68 per diluted share for the pre-COVID fiscal 2020 quarter. Net income before impacting items for the first half was $21.8 million or $1.11 per diluted share versus $15.1 million or $0.78 per diluted share for last year, and $14.5 million or $0.75 per diluted share for the pre-COVID fiscal 2020 period. Pretax ROIC was 21.1% at September 30, 2021 versus 17.5% for the prior year. Let me provide some color about the automotive aftermarket and our solid position within the hot parts business. Then I will briefly discuss our emerging presence within the electric vehicle market. The outlook for hot parts replacements continues to accelerate, despite global issues related to new COVID-19 variants and challenges impacting the supply chain, both of which don't really require much explanation given the extensive daily news coverage of the situation. Let's just say the challenges are real from a social and business standpoint, and we're doing our part to keep our employees safe, and our customers prepared for continued strong demand for automotive replacement parts. I can proudly say we demonstrated our capabilities in meeting the strong consumer demand by record second quarter performance. Our team has done an amazing job meeting customer orders. These orders continue to be driven by strong consumer demand in both the do-it-yourself and the do-it-for-me markets as drivers returned to the roads and used car sales continue to climb to record levels. Our investments in multi-growth platforms in our hot parts business contributed to a strong second quarter performance. This momentum is expected to continue and moving forward operational efficiencies will be enhanced as new production facilities mature and supply chain challenges normalize. It is important to know that the country of Malaysia was shut down for most of the second quarter due to COVID, which impacted our operations in that country with significantly reduced capacity and required us to outsource production to meet customer demand negatively impacting gross margins. Our team in Malaysia did an exceptional job during this period in addressing these challenges. Unfortunately, we're now back at work and operations are ramping up again. As I noted last quarter, our facility expansion in Malaysia is now complete. And we are focused on utilizing this increased capacity and productivity across multiple product lines to reduce dependence on outsourcing and to support our customers. Demand for our product lines across the board continues to grow, especially for brake-related products. To put this growth in perspective, our brake-related products as a percentage of overall sales doubled to 14% for the quarter from 7% for the same year period a year ago. At the same time, rotating electrical sales have also increased. The ramp-up momentum of our state-of-the-art brake caliper remanufacturing facilities and infrastructure, including core sorting and distribution is proceeding as planned notwithstanding supply chain challenges. Manufacturing efficiencies will improve as this operation matures. The market for current hot parts categories represents more than $6 billion at the retail level. There are approximately 287 million vehicles on the road, with an average age of 12.1 years in the United States alone, which fuels our optimism about the growth opportunities in our aftermarket hot parts business. This will fuel growth in the aftermarket hot parts replacement industry well beyond electric vehicles becoming mainstream. Industry reports continue to show that people are keeping vehicles longer. Used car sales continue to climb to record levels resulting in increased miles driven by old kind of vehicles. It is interesting to note that colonies residuals relative to the value of the vehicle at least are now sharply lower than the value of the vehicle. As a result, consumers are buying up in leases rather than leasing a new vehicle contributing to an increased aging of the vehicle population. Obviously, this bodes well for the aftermarket parts replacement industry and our non-discretionary product offerings. As I've said before, the rate of replacement of parts increases substantially as vehicles age, causing the zero to three year age group to have a replacement rate for alternators of 2.48% compared with 5.98% in the 12-year and above age group. I should note that the replacement rate for starters for the same period is 0.7% for the zero to three age group, and 3.34% in the 12-year and above age group. The replacement rate for brake calipers is currently 2.2% for the 0 to 3 age group, and 5.75% for the 12-year and above age group. As a complement to our solid position within the internal combustion engine aftermarket, our diagnostic business for alternators and starters is fast emerging, supported by strong orders from our retail customers as deferred spending due to the pandemic resumes. As many of you know, we acquired the D&V Electronics business in 2017, in part to complement our rotating electrical business and offer our retail customers a superior testing product for alternators and starters. In addition, our presence for electric vehicle testing applications in the areas of development and production continues to gain traction. We remain enthusiastic about the outlook, encouraged by new strategic partnerships, engineering strength, industry-leading technology and significant opportunities as driving options evolve. Well, we don't segment report, let me just take a few moments to comment about this exciting business. Demand for test equipment related to performance endurance and production of electric motors, inverters and batteries for electric vehicles, as well as belt-start generators for hybrid vehicles is gaining momentum. We are honored as we announced earlier today that D&V Electric motor emulator was selected to support the development of the rotor motor controllers for NASA's Dragonfly mission to Saturn's moon Titan, which is a testament to our technology and its exciting applications. All of these opportunities have required investments, but given the $5.4 billion estimated global automotive testing market, we believe the investments will generate solid results. In addition, our vision is to offer electric vehicle manufacturers, contract testing services via our newly established Detroit Technical Center. This also offers significant growth opportunities, and we look forward to announcing developments in this area. In short, our strategy before and since the pandemic has been to leverage our significant channel relationships for aftermarket parts and offer superior parts and solutions to our customers and consumers. Certainly, there are challenges facing the aftermarket industry today, including supply chain, freight, raw materials and other pandemic-related headwinds. We continue to experience supply chain challenges for freight, steel, semiconductors, and packaging, to mention a few items. We believe these are short-term issues, but there is still much uncertainty in the supply chain. We are working hard on a daily basis with our global team to manage production while working with our suppliers and logistics providers to address the challenges. Market dynamics and rational economics, including price increases will contribute to overcoming these challenges, as we continue to focus on taking full advantage of our competitive strengths. I should point out that gross margins for the quarter only reflect a small portion of the first round of price increases and will be fully reflected in our current third quarter. While a second round of price increases will become effective during the third quarter, they will be fully reflected in our fiscal fourth quarter. In summary, despite the challenges, our entire company is well positioned for sustainable top and bottom line growth for parts and solutions that move our world today and tomorrow. Our footprint for the future is now the footprint of today. And we are encouraged by the strong demand for automotive replacement parts despite global COVID dynamics. I can assure you we remain focused on benefiting from our multi-year strategic expansion initiatives. Based on our results for the first half of fiscal 2022, we anticipate solid year-over-year sales growth. In short, demand is strong and capacity is available. We remain focused on enhancing gross margins due to economies of scale from a consolidation of operations, as well as further expansion of brake caliper production, pricing initiatives and other product line activities. I will now turn the call over to David to review the results of the fiscal 2022 second quarter.

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect to our September 30, 2021 earnings press release for more detailed explanations of the results. For information about the items that impacted the results, see Exhibit 1, 2, 5 of the press release. Let me take a moment to review the financial highlights including record sales for a quarter and six months periods. Net sales for the fiscal '22 second quarter increased 13.5% to $175.5 million from $154.7 million a year ago, and 16.7% from the pre-COVID-19 fiscal second quarter two years ago. Net sales for the three months ended September 30, 2021 included $13.7 million in core revenue, compared with $12.8 million in the prior year second quarter period, due to a realignment of inventory at customer distribution centers with expected future sales benefits as product mix changes. Gross profit for the fiscal '22 second quarter was $36 million, compared with $39.7 million a year earlier. Gross profit as a percentage of net sales for the fiscal '22 second quarter was 20.5%, compared with 25.7% a year earlier. The quarter's gross margin was negatively impacted by an aggregate of 5.1% comprised of the following: 3.1% due to higher freight costs and other expenses related to COVID, 0.5% for brake caliper startup costs and relocation transition expenses, and 1.8% non-cash core and finished goods premium amortization impacting sales, partially offset by net 0.3% favorable impact for non-cash revaluation of course and customer shelves and gain from core revenue. Let me provide a little more color on the factors impacting gross margin. Brake caliper startup costs and relocation transition expenses are part of our footprint expansion in Mexico. As you may recall, we completed the construction of our buildings in Mexico this past fiscal year, and are focused on increasing production of brake calipers, including core sorting and related activities to meet current and future demand. Second quarter ramp-up and transition expenses were significantly reduced by approximately 80% to 797,000 on a year-over-year basis. We also incurred higher freight and other costs of approximately $5.1 million for the fiscal '22 second quarter due to a shortage of freight and supply chain inefficiencies caused by COVID as someone noted earlier. With regard to additional COVID-related expenses, we have address health and safety initiatives that also impacted gross margins. Fortunately, these corporate-related expenses decreased; as a point of reference, these second quarter expenses were approximately 382,000 versus 1.5 million in the prior year second quarter. Core premium amortization and revaluation of course and customer shelf that impacted gross margins are non-cash and non-economic. For a complete summary of items impacting gross profit, please see Exhibit 3 in this morning's earnings press release. In addition to the above item, gross profit was further impacted by growth initiatives in connection with expansion of our new product lines, and product mix, and inflationary costs related to the global pandemic, especially disruption with worldwide supply chain and logistic services. This includes higher costs for raw materials and supplies. I should also mention that we recently experienced offshore wage inflation, which further impacted results. We are focused on mitigating these expenses, including higher freight costs with price increases that have been implemented. We only realized a small price increase impact during the second quarter, primarily effective for the month of September. Total operating expenses increased to $26.4 million for the fiscal second quarter from $14.8 million for the prior-year period. The increase was primarily due to a $3.9 million non-cash loss, compared with a prior-year period gain of $4 million for the foreign exchange impact of lease liabilities and forward contracts. The remaining $3.7 million increase on a year-over-year basis was primarily due to salary reductions in the prior-year in response to the COVID-19 pandemic, increased share-based compensation, and increased commissions, marketing and advertising-related and travel expenses. Interest expense was $3.6 million for the fiscal second quarter, which was the same as last year. Income tax expense for the second quarter was $2.3 million, compared with $6.1 million for the prior-year period, which was due to lower pre-tax income. Net income for the fiscal '22 second quarter was $3.7 million or $0.19 per diluted share, compared with a net income of $15.2 million or $0.78 per share a year ago. In addition to the items impacting gross margin discussed previously, I should emphasize the non-cash non-economic foreign exchange impact of lease liabilities and forward contracts totaled $7.9 million on a pre-tax basis, or $0.30 per diluted share on a tax-effective basis for the quarter compared to the prior year. Details of items impacting net income totaling $0.49 per diluted share, or Exhibit 1 in this morning's earnings press release. Net sales for the fiscal '22 six months period increased 29.8% to $324.6 million from $250.1 million a year earlier, and 25.1% from the pre-COVID-19 fiscal six months period two years ago. Net sales for the six months ended September 30, 2021 included $13.7 million in core revenue, compared with $12.8 million for the prior-year period as I discussed. Gross profit for the fiscal '22 six months period was $59.5 million compared with $53.1 million a year earlier. Gross profit as a percentage of net sales for the fiscal '22 six month period was 18.3% compared with 21.2% a year earlier. Gross margin for the six months period was negatively impacted by 5.9% comprised of the following: Higher costs related to COVID-19 including higher freight costs for which we have implemented price increases and these will become effective during this third quarter. Brake caliper setup costs, relocation transition expenses, and other items including non-cash expenses, as I previously discussed. A summary of factors impacting gross profit as a percentage of net sales totaling 5.9% or Exhibit 4 in this morning's earnings press release. Net income for the fiscal '22 six months period was $4.5 million or $0.23 per diluted share, compared with net income of $12.2 million or $0.63 per share a year ago. I should emphasize the non-cash non-economic foreign exchange impact of lease liabilities and forward contracts totaled $10.2 million on a pre-tax basis, or $0.39 per share on a tax-effective basis for the six months period compared with the prior year. Items impacting net income totaling $0.88 per diluted share are in Exhibit 2 in this morning's earnings press release. Net cash used in operating activities during this fiscal year '22 second quarter was $19.6 million and during the fiscal year '22 six months period was $24.3 million, reflecting working capital requirements to support the company's record sales and anticipated growth while considering supply chain challenges due to COVID and the upcoming impact on the industry of the Chinese New Year holiday shutdown. This compares with cash provided by operating activities of $16.9 million for the prior-year fiscal second quarter and $39.3 million for the prior-year six months period. Net debt was $120.6 million at September 30, 2021 compared with $88.9 million at March 31, 2021 reflecting the required inventory increases for anticipated growth as I just mentioned. As you know there are various methods to calculate return on invested capital. For our purposes, we calculate ROIC by taking operating income and adding back non-cash expenses and certain one-time expenses. We believe this metric, considered together with GAAP measures provides useful information to investors and to management regarding the company's return on invested capital. In short, we take this metric, which was approximately $87.3 million for the 12 months ended September 30, 2021 and divided by the average equity and net debt balance of $414 million, resulting in a 21.1% pre-tax return on invested capital, compared with 17.5% a year earlier. We are continuing to realize the benefits of expanding our Mexican operations and the launch of our new brake category with expectations of increased returns from both new and existing product lines as the benefits of our strategic expansion are more fully realized. As I mentioned at September 30, 2021, our net debt was approximately $120.6 million. Total cash and availability on the revolver credit facility was approximately $109 million at September 30, 2021. Based on a total $238.6 million revolver credit facility and subject to certain limitations. At September 30, 2021 the company had approximately $927 million total assets. Current assets were $456 million and current liabilities were $349 million. During the fiscal first quarter, the company extended its credit facility with PNC Bank for five years through May of 2026, including amendments, which further increase the company's strong liquidity base. For the reconciliation of items that impact results and non-GAAP financial measures, please refer to Exhibit 125 in this morning's earnings press release. I'll now open the call for questions, and Selwyn would then provide some closing remarks.

Thank you, David. Your first question comes from the line of Sarkis Sherbetchyan from B. Riley Securities. Please proceed with your question.

Hi, thank you for taking my question here. I just wanted to start off on the item called out the $13.7 million in the quarter for core revenue. Aside from that, were there any pull-forwards for sales that impacted this quarter?

No, no, it's a vibrant quarter, demand continues to be very strong, Sarkis.

Got it. And would you care to frame up kind of what you're seeing for the back half of your fiscal year, it still sounds like demand is pretty robust for the sector. And just want to kind of get a sense for are you able to work through some of the supply chain situations in order to deliver to your customers?

We've been quite successful doing that so far. I expect this to continue into the third quarter. There are a lot of update orders and schedules in the fourth quarter. And so that's a little bit of a no, no, no demand, we know it is very, very strong as to whether our shipments will arrive and clear the port on time. So fourth quarter, first quarter, but that revenue is already those orders have already been committed to. And so the fourth corner will either have them or will be early in the first quarter.

Got it and I want to come back to the Malaysia facility, I think you mentioned it was shut down for most of the second quarter, because of their situation there. And that reduce your capacity. It sounds like you're running again, any sense for what that's going to contribute here, at least in the near-term, and then separately and kind of the midterm?

Well, I will let David talk a little more specifically, but the implications are being closed or where we outsource, a lot of the outsource came from Chinese companies, which means we have to pay incremental tariffs, pricing which is more efficient when we produce it in Malaysia, we have some of those expenses with a factory that's not open, even though at a workforce that we continue to pay well, and not operating. And so those were headwinds that will change. It will take us another 60 to 90 days to get it re-ramped up to the levels that it was at. But certainly those are the next fiscal year, we should see some significant margin enhancements as that comes back online.

Thanks, and David, any more quantitative color that you could provide on how it impacted the quarter?

A total is in Exhibit 3, we have the total increased expenses related to COVID. It's all part of that $5.5 million, which impacted the quarter, 3.1% on the gross margin percentage.

Thank you, I'll hop back in the queue.

Thank you. The next question comes from the line of Matt Koranda with Roth Capital. Please proceed with your question.

Hey guys, thanks. Just really quickly, housekeeping one. David, maybe could you run through the revenue breakdown between rotating electrical, wheel hub brake and other?

Yes, so for the second quarter, rotating electrical was 73% of sales, wheel hubs 11%, brake-related products was 14% and others 2%.

Got it. Okay. And then you mentioned some additional price to sell. That goes into effect and I think you said that third quarter, the full impact of which would be felt in the fourth quarter. And then some prior pricing action that went into effect in the second quarter, you get the full effect in the third quarter. Maybe you could just frame up for us what that means in terms of the implications for revenue growth, as we look into the back half of this year, any gating items that you can help provide to kind of gauge the size of the price increases, or at least just how it impacts revenue that'd be helpful. And then maybe also, on the gross margin front, you mentioned it's basically in reaction to some of the supply chain headwinds that you faced. And so does that mean we just essentially recover toward the kind of mid-20s, like 26 plus percent gross margin rate that we were at pre-COVID? How should we be thinking about revenue growth and gross margins for the next couple of quarters?

Yes, so I'll start with the gross margins and then you comment on the 26 plus margin, we should be back at that. And having said that, I think there's more margin upside as we go into the next fiscal year based on utilization, more effective utilization of the operating facilities, both in Malaysia and Mexico, especially with regards to our ramp-up of a brake caliper business. And we expect further rationalizations based on the move into the new footprint, which is in place now, and so we should see gross margin increases, I think fairly decent gross margin increases in the next fiscal year. And then the second part of that you ask is, the price increases should contribute an incremental 5% plus to revenues. But as I say that, we launched new products and new customers. And so it's hard to say that you're not going to be able to extrapolate just the price increases just to our revenue growth and revenue growth should exceed comfortably exceed the price increases.

Okay, great. And then just any commentary you can provide on the rotating electrical growth rate and just sort of what you're seeing in terms of order rates from some of your customers, and it looks like a good decelerated bid on a year-over-year basis? Maybe is there just a pause in terms of order flow or fewer update orders during the quarter? How should we expect sort of things to turn in rotating electrical, I guess maybe comment in the quarter and then kind of how to think about it for the next few quarters as well?

Yes, so I think you see the percentages of the total come down for rotating electrical, but rotating electrical is up, just that we have such fantastic growth in the brake-related products, you can see that, the percentage of revenue has gone from 7% to 14%, but that's despite rotating electrical increases as well. So we expect rotating electrical to continue to grow. We have almost 50% market share there. So it's going to be a more moderate growth rate. But the demand for the product is definitely up through the register, you've got a lot of deferred maintenance on used cars that are on the vehicle. And so there's plenty of tailwinds relating to rotating electrical. And I expect that to continue, I also expect all of our product lines to continue to grow, including the diagnostics business, which has been, I mean we suffered actually the revenue, if you think about the revenue for this quarter, we had a fairly significant amount of demand that we were unable to ship despite the fact of having record sales. And then in addition to that, I think the diagnostic business got disproportionately hit because of supply chain challenges, and that relates to not only us on the diagnostic side, but our customers, production assembly lines have to be in place before you can put in our diagnostic equipment. So their holdups hold us up. So I have a little bit of rambling there, Matt. Hopefully, I got to your question there.

Yes, I think you addressed them there. So just wondered on the supply chain front, obviously, the topics probably been beaten to death this earnings season with a number of companies, but you mentioned sort of some of the bigger pain points for you guys, freight, steel, semi and packaging. I'm just wondering if you could provide a little bit more color on sort of how those items progressed through the quarter in 2Q for you guys to things get better month-by-month? And then how we trended I guess since the quarter that ended in kind of through October and the early part of November here? Would you kind of characterize things getting better or worse or about the same?

Well, I would say things got better. So rates got better and supply chain got better having and continue to get better. Having said that, our demand is also growing probably faster than normal, maybe this is the normal, I'm not sure anymore. But -- so the supply chain, while we're getting better and better, the dollar effect of those delays is pretty significant. I mean, this is not a completely quantitative number, I mean but just sort of a -- we could have done -- have there been no supply chain challenges, or let me restate that. Have we gone back to the normal supply chain environment? There is probably $15 million to $20 million incremental revenue in demand for the quarter that we could have probably shipped, so and that's -- take it with a little bit of a grain of salt because some orders are shipped and canceled very hard to get the exact number of what gets deferred. But having said that, so the deferral remains fairly constant, but the actual fill rates are going up and the demand is going up.

Got it. Very helpful…

It's getting better, we're also making pretty significant investments pre-Chinese New Year. I try and get to bolster my inventory. And a lot of that the effectiveness of that will depend on whether we can get the inventory out of the ports, as you probably can see from the office. There is having 100 ships outside of Long Beach waiting to get in, but I don't know where that is. We look -- and I'll give you some -- this is sort of broad feel for where we are. But my expectation is, we have about $100 million in new business coming on Board in the next as quick as we can get to it, but at least to Europe. So, lots of new demand for us coming.

Okay, very helpful, Selwyn. I'll jump back to queue there.

Thank you. Your next question comes from the line of Scott Stember from CL King. Please proceed with your question.

Good afternoon.

Hi, Scott.

Hi, Scott.

David, I heard you correctly said that the -- I guess the extraneous costs out of Malaysia was in that. I guess that's $6 plus million COVID line on Exhibit 1. But if you look at the footnote, it says that basically all of it was just related to increased freight costs. So I'm just trying to get a sense of -- are you including the Malaysia cost or the extra cost there within that freight costs? Or is it just a smaller piece of that $6 million -- much smaller piece?

Good question. It's the latter. So that number is mostly freight. And you got about $1 million related to the Malaysia.

Okay. Got it. So obviously, we have a round the price increases that went through a small piece hit, I guess you could say one-third of it hit probably throughout the quarter at best. Can you quantify how much that was, or is it was it just really de minimis?

It's pretty small. And it's hard for us to quantify, one of those proprietary, so it's hard to quantify that, but it's pretty small for the quarter, you'll see it for the full quarter this quarter.

Right. So as we get into the back half of the year, and the offsetting benefit or relief so to speak, starts to come through, and assuming that we're in a more than the supply chain that is going to be with us for a while. Will you -- in your Exhibit 1 in the quarter's coming up have a line, I guess adjusting for the price increases, since you already backed up the costs related to those.

We will take out any adjustments that are going to be compensating us from the price increases. So to the extent that we have a freight surcharge, for example, we would not put freight in a material item anymore.

That's correct.

Okay guys.

So the adjustment should come down pretty significantly as we move forward.

Okay, and I guess just lastly on the rotating electric again, this was one of the hottest summers, we've had or an extension of heat all the way into the fall. Can you talk about how that benefit of rotating electric and where I guess customer inventory for rotating electric must be as low as it's been in years?

Well, I mean, definitely, there is some hardware that helps it's very difficult to quantify exactly how much it helped, and customers want more inventory, I can tell you, customers are selling the product, it's going through the register -- they're experiencing positive sales to the register. And we're filling. Our fill rates and rotating electrical are quite good. And I want to complement our team in terms of how they handled them. We do have -- what we think is the state of the art manufacturing facilities and global footprint in terms probably the most efficient global footprint in terms of our sourcing capabilities. So having said so, rotating electrical continues to be very strong. Having said that, we have new product lines that are even stronger. So as they ramp up not only because of demand has registered, but because of market share gains.

Got it. That's all I have. Thank you.

Thank you.

Thanks, Scott.

Thank you. Your next question comes from the line of Brian Nagel from Oppenheimer. Your line is open.

Hi, guys. Good afternoon.

Hi, Brian.

Hi.

So, a couple of questions. And some follow-ups to the prior questions. But first off with regard to supply chain, we talked a lot about just what you're seeing, I guess, is there a way for you given the perspective you have now and the kind of conversations you're having with your various partners? I mean, is there a way for you to say at what point you think the supply chain could potentially get significantly better to the point where it's not the type of drag it's been on your business?

Well, the answer -- I mean, if I had to say yes or no answer, I'd say, no. Having said that, because I mean, we just don't know if they would just catch the ports up here. That would make an enormous difference. The capacity for our product is available. A product is available, we just can't get it here. And so to the extent, the Long Beach port authorities talking about 24/7, and the shortage of axles, I wish I could say that, that it's a short-term problem, but I think that that's going to go on, I don't see -- I think the next 12 months, we're going to be talking about this quickly. Having said that, it's much, much better for us right now. Although we have a lot of product on the waterfall for anticipated needs and inventory. The good news for us is that we're able to bulk up inventory when we can get it, because we don't have perishable inventory and then the useful life in this inventory is 10, 20 years. So there is no risk of real obsolescence. And so, we do whatever we can to mitigate it, I think that I feel rates will continue to get better quarter-over-quarter. And I think will eat into that backlog over the next 12 months. But I really have not. And I just got back from the APEC show. And I don't think anyone feels like this is a short-term -- the business short-term solution in place, and then I think everyone is with round 12 months out.

It's very helpful. Then the second question I have with regard to demand, I can get a frame it's similarly we talked about there just would -- you and others have talked about this, which seems to be it is an extraordinarily solid demand backdrop for your space right now and for MPAA. How do you view the underlying sustainability particularly as hopefully the U.S. economy continues to pull away from the corporate crisis?

That question came up and discussed a lot of the trade shows. Well, look in my hypothesis and I've been saying this for a long time and I've been wrong for a fair amount of time is that the fundamental statistics of the aftermarket are tailwinds for us. I mean, the number of vehicles on the road continues to go up. Average age continues to go up. And I think now as you see COVID come into effect, but and the number of vehicles and prime replacement age has gone up, COVID came into effect were hot weather and all the sudden, you had this massive spike which for some reason people are saying well that temporary, but I don't see that as -- I think the fundamentals for non-discretionary hotpots which is what we're in. I just think there is just good fundamentals statistics that supported tailwind growth for a number of years, I don't see this changing. Having said that for discretionary items you may want to look at differently, but we don't -- people don't go I got extra money. I'm going to go replace my alternator. I mean they may get a pink job and spice up their wheels or whatever they do, but they're certainly not buying a new alternator for fun. So for our business, I think the fundamentals are in the statistics. And again, you look at $241 million, whatever that number is now, it keeps growing every quarter, I used to be able to say the same number, quarter-over-quarter, now keeps going up every quarter. And average age has just gone up, and then miles driven, even hasn't fully recovered that, but will continue to do better and better. I mean, I was looking at RV numbers, I mean, people are more dependent on the vehicle, RV sales are up. And I think it's just indicative of what's going on in use car, lots of empty, residuals on leases I mentioned, it makes it much more beneficial to exercise that the purchase option at the end of lease, and with the shortage of new cars, those cars are just staying on the road, not that they would go off the road. That is just less new cars being sold. So in some ways, I hope that new car sales come back soon, because seven, eight or nine years from now I want to be able to replace the alternators and start it. So we want both.

Okay. Very helpful, as always. Thank you.

Thanks, Brian.

Thank you.

Thank you. Our next question comes from the line of Bill Dezellem from Tieton Capital. Your line is open.

Thank you. The price increase that you have put in place, the first one. Will that be enough to offset the $6 million of logistics and freight costs that you called out this quarter?

No, because we have two rounds of price increases. So as Selwyn mentioned on the remarks, we have the first round that went into effect during the second quarter that will be fully reflected in our third quarter. The second round becomes effective in our third quarter and will be fully reflected in the fourth quarter.

Which would then offset all the trading increases. Assuming that freight doesn't go further.

That's correct.

That's helpful. Thank you. And then secondarily, longer-term, I'm not asking about any individual quarter or year for that matter. But just thinking about this business, what gross margin should it generate?

That's a tough question. Because, we've been under a lot of pressure on gross margins, but our fundamental gross margin about product line has not declined at all, but our product mix has declined. And so to the extent that you have startup costs in new product line gross margins are a little lower to start, but they should normalize. And then to the extent that you have products that you're not manufacturing that you're buying out, you're going to have a lower gross margin, but you're going to have higher return on invested capital. So, Bill, I don't know where the mix tops out at over a period of time, but certainly in the high 20s shouldn't be, should be is realistic, and return on invested capital, pushing on 30% plus should not be unrealistic.

I appreciate that. And then…

And then I'll add one thing, Bill, that when I address that question, I only -- I'm addressing hot pots. Now, obviously, in the electric vehicle space, it's a very different model, because as we start selling software as a solution, and that starts may well be pretty small, but it starts in January. And our electric vehicle solutions the margins are high and R&D expenses is a bigger number, but that should -- that could be a significant thing for us. I'll say as well that as we ramped up on our new, we won Vendor of the Year for one of the largest retailers for our new product initiatives. So yes, we actually wanted two of the three large retailers this year for new product initiatives. So that was pretty significant for us.

Well, congratulations on that. And I do want to ask a theoretical question, building off what you just said. So once the business achieves its, let's say normalized gross margin, picking a number whatever that is in the high 20s. Then if you are successful with your software initiative over time, the implication would be that you would have a generally upward trending margin from that point forward. Are we thinking about what you just said correctly?

Yes, absolutely.

Okay.

It's very simple. And if you look at our strategy, always have the analogy of backgammon. And if you play -- I like to block the back, the back corner, okay. And then I'll worry about the front game. And so when not say, block the back quarter, let's get the market share, let's take out the categories that we think are important. And then we'll grow into that module. And we're not, we look out and the board is very active and this is that we've always got rolling five-year estimates going on. And we -- I believe, are very, very well positioned for strategic growth over the next five years, as well as significant growth in our profitability.

Great, thank you. And I would like to ask one additional question, if I may. Relative to your comment in the press release, and I think you've alluded to it here in the -- on this call. You have increased inventory for anticipated business growth. Would you talk in more detail around that? Because that sounds like that increased inventory is distinctly separate from the increased inventory, trying to navigate the supply chain issues?

Yes, it's both, I mean, we'd love. Again, we -- I think I mentioned both. I mean, I see new business coming to us of, and this is a pretty round number as well, but about $100 million. And so we certainly are gearing up for that, but that's in a lot of that's in our existing product lines and in and we're trying to build inventory. I'm just concerned if you have another COVID shutdown somewhere. And so we're operating on the model today of carrying incremental inventory levels from what would be our normal. Our cost of capital is fairly low. Albeit that the stock price performance, slants that up a little bit. But overall, our cost of debt is efficient, and carrying inventory and having it available in the market the way it is today, I think will reward us handsomely. So it's a combination, that it's not all new.

Thank you. I appreciate both your comments.

Thank you.

Thank you.

Thank you. I would like to conclude our call today with a brief recap of our business. I mean, obviously, there are many variables in the world that we cannot control. But we do control our strategy. And our record performance for the first half of fiscal '22 underscores this point. Our added capacity supports growth today, as well as our strategic sales objectives. To accomplish our goals, we're extremely focused on our hard parts aftermarket business, and expect to continue to grow this business organically for each product line. In addition, we're expanding our brake-related product lines and we're excited about the opportunities, which will even further accelerate our growth. Also, as our new production facilities mature, we will realize increased productivity, which will lead to enhanced gross margins. While there are many variables and costs today, we expect us to stabilize and through a combination of appropriate pricing and enhanced efficiencies that I mentioned our margins will improve. This in conjunction with accelerated revenue growth bodes well for increased earnings and shareholder returns. In addition to our hard parts business, our diagnostic business in both in internal combustion engines and electric vehicles continues to pick up momentum. Along with this diagnostic business, we are focused on adding contract testing at year-end, which would well it'll start in January, which would further enhance our revenue and our contribution margins. It allows us to scale revenues without linear scaling of capital expenditures, and enables our customer base to get quicker and more efficient results and feedback with less capital outlay. Our vision group is also working diligently on numerous technologies that position us to take advantage of EV power systems, either software or licensed intellectual property. While the world of electrification is fast evolving, we have a strong opportunity to be a significant player in the space. These strategies when implemented will serve to grow shareholder value, and increase the growth rates in our business. In closing, I want to thank all our team members for their ongoing commitment and customer-centric focus on service during these challenging times. Their health and safety are top priority and they've done a fantastic job. We remain extremely vigilant to protect our global team from this horrible virus. And we're working diligently to get even more of our employees and their family members vaccinated. I might add that we've currently more than 91% vaccinated worldwide. For the most part, our corporate team is continuing to work remotely, though we remain committed to gradually and safely returning our team back to the office as conditions permit, most likely beginning in January. 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, and we have meaningful opportunities to enhance shareholder value in the dynamic $130 billion automotive aftermarket in the United States and the emerging electric vehicle industry. We are proud of our more than 50-year history in the aftermarket industry, and we're excited about our emerging presence in the electric vehicle space and all of us are committed to have vision being the global leader for parts and solutions that move our world today and tomorrow. We appreciate your continued support and we thank you again for joining us for this call. We look forward to speaking with you when we host our fiscal 2022 third-quarter conference call in February and at future investor conferences. This concludes today's conference call. Thank you for participating. You may now disconnect.