Shane Evangelist - CEO David Robson - CFO.

George Kelly - Craig-Hallum Jared Schramm - Roth Capital Partners.

Welcome to the U.S. Auto Parts First Quarter 2014 Conference Call. On the call today from the company are Shane Evangelist, Chief Executive Officer; and Dave Robson, Chief Financial Officer. By now, everyone should have access to the first quarter 2014 earnings release which went out today at approximately 4 P.M. Eastern Time.

If you have not received your release, it is available on the Investor Relations portion of the U.S. Auto Parts’ website at www.usautoparts.net by clicking on the U.S. Auto Parts Investor Relations tab. This call is being webcast, and a replay will be available on the company’s website through May 20, 2014.

Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and speak only as of the date hereof.

We refer all of you to the risk factors contained in U.S. Auto Parts’ Annual Report on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission for a more detailed discussion on the factors that could cause actual results to differ materially from those projected in any forward-looking statements. U.S.

Auto Parts assumes no obligation to revise any forward-looking projections that may be made in today’s release or call. Please note that on today’s call, in addition to discussing the GAAP financial results and the outlook for the company, the following non-GAAP financial measures will be discussed. EBITDA and adjusted EBITDA, an explanation of U.S.

Auto Parts’ use of these non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by the SEC Regulation G, is included in U.S. Auto Parts’ press release today, which again can be found on the Investor Relations section of the company’s website.

The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP, and the use of such non-GAAP measures have limitations, which are detailed in the company’s press release. With that, I would now like to turn the call over Shane Evangelist..

Thank you, Cathy, and thank you all for joining the call. I like to start by thanking our team members for putting U.S. Auto Parts in the strongest position that we’ve been in over the last few years. And I believe we’re back in position to be aggressive and achieve growth in both revenue and EBITDA.

Thank you all for your hard work and dedication to the company. Turning to highlights for the quarter, our go-forward sales channels were up double-digit or 11% year-over-year and the overall comps were up 4%. Our adjusted EBITDA for the quarter was 3.3 million, and adjusted EBITDA less CapEx was positive 1.8 million.

Our net debt less cash at the end of the quarter was positive. And currently we have no debt, and over $3 million of cash on the balance sheet. And currently for the second quarter, our go-forward sales channels are trending up 20% year-over-year, and overall revenues are trending up 13% year-over-year.

And before I get into more detail on the quarter, I’ll take a few minutes to discuss the industry in general and the shifts that are taking place from offline to online growth.

I believe that in either 2014 or 2015, the incremental growth of the overall $47.2 billion DIY market as estimated by the Automotive Aftermarket Suppliers Association or AASA will be larger online than offline.

According to the AASA the overall DIY growth is expected to grow 3.9% from 47.2 billion to 49 billion in 2014, of which we estimate 4.5 billion of the DIY market to be online between online marketplaces like eBay, pure-play retailers like U.S. Auto Parts and offline retailers going through the website like AutoZone.

We anticipate the 1.8 billion of growth to be split almost evenly between offline and online in 2014, with offline expected to grow 2.2%, while the online is expected to grow 20%.

In 2015, AASA estimates DIY growth to be 3.8% whether we can (indiscernible) report, expecting the online DIY growth to be 20% which will result in offline DIY growth at 1.7%. If these growth rates take place as expected before we split, the DIY dollar revenue growth in 2015 being around 60% online and 40% offline.

I believe the shift and greater share growth coming from online as a watershed moment in the DIY aftermarket. And by 2018, based on the different growth rates between online and offline, potentially 90% of the DIY market share growth could occur online. I believe U.S. Auto Parts is well positioned to take advantage of the shift.

Turning to revenues in the quarter, our go-forward sales channel finished up 11% year-over-year for the quarter driven by strong year-over-year performance in our online marketplaces and more aggressive pricing. Overall, we grew revenue by 4% in the quarter; a meaningful pickup over the currently announced going to mark of negative 0.4%.

Quarter to-date, for the second quarter our go-forward sales channels were up 20%, and our overall revenue comp up 13%, again driven by strong online marketplaces, more aggressive pricing and improvements in our branded business.

We had previously stated that we anticipated overall revenues to be down in the first half of the year, and up in the second half of the year and our go-forward sales channels being positive throughout the entire year.

We now anticipate overall revenue growth to be positive every quarter of the year and go-forward sales channels to be double-digit positive for the full year. Gross margins for the quarter came in at 30.4% which is an improvement over the fourth quarter by 110 basis points and a 20 point basis points improvement over last year.

Anticipated gross margin percent in the second quarter will be closer to our second quarter results of 2013 or down 200 to 300 basis points over the first quarter..

Adjusted EBITDA for the quarter was 3.3 million, with CapEx of 1.6 million, making adjusted EBITDA less CapEx positive 1.8 million. This is the first quarter in the last five quarters where adjusted EBITDA less CapEx was positive, and I believe to force what we have previous stated that adjusted EBITDA less CapEx will be positive for 2014.

Also of note, there is a reduction in debt during the quarter from 6.8 million at the end of the fourth quarter, 750,000 at the end of the first quarter. We also had 1.4 million of cash on the balance sheet at the end of the first quarter making us cash positive net of debt.

Currently we have no debt drawn against our revolver and over 3 million in cash on the balance sheet. We do anticipate using this cash and the availability under our revolver as needed to build inventory and take advantage of Quick Pay discounts in the future.

As I mentioned on the previous call our Private Label business has been growing at double-digit rate, and to be clear, will remain our main focus for growth.

Over 40,000 Private Label products along with the 4000 to 5000 Private Label products we will add this year provides us great competitive mode and provide great value to our customers at healthy margins. We’re beginning to see some improvement in our branded business. Last time we spoke I indicated our branded business was down double-digits.

This is improved to being down mid single-digit, and as we get smarter on our pricing strategies should continue to improve. We believe it is strategic to grow our branded business as it provides broad assortment of products and helps inform other areas of our business.

Moving to R&D, we continue to be excited about the opportunity to bring pricing trends turning to consumers as well as increased business just like a shop owner. We continue to anticipate our net direct investment in auto need to around 1.5 million in 2014 with the major focus on signing up shop to the R&D and support service.

In closing, we’re excited about the business. Over the next two years, I believe the DIY industry is going to go through a watershed moment where more DIY market growth will be achieved online versus offline and U.S. Auto Parts is in a great position to take advantage of this shift.

Based on our first quarter and current quarter revenue trends, we now anticipate revenue being positive for the entire year and our go-forward sales channels to be double-digit up for the year. I believe the double-digit growth rate for our continued sales channels demonstrate our ability to grow with the market.

We expect to see some gross margin compression as we offer more competitive pricing with gross margin rates ranging between 27% to 29% for 2014.

Adjusted EBITDA less CapEx was positive 1.8 million demonstrating our ability to produce cash from operations and reinforce our previous statements that adjusted EBITDA less CapEx will be positive for the year.

We currently have no debt which has been eliminated from a recent high of 8.3 million at the end of third quarter last year with currently over 3 million of cash on the balance, a $10.1 million positive free cash over the last seven months. And finally I want to thank U.S.

Auto Parts team for the tremendous job they have done to stay focus and turn the business profitable again. I recently returned from a trip to the Philippines where the spirit of the employees there is infectious and uplifting.

Thank you all for being inspirational and tremendous players and while much of the direction of our business may come from the very talented employees in the U.S., the heart of our organization resides in Manila and it’s a big [part] (ph). Thank you all. And with that, I’ll turn the call over to David..

Thanks, Shane. Good afternoon to everybody on the call. Unless otherwise stated, this quarter refers to consolidated Q1 2014, and last year refers to Q1 2013. In comparisons, our Q1 2014 compared with Q1 2013. Also, percentage and basis points discussed are calculated using net sales. However, for advertising, we’ll discuss comparing to net online sales.

Adjusted EBITDA, Shane mentioned for the quarter was 3.3 million compared to adjusted EBITDA of 1.5 million last year. Adjusted EBITDA excludes non-cash, share-based compensation expense of 376,000 this quarter and 409,000 for the first quarter last year. Last year’s adjusted EBITDA also exclude 498,000 in restructuring costs.

CapEx for the quarter was 1.6 million compared to 2.6 million last year. Adjusted EBITDA less CapEx was positive 1.8 million for the quarter, and improved by 2.9 million over last year. This quarter’s net sales were 68 million compared to 65.4 million last year, an increase of 2.6 million or 4%.

During the same period, our online sales grew by 3.8% while our offline sales grew by 5.7%. Net sales channels excluding websites we eliminated in 2013 grew by 11.4%.

The online sales increase of 3.8% or 2.2 million was driven by 6.5 million increase from continuing online sales channels offset by 4.3 million reduction in online sales from websites we discontinued.

The 6.5 million increase in continuing online sales channels was driven by 5.4 million increase in sales from our online marketplaces and 1.1 million increase in sales from our continuing e-commerce sales channel. Both our online and offline businesses benefited from better in-stock position and favorable weather conditions this year over last year.

Now turning to margins, this quarter’s gross margin was 30.4% up 110 basis points from last quarter of 29.3% and up 20 basis points from last year of 30.2%.

The 20 basis point improvement over last year and 110 basis point improvement over last quarter is primarily driven by higher penetration of sales of our private label products which generate a higher gross margin rate partially offset by more aggressive pricing across our online sales channels.

Our private label mix was 60% of net sales this quarter compared with 55% last quarter and 40% last year. Online advertising expense which includes catalog costs to 7.2% of net online sales this quarter compared with 7.4% last year, a reduction of 20 basis points. This compares to 7.0% in Q4 2013.

The 20 basis point improvement in advertising spend was primarily due to more efficient standard cost of commercial and search engine websites and reduce catalog spends on higher sales. This quarter’s marketing expense excluding online advertising expense was 8.4% of net sales compared to last year of 10.5%, a reduction of 210 basis points.

The decline was primarily due to lower depreciation and amortization expense of 90 basis points, lower wages of 70 basis points and lower overhead expenses of 50 basis points.

General and administrative expense excluding amortization of intangibles was 4.1 million or 6.1% of net sales this quarter compared to 4.7 million or 7.2% of net sales last year.

The decline of 110 basis points of $540,000, the decrease was primarily due to lower wages of 50 basis points, lower depreciation and amortization of 30 basis points and lower overhead costs of 30 basis points. Procurement expense was 6.9% of net sales this quarter, down from 8.2% last year, a decline of 130 basis points or $669,000.

This improvement was primarily due to lower depreciation and amortization expense of 90 basis points, reduced overhead expenses of 20 basis points, and a lower wages of 20 basis points. Technology expense was 1.75 of net sales this quarter, down from 2.3% last year, a decline of 60 basis points or $367,000.

The reduction was primarily due to lower wages of 20 basis points, a lower telephone expense of 10 basis points and a lower overhead of 30 basis points.

(Indiscernible) e-commerce site for the quarter was 30.3 million, down 18% over last year; 72% of the 18% decline was due to the impact of sites we discontinued which was a reduction of 4.7 million unique visitors. Excluding this impact, traffic declined by 5.6%.

Orders placed through our e-commerce channel this year were 488,000, down 7.8% from last year of 529,000 with an average order value of 107, down 1.8% from 109 last year. Our conversion rate was 1.61% this quarter up 11.8% from last year of 1.44%.

A strong growth in conversion and the decline in AOV are both due in part to our more competitive online pricing compared to last year. We are also seeing an improvement in year-over-year conversion of the sites we retired last year on lower conversion rates than on go-forward sites.

Revenues after the amount of actual dollars obtained after taking into consideration, return, credit card declines and product fulfillment improved by 270 basis points or 84% of gross sales compared to last year of 82.2% on gross sales. The revenue capital improvement is primarily due to the increase in stock position and lower sales returns.

This quarter’s customer acquisition price was flat compared with last year at $6.96. Now, turning to the balance sheet, cash and securities were 1.4 million, and debt on a revolving line of credit was 0.8 million compared with 0.9 million in cash and security and debt of 6.8 million last quarter. A reduction in debt net of cash was 6.6 million.

Our cash net of debt was positive at the end of the quarter at 0.7 million. Compared to last year, debt net of cash decreased by 11.4 million. Our availability at the end of the quarter on our line increased to 15.5 million and net availability not subject to any covenant test increased to 9.5 million.

As of today we have no debt and our net availability on our line is 10.3 million. Although we currently have no borrowings against our revolver we do anticipate future borrowings as needed for working capital and operating needs of the business.

Now, with that, operator, we’ll now open the call for questions?.

Thank you, sir. (Operator Instructions) Our first question comes from the line of Mitch Bartlett with Craig-Hallum Capital Group. Please go ahead..

Hey, guys. This is George on for Mitch..

Hi, George..

First question, great quarter on accelerating growth at the go-forward sites, so the question is what -- if you were to point to just a few things that’s really driving that acceleration, what would you point to? And second part of that is how much is weather contributing to that group?.

Hey, George. Yeah, so I think there is a couple of things, one is we continue to improve the Web site and so the user experience has been better. And you can see that in conversion as well as we have a better in-stock rate this year than we did last year, so that certainly help.

And I think we mentioned it a few times, we are a little more aggressive with our pricing. So the combination of those three things has helped drive the growth..

Okay, okay. And then ….

I am sorry. I apologize, George. My guess is we think weather is probably a couple of points..

A couple of points..

But I will definitely tell you that I believe the performance of the business is a much greater share of our performance than weather..

Sure. And then secondly, and you just talked a little bit about pricing getting -- I assume that’s getting more aggressive on the branded stuff.

Is that -- do you see more competition? Is competition sort of intensifying or is it mostly just been sort of internal decision to start to be more competitive with the market?.

Yeah. So a couple of things, one is, we have got more aggressive with some of the private label as well. And so it hasn’t just been branded. We like the result we see from private label. And as it relates to more price point competitive out there, I don’t think that’s the case.

I think we just made a decision to give our pricing more in line with some of the market pricing..

Okay.

And then lastly, could you go through the quarter to-date metrics again for a go-forward and consolidated?.

Which ones do you want, George?.

Can you just give the revenue growth for where we are so far in the quarter?.

Yeah. So, total revs are up 13% and go-forward sales channels were up 20% sort of quarter to-date for the second quarter..

Okay. Great. Thank you..

Thank you. (Operator Instructions) Our next question comes from the line of Jared Schramm with Roth Capital Partners. Please go ahead..

Hi, good afternoon..

Hi, Jared..

Most of my questions were just answered. Two -- ones that were not, you mentioned net direct investment in Auto will be for ‘14, it will be about a million and a half.

Have you picked out and that sort of figure for that property heading into 2015 at all or is it too soon to be forecasting that?.

Yeah. I don’t think we’ve -- I think we will read that Jared, based on the progress we make this we as well as what we see in 2015. We are certainly excited about the opportunity being transparent to the consumer as in we are certainly excited about filling up shop. I think those two are bug needs in the marketplace that haven’t been meant.

We think we are in the best position to do it. And as it relates to what the overall investment will be, we will continue to evaluate that as we go forward..

And I think you mentioned as well the private label comprised about 605 of sales for the quarter, is that correct?.

Yeah, that’s right..

How do you see that mix trending for ‘14? Is that a number that you are pleased with at this point? Or maybe like a different balance or mix shift in the future?.

Yeah. I think probably the right way to think about it is we certainly want our private label business to grow with market on a go-forward basis, and hopefully ahead of market. We also would like to see our branded business grow with market as well. And so that mix shift may come down a little bit since our branded just hasn’t been growing.

And I think as we get smarter and sharper about how to price it and position it as well as some of the changes we will make on our website coming forward, hopefully we see that growth. So, I wouldn’t be disappointed if the shift reduced a little bit from TL to branded, but it wouldn’t be because TL wasn’t growing.

I think it’s probably the best way to say it.

We think about these two businesses as kind of separate businesses as it relates to the growth of those businesses and we hope to grow both of them and frankly if they both grow then obviously TL would continue to keep the same percent mix it has today, but we wouldn’t be opposed to having our branded business grow too..

Okay. Congratulations on the quarter, and thanks for taking my question..

Thanks, Jared..

Thank you. I am showing no further questions at this time. I would like to turn the conference back over to management for closing remarks..

Thank you. Thanks everyone for joining the call. We look forward to updating you with the second quarter. Take care..

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect..