Neil Watanabe - CFO Shane Evangelist - CEO.

Mitch Bartlett - Craig-Hallum Darren Aftahi - ROTH Capital Partners.

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 Web site.

The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP and those with such non-GAAP measures have limitations, which are detailed in the company's press release.

Please also note that percentage and basis points discussed are calculated using net sales with the exception of advertising, which we will be discussing impact and comparing to net online sales.

Additionally, unless otherwise stated, all financial data reported including but not limited to revenue, gross margin, operating expense and net income loss, excludes our AutoMD reporting segment. We have included a chart of summarized segment information in our press release detailing the base U.S.

Auto Parts, AutoMD, and consolidated financials to provide the components of our business. With that, I would now like to turn the call over to Neil Watanabe..

Thank you, operator. Good afternoon everyone, and thank you for joining us today to discuss our first quarter 2016 results. Let me provide you with some additional color on the financials reported in our press release today, and then I'll touch on some of the key business metrics and initiatives that are driving our improved profitability.

I'd also like to remind listeners that all metric discussed exclude AutoMD unless specifically noted. Net sales for the first quarter decreased 6% to 80.7 million, compared to $76.3 million in the year ago quarter.

On sales were up 6% year-over-year, driven by 11% increase in our online marketplace revenue, which continues to reform well, given the strength of our private label business. In fact, private label revenues was up over 12%, while our branded business was down mid single-digits, as expected.

First quarter gross margins increased 230 basis points to 30.4% compared to 28.1% in the year ago quarter. This improvement was primarily driven by a higher mix of private label sales which were 67% of net sales, compared to 64% in the year ago quarter, and by strategic pricing initiatives and freight efficiencies.

Total operating expenses were 22.6 million, compared to 20.7 million in the year ago quarter. As a percentage of net sales, operating expenses were 28%, compared to 27.1% in the year ago quarter.

The increase was primarily the result of increased fulfillment costs and market spend, as well as certain costs as part of the implementation of a new warehouse management system, which we believe will help reduce fulfillment and freight costs.

Adjusted EBITDA for the quarter increased 52% to 4.3 million, compared to 2.9 million in the year ago quarter. As a percentage of net sales, adjusted EBITDA increased 170 basis points to 5.4%, compared to 3.7%.

The significant increase was driven by the aforementioned improvements in gross margin, partially offset by the increase in operating expenses. Adjusted EBITDA excludes non-cash share based compensation expense of 0.8 million in the first quarter, compared to 0.5 million last year.

Net income in the first quarter increased to 1.5 million, compared to 0.2 million, representing an eight times improvement over the year ago quarter. Our CapEx was 1 million in the quarter, versus 2 million in the year ago quarter. Now let me provide some details on our key sales metrics for the quarter.

Unique visitors to our ecommerce sites for the first quarter of 2016 increased 3% to 31.4 million, compared to 30.6 million in the year ago quarter.

Orders placed through our ecommerce channel increased over 8% to 559,000, compared to the year ago quarter, while our ecommerce average order value, or ALV, was $106, company to $110 in the year ago quarter. The decrease in ALV is a result of our ramp in higher margin private label products.

Online market place orders increased 9%, to 322,000, while ALV increased 1% to $72. Total Internet orders were up 8%, to 891,000, while total Internet ALV was down 2% to $94. Conversion rate for the quarter increased 10 basis points to 1.8%, compared to [technical difficulty] in the year ago quarter.

We believe this increase is the result of our improved user experience and increased number of private label SKUs. Revenue capture or the amount of actual dollars retained after taking returns, credit card declines and product fulfillment and consideration was flat compared to the year ago quarter at 85.5% of gross sales.

This quarter, customer acquisition cost came in at $7.73, compared to $7.30 in the year ago quarter, and $7.95 in Q4 of 2015. As we have stated in the past, one of our key initiatives is to become less reliant on organic search traffic to acquire customers.

As a result of our 15% increase in gross profit, we've been able to increase spend on customer acquisitions through paid search channels. We expect the increase in paid channels will grow our audience, and ultimately drive more traffic to our sites, which is validated by the increase in comp traffic over the last two quarters.

Net debt at April 2, 2016, defined as revolverless cash, decreased significantly to 1.7 million, compared to 10.3 million at January 2 of 2016. Our debt reduction from year end can be summarized into three components.

One, reduction in working capital as we gain improved productivity and turn from our inventory; two, increased proceeds from operations; and lastly, three, extended payment terms negotiated with our vendors, based on our improved operating performance. We continue to expect CapEx to be around $6 million for the year, compared to $6.7 million in 2015.

With that, I'll turn the call over to Shane..

Thank you, Neil. We were pleased with this quarter's performance, and I want to thank the team at U.S. Auto Parts for their commitment and hard work to improve the business.

With our first quarter adjusted EBITDA results, we now have a trailing 12-month adjusted EBITDA of 11.5 million, up from 10 million last quarter, and up 45% from the 7.9 million this time last year.

We anticipate that our trailing 12-month adjusted EBITDA will continue to grow in the second quarter as we comp over a weak second quarter last year that only produced $1.8 million in adjusted EBITDA. Our trailing 12-month CapEx was approximately $6 million.

We anticipated the spread between adjusted EBITDA and CapEx to increase as we anticipated adjusted EBITDA to increase further, or CapEx remains flat. Our strengthening financial position has helped to improve our debt position in a couple of significant ways. The most obvious is the retirement of debt with proceeds from operations.

In addition, our strength in financial position builds confidence with our suppliers, which has resulted in favorable extended terms on our payable. The combination of these two benefits along with a reduced inventory position has already enabled us a significantly reduced debt.

As Neil mentioned earlier, we reduced our net debt position down 83% to 1.7 million during the quarter. The business looks much different than it did 24 months ago, as we've reduced our dependency on organic search, increased our private label offerings, improved our financial performance, and significantly reduced debt.

We also find ourselves well-positioned to take advantage of several industry tailwinds. Online Auto Parts purchases are anticipated to grow over 15% annually, according to Bruce and Company. In addition, we continue to see miles driven increase, average age of the vehicle increase, and GAAP prices decreased.

Neil has already pointed out the details on the quarter's results. So I will point out the highlight, which is our private label business continuing its double-digit growth trajectory.

Our private label offering enables us to be one of the lowest providers in the marketplace, which appeals to be a very large demographic of customers who want to spent as little as possible on repairing their vehicle.

Private label also allows us to have one of the largest poises in the marketplace through marketing spend enabled by the high gross profits and margins in the private label business. The growth of this business is critical as the incremental adjusted EBITDA flow through on the private label business is around 18%-20%.

We continue to see plenty of opportunity to develop new SKUs going forward, and continue to anticipate adding 7,000 to 8,000 new SKUs this year alone. We're able to grow at this pace, because of our data engines we built, which identified fast moving SKUs and then source products with high economic returns.

Growing private label continue to be the top priority in the business. As it relates to 2016 guidance, we continue to expect low to mid single-digit revenue growth, and the second quarter is currently trending within that range. We also continue to expect adjusted EBITDA to range between $11.5 million and $14 million.

We are certainly off to a good start for the year as our current trailing 12-month adjusted EBITDA is 11.5 million that is already at the low-end of our guidance, and as I stated earlier, we anticipate that to grow.

Turning to our majority ownership in AutoMD, we have just over 4,000 shops on the service, and anticipate ending the year with 5,000 to 6,000 shops. In closing, our business continues to perform well. We experienced positive year-over-year traffic growth in the first quarter, and that trend is continuing in the second quarter.

Our private label business continues to see double-digit year-over-year revenue and gross profit growth. Gross margin expanded to over 30% in the quarter, driven by mix fixed of private label SKU. Adjusted EBITDA came in at 4.3 million, up 52% year-over-year, and adjusted EBITDA increased 170 basis points to 5.4%.

Our trailing 12-month adjusted EBITDA is now 11.5 million, up 45% from this time last year, and we anticipate continued growth. And finally, we are assisted by industry tailwinds of increased vehicle aids, favorable fuel prices, and higher miles driven. And with that, we'll now open up the call for question..

Thank you. [Operator Instructions] Our first question comes from Mitch Bartlett from Craig-Hallum..

Good afternoon, guys..

Hey, Mitch..

So, the pay down and the debt is quite dramatic; congratulations on that.

Is that likely to [indiscernible] through the year, or are you at a new level, or will that fluctuate with the orders this year?.

Yes. So, typically, Mitch, we will see a scale down in the debt during this period. I will say there is a couple of -- some large changes from years past. One is the amount of cash kicked off in the operations. It certainly can get rid of some of that debt, and also we've gotten better terms with our suppliers as our financial performances improved.

And so, we anticipate that continued significant reduction in debt throughout the year..

Perfect.

And gross margins, do you anticipate paying around the 30% level for the remainder of the year?.

Yes. So, the first quarter is typically our best quarter from margin percent perspective, and with private label up there, it's 67% of sales, certainly -- probably the strongest we will have from a gross margin percent, or typically that's been the way it's trended in the first quarter.

So it may come down a little bit off of that point, but certainly we'll be strong. If you look at the back half of last year, we were about 29.5, so I think that's sort of a benchmark for it [ph] as we're guiding to one way or the other, but margin trended where we would have anticipated it trending in the first quarter..

Got it. Okay, great. Thank you..

Thanks, Mitch..

[Operator Instructions] Our next question comes from Darren Aftahi from ROTH Capital Partners..

Hey, guys. Thanks for taking my questions -- I want to offer my congratulations.

A couple if I may, on the paying marketing side, you know, we -- looking at a lot of other Internet companies and people are focusing on such acquired data, I'm wondering, maybe it's not relevant to your business, but are you spending any of our paid marketing dollars in social, and if you are, you see any benefit from that?.

Yes. Darren, we do spend into the social category. It doesn't scale quite as well as other categories, but we certainly spend time in that category, spending into that category. And as our gross profit dollars has increased, we've been able to spend into that category more than we have in the past.

So, hope we can see some more growth there, but most of our dollars spend come through paid search, or product listing services, or the shopping engines on the search engines..

Got it.

And then secondly, so it seems like you guys have a pretty good formula kind of shifting to private label, you know, where do you see that as a percentage of sales longer term, and as it starts to kind of yield, greater, greater amounts of free cash flow, beyond de-leveraging your balance sheet, are you just going to continue to reinvest that into paid marketing, or are there other avenues kind of accelerate growth in your business? Thanks..

Yes. So, on the growth side, certainly we're excited about the growth in the private label business, and foresee that continuing going forward, because of the consumer proposition it provides, which is really low-cost product of high-quality. And that seems to be working really well with people who have vehicles that are over 11 years of age.

And so, I think we will continue to see more of the same here.

The cash from operations will go to eliminate the debt, and hopefully over time build on a balance sheet, and then if we see something opportunistic, use of that cash, we would certainly look at that, but as it relates to the marketing spend, we're very disciplined around how we spend that capital, specifically around return on variable contribution margin.

And so, as that goes negative, we stop spending. And so, we certainly wouldn't increase that spend level unless we saw what there was a return on it..

And Darren, we gave a projection this year of about 65% that private label would represent. For the first quarter, we came at 67%, but as Shane mentioned, the first quarter is a strong quarter for private label for us.

And so, we think that clearly as we continue to add new SKUs, that percent will go up, but the 65% was what we've been speaking about for this year..

Good-bye. Thank you..

Thank you. At this time, we have no further questions. I will turn the call back over to Neil for closing comments..

Thank you for joining the call today. Please note we will be presenting at the Needham Conference and Craig-Hallum Conference over the next few weeks, and hope to see some of you there. If not, we look forward to speaking with you next, when we report our second quarter results in August..

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..