Welcome to the U.S. Auto Parts Fourth Quarter 2019 Conference Call. On the call from the company are Lev Peker, Chief Executive Officer; and David Meniane, Chief Operating Officer and Chief Financial Officer. By now, everyone should have access to the fourth quarter 2019 earnings release, which went out today at approximately 4:05 p.m. Eastern Time.

If you have not viewed the release, it is available on the Investor Relations section of the U.S. Auto Parts website at usautoparts.com. This call is being webcast, and a replay will be available on the company's website through.

Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements within the meaning of the federal securities laws, and management may make additional forward-looking statements in response to your questions.

The forward-looking statements include, but are not limited to statements regarding future events, our future operating and financial results, financial expectations, expected growth in strategies, key operating metrics, and current business indicators, capital needs and deployment, liquidity, product offerings, customers, suppliers, competitors, and the impact of tariffs and our tariff mitigation efforts, and the potential impact of coronavirus on our supply chain and operating results.

The forward-looking statements are based on current information, and expectations are subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance. The forward-looking statements involve a number of factors that could cause actual results to differ materially from those statements.

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 detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statements. U.S.

Auto Parts assumes no obligation to, nor does it intend to update or revise any forward-looking projections that may be made in today's release or call or to update or revise the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Please note, on today's call in addition to discussing GAAP financial results, the outlook for the company, the non-GAAP financial measures such as adjusted EBITDA will be discussed. An explanation of U.S.

Auto Parts use of non-GAAP financial measures in this call and reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in the U.S. Auto Parts press release issued 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 delivered in accordance with GAAP, and those such as 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 to Lev Peker. Thank you. You may begin..

Thank you, operator, and good afternoon. Q4 of 2019 was a solid quarter for U.S. Auto Parts. As you all know, we began our turnaround roughly a year ago, and the continued improvement in our results is validating our strategy. David will provide more detail on the numbers but let me run through some highlights.

Adjusted EBITDA in the fourth quarter was more than double our EBITDA in Q4 of 2018. Total gross profit was up over 28% from Q4 of 2018, and we generated our strongest gross margin in more than eight years. Further, sales of private label parts were up 15% from last year, and we ended the year with zero revolver debt.

We see these results as a guidepost, they are proof we are moving in the right direction. While there have been many drivers of these results, including an increased focus on private label sales, and overhauled inventory forecasting system, and the consolidation of the number of websites we're on, we do not for a minute think our work is done.

There is still a lot we want to accomplish and improve upon as a business, and we took the first steps in 2019 to make those improvements, and we plan on continuing the momentum in 2020. In fact, through January and February of this year, we're on pace for more than 30% growth in private label sales, our strongest growth in company history.

Across the organization our management and associate teams have embraced our new strategy of right part, right time, right place. The first step in our journey last year was building up the team, and I'm happy to report that we made our final key hire at the end of 2019 with our new Chief Merchandising Officer, David Morris.

The new team includes executives, operations, technology, marketing, inventory forecasting, supply chain, call center, and merchandising personnel. All the work that was accomplished last year could not have been done without our great team, and I want to thank each and every person for all their hard work.

Now for some specific examples of the progress we've made. First, our technology team rolled out a newly redesigned CarParts.com website late last year. The site is significantly faster, and we have also redesigned the user experience to make it easier to find the right parts for your vehicle and checkout.

We have other improvements that we'll be rolling out over the next few months, and I plan to talk more about those on our next call. Second, our marketing team made improvements to the personalization of both, our marketing and sales efforts.

Email marketing is now personalized, and we're able to keep records of the type of car a customer drives, and thus what parts they are likely to be interested in. We're also looking forward to delivering more value to consumers by learning them about important service milestones for their vehicles like recalls [ph].

In line with our right parts initiative, we will continue making changes to our catalog to make it easier for customers to find the right products for their vehicle. The company and your staff strived to sell everything but the kitchen sink, we've bombarded consumers with too many options that are all of the same.

Going forward we will help remove the paradox of choice by presenting consumers with the right parts that will best fit their vehicle. And with our right time initiatives, once customers make a purchase; we want to ensure that they know where their shipments are at any time, so they can get their vehicle fixed and back on the road.

We're pleased about the progress we made last year but we're even more excited about what lies ahead in 2020. While we will not be providing formal guidance for 2020, we can say that we plan to deliver significant growth and adjusted EBITDA over 2019. Now, I'm going to turn the call over to David to provide some financial and operational highlights.

David?.

Thank you, Lev. As we mentioned on prior calls, our team remains laser-focused on selling the parts that generate the highest margin, and to always be on the lookout for ways to improve operational efficiency.

In the fourth quarter, our private label sales grew 15% compared to last year, and accounted for approximately 90% of sales versus 76% in the prior year period.

Even with us proactively cutting back on lower margin product sales, and exiting unprofitable lines of business, we're happy that the growth in our private label sales nearly fully offset the decline from our lower margin branded business.

We will continue to address low and negative margin transactions and focus on growing our private label business. Gross profit for the quarter increased 28% to $21.2 million versus $16.6 million last year. Our gross margins are up over 800 basis points to 33.7% versus 25.6% last year.

Now this is the fourth consecutive quarter of gross margin and gross Profit expansion, most of the increase was due to our focus on higher margin private label products. Total net loss for the quarter was $25.1 million, of which $21.5 million was due to a valuation allowance on deferred tax assets.

Adjusted EBITDA in Q4 more than doubled to $1.7 million compared to $700,000 in Q4 of 2018, reflecting the benefit of executing the many initiatives we've laid out over the past year, and we are seeing that momentum carry over in Q1. Our initial numbers for January and February of 2020 for private label sales continue to be strong.

If present trends hold, we will grow private label sales by more than 30% in Q1 year-over-year, leading to double digit revenue growth for total company sales, all while maintaining very solid gross margins. Now turning to the balance sheet; at fiscal year-end December 28, 2019, we had no revolver debt and a cash balance of $2.3 million.

As we mentioned on prior calls, inventory optimization and working capital improvements are top of mind for us, and we're excited about the progress that we've made including increased inventory turns, increase in stock position, created better safety stock position on fast moving items, as well as lowered the number of slow moving SKUs and inventory to make space for new and fast moving SKUs.

Our inventory optimization process helped us generate significant working capital improvements and execute our turnaround strategy without the need for additional outside capital.

We're also very thankful for our partners at JPMorgan Chase, who supported us in our efforts and extended the creditor agreement for asset baseline and revolver for three years until December 16, 2022. Now on to our operations update; total online orders were up over 6% compared to Q4 2018 to 807,000.

Total website traffic was down to 13.3 million visitors from 16.5 million in Q4 of 2018, but that comes with a big caveat. We were running more than a dozen sites a year ago and have consolidated that number down to just four.

And please note, that starting in our next earnings call for Q1 2020, we'll focus our reporting metrics on our flagship website CarParks.com, as this is where we're focusing most of our resources. We compensated for the Q4 dip in traffic by improving our conversion rate, which is up 30 basis points over Q4 of 2018.

Now there are many factors leading to this improvement including an overhaul to our flagship CarParks.com website, and enhancement to our traffic acquisition methodologies. Another major update is that our Las Vegas distribution center is now fully operational, it's been open just seven months and is already operating at nearly full capacity.

And moving on to global trends and the effect on our business; while the coronavirus remains a global concern, and we have tremendous sympathy for it's victims, the outbreak has had limited effect thus far on our operations.

Our global supply chain is not highly leveraged in China, but to be diligent we have created contingency plans to help mitigate any potential disruption. The situation remains fluid and uncertain, so our estimate of the minimal impact from the coronavirus outbreak is based on our best information as of today, which is subject to change.

On another note, the past winter was far milder than usual, which would normally have a negative impact on sales as inclement weather tends to be more favorable for our industry. With that said, we were able to offset the impact of the warm winter with all the initiatives that we've been working on.

Lastly, we continue to see limited financial impact from tariffs as customers continue to bear most of the cost of those tariffs, and this is similar to what we're seeing from our competitors. With that, I'll turn the call back over to the Lev.

Lev?.

Thank you, David. I'm excited by the progress this team has made over the last year, not to mention the numbers and operational improvements just shared. And while we as a team are eager to take on new projects to improve the company, we're proud of our results to date.

We're committed to supporting the growth in our private label business from 2019, and current trends in Q1 2020 show that we're delivering on that promise. We're also committed to delivering significant adjusted EBITDA growth in 2020.

The main takeaway for listeners today is that our turnaround is progressing very well, and Q4 of 2019 was the quarter where the business made a real breakthrough. We have been focused and relentless in our pursuit of efficiency while executing on growing our most profitable areas.

As we mentioned at the beginning of the call, our year-over-year Q4 EBITDA more than doubled and our private label sales continue to grow. There is however, still room to improve. The paraphrase Robert Frost, "we have promises to keep and miles to go before we sleep." There are opportunities for growth and for efficiency everywhere we look.

I'm now confident we have the right team in place to continue seizing those opportunities. With that, David and I will open up the call for questions.

Operator?.

Thank you. [Operator Instructions] First question comes to line of Ryan [ph] with Craig-Hallum. Please proceed with your question..

Good afternoon, guys and congrats on the results and solid -- solid results here to date..

Thanks..

Maybe to start; I know you comment in a lot of kind of moving pieces and if that trend continues, but -- do you expect or is there anything to consider in March either from a comp perspective or whether or you know, even a supply chain etcetera that would prevent you from continuing that type of growth in March and thereafter?.

For March, not right now. We feel pretty good about March..

And then, maybe switching over; so you updated your website, CarParts.com, redesigned it, launched it a few months ago.

Can you comment on what the trends were before that and then after you relaunched?.

Yes, so I think CarParts.com specifically, we've seen a lot of improvements in conversion. Now there are a lot of moving pieces, it wasn't just the redesign of the website, it was also site speed, and we've been reducing the paradox of choice for the consumer, and we've been really focused on our private label business.

And also the mix of traffic is different on CarParts.com than it is if you look at our total network. So if you put all of that together, conversion has been on the uptrend from -- I think we'll switch over the site in September and through now we continue to see improvements and conversion.

So we've probably got conversion up to a point where we feel pretty good about it. On CarParts.com, now if you look at our total conversion that includes other sites where we haven't been making any improvements, but CarParts.com is converting at a much higher rate than what you see in total..

And then, maybe just as a follow-up, Lev.

And without giving specific guidance, but directionally, do you think the e-commerce business can return to growth in 2020?.

Yes..

Easy enough. Last question for me, then I'll turn it over to someone else in the queue. But you talked a little bit about sourcing, but given the China and Taiwan sourcing, and the COVID-19 seems like it is disrupting everyone. Any thoughts, I guess, if or when that could disrupt operations in the U.S.

how long and any issues there?.

Well, from a sourcing perspective, you know that a lot of our parts; you know, we have kind of a global supply chain. A lot of it comes from Taiwan, which hasn't been really impacted from the virus.

Our supply chain from China is actually really limited, and we do have contingency plans to source parts from different places to keep our own stock rates in check.

From an operations perspective, we're obviously doing everything we can to stop the travels; domestic travels, foreign travels, we're making sure that we're doing our best to kind of keep communications open with our employees, whether it's here or in Manila..

Great, thanks, guys. Good luck..

Thanks..

Our next question comes from line of Gary Prestopino with Barrington Research.

Please, proceed with your question?.

Hi, good afternoon, guys. Couple of questions here; you've commented on the improvement in your in stock rates on the private label side.

Could you may be throw a number at that as just -- either how much it improved or what the actual rates were year-over-year?.

So Gary, we don't really give out the exact numbers but what I can tell you is that on fast movers, we saw substantial improvements. We did a pretty significant seasonal buy last year, and we loaded up on all the fast moving items, not only for Vegas, but also for Virginia and for the South [ph].

So obviously, inventory was one of the variables that we focused on to get our private label to grow in Q4, as well as in the early days of Q1. So -- but we don't really give out a specific number..

Okay. Is that why when you look year-over-year, your inventory was up about 5% and obviously, your sales were down but that's all really due to a branded product that you guys had enough confidence in what you're doing that you kind of loaded up on inventory to….

Yes, that's correct. Yes, we usually try to accumulate inventory before the peak season, which starts around the middle of Q1..

So you say there is room for improvement here, and as you shift to more private label from branded; I think you said in the last call, you could definitely take it to 90, and you're there.

I mean, where do you actually think you could take that? Are we talking about 95%? And then, would that entail -- would that also mean that you could still have gross margin improvement as you drive more private label?.

Yes. So I think the way we think about it is, we don't really have a target for it. I think in our DCs we have an asset that we need to utilize fully, and so even the branded business, we may end up putting it on stock and then shipping it out some DCs as long as it offers us compelling gross margin.

So, we don't really have a number in mind that we're targeting towards. We feel pretty good about 90 because that's where we are right now. But as we kind of ramp up other initiatives, and we can go out and private label everything because there is millions of parts out there; so we'll definitely branded to fill in gaps in our catalog.

I think you may see that number move around a little bit but we feel pretty good about 90..

Okay.

And then, how many websites do you know are burning [ph] if CarParts.com -- you saw the JC Whitney website or is that folded in CarParts?.

No. So, right now from a e-commerce perspective, we have CarParts.com, JC Whitney and Auto Parts Warehouse..

Right. And then, do you feel that -- I'm just writing this down as I'm talking; I'm moving from the phone.

If on a full year basis we had a full year of comparison here where you didn't have all these other websites versus the three that you have; do you feel that you would definitely start seeing growth in the e-commerce versus the marketplace, overall?.

Yes..

The goal is really to move away from marketplace, right?.

To reduce our reliance on marketplaces, yes, because we don't control our own destiny there. And so our goal is to grow our e-commerce business at a faster pace than marketplaces..

Okay. And then, one last question. I hate to keep because the last guy asked about the supply chain. But all we're seeing it here and it's doom and gloom, and even though it's not -- your parts aren't coming out of China. What I've been reading is that they can't even get these parts out of a port onto a ship and across the ocean.

Are -- is the reality of it is not the case in what you're doing there that there is still fairly good free movement shipping outside of the China market?.

That's what we're seeing in our supply chain. And then the other thing that I'll add, and maybe that's the nature of our business, is that we stock up on inventory for our busy season and we do that starting in November and December.

And so we're pretty stocked all the way through, you want to think about it through May; so whatever orders we're placing now, it's for June and July.

And so because we have longer lead times out of China, and because we have MOQs [ph] that are a little bit larger; we actually ended up in a pretty good inventory position for parts that are coming out of China, and that's why the impact is pretty small..

With the orders that you're placing now, are you getting any pushback from anybody over there? I mean, do you have an agent over there Lev or do you have an employee?.

No, we have an office in Shanghai..

Okay, okay.

So you're not getting any pushback on things that you're ordering now, that would come into the supply chain a couple of months from now?.

There is about a four to six week delay in production because they couldn't get the workers back in time, so they extended the Chinese New Year by a week and then it took another couple of weeks for them to get the workers back in. But 70% of the factories are basically saying that they're ramped up to full production..

Okay, thank you..

Our next question comes from line up Eric Beder with Wunderlich Securities. Please proceed with your question..

Good afternoon. Let's talk a little bit about, so you rolled out CarParts.com as a branded site, you've rolled out JC Whitney as the brand for your private label.

What has been the response and where do you want to take these brands in terms of the consumer?.

Yes. So JC Whitney actually hasn't rolled out yet as a brand, we're still working on that. CarParts.com, I mean we've seen pretty positive response but we've done more than just roll out CarParts.com, we have a blog that we have on CarParts.com where we're creating really, really good content for the consumer, and it's helping us with our SEO traffic.

So there is a lot of things that are going into CarParts.com but the idea is that CarParts.com is going to be the one site that we focus on, and where we drive all of our customers to, it's the one that has the highest conversion rate out of all the sites that we have.

Even if you break it down by channel, even within channels, it has the highest conversion rate. So we're going to drive all traffic to CarParts.com, and we're going to be directing the next sight into CarParts.com as well to benefit from that conversion rate..

Great.

Once they get the DCs and it's up and fully running, what are you gathering there? And what does that mean were your distribution network overtime?.

So obviously, the model for us is private label stock ship, meaning, what we want to do is have the DC network to support stocking the inventory. So overtime, we'll probably open up more DCs across the country but for now we don't feel like we need to open a fourth DC.

We'd rather find a little more capacity in our current network which is what we're working on right now..

And when you do the stock ship for the private label, and -- excuse me, for the non-branded pieces, is their ability to leverage your network with some of the non -- some of the branded products, excuse me, to drive higher margins now? And to get it out for some of them first there [ph]?.

Yes, absolutely..

How do you do -- does that help the margins also?.

Yes. So if you think about it from a distribution perspective, historically, our branded product was being sold through our network of drop shippers and they captured the distribution margin, right, whether it's 22% to 25%.

And so what we're saying is, hey, we're -- we know how to distribute product, we know how to store product, like that's part of our core capabilities. And so, you know, we want to be able to capture that margin by stocking the product ourselves, and by shipping out ourselves..

Great. That's it. Thank you..

[Operator Instructions] Our next question comes from line of Sarkis Sherbetchyan with B. Riley Financial. Please proceed with your question..

Good afternoon, Lev and David..

Hey, how are you?.

I'm well, thanks. Just a few quick questions for me. I know you mentioned that you'd expect to kind of maintain this level of gross margin going forward. And mind you, what we just saw was really your seasonally weakest quarter.

Can you may be help frame, kind of the level of gross margin in your seasonally stronger, maybe first half of the year?.

Yes. I think the seasonality is more for the impact to sales. I think the gross margin is really the underlying number to our entire business, regardless of the season. So we don't really provide guidance on margin, but we feel that right now we have a pretty good handle on where we are.

Obviously, we're going to continue to go after negative and low margin transactions, and we'll remain focused on stocking private label because this is where the margin is the highest for us..

That sounds good.

So about -- you know, call it the mid-30% range, consolidated seems like a fair place to be going here into fiscal 2020?.

I'm not going to give you an exact number, but I feel pretty good about where we are right now..

All right. So, if I kind of go back to the -- kind of the cash flow piece of the business; I mean, 4Q, you guys have free cash here despite closing inventory.

Can you may be talk about your plans on further inventory builds in 2020? And maybe talk about the cadence of that?.

Yes. So, obviously our inventory position is one of the main drivers to the growth of the business, it's not the only one but it's a big one, right. If you don't have the inventory in stock, it's going to be really difficult to sell it.

So we want to do two things; we want to have enough inventory to support the peak season which starts kind of in the middle of Q1, but we also don't want to make the mistake to ramp down inventory and impact the sales. So, you know, actually what we want to do is keep as much inventory as efficient in the DCs as we can.

And then, the ABL is structured in such a way that the more inventory we have, the more availability we have on the borrowing base; so it helps us two-fold. But for us, as long as we keep the DC network, kind of within the capacity targets that we have internally, we feel good about stocking inventory.

The goal for us is to make sure that inventory turns faster and faster, so as long as the turns stay where they are, we feel good about stocking inventory..

Thanks for that. And I guess, if I can piggyback off of the prior question.

You mentioned finding capacity in the current network for your DC footprint; can you may be help us triangulate what that means as far as inventory turns and your current capacity?.

Right. So there is a lot of -- there is a number of different things that we can do to increase capacity; increasing turns is one of them.

The other thing is, you know, that our supply chain has a combination of small parts and large parts; so we can start targeting turns at a part-name level, and on larger parts we could potentially stock a little less and make them turn faster.

The other thing is, some of our DCs do have a little bit of empty space, there is capabilities for us to add more racking and potentially more stocking capacity.

So there is a lot of different projects that we're working on right now but the goal is for the current network and the current footprint to be able to support a bigger business on the private label side..

Great, thanks so much. I'll hop back in the queue..

Ladies and gentlemen, this does concludes today's teleconference. You may now disconnect your lines at this time. Thank you for participation and have a wonderful day..