Q4 2019 Earnings Call

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Welcome to the U.S. Autoparts fourth quarter 2019 conference call on the call for the company.

Peaker Chief Executive Officer, David Many Chief operating Officer, Chief Financial Officer.

By now everyone should have access to the fourth quarter 2019 earnings release, which went out today, approximately four or five PM eastern time.

Have you have not viewed the release.

It is available in the Investor Relations section of the U.S. Autoparts Web site, a U.S. autoparts dotcom.

This call is being webcast a replay will be available on the company's website.

Before we begin.

To remind everyone that the prepared remarks contain certain forward looking statements within the meaning of the federal security laws.

Let me make additional forward looking statements in response to your questions.

The forward looking statements include but are not limited to statements regarding future events.

Future operating financial results.

Turning to expectations expected growth strategies key operating metrics.

Our business indicators.

Capital needs and deployment.

Could it be.

Oh for its customers suppliers.

Editors and the impact of tariffs and our tariff mitigation efforts.

Potential impact of currency virus on or supply chain and operating results.

Forward looking statements are based on current information and expectations.

Or 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 could differ materially from those statements.

For all of each of the risk factors contained in U.S. Autoparts annual report on form 10-K quarterly reports on form 10-Q filed with the Securities and Exchange Commission for detailed discussion on the factors that could cause actual results could differ materially from those projected it any forward looking statements.

He was autoparts assumes no obligation to nor does it intend to update or revise any forward looking projections that maybe made in today's release or call. What you update or revise the reasons actual results could differ materially from those anticipated. These forward looking statements, even if new information becomes available.

On the future.

Please note on todays call. In addition to discuss the GAAP financial results the outlook for the company.

Non-GAAP financial measures such as adjusted EBITDA will be discussed.

An explanation of U.S. autoparts use non-GAAP financial measures and this call.

Conciliation between GAAP and non-GAAP measures required, but as they see regulation G is included in the U.S. Autoparts press release issued today, which I guess can be found on the Investor Relations section of the company's website.

The <unk> the non-GAAP information is not a substitute for any performance measure.

Delivered in accordance with gap.

And those such as non-GAAP measures of limitations, which are detailed in the company's press release.

I would now let's turn the call over to let Peter Thank you may begin.

Thank you operator, and good afternoon, everyone Q4, 2019 was a solid quarter for U.S. Autoparts as you all know what began our turnaround roughly a year ago and the continued improvement in our results is validating our strategy.

David will provide more do your telephone numbers, but let me add on through some highlights.

Adjusted EBITDA in the fourth quarter was more than double our EBITDA in Q4 2018.

Total gross profit was up over 20% from Q4 20, Jim and we Germany was our strongest gross margin in more than eight years.

Further sales of private label parts were up 15% from last year.

For the year was your revolver dock.

Well she did result in the guide post.

There are pro for moving into right direction.

There have been many drivers are these results, including energy is focused on private label sales and overhauled inventory forecasting system and the consolidation of the number of websites were on whether or not for a minute think our work is done.

There's still a lot to want to accomplish on approve upon as it doesn't sound, but the first up from 29 tend to make those improvements and will continue the momentum in 2020.

In fact through January and February this year, we're on pace for more than 30% girlfriend private label sales are stronger growth in company history.

Across the organization our management on a social games have embraced our new strategies right part time right place.

The first step in our journey last year was building out the team and I'm happy to report that we made our final keyhole are at the end of 2019, whether our new Chief Merchandising Officer, David Morris.

New team includes executives operations technology, and marketing inventory forecasting supply chain call center and merchandising personnel.

All the work that was accomplished last year, but not to have been done, but our great team and I want to thank each and every person for all their hard work.

Now for thought specific examples of the progress was made.

First our technology team rolled out a newly redesigned car parts dotcom website late last year.

The fight the significantly faster and we have also redesigned the user experience to make it easier to find the right part three of vehicle and checkout.

We have other improvements that will get 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 were able to keep records of the type of car a customer dies and that's what parts are likely to be interested in.

We're also looking forward to delivering more value to consumers by learning about important service milestones for their vehicles like recalls.

In line with all right part than they should have well continue making trend just start catalog to make it easier for customers to find that I'd products for their vehicle.

The company in years past tried to sell everything, but the kitchen sink well I'm part of consumers will still many options are all look the same.

Going forward will help you moved the paradox of choice by presenting consumers what the right part that's all that's had their vehicle.

And with all right time initiatives once customers make a purchase will want to ensure that they know where their shipments are at anytime. So they can get their vehicle Sexton back on the road.

Were pleased about the progress we made last year well, we're even more excited about what lies ahead on 2021.

Well I will not be providing formal guidance for 2020, we can't say, there's a bunch of deliver significant growth in adjusted EBITDA for 2019.

Now I'm going to turn the call or to data to provide some financial and operational highlights David.

Do you live.

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 look out 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.

What else 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 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 income.

This was due to our focus on higher margin private label products.

Total net loss for the quarter was 25.1 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 700000 in Q4 of 2018, reflecting the benefit of executing the many initiatives we've laid out over the past.

Here 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 president 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 yearend December 28, 2019, we had no revolver debt in 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 increased in stock position created better safety stock position on fast moving items as well as lowered the number of slow moving skews and inventory to make space for new and.

Fast moving SK use.

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 JP, Morgan Chase, who supported us in or efforts and extended the creditor agreement for asset baseline revolver for three years until December 16th 2022.

Now onto our operations update total online orders were up over 6% compared to Q4 2018, <unk> 807000 total website traffic was down to 13.3 million visitors from 16.5 million in Q4 2018, but that comes with a big caviar, we were running more than it doesn't sites a year ago and.

Consolidated that number down to just for it and please note that starting in our next earnings call for Q1, 2020, well focus on reporting metrics on a flagship website car parts Dot com as this is why 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 car parts dotcom website and enhancement to our traffic acquisition methodologies. Another major update as there are Las Vegas distribution Center.

He is now fully operational it's been opened just seven months and has already operating at nearly full capacity.

Now moving on to global trends in the effect on our business, while the Corona virus remains a global concern and we have tremendous sympathy for its victims. The outbreak as 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 Corona virus 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 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 the life left Thank you David I'm excited by the progress. This team has made over the last year not to mention the numbers and operational.

Women's dress shirt and while we have the team are eager to take on new projects to improve the company were proud of our results to date.

We're committed to supporting the growth in our private label business from 29 team and current trends in Q1 2020 show that were delivering on that promise. We're also committed to delivering significant adjusted EBITDA growth and 2020.

The main take away for listeners today that our turnaround is progressing very well and Q4 of 29 team was a quarter, where the business made a real break so well have been focused on the relentless in our pursuit of efficiency, while executing on growing our most profitable areas.

That's what I mentioned at the beginning of the call our year over year Q4, EBITDA more than doubled and our private label sales continued to grow there is however, I still don't improve the paraphrase Robert Trost West promises to keep at miles to go before was sleep.

Opportunities for growth and for efficiency everywhere, we look I'm now confidence we'll have the right team in place to continue seizing those opportunities was that David and I will open up the call for questions operator.

Thank you at this time will be conducting a question answer session. If you look that's a question. Please press star one on your telephone keypad a confirmation. So indicate your line is no question Q. You May proceed to fuel let your move your question from the Q4 parts as much using speaker equipment. It may be necessary to pick up your hand said before person Starkey one moment. Please let me pull for quick.

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[noise]. Our first question comes the line of Ryan signal with Craig Hallum. Please see with your question.

Good afternoon, guys and congrats on the results and solid or sold results year to date.

Thanks.

Maybe to start I know you commented 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 et cetera that that would prevent you from continuing that type of growth in March and their thereafter.

Oh for March not right now we feel pretty good about March.

And then maybe switching over so you updated your website carpets dot com redesign their launched it a few months ago can you comment on.

You know what what the trends were before that and then after you relaunched.

Yeah, So I think a car parts dotcom specifically.

So in a lot of improvement in conversion.

Now there are lot of moving pieces I wasn't just study design of the website. It was also.

On the site speed and Oh, well, then reducing the paradox of choice for the consumer I'm I lived in Italy focused on our private label business.

And also the next of traffic is different than car park dotcom than that as if you look our total network. So if you put all of that together conversion has been on the uptrend.

From I think we'll switched over the side than September and through now we're continuing to see improvements in conversion. So we're probably got conversion up.

To a point, where we feel pretty good about it carpark dotcom I feel look at our total conversion that concludes the other sites, where we haven't been making any improvements.

About carpark dot com is converting at a much higher eight done what you see in total.

And then maybe just says a a follow up love and without giving specific guidance, but directionally do you think the E commerce business can return to growth in 2020.

Yes.

Usually it off last question for you, but I'll turn it over to someone else MCU, but you talked a little bit about sourcing, but given the China and Taiwan sourcing.

And the Cobot 19 seems like is disrupting that everyone any thoughts I guess, yeah for 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 or our supply chain from China is actually really limited and we do have contingency plans to source a parts from different.

Places to keep our in stock rates in check from an operations perspective, we're obviously doing everything we can to too you know stop the travels domestic travel swine 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 I.

Our next question comes the line of Gary perspective.

With Bernstein research please with the question.

Hi, good afternoon guys.

Couple of questions you commented on the improvement in your in stock rates.

On the private label side could you maybe throw a number that is just 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 we did a pretty pretty significant seasonal by last year and we loaded up on all the fast moving items not only for Vegas, but also for Virginia and for Lasalle. So obviously.

Inventory was one of the variables that we focused on to get our private label to grow you know 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 what is that why wouldn't you look year over year. Your inventory was up about 5% <unk>. You know 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 too yes.

That's correct, yes, we are we usually try to accumulate inventory before the peak season, which starts are on the middle of Q1.

So you say, there's there's room for improvement here and as you shift to more private label from a branded I think you said in the last call you could definitely take it to 90, Oh and you're there I mean, where where do you actually think you could take that are we talking about 95%.

And then would that entail would that also being that you could still have gross margin improvement as you drive more private label.

Yeah. So I think the way a we think about it does that we don't really have a targets for it I think.

No in our Dcs will 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 from our de sees as long as it offers US you know a compelling gross margin. So we don't really have a number in mind, that's worth targeting ports, we feel pretty good about 90 odd because that's where we are right now, but as we kind of.

Bob other initiatives and we can go out on private label everything for there's millions of parts out there.

So would that something you'd brand that the fill in gaps in our catalog I think you may see that number it moves around a little bit, but we feel pretty good about 90.

Okay, and then how many web sites you know operating in a car parts Dot Com do you saw did you see Whitney website or is that folded in a car parts.

No. So right now from a ecommerce perspective, we have car parts dotcom JC with me and the auto parts warehouse.

Right.

And then do you feel that I'm just.

On the phone yeah on on a full year basis. It we had a full year of comparison here Oh, where you didn't have all these other web sites versus three that you have do you feel that you would definitely start seeing growth in the.

Commerce versus the marketplace overall.

Yes goal is the goal is really to move away from marketplace right.

To reduce our reliance on marketplaces, yes, because we don't control our own duston, either and so our goal that grow our E commerce business at a faster pace and marketplaces.

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

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

Oh, that's what we're seeing and our supply chain and on the other thing that all odd 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 stock to all the way through you want to think about it through may.

So whatever orders were placing now it's for June and July and so because we know well have longer lead times out of China, and because we have ammo cues that are a little bit longer we actually ended up in a pretty good inventory position us for parts that are coming out of China, and that's why they impact is pretty small.

Oh.

Yeah with the with the orders that you're placing now are you getting any pushback from anybody over there I mean do you have an aging over their lab or do you have an employee.

Oh, well have a well have an office in Shanghai, Okay. Okay. So you're not getting any pushback on on on things that you're watering now.

You know that would come into the supply chain a couple of months from now.

I'm, a little bit there's about a four to six week delay and production because they couldn't get the workers back in time. So are they extended the Chinese new year by weak and then it took another couple of weeks for them to get the workers backend about 70% or the factories are basically saying that the around.

The top to full production.

Okay. Thank you.

Our next question comes the line up better with Wunderlich Securities. Please proceed with your question.

Good afternoon.

Eric.

Hey.

Himself a little bit about so you rolled out car parts sarcom branded side, you've rolled out to see Whitney.

As the brand for your private label what has been the response that where do you want to take these brands in terms of the consumer.

Yeah, So JC Whitney actually hasn't holdouts, yes, as a brand a were still working on that Carpark dotcom I mean, we've seen pretty positive response.

But we've done more than just throw a lot of car parts dotcom will have a a blog that's why haven't car parts dot com, where we're creating really really good content for the consumer and it's helping us with our FCL traffic. So there's a lot of things that are going into a into car part of dotcom, but they did not carpark dot com is going to.

Be the one side that will focus on and where would drive all of our customers too. It's the one that has the highest conversion right out of all the sides I would have a even if you break it down by channel even wasn't channels that has the highest conversion right. So we're going to drive all traffic the carpet dotcom and we're gonna be redirecting the next.

All right into car parts dot com as well to benefit from that come overnight.

Right.

I guess the D.C. you said, it's up and fully running what are you gather from that and what does that.

Where youre distribution network overtime.

So you know obviously the model for US this private label stock ship, meaning what we want to do as have the DC network to support stocking the inventory. So over time, we'll probably open up more de sees across the country, but for now we don't feel like we need to open a fourth D. C. A we'd rather find a little more capacity.

And in our current network, which is what we're working on right now.

And when you do the stocks ship for the private label in excuse me for for the non branded pieces is their ability to.

Leverage your network with some of the.

Non <unk> Smith branded product excuse me to drive higher margins.

To get it out yet for summer burst, yes there.

Yes, absolutely.

How do you 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 a network of drop shippers and they captured the distribution margin right, whether its 22% to 25% and so what were saying as hey, where we know how to distribute product.

We know how the store product like that's part of our core capabilities and so you know we want to be able to capture that margin by stock into product ourselves.

And by shipping out ourselves.

Great.

That's it thank you.

Once again, if you would like to ask a question. Please press star one on the telephone keypad. Once again, if you look to ask question. Please press star one on your telephone keypad. Our next question comes the line of Sarkis Sherbetchyan with B. Riley financial. Please proceed with your question.

Hey, good afternoon Love and David.

Hey, how are you.

Well. Thanks, I'm 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 in your mind you. What we just saw was really are seasonally weakest quarter can you maybe help frame you know kind of the level of gross margin in your seasonally stronger you know maybe first half of the year.

Yeah, I think the seasonality is more for the impact to sales I think the gross margin is really the underlying number two our entire business regardless of the season. So we don't really provide guidance on 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 transaction.

And we'll remain focused on on stocking private label because this is where the margin is the highest for us.

That sounds good so about you know called the mid 30% range consolidated it seems like a fair place to be going here into fiscal 2020.

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

All right so.

So if I kind of go back to the kind of the cash flow piece of of a the business I mean for Q you guys. It free cashier. Despite living inventory can you maybe talk about your plans on further inventory builds in in 2020, and maybe talk about the cadence of that.

Yeah. 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 gonna 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 into middle of Q1, but we also don't want to make the mistakes the ramp down inventory and the impact the sale. So you know actually what we want to do is keep as much inventory as efficient in the D.C. that we can and then the A.B.L. is structured in such a way that the more inventory we have the more visibility we have on the borrowing base. So it has.

Obsessed twofold, 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.

Oh, 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 D.C. footprint can you maybe.

Help us triangulate what that means as far as inventory turns and your current capacity.

Right. So there was a lot of you know theres a number of different things that we can do to increase capacity increasing tones is one of them. If the other thing is you know that our supply chain has a combination of small parts in large parts. So we can start targeting turns out apart name level and on larger part so we could potentially stock a little less and make.

Some turn faster, but the other thing is you know some of our Dcs do have a little bit of empty space.

There's capabilities for us to add more racking and potentially more stocking capacity. So there's a lot of different projects that were working on right now, but the goal is for the current network in the current footprint to be able to support a bigger business on the private label site.

Great. Thanks, so much I'll hop back into queue.

Ladies and gentlemen that does conclude todays teleconference. You may now disconnect. Your lines at this time. Thank you for participation and have a wonderful day.

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