Motorcar Parts of America, Inc.

Thank you for standing by. My name is Novi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Motor Car Parts of America, Inc. fiscal 2025 second quarter conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Gary Mayer, Vice President of Corporate Communications and Investor Relations at Motorcar Parts of America.

Thank you, Novi. And thanks, everyone, for joining us for our call this morning. Before I turn the call over to Selin Jaffe, Chairman, President, and Chief Executive Officer, and David Lee, the Company's Chief Financial Officer, I'd like to remind everyone of the safe harbor statement included in today's press release. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during today's conference call. Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by Motor Car Parts of America. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based upon various factors. In particular, expectations about anticipated future growth and opportunities with customers may not be achieved. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the various filings with the SEC that we make. I will now turn the call over to Selma Jaffe to begin our call.

Thank you, Gary. I appreciate everyone joining us today. We are gratified by our continued record sales performance for the quarter and six months. We were excited by the opportunities we see on the horizon and remain optimistic about the second half of fiscal 2025 and achieving our full year targets. We reported record gross profit for the quarter and six months, and gross margin metrics showed continued improvement, which David will discuss in more detail. We generated approximately $23 million of cash from operating activities, primarily due to strong operating results. Our initiatives to enhance profitability and neutralize working capital are progressing well. The result of these initiatives is to increase profitability and cash flow, which will enhance shareholder value. We are particularly excited by the operational efficiencies we are realizing from our emerging break-related products, which have grown to be our second largest category. New break business, commencing in January, will further enhance our production efficiencies, which should result in consolidated margin improvement. Clearly, our accelerating break-related product sales are contributing to efficiencies from both purchasing and production. Our team is doing an exceptional job to enhance performance metrics and we look forward to continued growth and gross margin accretion for our important non-discretionary products. There are various factors related to our financial performance that are non-cash and beyond our control, particularly the current sharply unfavorable non-cash mark-to-market foreign exchange laws from Mexican lease liabilities and forward contracts. A strengthening dollar versus the peso results in large non-cash mark-to-market expenses which we internally eliminate when evaluating underlying results. We are continuing to look at opportunities to minimize these non-cash expenses, including funding our Mexico operations with pesos from sales in Mexico. As our sales in Mexico continue to grow, we will purchase fewer forward contracts to meet our peso obligations, which will lessen the impact of non-cash foreign exchange expense fluctuations. Obviously, interest rates, particularly applicable to vendor finance programs utilized by our customers, are a headwind. On a positive note, interest rates are headed lower, which will have a meaningful impact on profitability moving forward. From an operational standpoint, results in the first half of fiscal 2025 were impacted by one-time severance expenses related to strategic cost reductions. This strategic relocation will generate expected annual savings of approximately $7.1 million. Approximately 90% of these savings will reduce the cost of goods sold, and the remainder will reduce operating costs. As I noted last quarter, this culminating action was part of a multi-year relocation process to reduce costs, utilizing our low-cost global footprint and will facilitate further operating efficiencies. we are actively exploring additional initiatives to further reduce cost of goods sold. Let me take a moment to highlight a few key near-term strategic objectives that support our favorable outlook. With respect to generating cash, we remain diligently focused on improving profitability and increasing margins. In addition, as the fiscal second half evolves, we expect our working capital metrics to gain momentum. We have implemented initiatives to enhance inventory efficiencies and have also implemented processes to extend days outstanding on accounts payable. Our supply chain finance program is ramping up nicely and being enthusiastically accepted by our suppliers. Most importantly, we continue to evaluate allocation of capital to maximize shareholder value. Another positive ongoing initiative is the acceleration of new part number introductions, targeting at least 800 per year, as supported by the introduction of 505 additional new part numbers announced last month, covering 302 million vehicles on the road. This maintains our leadership position in the categories we supply, which meets the needs of consumers and adds organic growth to our sales base. Not only are we growing organically, that we have secured meaningful new business commitments across all of our product lines. With respect to our diagnostic business, as I've previously mentioned, we expect to sell more than $100 million of diagnostic equipment within the next three years with further opportunities pending. We expect additional service revenue as more testers are deployed. We also expect more opportunities outside the United States as the business evolves. With regard to our heavy-duty business, we continue to leverage our reputation and industry position in this market, particularly with regard to supplying alternators and starters to our channel partners who are leaders in the heavy-duty aftermarket segment. Our growth opportunities continue to gain momentum across multiple platforms, such as agriculture, Class A trucks, refrigeration, construction, material handling, and transit motor coaches. Our Dixie brand is also evolving as an important supplier for the heavy-duty original equipment service for manufacturers. In the second half of the current fiscal year, we will remain focused on sales growth, profitability, and neutralizing working capital. As I noted earlier, we expect our sales and profitability will continue to grow organically, and new business is gaining solid traction. From a strategic standpoint, we will continue to leverage our strengths, including great products manufactured at state-of-the-art facilities, solid customer relationship, industry-leading skew coverage, and order fill rates, not to mention our value-added merchandising and marketing support. Our hard part sales in Mexico continue to gain momentum as we experience increased demand for our aftermarket parts. The rate of growth in this market is exciting. and we are well positioned to utilize our footprint to meet the growing demand. We are focused on increasing share in this region. We continue to benefit and grow sales via our relationships with U.S.-based retailers and warehouse distributors who are gaining a presence in this emerging market, as well as through independent Mexican distributors. Favorable long-term industry dynamics continue to bode well for the company. And we are extremely well positioned for sustainable top and bottom line growth in our hard parts business, as well as our testing solutions. We are focused on growth across all product lines, including our quality built brand, which is gaining market share within the professional installer market. This includes our most recent additions to our portfolio of brake calipers, brake pads, and rotors. I reiterate that as we grow these product lines, we expect overall gross margin accretion. We are beginning to see the benefits of this. In short, we have the capacity and capabilities to support our customers' increasing demand across multiple product lines. Our positive cash flows enable us to reduce net debt by $22 million during the quarter and will allow us to pursue opportunities to further enhance shareholder value. It is worth highlighting that 98.8% of the US car park is comprised of hybrid and internal combustion engine vehicles. Non-discretionary aftermarket parts for the internal combustion engine market will be here for decades, an outlook supported by recently updated industry data showing that the average age of vehicles is now 12.8 years. One of our key competitive advantages is our ability to offer a broad range of applications for all makes and models. We remain focused on newer model applications and our ability to meet expected demand as these vehicles enter the replacement market. I will now turn the call over to David to review our results in greater detail.

Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issue this morning, as well as the 10Q that will be filed later today. Let me first reiterate key financial performance metrics. for the fiscal 2025 second quarter that we highlighted in this morning's news release. Net sales increased 5.9% to a record $208.2 million. Gross profit increased to a record $41.3 million, impacted by certain one-time expenses of $2.7 million for onboarding new business and $1.3 million of transition expenses related to the recent strategic relocation of certain operations with expected annualized savings of $7.1 million, generated cash from operating activities of $22.9 million, and reduced net bank debt by $22 million. Results were impacted by non-cash items, totaling $10.6 million, as detailed in the exhibits. Net sales for the fiscal 25 second quarter increased 5.9% to an all-time record $208.2 million from $196.6 million in the prior year. Gross profit for the fiscal 25 second quarter increased to a record $41.3 million from $41.1 million a year earlier. I should mention that gross profit for the quarter was impacted by non-cash expenses. The non-cash expenses reflect core and finished good premium amortization and revaluation of cores on customer shelves which are unique to certain of our products and required by GAAP. The total for these non-cash expenses in the quarter was approximately $3.8 million or 1.8% impact to gross margin. A more detailed explanation of core accounting is available in a video posted on the company's website. Gross margin for the fiscal 25 second quarter was 19.8% compared with 20.9% a year earlier. In addition to the non-cash expenses previously explained, as detailed in Exhibit 3 of this morning's earnings press release, gross margin was also impacted by a one-time $1.3 million or 0.6% of transition expenses in connection with a recent strategic relocation of certain operations with expected annualized savings of $7.1 million. Additional to the items detailed in Exhibit 3, Gross margin for the fiscal second quarter was impacted by certain 2.7 million or 1.3% one-time expenses for onboarding new business, as I highlighted earlier. Aside from higher sales volume, particularly from certain of our newer product offerings, which supports increased absorption of costs, we're also focused on other initiatives to enhance gross margins. Due in part to a $5.4 million non-cash mark-to-market foreign exchange loss compared with a $4.8 million non-cash mark-to-market foreign exchange loss in the prior year, operating expenses were $28.8 million compared with $27.2 million last year. For those of you who are not familiar with our operations, our leases in Mexico are U.S. dollar denominated leases. the leases are recorded in pesos at our Mexico subsidiary. As a result, the fixed U.S. dollar lease, which are paid in U.S. dollars, are remeasured at the end of every period to reflect the current exchange rate, resulting in a $4 million non-cash foreign exchange impact of lease liabilities for the second quarter. Additionally, the company purchases forward peso contracts, which are also remeasured at the end of every period to reflect the current exchange rate. which resulted in a $1.4 million non-cash foreign exchange impact of forward contracts for the fiscal second quarter. I might add that we are in the process of analyzing reducing exposure to the foreign exchange impact of lease liabilities and the impact of foreign currency forward contracts. I should note that excluding these non-cash items above, operating expenses increased by $878,000 to $23.3 million compared with $22.5 million a year earlier, primarily due to timing of certain expenses. Interest expense for the fiscal second quarter decreased by $1.2 million to $14.2 million from $15.4 million a year ago, primarily due to lower average outstanding balances under the company's credit facility and lower interest rates. Interest expense includes accounts receivable discount program interest of $9.4 million for the fiscal 25 second quarter compared with $9.7 million for the prior year period. For the second quarter, income tax expense was $912,000 compared with $46,000 income tax benefit for the prior year. The effective tax rate for the fiscal second quarter was due in part to the inability to recognize the benefit of losses at specific jurisdictions. However, we expect these losses will be utilized against future profits, which will benefit future tax rates. Obviously, there are various factors impacting the tax effect. Net loss for the fiscal 25 second quarter was 3 million, or 15 cents per share, impacted by non-cash expenses of 8 million, or 40 cents per share, and one-time cash expenses of $1.1 million or $0.06 per share, compared with net loss of $2 million or $0.10 per share a year ago, impacted by various items detailed in Exhibit 1 in this morning's earnings press release. In addition to these items, as previously explained, results for the current quarter were also impacted by $2.7 million or $0.10 per share of certain one-time expenses for onboarding new business. As previously explained, higher sales volume and operating efficiencies will further improve results. EBITDA for the fiscal second quarter was $14.7 million, reflecting the $10.6 million impact of non-cash expenses and $1.5 million in one-time cash expenses, detailed in Exhibit 5 of this morning's earnings press release. EBITDA before the impact of non-cash and cash expenses mentioned above was $26.8 million for the second quarter, despite the impact of certain one-time expenses of $2.7 million for onboarding new business. Now let me discuss the six-month results. Net sales for the fiscal 25 six-month period increased 6.1% to a record $378.1 million from $356.3 million. Gross profit for the fiscal 25 six-month period increased to a record $70.5 million from $67.7 million a year earlier. Gross margins for the fiscal 25 six-month period was 18.6% compared with 19% a year earlier. Gross margins for the fiscal 25 six-month period was impacted by $6.9 million or 1.8% of non-cash expenses and $1.3 million or 0.3% of one-time cash expenses as detailed in Exhibit 4. In addition to the items detailed in Exhibit 4, gross profit for the current six-month period was also impacted by $2.7 million, or 0.7% of certain one-time expenses for onboarding new business. Net loss for the fiscal 25 six-month period was $21 million, or $0.07 per share, impacted by non-cash expenses of $17.4 million or $0.88 per share, and one-time cash expenses of $3.3 million or $0.17 per share, compared with a net loss of $3.4 million or $0.17 per share a year ago, impacted by various items detailed in Exhibit 2 in this morning's earnings press release. In addition to these items, as previously explained, results for the current six-month were also impacted by $2.7 million, or $0.10 per share, of certain one-time expenses for onboarding new business. EBITDA for the fiscal 25 six-month period was $13.6 million. EBITDA was impacted by $23.2 million of non-cash expenses, as well as $4.4 million in one-time cash expenses, detailed in Exhibit 5 of this morning's earnings press release. EBITDA before the impact of non-cash and cash expenses mentioned above was $41.3 million for the current period, despite the impact of certain one-time $2.7 million of expenses for onboarding new business. Now, we will move on to cash flow and key corporate items. The company generated cash of approximately $22.9 million in operating activities during the fiscal 25 second quarter. We anticipate an increase in operating profit and gross margin on a year-over-year basis for fiscal 25 and the generation of positive cash flow for the year, supported by organic growth from customer demand and operating efficiencies from our global footprint expansion. In addition to our goal of generating increased operating profits, we are diligently focused on opportunities to neutralize working capital, including customer product demand planning enhance inventory management, and further extending our vendor payment terms. We expect increasing financial performance from both new and existing product lines, including our emerging break categories. Net bank debt was $114.3 million at the end of the quarter, compared with $136.3 million at June 30, 2024, and $114 million as of March 31, 2024. Total cash and availability was approximately $105 million. I should mention that for every one-point reduction in interest rates, interest expense for accounts receivable discount programs offered by customers is reduced by approximately $6 million. For further explanation on the reconciliation of items that impacted results and non-GAAP financial measures, please refer to Exhibits 1 through 5 in this morning's earnings press release. I would now like to open the line for questions.

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Bill Desalum with Tieden Capital.

Thank you. First of all, would you please walk us through the increased guidance for operating income from that $62 to $67 million range that you had originally and now $79 to $84, and what changed to lead to that increase?

Thank you for that question. So there is no change in the net operating income because previously we gave the guidance, as you mentioned, 62 to 67, but we also highlighted there would be 17 million of non-cash items. So what we did was we combined the amounts. So if you add 17 million, the previous 62 and 67, it results in the 79 to the 84. Does that make sense?

It does. Okay, great. Thank you. And then secondarily, I believe in the release you'd referenced ordering activity was gaining momentum. So I'm looking for a little more perspective behind that. Were there specific customers that that's referring to? Was it specific product lines? Is this counter to, it seems like this is counter to the normal seasonal inventory declines that your customers have? So some perspective behind that, please.

Yeah. I mean, we're seeing, you know, in our two main categories, we're seeing, you know, pretty vibrant demand. We've had a strong start to this quarter as well. And I might add, Bill, that this is in light of a pretty soft market out there. I mean, we've just come back from the apex, and I think it's fairly unanimous that people – are generally experiencing softness. So I'm excited to be able to say that. I mean, I think that if the market was stronger, we would even see greater opportunity. I think our product lines are holding them. They're non-discretionary, and they're holding their own. And in particular, in the brake caliper line, just the programs that we offer are very strong. And I think they're picking share. So that, that continues on. I, you know, we're, we're seeing a bottom out as well. I think, I think, you know, we, what I'm hearing the industry say within the next sort of February timeframe seems like there's a bottom out in the opportunity on the tire replacement and sort of the brake category I think is bottomed out. And so we should see, we should see a further pickup there. So, uh lots of updates in terms of you know we were introducing new part numbers so a lot of that activity um so in general i think despite you know a relatively soft market which by the way i think is very temporary all the statistics continue to be positive um we're holding our own and we expect we expect uh tailwinds uh in the winds to change and tailwinds to further increase this

Great, thank you. And then just a little more color on this, if you would, please. Are you finding it's pretty much across the board, customer-wise, that you're having this order momentum, or does it tend to be with one or two customers?

You know, our top five customers are huge customers. contributors to all of our trends. So I would say in the majority of that top five, we're seeing that coming from different categories within what we supply to those top five customers. So I think different customers are experiencing different success with different initiatives. But rotating electrical and brake calipers in particular, the standouts.

Great, thank you for the color and perspective. Thank you, thank you.

Again, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from Bill Desalem with Tioden Capital.

Thank you. I'm going to jump in with a couple more, if I may now, please. So you had the $1.3 million of transition costs. Would you talk about what operations were moved from where to where?

Yeah. So the last... For a long time, we talked about how we got affected from COVID when Malaysia was closed down for 30 days, and we had to take in taper-bearing wheel hubs into the USA because we didn't want to be the importer of record into Mexico. So moving that out of the torrents, the Torrance facility was the last step in getting through that. So a lot of margin accretion will come to the wheel hub business as a result of that. And then in addition to that, there were ongoing special order activities relating to rotating electrical, mostly in conjunction with supplying our original equipment service program to some of the OE, the big OE manufacturers. And so we were able to get that relocated as well. So we're now in the process of evaluating the subleasing alternatives for this space. So we'll see how the market is and what happens. But we're optimistic. We have a below market rental. And so we think we have a nice opportunity.

That's helpful. And Selwyn, what is remaining in Torrance now in terms of operations besides offices?

Well, we still have our engineering operations, so a lot of our testing and diagnostic center And our content development center remains in Torrance. So definitely for new product and new pod introductions, we do significant quality testing on our products way beyond, in my opinion, what the aftermarket. We're in the levels of an OE type player on our quality levels. And we're proud of that. And that helps separate us. That happens in Torrance. And then in addition to that, we have a tech center. And they go hand in hand with each other. But our tech center is where we develop many of our training materials and videos and 3D content. And one of the things that we do is we do live installs. we're continuously checking applications against live vehicles. Our testers are very reliable, but we embellish that with testing on the actual vehicles. So we have a service center that is a full-blown education center with stadium seating and an ability where our customers can see examples and demonstrations of different installations, procedures, and That's all in tolerance still. And just our regular corporate headquarters as well, administration.

Great, thank you. And then this quarter you specifically called out $2.7 million of one-time expenses to onboard new business. I don't think I have seen expenses tied with onboarding of new business in the past. Would you detail what that was and what product line and

circumstances around it please yeah so it's a new rotating electrical business and uh with a significant customer and that'll begin shipping normally there are these these expenses in conjunction with with uh with uh the start of business this is this this was a little in advance so that that that business will start in january and uh it's good business the return on capital and that business is certainly in the 40% to 50% range or higher. So we're excited about that.

Is this with a new customer?

An existing customer. New business with an existing customer. Great. Thank you. And then one additional question. We're getting to the point, Bill, where we have a lot of customers now. So most of the new business is with existing customers. So, yeah.

I had one specific one in mind that I was wondering about. Okay, thank you. And relative to price increases, you've had several. Are there additional rounds of price increases that are in place now?

We have one price increase that we're expecting in January. But the market today is stabilized on that. I mean, we continue to fight for price. I mean, I think that... When you have weakness in the industry, it becomes much more challenging to get the price increases that perhaps you deserve. But we continue on and we're excited about margin accretion opportunities. And I think as we get into the next quarter, we'll start outlining that in a little more detail for everybody. But we're making some great progress on emerging opportunities. newer product lines that will help merchants.

And so in the magnitude of that price increase, really trying to gauge the impact on the total business.

Yeah, I think it's all in the guidance right now, Bill. I'd rather not get into the details of that at this point, but it's all in the guidance numbers. And certainly as we give you more visibility on the next fiscal, you'll see more of that.

Okay, that's fine. I'll let you take a pass on that one if you will give a little bit more perspective on or an update on the individual that you hired here several months ago who has lots of experience in the professional installer business.

Yeah. So not sure what to comment, but that business is growing. We further... uh added to our team there and and we're seeing to use a pun you know great traction from from that business i will now turn the call back over to selwyn joffe ceo for closing remarks okay i think bill may have got cut off there i'm not sure but uh Okay, but thank you. In summary, we're bullish. I'll restate, we're bullish as we begin the second half of the fiscal year. We are laser focused on further efficiencies and fully benefiting from a not easily duplicated global platform to meet demand for non-discretion products, as well as from our diagnostic testing capabilities. We are leveraging our expertise in solid customer and supplier partnerships. This includes our supply chain vendor finance program that benefits our suppliers. Our liquidity is strong, and we have the resources, capacity, and professional expertise to capitalize on significant market opportunities in all of our product lines. In closing, I must recognize the contributions of all of our team members who are continuously focused on providing the highest level of service. We are all committed to being the industry leader for the parts and solutions that move our world today and in the future. We also appreciate the continued support of shareholders and thank everyone again for joining us on the call. We look forward to speaking with you when we host our fiscal 2025 third quarter call in February and at various investor conferences and meetings this fall slash in the winter. Thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.