Motorcar Parts of America, Inc.

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America, Inc. fiscal 2025 fourth quarter and year-end conference call. 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'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Gary Mayer, Vice President, Corporate Communications and Investor Relations at Motorcar Parts of America. Please go ahead.

Thank you. Thank you, Regina. Thanks, everyone, for joining us for our call today. Before we begin, and I turn the call over to Selwyn 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 control of the company and are subject to change based on various factors. In particular, expectations about anticipated future growth and opportunities with customers may not be achieved. The company undertakes no obligation to 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 risks and uncertainties of the business, I refer you to the various SEC files. With that said, I'd like to turn the call over to Sel and John.

Great. Thank you, Gary. I appreciate everyone joining us today. Before we go over our strong results, and by the way, we're off to a strong start for this quarter, I'd like to first address tariffs. We have substantially mitigated the current tariffs with customer price increases and supply chain initiatives. We are confident that all the current tariffs imposed as of today will be fully offset, notwithstanding some short-term timing differences. We believe these tariffs will provide us strategic, competitive advantages going forward with strong market share growth opportunities. We are certainly excited by our accomplishments for fiscal 2025, with net sales increasing 5.5% to a record $757 million and gross profit increasing 16.1% to a record $154 million, along with solid cash flow generation from operating activities of $45.5 million and net bank debt reduction of $32.6 million, all of which David will review shortly. In addition, we repurchased 542,134 shares for 4.8 million at an average of $8.91 in fiscal 2025, and we anticipate further opportunities to enhance shareholder value through strong cash generation. Our team continues to be focused on continuous improvements, and we're excited by the opportunities. Notwithstanding the current challenges with regard to tariffs, the non-discretionary nature of our product portfolio coupled with a significant North American manufacturing footprint will continue to drive our long-term success. I should note that we have been focused on executing strategies designed to enhance our competitive edge long before the current events, including a focus on being less dependent on Chinese supply chain, whether components or parts, and providing industry-leading product fill rates. As we noted in today's press release, Chinese suppliers today provide less than 25% of our products and components, and we continue to work to mitigate the impact of tariffs. I might add that our Mexican and Canadian products are USMCA compliant and currently free from tariffs. We look forward to further clarify about tariffs as we continue to focus on serving our customers and achieving our financial performance targets. As I mentioned during our call last quarter, our hard parts business, led by a rotating electrical 50 plus year flagship category, continues to generate solid performance. The non-discretionary nature of our products, alternators and starters, for example, cannot be deferred. If non-discretionary products are broken, your car cannot be driven, which is particularly relevant in the current environment. According to industry reports, the average age of US light vehicles has risen to 12.8 years, an increase of two months for the second consecutive year. Research indicates that vehicle registrations in 2024 surpassed 16 million for the first time since 2019, exceeding scrappage rates. In addition, the number of vehicles on the road climbed to 289 million, remaining a favorable tailwind. We expect increased replacement opportunities for the life of vehicles, particularly with consumers holding onto their cars for longer. We are encouraged by the continued success of our second largest product category, brake-related applications, supported by our quality, customer service, and capacity to meet demand. Our team is doing an exceptional job to further enhance market share, and we look forward to continued sales growth for this important non-discretionary product category. As I've previously mentioned, and as referenced in the exhibits to our earnings release, there are various factors relating 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 Mexico lease liabilities and forward contracts for the year. A strengthening dollar versus the peso results in large non-cash mark-to-market expenses, which we internally eliminate. when evaluating our underlying results. We are continuing to look at opportunities to minimize these non-cash expenses, such as gains or losses related to foreign exchange, including funding our Mexican operations with pesos from our sales in Mexico. As our sales in Mexico continue to grow, we've reduced our purchases of forward peso contracts. We expect over time we will eliminate the need to purchase these contracts. We 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. We continue to leverage our strengths, particularly during these challenging times, offering our customers great products manufactured at state-of-the-art facilities, industry-leading SKU coverage and order fill rates, supported by value-added merchandising and marketing support. Our quality-built brand is gaining market share within the professional installer market. This increasingly recognized brand includes brake-related products, such as calipers, pads, and rotors. As volume increases for our hard parts business, we expect enhanced operating efficiency and margin improvement. 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 slash motor coach. Our Dixie brand is also evolving as an important supplier to the heavy-duty rotating electrical market. Our hard part sales in Mexico continue to gain momentum as we experience increased demand for our aftermarket products. 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 and continue to benefit in gross sales by our relationships with U.S.-based retailers and warehouse distributors. Both are gaining a presence in this emerging market, as are Mexican distributors. With regard to our diagnostic business, we continue to experience great success with our JBT1 benchtop tester, and we remain focused on expansion to meet our customer needs. Additional service-related revenues expect as more testers are deployed, which includes repairs, software, and database updates. These contributions will increase as the installed basement matures. We also expect more opportunities outside North America as the business evolves. In short, 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. As I mentioned, the outlook is bright for non-discretionary aftermarket parts for the internal combustion engine market, and we are focused on leveraging our ability to offer a broad range of applications for all makes and models, whether newer or older vehicles. Tariffs continue to cause uncertainty, Despite these challenges, we expect rational prices for our products from our customers, particularly in the face of these tariffs, and we remain committed to offering quality, non-discretionary products and being a reliable partner. This, combined with exceptional value-added services, will continue to distinguish our organization. Before I turn the call over to David to review our results in greater detail, let me summarize. From a sales perspective, We expect continued organic growth for our business, supported by the favorable tailwinds, which I previously mentioned. Our commercial heavy-duty market continues to grow. Our brake-related business is gaining further traction, particularly brake calipers. In addition, our sales in the Mexican market are growing nicely, and we expect this momentum will continue and expand throughout the region. And finally, our diagnostic business is growing nicely and we look forward to continued success. From a gross margin perspective, increasing market share gains, particularly for break-related products, should enhance our gross margin targets. With continued operating efficiencies and supply chain cost reduction opportunities, we expect further margin growth. Finally, and most importantly, sales growth, gross margin improvement, and an ongoing focus on neutralization working capital support our ability to further reduce debt, repurchase shares, and take advantage of other opportunities to enhance shareholder value.