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.

Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning, as well as the 10K that we filed later today. Let me reiterate key financial performance metrics for the full fiscal 2025 that we highlighted in this morning's news release and Selwyn mentioned earlier. Net sales increased 5.5% to a record $757.4 million. Gross profit increased 16.1% to a record $153.8 million. Generated cash from operating activities of $45.5 million and reduced net bank debt by $32.6 million to $81.4 million. And we repurchased 542,134 shares for 4.8 million. Net sales for the fiscal 25 fourth quarter increased 1.9% to 193.1 million from 189.5 million in the prior year. Gross profit for the fiscal 25 fourth quarter increased 10.6% to a fourth quarter record 38.5 million from 34.8 million a year earlier impacted by $4.6 million, or 2.4% for certain tariff costs, paid for products sold before price increases were effective, as highlighted in our earnings press release this morning. I should mention that gross profit for the quarter was also 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 $3.2 million, or a 1.7% impact to gross margin. Gross margin for the fiscal 25 fourth quarter was 19.9% compared with 18.4% a year 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. Operating expenses were $22.2 million compared with $22.6 million last year, which benefited from a $3.1 million non-cash mark-to-market foreign exchange gain compared with a $1.2 million non-cash mark-to-market foreign exchange gain in the prior year. Interest expense for the fiscal fourth quarter decreased, by $2.1 million to $12.5 million for $14.6 million a year ago, impacted by lower average outstanding balances under the company's credit facility and lower interest rates. For the fourth quarter, income tax expense was $1.9 million compared with a $1.1 million income tax benefit for the prior year. The effective tax rate for the fiscal fourth 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 fourth quarter was $722,000, or 4 cents per share, reflecting the impact of $4.6 million, or 24 cents per share pre-tax, for tariff costs that I explained earlier in my gross profit discussion. Net loss was also impacted by certain non-cash items of $2.6 million, or $0.14 per share, as detailed in Exhibit 1. Net income for the prior year was $1.3 million, including the impact of non-cash expenses and cash expenses, as detailed in Exhibit 1. As previously explained, higher sales volumes and operating efficiencies will further improve results. EBITDA for the fiscal fourth quarter was $16.3 million, reflecting the $3.5 million impact of non-cash expenses, and $4.8 million of one-time cash expenses, detailed in Exhibit 5 of this morning's earnings press release. EBITDA before the impact of non-cash expenses and one-time cash expenses mentioned above was $24.6 million for the fourth quarter. Now let me discuss the 12-month results. Net sales for fiscal 25 increased 5.5% to a record $757.4 million from $717.7 million a year ago. Gross profit for fiscal 25 increased 16.1% to a record $153.8 million from $132.6 million a year earlier. Gross margin for fiscal 25 increased by 1.8 percentage points to 20.3% compared with 18.5% a year earlier. Gross margin for fiscal 25 was impacted by 13.5 million or 1.8% of non-cash expenses and 5.9 million or 0.8% of one-time cash expenses, primarily for a certain tariff cost paid for products sold before pricing increases were effective as detailed in exhibit four in this morning's earnings press release. The loss for fiscal 25 was $19.5 million, or $0.99 per share, primarily due to the impact of non-cast expenses of $25 million, or $1.27 per share, and one-time cast expenses of $6.9 million, or $0.35 per share, as detailed in Exhibit 2 in this morning's earnings press release. Net loss for the prior year period was $49.2 million, or $2.51 per share, including the impact of non-cash expenses of $50.3 million, or $2.56 per share, and cash expenses of $7 million, or $0.36 per share, as detailed in Exhibit 2. EBITDA for fiscal 25 was $50.3 million. EBITDA was impacted by $33.4 million of non-cash expenses, as well as $9.2 million in one-time cash expenses, including $4.6 million for certain tariff costs paid, for products before price increases were effective, and $4.6 million for transition and severance costs related to the closure of our Torrance warehouse, detailed in Exhibit 5 of this morning's earnings press release. EBITDA before the impact of non-cash and cash expenses mentioned above was $92.8 million for the current period. Now, let me move on to cash flow and key corporate items. The company generated cash of approximately $45.5 million in operating activities during fiscal 25. We continue to focus on increasing operating profit and gross margin and generating positive cash flow 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 expect further opportunities to neutralize working capital. supported by customer product demand planning, enhanced inventory management, and extending our vendor payment terms. Net bank debt decreased by $32.6 million during fiscal 25 to $81.4 million from $114 million. Our liquidity remains very strong with total cash and availability of approximately $144.6 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. Now, let me address our outlook. As stated in our news release this morning, we expect net sales for the fiscal year ending March 31, 2026 to be between $780 million and $800 million, representing between 3% and 5.6% year-over-year growth. Operating income is expected to be between 86 million and 91 million, representing between 4.3% and 10.4% year-over-year growth. We estimate depreciation and amortization will be approximately 11 million. These estimates do not include certain non-cash items and one-time expenses and exclude the impact of tariffs recently enacted due to the uncertainty and continuing changes. For further explanation on the reconciliation of items that impact 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.

We will now begin our question and answer session. If you'd like to ask a question, simply press star followed by the number 1 on your telephone keypad. Our first question will come from the line of Derek Soderberg with Cantor Fitzgerald. Please go ahead.

Yeah. Hey, guys, thanks for taking the questions. So, Selwyn, you mentioned tariffs increasing strategic competitive advantage. Can you just expand on how you see tariffs potentially helping out on market share? Are you already having those conversations with customers? And what do you think specifically positions you guys better to gain share in this sort of global tariff environment? And then I'm going to follow up.

Yeah, I think, Derek, I mean, great to hear from you. I mean, that's just a question that we're going to delay answering for a period of time. But, you know, we have adjusted our footprints way in advance of the tariffs to be less dependent on China. And we continue to, you know, we continue to focus on that with lots more opportunity to come. I think I mentioned to you less than 25%. of our product comes imported from China. And so just inherently, we're ahead of the game. I think the other thing that's really important to understand is we ship direct from our factories. And so when it comes to tariffs and cash flow from tariffs, we only pay tariffs when we sell the product. And obviously, once the price increases and these initiatives kick in, you know, that's cash neutral. I believe that the majority of our competitors house their inventory in the United States and are going to need to, you know, to replenish inventory with tariff goods. So the cash requirement will be far, far greater than ours.

Got it. That makes sense. And then as my follow-up, David, you know, just wondering around the customer price increases, Wondering how that's going to impact gross margin. You guys have been expanding margin pretty nicely here. I think fiscal 25 adjusted gross margin was around 22 and a half. You know, with the addition of tariffs and those price increases, do you think you can grow off that for fiscal 26? Thanks.

That's a good question. So if we just look at tariffs, if you increase the numerator and denominator, the gross margin would be slightly negatively impacted. Other initiatives to expand gross margin and increase that margin percentage should offset that impact.

Scott, that's helpful. Thanks, guys. Thanks, Sarah.

Thank you. And again, for any questions, press star followed by the number one on your telephone keypad. Our next question will come from the line of Carolina Jolly with Gabelli. Please go ahead.

Good morning. Thank you for taking my question.

Hi, Carolyn.

So I was hoping for some clarification on the tariffs. Is, I guess, what we saw in the quarter a good representation of what we should be expecting? Or are the tariffs moving around so much that it's hard to really kind of project any certain impact at this point?

I think the timing impact is unpredictable. We will see a little more of it and, you know, certainly it'll disappear, you know, soon. So, you know, as these price increases and initiatives kick in. It's a little uncertain right now as to the exact timing and what happens with tariffs. So, you know, we can't give you exact guidance on where that's going to go yet.

Great. And then also another clarification, the price increases that you talked about, are those price increases that you've already enacted or expected going forward?

We have accomplished almost 100% of our price increases have been accepted.

Perfect. Thanks. And then last question. Just looking at the guidance, I do believe it looks like you're expecting some margin expansion next fiscal year. Can you just elaborate on some of the catalysts behind that?

So all the initiatives that we're focused on in lowering costs per unit, in increasing sales per unit, so we're constantly focused on reducing our costs.

Capacity absorption. With more volume, yes. So our momentum right now is quite strong. So I mean, the natural organic one is overhead absorption, but we've got a number of operating initiatives as well that continue. Great, thank you.

And that will conclude our question and answer session. I will turn the call back over to Sal Linjofi for any closing remarks.

Thank you so much. Well, in summary, as you can tell, we remain bullish about our outlook. We remain laser focused on further efficiencies, as we just discussed, and fully benefiting from a not easily duplicated global platform to meet demand for our non-discretionary products, as well as for my diagnostic testing capabilities. We continue to leverage our expertise in solid customer and supplier partnerships. This includes our supply chain vendor finance program that benefits our suppliers. Our liquidity is very strong and we have the resources, capacity and capability to further enhance shareholder value. 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 parts and solutions that move our world today and tomorrow. We also appreciate the continued support of our shareholders and thank everyone again for joining us for the call. We look forward to speaking with you when we host our fiscal 2026 first quarter call in August and at various investor conferences, including tomorrow and future meetings. Wednesday, sorry, not tomorrow. I'm a day ahead of myself.

Ladies and gentlemen, that will conclude our call. Thank you all for joining, and you may now disconnect.