Motorcar Parts of America, Inc.

Thank you for standing by. My name is Eric and I will be a conference operator today. At this time, I would like to welcome everyone to the Motor Car Parts of America Incorporated fiscal 2026 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'd now like to turn the call over to Gary Mayer, Vice President, Corporate Communications and Investor Relations. Please go ahead.

Thank you, Eric, and thanks, everyone, for joining us for our fiscal second quarter call. 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 affect those anticipated by the company. 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. With that, I'd like to begin the call and turn the call over to Selin. Thank you, Gary.

I appreciate everyone joining us today. We have experienced strong consecutive quarters And I want to highlight our first half performance, and David will discuss both the quarter and six-month period in more detail, as well as trailing 12-month metrics. For the first half, we reported continued sales growth of $31.8 million, or 8.4%, gross profit improvement of $6.2 million, or 8.8%, strong operating cash flow of $31.9 million, and net bank debt reduction of $24.6 million. as well as share repurchases of 287,910 shares for $3.4 million at an average share price of $11.65. This reflects well on our annual guidance and the future. We continue to focus on opportunities to further enhance shareholder value. We remain focused and committed to being the leading supplier of non-discretionary automotive aftermarket parts. Our team is focused on continuous improvement and success. We are excited by the opportunities for growth moving forward, particularly given the rapidly changing industry environment. Equally important, we believe our financial strength and flexibility provide a distinct competitive advantage. As you know, we offer a well-respected portfolio of products and services and have the capacity and ability to benefit from a state-of-the-art North American operational footprint. In short, we are well positioned to be the industry leader. As I've highlighted before, the average age of U.S.-like vehicles has risen to 12.8 years from 12.6 years in 2024. In addition, the number of vehicles on the road climbed to 293.5 million from 289 million a year ago. we expect increased replacement opportunities for the life of vehicles, particularly with consumers holding onto their cars for longer and new car prices recently reaching all-time highs. We are encouraged by the continued success of our second-largest product category, brake offerings, which includes brake calipers manufactured at our production operation in Mexico. Our team is doing an exceptional job to further gain market share for the entire Brake product line, as well as of our other non-discretionary product offerings. We continue to leverage our strengths, offering our customers great products, industry-leading SKU coverage, and order fill rates, supported by value-added merchandising and marketing support. In short, we are all committed and focused on our customers, offering quality products and services with rational pricing. Our quality built brand name products are offered to the professional installer market through warehouse distributors and continue to gain market share. As production volume increases for certain new or hard part products, such as brake related offerings, we expect enhanced operating efficiency and overall 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 sector. Our growth opportunities continue to gain momentum. We are becoming an increasingly important supplier to the heavy-duty rotating electric market with opportunities to expand our quality-built brand name. We are experiencing increased demand for our aftermarket products in Mexico, which complements our existing strategic, operational, and distribution footprint there. As our U.S.-based retailers and warehouse distributor customers expand throughout Latin and South America, we are well-positioned to benefit while supporting their growth. With regard to our diagnostic business, our JBT1 benchtop tester leads the industry, and the installed bases continue to grow, with additional service-related revenue related to software, and database updates anticipated. We also expect more opportunities outside North America as the business evolves, including potential new applications that complement and real leverage our technology. We remain focused on benefiting from cost reduction initiatives to enhance margins, including strategic supply chain sourcing changes and capitalizing on our North American footprint. As I mentioned, we believe the outlook is bright for non-discretionary off-market parts for the internal combustion engine market, and we are focused on leveraging our capability and capacity to offer a broad range of SKUs for all makes and models, whether new or older vehicles. While the industry has expressed some recent headwinds due to consumers deferring certain repairs, as well as the impact of the recent government shutdown, deferment is not really a long-term option for our non-discretionary products. If your car doesn't start or stop, you're not driving. We believe that there are meaningful opportunities for further growth as the competitive landscape changes. Before I turn the call over to David to review our results in details, let me summarize. From a sales perspective, we expect continued organic growth for our business, supported by favorable long-term industry tailwinds and our strong financial position. Our commercial heavy-duty market continues to grow. Our breakaway business is gaining further traction, particularly brake calipers. In addition, our sale in the Mexico market are growing nicely, and we expect this momentum will continue and expand throughout the region. Finally, our diagnostic business continues to grow nicely, and we look forward to ongoing success. I should mention that net sales for the quarter reflected two unusual events that offset each other. We reduced our customer call returns of pool in connection with the realignment of inventory at certain customer distribution centers, which resulted in a one-time gain for the quarter. This one-time revenue recognition of $14.8 million nominally contributed $643,000 to profitability, reduced gross margin by 1.1%, and was completely neutral to cash flow. In simple terms, we lost some business and picked up some other business. Second, one of our largest customers delayed purchases in an amount that offset the core revenue. This delay is temporary, and we anticipated it will result in increased orders during the second half of the year. I want to emphasize that we're excited by our progress and future opportunities, and that we are confirming our guidance for fiscal 2026. This one-time core revenue is not included in our revenue patterns. 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 non-cash mark-to-market foreign exchange, which can have a positive or negative impact on our Mexican lease liabilities and forward contracts that we purchase. We are focused on opportunities to minimize 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 have reduced our purchases of forward peso contracts. We expect over time we will eliminate the need to purchase these contracts. I would now like to turn the call over to David.

Thank you, Selwyn, and good morning, everyone. Let me summarize key financial performance metrics for the fiscal 26 second quarter that we highlighted in this morning's news release, and additional information will be available in the 10-Q that will be filed later today. Debt sales increased 6.4% to $221.5 million. Gross profit increased 3.5% to a second quarter record of $42.7 million. generated $21.9 million of cash from operating activities, and reduced net bank debt by $17.7 million to $56.7 million. Repurchased 90,114 shares for $1.4 million at an average price of $15.41. Now, let me discuss our results in more detail. Net sales for the fiscal 26 second quarter increased $13.3 million, or 6.4% to $221.5 million from $208.2 million in the prior year. Net sales for the quarter reflect $14.8 million of core revenue in connection with the realignment of inventory at certain customer distribution centers, offset by the timing of purchases by one of our largest customers, as someone mentioned previously. Gross profit for the fiscal 26 second quarter increased 3.5% for a second quarter record of 42.7 million from 41.3 million a year earlier. I should mention that gross profit for the quarter was also impacted by non-cash expenses. The non-cash expenses reflect core and finished premium amortization and revaluation of cores and customer shelves, which are unique to certain of our products and required by GAAP. The total for all non-cash expenses in the quarter with approximately $3.6 million, or a 3% impact to gross margin, as detailed in Exhibit 3 in this morning's press release. Gross margin for the fiscal 26 second quarter was 19.3% compared with 19.8% a year earlier. In addition to the non-cash expenses previously explained, gross margin for the fiscal 26 second quarter was also impacted by one-time cash expenses of $698,000, or a 0.3% impact to gross margin, as detailed in Exhibit 3 of this morning's earnings press release. I should note, excluding the non-cash expenses and one-time cash expenses, gross margin on adjusted basis increased slightly, as detailed in Exhibit 3. Aside from higher sales volume, particularly from certain of our newer product offerings, which supports increased absorption of costs, we remain focused on other initiatives to enhance gross margins. Operating expenses were $26.4 million for the fiscal 26 second quarter, compared with $28.8 million last year, which benefited from a $1.5 million non-cash market-to-market foreign exchange gain, compared with a $5.4 million non-cash market-to-market foreign exchange loss in the prior year. The remaining increase includes increased general and administrative expenses at our offshore locations, increased commissions, and increased research and development expenses. Operating income for the fiscal 26 second quarter increased 30.8% to $16.4 million from $12.5 million in the prior year. Interest expense for the fiscal second quarter decreased by $1.5 million to $12.7 million from $14.2 million a year ago reflecting lower average outstanding balances under the company's credit facility and lower interest rates compared with a year ago. For the second quarter, income tax expense was $3.6 million, compared with $912,000 for the prior year. The effective tax rate for the fiscal second quarter reflects in part the inability to recognize the benefit of losses at certain 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 26 second quarter was $2.1 million, or $0.11 per share, compared with a net loss of $3 million, or $0.15 per share, for the prior year. Net loss was impacted by non-cash expenses of $4.8 million, or $0.25 per share, and was impacted by one-time cash expenses of $523,000 or $0.03 per share, as detailed in Exhibit 1. As previously explained, higher sales volumes and operating efficiencies will further improve results. EBITDA for the fiscal second quarter was $16.5 million, reflecting $6.3 million of non-cash expenses and $698,000 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 $23.5 million for the second quarter. Now, let me discuss the six-month results. Net sales for the fiscal 26-month period increased $31.8 million, or 8.4%, to a record $409.8 million from $378.1 million. Net sales for the six-month period reflect $14.8 million of core revenue in connection with the realignment of inventory at certain customer distribution centers offset by the timing of purchases by one of our largest customers. Gross profits for the fiscal 26-month period increased to a record $76.6 million from $70.5 million a year earlier. Gross margin for the fiscal 26-month period was 18.7%, compared with 18.6% a year earlier. Gross margin for the fiscal 26 six-month period was impacted by $7.4 million, or 2.5% of non-cash expenses, and $2.1 million, or 0.5% of one-time cash expenses, as detailed in Exhibit 4. Net income for the fiscal 26 six-month period was $893,000, or 4 cents per diluted share, impacted by non-cast expenses of $3.5 million or $0.17 per diluted share, and one-time cast expenses of $1.6 million or $0.08 per diluted share, compared with a net loss of $21 million or $1.07 per share a year ago, impacted by various items detailed in Exhibit 2 in this morning's earnings press release. EBITDA for the fiscal 26 six-month period was $37.2 million, EBITDA was impacted by $4.6 million of non-cash expenses as well as $2.1 million in one-time cash expenses detailed in Exhibit 5 of this morning's earnings request release. EBITDA before the impact of non-cash and one-time cash expenses mentioned above was $43.9 million for the current period. Now, let me move on to cash flow and key corporate items. The company generated cash of $21.9 million in operating activities during the fiscal 26 second quarter and generated 31.9 million in operating activities for the fiscal 26 six-month period compared with 2 million for the prior year fiscal 25 six-month period. We remain focused on increasing operating profit and gross margin and generating positive cash flow supported by growth 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 expending our vendor payment term. Net bank debt decreased by $17.7 million during the fiscal 26 second quarter to $56.7 million from $74.4 million and decreased $24.6 million during the fiscal 26 six-month period, the $56.7 million from $81.4 million. As explained previously, EBITDA before the impact of non-cash and one-time cash expenses mentioned above was $43.9 million for the six months ended September 30, 2025. Based on information provided above and in our previous filings, EBITDA for the 12 months ended September 30, 2025 was $73.9 million. EBITDA before the impact of non-cash and one-time cash expenses was $95.5 million for the same period. To recap, our net bank debt was $56.7 million in September 30, 2025, compared with EBITDA before the impact of non-cash and one-time cash expenses mentioned above of $95.5 million for the 12 months ended September 30, 2025. For the past two years, through September 30, 2020-25, we have generated cash from operating activities of approximately $122 million, or approximately $6.21 per outstanding share on average. And we reduced net bank debt by approximately $98 million. For the 12 months ended September 30, 2025, we have generated cash from operating activities of approximately $75 million. Our liquidity remains very strong. with total cash and availability of approximately 161 million. During the fiscal 26 second quarter, the company repurchased 90,114 shares for 1.4 million at an average price of $15.41 under its current authorization program, supported by solid cash generation from operating activities. For the six-month period, the company repurchased 287,910 shares for $3.4 million at an average share price of $11.65. 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, please press star followed by the number 1 on your telephone keypad. Your first question comes from the line of Brian Nagel with Oppenheimer. Please go ahead.

Hey, guys. Good afternoon. Hi, Brian. So a couple questions. First off, Selwyn, you mentioned in your comments just on the effects of deferral. This has been a topic that we've heard from a number of companies within your space lately. So I guess the question I have is if you can expand a little bit, recognizing like you said in your comments, I mean, You know, this is a break-fix type industry, so any type of deferral will be short-lived. But I guess the question I have is, you know, what are you seeing? Was there a measurable impact on the quarter, you know, from deferral?

Go ahead. Yeah. Okay, great. Yeah, so the questions regarding the deferral, I think – You know, there's a customer that is going through some operational changes, in particular relating to their warehousing. And as a result of that, we've had some purchases deferred for the quarter. We believe that customer is committed to continuing inventory levels and don't believe that there is any fundamental difference to that. The, you know, we mentioned the 14 million of core revenue was offset by a reduction of about the same amount by that deferral. And we expect that we'll pick up that deferral in the back six months of our year. So, you know, I think the net wash, I mean, all in all, the numbers would have been better had we not had the deferral. But, you know, excluding the revenue that from the core revenue, I mean, it still meets all of our annual guidance expectations. And quite frankly, you know, we're excited about the performance of the company right now. There's significant cash flow generation, debt, you know, debt payback, cash flows basically coming from profitability and working capital, excluding the calls. And the fundamental outlook for our business, while there are some changes in the revenue, that's not abnormal for us. we expect that, you know, we will continue to maintain our momentum.

That's helpful. I guess the second question, so, you know, the second question I have is just on consumer behavior. You know, and I think you mentioned, maybe we're probably, I think we're using the term deferral twice. I mean, that's in terms of a specific customer of yours. But then also, if I heard you correctly, you were talking about at the consumer level, You're seeing some type of maybe demand deferral as consumers are pushing off projects longer. So I want to make sure I heard that correctly because that's something I think we've heard elsewhere.

Yeah, yeah. I think anywhere where there's discretion, Brian, there seems to be some deferral and some uncertainty. But for the majority of our products, for all of our products, they're non-discretionary. The vehicle will not operate without replacing them. You are capable of deferring, replacing your brakes. for a little bit, but, you know, not too long. I mean, you've got to get the job done. So, you know, I think with our product lineup, the deferral, that deferral is different than the one-time deferral on some restructuring or warehousing. But that deferral, I think, is more nominal on us than others. Okay.

Great. Appreciate it. Thank you. Thank you. Thank you.

The next question comes from the line of Derek Zuckerberg with Cantor Fitzgerald. Please go ahead.

Yeah. Hey, guys. Thanks for taking the questions. Hey, guys. Can you talk about, you know, just market share trending, any trends in market share for your core as well as breaking business? And additionally, there's been some news flow regarding the first brands. wondering if you could talk about whether or not there are any sort of knock-on effects from what's going on there, and then I've got to follow up.

Yeah, I think market share for us, I mean, it fluctuates a little bit, but I don't see any major material changes in market share right now. I think, you know, if we look at the momentum of our business, our brake-related products are certainly the ones that are picking up momentum faster than others. You know, relative to first brands, difficult for me to comment. I mean, it's sad that something like that has, you know, cast a veil over our industry. You know, having said that, I think for customers that are reliable, have integrity, have great, good products, and, I mean, I think there's going to be lots of opportunities. So, I mean, but really much more than that, I couldn't comment.

Got it. And then as my follow-up, I wanted to touch on cash flow. Really good generation here. Looks like trailing 12 months. Free cash flow is around $70 million, something like that. And, you know, you guys have been buying back shares. Can you talk about how you plan on utilizing further cash flow? Wondering if the repurchases will continue. And then just looking at debt levels, how comfortable are you with where it's at? Do you plan on continuing to reduce debt as well? Thanks.

Yeah, I think, look, in light of what's happened to the stock today, I mean, certainly, you know, I think really to the extent we have liquidity, to the extent that we think that there's an undervaluation, I mean, I think that we'll continue to buy back stock. I mean, we do have an authorization out there to repurchase stock, so we'll have to look at that and continue. As far as the debt levels, I mean, our debt levels are very low. I think it will continue to get lower. Right now, you know, we think that having liquidity is going to leave us in a good stead to be able to take advantage of numerous opportunities that will be unfolding in the marketplace. And so we're excited about that. I think we're sitting in a good position. And having lots of liquidity will be helpful.

Really appreciate it.

Thanks, guys. Thank you. We have no further questions at this time. I would now like to turn the call over to Selvin Jaffe for closing remarks. Please go ahead.

Thank you. In summary, I mean, we continue to be bullish about our outlook. We remain laser focused on further efficiencies and fully benefiting from a not easily duplicated global platform to meet demand and grow market share for our non-discretionary products. as well as for our diagnostic testing business. We continue to leverage our expertise in solid customer and supply partnerships. Our liquidity is strong, our leverage is low, and we have the resources, capacity, and capability to further enhance shareholder value. Let me reiterate our strategic focus. Growing sales of our existing product lines. Continuous operational efficiency improvements to further enhance margins, and we are making great progress there. mitigating tariffs, and increasing cash conversion by increased profitability and neutralization of working capital. In closing, we appreciate the contributions of all our team members who are continuously focused on providing the highest level of service. We're 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 third quarter conference call in February and at various investor conferences and meetings. Thank you.

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