Motorcar Parts of America Q1 2024 Earnings Call Transcript

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August 9, 2023

There are 5 speakers on the call.

Operator

My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorparts of

Speaker 1

America

Operator

Fiscal 20 24 First Quarter Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Followed by the number 1 on your telephone keypad. Thank you.

Operator

Gary Mayer, Vice President, Corporate Communications and Investor Relations. You may begin your conference.

Speaker 2

Thank you, Brian, and thanks everyone for joining us. Before I turn the call over to Selwyn Jaffee, Chairman, President and Chief Executive Officer and David Lee, our 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 Motorcar Parts of America.

Speaker 2

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.

Speaker 2

I refer you to our various filings with the Securities and Exchange Commission. With that, I'd like to begin our call and turn it over to Selwyn.

Speaker 3

Thank you, Gary. I appreciate everyone joining us today. We are still on track to achieve our year over year targets, Notwithstanding the timing of orders and softness in April due to a very rainy and cooler March as reported by the retailers. We saw a strong recovery in the May June months and sales continue to be robust. Also, I may note the fiscal second quarter is off to an excellent start based on record sales for a July month.

Speaker 3

Industry trends and extreme hot weather across the country support our optimism. Equally important, we are seeing improved operational efficiencies starting to materialize, enhanced by increasing sales volume, particularly from our emerging brake related product lines. These operating efficiency improvements, along with increased overhead absorption from higher sales and production and price increases all bode well for margin expansion. I might add that following the completion of the 2nd quarter On a run rate basis, all price increases will be recognized. We remain focused on leveraging our strengths, including our solid customer relationships, highly regarded product quality, range of applications and performance, not to mention our value added merchandising and marketing support.

Speaker 3

With respect to gross margins, we expect improvement as fiscal 2024 evolves. We anticipate benefits from current order volume improvement, operating efficiencies and cost reduction initiatives that we continue to implement across the entire organization. It is important to understand that product mix affects our gross margin, That's our gross profit dollars should increase from all categories as a result of our initiatives. Also noteworthy, margins on our newly launched product lines tend to be lower than mature products until we grow into our capacity and develop the efficiencies that come with time. In addition, we are exploring potential strategic partnerships for our electric vehicle operation.

Speaker 3

High interest rates continue to have a significant impact on profitability, primarily due to rates related to long established customer supply chain finance programs. To offset these interest expenses, we have received price increases from customers, which will be fully implemented this quarter. Besides the price increases as we have previously discussed, we are looking for ways to reduce interest expense by enhancing cash flow. We are focused on neutralizing working capital as much as possible. Our initiatives include increasing gross profit and operating income, Managing our inventory as a percentage of sales and implementing programs to extend days outstanding on accounts payable.

Speaker 3

We still expect sales for fiscal 2024 to be between $720,000,000 $740,000,000 representing between 5.4% and 8.3% year over year growth respectively. Also, we expect to see further margin accretion from efficiencies related to the higher volume and cost cutting initiatives, as I noted earlier in my remarks. With respect to cash flow, our expectation is to continue to make progress to generate cash. David will expand upon this in a few minutes. Regarding year end guidance, we expect operating income before the impact of the non cash and cash items and before depreciation and amortization to be between $90,000,000 $95,000,000 To provide more details, Before the non cash foreign exchange impact of lease liabilities and forward contracts, the non cash impact of revaluation of course on customer shelves and Supply Chain Disruptions.

Speaker 3

Operating income for fiscal 2024 is expected to be between $60,000,000 65,000,000 We estimate other non cash items will be approximately $16,000,000 which include core and finished goods premium amortization and share based compensation. And cash expenses are expected to be approximately $2,000,000 for Special EV related research and development expenses, which impact operating income. Depreciation and amortization are estimated to be approximately $12,000,000 In short, as fiscal 2024 evolves, we expect our gross margins across the board to increase and enhance cash flow. Our multiyear strategic initiatives and favorable industry dynamics bode well for the company, and we are extremely well positioned for sustained top and bottom line growth and our hot parts business as well as testing solutions. Now let me expand a bit further and provide some updates to the other drivers of our business to support our ability to achieve our long term financial targets.

Speaker 3

We continue to experience meaningful traction with customers and Consumers with the launch of our brake related product lines, with operating efficiency improvements continuing as volume increases and with the fixed cost absorption. We are continuing to expand hard part sales in Mexico with multiple product lines as our customers experience increased demand for aftermarket parts. We are receiving increasing orders and new customer interest for our test solutions and diagnostic equipment. In particular, bench top testers were alternators and starters from major automotive retailers and distributors to the professional installers. Major Global Automotive, Aerospace and Research Institutions for Electric Vehicle Mobility, Product Development and Design continue to purchase our equipment and or utilize our Detroit Tech Center for testing services.

Speaker 3

In short, we continue to be well positioned to address both the internal combustion engine market and the emerging electric vehicle market of product functionality and applications across both markets. Industry data continues to support our view That strong demand for internal combustion engine applications and our broad line of nondiscretionary aftermarket parts will be here for decades, notwithstanding electric vehicle growth, which still represents a small percentage of the overall car park. I'll now turn the call over to David to review our results in greater detail.

Speaker 4

Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning as well as the 10 Q that will be filed later today. Let me now provide a review of our fiscal Q1 financial results. Net sales for the fiscal 2024 Q1 were $159,700,000 compared with $164,000,000 in the prior year, primarily reflecting timing of orders. Gross profit for the fiscal 2021st quarter was $26,600,000 compared with $30,300,000 a year earlier.

Speaker 4

Gross profit for the quarter was impacted by non cash items as well as cash items. Let Let me provide details for each and then I will provide further details on the impact on each additional line item, So you can further understand the underlying fundamentals between periods and the opportunities to enhance profitability. The non cash items 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 items in the quarter of approximately $3,400,000 A more detailed explanation of core accounting is available on our website, and I would encourage anyone with questions about this topic to review the video. 1st quarter gross margin was 16.6% compared with 18.5 percent a year earlier.

Speaker 4

Gross margin was impacted by 2.2% from the previously mentioned non cash items as well as 1% from cash items. In summary, in addition to the non cash and cash items explained previously, Gross margin for the fiscal 2024 Q1 were impacted by inflationary costs not yet covered by price increases, higher per unit costs resulting from less absorption of overhead costs due to lower production volume, higher return as a percentage of sales and changes in product mix. Let me emphasize that price increases will enhance gross margins. Furthermore, gross margins will be enhanced by higher sales volume, which we are experiencing, and that will increase overhead absorption, lower the returns as a percentage of sales and further enhance operating efficiencies. Operating expenses were down $6,800,000 for the quarter to $16,100,000 from $23,000,000 in the prior year period.

Speaker 4

This included a non cash gain of $4,300,000 for the foreign exchange impact of lease liabilities and Florida contracts compared with a prior year non cash loss of $678,000 The The remaining $1,900,000 of operating expense decreases included cost reduction initiatives. We reported a net loss of $1,400,000 or $0.07 per share. As detailed in Exhibit 1 of this morning's earnings press release, non cash items impacted results by $461,000 or $0.02 per share. Cash items reflect a $1,700,000 impact or $0.09 per share. In addition to the above non cash and cash items, results for the quarter were impacted by the previously mentioned items that impacted gross margins.

Speaker 4

Results are expected to be enhanced moving forward as a full benefit of certain price increases realized and with higher sales volumes throughout fiscal 2024. We continue to implement cost reduction initiatives throughout the company, including travel, outside services, labor costs and overall cost saving initiatives and Opportunities, all of which are expected to further enhance profitability. Results for Fiscal 1st quarter were impacted by $4,800,000 or $0.18 per share of higher interest expenses, primarily due to higher market interest rates. Interest expense was $11,700,000 compared with $6,900,000 for last year. We have received meaningful annualized price increases, which will contribute to net income enhancement.

Speaker 4

Income tax benefit was $9,000 compared with income tax expense of $589,000 for the same period a year ago. I should mention that the effective tax rate for the fiscal Q1 was affected in part due to the inability to recognize the benefit of losses at specific foreign jurisdictions. However, we expect these losses will be utilized against future profits, which will benefit future tax rates. In short, there are various factors impacting the tax effect. EBITDA for the Q1 was $13,300,000 EBITDA was impacted by $615,000 of non cash items and impacted by $2,300,000 in cash items.

Speaker 4

EBITDA before the impact of non cash and cash items mentioned above was $16,300,000 for the Q1. In addition to the above non cash and cash items, EBITDA for the Q1 was impacted by the items impacting gross margin previously explained. In summary, further EBITDA improvement for fiscal 2024 is expected as the full benefit of certain price increases is realized and with higher sales volume in addition to cost reduction initiatives. Now we will move on to cash flow and key corporate items. Notwithstanding the use of cash for the quarter of $20,500,000 to support operating activities, the company a positive reversal in the fiscal Q2.

Speaker 4

As we noted in our press release this morning, we strategically elected to lower collections receivables by approximately $20,000,000 paid through our customer offered supply chain finance programs during the fiscal Q1. This resulted in interest savings of approximately $1,300,000 and enabled us to defer interest expenses until price increases for interest rates are recognized. I should emphasize that the company's strong liquidity allowed us to execute this strategy and additionally, subsequent to quarter end, pay down the company's $11,250,000 term loan. Interest rates on the term loan were approximately 2% higher than rates offered by the company's customer supply chain vendor finance programs. In short, we will continue throughout the year to monitor interest expense level and opportunities to reduce interest based on the timing of monetizing customer payments.

Speaker 4

The terms are 3 60 days to the customers and we can elect when to be paid through the customer supply chain vendor finance programs offered and we paid a proportional discount rate. We expect to generate an increase in operating profit on a year over year basis for fiscal 2024, supported by organic growth from customer demand and operating efficiencies from our now completed footprint expansion and generate positive cash flow for fiscal 2024. In addition to our goal of generating increased operating profits, We are diligently focused on opportunities to neutralize working capital growth, including customer product demand planning, enhanced inventory management and improving vendor payment terms. Our investments are and will further Bear fruit, and we're gratified by the ongoing success of our expanded operations in Mexico and the growth momentum of our emerging brake categories, along with expectations of increasing financial performance on both new and existing product lines. Our net debt at the end of the quarter, excluding our convertible note, was approximately $168,000,000 while total cash and availability on the revolving credit facility with approximately $76,000,000 after certain contractual adjustments.

Speaker 4

Lastly, we recently entered into a 7th amendment to our credit facility, including paying down the outstanding balance of our term loan and eliminating the senior leverage ratio covenant as of June 30, 2023. Our liquidity after paying down the term loan remained strong and north of 75,000,000 For further explanation on the reconciliation of items that impacted results and non GAAP financial measures, please refer to Exhibits 1 through 3 in this morning's earnings press release. I would now like to open the line for questions.

Operator

Your first question comes from the line of Matthew Coronado from Roth MKM. Your line is open.

Speaker 1

Hey, guys. Good morning, I guess. So Just I'll start with a traditional question, which is for David. Can you give the product breakdown within the quarter between rotating electrical Wheel Hubs and Brake Products.

Speaker 4

Yes, Matt. For the Q1, rotating electrical was 64% of sales. Brakes were 22%, brake related parts were 22%, wheel hubs 11% and others was 3%.

Speaker 1

Okay. So 64, sorry, I'm trying to do this on the fly here, 64, what was wheel 11%. And then brake hub or sorry brake products?

Speaker 4

22%.

Speaker 1

22%. Got it. Okay. Other 3%.

Speaker 4

So it

Speaker 1

seems like the bulk of the decline in the quarter comes from rotating electrical and wheel hub at least sequentially and then on a year over year basis if we look at that, It looks like wheelhouse is a little bit weak. Maybe just speak to the trends you saw during the quarter and sort of why the shortfall there?

Speaker 3

Yes. So I'll start just again. When you have rainy weather and cooler weather at the retailers reported in March, there were The replenishment on those items slows down in the following month. Let's say April slowed down in those items, but We see a resurgence of that. I will say along with that, Matt, is we've got significant momentum in our brake related products.

Speaker 3

So that will continue to grow. We do expect rotating electrical to continue to grow as well, that we have a little bit of a softness going into the Q1. Now for hot weather, and you should see rotating electrical fails in extreme hot weather. So that should be a driver going forward. And I will say just on the margin perspective is that, the margin pressure is not on the legacy I mean the margin pressure is just because of new and emerging product lines that are coming up.

Speaker 3

And as those volumes get better, I mean, we're already starting to see improvement in operating efficiencies in those product lines. So and those product lines are getting more and more momentum. So we expect a very strong back 9 months and I think I reiterated the guidance That we have. I think a lot of this is just a little bit of timing that the sales are a little lower than what you expected. But we expect to be ahead of your numbers and for the year.

Speaker 1

Okay. Maybe in that vein, and you mentioned the hotter They're selling more recently. Could you speak to July order trends and just the visibility that gives you End of Q2 growth and how we should be thinking about the front quarter here in terms of top line growth.

Speaker 3

Yes. I mean, the July is off to I mean, July is all time record July for us and probably one of the higher months ever. But so we're off to a very strong side with really good visibility for the rest of the quarter, along with good cash flow metrics. I mean, we were able to pay down our debt and antenna availability. So a lot of that was paid off with just the collections And so that eliminates one covenant.

Speaker 3

So I think overall, incidentally, we're feeling very positive about the outlook for the next 9 months.

Speaker 1

Okay. Any thoughts on seasonality? You reiterated the full year guide, so it does require pretty big pickup in growth. So maybe just to and level set folks on the seasonality expected during the year.

Speaker 4

Yes. I

Speaker 3

think that's a great question. I mean, I think again, I think The second quarter is going to be real strong, I mean, as everyone's expecting and we're certainly expecting that. You probably expect your 3rd quarter numbers. We think the Q3 will be a little higher than what's expected right now, and the Q4 is always good for us. So we think the back 9 months should be very strong.

Speaker 3

Now lots of work to be done and lots of variables out there, but the indications are that the remaining 9 months should be very, very strong for us.

Speaker 1

Okay. And then just maybe one more on the pricing environment. You talked about pricing for the factoring expense. Has all of that been put into effect as of now? What was the last round of price increases that you did to factor in, no pun intended, the expense that you've got on the interest expense line.

Speaker 3

Yes. So most of it has been put into effect. Now there's still another $3,000,000 to $4,000,000 of price increases that are will be in effect soon, very soon in that couple of weeks.

Speaker 1

Okay. Okay. Got it. And then you mentioned the drag on gross Margin is most likely related to sort of the brake products ramp up. What do you think the differential is there in gross margin between brake products versus the core rotating electrical and wheel hub product lines that you have and when do we get to it like a normalized state of being here.

Speaker 1

Can we do it this year or is it more likely next?

Speaker 3

Yes. We can't give you unfortunately granular data on the actual margins. But the only sort of thing I would tell you is that those margins continue to increase and they're all positive. And so each quarter we're seeing sequential improvement overall and a lot of it is overall absorption of We have now consolidated freight where things are combined. There's some consolidated operations.

Speaker 3

And so it's very difficult to give you that number. We don't report by product line, but I think the important thing for people to understand is that The core margins are intact and the core business is intact. We expect that to continue to grow even though you've sometimes these fluctuations and some softness in Rotating Electrical, but it will continue to grow. And the other businesses are growing. Now the brake related business is growing disproportionately, it's It's brand new.

Speaker 3

So when you see that growth and so that affects overall margins, but incremental gross profit contribution should continue to go up from all of this. And So I think it's important that people understand that.

Speaker 1

Okay, fair enough. I I guess I lied one more on just cash management and working capital. Maybe just speak to where should inventory balance or days on hand be for the remainder of the year. I know last year it peaked in Q1 and then kind of came down slowly On the inventory balance, is that the same sort of seasonality we should expect this year? And then on AR, I mean, It continues to tick up.

Speaker 1

Is there a point at which we just hit the collection button on sort of on some of receivables and that balance drops or should we continue to expect the DSOs to kind of tick higher for the rest of the year?

Speaker 3

Yes. No, so I'll address receivables. I'll give David the hard one, which is inventory. The receivables, We have the option of generally retail days outstanding of 30 days because of the factoring. And so receivables tick up there is only directly related to 1 of 2 things.

Speaker 3

I mean that Sales are growing and the timing of sales for our Q1, this one we're reporting on Got very strong as we got through the quarter. So you see receivables going up and we elected not to collect $20,000,000 plus of cash because we could say interest expense. We expect receivable. I mean, again, we expect to as these prices go in not to defer receivable collections because that's Not what we want to do. I mean, we're always looking at minimizing interest.

Speaker 3

But the last three quarters of this year are all to be very strong. And so I think you'll start seeing a normalized receivable balance as we get through the end of this quarter. And that's again, I think, Day is outstanding. Now I will also mention that While we don't sell receivables to the professional installer market doesn't have that program, And we continue to grow pretty significantly there. So those receivable days outstanding are a little bit longer, but there's no interest rate, external interest rate.

Speaker 3

So as that number also affects the days outstanding on the receivables. And We've had some success, really significant success in the rotors and pads business as well continues to grow pretty significantly. But both parts of that business, both all of our business is growing. I'm happy to say that. And so I think overall with a lot of mumbo jumbo I'm going through here, but I'm thinking a lot.

Speaker 3

Overall, I would say that receivables should stabilize As we get to the end of this quarter, because the remaining 3 quarters all will be strong should be strong.

Speaker 1

Okay. And then maybe David on the inventory. Sure.

Speaker 4

Thanks, Alan. Yes. You'll recall, we increased inventory for three reasons. To support the demand in new business, address supply chain disruptions and support expansion of our brake related products. We're seeing increased demand for all of our product lines.

Speaker 4

So going forward, you're going to see that inventory as So as our sales momentum keeps growing, that inventory as a percentage of that growth will be coming down.

Operator

There are no further questions at this time. Selwyn Joffe, I turn the call back over to you.

Speaker 3

Okay. In summary, we're excited about the quarters ahead. As I mentioned, supported by strong demand for replacement parts and aging car park as well and opportunities for multiple replacements as cars stay on the road longer. Equally relevant is the miles driven growth rate for the 1st 6 months of 2023, which was 2.3%. Industry observers expect that we will surpass the pre pandemic growth rate of 1.6 percent, reached in the 2017, 2019 3 year period.

Speaker 3

In short, we have a built in solid platform for growth and our non discretionary aftermarket products have a critical need for customers and consumers. And in closing, I must recognize the contributions of all of our team members who are focused every day 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 in the future. We appreciate your continued support and we thank you again for joining us for this call. We look forward to speaking with you when we host our fiscal 2024 Q2 call in November and at future investor conferences.

Speaker 3

Thank you.

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Earnings Conference Call
Motorcar Parts of America Q1 2024
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