Motorcar Parts of America Q3 2024 Earnings Call Transcript

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February 9, 2024

There are 6 speakers on the call.

Operator

afternoon. My name is Rob, and I will be your conference At this time, I would like to welcome everyone to the Motorcar Parts of America Third Quarter 2024 Webcast and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.

Operator

Gary Mair, Vice President of Communications and Investor Relations, you may begin your conference.

Speaker 1

Thanks, Rob, and thanks everyone for joining us for our call. Before we begin and I turn the call over to Selwyn Jaffee, 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 Motorcar Parts of Actual results may differ from those projected in the forward looking statements.

Speaker 1

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 that 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 Securities and Exchange Commission. With that, I'd like to begin the

Speaker 2

call and turn it over to Selwyn.

Speaker 3

Thank you, Gary. I appreciate everyone joining us today. We are encouraged by operating results for the quarter, including strong sales performance, increased gross margins, increased EBITDA and significant positive cash flow and a revolver pay down of $50,000,000 to $102,800,000 of net debt. While some of this cash flow resulted from deferred collection catch up in the quarter, for the 9 months we generated $48,400,000 in positive cash. I might add that these results were particularly impressive considering the industry softness in November December.

Speaker 3

Recent extreme weather conditions throughout the country should help bolster this industry sales softness in future quarters. We were also pleased that gross profit for the quarter 9 months increased substantially. Gross margins continue to improve and benefit from better operating efficiencies as anticipated, particularly from increased overhead absorption with higher sales and production in newer product categories. I should also add that price increases in effect, but not yet realized, will contribute an additional $10,000,000 in annualized sales and gross profit and EBITDA. We remain focused on 3 key initiatives: sales, profitability and neutralizing working capital.

Speaker 3

We are confident that our sales and profitability will grow organically and through market share gains in all of our product lines. Increased profitability along with our working capital initiatives will further enhance cash flow generation. With regard to working capital, we continue to focus on the balance sheet including extending vendor payment term. This initiative is being supported by the launch of our vendor finance program offered to our suppliers. This enables us to extend our payment terms while facilitating a for our suppliers to have early access to capital.

Speaker 3

We expect to increase the number of days outstanding for accounts payable, which will result in additional cash generation. While in its early stages, this program is progressing nicely and will gain increased traction in the months ahead. I should note that the effects of this program are not yet reflected in our results and will provide additional upside to cash flow generation. From a strategic standpoint, we are continuing to leverage our strengths, including great products manufactured at state of the art facilities, solid customer relationships, industry leading SKU coverage, not to mention our value added merchandising and marketing support. We are continuing to expand hard pot sales in Mexico with opportunities to further expand in other Latin American countries with multiple product lines as our customers experience increased demand for aftermarket products.

Speaker 3

The rate of growth is exciting and we are well positioned to utilize our footprint to meet the growing demand for our non discretionary aftermarket parts. Our test solutions and diagnostic equipment in particular, our industry leading JBT-one bench top testers for alternator starters used by major automotive retailers and professional installers continues to grow significantly. We believe the market opportunity for additional growth in the U. S. Is approximately $110,000,000 and we are well on our way.

Speaker 3

Favorable industry dynamics continue to bode well for and we're extremely well positioned with sustainable top and bottom line growth in our hard parts business as well as the testing solution. Let me take a moment to further discuss our near term initiatives to support our long term growth and profitability plan. Our near term plan is in motion as we expect to achieve significant growth in all of our product lines, including our quality built brand that continues to gain significant market share within the professional market. This includes our most recent additions to our portfolio of brake calipers, pads and rollers. Operating efficiency improvements are continuing as volume increases.

Speaker 3

Overall, this growth is supported by investments, especially the company's global footprint expansion in Mexico, backed by well trained and a seasoned team of professional employees. Also we have expanded our Malaysian operation to add capacity and additional capabilities to We recently opened a new state of the art wheel hub manufacturing facility in Malaysia, enabling us to ship product directly to our customers. Congratulations to our spectacular operating team, especially to those in Singapore and Malaysia. Our business growth is strategic and we are focused on generating solid cash flow and profitability. The strong cash generation will enable us flexibility to further pay down debt and pursue other related opportunities to enhance shareholder value.

Speaker 3

In conclusion, non discretionary aftermarket parts for the internal combustion engine market will be here for the outlook supported by recently updated industry data showing that the average age of vehicle is 12.5 years. It is worth highlighting that the population of vehicles operating with internal combustion engines versus EVs represents 98 Approximately 98.3 percent of all vehicles on the road. One of our key competitive advantages is our ability to offer a broad range of applications all makes and models. We remain focused on newer model applications and our ability to meet expected demand as these vehicles enter the replacement. As you probably know, the emerging electric vehicle market is still quite small relative to the overall car park population.

Speaker 3

Recent news articles regarding EV range, particularly in cold regions in the country, contribute to consumer hesitancy to plug in. But as technology improves and these types of issues are addressed, we expect to continue to benefit in both markets with product functionality and applications across both EV and ICE applications. While I am disappointed in the tax valuation allowance, I want to emphasize that it has no bearing on any operating metrics, cash flow, tax liability or any economics of the company. It is simply required by GAAP. Finally, we had recently announced change to our sales team.

Speaker 3

Jamie Cook has been promoted to Senior Vice President of Sales and Marketing. She is succeeding Rick Michellski, who will transition to a new role as Senior Vice President of Business Development. Jamie and Rick have worked closely together at MPA for many years. Jamie is recognized throughout the automotive aftermarket. She is an exceptional leader with the added benefit of being a role model for women's women seeking to advance in the industry.

Speaker 3

Rick will remain an important member of our team in his new role, helping to drive demand for all of our products, both from existing and new retail professional customers. I'll now turn the call over to David to review our results in greater detail.

Speaker 4

Thank you, Selman, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning as well as the 10 Q that we filed later today. Let me first provide key highlights for the fiscal Q3. Net sales increased 13.2% to $171,900,000 Gross margin improved by 3.7 percentage points. Gross profit increased 43.1 percent to $30,000,000 Operating income increased 170.1 percent to $9,500,000 and the company generated cash of approximately $53,600,000 I should mention that gross profit for the quarter was impacted by non cash items as well as cash items.

Speaker 4

The non cash items reflect core and finished good premium amortization and revaluation of cores and customer shells, which are unique to certain of our products and required by GAAP. The total for these non cash items in the quarter was approximately $4,400,000 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. 3rd quarter gross margin was 17.5% compared with 13.8% a year earlier. Gross margin was impacted by 2.6% From the previously mentioned non cash items as well as 0.9% from cash items as detailed in Exhibit 3 of this morning's earnings press release. In summary, in addition to the non cash and cash items explained previously, gross margin for the fiscal 2024 Q3 reflects the partial benefit of price increases that went into effect during the current quarter and operating efficiencies.

Speaker 4

Additionally, we have meaningful annualized price increases that started in the current Q4, which will further contribute to gross margin enhancements. Operating expenses were $20,500,000 compared with $17,500,000 in the prior year period. This included a non cash gain of $3,100,000 for the foreign exchange impact of lease liabilities and Florida contracts, compared with the prior year non cash gain of $4,300,000 The remaining $1,900,000 of operating expense increases included employee related expenses. Operating income for the 3rd quarter increased 170.1 percent to $9,500,000 from $3,500,000 in the prior year. Results for the fiscal Q3 were impacted by $6,800,000 or $0.26 per share of higher interest expenses, primarily due to higher market interest rates and higher utilization of the accounts receivable discount program due to higher sales.

Speaker 4

Interest expense was CAD18,300,000 compared with $11,500,000 for last year, which is primarily related to our customers' accounts receivable discount program. We are working diligently to address the higher interest environment, particularly areas that we can control. For example, among other initiatives, we are focused on neutralizing working capital to generate positive cash flow to pay down debt as evidenced by our year to date results. In addition, we continue to work with our customers to mitigate higher interest rates. Due primarily to a $37,500,000 U.

Speaker 4

S. Federal and state deferred tax asset valuation allowance Under U. S. GAAP, recorded during the fiscal 'twenty four Q3, income tax expense was $37,300,000 compared with an income tax benefit of $9,000,000 for the same period a year ago. Let me emphasize that this tax valuation allowance is required by GAAP and is non cash and does not impact any operating metrics, Due primarily to $40,400,000 of non cash items, including a $37,500,000 U.

Speaker 4

S. Federal and state deferred tax asset valuation allowance. Under U. S. GAAP noted previously, we reported a net loss for the fiscal 2024 Q3 of $47,200,000 or $2.40 per share compared with net income of $1,000,000 or $0.05 per diluted share a year ago.

Speaker 4

To reemphasize, this accounting item is non cash and does not impact any operating metrics. The details of the non cash And cash items impacting results are in Exhibit 1 of this morning's earnings press release. As I mentioned previously, We experienced a 13.2% sales increase despite industry softness in November December, With this higher expected sales volume moving forward and the full impact of certain price increases already in effect, Results are expected to further improve. As Selwyn mentioned, I should also add that price increases in effect will contribute an additional CAD10 1,000,000 in annualized sales, gross profit and EBITDA. EBITDA for the fiscal Q3 was CAD11 point $2,000,000 EBITDA was impacted by $3,900,000 of non cash items and impacted by $1,900,000 in cash items.

Speaker 4

EBITDA before the impact of non cash and cash items mentioned above was CAD17 1,000,000 for the 3rd quarter. EBITDA for the prior year's fiscal Q3 was CNY6.6 million. EBITDA was impacted by $646,000 in non cash items as well as $3,800,000 in cash items. EBITDA before the impact of non cash and cash items mentioned above was CAD11 1,000,000 for the prior year Q3. Now let me discuss the 9 months results.

Speaker 4

Net sales for the fiscal 20 four-nine month period increased 8.2% to a record $528,200,000 from $488,300,000 Gross profit The fiscal 20 4 9 month period increased 25.6 percent to $97,800,000 from $77,800,000 a year earlier. Gross margin for the fiscal 20 4 9 month period was 18.5% compared with 15.9% a year earlier. Gross margin for the fiscal 20 four-nine month period was impacted by $12,600,000 or 2.4% of non cash items and $6,700,000 or 1.3 percent of cash items. Operating income for the 9 month period increased 166.7 percent to 33,900,000 from $12,700,000 in the prior year. Results for the 9 months were impacted by $17,700,000 or $0.68 per share of higher interest expenses, primarily due to higher market interest rates and higher utilization Our customers accounts receivable discount program due to higher sales.

Speaker 4

Interest expense was $45,400,000 compared with CAD 27,700,000 for last year. As I previously noted, we are working diligently to address the higher interest environment, particularly areas that we can control, due primarily to $49,500,000 of non cash items, Including a US37.5 million dollars US federal and state deferred tax assets valuation allowance under US GAAP, We reported a net loss for the fiscal 20 four-nine month period of $50,600,000 or $2.58 per share, compared with a net loss of $5,700,000 or $0.29 per share a year ago. Once again, this accounting item is non cash does not impact any operating metrics. The details of the non cash and cash items impacting results are in Exhibit 2 of this morning's earnings press release. Results are expected to improve from various initiatives that will be realized, as I discussed earlier, concerning price increases in effect and higher sales volume.

Speaker 4

EBITDA for the fiscal 24 9 month period was 40,900,000 EBITDA was impacted by $16,000,000 of non cash items as well as $7,700,000 in cash items. EBITDA before the impact of non cash and cash items mentioned above was $64,700,000 for the current period. EBITDA for the prior year fiscal 2023 9 month period was CAD22 1,000,000 EBITDA was impacted by CAD12.9 million of non cash items as well as CAD 12,600,000 in cash items. EBITDA before the impact of non cash and cash items mentioned above was CAD 47,500,000 for the prior year 9 month period. Now we will move on to cash flow and key corporate items.

Speaker 4

The company generated approximately CAD53.6 million of cash from operating activities during the quarter, including accounts receivable catch up from the prior quarter and approximately $48,400,000 of cash from operating activities for the 9 month period, which is not impacted by any accounts receivable deferral. During the 9 month period, the company reduced net bank debt by $43,700,000 to $102,800,000 from $146,500,000 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 bearing fruit. 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 from both new and existing product lines.

Speaker 4

Our net debt at the end of the quarter, excluding our convertible note, was approximately $102,800,000 while total cash and availability was approximately $126,300,000 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.

Operator

Your first question comes from the line of Matt Koranda from ROTH MKM. Your line is open.

Speaker 2

Hey, guys. It's Mike Zabran on for Matt. Could we just start, like usual with the breakdown of product revenue by mix?

Speaker 4

Yes. So for the Q3, rotating electrical was 65%, brake related products was 21%, Wheel Hobbs was 11% and others was 3%.

Speaker 2

Got it. Helpful. So the release And on the call you talked about a slowdown in November December. Maybe just elaborate a little bit further on what exactly happened And what's our sense for why demand was weak in those months?

Speaker 3

Well, we started off the quarter With a great October and I think a lot of the professional installer base got soft. I think we had some pretty mild weather. Again, it's very hard for me to really put an accurate finger on the pulse as to why things softened up. The fundamental metrics remain good, but We've seen that now that there was some extreme weather, mostly in the West and East part of the country. We've seen a pickup.

Speaker 3

So while it's hard to predict, I mean, we're maintaining our guidance We're optimistic it should come back. I mean, I just don't know. I wish I could give you an exact XYZ explanation as to why this happens. The other issue that we have is that and I don't know if this the fact or not, but sometimes it's our customers fiscal calendar year ends and maybe they're managing their working capital levels. So That could have an effect as well.

Speaker 3

But really, I think the fundamentals for November, December on a macro level across the industry, across the We crossed the base. It definitely was a little softer out there in particular. I mean, I can only refer to our products, but we think that just Number of vehicles and footprint, research that we've shown showed a little bit softer.

Speaker 2

Got it. Okay. And Salim, you said we are sticking with the guidance through the end of the year.

Speaker 3

Yes. So we've had a strong start to this quarter and we'll see. As we come towards spring, we're optimistic still About demand, we're busy and yes, we're sticking to our guidance.

Speaker 2

Got it. Okay. Okay. Maybe just help level set us on how much Pricing has been put through as of today. We talked about it a little bit on the call, but Just further elaborate on how much pricing has been put through today.

Speaker 2

Should we expect to keep continuing to take price? And then I have a follow-up as well, but maybe let's just start there.

Speaker 3

Yes. So it's becoming harder and harder to quantify on how much is How much isn't put through? I mean, we put a significant amount through this $10,000,000 of annualized pricing that's already in the The price increases hasn't been reflected in the numbers that will start in this quarter. And we expect to mitigate inflationary costs and hopefully including interest In pricing strategies, we also as we pick up volume, we become more operationally efficient. And we've got a lot of initiatives on continuous improvement that continue to drive Profitability.

Speaker 3

So across the board, I mean, our biggest challenge today is mitigating the interest expense. I mean, the interest The vast majority is due to more success with sales. And With the new loan agreement that we have, we're able to collect that cash and you can see our operating metrics we paid down over $40,000,000 in debt for the 9 months. I think the quarter It's a little disproportionate because of some of the deferrals, but the 9 months is not. And so we I think everyone is aware of the interest rates and we expect to continue to mitigate it.

Speaker 2

Got it. Makes sense. And so then the price increases that we started in the 4th quarter, I guess, when do those fully filter through? Do we have a sense for that?

Speaker 3

Yes. So they started in the Q4. I just assume in a middle to late Q4, but they filter through going forward on an annualized basis, all those there's another $10,000,000 that will be over and above We've already got to hit the numbers for the next 12 months.

Speaker 2

Got it. Okay. So those start filtering through as soon as I

Speaker 3

mean, they've got it. That's right.

Speaker 4

Okay. Got

Speaker 2

it. Okay. That makes sense. Last one for me. The tax valuation allowance, so I understand It was required by GAAP and it's a non cash expense.

Speaker 2

We made that very clear. But maybe just why exactly did we have to recognize that Allowance, just help us get a better sense for that?

Speaker 3

Yes. So the First thing, let me just sort of back up and say, it's those assets remain on our balance sheet and we're optimistic that we're going to be able to use those assets. And as we get more GAAP income, we'll be able to reverse it and it will take some time. But Assuming the company performs, which we expected to, we'll reverse them. That doesn't affect our tax liability.

Speaker 3

It doesn't affect cash. It doesn't affect anything. And the real the trigger is that we had a higher expectation for results in the Q3, in this past quarter that we're reporting on. And we had a soft 2 months out of the 3 months. And we had to revise our we had to, we did revise our forecast, internal forecast down and that results in a taxable loss in the U.

Speaker 3

S. Entities. And so we had to put a reserve on the tax asset. It's unfortunate, I hate it, but it's the rules And that's what's happened. And again, while the optics of it and the rules are the rules, In no way affects us other than what the perception is out there, no way affects us in terms of anything that we're doing right now.

Speaker 3

And our focus continues to drive GAAP income and all income. And so as that reverses those assets, That valuation will come off the assets.

Speaker 2

Got it. Thanks, Selwyn. That's all for me guys.

Speaker 5

Thank you very much.

Speaker 4

Thank you.

Operator

Your next question comes from the line of Matt Dane from Tieton Capital Management. Your line is open.

Speaker 5

Great. Thank you. I wanted to ask about the new Malaysian facility that you referenced in the call. I hoping you could walk through some of the benefits that you expect from that. I just wasn't certain if you were just expanding capacity or

Speaker 1

if there's other benefits or just

Speaker 5

help me understand that if you could.

Speaker 3

Yes. So that's a great question, Matt. It's very exciting for us. What we did there is we opened we've been in Malaysia, I wish I knew the exact number of years, I mean, probably over 3 decades. And We've been able to continue to grow the old facility.

Speaker 3

What we've done is we've created a brand new state of the art facility, which allows us now to meet all the tests to ship our customers direct from Malaysia to our customers. So it will never be touched here. So wheel hubs, The new wheel hub program, which is in line with what we've been doing, same thing, now has more capacity to go direct with storage for that inventory, staging areas for that inventory to be shipped directly to our customers around the world, but in particular in the United States. And that's a big deal because our competitors are Chinese based and they are subject to tariffs. And our customers buy large orders of this and so want to take ship direct programs.

Speaker 3

And we think that's going to open up Some big opportunities going forward. I think short term, you'll see a little bit of a dip in that product line. And then in the next 6 months, we should see some extreme I think we'll see some extreme gains in that product line. So very exciting and it's a fabulous plant. Already had a major customer visit and he was extremely impressed with it.

Speaker 3

I mean, and that's all in the CapEx, it's all paid for and done.

Speaker 5

Okay. So you expect this plant and the cost efficiency of shipping directly to the customers basically To lead to some substantial revenue gains as you gain share from your Chinese competitors. Is that what I heard you say more or less?

Speaker 3

Yes. I think we'll see margin gain and

Speaker 5

Great, great. Glad to hear. I also did want to ask about the quality build product line, referenced that very briefly in the call as well. Just was curious, the traction that you are seeing with that product line, how is that relative to your expectations?

Speaker 3

It's well, we have high expectations. I'll start there. So answering relative, every time I get results How are we doing? My expectations grow. But I mean, we're growing that.

Speaker 3

We've had over 40% growth rates in that product line and in that product branding name and it's becoming a nationally recognized brand and I'm extremely excited about how that's unfolding. We are adding many new customers to that to the brake line under our quality built name, and we're just getting more and more demand for quality built. And so that brand value and that brand equity, we're excited about that. The other side of that is there's no factoring cost, no supply chain cost on launching and growing that business. So that's also encouraging to us.

Operator

And there are no further questions at this time. I will now turn the call back over to Selwyn Joffe for some final closing remarks.

Speaker 3

Okay. Thank you. So just in summary, we're excited about year to date accomplishments and our outlook, in particular, our strong cash flow, A pay down of debt, we expect the further benefit of additional price increases and the opportunities to further enhance shareholder value. We're encouraged by our leadership position in the industry and our solid customer partnerships. We've built a platform for growth that is not easily duplicated And we expect this growth to continue on in the future, especially as The demand for non discretionary aftermarket products set the critical need for our consumers.

Speaker 3

The cars are on the road. The Our population continues to grow and non destruction products will be there. There may be temporary ups and downs, but Long term, medium term and near term, the demand will be there. In closing, I must recognize the contributions of all of our team members We're continuously focused on providing the highest level of service. We're all committed to being the industry leader for parts and solution that move our world today and in the future.

Speaker 3

We appreciate your continued support and we thank you again for joining us on the call We look forward to speaking with you when we host our fiscal 2024 year end conference call in June and at the various investor conferences in the interim. Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Motorcar Parts of America Q3 2024
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