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Motorcar Parts of America, Inc.NASDAQ:MPAAConference Call Q3 2024 Earnings on February 9, 2024, 1:00 PM ET
Gary Maier – Vice President-Corporate Communications & Investor Relations
Selwyn Joffe, Chairman, President and chief executive officer
David Lee, Chief Financial Officer
Participants to Conference Calls
Mike Zabran – Roth MKM
Matt Dane – Titan Capital Management
Good afternoon. Rob will be your conference operator for today. I’d like to welcome you all to the Motorcar Parts of America 3rd Quarter 2024 webcast. All lines are muted to avoid background noise. There will be a Q&A session after the speakers’ remarks. [Operator Instructions]
Thank you. Gary Maier Vice President, Communications and Investor Relations You may start your conference.
Thanks. Thanks, Rob. We thank everyone for joining us on our call. Before we begin, and before I hand the call over to Selwyn Joffé, Chairman, President, and Chief Executive Officer, and David Lee, Chief Financial Officer of the company, I’d remind everyone to the Safe Harbor Statement included in today’s press release. The Private Securities Litigation Reform Act of 1996 provides a Safe Harbor to certain forward-looking statement, including those made during today’s call. These forward-looking statements are based upon the company’s current beliefs and expectations about future developments and the potential effects they may have on the company. Motorcar Parts of America can’t guarantee that future events will affect the business in the manner Motorcar Parts of America had anticipated.
Actual results may vary from those projected in forward-looking statement. These forward-looking statement involve significant risks and uncertainties, some of which may be beyond the control of our company and are subjected to change depending on various factors. Expectations about future growth with customers and potential opportunities may not come to pass.It will be achieved. The company is not obligated to update or revise forward-looking statements in light of new information or future events. Please refer to the various filings of the company for a more detailed description of the risks and uncertainties that are part of its business.The Securities and Exchange Commission.
Selwyn is now on the line.
Gary, thank you. I’m grateful for everyone joining us today. Our operating results are encouraging, with strong sales, increased gross margins and EBITDA, as well as significant positive cash flow. We also paid down $50 million in net debt through a revolver, bringing the total to $102.8 millions. Some of this cash flow was generated by deferred collections catching up in the quarter, but for the nine-month period we generated $48.4 millions in positive cash. I would like to add that these results are especially impressive given the industry softness in December and November.
The recent extreme weather conditions across the country will help to boost this industry’s softness in sales in future quarters. We were pleased that the gross profit for quarter and nine months had increased substantially. Gross margins improved and benefited from better operating efficiency as expected, especially from increased overhead absorption due to higher sales and production of newer product categories. I should add that the price increases in effect but not yet realized will contribute an extra $10 million in annualized revenue, gross profit and EBITDA.
We are focused on three main initiatives: sales, profitability, and neutralizing working Capital. We are confident in the organic growth of our sales and profitability, as well as through gains in market share across all our product lines. Cash flow generation will be further enhanced by increased profitability and our working capital initiatives.
In terms of working capital, we will continue to focus on our balance sheet and extend vendor payment terms. This initiative is supported by our vendor financing program, offered to our vendors. This allows us the opportunity to extend our payment term while also facilitating a program to allow our suppliers early access to capital. We expect that the number of outstanding days for accounts payable will increase, resulting in an additional cash generation. This program is still in its infancy, but it is moving along nicely and will gain more traction in the coming months. The effects of this program have not yet been reflected in our results. This will add to the cash flow generation.
We continue to leverage our strengths from a strategic perspective, including our great products manufactured in state-of-the art facilities, solid customer relations, industry-leading skew coverage and our value-added marketing and merchandising support. We are expanding hard part sales in Mexico and have opportunities to expand into other Latin American countries. Our customers have experienced an increased demand for aftermarket components.
We are excited by the rate of growth and are well-positioned to use our footprint to meet growing demand for non-discretionary parts. Our test solutions, diagnostic equipment and in particular our industry-leading JBT-1 Benchtop Testers for Alternative Starters used by major Automotive Retailers and Professional Installers continues to grow. We estimate that the U.S. market has an additional growth opportunity of approximately $110 million, and we are well on track. The industry dynamics are favorable and continue to be positive for the company. We are well positioned to achieve sustainable growth both in terms of top-line and bottom-line for our hard parts business and testing solutions.
Let me take a few moments to discuss our near-term initiative to support our long term growth and profitability plan. Our near-term plans are in motion. We expect to achieve significant gains in all of our products, including our quality built brand which continues to gain market share in the professional sector. This includes our newest additions to the brake calipers portfolio, including pads and rotors. As volume increases, we continue to improve our operating efficiency.
This growth is primarily supported by investments and the company’s expansion of its global footprint in Mexico. The team of highly-skilled professionals that work for the company are also well-trained. We have also expanded our Malaysian operations to increase capacity and capabilities to support customers. Recently, we opened a state-of-the art wheel hub manufacturing facility for Malaysia. This allows us to ship directly to our customers. Our team is outstanding, especially those in Singapore and Malaysia. Our business is growing strategically and we’re focused on generating cash flow and profit. The strong cash flow will allow us to pay down our debts and pursue other opportunities to increase shareholder value.
The non-discretionary market for aftermarket parts for internal combustion engines is expected to continue for decades. Recent industry data shows that the average age for vehicles is 12 1/2 years. It is important to note that the percentage of vehicles with internal combustion engines as opposed to EVs is 98 points — or approximately 98.3%. Our ability to offer a wide range of applications for different makes and models is one of our main competitive advantages. We remain focused on the newer model applications, and our ability to meet anticipated demand as these vehicles enter into the replacement part market. [ph].
As you know, electric vehicles are still a relatively small market compared to the total car park population. Recent news articles about EV range in colder regions of the country have contributed to consumers’ hesitation to plug in. As technology improves, and these issues are addressed we expect to continue to gain in both markets. This will be true for product functionality and application across both EV applications and ICE applications. I am disappointed by the tax valuation allowance but I want to stress that it has no impact on any operating metrics or economics of the business. It is a requirement of GAAP.
We have made a recent change to our sales staff. Jamie Cook was promoted to Senior Vice-President of Sales and Marketing. She succeeds Rick Mochulsky in his new role as Senior VP of Business Development. Jamie and Rick have been working closely together at MPA since many years. Jamie is well-known in the automotive aftermarket. She is an exceptional woman leader, and she also serves as a role-model for women looking to advance in this industry. Rick will remain a key member of the team in his new position, helping to drive demand from our existing and potential retail and professional clients.
David will now review our results in more detail.
Thank you Selwyn, and good morning to all. I encourage everyone to review the earnings press release that was released this morning as well as the 10-Q which will be filed later.
Let me start by highlighting the key highlights of the fiscal third quarter. Net sales increased 13.2%, to $171.9 Million. Gross margin improved by 3.7 points. Gross profit increased to $30 Million, a 43.1% increase. Operating income increased by 170.1%, to $9.5 Million. The company generated cash of $53.6 million. I should note that gross profit was affected by both cash and non-cash items for the quarter. The non-cash expenses are amortization of finished goods and cores, as required by GAAP, and revaluation on customer shelves. These non-cash items totaled approximately $4.4million in the quarter. Our website has a more detailed explanation of core accountancy. I encourage anyone with questions to watch the video.
The third quarter gross margin was 17.5% compared to 13.8% one year earlier. Gross margin was affected 2.6% by the previously-mentioned cash items and 0.9% by cash items as detailed on Exhibit 3 in this morning’s earnings announcement. in summary, in addition to the non-cash and cash items explained previously, gross margin for the fiscal ’24 third quarter reflects the partial benefit of pricing increases that went into effect during the current quarter and operating efficiencies. Additionally, we have meaningful annualized pricing increases that started in the current fourth quarter, which will further contribute to gross margin enhancements.
Operating expenses were $20.5 million, compared with $17.5 million in the prior-year period. This included a non-cash gain of $3.1 million for the foreign exchange impact of lease liabilities in Florida contracts, compared with a prior-year non-cash gain of $4.3 million. The remaining $1.9 million of operating expense increases included employee-related expenses.
Operating income for the third quarter increased 170.1% to $9.5 million from $3.5 million in the prior year. Results for the fiscal third quarter were impacted by $6.8 million or $0.26 per share of higher interest expenses, primarily due to higher market interest rates and higher utilization of the accounts receivable discount programs due to higher sales. interest expense was $18.3 million, compared with $11.5 million for last year, which is primarily related to our customers’ accounts receivable discount programs.
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 $37.5 million U.S. federal and state deferred tax asset valuation allowance under U.S. GAAP recorded during the fiscal ’24 third quarter, income tax expense was $37.3 million, compared with an income tax benefit of $9 million 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 $40.4 million of non-cash items including a $37.5 million U.S. federal and state deferred tax asset valuation allowance under U.S. GAAP noted previously, we reported a net loss for the fiscal ’24 third quarter of $47.2 million or $2.40 per share compared with net income of $1 million or $0.05 per diluted share a year ago.
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’s softness in November and 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 someone mentioned, I should also add that price increases in effect will contribute an additional $10 million in annualized sales, gross profit and EBITDA. EBITDA for the fiscal third quarter was $11.2 million. EBITDA was impacted by $3.9 million of non-cash items and impacted by $1.9 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $17 million for the third quarter. EBITDA for the prior year’s fiscal third quarter was $6.6 million. EBITDA was impacted by $646,000 of non-cash items as was $3.8 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $11 million for the prior-year third quarter.
Now, let me discuss the nine-month results. Net sales for the fiscal ’24 nine-month period increased 8.2% to a record $528.2 million from $488.3 million. gross profit for the fiscal ’24 nine-month period increased 25.6% to $97.8 million from $77.8 million a year earlier. Gross margin for the fiscal ’24 nine-month period was 18.5%, compared with 15.9% a year earlier.
Gross margin for the fiscal ’24 nine-month period was impacted by $12.6 million or a 2.4% of non-cash items and $6.7 million or 1.3% of cash items. operating income for the nine-month period increased 166.7% to $33.9 million from $12.7 million in the prior year. Results for the nine months were impacted by $17.7 million or $0.68 per share of higher interest expenses, primarily due to higher market interest rates and higher utilization for our customers’ accounts receivable discount programs due to higher sales.
interest expense was $45.4 million, compared with $27.7 million 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 $49.5 million of non-cash items including a $37.5 million U.S. federal and state deferred tax assets valuation allowance under U.S. GAAP, we reported a net loss for the fiscal ’24 nine-month period of $50.6 million or $2.58 per share, compared with a net loss of $5.7 million or $0.29 per share a year ago.
Once again, this accounting item is non-cash and does not impact any operating metrics. The details of the non-cash and cash items impacting results on 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 pricing increases in effect and higher sales volume.
EBITDA for the fiscal ’24 nine-month period was $40.9 million. EBITDA was impacted by $16 million of non-cash items, as well as $7.7 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $64.7 million for the current period. EBITDA for the prior-year fiscal ’23 nine-month period was $22 million. EBITDA was impacted by $12.9 million of non-cash items, as well as $12.6 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $47.5 million for the prior-year nine-month period.
Now, we will move on to cash flow and key corporate items. The company generated approximately $53.6 million of cash from operating activities during the quarter, including accounts receivable catch up from the prior quarter and approximately $48.4 million of cash from operating activities for the nine-month period, which is not impacted by any accounts receivable deferral.
During the nine-month period, the company reduced net bank debt by $43.7 million to $102.8 million from $146.5 million. We expect to generate an increase in operating profit on a year-over-year basis for fiscal ’24, supported by organic growth from customer demand and operating efficiencies from a now-completed footprint expansion and generate positive cash flow for fiscal ’24.
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 are gratified by the ongoing success of our expanded operations in Mexico, and the growth and momentum of our emerging brake categories along with expectations of increasing financial performance from both new and existing product lines.
Our net debt at the end of the quarter, excluding our convertible note, was approximately $102.8 million while total cash and availability was approximately $126.3 million. For further explanation, on the reconciliation of items that impact the 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 Instructions] Your first question comes from the line of Matt Koranda from Roth MKM. Your line is open.
Hey guys, it’s Mike Zabran on for Matt. Can we just start like usual with the breakdown of product revenue by mix?
Yes. So, for the third quarter, rotating electrical was 65%, brake-related products was 21%, wheel hubs was 11% and others was 3%.
Got it. Helpful. So, the release in the — on the call, you talked about a slowdown in November, in 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?
Well, we started off the quarter with a great October and I think a lot of the professional installer base got soft. I think that we had some pretty mild weather. I mean, 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, so while it’s hard to predict. I mean, we are maintaining our guidance for the year and we are optimistic, should come back. I mean, I just don’t know, I wish I could give you an exact, x, y, z explanation as to why this happens.
The other issue that we have is that and I don’t know if this is a fact or not, but sometimes it’s our customers’ fiscal calendar year ends and maybe, they’re managing their working capital level, so that could have an effect as well. But really, I think that the fundamentals for November, December on a macro level across the industry, across 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 it a little bit softer.
Got it. Okay. And Selwyn, you said we are sticking with the guidance through the end of the year.
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.
Got it. Okay. okay, maybe, just help level set us on how much pricing has been put through as of today. And we talked about it a little bit on the call, but just further elaborate on how much pricing has been put through today. 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.
Yes. So, it’s becoming harder and harder to quantify on how much is put through and how much isn’t put through. I mean, we put a significant amount through, there’s $10 million of annualized pricing that’s already in the existing price increases that hasn’t been reflected in the numbers that’ll 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.
So, across the board, I mean, our biggest challenge today is mitigating the interest expense. I mean the interest expenses is due — 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’ve paid down over $40 million in debt for the nine months. I think the quarter is a little disproportionate, because of some of the deferrals, but the nine months is not. And so we — I think, everyone is aware of the interest rates and we expect to continue to mitigate it.
Got it. Makes sense. And so then the price increases that we started in the fourth quarter, I guess, when do those fully filter through? Do we have a sense for that?
Yes. So they start in the fourth quarter, just assume in middle, middle to late fourth quarter, but they filter through going forward on an annualized basis, all those, there’s another $10 million that’ll be over and above what we’ve already got in the numbers for the next 12 months.
Got it. Okay. So, those start filtering through as soon as —
Okay. Okay, got it. Okay. that makes sense. Last one from me, the tax valuation allowance. So, I understand, it was required by GAAP and it’s a non-cash expense. 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.
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 are 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’ll take some time. but assuming the company performs, which we expect it to, and we’ll reverse them, it doesn’t affect our tax liability, 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 third quarter in this past quarter that we’re reporting on. And we had a soft two months out of the three 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.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 of the rules, in no way affects us other than what the perception is out, it no way affects us in terms of anything that we’re doing right now. And our focus continues to drive to drive GAAP income and all income. And so as that reverses those assets, that valuation will come off the assets.
Got it. Thanks, Selwyn. That’s all from me guys.
Thank you very much.
[Operator Instructions] Your next question comes from the line of Matt Dane from Titan Capital Management. Your line is open.
Great. thank you. I wanted to ask about the new Malaysian facility that you referenced in the call. I was 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 if there’s other benefits or just help me understand that if you could.
Yes. So, that’s a great question, Matt. That’s — 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 three decades. And we’ve been able to continue to grow the old facility. 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’ll never be touched here. So, wheel hubs, the new wheel hub program, which we — 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 have subject to tariffs, and our customers buy large orders of this and so want to take ship direct programs 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 six 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. I mean and that’s all in the CapEx. It’s all paid for and done.
Okay. So, you expect this plant and the cost efficiency of shipping directly to the customer, it’s basically to lead to some substantial revenue gains as you gained share from your Chinese competitors. Is that what I heard you say more or less?
Yes. Yes, I think we’ll see margin gain and share gain in time.
Great, great. Glad to hear. I also did want to ask about the quality bill product line and reference 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?
It’s — well, we have high expectations, I’ll start there. So, although answering relative, every time I get results of how we’re doing, my expectations grow. but I mean, we’ve growing that, we’ve had over 40% growth rates in that product line and that product branding name, and it’s becoming a nationally recognized brand. and I’m extremely excited about how that’s unfolding. We’re adding many new customers to the brake line under our quality-built name, and we are just getting more and more demand for quality-built. And so that brand value and that brand equity, we are excited about that. The other side of that is there’s no factoring cost, there’s no supply chain cost on launching and growing that business. So that’s also encouraging to us.
Okay, good to know. I appreciate it.
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.
Okay, thank you. So, just in summary, we’re excited about year-to-date accomplishments and our outlook; in particular, our strong cash flow, our pay down of debt. We expect the further benefit of additional price increases and the opportunities to further enhance shareholder value. We are encouraged by our leadership position in the industry and our solid customer partnerships. We built the platform for growth that is not easily duplicated and we expect this growth to continue on in the future, especially as the demand for our non-discretionary aftermarket products. So, the critical need for our consumers, the cars are on the road that the car population continues to grow and non-discussion parts will be there. There may be temporary ups and downs, but long-term, there’s a medium-term and near-term, the demand will be there.
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 in the future. We appreciate your continued support and we thank you again, for joining us the call — on the call and 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.
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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