MPAA - NASDAQ

Thank you for standing by. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America – I would like to welcome everyone to the Motorcar Parts of America Fiscal 2024 First Quarter Conference Call and Webcast. [Operator Instructions] Thank you. Gary Maier, Vice President, Corporate Communications and Investor Relations, you may begin your conference.

Thank you, Brian. Thanks, everyone, for joining us. Before I turn the call over to Selwyn Joffe, 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 other car parts of America. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond 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 our various filings with the Securities and Exchange Commission. With that, I’d like to begin our call and turn it over to Selwyn.

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. Industry trends and extreme hard 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 brick-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 second 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. 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, but that 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. 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 we have – 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. We still expect sales for fiscal 2024 to be between $720 million and $740 million, 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 million and $95 million. To provide more details, before the non-cash foreign exchange impact of lease liabilities and forward contracts, the non-cash impact of revaluation pools and customer shells and supply chain disruptions, operating income for fiscal 2024 is expected to be between $60 million and $65 million. We estimate other non-cash items will be approximately $16 million, which include core and finished goods premium amortization and share-based compensation. And cash expenses are expected to be approximately $2 million for specialty EV-related research and development expenses, which impact operating income. Depreciation and amortization are estimated to be approximately $12 million. 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 in our hard 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. We continue to experience meaningful traction with customers and consumers with the launch of our break-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, desktop testers were alternated and starters from major automotive retailers and distributors to the professional installers. Major global automotive, aerospace and research institutions for electric product development and design, continue to purchase our equipment and/or utilize our Detroit tech center for testing services. In short, we continue to be well positioned to address both the internal combustion engine market and the emerging electric vehicle market with 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 non-discretionary 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.

[Operator Instructions] Your first question comes from the line of Matthew Koranda from ROTH MKM. Your line is open.

Hi, guys good morning. So, just – I will start with the traditional question, which is for David. What – can you give the product breakdown within the quarter between rotating electrical, wheel hubs and brake products?

Yes, Matt, for the first quarter, rotating electrical was 64% of sales. Brakes were 22% - brake related products were 22%, wheel hubs 11% and others was 3%.

Okay. So, 64% – sorry, I am trying to do this on the fly here, 64%, what wheel hubs?

11%.

And then break hub – or sorry, break related products?

22%.

22%. Got it. Okay. Other 3%, so it 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 wheel hub is a little bit weak. Maybe just speak to the trends you saw during the quarter and sort of why the shortfall there?

Yes. So, I will start just again. When you have rainy weather and cooler weather at the retailers reported in March, the replenishment on those items slows down in the following month. And so April slowed down in those items. But we see a resurgence of that. I will say along with that, Matt, is we have got significant momentum in our break-related products. 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 first quarter. Now, for hot weather, and you should see rotating electrical sales in extreme hot weather, so that should be driver going forward. And I will say just on the margin perspective is that our – the margin pressure is not on the legacy products. I mean the margin pressure is just because of new and emerging product lines that are coming up. And as those volumes get better, I mean we are already starting to see improvement in operating efficiencies in those product lines. And those product lines are getting more and more momentum. So, we expect a very strong back nine 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 for the year.

Okay. Maybe in that vein and you mentioned the hotter weather sell-in more recently. Could you speak to July order trends and just the visibility that gives you into 2Q growth and how we should be thinking about the front quarter here in terms of top line growth?

Yes. I mean the July is off to – I mean July is an all-time record July for us I mean – and probably one of the higher months ever. But – so we are 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 maintain our availability. So, a lot of that was paid off with just the collections and so – and eliminates one covenant. So, I think overall, and certainly, we are feeling very positive about the outlook for the next nine months.

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

Yes. I 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 is expecting, and we are certainly expecting that. We probably expect your third quarter numbers. We think the third quarter will be a little higher than what’s expected right now, and the fourth quarter is always good for us. So, we think the back nine months should be very strong. Now, lots of work to be done and lots of variables out there, but the indications are that the remaining nine months should be very, very strong for us.

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 unintended the expense that you have got on the interest expense line?

Yes. So, most of it has been put into effect. Now, there is still another $3 million to $4 million of price increases that will be in effect soon, very soon in the next couple of weeks.

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 like a normalized data being here? Can we do it this year, or is it more likely next?

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 are all positive. And so each quarter, we are seeing sequential improvement overall. And a lot of it is overall absorption of we have now consolidated freight where things are combined, there is some consolidated operations. 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 sometimes see 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 brand new. 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 those. And so, I think it’s important that people understand that.

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

Yes. No. So, I will address receivables, I will 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 one of two things. I mean that sales are growing and the timing of the sales – the timing of sales for our first quarter, this one we were reporting on got very strong as we got through the quarter, so you see receivables going up and we elected not to collect 20 – $20-plus million of cash because we could save the 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 are always looking at minimizing interest. But the last three quarters of this year are all expected to be very strong. And so I think you will start seeing a normalized receivable balance as we get through the end of this quarter. And that’s – again, I think days 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 receivables days outstanding are a little bit longer, but there is no interest rate, external interest rate. So, as that – that number also effects the days outstanding on the receivables. And we have 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 am happy to say that. And so I think overall, with a lot of mumbo jumbo I am going through here, but I am thinking a lot. Overall, I would say that receivables should stabilize as we get to the end of this quarter because the remaining three quarters all will be strong, should be strong.

Okay. And then maybe, David, on…

Yes.

Thanks for that question. Yes. You will 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 are seeing increased demand for all of our product lines. So, going forward, you are going to see that inventory as a percentage of sales coming down. So, as our sales momentum keeps growing, that inventory as a percentage of that growth will be coming down.

Okay. Fair enough. Thanks.

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

Okay. In summary, we are excited about the quarters ahead. As I have mentioned, supported by strong demand for replacement parts and aging car park as well and opportunities for multiple replacements as cost down the road longer, equally relevant is the miles-driven growth rate for the first six months of 2023, which was 2.3%. Industry observers expect that we will surpass the pre-pandemic growth rate of 1.6%, reached in the 2017-2019, 3-year period. 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 second quarter call in November and at future investor conferences. Thank you.