MPAA - NASDAQ

Hello, and thank you for standing by. My name is Lacey, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America Inc. Fiscal 2026 First Quarter Conference Call and webcast. [Operator Instructions] Thank you. I would now like to turn the conference over to Gary Maier. You may begin.

Thank you, Lacey, and thanks, everyone, for joining us for our call today. Before I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the company's Chief Financial Officer, I'd like to remind everyone of the safe harbor statement included in today's press release. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during today's conference call. Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by the company. Actual results may differ from those projected in these forward-looking statements. Forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and subject to change based on various factors, in particular, expectations about anticipated future growth and opportunities with customers that may not be achieved. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the various filings with the SEC. I would now like to begin the call and turn it over to Selwyn to begin.

Thank you, Gary. I appreciate everyone joining us today. We're off to a solid start for fiscal 2026. We are encouraged by our first quarter performance, reflecting record net sales and gross profits for our fiscal first quarter. Equally important, we generated solid cash flow from operating activities, reduced net debt -- net bank debt and continued to repurchase shares. All of this underscores our commitment to success as a leading supplier of nondiscretionary automotive aftermarket parts. Our team is focused on continuous improvement and success. We are excited by the opportunities for growth. We offer a well- respected portfolio of products and services and have the capacity and ability to further leverage our state-of-the-art North American operational and distribution footprint. Our hard parts business, led by our rotating electrical 50-plus year flagship category continues to generate solid performance. Nondiscretionary parts cannot be deferred. If parts fail, your car cannot be driven. According to industry reports, the average age of U.S. light vehicles has risen to 12.8 years from 12.6 years in 2024. In addition, the number of vehicles on the road climbed to 293.5 million from 289 million just a year ago. We expect increased replacement opportunities for the life of the vehicle, particularly with consumers holding on to their cars for longer. We are encouraged by the continued success of our second largest product category, brake offerings, which includes brake calipers manufactured at our state-of-the-art production operation in Mexico. Our team is doing an exceptional job to further enhance market share for the entire brake product line as well as all of our other nondiscretionary product offerings. We continue to leverage our strengths, offering our customers great products, industry-leading SKU coverage and order fill rates, supported by value-added merchandising and marketing support. In short, we are all committed and focused on our customers, offering quality products and services with rational pricing. All of our products are offered to the professional installer market under our Quality-Built brand, and we are gaining market share. As production volume increases for certain newer hard part products such as brake-related offerings, we expect enhanced operating efficiency and margin improvement. With regard to our heavy-duty business, we continue to leverage our reputation and industry position in this market, particularly with regard to supplying alternators and starters to our channel partners who are leaders in the heavy-duty aftermarket segment. Our growth opportunities continue to gain momentum. We are becoming an increasingly important supplier to the heavy-duty rotating electrical market with multiple opportunities to expand our Quality-Built brand name to this market. We continue to experience increased demand for our aftermarket parts in Mexico, which complements our existing strategic and operational and distribution footprint there. As our U.S.-based retailers and warehouse distributors, customers expand through Latin and South America, we are well positioned to support their growth and benefit. With regard to our diagnostic business, our JBT-1 Bench Top tester leads the industry and the installed base is continuing to grow. Additional service-related revenue is expected as more testers are deployed, which includes repairs, software and database updates. We also expect more opportunities outside North America as the business evolves. We continue to work on mitigating tariffs with customer price increases and important cost reduction initiatives, including strategic supply chain sourcing changes. From a positive perspective, we believe tariffs present some strategic competitive advantages given the strength of our North American footprint and being USMCA compliant. I should emphasize that we have been focused on executing strategies designed to be less dependent on Chinese supply chain for a number of years, whether it be components or parts. In short, favorable long-term industry dynamics continue to bode well for the company, and we are extremely well positioned for sustainable top and bottom line growth. As I've mentioned, the outlook is bright for nondiscretionary aftermarket parts for the internal combustion engine in particular. We are focused on leveraging our capability and capacity to offer a broad range of applications for all makes and models whether newer or older vehicles. Before I turn the call over to David to review our results in greater detail, let me summarize. From a sales perspective, we expect continued organic growth for our business, supported by the favorable industry tailwinds I previously mentioned. Our commercial heavy-duty market continues to grow. Our brake-related business is gaining further traction, particularly with brake calipers. In addition, our sales in the Mexican market are growing nicely, and we expect this momentum will continue and expand throughout the region. And finally, our diagnostic business is growing nicely, and we look forward to ongoing success. From a gross margin perspective, we are encouraged by the increase in the year-over-year gross margin despite the headwinds related to tariffs, increasing market share gains, particularly for brake-related products should continue to enhance our gross margin. With continued operating efficiencies and supply chain cost reduction initiatives, we expect further margin growth. Finally, sales growth, gross margin improvement and an ongoing focus on neutralization of working capital support our ability to further reduce debt, repurchase shares and to take advantage of other opportunities to enhance shareholder value and achieve our financial performance targets. As I've previously mentioned and as referenced in the exhibit to our earnings release, there are various factors related to our financial performance that are noncash and beyond our control, particularly with regard to noncash mark-to-market foreign exchange, which can have a positive or negative impact on our Mexico lease liabilities and forward contracts that we purchase. We are focused on opportunities to minimize noncash expenses, such as gains or losses related to foreign exchange, including funding our Mexican operations of pesos from our sales in Mexico. As our sales in Mexico continue to grow, we have reduced our purchases of forward peso contracts. We expect over time, we will eliminate the need to purchase these contracts. I would now like to turn the call over to David.

Thank you, Selwyn, and good morning, everyone. Let me summarize key financial performance metrics for the fiscal 2026 first quarter that we highlighted in this morning's news release and additional information will be available in the 10-Q that will be filed later today. As Selwyn referenced earlier, net sales increased 10.9% to a first quarter record of $188.4 million, gross profit increased 16.3% to a first quarter record of $33.9 million. Operating income increased to $20.1 million from an operating loss of $6.5 million in the prior year. We generated $10 million of cash from operating activities and reduced net bank debt by $7 million to $74.4 million, repurchased 197,796 shares for $2 million at an average price of $9.94. Now let me discuss our results in more detail. Net sales for the fiscal 2026 first quarter increased 10.9% to a first quarter record of $188.4 million from $169.9 million in the prior year. Gross profit for the fiscal 2026 first quarter increased 16.3% to a first quarter record of $33.9 million from $29.2 million a year earlier. I should mention that gross profit for the quarter was also impacted by noncash expenses. The noncash expenses 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 noncash expenses in the quarter was approximately $3.9 million or a 2.1% impact to gross margin. Gross margin for the fiscal 2026 first quarter was 18% compared with 17.2% a year earlier. In addition to the noncash expenses previously explained, gross margin for the fiscal 2026 first quarter was also impacted by cash expenses of $1.4 million or a 0.8% impact to gross margin as detailed in Exhibit 2 of this morning's earnings press release. Aside from higher sales volume, particularly from certain of our newer product offerings, which supports increased absorption of costs, we remain focused on other initiatives to enhance gross margins. Operating expenses were $13.8 million compared with $35.6 million last year, which benefited from an $8.3 million noncash mark-to- market foreign exchange gain compared with an $11.1 million noncash mark-to-market foreign exchange loss in the prior year. Operating income for the fiscal 2026 first quarter increased to $20.1 million from an operating loss of $6.5 million in the prior year. Excluding the noncash foreign exchange impact of lease liabilities and forward contracts, operating income increased 153.6% to $11.7 million compared with $4.6 million in the prior year. Interest expense for the fiscal first quarter decreased by $1.6 million to $12.8 million from $14.4 million a year ago, reflecting lower average outstanding balances under the company's credit facility and lower interest rates compared with a year ago. For the first quarter, income tax expense was $2.4 million compared with $178,000 income tax benefit in the prior year. The effective tax rate for the fiscal first quarter reflects, in part, the inability to recognize the benefit of losses at certain jurisdictions. However, we expect these losses will be utilized against future profits, which will benefit future tax rates. Obviously, there are various factors impacting the tax effect. Net income for the fiscal '26 first quarter was $3 million or $0.15 per diluted share compared with a net loss of $18.1 million or $0.92 per share for the prior year. Net income benefited from noncash items of $1.3 million or $0.07 per diluted share and was impacted by cash expenses of $1.1 million or $0.05 per diluted share as detailed in Exhibit 1. As previously explained, higher sales volume and operating efficiencies will further improve results. EBITDA for the fiscal first quarter was $20.7 million, reflecting the $1.7 million benefit of noncash items, offset by $1.4 million of onetime cash expenses detailed in Exhibit 3 of this morning's earnings press release. EBITDA before the impact of noncash expenses and onetime cash expenses mentioned above, was $20.4 million for the first quarter. Now let me move on to cash flow and key corporate items. The company generated cash of approximately $10 million in operating activities during the fiscal 2026 first quarter compared with a use of cash of approximately $20.8 million from operating activities a year ago. We remain focused on increasing operating profit and gross margin and generating positive cash flow, supported by organic growth from customer demand and operating efficiencies from our global footprint expansion. In addition to our goal of generating increased operating profit, we expect further opportunities to neutralize working capital, supported by customer demand -- customer product demand planning, enhanced inventory management and extending our vendor payment terms. Net bank debt decreased by $7 million during the fiscal 2026 first quarter to $74.4 million from $81.4 million. For the past 2 years through June 30, 2025, we have generated cash from operating activities of approximately $115 million or approximately $5.87 per outstanding share on average and we reduced net bank debt by approximately $94 million. Our liquidity remains very strong, with total cash and availability of approximately $147 million. I should mention that for every 1 point reduction in interest rates, interest expense for accounts receivable discount programs offered by customers is reduced by approximately $6 million. The company has increased its fiscal 2026 sales guidance since issuing annual guidance in June. This increase reflects a strong start to the fiscal year and incorporates the impact of tariff pass-throughs. The increased sales guidance is now between $800 million and $820 million, representing between 5.6% and 8.3% year-over-year growth. The company reaffirms the operating income guidance range to between $86 million and $91 million, representing 4.3% and 10.4% year-over-year growth, reflecting a combination of tariff pass-throughs and cost mitigation measures. The company estimates depreciation and amortization will be approximately $11 million. These estimates reflect the expected impact of tariffs enacted as of today, do not include certain non-cash items and onetime expenses. 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 Instructions] Your first question comes from the line of Derek Soderberg with Cantor Fitzgerald.

Really good results here. Wondering if you could sort of give a high-level description of what you faced this quarter as it relates to tariffs versus last quarter? It looks like there was a smaller impact from tariffs. What was sort of the difference there? And then just looking at guidance, it looks like you're assuming some additional pass-throughs than maybe you previously expected. What are some of your assumptions on that you're making on tariffs for this year? Can you just kind of take a high-level approach to explaining what you're seeing out there for tariffs?

Derek, that's a good question. So to recap, in our March quarter, we had approximately $4.6 million impact of those net tariff costs. As you pointed out in this June quarter, we had a much lower $1.4 million net impact of tariffs. For our September quarter, which is our second quarter, we do expect a little bit more impact, but it will sequentially continue to come down. So less impact.

Got it. And then for full year guidance, I mean, you cited some pass-throughs on tariffs. I guess what are some of the assumptions you made for the full year for tariffs? It looks like we had kind of that blanket tariff come off and there's a bit of a pause, but maybe that comes back on. What were some of the assumptions that you guys sort of made for the full year that led you to raise the revenue range?

So we did increase our sales guidance. We're not breaking out how much of that increase is related to tariff pass-throughs, it's confidential sensitive information regarding customer price increases. So it's all included in that higher guidance.

Yes. And I do want to point out that regardless of tariffs, we have record sales.

That's right.

Yes. The majority of our sales increase is not tariffs.

That's correct.

Got it. That's helpful. And then Selwyn, just sort of looking at the rotating electric and braking businesses, what's sort of the next major growth opportunity in either of those segments? I think you've sort of mentioned geographic expansion in Mexico, obviously, market share growth as you guys have seen that. Maybe it's going to be new products in those segments. What's sort of the next major growth opportunity in either of those segments?

I think, look, we're still very small in the professional installer market -- in the pure professional installer market. We sell customers who sell to both installers and DIY, and we have a large share there. But the pure professional markets we're still small, and there's a significant amount of upside growth in our branded product, and we're seeing that. And I'm just really optimistic about what the brand can do with quality build. And so I think that's -- and that's across the board for all of our categories. I think there's opportunity in all of our categories for that. On the brake-related product side, I mean, we're still fresh. I mean we've got a long way to go. We've got plenty of capacity. We get more efficient as we grow. And then that's just the North American market, I mean. So we have lots of opportunity throughout the world, quite frankly. I mean, I think the North American is planning for now, but we're starting definitely to look over our shoulder to see what else is out there in terms of bigger opportunities on a more global basis. So we're optimistic. I mean the brake pad business is an opportunity that's just beginning. And we're excited about that business. We think we have the premier product in the marketplace. And we're just beginning. I mean, I don't think you've seen the effect of that yet. And it's coming. It's not -- this year's story is a pretty conventional same as story and next year's story just picks up more momentum.

Got it. Well, congrats on the results, guys.

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to Selwyn Joffe for closing remarks.

Great. Well, I appreciate everybody listening today. In summary, I can just repeat, we're bullish about our outlook for fiscal '26 and forward. We remain laser-focused on further efficiencies and fully benefiting from a not easily duplicated global platform to meet demand and grow market share for our nondiscretionary products emphasize nondiscretionary as well as from our diagnostic testing capabilities. We continue to leverage our expertise in solid customer and supplier partnerships. Our liquidity is strong. Our leverage is very low, and we have the resources, capacity and capability to further enhance shareholder value. Let me reiterate our strategic focus, growing sales of our existing product lines, continuous operational efficiency improvements to further enhance margins, mitigating tariffs and increasing cash conversion by neutralizing working capital, and we are positive on all those fronts. In closing, we appreciate 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 tomorrow. We also appreciate the continued support of our shareholders, and we thank everyone again for joining us on the call. We look forward to speaking with you when we host our fiscal 2026 second quarter call in November and at various investor conferences and meetings in the interim. Thank you.