Motorcar Parts Of America Inc Q2 FY2026 Earnings Call

Thank you for your patience. My name is Eric, and I will be your conference operator today. I would like to welcome everyone to the Motorcar Parts of America, Inc. Fiscal 2026 Second Quarter Conference Call. Now, I will turn the call over to Gary Maier, Vice President, Corporate Communications and Investor Relations. Please go ahead.

Thank you, Eric, and thanks, everyone, for joining us for our fiscal second quarter call. 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 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 the various filings with the SEC. With that, I'd like to begin the call and turn the call over to Selwyn.

Thank you, Gary. I appreciate everyone joining us today. We have experienced strong consecutive quarters, and I want to highlight our first half performance, and David will discuss both the quarter and 6-month period in more detail as well as trailing 12-month metrics. For the first half, we reported continued sales growth of $31.8 million or 8.4%, gross profit improvement of $6.2 million or 8.8%, strong operating cash flow of $31.9 million and net bank debt reduction of $24.6 million as well as share repurchases of 287,910 shares for $3.4 million at an average share price of $11.65. This reflects well on our annual guidance and the future. We continue to focus on opportunities to further enhance shareholder value. We remain focused and committed to being the leading supplier of nondiscretionary automotive aftermarket parts. Our team is focused on continuous improvement and success. We are excited by the opportunities for growth moving forward, particularly given the rapidly changing industry environment. Equally important, we believe our financial strength and flexibility provide a distinct competitive advantage. As you know, we offer a well-respected portfolio of products and services and have the capacity and ability to benefit from our state-of-the-art North American operational footprint. In short, we are well positioned to be the industry leader. As I've highlighted before, 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 a year ago. We expect increased replacement opportunities for the life of vehicles, particularly with consumers holding on to their cars for longer and new car prices recently reaching all-time highs. We are encouraged by the continued success of our second largest product category, brake offerings, which includes brake calipers manufactured at our production operation in Mexico. Our team is doing an exceptional job to further gain market share for the entire brake product line as well as 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. Our quality-built brand name products are offered to the professional installer market through warehouse distributors and continue to gain market share. As production volume increases for certain newer hard part products such as brake-related offerings, we expect enhanced operating efficiency and overall margin improvement. With regard to our heavy-duty business, we continue to leverage our reputation and industry position in this market, particularly regarding supplying alternatives 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 electric market with opportunities to expand our Quality-Built brand name. We are experiencing increased demand for our aftermarket products in Mexico, which complements our existing strategic operational and distribution footprint there. As our U.S.-based retailers and warehouse distributor customers expand throughout Latin and South America, we are well positioned to benefit while supporting their growth. With regard to our Diagnostic business, our JBT-1 Bench Top Tester leads the industry, and the installed base is continuing to grow with additional service-related revenue related to software and database updates anticipated. We also expect more opportunities outside North America as the business evolves, including potential new applications that complement and leverage our technology. We remain focused on benefiting from cost reduction initiatives to enhance margins, including strategic supply chain sourcing changes and capitalizing on our North American footprint. As I mentioned, we believe the outlook is bright for nondiscretionary aftermarket parts for the internal combustion engine market, and we are focused on leveraging our capability and capacity to offer a broad range of SKUs for all makes and models of newer or older vehicles. While the industry has expressed some recent headwinds due to consumers deferring certain repairs as well as the impact of the recent government shutdown, deferment is not really a long-term option for our nondiscretionary products. If your car doesn't start or stop, you're not driving. We believe that there are meaningful opportunities for further growth as the competitive landscape changes. Before I turn the call over to David to review our results in detail, let me summarize. From a sales perspective, we expect continued organic growth for our business, supported by favorable long-term industry tailwinds and our strong financial position. Our commercial heavy-duty market continues to grow. Our brake-related business is gaining further traction, particularly brake calipers. In addition, our sales in the Mexico market are growing nicely, and we expect this momentum will continue and expand throughout the region. Finally, our diagnostic business continues to grow nicely, and we look forward to ongoing success. I should mention that net sales for the quarter reflected two unusual events that offset each other. First, we reduced our customer core returns accrual in connection with the realignment of inventory at certain customer distribution centers, which resulted in a one-time gain for the quarter. This one-time revenue recognition of $14.8 million nominally contributed $643,000 to profitability, reduced gross margin by 1.1%, and was completely neutral to cash flow. In simple terms, we lost some business and picked up some other business. Second, one of our largest customers delayed purchases in an amount that offset the core revenue. This delay is temporary, and we anticipate it will result in increased orders during the second half of the year. I want to emphasize that we are excited by our progress and future opportunities and that we are confirming our guidance for fiscal 2026. This one-time core revenue is not included in our revenue guidance. As referenced in the exhibits to our earnings release, there are various factors relating to our financial performance that are noncash and beyond our control, particularly noncash mark-to-market foreign exchange, which can have a positive or negative impact on our Mexican 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 with 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.

Thank you, Selwyn, and good morning, everyone. Let me summarize key financial performance metrics for the fiscal '26 second 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. Net sales increased 6.4% to $221.5 million. Gross profit increased 3.5% to a second quarter record of $42.7 million, generated $21.9 million of cash from operating activities and reduced net bank debt by $17.7 million to $56.7 million, repurchased 90,114 shares for $1.4 million at an average price of $15.41. Now let me discuss our results in more detail. Net sales for the fiscal '26 second quarter increased $13.3 million or 6.4% to $221.5 million from $208.2 million in the prior year. Net sales for the quarter reflect $14.8 million of core revenue in connection with the realignment of inventory at certain customer distribution centers, offset by the timing of purchases by one of our largest customers, as Selwyn mentioned previously. Gross profit for the fiscal '26 second quarter increased 3.5% to a second quarter record of $42.7 million from $41.3 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 goods premium amortization and revaluation of cores on customer shelves, which are unique to certain of our products and required by GAAP. The total for all noncash expenses in the quarter was approximately $3.6 million or a 3% impact to gross margin as detailed in Exhibit 3 in this morning's press release. Gross margin for the fiscal '26 second quarter was 19.3% compared with 19.8% a year earlier. In addition to the noncash expenses previously explained, gross margin for the fiscal '26 second quarter was also impacted by one-time cash expenses of $698,000 or a 0.3% impact to gross margin as detailed in Exhibit 3 of this morning's earnings press release. I should note, excluding the noncash expenses and one-time cash expenses, gross margin on an adjusted basis increased slightly as detailed in Exhibit 3. 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 $26.4 million for the fiscal '26 second quarter compared with $28.8 million last year, which benefited from a $1.5 million noncash mark-to-market foreign exchange gain compared with a $5.4 million noncash mark-to-market foreign exchange loss in the prior year. The remaining increase includes increased general and administrative expenses at our offshore locations, increased commissions, and increased research and development expenses. Operating income for the fiscal '26 second quarter increased 30.8% to $16.4 million from $12.5 million in the prior year. Interest expense for the fiscal second quarter decreased by $1.5 million to $12.7 million from $14.2 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 second quarter, income tax expense was $3.6 million compared with $912,000 for the prior year. The effective tax rate for the fiscal '26 second 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 loss for the fiscal '26 second quarter was $2.1 million or $0.11 per share compared with a net loss of $3 million or $0.15 per share for the prior year. Net loss was impacted by noncash expenses of $4.8 million or $0.25 per share and was impacted by one-time cash expenses of $523,000 or $0.03 per share as detailed in Exhibit 1. As previously explained, higher sales volumes and operating efficiencies will further improve results. EBITDA for the fiscal second quarter was $16.5 million, reflecting $6.3 million of noncash expenses and $698,000 of one-time cash expenses detailed in Exhibit 5 of this morning's press release. EBITDA before the impact of noncash expenses and one-time cash expenses mentioned above was $23.5 million for the second quarter. Now let me discuss the 6-month results. Net sales for the fiscal '26 6-month period increased $31.8 million or 8.4% to a record $409.8 million from $378.1 million. Net sales for the 6-month period reflects $14.8 million of core revenue in connection with the realignment of inventory at certain customer distribution centers, offset by the timing of purchases by one of our largest customers. Gross profit for the fiscal '26 6-month period increased to a record $76.6 million from $70.5 million a year earlier. Gross margin for the fiscal '26 6-month period was 18.7% compared with 18.6% a year earlier. Gross margin for the fiscal '26 6-month period was impacted by $7.4 million or 2.5% of noncash expenses and $2.1 million or 0.5% of one-time cash expenses as detailed in Exhibit 4. Net income for the fiscal '26 6-month period was $893,000 or $0.04 per diluted share, impacted by noncash expenses of $3.5 million or $0.17 per diluted share and one-time cash expenses of $1.6 million or $0.08 per diluted share compared with a net loss of $21 million or $1.07 per share a year ago, impacted by various items detailed in Exhibit 2 in this morning's earnings press release. EBITDA for the fiscal '26 6-month period was $37.2 million. EBITDA was impacted by $4.6 million of noncash expenses as well as $2.1 million in one-time cash expenses detailed in Exhibit 5 of this morning's earnings press release. EBITDA before the impact of noncash and one-time cash expenses mentioned above was $43.9 million for the current period. Now let me move on to cash flow and key corporate items. The company generated cash of $21.9 million in operating activities during the fiscal '26 second quarter and generated $31.9 million in operating activities for the fiscal '26 6-month period compared with $2 million for the prior year fiscal '25 6-month period. We remain focused on increasing operating profit and gross margin and generating positive cash flow, supported by growth and operating efficiencies from our global footprint expansion. In addition to our goal of generating increased operating profits, we expect further opportunities to neutralize working capital, supported by customer product demand planning, enhanced inventory management, and expanding our vendor payment terms. Net bank debt decreased by $17.7 million during the fiscal '26 second quarter to $56.7 million from $74.4 million and decreased $24.6 million during the fiscal '26 6-month period to $56.7 million from $81.4 million. As explained previously, EBITDA before the impact of noncash and one-time cash expenses mentioned above was $43.9 million for the 6 months ended September 30, 2025. Based on information provided above and in our previous filings, EBITDA for the 12 months ended September 30, 2025, was $73.9 million. EBITDA before the impact of noncash and one-time cash expenses was $95.5 million for the same period. To recap, our net bank debt was $56.7 million at September 30, 2025, compared with EBITDA before the impact of noncash and one-time cash expenses mentioned above of $95.5 million for the 12 months ended September 30, 2025. For the past 2 years through September 30, 2025, we have generated cash from operating activities of approximately $122 million or approximately $6.21 per outstanding share on average, and we reduced net bank debt by approximately $98 million. For the 12 months ended September 30, 2025, we have generated cash from operating activities of approximately $75 million. Our liquidity remains very strong with total cash and availability of approximately $161 million. During the fiscal '26 second quarter, the company repurchased 90,114 shares for $1.4 million at an average price of $15.41 under its current authorization program, supported by solid cash generation from operating activities. For the 6-month period, the company repurchased 287,910 shares for $3.4 million at an average share price of $11.65. 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 have a couple of questions. First, Selwyn, you mentioned the effects of deferral in your comments. This has been a topic we've heard from several companies in your industry recently. Could you elaborate on that? Recognizing that, as you mentioned, this is a break-fix type industry, any deferral will likely be short-lived. However, what are you observing? Was there any measurable impact in the quarter from the deferral?

Yes, there's a customer that has undergone some operational changes, particularly related to their warehousing, which has led to some purchases being deferred for the quarter. We believe that this customer remains committed to maintaining their inventory levels, and we don't see any fundamental changes in that regard. The $14 million of core revenue was offset by a similar reduction due to that deferral. We anticipate recovering that deferral in the latter half of the year. Overall, while our numbers would have been stronger without the deferral, the core revenue still aligns with our annual guidance expectations. We are excited about the company's current performance, characterized by significant cash flow generation, debt repayment, and positive cash flows driven by profitability and working capital. The fundamental outlook for our business, despite some revenue changes which are not unusual for us, indicates that we will continue to maintain our momentum.

That's helpful. The second question I have is about consumer behavior. I think you mentioned the term deferral twice, referring to a specific customer of yours. Additionally, if I heard you correctly, at the consumer level, it seems there might be some demand deferral, as consumers are delaying projects longer. I want to confirm that I understood that correctly because it's something we've encountered elsewhere.

Yes, I believe there is some deferral and uncertainty regarding discretionary spending. However, for the majority of our products, they are essential. Vehicles cannot operate without replacing certain parts. You can delay replacing your brakes for a short time, but eventually, it needs to be done. Thus, for our product range, this type of deferral differs from a one-time delay related to warehouse restructuring. I think the impact of this deferral on us is relatively minor compared to others.

Can you talk about just market share trending? Any trends in market share for your core as well as braking business? And then additionally, there's been some news flow regarding the First Brands situation. Wondering if you could talk about whether or not there are any sort of knock-on effects from what's going on there? And then I've got a follow-up.

Yes, I believe our market share has some fluctuations, but I don't anticipate any significant changes at the moment. If we consider the momentum of our business, our brake-related products are clearly gaining traction more quickly than others. Regarding First Brands, it's difficult for me to provide comments. It's unfortunate that situations like that affect our industry. However, I believe there will be numerous opportunities for customers who are dependable, maintain integrity, and offer quality products. Beyond that, I can't provide further comment.

Got it. And then as my follow-up, I wanted to touch on cash flow. Really good generation here. It looks like trailing 12 months free cash flow is around $70 million, something like that. And you guys have been buying back shares. Can you talk about how you plan on utilizing further cash flow? Wondering if the repurchases will continue? And then just looking at debt levels, how comfortable are you with where it's at? Do you plan on continuing to reduce debt as well?

Yes, given the recent performance of our stock, we definitely see value in continuing to buy back shares as long as we have the liquidity and believe the stock is undervalued. We do have authorization in place for stock repurchases. As for our debt, it remains very low, and we expect it to decrease further. Currently, we believe maintaining liquidity will position us well to seize various opportunities in the market, and we're optimistic about that. We feel we are in a strong position, and having ample liquidity will support our plans. Thank you. In summary, I mean, we continue to be bullish about our outlook. 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 as well as for our diagnostic testing business. We continue to leverage our expertise and solid customer and supply partnerships. Our liquidity is strong, our leverage is 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, and we are making great progress there, mitigating tariffs and increasing cash conversion by increased profitability and neutralization of working capital. In closing, we appreciate the contributions of all 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 thank everyone again for joining us for the call. We look forward to speaking with you when we host our fiscal 2026 third quarter conference call in February and at various investor conferences and meetings. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.