morning. Thank you all for joining us. So my name is Brian Nagel. I'm a senior equity research analyst here at Oppenheimer covering consumer growth and e-commerce. This is day two of our 26th annual Oppenheimer Consumer Growth and E-commerce conference. We very much appreciate everyone tuning in. So I'm very pleased to have with us our next presenting company, Motor Car Parts of America, and the company's president and CEO, Selwyn Jaffe. So Selwyn, thank you for joining us.

Brian, thanks for having us. I look forward to it.

So we're going to structure this as a informal fireside chat with me asking questions and Selwyn respond to the questions. To the extent there are questions from the audience, just put them in the chat and I'll be happy to work them into our conversation. So again, Selwyn, thank you. So Selwyn, I think, you know, maybe the first place to start, you know, you and your company reported a very nice fiscal fourth quarter yesterday uh i know a lot of us have been busy so maybe we haven't had time to really dig through these results as much as we want to yet but i'd love just to kind of hear your you know thoughts on the quarter you know and and and and the bright spots we saw a nice uh bounce in the stock and reaction to the to the results so just kind of get your overall view of the q4 and how what we should be interpreting from it yeah i think you know q4 stands out probably more than than normal in that we had a little you know tougher start to the year with one of our main customers um going through a little bit of a, not a little bit, quite a significant restructuring, which

affected us pretty significantly. That customer has now resurfaced and, you know, came back and has hit what I think is their new norm. And that, you know, that really played a big part in sort of the return of where we should be in terms of performance. So always the fourth quarter is for us, which is the March quarter, usually is stronger because customers are getting ready for the summer and the hot weather and stocking up on inventory. So generally, the fourth quarter is more positive. And I think that is aided by the benefit of some of our customers coming back to the table, which is exciting because that's what we think the new norm is.

So I know we've talked about over the last few quarters, the disruption from this customer of yours. So is there a way to quantify, you know, look at Q2, Q3, then into Q4, the benefit of Q4, how much of this reflected that customer sort of state coming back online?

Well, I think going into Q4, I think that customer was a drag of about $50 million of annualized sales. So that's a pretty significant drag. And I would say that in the fourth quarter, that drag, you know, was reduced and is now normal. So I would say that's probably, you know, anywhere from sort of $15 million to $20 million swing. um uh and and again i'm i'm really first of all you know want to congratulate them and on getting through their their restructuring and and congratulate them on some excellent results and and you know we're excited to be part of of of a new norm for that customer and so we think that that this year is going to be a positive year for them and and for us relative to that business That's very helpful.

So stepping back, I think as I talk to clients, Motor Car Parts of America is still a new name for a lot of clients. So I would love you just to kind of discuss the position of the company within the broader aftermarket auto parts space.

All right. So just the general space on hard parts is probably $135 billion in the U.S. market alone. And we play in two pieces of that aftermarket. We play in charging systems, which is rotating electrical, which is the alternator and the starter. Both of them are non-discretionary product lines. It's about a $1.5 billion category out of that big parts category. And we've got about a 50% share in that arena. It's our legacy product. We're one of the few competitors or maybe the only player that I'm aware of that can do both remanufactured and new units. And so we also have 100 percent coverage for both for both in both in both areas. So that's where we sit in the rotating electrical space, which is the charging system space. And then the other portion of our business is in the brake space and the brake charging. The charging space is basically it's a failure category, so you use the part until it fails. And the brake space, which we have a full braking system offering, is basically its wear replacement. Okay, so all the cars are going to need, and again, non-discretionary. So from the brakes, we can start with the pad that hits the rotor, and we sell both pads, rotors, The hydraulic system, which is the brake master cylinder, we sell brake master cylinders. The power brake system, which is the brake boosters, we sell the brake boosters. And the anti-lock braking system, which is on the wheel hub, we sell that. So we basically, fundamentally, other than some of the tubing and part of the business, we offer a relatively full break line solution. That's a relatively new business for us. We like it a lot. The growth opportunity for us there is enormous. We're still fairly small in that size of the business, picking up significant share there. Our pad business is starting to show some, you know, it's a massive business. It's a wear replacement business. I think it's an 8-point-something billion business that's starting to pick up. Significantly, it's a decent margin business. And so, you know, the break, and it's technology agnostic. And so whether it be electric cars, hydrogen fuel cells, hybrid cars, they all need braking systems. So very excited about our positioning in the aftermarket space. We also have diagnostics that relate to both rotating electrical, the charging system. We have the leading diagnostics in the world related to producing alternators and starters. And we have a business that does very nicely in that space. And then we have power management, electric powertrain, electric vehicle technology. Some of that we're looking at some strategic alternatives. But this technology is really, and even more recently, just been acquired by the top OE companies in the world. So we're sitting, we will look at potentially spinning off a piece of that, but we still have electric technology capability and certainly feel that the knowledge base on the OE side will lead us to being ahead of the curve when electric vehicles come in, which is a long way from now in terms of the aftermarket. So that's the general positioning. Our leverage, very nominal leverage. We have $80 million of bank debt and bank debt to EBITDA less than one, generating cash. And we see upside opportunities. We're looking at 7% to 10% of committed revenue growth. And we expect to have, by the end of this fiscal year, another $100 million of annualized revenue. So, you know, so overall picture looks fundamentally good. The aftermarket itself is very strong. I think there's 295 million vehicles on the road. The average age continues to get older. These cars, as they get older, they need more replacement parts. New car sales are down, used car sales are up. So in particular, the price of new cars has gone up pretty dramatically. And so the fundamentals of the aftermarket, to me, are very strong. We have high fuel prices, which does affect it short term, but we think that neutralizes as time goes on.

I do want to touch there again, before we talk more specifically about MPAA and the opportunity for MPAA, just the macro backdrop.

So I've been talking through this conference, a number of operators of lumber within your specific sector, just kind of helping to size, if you will, the macro backdrop and what impact, you know let's you just mentioned a moment ago the elevated gas prices and other factors are happening upon demand trends within within the space so let me get your thoughts there you know you know i mean we have seen a small downtick in miles driven in the most recent months um generally miles driven affects failures you know i mean if you don't drive your car as much the odds of it failing a little bit lower um i think the bigger the bigger neutralization for us is perhaps some milder weather because failure rates go up in extreme weather. I think right now, miles driven is not a huge factor. It could end up being a bigger factor in a little bit of softness and that people filling your car up is very expensive. So they'll look to reduce the amount they drive. But the other side of it is airline prices have gone up. The alternative ways of transportation costs have gone up so relative to the rest of the market even though you've got inflation and fuel prices your vehicle is the last thing you're cutting back on you're moving you're moving from more luxurious transportation to more basic transportation and and whether it be if you're not driving your own vehicle you're going to use ride share and again ride shares we've got tons of failure as well so um it's better to have low fuel prices that's for sure but you know i think that on a real hopefully this is relatively short term which no one really knows um we

shouldn't see that much of an impact i do think weather is a little bit of an impact though right now as you look at the weather i know it's always a funny change at the moment uh look out my window I know it's quite nice here, but is weather right now a positive or a negative?

It's a negative right now. I mean, the weather's great. Everybody's loving the weather. That's a negative. When everyone's complaining about how hot or cold it is, that's a positive for us. So when you're miserable with the weather, think about buying MPA stock.

So if we go into this really, what I hear a lot, or read a lot about potentially really hot summer, that could be a positive from a weather perspective.

We're coming into summer. The weather's been fairly mild over the spring. We're coming into summer. That will, you know, the hotter weather, whether it be extreme or not that extreme, hotter weather will drive failures of parts, and that drives our business. Sounds a little sadistic, but it's a need. We need to help people keep their cars on the road, and that's what we fill that need. There is no other way. I mean, in many cases, you know, for the aftermarket, the OE doesn't have a solution, you know, to keep that car on the road. They need the aftermarket suppliers like us to do that. And whether it be directly through them, whether it be direct to the consumer, whether it be through the retail chains, whether it be through the WD, warehouse distributors, it's a critical need that the car park needs.

Yeah. So I want to talk about the sector dynamics. You've had what I consider to be some really significant competitive upheaval within your space. In fact, my team and I published a rather substantial initiation report on MPAA back in early March. We talked a lot about this. So I guess from your perspective, as you look at what's happening out there competitively, where's the opportunity for MPAA? You were talking before about the break category, a newer category. I think this does open up now, too, but I'll let you kind of elaborate on what you see.

So I think that's a great question, Brian. I think the key, you know, first brands were acquirers of a centric corporation, which I think was, I don't know the exact numbers, but estimates are sort of mid $300 million of revenue. And there were also acquirers of Breakparts International, which I think was in the $300 plus million. So, you know, combined, it's probably $700 million at some time back. I don't think anyone really knows exactly where that ended up just because of all the irregularities in first brands. But to us, we see probably a $500 million opportunity overall. We certainly don't expect or have delusions of getting all of that. But the big opportunity for us is in our break parts. I mean, that's where they, you know, that's where first the categories that we were in, the overlap with first brands is in break parts. And they played in all of the breaking system. And we think that there's lots of revenue opportunity. We're seeing it already. I think we've given some guidance on committed revenues that we have, committed accounts that we have. And we think that there's, you know, a real opportunity at another $100 million of annualized revenue in the break part space.

So looking back at yesterday's fiscal fourth quarter report in the, you know, in the sales upside there. So was any of that sales upside, did any of that pertain to what we're talking about here with the break? Was that all on the come?

Very little. Very little. It's all to come. I think you're going to see it at the back end of this fiscal year. I think there's a lot of liquidation of inventory that's delaying the orders from new business. You know, customers were able to buy inventory out of first brands in excess to keep their, you know, to stuff their supply chain and have a softer landing and making sure when they change. We've got a lot of commitments, and I think that we'll start seeing the benefit later in the year. I mean, even though we have the commitments now, I think the big demand will come later. So, yeah, I think the fundamentals of the business remain strong. I do think that generally the first quarter is softer than the fourth quarter. And the ramp up, the weather's been a little mild. But we're very confident for the year and of the run rate numbers.

And talking about that market share opportunity, how should we think about this from a margin profile, you know, those incremental sales, potential incremental sales, what type of margin, you know, should we expect to get from those? And then if you're looking at if this is likely to benefit MPA more in the latter part of what I'm going to call fiscal 26, the March 27 year, then have you talked yet about how big that opportunity could be in the next fiscal year?

Yeah. So, well, let's just start with margin profile. I, you know, I think that as, as the revenue grows in the break line, it becomes accretive to our current margin levels, but we're not, you know, we're not out there giving guidance on significant margin enhancement. We're playing in a competitive space, but we do think there's efficiencies in what we're doing. We've talked about low 20s in our guidance that we have out there. We do think there's upside over time to that number. The break categories that we're in are very respectable margin businesses, very competitive, though. So I don't want to get ahead of that curve. But efficiencies and overhead absorption, we've been planning for this. of the last you know it's probably pre-covert you know where we've talked about how we want to become a major break supplier and and quite frankly it's it's arrived we are now a major break supplier and uh in many categories and and in in the categories that we're still small we see tremendous potential of coming at us so and it's a great it's a great place to be because again, it's a wear business. There's always replacements, and you cannot drive your car. So we're in the power business, making the car go, and we're in the stopping business, making the car stop. So both sides of the fundamental equations of that, and there's big upside. And by the way, we're only talking about the US market right now. The Mexican market we're starting to unfold into, that'll be a big opportunity. The whole South American market, The whole international market is something that we will tackle. It's just at the right time. We have so much local opportunity still to absorb. But certainly we're playing in just a small part of the global market. And we have global capability.

So with this break-it opportunity, is it selling or breaking products to the existing customers? the customers where MPA has enjoyed some really nice relationships for a long time.

It is. And it's that and also opening doors where we haven't had relationships. And, you know, where so it's both. And the formulations, the break pad formulations that we have are tried, tested and are very successful. We own all of the centric formulations, the former centric formulations. So the consumer, the professional installer understands and knows those formulations and can see them. I mean, they stand out. When you look at it in the box, you can tell that it's now under quality built, but it's a quality built formulation. And so the installer trusts it. It's got a great feel. It's a great product. Very, very reliable. And so we're excited about that opportunity. It's small for us right now, and that's even more exciting in a category that's, you know, I believe it's over an $8 billion category in the U.S. alone. So that's a very significant opportunity. Yeah, so I think lots of upside, lots of work to be done. And we have lots of capacity. I think that certainly over the next wave of growth, and, you know, we talked about a $900 million run rate by the end of this fiscal year, I think we're going to have a lot of leverage on our overhead. I don't think there's much overhead we need to add.

Well, that's a good question I wanted to ask someone. Again, looking at this break-in opportunity, how much, you know, you just mentioned labor. How much investments needed to basically, you know, manufacture into this opportunity?

It's inventory. I mean, we've got our entire infrastructure is already in place to handle this opportunity.

Yeah.

So there's no fixed overhead. I shouldn't say no. There's always a small amount. But the leverage on the fixed overhead is significant.

And if we continue to grow, we've got some more.

We can move to the billion-dollar mark without significant fixed-cost investment.

Are there other competitors? So there you have this opportunity. Like you said a moment ago, you've been eyeing this opportunity now for several years. You've got this competitive disruption within the space. It's opened the opportunity here. Are there others that are basically positioned like you to get into this space?

There's a lot of good competitors. It's a massive market. Wherever you have a massive market, you have a lot of competitors. So there are a lot of competitors. There's enough space for all of us. I mean, we're certainly not saying we're going to be an $8 billion or even a $4 billion player in the break business we just want a small share and we want to share that we we are known for which is a is a high profile professional installer base uh share that's what we very much focused on in the break category very much around the professional installer um so you know we think that we can play in that there are competitors in that space too that are very good competitors but there's room there's room for a number of players and i think Again, I think that if we were starting out with something that was unproven, I'd be a little more cautious, but we've got a proven product. This is a product that for many years dominated the friction business, you know, in the space that we're targeting. So that message has to get out to the consumer and to the installer. And we believe that there's a high degree of loyalty, that they will come back to this product. And we're seeing it. We're seeing it and we're hearing it.

So do you want to shift gears just a bit as our time starts to wind down here? Tariffs and trade policies. I mean, to what extent have tariffs impacted our budget America and how are you dealing with it? Oh, my God.

You know, I mean, it affects us significantly. One day there are tariffs and, you know, we pass them through the next day that there are no tariffs and we have to refund. And it's just it's an ongoing it's an ongoing part of our life now. But, you know, I think that sometimes, you know, we have I think Warren Buffett used to say, you know, what makes you good is being fortunate and makes you makes you even better as being able to take advantage of being fortunate. And I think we're fortunate in that we've got a footprint that can that plays well within the tariff structure and that that that we use MCA compliant on most of our product. And we're mostly out of out of China, which has higher duties than other countries. And we have a great ship direct capability out of our Malaysia facilities. So, you know, I think we were fortunate in that we saw this coming, not so much the tariffs, but we saw, you know, some of the challenges on the Chinese infrastructure coming and we moved. And then tariffs came and I think we're now in a position and I think we're able to take advantage of that, of being fortunate with this new footprint. And we're going to have to see where tariffs go and what this all means day by day. But I think overall we're in a pretty good spot.

So the final question, I'm not going to say our time is going to wind down here, but you mentioned early on the solid capital position of the company. So maybe you can just address that. The balance sheet, your debt levels seem to be very subdued cash at this point.

So, I mean, we have a bank debt of $80 million. I mean, on EBITDA, that's north of $80 million. Our guidance is in the mid-90s and pushing on close to $100 million or a little over $100 million. So debt to EBITDA is below one, and we'll continue to generate cash. We don't think we're going to be a net user of cash. So that only gets us in a better position. We have been buying back shares. We think we're a good value. And so to the extent that we'll continue to do that. We do have a convote out there at 15. The mentality of that convote is as an equity player, not as a debt player. But we were able to, to the extent the stock's below 15, we were able to significantly reduce share count by buying back stock. So we'll have a lot of capital to deploy in the right ways. I think the supply chain in general is private equity owned. I think that they're over leveraged. And, you know, there was a time when debt was more available than it is today. And refinancing that debt, I think, is challenging. And we're nowhere near having any of those issues. I mean, we have lots of liquidity. And quite frankly, we haven't even tapped the capability of the amount of liquidity we could get. So we have favorable interest rates and we have great relationships with our lenders. So from a financial perspective, I think we're another, you know, you talk about being fortunate and able, but matching our financial capability to the opportunity, I think it's there. We've got a lot of financial capability.

Was there anything we did discuss that we should have discussed here?

No, I appreciate you. you know we've we've participated in these conferences for a long time thank you so much for keeping me inviting us i mean we'd like to be here thank you so much for taking an interest in our company and providing coverage i think that's great and um you know look forward to continuing dialogue and you know we're we very much uh you know have our core values that we live by which is epic it's excellence excellence passion productivity innovation and integrity community and last but we spell epic with a Q and last of all is quality and we think applying those basic core values to our vision statement to being the global leader for parts and solutions that move our world today and tomorrow will make us an industry leader and already has made us an industry leader and the opportunity is very sustainable over a long period of time. So I thank you for being interested.

Well, thank you. Congratulations on the recent successes here and I look forward to watching it continue to play out.

Thank you so much. Appreciate it so much, Brian.