Motorcar Parts of America, Inc. ($MPAA)

Thank you for standing by, and welcome to the Motorcar Parts of America Inc. Fiscal 2026 Fourth Quarter and Year-End Conference Call. [Operator Instructions] I'd now like to turn the call over to Gary Maier, Vice President, Corporate Communications and Investor Relations. You may begin.

Thanks. Thanks, Rob. Thanks, everyone, for joining us today for our fiscal fourth quarter and year-end conference call. Before we begin, I turn it 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. 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 Motorcar 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 revise or update 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 company's various filings with the Securities and Exchange Commission. With that said, I'd like to begin the call and turn it over to Selwyn.

Thank you, Gary. I appreciate everyone joining us today. As stated in our earnings release issued this morning, we ended the year with a strong fourth quarter and numerous new business commitments phasing in throughout fiscal 2027. We as well as exciting new additional pending business opportunities. Let me start by highlighting our meaningful financial accomplishments for the fourth quarter and year. Net sales increased 9.9% for the quarter and 4.3% for the year. Gross profit increased 30.9% for the quarter and 3.9% for the year. Gross margin increased to 23.7% for the quarter and was 20.2% for the year. Operating income increased 29.4% for the quarter and 64.9% for the year. Net income for the quarter was $9.7 million compared with a net loss of $722,000 a year ago. Our net income for the year was $12.4 million compared with a net loss of $19.5 million a year ago. We used cash from operating activities of $4.5 million in the quarter. This was primarily due to an increase in accounts receivable of $32.5 million, reflecting strong sales towards the end of March. For the year, we generated cash from operating activities of $19.2 million. We generated cash of $57 million before working capital reuse of $37.8 million. Working capital was impacted by an inventory ramp-up for new business in the upcoming fiscal year and a large increase in accounts receivable at fiscal year-end because of significantly strong sales late in the fourth quarter. We reduced net bank debt to $80 million despite repurchasing shares of $11.4 million for the year. David will discuss these metrics in more detail shortly. In short, we are encouraged by our achievements, particularly in the fourth quarter. Our strategy remains focused on increasing profitability, growing share and neutralizing working capital. We believe accelerating gains in our brick related business will continue to support our overall margin goals, supported by further efficiencies and increased utilization of our facilities. We have a number of initiatives that we were exploring, including utilizing AI tools to help neutralize working capital. We expect to continue to generate positive cash flow on an annual basis. Over the last 3 years, we have generated more than $100 million of cash from operating activities, which supports further debt reduction and share repurchases, while leveraging our strength to take advantage of additional opportunities in both the retail and traditional markets. We remain focused on gaining share across all product categories by leveraging our leadership position, our financial strength and reputation. I might add that our quality built brand products continue to gain name recognition and market share across the traditional distribution and repair market. Equally important, this growing brand name recognition within the professional aftermarket presents exciting opportunities for us to expand awareness and enhance loyalty among customers and consumers both near and long term. In short, we offer our retail and traditional customers' rate products, industry-leading SKU coverage and order fill rates supported by value-added merchandising and marketing support. I should mention that we continue to seek opportunities to support our customers, leveraging our low-cost footprint. As I've highlighted before, the average age of U.S. light vehicles continues to rise. Most recent industry data shows that the average age has risen to 12.8 years from 12.5 years in 2024. In addition, the number of vehicles on the road climbed to $295.9 million from $291.1 million a year ago. We expect increased replacement opportunities from the life of vehicles, particularly with consumers holding on to their vehicle longer. In short, we are all committed and focused on our customers, offering quality products and services with rational pricing. With regard to our heavy-duty business, we continue to leverage our reputation and the industry position in this market, focused on opportunities to further enhance operating efficiencies and margins. Our vision is to leverage the reputation of our quality built brand name. We anticipate this will build momentum and enhance our market position, particularly with regard to supplying alternators and starters, to our channel partners who are leaders in the heavy-duty aftermarket segment and the overall heavy-duty rotating electrical market. I should note that we commenced the relocation of our duty operation to Mexico from Canada in the latter part of fiscal 2026 as part of our ongoing commitment to continuous improvement, and we look forward to further opportunities to enhance operating efficiencies as we complete the transition. In addition, we continue to experience increased demand for our aftermarket parts 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. Regarding our diagnostic business, our JBT 1 benchtop test that leads the industry, and the installed base is continuing to grow. We also expect more opportunities outside North America as the business evolves, including potential new applications that complement and leverage our technology. 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 markets all makes and models with the newer or older vehicles. As I've previously mentioned, the format 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 we have meaningful opportunities for further growth and profitability as the competitive landscape continues to change. I'd now like to turn the call over to David.

Thank you, Selwyn, and good morning, everyone. Let me begin by outlining several topics I want to discuss. We will go over analytics for the fiscal fourth quarter, sales momentum and opportunities, gross margin and operating income, cash flow, balance sheet, liquidity and debt leverage, share repurchases and potential strategic alternatives for our EEV emulated business and guidance for the new fiscal year ending March 31, 2027. Let's start with analytics for the fiscal fourth quarter. Fiscal fourth quarter ended March 31, 2026, net sales, gross profit, gross margin and profitability increased compared with a year ago. As we start the new fiscal year, we believe this momentum will continue for fiscal 2027. From a sales perspective, as sales momentum increases, combined with new business commitments that Selwyn referenced earlier, as well as other meaningful opportunities, we believe the company will benefit in several ways near term, including favorable impact to gross margin, continued annual cash flow generation, net bank debt reduction and opportunities to increase shareholder value. In short, the fundamentals of our business are strong. Regarding gross margin, let me first discuss the fourth quarter in more detail. Gross margin was 23.7% compared with 19.9% a year earlier, enhanced by an ongoing focus on cost reduction opportunities. Gross margin was impacted by noncash expenses of 1.8% and onetime items of 0.3% as detailed in Exhibit 3 of this morning's earnings press release. Excluding these noncash and certain onetime cash items, gross margin increased to 25.8%. Fiscal 2027 gross margin is expected to continue to be favorably impacted by increased sales over absorption and overall cost reductions and efficiencies impacted by product mix. Overall, regarding gross margin, we remain focused on overall gross margin accretion, supported by strong momentum and greater utilization of brake-related capacity. We are also focused on positive impacts to overall margin from further improvements in operating efficiency supported by benefiting from our tariff mitigation initiatives, better pricing for scrap sales as we gain more market share for our products. Additional opportunities to relocate certain operations to our low-cost facilities globally, including Mexico and further strategic cost reductions. These initiatives are expected to positively impact overall gross margin. Operating income for fiscal year 2026 was $65.8 million. Operating income was $76.6 million before the impact of noncash expenses of $11.6 million and the benefit of onetime cash items of $791,000 as detailed in Exhibit 6 of this morning's earnings press release. Regarding our cash flow, balance sheet and liquidity. The 12-month period, cash generated from operating activities was $19.2 million. As someone previously indicated, we generated cash of $57 million before working capital use of $37.8 million. Working capital was impacted by an inventory ramp-up for new business in the current new fiscal year. and a large increase in accounts receivable of $32.5 million for the fourth quarter because of significantly strong sales late in the fourth quarter. After share repurchases of $11.4 million for fiscal year 2026, the company's revolver loan of $94.7 million, less cash of $14.7 million at March 31, 2026, resulted in a net bank debt of $80 million. The company has $22.1 million remaining to repurchase shares under its current authorized share repurchase program. For the 3 years ended March 31, 2026, the company generated cash from operating activities of approximately $103.8 million, as Selwyn previously highlighted. Our liquidity remains strong with total cash and availability of approximately $133.7 million as of March 31, 2026. We remain focused on increasing operating profit and gross margins and generating positive cash flow supported by growth and operating efficiencies from our global footprint. In addition to our goal of generating increased operating profits, including benefits from our gross margin expansion initiatives previously explained, we expect further opportunities to neutralize working capital, supported by customer product demand planning, enhanced inventory management and extending our vendor payment terms including growing our supply chain finance program offered to our vendors. Regarding our debt leverage, based on information in our filing today, EBITDA for the 12 months ended March 31, 2026, was $76.4 million. EBITDA before the impact of noncash and onetime cash expenses was $86.1 million for the same period. To cap, our net bank debt was $80 million at March 31, 2026, compared with EBITDA before the impact of noncash and onetime cash expenses mentioned above of $86.1 million for the 12 months ended March 31, 2026, resulting in a net bank debt-to-EBITDA ratio of 0.93x. We're also committed to further opportunities to increase share repurchases. For the 12-month period, the company repurchased 955,608 shares or $11.4 million at an average share price of $11.88. With regard to our EV annulated business, which is a noncore asset, we are continuing to explore strategic alternatives to capitalize on its proprietary industry-leading technology, including a state-of-the-art next-generation emulator. While we continue to explore strategic alternatives, we have secured prestigious new OE customer commitments for our emulated business. Regarding guidance. Motorcar Parts of America expects net sales for the fiscal year ending March 31, 2027, to increase between 7.5% to 10.2% year-over-year growth. reflecting the exclusion of certain nonrecurring items, including tariff pass-throughs due to the reduction of import tariffs and nonrecurring core revenue representing net sales of between $780 million to $800 million. Current guidance includes new business commitments that are expected to ramp up in the second half of the fiscal year. The timing of the ramp-up is due to customers taking advantage of liquidated inventory purchased from a previous supplier. In addition, the company expects to add more than $100 million of additional annualized net sales by the end of fiscal 2027, which is not included in the guidance due to the uncertainty of the timing. In summary, the company expects annualized net sales to be more than $900 million by the end of fiscal 2027. Operating income is expected to be between $86 million and $91 million, representing between 12.3% and 18.8% year-over-year growth and these estimates reflect the expected impact of tariffs enacted as of June 8, 2026, and do not include certain noncash items and onetime expenses. The company estimates depreciation and amortization will be approximately $9 million. Based on the above, the company expects EBITDA to be between $95 million and $100 million. For details on the results refer to the earnings press release issued this morning. I would now like to open the line for questions.

[Operator Instructions] First question comes from the line of Brian Nagel from Oppenheimer.

This is Andrew Casino on for Brian Nagel. Really nice quarter here. Yes. I guess just 2 questions. You referenced the competitor bankruptcy as a key driver for new business. So I guess the question is around the $100 million incremental opportunity. How much of that is directly tied to this dislocation? And how would you describe the stickiness of that longer term? And then I've got a follow-up.

Yes. I think a good portion of that is, but we've also got some other good organic growth coming that's unrelated to that. So we're benefiting on both fronts.

That's helpful. And then just as my follow-up, you discussed the larger customer ordering disruption that weighed on Q3. It clearly seems to have normalized. So -- is the relationship now fully back to baseline? Or is there still some recovery volumes that we should be thinking about?

Well, I think that, again, without getting into specifics of the customer, I mean, that revenue came back. A customer did shut down about 15% of their stores. So our estimate is that baseline is now 85% of previous revenues, although the customers reported strong financial results in between our last call. So we're optimistic overall for all of our customers. We think -- I go back to the fundamentals and the statistics is that the car population continues to grow. The average age of vehicles continues to go up. The call prices, new car prices up significantly. And as a result, used car sales are going up, their prices are also going up. So we see the fundamentals though of people maintaining their vehicles, keeping down the road, and we focused on nondiscretionary items. So we're bullish organically from the business as well as that we believe that there is some challenge in the supply chain with overleveraged companies. So we think there's opportunity.

[Operator Instructions] Your next question comes from the line of Derek Soderberg from Cantor Fitzgerald.

Just a quick -- just a quick clarification on gross margin for the quarter. I'm actually getting 23.3%. I was wondering if you can clarify that. Just looking at Exhibit it looks like the cash and noncash impacts largely cancel each other out. It looks like you've got an impact that's negative, but it shows positive on the like a 30 basis point improvement. I just wonder if you can clarify that quick.

Sure. So if you look at Exhibit 3 of this morning's earnings press release, our reported gross margin was 23.7%. The noncash items had a 1.8% impact. So you add that 1.8% on and also the cash items had 0.3%. So if you add to 1.8% in the 0.3% to the 23.7%, that gives you to 25.8%. Does that make sense?

Yes, I'm seeing the cash impact, a negative $4 million or negative $3.976 million?

Right. So that's a good point. If you look at the letter A, the negative $6.5 million had an impact of negative 0.9% and we indicate that's the impact when you take into consideration both the sales and cost of goods sold impact. So the combined impact of sales and cost to be sold on gross profit was a negative 0.9%. So the total cash impact was 0.3% unfavorable for the quarter that if you add to the noncash 1.8% and that the 23.7% gets you to 25.8%.

Got it. Okay. Okay. And so just -- I just changed that quick in the model. And so it looks like for the change year-on-year sort of flattish on adjusted gross margin. I was wondering if you can maybe briefly review kind of the puts and takes on that. I know you guys have a breaking business that's becoming very accretive to gross margin, but I know there are some tariff impacts in the year. I was just wondering if you can briefly kind of summarize the puts and takes on adjusted margin this year and then what maybe we should expect looking into fiscal '27 for gross margin?

That's a good question. We continue to focus on margin accretion. So this past quarter, we experienced not only cost reductions but efficiencies. We're very focused on efficiencies. So all our product lines, we're focused on becoming higher in gross margins. So we do expect in the new fiscal year, all those initiatives that we're undertaking, including continuing with cost reduction becoming more efficient, although be positively contributing to gross margin.

Yes. And then on the revenue side, we've got significant new business commitments as well as a significant amount pending that we're optimistic about. But the timing of all of that, Derek, was the change in the supply chain is making it difficult for us to estimate. So we're trying to sort of give a baseline guidance and then sort of look at the year-end run rate has significantly up.

Got it. That's helpful. And then just 1 last quick one. Is the inventory that some of your customers are working through? Is that related to the first brands issue. And so there was kind of a bankruptcy and there were maybe some cheap components out there that need to be worked through? Is that how we should think about it?

Yes. So if you think about it, the customers who are already getting product from first brands, as soon as they heard a problem started buying in more and more inventory, so the transition for the new supply would give them more time at the transition for the new supplier. We are ready to go, but our customers are reducing that inventory. They're all firm commitments that we have. And we are shipping all those customers but smaller quantities today. And as we get through the year, you'll see significant ramp-up in those volumes. So that relates to that liquidation, yes.

Your next question comes from the line of Brian Nagel from Oppenheimer.

I thought I would just squeeze 1 more quick follow-up, if that's all right -- and I guess really just wanted to get your thoughts on bigger picture on the macro and what is being contemplated within your guidance? On one hand, you have maybe winning tax benefits from the end consumer, you have higher gas prices wanting maintain vehicles, potentially less models driven on the road. How are you -- what macro factors are you considering as you're thinking about the next year ahead?

Yes. I think we -- I mean, I think we -- to the extent that we're capable, I mean, sort of the status quo is what we're incorporating. I mean we see higher fuel prices affecting miles driven, but again, we're -- the point I was trying to make is we're nondiscretionary. There is some deferral of nondiscretionary, but not nearly to the extent of discretionary items. We have seen some mild that affect sales. And again, we've seen other public reports come out talking about milder weather and affecting sales. So we've taken all that into account again, the delay. I think from a macro perspective, I think the industry is probably an agreement with what I'm saying is that the fundamental tailwinds are strong. I'm not sure we don't -- refunds, we don't know what's going to happen there. So we're not -- we're somewhat agnostic in our guidance to the refunds. To the extent that we have windfall refunds, we'll have to see how that affects us, hopefully, positively. But we're looking at a relatively modest outlook in light of all the geopolitical situation. And but with some optimism because of the amount of momentum we have, and particularly in our brake lines. The break opportunity for us we think is unfolding in a bigger way than even we anticipated coming into this year. I think, Derek, you've been a big Derek at Kantar in particular on you guys as well, but we have called out the brakepad opportunity, and we certainly believe from the momentum we're seeing in our brake business at the brake pad opportunity, which is a massive, massive market could be enfolding positively for us.

As there are no further questions, I will now turn the call back over to Selwyn Jaffe for closing remarks.

Great. In summary, again, we are bullish about our outlook. -- notwithstanding the headwinds we experienced during fiscal 2016, 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. Our liquidity is strong. Our leverage is low and we have the resources, capacity and capability to further enhance shareholder value. In closing, we appreciate the contributions of all of our team members who are continuously focused and 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 you, everyone, again for joining us for the call. We look forward to speaking with you when we host our fiscal '27 first quarter call in August, and at the various investor conferences and meetings in the interim. Thanks once again.

This concludes today's conference call. Thank you for your participation. You may now disconnect.