Motorcar Parts of America, Inc. (NASDAQ:MPAA) Q2 2024 Earnings Call Transcript
Motorcar Parts of America, Inc. (NASDAQ:MPAA) Q2 2024 Earnings Call Transcript November 10, 2023
Operator: Ladies and gentlemen, thank you for standing by. My name is Bhavesh, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America Fiscal 2024 Second Quarter Conference Call and Webcast. At this time, all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now hand the call over to Gary Maier, VP of Communications and Investor Relations with Motorcar Parts of America. You may begin your conference.
Gary Maier: Thank you. Thanks everyone for joining us today. Before I turn the call over to Selwyn Joffe, the Chairman, President and Chief Executive Officer, and David Lee, the company's Chief Financial Officer. Let me 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 Motorcar Parts of America.
Actual results may differ from those projected in these 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 company's various filings with the Securities and Exchange Commission. I would now like to begin the call and turn it over to Selwyn.
Selwyn Joffe: Thank you, Gary. I appreciate everyone joining us today. We were encouraged by record sales and record gross profit for the quarter and six months and solid cash flow from operating activities. The company generated approximately $15 million of cash from operating activities during the quarter. For the six-month period the company used approximately $5 million in operating activities. However, I should mention had we not intentionally decided to lower collection of receivables by $35 million as of September 30 we would have generated approximately $30 million of positive cash from operating activities for the six month period, predominantly coming in the second quarter. Using the customer supply chain vendor finance programs, we have the option to draw down on customer payments at any time which David will explain in more detail.
Industry trends remain favorable and we're seeing improving operational efficiencies with increasing sales volume. We're continuing our focus on leveraging our strengths including our solid customer relationships, highly regarded product quality industry-leading steel coverage and quality not to mention our value added merchandising and marketing support. In summary, our operating efficiency improvements along with increased overhead absorption from higher sales and production and price increases all bode well for margin expansion. Our quarterly results reflect the benefit of some price increases and we anticipate additional benefits from further price increases for the balance of the year. We're excited with our positive cash flow generation for the quarter and remain focused on neutralizing working capital as much as possible for the balance of the year.
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. As a reminder, we 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. With respect to cash flow, our expectation is to continue to generate cash. David will expand upon this in a few moments. 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 of cores on customer shelves and supply chain disruptions, operating income of 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 including core and finished goods premium amortization and share-based compensation and cash expenses to be approximately $2 million for special EV related R&D expenses that impact operating income. Depreciation and amortization are estimated to be approximately $12 million. In short for the fiscal 2024 second half, we expect to continue to enhance our gross margins across the board and enhance our cash flow. Our multi-year strategic initiatives and favorable industry dynamics bode well for the company and we are extremely well-positioned for sustainable 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 other drivers of our business to support our ability to achieve our longer-term financial targets.
We continue to experience meaningful traction, with customers and consumers with the launch of outbreak related product lines with operating efficiency improvements continuing, as volume increases and with fixed cost absorption. We've continued to expand HubSpot Sales in Mexico, with multiple product lines as our customers experienced increased demand for aftermarket products. We're receiving increasing orders and new customer interest for our test solutions and diagnostic equipment. In particular, our benchtop testers for alternators and starters from major automotive retailers and distributors to the professional installer. Major global automotive aerospace and research institutions for electric vehicle mobility, product development and design, continue to purchase our equipment and utilize, our Detroit tech center testing services.
Lastly, the AAPEX show last week was very positive and the outlook for new business remains very strong. 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 our 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 copper. I'll now turn the call over to David, to review our results in greater detail.
David Lee: Thank you, Selwyn and good morning, everyone. I encourage everyone to read the earnings press release issued this morning, as well as the 10-Q that will be filed later today. Let me first, provide key highlights for the fiscal second quarter. Net sales for the three months increased 14% to a record $196.6 million. Gross margin increased by 5.5 percentage points. Gross profit increased 35.2% to a record $41.1 million, and the company generated approximately $15 million cash from operating activities. I should mention that gross profit for the quarter was impacted by non-cash items, as well as cash items. The non-cash items 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 non-cash items in the quarter was approximately $4.7 million. A more detailed explanation of core accounting is available on our website and I would encourage anyone with questions about this topic, to review the video. Second quarter gross margin was 20.9% compared with 15.4% a year earlier. Gross margin was impacted by 2.4% from the previously mentioned non-cash items, as well as 1.6% from cash items as detailed in exhibit three of this morning's earnings press release. In summary, in addition to the non-cash and cash items explained previously, gross margin for the fiscal 2024 second quarter reflects the partial benefit of price increases, that went into effect during the current quarter and operating efficiencies as well as changes in product mix.
Operating expenses were $27.2 million compared with $24.7 million in the prior year period. This included a non-cash expense of $4.8 million, for the foreign exchange impact of lease liabilities and forward contracts, compared with a prior year non-cash expense of $1.1 million. The remaining $1.1 million of operating expense decreases, included cost reduction initiatives. Net loss for the fiscal 2024 second quarter improved to $2 million or $0.10 per share from a net loss of $6.5 million or $0.34 per share, a year ago. As detailed in exhibit one of this morning's earnings press release, non-cash items impacted results for the quarter by $8.7 million or $0.44 per share and cash items by a $2.7 million impact or $0.14 per share. In addition to the above non-cash and cash items, results for the quarter were impacted by the previously mentioned items that impacted gross margins.
As Selwyn mentioned, results are expected to benefit moving forward as the full impact of certain price increases realized combined with higher sales volumes. Results for the fiscal second quarter were impacted by $6.1 million or $0.23 per share of higher interest expenses, primarily due to higher market interest rates related to the supply chain vendor finance programs. Interest expense was $15.4 million, compared with $9.3 million for last year. We've received meaningful annualized price increases, which will contribute to a net income enhancement. Income tax benefit was $46,000 compared with an income tax benefit of $914,000 the same period a year ago. I should mention that the effective tax rate for the fiscal second quarter was affected in part, due to the inability to recognize the benefit of losses by specific foreign jurisdictions.
However, we expect that these losses will be utilized against future profits which will benefit future tax rate. In short, there are various factors impacting the tax effect. EBITDA for the second quarter was $16.3 million. EBITDA was impacted by $11.6 million of non-cash item and impacted by $3.5 million in cash items. EBITDA before the impact of non-cash and cash items, mentioned above, was $31.4 million for the second quarter. EBITDA for the prior year second quarter was $4.9 million. EBITDA was impacted by $6.7 million of non-cash items as well as $5.1 million in cash items. EBITDA before the impact of non-cash and cash items, mentioned above, was $16.7 million for the prior year second quarter. Now let me discuss the six months results.
Net sales for the fiscal 2024 six month period increased 5.9% to a record $356.3 million from $336.5 million. Gross profit for the fiscal 2024 six month period increased to a record $67.7 million from $56.8 million a year earlier. Gross margin for the fiscal 2024 six month period was 19% compared with 16.9% a year earlier. Gross margin for the fiscal 2024 six month period was impacted by $8.1 million or 2.3% of non-cash items and $5.2 million or 1.5% of cash items. Net loss for the fiscal 2024 six month period improved to $3.4 million or $0.17 per share from a net loss of $6.7 million or $0.35 per share a year ago. Results were impacted by non-cash items totaling $9.1 million or $0.47 per share and cash items totaling $4.4 million or $0.23 per share as detailed in Exhibit 2.
Results expected to benefit from various initiatives that will be realized that I discussed earlier, concerning price increases and higher sales volume. EBITDA for the fiscal 2024 six month period was $29.6 million. EBITDA was impacted by $12.2 million of non-cash items as well as $5.9 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $47.7 million for the current period. EBITDA for the prior year fiscal 2023 six month period was $15.4 million. EBITDA was impacted by $12.2 million of non-cash items as well as $8.9 million cash items. EBITDA before the impact of non-cash and cash items, mentioned above, was $36.5 million for the prior year six month period. Now we will move on to cash flow and key corporate items.
The company generated approximately $15 million of cash from operating activities during the quarter with expectations as strong operating cash flow will continue for the balance of the fiscal year. During this period, the company intentionally deferred collecting approximately $15 million of receivables offered through its customer supply chain vendor finance programs, which resulted in lowering cash flow by that amount and interest expense savings of approximately $1 million. This enabled the company to defer interest expenses until price increases for interest rates are fully recognized. Additionally, the company used this liquidity to pay down the $11.25 million balance of its term loan. Interest rates on the term loan were approximately 2-percentage points higher than rates offered by the company's customer supply chain vendor finance program.
In short, we will continue throughout the year to monitor interest expense levels and opportunities to reduce interest based on the timing of monetizing customer payments, we can elect when to be paid through the customer's supply chain vendor finance programs offered and we paid a proportional discount rate. We expect to generate an increase in operating profit on a year-over-year basis for fiscal 2024 supported by organic growth from customer demand and operating efficiencies from our now completed footprint expansion and generate positive cash flow for fiscal 2024. In addition to our goal of generating increased operating profits, we're diligently focused on opportunities to neutralize working capital growth, including customer product demand planning, enhanced inventory management and improving vendor payment terms.
Our investments are and will further bear fruit. We're gratified by the ongoing success of our expanded operations in Mexico and the growth momentum of our emerging brake categories, along with expectations of increasing financial performance from both new and existing product lines. Our net debt at the end of the quarter, excluding our convertible note, was approximately $155 million while total cash and availability was approximately $112 million. 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 would now like to open the line for questions.
Operator: Thank you. [Operator Instructions] Our first question comes from line of Matt Koranda from ROTH MKM. Please go ahead with your question.
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