Q3 2024 Motorcar Parts of America Inc Earnings Call
Participants
Gary Maier; Vice President - Corporate Communications and Investor Relations; Motorcar Parts of America Inc
Selwyn Joffe; Chairman, President, & CEO; Motorcar Parts of America Inc
David Lee; Chief Financial Officer; Motorcar Parts of America Inc
Mike Zabran; Analyst; ROTH Capital Partners, LLC
Matt Dhane; Analyst; Tieton Capital Management LLC
Presentation
Operator
Yes, good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America third quarter 2024 webcast and conference call. (Operator Instructions) Thank you. Gary Maier, Vice President of Communications and Investor Relations, you may begin your conference.
Gary Maier
Thanks, Rob, and thanks, everyone, for joining us for our call. Before we begin and 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. 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. And 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 and particularly expectation, spending, 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 Securities and Exchange Commission filed. With that, I'd like to begin the call and turn it over to Selwyn.
Selwyn Joffe
Thank you, Gary. I appreciate everyone joining us today. We are encouraged by our operating results for the quarter, including strong sales performance, increased gross margins, increased EBITDA, and significant positive cash flow and a revolver paydown of $50 million to $102.8 million of net debt. While some of this cash flow resulting from deferred collection catch-up in the quarter, for the nine months, we generated $48.4 million in positive cash. I might add that these results were particularly impressive considering the industry softness in November and December. Recent extreme weather conditions throughout the country should help bolster this industry sales softness in future quarters. We were also pleased that gross profit for the quarter and nine months increased substantially gross margins continued to improve and benefit from better operating efficiencies as anticipated, particularly from increased overhead absorption with higher sales and production in NeuroCare product category.
I should also add that price increases in effect, but not yet realized will contribute an additional $10 million in annualized sales and gross profit and EBITDA, we remain focused on three key initiatives. Sales profitability and neutralize working capital. We are confident that our sales and profitability will grow organically and through market show share gains in all of our product lines, increased profitability, along with our working capital initiatives will further enhance cash flow generation.
With regard to working capital, we continue to focus on the balance sheet, including extending vendor payment terms. This initiative is being supported by the launch of our vendor finance program offer to our suppliers. This enables us to extend our payment terms while facilitating a program for our suppliers to have early access to capital, and we expect to increase the number of days outstanding for accounts payable, which will result in additional cash generation while in its early stages. This program is progressing nicely and will gain increased traction in the months ahead. I should note that the effects of this program are not yet reflected in our results and will provide additional upside to cash flow generation. From a strategic standpoint, we are continuing to leverage our strengths, including great products manufactured in state-of-the-art facilities, solid customer relationships, industry-leading Stu coverage, not to mention our value added merchandising and marketing support. We are continuing to expand our parts sales in Mexico with opportunities to further expand in other Latin American countries with multiple product lines as our customers experienced increased demand for aftermarket parts. The rate of growth is exciting, and we are well positioned to utilize our footprint to meet the growing demand for our nondiscretionary aftermarket aftermarket parts. Our test solutions and diagnostic equipment. In particular, our industry leading JVT. one benchtop testers for alternators. Starters used by major automotive retailers and professional installers continues to grow significantly. We believe the market opportunity for additional growth in the US is approximately [$110 billion], and we are well on our way favorable industry dynamics continue to 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 the testing solutions.
Let me take a moment to further discuss our near-term initiatives to support our long-term growth and profitability plan. A near term plan is in motion as we expect to achieve significant growth in all of our product lines. Including our quality built brand that continues to gain significant market share within the professional market. This includes the most recent additions to our portfolio of brake calipers pads and roads, operating efficiency, improved efficiency improvements are continuing as volume increases. Overall, this growth is supported by investments, especially the Company's global footprint expansion in Mexico, backed by our well trained and seasoned team of professional employees. Also, we have expanded our Malaysian operation to add capacity and additional capabilities to support customers who recently opened the new state of the art will have manufacturing facility in Malaysia, enabling us to ship product directly to our customers. Congratulations that spectacular operating team, especially to those in Singapore and Malaysia.
Our business growth is strategic, and we are focused on generating solid cash flow and profitability. Strong cash generation will enable us the flexibility to further pay down debt and pursue other related opportunities to enhance shareholder value and conclusion, nondiscretionary aftermarket parts for the internal combustion engine market will be here for decades and outlook, supported by recently updated industry data showing that the average age of vehicle is 12.5 years. It is worth highlighting that the population of vehicles operating with internal combustion engines versus EVs represents approximately 98.3% of all vehicles on the road. One of our key competitive advantages is our ability to offer a broad range of application for all makes and models. We remain focused on newer model applications and our ability to meet expected demand as these vehicles enter that are in place. As you probably know, the emerging electric vehicle market is still quite small relative to the overall car park population recent news articles regarding EV range, particularly in cold regions of the country contribute to consumer hesitancy hesitancy to plug-in, but as technology improves and these types of issues are addressed, we expect to continue to benefit in both markets with product functionality and applications across both EV and ICE application. While I am disappointed in the tax valuation allowance, I want to emphasize that it has no bearing on any operating metrics, cash flow, tax liability or any economics of the company, it is simply required by GAAP.
Finally, we recently announced change to our sales team, Jamie Cook has been promoted to Senior Vice President of Sales and Marketing. She is succeeding Rick Mochulsky, who will transition to a new role as Senior Vice President of Business Development. Jamie and Rick have worked closely together at MPA for many years. Jamie is recognized throughout the automotive aftermarket. She is an exceptional leader with the added benefit of being a role model for women's women seeking to advance in the industry. Rick will remain an important member of our team in his new role helping to drive demand for all of our products, both from existing and new retail and professional customers. I'll now turn the call over to David to review our results in greater detail.
David Lee
Thank you, Phil, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning as well as the 10-Q that we'll file later today.
Let me first provide key highlights for the fiscal third quarter net sales increased 13.2% to $171.9 million. Gross margin improved by 3.7 percentage points. Gross profit increased 43.1% to $30 million. Operating income increased 170.1% to $9.5 million, and the company generated cash of approximately $53.6 million. I should mention that gross profit for the quarter was impacted by noncash 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 $4.4 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. Third quarter gross margin was 17.5% compared with 13.8% a year earlier. Gross margin was impacted by 2.6% from the previously mentioned non-cash items as well as 0.9% 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 24th third quarter reflects the partial benefit of price increases that went into effect during the current quarter and operating efficiencies. Additionally, we have meaningful annualized price increases that started in the current fourth quarter, which will further contribute to gross margin enhancements.
Operating expenses were $20.5 million compared with $17.5 million in the prior year period. This included a non-cash gain of $3.1 million for the foreign exchange impact of lease liabilities and forward contracts compared with the prior year non-cash gain of $4.3 million. The remaining $1.9 million of operating expense increases included employee related expenses.
Operating income for the third quarter increased 170.1% to $9.5 million from $3.5 million the prior year. Results for the fiscal third quarter were impacted by $6.8 million or $0.26 per share of higher interest expenses, primarily due to higher market interest rates and higher utilization of the accounts receivable discount programs due to higher sales. Interest expense was $18.3 million compared to $11.5 million for last year, which is primarily related to our customers' accounts receivable discount programs. We are working diligently to address the higher interest environment, particularly areas that we can control. For example, among other initiatives, we are focused on neutralizing working capital to generate positive cash flow to pay down debt as evidenced by our year-to-date results. In addition, we continue to work with our customers and mitigate higher interest rate due primarily to a $37.5 million US federal and state deferred tax asset valuation allowance under US GAAP recorded during the fiscal 2014 third quarter income tax expense was $37.3 million compared with an income tax benefit of $9 million for the same period a year ago. Let me emphasize that this tax valuation allowance is required by GAAP and is noncash and does that impact any operating metrics due primarily to $40.4 million of non-cash items, including a $37.5 million US federal and state deferred tax asset valuation allowance under US GAAP noted previously we reported a net loss for the fiscal 2014 third quarter of $47.2 million, or $2.40 per share compared with net income of $1 million or $0.05 per diluted share a year ago. To reemphasize. This accounting item is noncash and does not impact any operating metrics. The details of the non-cash and cash items impacting results are in Exhibit 1 of this morning's earnings press release. As I mentioned previously, we experienced a 13.2% sales increase despite industry softness in November and December, which has higher expected sales volume moving forward and the full impact of certain price increases already in effect, it's also expected to further improve. As Selwyn mentioned, I should also add that price increases in effect will contribute an additional $10 million in annualized sales.
Gross profit and EBITDA. EBITDA for the fiscal third quarter was $11.2 million. EBITDA was impacted by $3.9 million of noncash items and impacted by $1.9 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $17 million for the third quarter. EBITDA for the prior year's fiscal third quarter was $6.6 million. EBITDA was impacted by$646,000 of non-cash items as well as $3.8 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $11 million for the prior year third quarter.
Now let me discuss the nine months results. Net sales for the fiscal '24 nine month period increased 8.2% to a record $528.2 million from $488.3 million. Gross profit for the fiscal '24 nine months period increased 25.6% to $97.8 million from $77.8 million a year earlier. Gross margin for the fiscal '24 nine month period was 18.5% compared with 15.9% a year earlier.
Gross margin for the fiscal '24 nine month period was impacted by $12.6 million or 2.4% of non-cash items and $6.7 million or 1.3% of cash items. Operating income for the nine month period increase 166.7% is $33.9 million from $12.7 million in the prior year. Results for the nine months were impacted by $17.7 million or $0.68 per share of higher interest expenses, primarily due to higher market interest rates and higher utilization. Our customer accounts receivable discount programs due to higher sales. Interest expense was $45.4 million compared with $27.7 million last year. As I previously noted, we are working diligently to address the higher interest environment, particularly areas that we can control due primarily to $49.5 million of non-cash items, including a $37.5 million US federal and state deferred tax asset valuation allowance under US GAAP.
We reported a net loss for the fiscal '24 nine month period of $50.6 million or $2.58 per share compared with a net loss of $5.7 million or $0.29 per share a year ago. Once again, this accounting item is non-cash and does not impact any operating metrics. The details of the noncash and cash items impacting results on Exhibit 2 of this morning's earnings press release, results are expected to improve from various initiatives that will be realized, as I discussed earlier, concerning price increases in effect and higher sales volume. EBITDA for the fiscal 20 for nine month period was $40.9 million. EBITDA was impacted by $16 million of non-cash items as well as $7.7 million in cash rents. EBITDA before the impact of non-cash and cash items mentioned above was $64.7 million for the current period. EBITDA for the prior year fiscal '23 and nine month period was $22 million. EBITDA was impacted by $12.9 million of non-cash items was 12.6 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $47.5 million for the prior year nine month period.
Now we move on to cash flow and key corporate items. The Company generated approximately $53.6 million of cash from operating activities during the quarter, including accounts receivable catch-up from the prior quarter and approximately $48.4 million of cash from operating activities for the nine month period, which is not impacted by any accounts receivable deferrals. During the nine month period, the company reduced net bank debt by $43.7 million to $102.8 million from $146.5 million. We expect to generate an increase in operating profit on a year-over-year basis for fiscal 24, supported by organic growth from customer demand and operating efficiencies from a now completed footprint expansion and generate positive cash flow for fiscal '24 in addition to our goal of generating increased operating profits, we are diligently focused on opportunities to neutralize working capital growth, including customer and product demand planning, enhanced inventory management and improving vendor payment terms, our investments are bearing fruit. We are gratified by the ongoing success of our expanded operations in Mexico and the growth and 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 $102.8 million, while total cash availability was approximately $126.3 million. For further explanation on the reconciliation of items that impacted results and non-GAAP financial measures, please refer to Exhibit 1 through five in this morning's earnings press release. I would now like to open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Matt Koranda, ROTH MKM.
Mike Zabran
Hey, guys, this is Mike Zabran on for Matt. Can we just start on like usual the breakdown of product revenue by mix?
David Lee
Yes, so for the third quarter, rotating electrical was 65% freight related products with 21%, wheel harvest was 11%, and others was 3%.
Mike Zabran
Got it. Helpful. So the release and the call, you talked about a slowdown in November and December. Maybe just elaborate a little bit further on what exactly happened and what's our sense for why demand was weak in those months?
Selwyn Joffe
Well, we started off the quarter with a great October. And I think a lot of the professional installer base got soft. I think we had some pretty mild weather. I mean, and again, I know, it's very hard for me to really put an accurate finger on the pulse as to why things softened up. The fundamental metrics remain good, but we have seen that now that there was some extreme weather on mostly in the west and the east part of the country on we've seen a pickup. So while it's hard to predict, I mean, we are maintaining our guidance for the year and we we are a we're optimistic should come back. I mean, I just don't know. I wish I could give you an exact XYZ explanation as to why and this happens is the other issue that we have is that and I don't know if this is a fact or not, but sometimes it's our customers' fiscal or calendar year ends and maybe they're managing their working capital levels. So that could have an effect as well. But really, I think the fundamentals for November December on a macro level across the industry across the base. I think it definitely was a little softer out there in particular. I mean, I can only refer to our products, but we think that just number of vehicles in footprint and Research Solutions showed a little bit softer.
Mike Zabran
Got it. Okay. And so when you said we are sticking with the guidance through the end of the year?
Selwyn Joffe
Yeah. So we've had a strong start to this quarter, and we'll see as we come towards spring, we're optimistic still about about demand. We're busy and yeah, we're sticking to our guidance.
Mike Zabran
Got it. Okay. Maybe just help level set us on how much pricing has been put through as of today? And we talked about it a little bit on the call. But just to further elaborate on how much pricing has been put through today, should we expect to keep continuing to take price? And then and I'll have a follow-up as well, but maybe let's just start there.
Selwyn Joffe
Yeah, it's becoming harder and harder to quantify on how much is put through and how much isn't put through I mean, we put a significant amount through this $10 million of annualized pricing that's already in the existing price increases. It hasn't been reflected in the numbers that will start in this quarter and we expect to mitigate inflationary costs and hopefully, including interest, you know, in pricing strategies. And we also as we pick up volume, we become more operationally efficient and we've got a lot of initiatives on continuous improvement that continue to drive profitability. So across-the-board, I mean, our biggest challenge today, you know, is mitigating the interest expense and interest expense is due. The vast majority is due to more success with sales. And with the new loan agreement that we have, we're able to collect that cash. And then you can see our operating metrics, we paid down over $40 million in debt for the nine months. I think the quarter a little disproportionate because of some of the deferrals, but the nine months is not. And so we I think everyone is aware of the interest rates and we expect to mitigate it.
Mike Zabran
Got it, makes sense. And so then the price increases that we started in the fourth quarter. I guess, when do those fully filtered through? Do we have a sense for that?
Selwyn Joffe
Yeah. So they started in the fourth quarter just assume in a middle middle to late fourth quarter, but they've held through going forward on an annualized basis. All those there's another [$10 million] that will be over and above what we've already got in the numbers for the next 12 months.
Mike Zabran
Got it. Okay. So those start filtering through a seamless (technical difficulty).
Selwyn Joffe
That's right.
Mike Zabran
Okay. And I kind of makes sense on the last one for me, the tax valuation allowance. So I understand it was required by GAAP and non-cash expense. You made that very clear. But maybe just why why exactly did we have to recognize that allowance on and help us get a better sense for that.
Selwyn Joffe
Yeah. So the I guess the first thing, let me just sort of back up and say it's those assets remain on our balance sheet, and we're optimistic that we're going to be able to use those assets. And as we get more GAAP income, we'll be able to reverse it and those will take some time. But assuming the Company performs, which we expect to will reverse and that doesn't affect our tax liability, it doesn't affect cash doesn't affect anything. And the real the trigger is that we had a higher expectation for results in the third quarter this past quarter that we're reporting on and we had a soft two months out of the three months and we had to revise our we had to we did revise our forecast internal forecast down and that results in a in a taxable loss in the US entities.
And so we have put a reserve on the tax asset and it's unfortunate, I hate it, but it's the rules on and that's what's happened. And again, while the optics of it and the rules are the rules I'm in no way affects us other than what the perception is out there. No way affects us in terms of anything that we're doing right now. And our focus continues to drive to drive, you know, GAAP income and all income. And so as that reverses those assets, that valuation will come out of the assets.
Mike Zabran
Got it. Thanks. That's all for me.
David Lee
Thank you.
Selwyn Joffe
Thank you very much.
Operator
Matt Dhane, Tieton Capital Management.
Matt Dhane
Great. Thank you. I wanted to ask about the new Malaysian facility that you referenced in the call. I was hoping you could walk through some of the benefits that you expect from that. I just wasn't certain if you're just expanding capacity or there's other benefits or just help me understand that.
Selwyn Joffe
Yeah. So that's a great question because it's very exciting for us. What we did there is we opened the we've been in Malaysia. I wish I knew the exact number of years and then probably over three decades, and we've been able to continue to grow the old facility. What we've done is we've created a brand new state of the art facility, which allows us now to meet all the tests to ship our customers direct direct from Malaysia to our customer. So it will never be touched yet. So we'll hubs through new wheel hub program, which we in Otis in light of what we've been doing. The same thing now as more capacity to go direct with storage for that inventory staging areas for that inventory. And we ship directly to our customers around the world, but in particular in the United States. And that's a that's a big deal because our competitors are Chinese-based and that are subject to tariffs and our customers by large orders of this. And so I want to take ship direct programs and we think that can open up some big opportunities going forward. I think short term, you'll see a little bit of a dip in that in that product line. And then in the next six months, we should see some extreme. I think we'll see some extreme gains in that product line. So very exciting. And it's a fabulous plant already had a major customer visits and was extremely impressed with it. I mean, and that's all in the CapEx to pay for and done.
Matt Dhane
Okay. So you expect this plant and the cost efficiency of shipping directly to the California-based retailer can lead to some substantial revenue gains as you gain share from your Chinese competitors. Is that what I believe I heard you say more or less?
Selwyn Joffe
Yeah, I think we'll see margin gain and share gain in time.
Matt Dhane
Great. Glad to hear. I also did want to ask about the quality build product line referenced that very briefly in the Caldwell. Just curious the traction that you are seeing with that product line, how is that relative to your expectations?
Selwyn Joffe
Well, we have high expectations, I'll start there some of those answered relative I every time I get results from how we do my expectations grow. But I mean, we're growing that. We've had over 40% growth rates in that product line and that product and branding name and it's becoming and nationally recognized brand. And I'm extremely excited about how that's unfolding where we were adding many new customers to that the brake line and our quality built name. And we're just getting more and more demand for quality built. And so that brand value in that brand equity. We're excited about that the other side of that is there's no there's no factoring costs. There's no supply supply chain cost of launching and growing that business, so that's also encouraging to us.
Matt Dhane
Okay. Good to know. I appreciate it.
Selwyn Joffe
Thank you.
David Lee
Thank you.
Operator
And there are no further questions at this time. I will now turn the call back over to Selwyn Joffe for some final closing remarks.
Selwyn Joffe
Okay. Thank you. So just in summary, we're excited about year-to-date accomplishments and our outlook. In particular, our strong cash flow, a paydown of debt. We expect the further benefit of additional price increases and the opportunities to further enhance shareholder value. We're encouraged by our leadership position in the industry and that solid customer partnerships. We've built a platform for growth that is not easily duplicated. And we expect this growth to continue on in the future, especially as the demand for our nondiscretionary aftermarket products. And so the critical need of the consumers faster on the road population continues to grow and the nondiscretionary parts will be there that may be temporary ups and downs. But long term, this medium term, the near term, the demand will be there.
In closing, I must recognize 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 in the future.
We appreciate your continued support, and we thank you again for joining us the call on the call, and we look forward to speaking with you when we host our fiscal 2024 year-end conference call in June and at the various investor conferences in the interim. Thank you.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.
