Q1 2024 Motorcar Parts of America Inc Earnings Call
Yes.
Thank you for standing by my name is Brian and I will be your conference operator today at.
At this time.
I'd like to welcome everyone to the motor parts of America.
Hmm.
I would like to welcome everyone to the Motorcar parts of America fiscal 2024 first quarter conference call and webcast.
All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one thank you.
Gary Maier, Vice President Corporate Communications Investor Relations you May begin your conference.
Thank you, Brian and thanks, everyone for joining us.
Before I turn the call over to sell and Jonathan <unk>, 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 $19 95 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 comp.
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 our future anticipated future growth and opportunities with customers, who 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 our various filings with the Securities and Exchange Commission with that.
I'd like to begin our call and turn it over to Sarah Thank.
Thank you Gary I appreciate everyone joining us today.
We're still on track to achieve our year over year targets, notwithstanding the timing of orders and softness in April due to very Iranian cooler March as reported by the retailers.
We saw a strong recovery in the May June months in sales continue to be robust.
Also I may know the fiscal second quarter is off to an excellent start based on record sales for a July month industry.
Industry trends and extreme hot weather across the country support our optimism.
Equally important we are seeing improved operational efficiencies starting to materialize enhanced by increasing sales volume, particularly from our emerging brake related product lines.
Operating efficiency improvements along with increased overhead absorption from higher sales and production and price increases all bode well for margin expansion.
I might add that following the completion of the second quarter on a run rate basis, all price increases will be recognized.
We remain focused on leveraging our strengths, including our solid customer relationships highly regarded product quality range of applications and performance not to mention our value added merchandising and marketing support.
With respect to gross margins, we expect improvement this fiscal 2024 evolves, we anticipate benefits from current order volume improvement operating efficiencies and cost reduction initiatives that we continue to implement across the entire organization.
It is important to understand that product mix effects, our gross margin.
The gross profit dollar should increase from all categories as a result of our initiatives.
Also noteworthy margins on our newly launched product lines tend to be lower than mature products until we grow into our capacity and develop the efficiencies that come with time.
In addition, we are exploring potential strategic partnerships for our electric vehicle operation.
High interest rates continue to have a significant impact on profitability, primarily due to rates related to long established customer supply chain finance programs.
To offset these interest expenses, we have received price increases from our customers, which will be fully implemented this quarter.
Besides the price increases we have as we have previously discussed we are looking for ways to reduce interest expense by enhancing cash flow.
We are focused on neutralizing working capital as much as possible.
Initiatives include increase in gross profit and operating income.
Managing our inventory as a percentage of sales and implementing programs to extend days outstanding on accounts payable.
We still expect sales for fiscal 2024 to be between 720 and $740 million representing between five 4% and eight 3% year over year growth respectively.
Also we expect to see further margin accretion from efficiencies related to the higher volume and cost cutting initiatives as I noted earlier in my remarks.
With respect to cash flow our expectation is to continue to make progress to generate cash David will expand upon this in a few minutes.
Regarding year end guidance, we expect operating income before the impact of the noncash and cash items and before depreciation and amortization to be between 90 and $95 million.
To provide more details before the noncash foreign exchange impact of lease liabilities and forward contracts the noncash impact of revaluation of cores on customer shelves and supply chain disruptions operating income for fiscal 2024 is expected to be between 60 and $65 million.
We estimate other noncash items will be approximately $16 million, which include core and finished goods premium amortization and share based compensation.
And cash expenses are expected to be approximately $2 million for specialty EV related research and development expenses, which impact operating income.
Depreciation and amortization I estimated to be approximately $12 million.
In short as fiscal 2024 evolves, we expect our gross margins across the board.
The increase in enhanced cash flow.
Our multi year strategic initiatives and favorable industry dynamics bode well for the company and we are extremely well positioned for sustained top and bottom line growth and our hard parts business as well as testing solutions.
Now, let me expand a bit further and provide some updates to the other drivers of our business to support our ability to achieve our long term.
Financial targets.
We continue to experience meaningful traction with customers and consumers with the launch of our brake related product lines with operating efficiency improvements continuing as volume increases and with the fixed cost absorption.
We are continuing to expand hotspot sales in Mexico with multiple product lines as our customers experienced increased demand for aftermarket parts.
We are receiving increasing orders and new customer interest for our test solutions and diagnostic equipment.
In particular, our best Subtest is alternators and starters for major automotive retailers and distributors to the professional installers.
Major global automotive aerospace and reshaped institutions electric vehicle mobility product development and design continue to purchase our equipment and or utilize our Detroit Tech center for testing services.
In short, we continue to be well positioned to address both the internal combustion engine markets 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 internal combustion engine applications and a broad broad line of non discretionary aftermarket parts will be here for decades now.
Notwithstanding electric vehicle growth, which still represents a small percentage of the overall car park.
I'll now turn the call over to David to review our results in greater detail.
Thank you sell it and good morning, everyone.
Chris everyone to read the earnings press release issued this morning as well as the 10-Q that will be filed later today.
Let me now provide a review of our fiscal first quarter financial results.
Net sales for the fiscal 'twenty for first quarter were $159 7 million compared with 164 million in the prior year, primarily reflecting timing of orders.
Gross profit for the fiscal 'twenty first quarter was $26 6 million compared with $30 3 million a year earlier.
Gross profit for the quarter was impacted by noncash items as well as cash items.
Let me provide details for each and then I will provide further details on the impact on each additional line item.
You can further understand the underlying fundamentals between periods and the opportunities to enhance profitability.
The noncash items reflect core and finished good premium amortization.
And revaluation of cores on customer shelf, which are unique to certain of our products and required by GAAP.
The total for these noncash items in the quarter was approximately $3 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 redeem the video.
First quarter gross margin was 16, 6% compared with 18, 5% a year earlier.
Gross margin was impacted by two 2% from the previously mentioned noncash items.
As far as 1% non cash items.
In summary in addition to the noncash and cash items explained previously gross margin for the fiscal year 'twenty for first quarter were impacted by.
Inflationary cost not yet covered by price increases.
Higher per unit costs, resulting from less absorption of overhead costs due to lower production volume.
Higher return as a percent of your sales and changes in product mix.
Let me emphasize that price increases will enhance gross margin.
Furthermore, gross margins will be helped by higher sales volume, which we are experiencing and that will increase over the abduction lowered our returns as a percentage of sales and further enhance operating efficiencies.
Operating expenses were down $6 8 million for the quarter to $16 1 million from $23 million in the prior year period.
This included a noncash gain of $4 3 million for the foreign exchange impact of lease liabilities and Florida contract.
Compared with the prior year, a noncash loss of 678000.
Remaining $1 9 million of operating expense decreases included cost reduction initiatives.
We reported a net loss of $1 1 million or <unk> 10 per share.
As detailed in exhibit one of this morning's earnings press release.
Noncash items impacted results by 461000, or <unk> <unk> per share cash items reflects a $1 7 million impact or nine cents per share.
In addition to the above noncash and cash items results for the quarter were impacted by the previously mentioned items that impacted gross margins.
Results are expected to be enhanced moving forward as the full benefit of certain price increases realized and with higher sales volumes throughout fiscal 'twenty four.
We continue to implement cost reduction initiatives throughout the company, including travel outside services labor costs, and overall cost saving initiatives and opportunities.
All of which are expected to further enhance profitability.
Results for the fiscal first quarter were impacted by $4 8 million or <unk> 18 per share of higher interest expenses, primarily due to higher market interest rates.
Interest expense was $11 7 million compared with $6 9 million for last year.
We have received meaningful annualized price increases, which will contribute to net income enhancement.
Income tax benefit was <unk> 9000, compared with income tax expense of 589000 for the same period a year ago.
Shouldnt mentioned that the effective tax rate for the fiscal first quarter was affected in part due to the inability to recognize the benefit of losses at specific foreign jurisdictions. However, we expect these assets will be utilized against future profits, which will benefit future tax rates and short there are various factors impact.
The tax effect.
EBITDA for the first quarter was $13 3 million EBITDA was impacted by 615000 of noncash items and impacted by $2 3 million in cash items.
EBITDA before the impact of noncash and cash items mentioned above.
Was $16 3 million for the first quarter.
In addition to the above noncash and cash items EBITDA for the first quarter was impacted by the items impacting gross margin previously explained.
In summary, further EBITDA improvements for fiscal 'twenty four as expected as the full benefit of certain price increases is realized and with higher sales volume. In addition to cost reduction initiatives.
Now, we will move on to cash flow and key corporate items.
Notwithstanding the use of cash.
For the quarter of $20 5 million to support operating activities.
The company expects a positive reversal in the fiscal second quarter.
As we noted in our press release. This morning, we strategically elected to lower collections of receivables by approximately $20 million paid through our customer offer and it supply chain finance programs during the fiscal first quarter.
This resulted in interest savings of approximately $1 3 million and enabled us to defer interest expenses until price increases for interest rates are recognized.
I should emphasize that the company's strong liquidity allowed us to execute this strategy and additionally, subsequent to quarter end pay down the company's 11, two 5 million term loan.
Interest rates on the term loan were approximately 2% higher than rates offered by the company to customer supply chain vendor finance programs.
Sure. We will continue throughout the year to monitor interest expense level and opportunities to reduce interest based on the timing of monetizing customer payments.
The terms are 360 days for the customers and we can elect when to be paid through the customer supply chain and vendor finance programs offered and we pay the proportional discount rate.
We expect to generate an increase in operating profit on a year over year basis for fiscal 'twenty four supported by organic growth from customer demand and operating efficiencies from our now completed footprint expansion and generate positive cash flows for fiscal 'twenty four.
In addition to our goal of generating increased operating profit we are diligently focused on opportunities to neutralize working capital growth include.
Including customer product demand planning.
<unk> inventory management and improving vendor payment terms.
Our investments are and will further their food and 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 on both new and existing product lines.
Our net debt at the end of the quarter. Excluding a convertible note was approximately $168 million, while total cash and availability under our revolving credit facility was approximately $76 million after certain contractual adjustments.
Lastly, we recently entered into a seventh amendment to our credit facility, including paying down the outstanding balance of our term loan and eliminating the senior leverage ratio covenant as of June 32023.
Our liquidity after paying down the term loan remains strong and north of $75 million.
For further explanation on our reconciliation of items that impacted results.
And non-GAAP financial measures. Please refer to exhibits one through three in this morning's earnings press release.
I would now like to open the line for questions.
Yes.
At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Matthew Coronado from Ross Your.
Your line is open.
Hey, guys.
Good morning, I guess.
So just I'll start with a traditional question, which is for David can.
Can you get the product breakdown within the quarter between rotating electrical wheel hubs in brake products.
Yes, not for the first quarter of rotating electrical was 64% of sale.
Brakes were 22% greatly impacts were 22% will have the 11% and others were <unk>, 3%.
Okay. So 64.
Sorry, I'm trying to do this on the fly here 64, what was wheel hub.
I love it.
Yes.
And then break hub or sorry break brick products.
22% just wanted to got.
Got it okay. Other three.
It seems like the bulk of the declines.
In the quarter comes from last call and.
And we'll have at least sequentially and then on a year over year basis, if we look at that.
It looks like we'll have it a little bit weak, maybe just speak to the trends you saw during the quarter.
And sort of why the shortfall there.
Yes.
Just again, when you have rainy weather and cooler weather.
The retailers reported in March they were planning on replenishment on those items slows down in the following months I'd say April slowed down in those items, but.
We see a resurgence of that.
I will say along with that math is we've got significant momentum in our brake related products.
So that will continue to grow.
We do expect rotating electrical to continue to grow as well, but we had a little bit of a softness going into into the first quarter.
Now also hot weather.
You should see rotating electrical sales.
Extreme hot weather, so that should be.
Driver going forward.
I will say just on the on the margin.
Our perspective is.
The margin pressure is not.
On the legacy products and the margin pressure is just because of new and emerging product lines that are coming up and as those volumes get better I mean, we're already starting to see.
<unk> and operating efficiencies in those in those product lines, so and those those product lines are getting more and more momentum so.
And we expect a very strong back nine months.
And I think I reiterated the guidance.
That we that we have I think a lot of this is just a little bit of timing that the <unk>.
Sales, a little lower than what you expected.
But we expect to be ahead of your numbers for the year.
Okay, maybe in that vein and you mentioned the hotter weather selling more more recently.
Could you speak to July quarter trends and just the visibility that gives you and.
<unk> growth and how we should be thinking about the front quarter here in terms of top line growth.
Yes, I mean, the July is off to a rent July with all time record July for us.
And probably one of the highest months ever.
So we were off to a very strong side with really good visibility for the rest of the quarter.
Along with good good cash flow metrics, I mean, we were able to pay down our debt to maintain.
Our antenna availability so a lot of that was paid off with with.
Just.
Collections.
And so.
It eliminates one covenant so I think overall.
Internally, we're feeling very positive about the outlook for the next nine months.
Yes.
Okay.
Any thoughts on seasonality you reiterated the full year guide. So it does require a pretty good pickup in growth. So maybe just speak to and level set folks on.
As expected during the year.
I think thats a great question I mean, I think again I think the second quarter's going to be real strong.
As everyone's expecting.
Suddenly expecting that.
We probably expect your third quarter numbers.
We think the third quarter will be a little higher than what's expected right now in the first quarter is always fit for us.
Within the back nine months should be very strong.
Lots of work to be done and lots of variables out there, but the indications are.
The remaining nine months should be very very strong for us.
Okay, and then just maybe one more on <unk>.
Pricing environment, you talked about pricing for the factoring expense is all of that been put into effect as of now what was the last round of price increases that you did.
Factor and.
No pun intended.
You got on the interest expense line, yes. So most of it has been put into effect.
Now there's still a.
Sure.
$3 million to $4 million of price increases.
There will be an effect soon very soon.
Next couple of weeks.
Okay. Okay.
Got it.
And then you mentioned the drag on gross margin is most likely.
<unk> to sort of the brake products ramp up.
Sure.
What do you think the differential is there.
And gross margin between brake products versus the core rotating electrical and wheel hubs.
Product lines that you have.
And when do we get to like a normalized.
Data being here can we do it this year or is it more likely next year.
Yes, we cant give you unfortunately granular data on.
The actual margins but.
The only thing I would tell you is that those margins continue to increase and they're all a positive.
And so each quarter, we are seeing sequential.
Improvement overall in a lot of it is in our overall absorption of we have now consolidated freight where things are combined.
There is some consolidated in our operations and so it's very difficult to give you that number we don't report by product line, but.
I think the important thing for people to understand is that.
Core margins are intact on the coal business is intact.
We expect that to continue to grow even though sometimes these fluctuations and some softness in rotating electrical that it will continue to grow and the other businesses are growing in all the brake related business is growing disproportionately it's brand new so when you see that growth.
And so that affect overall margins that incremental gross profit contribution.
Should continue to go up from from all of Us and so.
So.
I think it's important that people understand that.
Okay fair enough.
I guess I lied one more.
Cash management and working capital.
And maybe just speak to where should inventory balance our days on hand be for the remainder of the year I know last year. It peaked in Q1, and then kind of came down slowly on the inventory balance is that the same sort of seasonality. We should expect this year and then on <unk>.
It continues to tick up.
There a point at which we just.
The collection button.
<unk>.
On some of the receivables.
That balance drops or should we continue to expect.
Dsos to kind of tick higher for the rest of the year.
Yeah, no. So I'll address the receivables I'll give david the hardware, which is inventory the receivables we have the option of.
Generally no.
Retail days outstanding of 30, 30 days because of the factory.
So the receivables ticked up.
There is only directly related to one of two things.
Sales are growing and the timing of sales of the timing of sales for our first quarter. This one we are reporting on.
Very strong as we got through the quarter, So youll see receivables going up and we elected not to collect 2020 plus million dollars of cash because we could save interest expense.
Yes.
We expect receivable I mean again, we expect to as these prices go where not to defer receivable collections, which was that's not enough.
What we wanted to do I mean, we are always looking at minimizing interest but.
The last three quarters of this year.
But to be very strong and so I think youll start seeing a normalized receivable balances will get through the end of this quarter.
And Thats.
Again, I think days outstanding now I will also mention that while we don't sell.
Receivables to the professional installer market doesn't have that program and we continue to grow pretty significantly there. So those receivables days outstanding or a little bit longer but there is no. There is no interest rate external interest rates.
That number also effects.
Affects the day's outstanding on the receivables.
We've had some success really.
No.
Significant success in the rotors and pads business as well continues to grow pretty significantly but <unk>.
Parts of that business, both all of our businesses growing I'm happy to say that and so I think overall there are a lot of mumbo jumbo I'm gone through yet, but I'm thinking of La <unk>.
Overall, I would say that receivables should stabilize as we get to the end of this quarter because.
The remaining three quarters, all will be strong should be strong.
Okay.
David.
Alright, well.
Well. Thank you Alan Thank you for that question.
Yes.
You'll recall, we increased inventory for three reasons and to support the demand in the business address supply chain disruptions and support the expansion of our brake related products.
The increased demand for all of our product lines.
So going forward youre going to see that inventory as a percentage of sale is coming down so as our sales momentum keeps growing that inventory as a percentage of that growth will be coming down.
Okay, Great I'll take the model thanks, guys. Thanks.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
There are no further questions at this time.
Selwyn Jaffe I turn the call back over to you.
In summary, we are excited about the quarters ahead.
I mentioned supported by strong demand for replacement parts and aging car park, as well and opportunities for multiple replacements as cost stay on the road longer.
Equally relevant is the miles driven growth rate for the first six months of 2023, which was two 3% industry observers expect that we will surpass the prepaid debit growth rate of one 6% reached in the 2017 in 2019 three year period.
In short we have built built in solid platform for growth and are non discretionary aftermarket products are a critical need for our customers and consumers.
And in closing I am.
Just recognize the contributed contributions of all of our team members, who are focused everyday 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 for this call. We look forward to speaking with you when we host our fiscal 2024 second quarter call in November and at future Investor conferences. Thank you.
Okay.
This concludes today's conference call you may now disconnect.
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