Q3 2025 Motorcar Parts of America Inc Earnings Call

In This Article: Participants Gary Maier; Vice President - Corporate Communications and Investor Relations; Motorcar Parts of America Inc Selwyn Joffe; Chairman of the Board, President, Chief Executive Officer; Motorcar Parts of America Inc David Lee; Chief Financial Officer; Motorcar Parts of America Inc Derek Soderberg; Analyst; Cantor Fitzgerald & Co. William Dezellem; Analyst; Tieton Capital Management Presentation Operator Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Motorcar Parts of America, Inc. Fiscal 2025 Third Quarter Conference Call and Webcast. (Operator Instructions) I would now like to turn the conference over to Gary Maier, Vice President, Corporate Communications and Investor Relations at Motorcar Parts of America.



Please go ahead. Gary Maier Thank you, Regina, and thanks, everyone, for joining us for our call this morning. Before I begin, I turn the call over to Selwyn Joffe, 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.

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 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 SEC filings. 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 certainly encouraged by our record sales, gross margin improvement and solid cash flow generation for the fiscal '25 third quarter.

Our initiatives to enhance profitability are gaining traction. Our team continues to be focused on continuous improvements, and we are excited by the opportunities for the balance of fiscal 2025 and beyond. We generated approximately $34.

4 million of cash from operating activities during the fiscal third quarter, primarily due to strong operating profits. We remain focused on initiatives to enhance profitability, including gross margin expansion and neutralizing working capital, which should continue to result in strong cash flow generation. With regard to our balance sheet, our positive cash flow and related initiatives enabled us to reduce net debt by $30.

3 million for the fiscal third quarter, resulting in a 26% reduction to $84 million from $114 million. In addition, as highlighted in our earnings press release this morning, we repurchased 268,130 shares for $2.1 million at an average price of $7.

82 under our current repurchase authorization program. We anticipate further opportunities to enhance shareholder value through strong cash generation and the neutralization of working capital. I should mention that rotating electrical, a 50-plus year old flagship category continues to generate solid performance, and we expect further opportunities to add retail and traditional customers despite some recent market softness.

As I've mentioned many times, the replacement of alternators and starters cannot be deferred. If these products are broken, your car is not drivable. And the aging car park remains a favorable tailwind with multiple replacement opportunities for the life of vehicles.

We are also particularly excited by the continued success of our emerging and second largest category, brake-related products. We expect continued success in this category based on our quality, customer service and capacity to meet demand, and we anticipate strong demand as we enter the important spring repair season. Equally important, these accelerating brake-related product sales support purchasing and production efficiencies, which contribute to gross margin improvement.

Our team is doing an exceptional job to further enhance performance metrics, and we look forward to continued sales growth for this important nondiscretionary product category. As I've previously mentioned and as referenced in the exhibits to our earnings release, there are various factors relating to our financial performance that are noncash and beyond our control, particularly the current sharply unfavorable noncash mark-to-market foreign exchange loss from Mexican lease liabilities and forward contracts. A strengthening dollar versus the peso results in large noncash mark-to-market expenses, which we internally eliminate when evaluating our underlying results.

We are continuing to look at opportunities to minimize these noncash expenses, including funding our Mexico operations with pesos from sales in Mexico. As our sales in Mexico continue to grow, we will purchase fewer forward contracts to meet our peso obligations, which will lessen the impact of noncash foreign exchange expense fluctuations. Obviously, interest rates, particularly applicable to vendor finance programs utilized by our customers, are a headwind.

On a positive note, interest rates have decreased. If this trend continues, this should benefit profitability. Utilizing our low-cost global footprint will facilitate further operating efficiencies.

We are actively implementing additional initiatives to further enhance gross margins. Let me take a moment to highlight a few key near-term strategic initiatives that support our favorable outlook. With respect to our diagnostic business, as I've previously mentioned, we are experiencing great success with our JBT-1 Bench Top test, and we remain focused on achieving the $100 million milestone for diagnostic equipment.

Additional service-related revenues expected as more testers are deployed, which includes repair software and database updates. These contributions will increase as the installed base matures. We also expect more opportunities outside North America as the business evolves.

With regard to our heavy-duty business, we continue to leverage our reputation and industry position in this market, particularly with regard to supplying alternators and starters to our channel partners who are leaders in the heavy-duty aftermarket segments. Our growth opportunities continue to gain momentum across multiple platforms such as agriculture, Class 8 trucks, refrigeration, construction, material handling and transit and motor coach. Our Dixie brand is also evolving as an important supplier to the heavy-duty original equipment manufacturers.

We will remain focused on sales growth, profitability and neutralizing working capital. As I noted earlier, we expect our sales and profitability will continue to grow organically. From a strategic standpoint, we are continuing to leverage our strengths, including great products manufactured at state-of-the-art facilities, solid customer relationships, industry-leading SKU coverage and auto fill, not to mention our value-added merchandising and marketing support.

Our hard part sales in Mexico continue to gain momentum as we experienced increased demand for our aftermarket parts. The rate of growth in this market is exciting and we are well positioned to utilize our footprint to meet the growing demand. We are focused on increasing share in this region.

We continue to benefit and grow sales via our relationships with U.S.-based retailers warehouse distributors who are gaining a presence in this emerging market as well as through Mexican distributors.

Favorable long-term dynamics continue to bode well for the company, and we are extremely well positioned for suitable top and bottom line growth in our hard parts business as well as testing solutions. We are focused on growth across all product lines, including our quality built brand, which is gaining market share within the professional installer market, this includes our most recent additions to our portfolio of brake calipers, brake pads and rotors. I reiterate that as we grow these product lines, we expect overall gross margin accretion.

We are beginning to see the benefits. It is worth reiterating that 98.8% of the U.

S. car park is comprised of internal combustion engines and hybrid engine vehicles. Nondiscretionary aftermarket parts for the internal combustion engine market will be here for decades, an outlook supported by recently updated industry data showing that the average age of vehicles is now 12.

8 years plus. One of our key competitive advantage is the ability to offer a broad range of applications for all makes and models. We remain focused on newer model applications and our ability to meet expected demand as these vehicles enter the replacement market.

I'll now turn the call over to David to review our results in greater detail..