Yahoo Finance Motorcar Parts of America, Inc. (NASDAQ:MPAA) Q4 2024 Earnings Call Transcript
Motorcar Parts of America, Inc. (NASDAQ:MPAA) Q4 2024 Earnings Call Transcript June 11, 2024
Motorcar Parts of America, Inc. misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.16.
Operator: Thank you for standing by. My name is Ellie, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Motorcar Parts of America Incorporated Fiscal 2024 Year End Conference Call and Webcast. 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'd now like to hand over the conference to Gary Maier, Vice President of Corporate Communications and Investor Relations. You may now begin.
Gary Maier: Thank you, Ellie, and thanks, everyone, for joining us this morning. Before 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. 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 various filings with the Securities and Exchange Commission. With that said, I'd like to turn the call over to Selwyn Joffe.
Selwyn Joffe: Thank you, Gary. I appreciate everyone joining us today. We are encouraged by our operating results for the fiscal year, including strong sales performance, increased gross margin, increased EBITDA and significant positive cash flow. For the 12 months, we generated $39.2 million in positive cash from operating activities and paid down net debt by $32.5 million to $114 million. I might add that these results were particularly satisfying considering the industry softness for two months in the third fiscal quarter and in the fourth quarter. I also might add that for the quarter, we are comping against a record fourth quarter in the prior year. Also, it should be noted that sales were up in all product categories other than wheel hubs.
We have had a realignment of our wheel hub business at one of our customers and expect to regain momentum starting this month. Let me take a moment to highlight a few key near-term strategic initiatives. First, generating cash both from increased profitability and working capital. With respect to increased profitability, we expect to benefit from volume increases in our brake program that will help absorb overhead, which will in turn result in accretion to overall margins. We expect accelerating brake related product sales will lead to more opportunities to take advantage of efficiencies from both purchasing and production. I should emphasize that we started our brake caliper business as a greenfield operation in August of 2019. And today, we are in the top three suppliers in this category.
As our newer brake product lines gained traction, we expect more efficient inventory turns to further support initiatives to neutralize working capital. Second, with respect to generating cash from working capital, we are focused on two major areas to reduce working capital, which include inventory and accounts payable. We have implemented processes to extend days outstanding on accounts payable and to enhance inventory efficiencies. These processes are still in their early stages. However, we expect to recognize meaningful benefits over time. We continue to evaluate allocation of capital to maximize shareholder value. Let me provide a few metrics about our accomplishments to date. As I previously mentioned, we are focused on neutralizing working capital.
As of today, we have commitments that will extend our days outstanding on payables by 30 days on an annualized basis, which should reduce working capital by $20 million at the end of the full year cycle. We continue to aggressively implement this program. Third, we are accelerating new part number introductions, targeting at least 800 per year. These new part introductions help us to maintain our leadership position in the categories we supply and adds to our sales base. Finally, we expect growth and profitability from our other -- other segment, which includes D&V and Dixie, beginning in this current fiscal year. We expect to sell more than $100 million of diagnostic equipment within the next three years with additional opportunities pending.
Additional service revenue should be realized as more testers are deployed. We are gratified that the diagnostic testing business achieved profitability in fiscal 2024, and our heavy-duty business is expected to achieve profitability in the current fiscal year. Despite some softness for the industry in the second half of the fiscal year, which is rebounding, gross profit improved nicely on a year-over-year basis, among other positive metrics that David will highlight shortly. To reiterate, we remain focused on sales, profitability and neutralizing working capital. We are confident that our sales and profitability will grow organically and through market share gains. Increased profitability, along with our working capital initiatives will further enhance cash flow generation.
The rollout of our vendor finance program offered to our suppliers is progressing nicely. This program enables us to extend our payment terms, while facilitating a program for our suppliers to have early access to capital. As I just mentioned, we already have commitments to extend the number of days outstanding for accounts payable by 30 days, which will result in reducing working capital. 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, not to mention our value added merchandising and marketing support. I might add that we recently received an award for what it takes to do the job right from AutoZone, identifying us in their top echelon of suppliers.
I should mention that we opened a new facility in 2024 in Malaysia to support manufacturing of wheel hub products for direct shipment to our customers, which is expected to further enhance our competitive position. Our hard part sales in Mexico continues to gain momentum, and we are focused on additional opportunities with multiple product lines as our customers experience 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 for our non-discretionary aftermarket parts. Favorable long-term 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 testing solutions.
We expect growth in all of our product lines, including our quality build brand that continues to gain significant market share within the professional market. This includes our most recent additions to our portfolio of brake calipers, brake pads, shoes and rotors. I reiterate, as we grow these product lines, we expect overall gross margin accretion. In short, we have in place the capacity and capabilities to support our customers' increasing demand across multiple lines. Our strong cash generation will enable us the flexibility to further pay down debt and pursue other related opportunities to enhance shareholder value. In conclusion, non-discretionary 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 vehicles is 12.6 years.
It's worth highlighting that the population of vehicles operating with internal combustion engines versus electric vehicles represents approximately 98.4% of all vehicles on the road. One of our key competitive advantages is our 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. Finally, before I turn the call over to David, I'd like to comment on yesterday's announcement regarding the Board. The company has been focused on refreshing the Board and working to identify and evaluate director candidates. We are fortunate to have identified Jack Liebau, who we intend to nominate to stand for election at this year's annual meeting.
The Board has received input from major shareholders regarding qualifications that would be most helpful to the company. We have taken that input seriously and believe that Jack not only meets the highest standards for independence and governance, but also has experience in the aftermarket industry. He has a solid background and is an excellent candidate for the Board at an exciting point in the company's evolution. You can read more about Jack's background in the release we issued yesterday. The process is ongoing, and we expect to further report developments in the coming weeks and months ahead. 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-K that will be filed later today. Let me first reiterate key financial performance metrics for fiscal year '24 that we highlighted in this morning's news release. Net sales increased 5.1% to $717.7 million. Gross profit increased 16.3% to $132.6 million. Gross margin increased 1.8 percentage points to 18.5%. Operating income increased 26.5% to $46.1 million. The company generated cash from operations of approximately $39.2 million. Despite industry softness, contributing to lower net sales for the fiscal '24 fourth quarter of $189.5 million compared with $194.7 million in the prior year.
Net sales for the full fiscal year 2024 increased 5.1% to a record $717.7 million from $683.1 million. I should mention the fourth quarter sales were primarily impacted by softer wheel hub sales, which we expect to regain momentum in June. Gross profit for the fiscal '24 fourth quarter was $34.8 million compared with $36.2 million a year earlier. For the full fiscal year 2024, gross profit increased 16.3% to $132.6 million from $114 million a year earlier. 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 customers' shelves, which are unique to certain of our products and required by GAAP.
A more detailed explanation of core accounting is available in a video posted on the company's website. Fourth quarter gross margin was 18.4% compared with 18.6% a year earlier, impacted by inflationary costs. Additional price increase in effect and operating efficiencies will enhance gross margin. For the full fiscal year '24, gross margin was 18.5% compared with 16.7% a year earlier. Gross margin for fiscal 2024 was impacted by $16.3 million or 2.3% of non-cash items and $7.5 million or 1% of non-recurring cash items as detailed in Exhibit 4 of this morning's earnings press release. Operating expenses were $22.6 million compared with $12.4 million in the prior year period. This included a non-cash gain for the foreign exchange impact of lease liabilities and forward contracts of $1.2 million compared with $6.7 million a year earlier.
In addition, prior year operating expense was favorably impacted by $3.1 million employee retention credit recorded in March of '23. The remaining $1.5 million of operating expense increases for fiscal '24 fourth quarter included employee related incentives. Operating income for the fourth quarter was $12.2 million compared with $23.7 million in the prior year, reflecting a non-cash $5.6 million less favorable foreign exchange rate gains associated with lease liabilities and forward contracts and the benefit in the prior year of $5.1 million employee retention credit. I should point out for the full fiscal year, operating income increased 26.5% to $46.1 million from $36.4 million in the prior year. Results for the fiscal fourth quarter were impacted by $2.8 million or $0.09 per diluted share of higher interest expenses, primarily due to higher market interest rates and increased collection of receivables, utilizing accounts receivable discount programs on higher sales.
Interest expense was $14.7 million compared with $11.9 million for last year, which is primarily related to accounts receivable discount program. We are working diligently to address the higher interest environment, particularly areas that we can control. For example, among other initiatives, we're focusing -- focused on neutralizing working capital to generate positive cash flow to pay down debt, as evidenced by our year end results. In addition, we continue to work with our customers to mitigate higher interest rates. Results for the full year were impacted by $20.5 million or $0.78 per share of higher interest expenses, primarily due to higher market interest rates and increased collection of receivables, utilizing accounts receivable discount programs and higher sales.
Interest expense was $60 million compared with $39.6 million for last year. As I previously noted, we are working diligently to address the higher interest environment, particularly areas that we can control. Net income for the fiscal '24 fourth quarter was $1.2 million compared with $1.5 million for the prior year. Net income for the fiscal '24 fourth quarter was impacted by approximately $800,000 or $0.04 per diluted share of non-cash items and $1.2 million or $0.05 per diluted share of cash items as detailed in Exhibit 1. For the full fiscal year due primarily to higher interest expense of $20.5 million I previously discussed and $50.3 million of non-cash expenses, including a $38 million U.S. federal and state deferred tax asset valuation allowance under U.S. GAAP, we reported a net loss for fiscal '24 of $49.2 million or $2.51 per share compared with a net loss of $4.2 million or $0.22 per share a year ago.
Once again, this valuation allowance is a non-cash accounting item and does not impact any operating metrics. The details of the non-cash and cash items impacting results on Exhibit 2 of this morning's earnings press release. With higher expected sales volume moving forward and the full impact of certain price increases already in effect, results are expected to further improve. 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 fourth quarter was $17.7 million. EBITDA was negatively impacted by $300,000 of non-cash items and by $1.6 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $19.6 million for the fourth quarter.
EBITDA for the full fiscal year 2024 was $58.6 million. EBITDA was impacted by $16.4 million of non-cash items and $9.3 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $84.2 million for the current period compared with $71.2 million in the prior year, taking into account the non-cash and cash items noted in this morning's earnings press release Exhibit 5. We anticipate supply chain disruption expenses will be non-recurring. Now we will move on to cash flow and key corporate items. We generated approximately $39.2 million of cash from operating activities during fiscal '24 and reduced net bank debt by $32.5 million to $114 million from $146.5 million, notwithstanding $9.3 million cash used in operating activities during the fourth quarter due to seasonality of the company's business.
I should mention that in fiscal '24, we also paid off and retired by $11.25 million term loan, which further highlights our solid financial position. We expect to generate an increase in operating profit on a year-over-year basis for fiscal '25 supported by organic growth from customer demand and operating efficiencies from our now completed footprint expansion and generate positive cash flow for fiscal '25. In addition to our goal of generating increased operating profits, we are diligently focused on opportunities to neutralize working capital, including customer product demand planning, enhanced inventory management and further extend our vendor payment terms. We expect increasing financial performance from our new and existing product lines, including our emerging brake categories.
Our net debt at the end of the quarter, excluding our convertible note was approximately $114 million, while total cash and availability was approximately $114.9 million. Now let me address our outlook. As stated in our news release this morning, our expectation for fiscal '25 is to achieve sales in the range of $746 million to $766 million, representing between 3.9% and 6.7% year-over-year growth, respectively. We expect to see margin accretion from efficiencies related to the higher volume, price increases and cost-cutting initiatives. With respect to cash flow, our expectation is to continue to improve cash generation. Operating income is expected to be between $62 million and $67 million before the noncash foreign exchange impact of lease liabilities and forward contracts and the non-cash impact of revaluation of cores on customer' shelves.
The company estimates other non-cash items will be approximately $17 million, including core and finished good premium amortization and share-based compensation. The company estimates depreciation and amortization will be approximately $11 million. In summary, operating income before the impact of the non-cash and cash items and before depreciation and amortization is expected to be between $90 million and $95 million. For further explanation on the reconciliation of items that impact the 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: We are now opening the floor for question-and-answer session. [Operator Instructions] We have our first question from Carolina Jolly from Gabelli. Your line is now open.
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