Motorcar Parts of America 2027 Q2 Earnings Call

Please go ahead. Thank you, Caleb, and thanks everyone for joining us.

Before I turn the call over to Selwyn Joffe, 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. 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 regarding future financial performance, sales growth, margin improvement, operating efficiencies, customer demand, new business strategies, capacity utilization, working capital liquidity, debt levels, cash flows, strategic initiatives, and market conditions. These statements are based on current expectations, estimates, forecasts, and assumptions, and are not guarantees of future performance.

Actual results may differ materially from those expressed or implied in these forward-looking statements due to risks and uncertainties, including changes in customer ordering patterns, customer concentration, competitive conditions, supply chain constraints, inflation, tariffs, interest rates, credit availability, labor and production costs, inventory levels, operational execution, and macroeconomic conditions, and other risks described in the company's most recent Form 10-K, 10-Q, and other filings with the Securities and Exchange Commission. The company undertakes no obligation to update or revise any forward-looking statements, except as required by law. For a more detailed discussion of some of our ongoing risks and uncertainties of the company's business, I refer you to the various filings. With that, I'd like to begin the call and turn the call over to Selwyn Joffe.

Thank you, Gary. Good morning, everyone, and thank you for joining us. As outlined in our earnings release this morning, our second quarter results reflect delayed customer orders. There were also delayed orders relating to the realignment of inventory at certain customer distribution centers. Also, there were lower tariff pass-throughs compared with the prior year. While these conditions have affected our near-term performance, we remain confident in the underlying fundamentals of our industry, and most importantly, in the substantial opportunities we are developing to expand our business and improve profitability. I want to focus today on several developments that we believe will strengthen Motorcar Parts of America's competitive position and provide a foundation for meaningful future growth. First, we have secured nearly $60 million in incremental annualized new business awards from both existing and new customers.

These awards represent product programs we were not previously supplying, with anticipated annual volumes based on customer requirements and historical sales activity. This is an important distinction. We are not simply forecasting opportunities. We have been awarded business that we expect to translate into additional revenue as the programs launch and mature. Small initial shipments have already commenced, and we expect all these programs to launch during the second half of this fiscal 2027, with the majority of these programs launching towards fiscal year-end. We also currently anticipate approximately $25 million in incremental annualized sales by the end of March, with additional contributions expected as these programs ramp during fiscal 2028. We believe these awards demonstrate our ability to gain market share even during a period of softer industry demand.

Turning to our brake business, brakes have become our second major product category, building on more than 50 years of experience and our established leadership in rotating electrical products. We believe this is particularly attractive because brakes represent an essential non-discretionary wear category with multiple replacement opportunities over the life of a vehicle. Our brake-related product offerings, including calipers, pads, rotors, master cylinders, power boosters, wheel hubs, and brake shoes, provide opportunities to expand our relationships with major retailers and professional aftermarket customers. The relaunch of our Centric Parts brand represents an important additional opportunity. Centric is an established name in the professional brake aftermarket, and we believe that combining that brand with our existing manufacturing capabilities, product coverage, and distribution infrastructure significantly strengthens our competitive position. Importantly, potential Centric sales are not included in our current incremental growth estimates.

We also believe increased utilization of our existing brake manufacturing capacity can contribute to improved operating leverage and profitability as these volumes grow. We are also encouraged by the expansion of our business opportunities beyond the U.S. Mexico is becoming an increasingly important growth market for us. Some of our largest customers are expanding their operations there, creating additional opportunities for Motorcar Parts of America to supply products through our established relationships, capability, and performance. Some of these opportunities are included in our current new business expectations, while others represent additional potential growth. We also see opportunities as major aftermarket customers expand geographically into Canada. Our established North American relationships, combined with our manufacturing and distribution capabilities, provide a strong platform to support these exciting developments.

Turning to our heavy-duty rotating electric business, we have completed the relocation of this operation from Canada into our existing manufacturing facility in Mexico, where production has commenced. This initiative is an important part of our continuing efforts to improve our manufacturing competitiveness. By leveraging existing infrastructure, manufacturing resources, and operating capabilities, we expect to reduce costs, improve production efficiencies, and benefit from operating synergies. We believe this will strengthen our competitive position in the heavy-duty aftermarket and improve our ability to pursue additional business. Another business demonstrating continued positive momentum is our rotating electric diagnostic testing equipment program. Our JBT-1 diagnostic testing equipment has an established presence with major automotive aftermarket customers across the U.S., Mexico, and Canada. We continue to expand installations within existing customer networks while pursuing additional opportunities, including international markets.

We believe there is significant long-term potential for broader deployment of this technology throughout the automotive aftermarket. Stepping back, we remain constructive about the long-term fundamentals of the automotive aftermarket. The average age of vehicles on the road continues to increase, and consumers are keeping their vehicles longer. High new vehicle prices also reinforce the economic incentive to maintain and repair existing vehicles. These dynamics are particularly relevant to our business because we supply essential components required for vehicles to start, stop, and operate safely. Although repairs and purchases can be deferred temporarily, the underlying need for replacement parts remains. While we see temporary deferrals, we believe that a catch-up is ahead as the economy stabilizes. We believe our broad product coverage, manufacturing capabilities, customer relationships, and global operating platform uniquely position us to participate and meet the long-term demands.

In summary, while the current operating environment remains challenging, we are making progress on several important fronts. We have secured significant incremental new business. We are expanding our brake platform through Centric. We are pursuing additional opportunities as major customers expand geographically. Our rotating electrical diagnostic business continues to gain momentum, and we have completed an important heavy-duty manufacturing relocation designed to improve our competitiveness. These developments are not dependent solely on an industry recovery. They reflect initiatives we are undertaking to strengthen our market position and improve our long-term operating performance. We remain focused on converting these opportunities, improving manufacturing utilization, generating cash flow, and delivering sustainable profitability. With that, I will turn the call over to David to review our financial results and updated outlook.

Thank you, Selwyn, and good morning, everyone. Let's start with analytics for the fiscal second quarter. Fiscal second quarter ended September 30, 2026. Net sales of $169.2 million were impacted by delayed customer orders and a reduction in tariff pass-throughs. Broader economic uncertainty, including inflation, tariffs, and uneven consumer spending, also contributed to a cautious operating environment. Additionally, net sales for the prior year reflect $14.8 million of core revenue in connection with the realignment of inventory at certain customer distribution centers. We believe higher sales and a continued focus on efficiency and cost reductions will favorably contribute to results for the second half of fiscal 2027.

From a sales perspective, as sales momentum increases, combined with new business commitments that Selwyn referenced earlier, which has had a small impact through September 30, 2026, as well as other meaningful opportunities, we believe the company will benefit in several ways near term, including favorable impact to gross margin, continued annual cash flow generation, net debt reduction, and opportunities to increase shareholder value. In short, we believe the fundamentals of our business are strong. Regarding gross margin, let me first discuss the second quarter in more detail. Gross margin was 24.2% compared with 19.3% a year earlier. Gross margin was impacted by non-cash expenses of 2.8 percentage points and benefited from one-time items of 5.7 percentage points. Including approximately $11.1 million of IEEPA tariff refunds, as detailed in Exhibit 3 of this morning's earnings press release.

In addition, gross margin was impacted by unfavorable foreign exchange rates of approximately 1.4 percentage points, or approximately $2.4 million, due to the weakening of the U.S. dollar versus the Mexican peso. Excluding the non-cash expenses and one-time items, as well as the foreign exchange impact, gross margin was approximately 22.7% for the quarter. Fiscal 2027 gross margin is expected to be favorably impacted by increased sales and overall cost reductions and efficiencies. Overall, regarding gross margin, we remain focused on overall margin accretion, supported by strong momentum and greater utilization of brake-related capacity from growth of existing and new business.