Motorcar Parts of America, Inc. 2027 Q1 Earnings Call

These 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 revise or update 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 company's various filings with the Securities and Exchange Commission.

With that said, I would now like to begin the call and turn it all over to Selwyn Joffe.

Okay. Thank you, Gary. I appreciate everyone joining us today. As stated in our earnings release issued this morning, we are still on target to meet our expectations for fiscal 2027, notwithstanding anticipated headwinds we and the industry experienced during the fiscal first quarter. Our confidence is bolstered by numerous new sales commitments, business developments, and opportunities phasing in throughout fiscal 2027, some of which are being enhanced by the changing competitive landscape. Regarding the latter, let me start with a brief discussion of our recently announced Centric Parts brake brands acquisition, which we expect to relaunch by the current fiscal year-end. We're excited about the strategic growth opportunities that we expect from the introduction of our new original Centric brake brands product lines.

Preliminary customer feedback indicates pent-up demand and confidence in our ability to offer a quality product with strong consumer brand recognition and the benefit of an industry-leading team to reestablish market position. At the heart of Centric success were two enduring strengths. Uniformly consistent, excellent consumer satisfaction with the brand, and best-in-class catalog accuracy. Installers have consistently praised the brake pads, not to mention all the other brake-related products, as being industry-leading. We are particularly excited to have the product with the original brake pad formulations. These strengths will be powerfully amplified by MPA's proven manufacturing, engineering, cataloging, and related capabilities. We are excited to bring these customers the original magic sauce formulation they loved, reunited with their recognized brand. Together, these attributes have established a deep history and foundation of customer confidence, built on the consistent delivery of the highest quality brake products.

This commitment to quality and precision will be reestablished to drive stronger consumer satisfaction and loyalty, positioning Centric for projected strong growth and long-term sustainability. As you probably know, we have been strategically focused on expanding our position within brake-related product categories for several years. Clearly, the Centric brake brands purchase complements this strategy. I should mention that at its peak, we believe Centric generated approximately $400 million in gross annualized sales, indicative of the meaningful opportunities we anticipate moving forward. Even before the opportunities we expect from the Centric purchase, brake-related product sales have climbed, resulting in a second mega category built upon our 50-plus-year flagship rotating electrical category and industry reputation. The market opportunities within the non-discretionary, quote, "wear categories" are significant, enhanced by multiple replacement sales during the life of a vehicle, whether a repair has been done by a do-it-yourselfer or a do-it-for-me professional service provider.

In either case, we have a growing presence in both markets across the big three automotive retailers, along with NAPA and the major traditional warehouse distributors. In short, we have the capacity, financial strength, and strategic vision to achieve meaningful market share gains across all of our non-discretionary aftermarket categories. We offer our retail and traditional customers great products, industry-leading SKU coverage, and order fill rates supported by value-added merchandising and marketing support. As I have highlighted before, the average age of U.S. light vehicles continues to rise. Most recent industry data indicates that the average age has risen to approximately 13 years from 12.6 years in 2024. In addition, the number of vehicles on the road climbed to 289 million from 286 million just a year ago. We expect increased replacement opportunities for the life of vehicles, particularly with consumers holding on to their vehicles longer.

This trend is also supported by broader aftermarket and new vehicle affordability data. According to Auto Care Association and Motor & Equipment Manufacturers Association data provided to S&P Global Market Intelligence, the U.S. light-duty aftermarket is projected to grow 5.2% in 2026, reflecting continued strength in hard parts, fluids, and service labor, and is forecasted to exceed $500 billion by 2029. At the same time, new vehicle affordability remains a constraint for many consumers, with Kelley Blue Book reporting that the average new vehicle transaction price exceeded $50,000 for the first time in September 2025. We believe these dynamics reinforce the consumer's tendency to maintain and repair existing vehicles rather than accelerate new car purchases. This supports long-term demand for non-discretionary aftermarket categories. In short, industry dynamics are favorable, and we are all committed and focused on our customers, offering quality products and services with rational pricing.

Our heavy-duty rotating electrical strengths also offer great opportunities going forward. We are continuing to leverage our reputation and industry position in this market while focusing on opportunities to further enhance operating efficiencies and margins. In this regard, I should highlight the relocation of our heavy-duty operations to Mexico from Canada that started in the latter part of fiscal 2026 as part of our ongoing commitment for continuous improvement, which is near completion. We look forward to further opportunities to enhancing operating efficiencies as we near the completion of this transaction. Industry reports indicate that fleet operators are holding onto vehicles longer, which bodes well for our business because of our ability to offer dependable replacement parts. These dynamics also support our vision to leverage the reputation of our quality-built brand name.

We anticipate this will build momentum and enhance our market position, particularly with regards to supplying alternators and starters to our channel partners, who are leaders in the heavy-duty aftermarket segment and the overall heavy-duty rotating electrical market. In addition, we continue to experience increased demand for our aftermarket parts in Mexico, which complements our existing strategic, operational, and distribution footprint there. As our U.S.-based retailers and warehouse distributor customers expand through Latin and South America, we are well-positioned to benefit while supporting their growth. Regarding our diagnostic business, our JBT-1 bench/top tester leads the industry, and the installed base is continuing to grow. We also expect more opportunities outside North America as the business evolves, including potential new applications that complement and leverage our technology. In short, we believe the outlook is bright for our non-discretionary aftermarket parts, both for passenger vehicles and for heavy-duty applications.

We are focused on leveraging our capability and capacity to offer a broad range of SKUs for all makes and models with newer or older vehicles. As I previously mentioned, deferment is not really a long-term option for our non-discretionary products. If your car or heavy-duty vehicle doesn't start or stop, you're not driving. We believe we have meaningful opportunities for further growth and profitability as the competitive landscape continues to change. I'd now like to turn the call over to David.

Thank you, Selwyn, and good morning, everyone. Let me begin by outlining several topics I want to discuss. We will go over analytics for the fiscal first quarter, sales momentum and opportunities, gross margin, cash flow, balance sheet liquidity and debt leverage, share repurchases, potential strategic alternatives for our EV emulator business, and reaffirming guidance for the current fiscal 2027 year-ending March 31, 2027. Let's start with analytics for the fiscal first quarter. Fiscal first quarter ended June 30, 2026, net sales of $168 million, as expected, were impacted by timing of orders. As the fiscal year progresses, we believe higher sales and a continued focus on efficiency and cost reduction will favorably contribute to fiscal 2027 results.

From a sales perspective, as sales momentum increases, combined with new business commitments that Selwyn referenced earlier, 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 bank debt reduction, and opportunities to increase shareholder value. In short, the fundamentals of our business are strong. Regarding gross margin, let me first discuss the first quarter in more detail. Gross margin was 16.2%, compared with 18% a year earlier. Gross margin was impacted by non-cash expenses of 2.4% and one-time items of 1.6%, as detailed in Exhibit 2 of this morning's earnings press release. Excluding these non-cash and certain one-time cash items, gross margin was 20.2%.

In addition, gross margin was impacted by unfavorable foreign exchange rates of approximately 2%, or approximately $3.5 million due to the weakening of the U.S. dollar versus the Mexican peso. Gross margin was also impacted by lower sales due to timing of orders. Fiscal 2027 gross margin is expected to continue to be favorably impacted by increased sales, overhead absorption, 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. We are also focused on positive impacts to overall margin from further improvements in operating efficiencies supported by benefiting from our tariff mitigation initiatives, better pricing for scrap sales as we gain more market share for our products, additional opportunities to relocate certain operations to our low-cost facilities globally, including Mexico, and further strategic cost reductions.