Fiscal 2027 Second Quarter Conference Call - MOTORCAR PARTS OF AMERICA INC

Financial Performance:

• Fiscal 2027 Q2 net sales were $169.2 million, negatively impacted by delayed customer orders, tariff pass-through reductions, and a non-recurring $14.8 million from the prior year's inventory realignment.
• Gross margin for the quarter was 24.2%, compared to 19.3% previously; this includes 2.8 percentage points of non-cash expenses and a 5.7 percentage point benefit from $11.1 million in IEPA tariff refunds.
• Excluding non-cash items, one-time benefits, and foreign exchange impacts ($2.4 million unfavorable), normalized gross margin was approximately 22.7%.
• Net sales for the prior period were inflated by core revenue from customer distribution center realignments; excluding this, current guidance implies 5% to 11.9% growth in the second half of fiscal 2027.
• Operating cash flow was approximately $4.1 million net used in the quarter due to inventory ramp-up for new business.
• Net bank debt stood at $105.8 million ($126.6 million revolver less $20.8 million cash) as of September 30, 2026.
• EBITDA for the 12 months ended September 30, 2026, was $58.9 million, or approximately $70 million excluding non-cash and one-time items.
• Net bank debt-to-EBITDA ratio is 1.5x based on adjusted EBITDA.
• The company utilized over $11 million for share repurchases in the trailing 12 months, with $20.1 million remaining in the authorization.

Guidance and Future Outlook:

• Revised FY2027 net sales guidance lowered to $715 million–$740 million from a previous range of $780 million–$800 million due to timing of new program launches and customer order deferrals.
• FY2027 full-year operating income is guided at $37 million–$44 million, reflecting approximately $30 million in non-cash expenses, $5 million in relocation costs for heavy-duty operations, and excluding $11 million in tariff refunds.
• Fiscal 2027 second half is projected to generate net sales of $378 million–$403 million and operating income of $23 million–$30 million.
• Management expects all awarded new business programs to launch in the second half of fiscal 2027, with most launching near fiscal year-end and continuing to ramp into fiscal 2028.
• Management anticipates a "catch-up" in demand as the economy stabilizes and vehicle maintenance needs increase, though guidance does not fully price in significant tailwinds from this recovery.
• October sales have shown an increase compared to the end-of-quarter trend, with management expecting this pickup to continue.

Business Segments and Product Lines:

• Secured nearly $60 million in incremental annualized new business awards from existing and new customers, representing firm commitments; small initial shipments have already commenced.
• An additional $25 million in incremental annualized sales is expected by March 2028 from very advanced discussions, separate from the $60 million commitment.
• The brake business is the second major category, featuring an expanded product line (calipers, pads, rotors, etc.) and the relaunch of the Centric Parts brand in the professional aftermarket.
• Centric Parts sales are currently excluded from incremental growth estimates but represent a significant future opportunity with strong installer demand.
• Heavy-duty rotating electric business has completed relocation of production from Canada to Mexico, aiming to improve competitiveness and reduce costs via existing infrastructure.
• Rotating electric diagnostic testing equipment (JBT1) continues to expand across the US, Mexico, and Canada, offering unique bilingual/trilingual capabilities for testing communication protocols.
• Geographic expansion in Mexico is accelerating, with sales growing significantly and creating export opportunities to Canada and South America.

Market and Competitive Landscape:

• Market fundamentals are supported by increasing average vehicle age and higher new vehicle prices, driving demand for aftermarket repairs.
• Management believes the company is gaining market share in the brake sector, particularly following the bankruptcy/liquidation of a competitor (First Brands), leading to new business opportunities.
• The company leverages its global footprint, specifically manufacturing in Mexico and Malaysia, to navigate tariffs and cost pressures.
• Competitive advantage is highlighted by the ability to supply essential non-discretionary wear parts and the unique diagnostic testing technology for rotating electrical components.
• South America is identified as a major future growth continent, leveraging trade contracts between Mexico and South American nations and the expansion of major customers like AutoZone into Brazil.

Risks and Challenges:

• Near-term revenue was negatively impacted by delayed customer orders and slower-than-anticipated ramp-ups at new customer distribution center locations.
• Inventory liquidation by competitors (First Brands) caused temporary deferral of volume for existing customers in the brake segment, though this is expected to normalize.
• Softness in the DIY (Do-It-Yourself) sector contributed to order deferrals, though signs of recovery are emerging.
• Macroeconomic headwinds including inflation, uneven consumer spending, and foreign exchange volatility (weakening USD against the Mexican Peso) continue to pose risks.
• Revenue guidance remains dependent on the timing of customer ordering patterns and the successful execution of new program launches.

Management Commentary and Tone:

• Management expressed confidence in underlying industry fundamentals and the company's strategic initiatives despite the challenging Q2.
• Tone was constructive, emphasizing that current results are impacted by temporary dislocations and one-time items rather than structural weakness.
• Emphasis was placed on the strength of the balance sheet, cash generation capabilities, and the ability to execute on new business commitments.
• Management acknowledged the impact of tariffs on consumer repair costs but noted that the company's remanufactured products (largely from Mexico) are largely exempt, while new units from Malaysia face tariff burdens.
• CEO Selwyn Jaffe highlighted the strategic value of the Centric brand relaunch and the geographic diversification of sales.

Analyst Questions and Answers:

• On Sales Dislocations: Management clarified that the Q2 revenue decline was driven by one customer's warehouse realignment, liquidation of competitor inventory, and DIY softness; they see a pickup in the last four weeks of the quarter.
• On Guidance Assumptions: Management stated the guidance embeds a partial recovery in existing business demand but does not assume a massive "catch-up" tailwind, though one is possible.
• On New Business Ramp: The $60 million award is firm and will launch this fiscal year; the additional $25 million is in advanced discussions with potential for later launch.
• On Margins: New business is expected to be margin-comparable to historical normalized levels (~22%+) with future accretion expected from volume absorption and cost reductions.
• On Tariffs: Management views potential tariff reductions positively, as lower costs could accelerate consumer repair demand, though company margins might temporarily compress if passing savings to customers.
• On Share Repurchases: With ~$11 million repurchased in the trailing 12 months and $20 million remaining, the company remains optimistic about capital allocation.
• On Poison Pill: Management confirmed no poison pill is currently in place but agreed to consider the suggestion.
• On South America: Management views South America as a significant growth opportunity due to trade agreements and the company's trilingual diagnostic capabilities.

Other Key Points:

• MPA received an award for best use of supply chain finance from a leading provider.
• The company has a broad cataloging capability allowing for rapid international market penetration.
• The Centric Parts brand has an established history in the professional aftermarket, and installers are waiting for its reintroduction.
• The company remains focused on neutralizing working capital through inventory management and extending vendor payment terms.