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

Explicit Guidance:

• Fiscal 2027 Net Sales: Revised downward to $715 million–$740 million (vs. prior $780 million–$800 million), reflecting delayed orders and new business timing; implies Second Half 2027 sales of $378 million–$403 million.
• Fiscal 2027 Operating Income: Expected to be $37 million–$44 million, excluding $11 million IEPA tariff refunds and factoring in ~$30 million non-cash expenses and $5 million relocation costs.
• Fiscal 2027 Second Half Operating Income: Projected at $23 million–$30 million, reflecting ~$14 million non-cash expenses and ~$5 million depreciation/amortization.
• Fiscal 2028 Sales Contribution: Additional incremental annualized sales of $25 million expected from advanced discussions, with ramp-up continuing into FY2028; total ramp-up of new programs (including the $60M committed) anticipated throughout FY2027 and FY2028.
• Gross Margin: FY2027 gross margin expected to expand via increased sales volume, cost reductions, tariff mitigation, and improved scrap pricing; normalized gross margin (excluding one-time/non-cash items) historically ~22.7%, with new business expected to maintain comparable levels before accretion from operating leverage.
• Cash Flow & Debt: Continued positive operating cash flow generation expected; net bank debt-to-EBITDA ratio of 1.5x (as of Sept 30, 2026); $20.1 million remaining capacity under authorized share repurchase program.

Business-Segment Outlook:

• New Business Awards: ~$60 million in incremental annualized revenue secured from existing and new customers; initial shipments commenced, with all programs expected to launch in the second half of FY2027, majority at fiscal year-end.
• Brake Business: Centric Parts brand relaunch positioned to expand professional aftermarket relationships; product line (calipers, pads, rotors, etc.) leverages existing manufacturing capacity for improved operating leverage; Centric sales excluded from current $60M/$25M incremental estimates.
• Heavy-Duty Rotating Electric: Manufacturing relocation from Canada to Mexico completed; expected to reduce costs, improve efficiencies, and enhance competitiveness in the heavy-duty aftermarket.
• Diagnostic Equipment (JBT1): Continued expansion of installations across US, Mexico, and Canada; significant long-term potential for broader deployment in the automotive aftermarket; trilingual capability supports international growth.
• Geographic Expansion: Mexico identified as a key growth market driven by customer expansion and trade zones; South America viewed as the "biggest opportunity" for new continent expansion (specifically Brazil) via existing Mexico infrastructure; Canada expansion anticipated as major aftermarket customers grow.

Market and Competitive Outlook:

• Demand Trends: Anticipate a "catch-up" effect as deferred vehicle repairs (non-discretionary) occur once the economy stabilizes; current environment shows temporary softness in DIY sector and warehouse reallocation delays, but recent data (Oct) shows increasing order vibrancy.
• Industry Dynamics: Average vehicle age increasing and higher new vehicle prices reinforce consumer incentive to repair existing vehicles; company positioned to capture share via essential component supply (start/stop/operate safety).
• Competitive Positioning: Expected to gain market share through expanded product coverage, global operating platform, and Centric brand integration; potential for pricing advantages if US-Canada/Mexico tariffs are reduced.
• Pricing & Tariffs: Full-year guidance assumes modest recovery but does not assume significant tailwinds from tariff reduction; however, management expects volume acceleration if consumer repair costs decrease due to lower tariffs.

Macro / Industry Outlook:

• Economic Conditions: Acknowledges current broad economic uncertainty, inflation, and uneven consumer spending as drivers for cautious behavior; expects industry recovery and catch-up demand as economy stabilizes.
• Tariffs & FX: Tariffs currently impacting consumer repair costs and pass-throughs; weakening USD vs. Mexican Peso negatively impacted Q2 gross margin by 1.4% ($2.4M); potential tariff reductions viewed as highly positive for volume and pricing.
• Regulatory/Trade: Success in Mexico leveraged for South America entry via trade contracts and free enterprise zones.

Strategic Initiatives:

• Product Launches: Execution of ~$60M new business programs beginning H2 FY2027; Centric Parts brand relaunch planned for professional aftermarket; JBT1 diagnostic equipment international deployment.
• Capacity & Efficiency: Relocation of heavy-duty operations to Mexico completed; plans to utilize existing brake manufacturing capacity more fully; strategic cost reductions and further relocation of operations to low-cost facilities globally.
• Working Capital Management: Focus on neutralizing working capital via customer demand planning, enhanced inventory management, and extending vendor payment terms through supply chain finance programs.

Risks and Headwinds to Outlook:

• Ordering Patterns: Customer ordering delays remain a primary uncertainty; warehouse reallocation at a key customer caused revenue gaps, though expected to catch up.
• Macro Sensitivity: Consumer spending softness and potential deferrals of repairs if economic conditions worsen; inflation and interest rates impacting consumer repair decisions.
• Supply Chain & Costs: Tariffs, foreign exchange volatility (USD/MXN), and labor/production cost fluctuations remain risks.
• Execution Risks: Delays in new business program launch timing or failure to achieve anticipated cost synergies from Mexico relocation.

Management Tone on the Future:

• Confidence Level: "Confident" in underlying industry fundamentals and company competitive position despite near-term headwinds; "Constructive" about long-term automotive aftermarket demand.
• Forward Look: Emphasis on converting secured business awards into revenue; belief in "catch-up" demand; tone suggests the second half will be stronger than the first half of FY2027, though not assuming a full return to previous growth rates immediately.
• Strategic Focus: Clear focus on "executing scheduled launches, improving margins, and converting sales to cash" to deliver sustainable profitability.

Miscellaneous:

• Share Repurchases: No poison pill in place; $20.1 million remaining authorization; management noted ~$11M–$12M bought back over trailing 12 months, with optimism on future capital allocation.
• Non-GAAP Metrics: Adjusted gross margin for Q2 2027 excluded non-cash expenses (2.8 pp) and one-time items (5.7 pp), settling at 22.7%; EBITDA before non-cash/one-time items ~$70M for the 12 months ended Sept 30, 2026.