Motorcar Parts of America Inc (MPAA) 2021 Q4 法說會逐字稿

Good day. Thank you for standing by. Welcome to the Motorcar Parts of America's Fiscal 2021 Fourth Quarter Year-end conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Gary Maier, Investor Relations. Please go ahead.

Thank you. Thank you, Charlie. Thanks, everyone, for joining us for our call today. Before we begin, 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 the real 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 the beyond the control of the company and are subject to change based upon various factors. 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 business, I refer you to the company's various filings with the Securities and Exchange Commission.

With that, I would like to begin the call and turn the call over to Selwyn for some remarks.

Thank you, Gary. I appreciate everyone joining us today for our year-end call. I hope everyone is safe and healthy and starting to venture out as vaccinations are more readily available. We're excited to be able to reserve personal interaction with our customers and team members.

As noted in this morning's press release, we achieved record sales for our fiscal fourth quarter and full year. Notwithstanding the sharp drop in the first quarter of fiscal 2021. Equally significant, net income was up sharply for both periods, and the new fiscal year is off to a strong start, with strong demand for our products.

I will now address our company's current position and outlook for our business, and then David will then address our financial results in detail. The outlook for hard parts replacement continues to be positive. And we're excited about the company's position in the market.

In addition, the electric vehicle marketplace is fast evolving, and our electric vehicle subsidiary should substantially benefit from the momentum. Let me provide some color to these dynamics. Demand for automotive hard parts is strong as drivers return to the roads. The availability of vaccines across the country is clearly helping and it appears that people are getting back to more normal routines and rely on their vehicles for everyday activities and vacation travel.

Overall, we are benefiting from our investments from multigrowth platforms in our hard parts business. We expect each of our product lines to grow, and we are focused on meeting the increased demand in all categories. Our newest product line, brake calipers, continues to gain traction focused on meeting the increasing demand in the brake category. The market for our current categories for internal combustion engines represents more than $6 billion at the retail level.

There are approximately 287 million vehicles on the road with an average age of 12.1 years in the United States alone, which fuels our optimism about the growth opportunities in our aftermarket hard parts business. This will fuel growth in aftermarket parts replacement industries well beyond 2030. You've heard me say before that people are keeping the vehicles longer. In recent months, news reported indicated that used car sales at record levels, resulting in increased miles driven by (inaudible) vehicle. Obviously, this bodes well for the aftermarket parts replacement industry and our nondiscretionary product offerings.

And in fact, we are seeing demand increase. As these vehicles age, the rate of replacement of parts increases substantially. For example, cars in the 0 to 3 or age group have a replacement rate for alternators of 2.42% compared with 6.65% in the 12-year and above age group. Though new car sales should return at some point, we expect to benefit because used car scrap rates are lower than new car sales. Resulting in an increase in the average age in the number of cars in the road, generating further increases in demand for parts replacement. Of course, any new car sales will drive aftermarket play through -- aftermarket parts replacement in the future.

As I emphasized last quarter, our facility expansion in Malaysia is now complete, and we are focused on utilizing this increased capacity and productivity across multiple product lines to reduce dependence on outsourcing. While COVID and related supply chain challenges continue in Malaysia and throughout Asia, we see tremendous opportunities to leverage our presence in Malaysia and support our customers.

In short, our strategy before and since the pandemic has been to leverage our significant channel relationships for aftermarket products and offer superior parts and solutions to our customers and consumers. We are equally excited about our opportunities in the EV space. Our strategic position in the EV space is gaining momentum. For example, let me highlight several exciting developments we recently announced.

Orders from 2 global electric vehicle manufacturers in China and Europe for advanced power hardware in the loop test beds and inverted test systems. The establishment of a collaboration agreement with National Instruments, also known as NI, which has a strong offering for development and production of electric vehicles. It will seamlessly integrate DMV's technology supported by global sales force to market our products and technology.

We also recently announced the opening of our first state-of-the-art technical center in the Detroit area. Providing automobile manufacturers with a convenient location for electric powertrain testing solutions and on-site engineering support. We also announced a development program of an extremely fast EV charger, spearheaded by Delta Electronics Automotive division and sponsored by the U.S. Department of Energy that utilizes our emulated technology.

In short, we believe our EV subsidiary provides meaningful opportunities for growth while complementing our leadership presence within the automotive hard parts market. We believe both of these businesses provide our shareholders with exciting opportunities as transportation needs and driving options evolve.

In short, all our initiatives continue to enhance our position as a valued premier supplier of automotive aftermarket parts in North America and the rapidly emerging electric vehicle in the aerospace markets.

Certainly, there are challenges facing the aftermarket industry today, including supply chain, freight and other pandemic-related headwinds. We continue to experience supply chain challenges for steel semiconductors and packaging. To mention a few items. We think these are short-term issues, and we are working hard with our global team to manage production while working with our suppliers and logistics providers to address the challenges.

Market dynamics and rational economics, including price increases, supported by our customers, will contribute to overcoming these challenges as we continue to focus on taking full advantage of our competitive strengths.

In summary, our entire company is well positioned for sustainable top and bottom line growth for parts and solutions that move our world today and tomorrow. Our footprint for the future has become a reality. We are now focused on benefiting from this move in the following ways: increased sales due to higher capacity. Better gross margins due to economies of scale from consolidation of operations, including the brake caliper launch, pricing initiatives and other product line transition activities.

In short, we're excited about the continuing growth opportunities and utilizing our highly efficient new footprint. As noted in today's earnings release, given the ongoing global pandemic and near-term related considerations, the company believes it is still not prudent at this time to provide specific annual sales and gross margin guidance. We will reevaluate this policy as fiscal 2022 evolves.

However, we are currently experiencing strong customer demand for our aftermarket parts and our EV solutions. I will now turn the call over to David to review the results for the fourth quarter and fiscal 2021 year-end.

Thank you, Selwyn. To begin, I encourage everyone to read the 8-K filed this morning with respect to our March 31, 2021 earnings press release for more detailed explanations of the results. For information about the items that impacted the results, see Exhibits 1 through 5 of the press release.

Let me take a moment to review the financial highlights, including record sales for our fiscal '21 fourth quarter and fiscal year. Net sales for the fiscal '21 fourth quarter increased 11.5% to $168.1 million from $150.7 million for the same period a year earlier. Gross profit for the fiscal '21 fourth quarter was $32.1 million compared with $36.6 million a year earlier.

Gross profit as a percentage of net sales for the fiscal '21 fourth quarter was 19.1% compared with 24.3% a year earlier. Gross margin for the fiscal '21 fourth quarter was negatively impacted by an aggregate of 6.4% by the following: a 2.8% for brake caliper start-up costs and relocation and transition expenses; 1.4% due to higher freight costs and expenses related to COVID; 1.4% noncash core premium amortization impacting sales; 0.6% noncash revaluation of cores on customer shares; and 0.2% customer allowances related to new business and the impact of tariffs.

Let me provide a little more color to the factors impacting gross margin. Brake calipers set-up costs and relocation transition expenses are part of our footprint expansion in Mexico. As you may recall, we completed the construction of our buildings in Mexico this past fiscal year and a focus on increasing production at brake calibers, including core sorting and related activities to meet current and future demand.

We anticipate that these costs and expenses will diminish significantly in the first half of the current fiscal year. We also incurred higher freight costs due to a freight -- a shortage of freight caused by COVID, as Selwyn noted earlier. With regard to additional corporate-related expenses, we have addressed health and safety initiatives that also impacted gross margins.

Fortunately, these corporate-related expenses have been slowly decreasing. Core premium amortization and revaluation of cores on customer shelf that impacted gross margins are noncash, noneconomic. For a summary of items impacting gross profit, please see Exhibit 3 in this morning's earnings press release.

We also incurred higher costs for raw materials and supplies. I should also mention that we experienced offshore wage inflation, which further impacted results. We have mitigated these expenses, along with higher freight costs with price increases that have been implemented and will be realized shortly.

Total operating expenses decreased approximately $15.4 million for the fiscal fourth quarter on a year-over-year basis. This decrease includes $17.1 million of foreign currency-related net gains which are noneconomic and relate to lease liability remeasurement and Mexican peso forward contracts. This was partially offset by higher expenses, such as corporate-related expenses of $520,000.

Interest expense was $3.7 million for the fourth quarter compared with $5.5 million last year. The decrease in interest expense was primarily due to lower interest rates and lower net debt. Income tax expense for the fourth quarter was $939,000 compared with income tax benefit of $2.8 million for the prior year period. Net income for the fiscal '21 fourth quarter was $835,000 or $0.04 per diluted share compared with a net loss of $8.2 million or $0.43 per share a year ago.

Prior year fourth quarter results include the unfavorable foreign exchange impact of lease liabilities and forward contracts totaling $20.7 million. Additional details of items impacting net income are in Exhibit 1 in this morning's earnings press release.

Net sales for fiscal '21 were $540.8 million, compared with $535.8 million a year earlier, impacted by a sharp drop in demand in April due to the global pandemic. In addition, net sales were impacted by current pandemic supply chain challenges. This was partially offset by the benefit of $12.8 million due to a realignment of inventory at 2 customer distribution centers with expected future sales benefits as product mix changes. Gross profit for fiscal '21 was $109.5 million compared with $118.4 million a year earlier.

Gross profit as a percentage of net sales for fiscal '21 was 20.2% compared with 22.1% a year earlier. Gross margin was negatively impacted by 5.5%, including brake caliper start-up costs, relocation transition expenses and higher costs related to COVID-19, as I previously discussed. A summary of factors impacting gross profit are in Exhibit 4 in this morning's earnings press release.

Net income for fiscal '21 was $21.5 million or $1.11 per diluted share compared with a net loss of $7.3 million or $0.39 per share a year ago. Additional detail of items impacting net income are in Exhibit 2 in this morning's earnings press release.

Net cash used in operating activities during the fiscal year '21 fourth quarter was $16.4 million, reflecting working capital requirement to support the company's record sales and inventory increases for anticipated business growth in fiscal '22. This compares with cash provided by operating activities of $23.2 million for the prior year -- prior fiscal year fourth quarter. Net debt was $88.9 million at March 31, 2021, compared with $67.6 million at December 31, 2020.

Net cash provided by operating activities during fiscal '21 was $56.1 million compared with net cash provided by operating activities of $18.8 million for the prior fiscal year. Net debt during fiscal '21 was reduced to $88.9 million at March 31, 2021, from $126.5 million at March 31, 2020. As you know, there are various methods to calculate return on invested capital. For our purposes, we calculate ROIC by taking operating income and adding back noncash expenses and certain onetime expenses.

We believe this metric, considered together with GAAP measures provides useful information to investors and to management regarding the company's return on invested capital. In short, we take this metric, which was approximately $77.1 million, for the 12 months ended March 31, 2021, which included an extraordinarily weak fiscal first quarter as a result of the COVID-19 shutdown across the country and divided by the average equity and net debt balance of $403 million, resulting in a 19.1% pretax return on invested capital.

We are just starting to realize the benefits of expanding our Mexico operations and the launch of our new brake categories. With the expectation of increased returns from both new and existing product lines. This should result in higher ROIC as the benefit of our strategic expansion are more fully realized.

During the fourth quarter ended March 31, 2021, the company repurchased 1.1 million of shares, an average price of approximately $20.70. Under the authorized share repurchase program, as of March 31, 2021, 16.8 million of the 37 million common stock authorization has been repurchased and 20.2 million remain available to repurchase shares. As I mentioned, at March 31, 2021, our net debt was approximately $88.9 million. Total cash and availability on the revolver credit facility was approximately $140.8 million at March 31, 2021, based on a total of $238.6 million revolver credit facility and subject to certain limitations.

At March 31, 2021, the company had approximately $848 million in total assets. Current assets were $423 million and current liabilities were $326 million. We recently announced that the company extended its credit facility with PNC Bank for 5 years through May of 2026, including amendments, which further increase the company's strong liquidity base. For the reconciliation of items that impacted results and non-GAAP financial measures, please refer to Exhibits 1 to 5 in this morning's earnings press release.

I will now open the call for questions, and Selwyn will then provide some closing remarks.

(Operator Instructions) Your first question comes from the line of Scott Stember with CL King.

Yes, coming out of the third quarter, there was a fair amount -- I think it was like $17 million worth of sales that kind of got caught up because of some of the supply chain issues.

Scott, you've faded out. I'm not sure if you're on.

Q4 into Q1?

Yes. You faded out, but I'll guess your question, and I'll restate that. You're asking about the deferral of the revenue that we talked about. That deferral continues on. That deferral, it continues on. I mean the supply chain challenges in the industry, and they are significant deferrals. So the strong revenue is despite the fact there's still continued deferral.

Got it. Could you tell us how much is being deferred? Or at this point, it's just going to be an ongoing thing?

It's an ongoing thing. It's going to be an ongoing thing right now, Scott, it's unpredictable. It's hard to measure because some gets caught up and then additional deferrals come in. So I think it's just a fundamental right now in the industry. I think the whole industry is experiencing this. But the industry needs these parts and when the supply chain catches up, we should catch that up.

Got it. And just in general, I know that we can all look at the -- your customers and look at their retail sales or their comparable sales numbers, they just continue to improve. Can you talk about what you're seeing and do it for me versus do it yourself? I know that miles driven have it definitely improving continually? Just what are you seeing the strength of the pockets of strength that you're seeing right now?

Yes. So it started out a big recovery in the DIY and a boom in the DIY, but we're now seeing it in the DIFM as well. So you've got just a lot more people relying on their vehicles, used cars and we parking lots that are now being driven. And the professional stores are busy. Just come off a couple of professional installer conferences, and they're doing very well. Professional stores are happy. So it's both right now.

Got it. And just lastly, before I jump back in the queue. I appreciate that a lot of volatility right now, hence, the no guidance. But is there anything you can give us just as far as high-level expectations, expectations of growth in 2022, just from a sales perspective, margins on just some high-level data that we can kind of run with for the trajectory of the business?

We expect our margins to be accretive as the year progresses based on the things we mentioned in the call, price increases. And hopefully, we'll have more stability in the supply chain. The supply chain is very unpredictable. As you know, the ship stuck in ports, product is not being manufactured. There's reoutbreaks of COVID in Southeast Asia.

So a very significant -- the demand is predictably very strong. The question is, is the supply going to be strong enough to keep up with the demand. We are in a great position if we can get enough inventory to meet our demand. We're in a great position. But we'll have to see how that unfolds over the next few months.

Our next question comes your next question comes from the line of Brian Nagel with Oppenheimer.

Nice quarter. My first question, I think it's a bit of a follow-up to prior question, but what I'm asking is, I guess, more from a color standpoint, but as the economy, market-by-market has been opening now, and we're heading towards this hopefully post COVID world. What are you seeing as far as demand trends? And again, what I'm getting at is from your business, obviously, we do see the very strong results at your retail partners. But what are you seeing that could basically help us think about the sustainability of this demand, particularly relative to like pre-pandemic levels?

Yes. What's interesting is, and again, without announcing specific customers, I had a cross-section of conversations with various suppliers to the professional installer market. And some of them are quoting 70% gains over the prior pre-COVID revenue levels. Some of it's hard to explain, to be honest with you, but I think we've been talking about for years, the statistics where the average cars are aging. This morning's newspapers were covered everywhere with average age went from 11.9 to 12.1 in the last 1.5 years. A number of cars up on the road. New car sales are a little slower than they have been. But I think a lot of these used cars are getting back on the road.

So cars that were perhaps in the car population that weren't being driven. So we see a resurrection of miles. It looks like the fundamentals are really strong, whether the sustainability at the -- I mean current demand levels are record. Is that sustainable? I don't know that, but I don't anticipate it being softer than in pre-COVID levels. So I do see more dependence on the vehicle. And even -- and just people spending more money on their cars across the board.

Hopefully, that just gives you color, Brian. I don't -- I can't give you any stats because I don't -- I haven't seen any out there. But the color, wherever I turn and whatever conversation I have in the market and I'm talking much more granular with the consumer sort of statistics and just people -- the demand is up.

That's very helpful. The second question I have, is also bigger picture in nature. But we've talked a lot about the portion of the part of your company to EV and talk a little more today about it. At what point does that become a real needle mover for MPAA, this EV push?

I'd tell you, I expect 100% growth in their business this year. Again, it's not -- it doesn't move the needle. But we've got some exciting things that are in the works. We haven't announced them publicly, so I'll stay away from any specifics.

But we think that there's an opportunity to keep that growth rate going. It's a little more unpredictable because of 2 reasons. It's -- number one, on a global basis, it's a brand new market. That's evolving. And number two, it's brand-new for us. So we are a little bit in learning mode, look and listen mode, but indications for what we have are very positive.

Got it. And then just one final question for me. Just on -- I think catch if you talked about this in your prepared comments, but looking at the consumer broadly. I mean inflation is a massive topic right now. What are you seeing in terms of your business as far as inflation, either from your cost perspective or potentially pricing changes you've made to your customers? And any reaction to that?

Yes. So I mean, I will tell you, our margins lower than little bit this quarter, even when you look at the various considerations that affected it. And so we've implemented price increases, and we're one of everyone. That's implemented price increases. Costs are up. And it's my expectation. There'll be some -- the consumer is going to have to pay a little more for their parts. I mean, it's real cost. And it's real inflation, to be honest.

And there is no choice. I mean, the industry is taking -- has taken price increases. And I think we just got to keep our eye on the producer price index and see how that evolves. But for now, the outlook is fairly inflationary and certainly, as a company, we intend to keep our eye on our pricing.

Your next question comes from the line of Sarkis Sherbetchyan with B. Reilly.

Selwyn, it looks like you're building working capital. And clearly, it's going to look like a drag on operating cash flow. So and you're highlighting you have inventory increases for the anticipated business growth in this fiscal year. And I appreciate kind of not providing guidance here in the near term, and you'll reevaluate that. But help us understand the magnitude of inventory growth expected and also linked to that, if you expect the business to generate free cash flow this fiscal year?

Yes. Well, I'll start with the free cash flow. We definitely expect free cash flow this year. It will come a little later in the year. See we invested fairly secondly in inventory in the quarter. Our receivables are growing because of the increased sales. We expect bigger demand for the year. I mean, Sarkis, I'd love to give guidance but I'm just concerned of the unpredictability of when this is all going to happen and how this is going to unfold. I mean we've got I would say, over 1 million units tied up between stuck in ports, whether it be in the United States ports or whether it be in Asian ports. And accidents that have happened in ports. I mean we have closures in Malaysia right now mandatory closure.

So it's very unpredictable. But what is predictable is that the demand is there. What's unpredictable is is how fast we can meet that demand and . Having said that, we are meeting most of it, and we're doing well. But we could be -- we have strong numbers, but these numbers could be even much stronger. I mean, based on demand, if we could meet all the demand.

So I think inventory should plateau barring some additional big ones, which we always look for. And I'm confident we'll generate positive cash flow for the year. So hopefully, that gives you color. I'm not sure I was very specific, but yes.

Yes. No, that's helpful. I think another interesting point is you said inventory should plateau barring some big wins. I guess, can you maybe talk about which categories you're maybe gunning to win some more business? I think your traditional kind of core business that we're aware of, right, probably more of a market share story, but from the brake calibers and related products and certainly the diagnostics, it seems like there could be a little bit more of an open and larger opportunity. I guess any comments on magnitude of what you're pursuing there?

Yes. I mean I would say that, first of all, all the categories have big opportunities for growth. I think brake calipers, we're probably looking at 70%, 80% growth for this year. So a lot going on there. We're busy ramping up. There's inefficiencies in the ramp-up in the beginning, but lots of opportunity there and lots in all the other product lines.

So it's a tough market out there, as always, hard to predict, but we feel, again, pretty good about demand we just, again, one more time, we just got to make sure we can get the supply. And so whatever we can get our hands on an inventory, we're getting our hands on. We may if we're going to make a mistake now, we're going to make a mistake on having more inventory than less just because of the supply. And I don't know what's going to happen as there has -- there seems to be a resurgence of the COVID issues in Asian countries. In certainly, India, Malaysia, Thailand, Taiwan, certain cities in China. I mean, they all sort of are having some type of resurgence. But we've got our eye on it closely. And I expect it to be a positive year still, but giving guidance is a little difficult right now.

Your next question comes from Matthew Koranda with ROTH Capital.

This is Mike Zabran on for Matt Koranda. First, could you guys provide some color on the revenue buildup for the quarter? And maybe talk about the momentum you're seeing in the rotating electrical category specifically?

So I can start out with the allocation of the sales by product line. This will all be available in the 10-K filed later today. For the fourth quarter, about 67% was rotating electrical, wheel hubs was about 19%. Regulated products was 11% and other products was 3%.

Okay. Great. And in the fourth quarter, we saw new product start-up costs at $5 million, assuming that the Mexico move is mostly complete, should we expect this line item to move to 0? And if so, how soon?

Good question. So as I prepared in the -- as I said in the prepared remarks, in this new fiscal year, they're going to be diminishing significantly. So it will definitely go down to 0 a little bit later in the fiscal year.

(Operator Instructions) Your next question comes from the line of Matt Dhane with Tieton Capital Management.

Great. That's Tieton Capital Management. So I wanted to ask, I know you just highlighted that you expect brake calipers to grow at 60% to 70% rate this year. And just wanted to take a step back and ask, if we were to look at the biggest dollar revenue growth drivers as you look at what you expect here this fiscal year? What product lines or offerings do you expect to be the biggest dollar driver in revenue growth?

Again, it's going to be hard to predict for the year. But we certainly -- again, I mentioned the brake calipers, I mentioned 100% growth in our EV business, and we expect solid growth in the other categories.

Is there any category that you're not expecting growth in at this point in time, Selwyn?

No.

And we have no further question at this time. Presenters, please continue.

Great. Well, I appreciate everybody's interest. I wanted to thank all our team members, firstly, for their ongoing commitment and customer-centric focus on incredible service during these challenging times. Their health and safety are our top priority, and I'm excited about the number of people that are being vaccinated, and especially as we move into some of the third world countries that we're in.

We remain extremely vigilant to protect our global team from this horrible virus, and we're working diligently to get even more of our employees and their family members vaccinated. In fact, this Friday, June 18, we'll be hosting a Pfizer mobile vaccine clinic, which is open to our employees, neighbors, and we encourage everybody to attend.

For the most part, our corporate team is continuing to work remotely, though we remain committed to gradually and safely returning our team back to the office as conditions permit. As a result of everyone's contributions, our operations have continued largely uninterrupted, and I'm extremely, extremely proud of our company.

In summary, our investments are bearing fruit we have reached important inflection points with strong positive cash flow, solid earnings performance, debt reduction and meaningful opportunities to enhance shareholder value in a dynamic $130 billion automotive aftermarket industry. And the emerging electric vehicle industry.

We are proud of our more than 50-year history in the aftermarket industry and are excited about our emerging presence in the electric vehicle space, and all of us are committed to our vision of being the global leader for parts and solutions that move our world today and tomorrow.

We appreciate your continued support, and thank you again for joining us on the call. We look forward to speaking with you when we host our fiscal 2022 first quarter conference call in August and at investor conferences and hopefully in person some time in the future. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.