Prepared remarks
Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Motorcar Parts of America Inc. Fiscal 2025 First Quarter Conference Call and Webcast. I would now like to turn the call over to Gary Maier, Vice President of Corporate Communications and Investor Relations. You may begin.
Thank you, Kayla, and thanks, everyone, for joining us for our call. Before 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 made during today’s call. These forward-looking statements are based on the company’s current expectations and beliefs 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 various filings with the Securities and Exchange Commission. I would now like to turn the call over to Selwyn to begin today’s call.
Thank you, Gary. I appreciate everyone joining us today. We were encouraged by our record sales performance for the quarter and remain optimistic about the quarters ahead and achieving our full-year targets. For the quarter, our gross profit and gross margin metrics improved, which David will discuss in more detail, and we expect to realize further improvements through solid sales performance combined with ongoing strategic initiatives to enhance operations. Unfortunately, our results for the fiscal first quarter were impacted by a sharply unfavorable non-cash mark-to-market foreign exchange loss from the lease liabilities and forward contracts due to a strong dollar versus the peso. From an operational standpoint, results were impacted by one-time severance expenses related to strategic cost reductions. This initiative will generate expected annualized savings of approximately $7 million.
Approximately 90% of these savings will reduce the cost of goods sold and the remainder will reduce operating expenses. This action was part of a multiyear relocation process to reduce costs, utilizing our new low-cost global footprint and facilitate further operating efficiencies. We are actively exploring additional initiatives to further reduce the cost of goods sold. I should note our results for the quarter reflected some industry choppiness with the month of June regaining some momentum. This bodes well for the current fiscal second quarter, which historically is stronger than the first quarter. We are off to an excellent start for the second quarter with a strong July. We operate in a market where deferring repairs is not a viable option for too long, other than rotating electrical, which you can’t defer at all. Hot weather will certainly hasten the failure of all parts that we offer.
Let me take a moment to highlight a few key near-term strategic initiatives that support our favorable outlook. As I noted during our year-end call, volume increases in our brake program will help absorb overhead, which in turn will result in accretion to overall margins. We expect accelerating brake-related product sales will lead to more opportunities to take advantage of efficiencies from both purchasing and production. As many of you know, we started our Brake Caliper business as a greenfield operation in August of 2019. And today, we are one of the leading suppliers in this category. As our newer brake product lines gain traction, we expect more efficient inventory turns to further support initiatives to neutralize working capital. Second, with respect to generating cash from working capital on a year-over-year basis, we are focused on inventory and accounts payable, which David will expand upon shortly.
We have implemented processes to extend days outstanding on accounts payable and to enhance inventory efficiencies. These processes are still in their early stages; however, we are recognizing meaningful benefits, in particular with our Supply Chain Finance program. We continue to evaluate the allocation of capital to maximize shareholder value. The first-quarter working capital ratios were somewhat negative, though we are confident that working capital ratios will move in the right direction, as David will discuss further. Another positive ongoing initiative is the acceleration of our new part number introductions, targeting at least 800 per year, as supported by the introduction of more than 150 new part numbers last month, covering an additional 49 million vehicles on the road. This maintains our leadership position in the categories we supply, meets consumer needs, and adds organic growth to our sales base.
Not only are we growing organically, but we have secured meaningful new business commitments across all of our product lines. With respect to our Diagnostic business, as I’ve previously mentioned, we expect to sell more than $100 million of diagnostic equipment within the next three years, with further opportunities pending. We expect additional service revenue as more testers are deployed. We expect more opportunities outside North America as the business evolves. With regard to our Heavy-Duty business, we continue to leverage our reputation and industry position in this market, particularly with regard to supplying alternators and starters to our channel partners who are leaders in the Heavy-Duty aftermarket segment. Our growth opportunities continue to gain momentum across multiple platforms, such as agriculture, Class 8 trucks, refrigeration, construction, material handling, and transit/motor coaches.
Dixie is also evolving as an important supplier to the heavy-duty original equipment manufacturers. As the new fiscal year evolves, we remain focused on sales, profitability, and neutralizing working capital. We are confident that our sales and profitability will grow organically and with our strong new business commitments, as I mentioned earlier. This, along with numerous efficiency initiatives, will enhance profitability and improve cash flow generation. From a strategic standpoint, we are continuing to leverage our strengths, including great products manufactured at state-of-the-art facilities, solid customer relationships, industry-leading SKU coverage, not to mention our value-added merchandising and marketing support. I should mention that we opened a new facility in 2024 in Malaysia to support the manufacturing of wheel hubs for direct shipment to our customers, which is expected to enhance our competitive position.
Our Hard Part sales in Mexico continue to gain momentum as we experienced increased demand for our aftermarket parts. The rate of growth in this market is exciting, and we are well positioned to utilize our footprint to meet the growing demand. We are focused on increasing market share in this region. We continue to benefit and grow sales via our relationships with U.S.-based retailers who are gaining a presence in this emerging market. Favorable long-term industry dynamics continue to bode well for the company, and we are extremely well positioned for sustainable top- and bottom-line growth in our Hard Parts business, as well as our Testing Solutions business. We are focused on growth across all the product lines, including our quality build brand, which is gaining market share within the professional installer market. This includes our most recent additions to our portfolio of brake calipers, brake pads, and brake rotors.
I reiterate, as we grow these product lines, we expect overall gross margin accretion. In short, we have the capacity and capabilities to support our customers’ increasing demand across multiple lines. Our expected positive cash flow on an annualized basis will enable us the flexibility to further pay down debt and pursue other related opportunities to enhance shareholder value. In conclusion, non-discretionary aftermarket parts of the internal combustion engine market will be here for decades, an outlook supported by recently updated industry data showing that the average age of vehicles is now 12.8 years. It is worth highlighting that 98.8% of the U.S. car park is comprised of hybrid and internal combustion vehicles. One of our key competitive advantages is our ability to offer a broad range of applications for all makes and models. We remain focused on newer model applications and our ability to meet expected demand as these vehicles enter the replacement market.
Finally, before I turn the call over to David, I’d like to comment on our recent announcements regarding Jack Liebau and Anil Shrivastava, who are standing for election to our Board at the company’s annual meeting next month. Their impressive backgrounds and qualifications are detailed in the press releases and proxy statement. Let me just say both of these candidates offer unique perspectives and insights that will complement our commitment to driving shareholder value, at a particularly exciting point in the company’s history. These two fine candidates are indicative of our commitment to our Board refreshment program. I encourage everyone to read their biographies and support the nominees. I’ll now turn the call over to David to review our results in greater detail.
Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning as well as the 10-Q that will be filed later today. Let me first reiterate key financial performance metrics for our fiscal ‘25 first quarter that we highlighted in this morning’s news release. Net sales increased 6.4% to a first quarter record of $169.9 million. Gross profit increased 9.8% to $29.2 million. Gross margin increased modestly to 17.2%. Operating results impacted by an unfavorable non-cash $11.1 million foreign exchange loss from lease liabilities and forward contracts, implemented cost reduction initiatives to provide expected annualized savings of approximately $7 million. Net sales for the fiscal ‘25 first quarter increased 6.4% to a first quarter record of $169.9 million from $159.7 million in the prior year. Gross profit for the fiscal ‘25 first quarter increased 9.8% to $29.2 million from $26.6 million a year earlier.
I should mention that gross profit for the quarter was impacted by non-cash items. The non-cash items reflect core and finished good premium amortization and revaluation of cores on customer shelves, which are unique to certain of our products required by GAAP. The total for these non-cash items in the quarter was approximately $2.7 million. A more detailed explanation of core accounting is available in a video posted on the company’s website. Gross margin for the fiscal ‘25 first quarter increased to 17.2% from 16.6% a year earlier. Gross margin for the fiscal first quarter was negatively impacted by higher returns as a percentage of sales, but we expect to return to normalized return levels going forward. Additional price increases in effect and operating efficiencies will enhance gross margin, due primarily to a $15.3 million increased non-cash mark-to-market foreign exchange loss compared with the prior year and a $1.9 million increased expense resulting from currency exchange rates compared with the prior year as well as $2.9 million in severance expenses.
Operating expenses were $35.6 million compared with $16.1 million last year. I should note that excluding these items above, operating expenses decreased by $644,000 to $20.7 million compared with $21.3 million a year earlier. Non-cash loss for the foreign exchange impact of lease liabilities and forward contracts was $11.1 million compared with a non-cash gain of $4.3 million a year earlier. In addition, the company incurred $2.9 million in severance expenses due to headcount reductions in connection with our strategy to utilize our global footprint to enhance operating efficiencies with expected annualized cost reductions of approximately $7 million, which includes salary, infrastructure, and other related operating expenses. Results for the fiscal first quarter were impacted by $2.7 million of higher interest expenses primarily due to increased collection of receivables, utilizing accounts receivable discount programs on higher sales, partially offset by lower average outstanding balances under the company’s credit facility.
Interest expense was $14.4 million compared with $11.7 million for last year, which is primarily related to accounts receivable discount programs. Interest expense related to accounts receivable discount programs was $9.5 million compared with $6.3 million for the prior year. We are working diligently to address the higher interest environment, particularly areas that we can control. In addition, we continue to work with our customers to mitigate higher interest rates. For the first quarter, income tax benefit was $178,000 compared with a $9,000 income tax benefit for the prior year. The low effective tax rate benefit for the fiscal first quarter was due in part to the inability to recognize the benefit of losses at specific jurisdictions. However, we expect these losses will be utilized against future profits, which will benefit future tax rates. Obviously, there are various factors impacting the tax effect.
As a result of the items discussed above, net loss for the fiscal ‘25 first quarter was $18.1 million, compared with a net loss of $1.4 million a year ago. With higher expected sales volume moving forward and the full impact of certain price increases already in effect as well as operating efficiencies, results are expected to further improve. Due primarily to the items I discussed previously, EBITDA for the fiscal first quarter was negative $1.1 million, reflecting the negative $12.6 million impact of non-cash items and $2.9 million in cash items, in Exhibit 3 of this morning’s earnings press release. EBITDA before the impact of non-cash and cash items mentioned above was $14.4 million for the first quarter. Now we will move on to cash flow and key corporate items. The company used cash of approximately $20.8 million in operating activities, during the fiscal ‘25 first quarter, impacted by a reduction of accounts payable related to the seasonal inventory growth during the second half of fiscal year 2024 to support expected business increases for fiscal year 2025.
We anticipate an increase in operating profit on a year-over-year basis for fiscal ‘25 and the generation of positive cash flow for the year, supported by organic growth from customer demand and operating efficiencies from our global footprint expansion. In addition to our goal of generating increased operating profits, we’re diligently focused on opportunities to neutralize working capital, including customer demand planning, enhanced inventory management, and further extending our vendor payment terms. We expect increasing financial performance from both new and existing product lines, including our emerging brake categories. Net bank debt was $136.3 million at the end of the quarter, compared with $114 million as of March 31, 2024. However, net debt was lower compared with $168.1 million at prior year June 30, 2023. Total cash and availability was approximately $90 million. As previously provided, our expectation for fiscal ‘25 is to achieve sales in the range of $746 million and $766 million, representing between 3.9% and 6.6% year-over-year growth respectively.
We expect to see margin accretion from efficiencies related to higher volume, price increases, and cost-cutting initiatives. With respect to cash flow, our expectation is to generate positive cash flow for the full fiscal year as I previously highlighted. Operating income is expected to be between $62 million and $67 million before the non-cash foreign exchange impact of lease liabilities and forward contracts, and the non-cash impact of the revaluation of cores on customer shelves and also before one-time severance expenses. The company estimates other non-cash items will be approximately $17 million, including core and finished good premium amortization and share-based compensation. The company estimates depreciation and amortization will be approximately $11 million. In summary, operating income before the impact of the non-cash and cash items mentioned previously and before depreciation and amortization is expected to be between $90 million and $95 million.
For further explanation on the reconciliation of items that impact results and non-GAAP financial measures, please refer to Exhibits 1, 2, 3 in this morning’s earnings press release. I would now like to open the line for questions.
Questions and answers
Our first question comes from the line of Matt Koranda with ROTH Capital Partners. Your line is open.
Good afternoon. This is Joseph on for Matt today. I wanted to ask if you could provide a breakdown of revenue by product line in 1Q? And if you could comment on inventory at retail customers and sell-through versus sell-in dynamics in your key product categories during 1Q and through quarter-to-date?
For the first quarter, the product mix was 65% rotating electrical, 7% wheel hubs, 24% brakes, and 4% others.
In terms of just moving forward and talking about the retailers and inventory levels, I mean, I think in general, what we’re seeing is that there’s a pickup in the business. I mean, I think we’ve had some softness, and wherever there’s been a possibility for the consumer to defer maintenance, they’ve taken that opportunity. But, I think the hot weather has positively impacted sales in July; it was the highest July we’ve ever had in the history of the company. So we’re seeing customers bring in inventory with the expectation of some improvement. I don’t think we’re totally there yet as an industry, but due to consumer disposable income, we are on our way, and we’re extremely encouraged by our progress right now. I think that conjunction with the significant cost savings initiatives we’ve completed and others that are still in process are showing positive results.
And if I could just squeeze one more in, we wanted to see what your latest thinking on interest expense, given rates are coming down. How should we think about the cash interest savings potentially to come for the rest of the year?
Well, I mean, every point in interest reduction on the supply chain factoring is worth $7 million to us. So we’re encouraged by the reduction in interest. I mean, that’s certainly been a tremendous headwind for us. We are excited that the rates are coming down. But we’re not stopping there. I mean, we’re tackling every bit of waste through lean manufacturing and lean operations. With the volumes we’re getting now and with some of our new product lines, we can take our efficiencies up dramatically. So we’re excited. We believe there are a lot of tailwinds for us on the earnings side moving forward.
Thank you for taking my question, guys. I will back into the queue.
And your next question comes from the line of Bill Dezellem with Tieton Capital. Your line is open.
Thank you. Would you please start with inventory and discuss why you saw that increase versus a year ago level?
So the inventory saw a small growth in the first quarter, primarily due to upcoming sales increases we’re expecting. So we are ramping up our guidance for strong growth for the full fiscal year. So we need the inventory to meet our demand.
And I think you’ll see that moderate pretty dramatically. I mean, as we’re coming into our season, our second quarter is much stronger than our first quarter. So you’ll see significant progress in working capital as we get through this quarter.
Thank you. And then on that note, when does the next tranche of Brake business come into your revenues?
Let me try and answer that. The biggest piece starts in January, but we have other new business starting between now and then. We have a new business in Wheel Hubs that’s starting now, and we have additional Rotating Electrical business starting in the next two to three months as well as significant new business in our Diagnostic business and additional Hard Parts categories. We don’t want to get ahead of our skis, but we have this in our guidance, and the opportunities we’re seeing, with the correct pricing and operating efficiencies, certainly are driving better profit metrics as we move through this year.
Thank you. And I think in the opening remarks, David, you had mentioned that returns were higher than normal. Could you walk through the dynamics behind that? And what aspect of that is unique versus something that may naturally happen again?
Yes. So it happens every now and again. I’m not going to call out customers, but we have one very large customer whose purchases were at a lower level, but returns are at a general rate of return. So you get the same returns back regardless of the purchases. So the returns as a percentage of purchases for this customer were higher. Now that has changed; it has already reversed out in this quarter. So far, we’re seeing very, very strong results, and those return levels should return to normalized levels going forward.
What was the dollar impact of that on income?
We did not disclose the dollar amount, but it did have a small impact on the gross margin percentage as well as sales.
Great. Thank you. And then one additional question relative to the Quality-Built brand, are you seeing any spillover from that brand’s success in the professional market on the brake side for the rotating electrical side of the business?
You raise an interesting point. I’ve had very unique calls from customers, particularly one large customer who expressed that the acceptance and renewal rate of installers using our product is extraordinarily good. This indicates that we have something special. As such, we expect to see strong sales as the installer recognizes our brand. We should continue to see positive sales across all product lines as a result of this brand recognition and success. Furthermore, we see significant growth in our Mexican opportunity which we will get more granular about later in the year. Additionally, our Diagnostic business is now being embraced by every major chain out there, leading to further growth and high margins. Our Heavy-Duty Rotating Electrical business is also gaining momentum. So these are positive trends we're experiencing throughout the business.
Selwyn, it did hit my questions, but did create two others. Relative to the call you received regarding the renewal rate with the installers and the Quality-Built brand being very high. Was that specific to the brake pads and rotors or broader than that?
Specifically to the pad and rotor program. So very encouraging there. I will say that there’s a general significant softness in the tire industry. I’m hearing it’s getting a little better, but still soft. When that happens, installers might only opt to replace the least expensive repair; however, we expect growth despite these challenges.
Relative to the opportunity in Mexico, I have been unclear how to think about that opportunity because the installed base of vehicles is much smaller than the U.S. My impression is that the average age of vehicles in Mexico is older than in the U.S. If that's correct, how are you thinking about this?
Yes, you’re correct. The fleet is smaller than the U.S., but it's still significant, and the average age continues to rise. Disposable income is increasing in Mexico. There has been a shift toward purchasing finished goods instead of rebuilding engine parts. Major retailers like AutoZone and O’Reilly's are entering the market. We have a strong presence and product lineup for the Mexican market, and we believe it's going to turn out to be a substantial opportunity for us.
Great. Thank you for taking all my questions.
And there are no further questions at this time. Selwyn Joffe, I’ll turn the call back over to you.
Okay. Thank you so much. To summarize, we are bullish as we begin our new fiscal year. We’re laser-focused on further efficiencies. We have strong liquidity and the resources, capacity, and expertise to capitalize on significant market opportunities across our product lines, particularly our brake-related businesses, which are gaining solid momentum. I extend my best wishes to Rudy and Jamie, who are retiring from our Board. We greatly appreciate their contributions. Lastly, thank you to our shareholders. We look forward to our fiscal 2025 second-quarter call in November and various investor conferences this fall. Thank you very much.
And this concludes today’s conference call. You may now disconnect.