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. [Operator Instructions] 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, 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 further 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 onetime 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 cost of goods sold and the remainder will reduce operating expenses. This action was part of a multiyear relocation process to reduce cost, utilizing our new low-cost global footprint and facilitate further operating efficiencies. We are actively exploring additional initiatives to further reduce 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…

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, $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 prices 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…

[Operator Instructions] 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 guys could provide a breakdown of revenue by product in – by product line in 1Q? And if you guys can 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?

Okay. I could start. For the first quarter, the product mix was 65% rotating electrical, wheel hubs was 7%, brakes were 24% and others was 4%.

Yes. 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, I think that there’s been – wherever there’s been a possibility for the consumer to defer maintenance, they’ve had that deferral. But the – I think the hot weather and we’re seeing – we’re certainly – our sales in July, but frankly, it was the highest July we’ve ever had in the history of the company. So we’re seeing customers bring in inventory and with the expectation of some pickup. I mean, I don’t think we’re totally there yet, but as an industry, but due to, again, disposable income of the consumer, but, certainly. I think we are on our way, and we’re extremely encouraged by our progress right now. I think that in conjunction, by the way, with the significant cost savings initiatives, one, we’ve completed and others that are still in process. We’re excited about where we’re moving to.

And if I could just squeeze one more in there, 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 just 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 encouraged that the rates are coming down, and we’re excited about that. And – but we’re not stopping at that. I mean we’re taking every bit of waste or what – when we use the concept of lean manufacturing and lean operations, waste has to be eliminated. And with the volumes that we’re getting now, and our new – some of our new product lines, we can take and – it’s not – I hate to use the word waste a little bit, but we can take our efficiencies up pretty dramatically. But that is a sort of term of art for the manufacturer. So we’re excited. I mean, we think that there’s a lot of tailwinds for us on the earnings side moving forward.

Alright. Thank you for taking my question, guys. I will back into queue.

Thank you very much.

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 kind of why you saw that increase versus a year ago level?

So the inventory, there was a small growth in the first quarter, primarily for the update – upcoming – sales increases we’re expecting. So we are ramping up our guidance, again, is a strong growth for the full fiscal year. So we need the inventory to supply our demand.

Yes. 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 – the biggest piece starts in January, but we have other new business that’s starting between now and then. We have a new business in Wheel Hubs that’s starting now, and we have additional Rotating Electrical business that’s starting in the next few 2 to 3 months and then additional Brake business starting and significant new business in our Diagnostic business and some additional Hard Parts categories and – and again, we don’t want to get ahead of our skis. I mean we’ve got this in our guidance, but the amount of opportunities that we’re getting and seeing, have the correct pricing with the correct operating efficiencies, certainly are driving to see better profit metrics as we get 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, Bill. And it’s – and I’m not going to call out customers. We have one customer, a very large customer, whose purchases were at a lower level but returns are – there’s a general rate of return. And so you get the same returns back regardless of the purchases. So the returns as a percentage of purchases, for this particular customer, were higher. Now that has changed. It has already reversed out in this quarter. So again, we’re a little early in the quarter, but so far, very, very, very strong, and those return levels should come back to normalized levels. They are at normalized levels now, hopefully, that will maintain itself. And then we had one other – and it’s not – that won’t come back, but we had one other large incentive program that was taken early as a result of renewal of a contract. So – and that’s – it’s one time for that particular event, but I mean, that affected us a little bit as well in the quarter. But we – again, those are both behind us and again, we’ve seen significantly more positive energy in sales right now.

Thank you. What was the – I missed in the opening remarks, the dollar impact of that to 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? Or are those different enough that there really is not an opportunity for a benefit?

Yes. You open – I’m going to give you a little more of some background, some great feedback that we’re getting, and then I’m going to try and open to answer your question. On the brake side, I’ve had very unique calls from customers that – particularly one large customer that is saying, that the acceptance rate and the renewal rate of installers that are using our product is extraordinarily good. And unusual call from a particular customer saying, how they think we’ve got something extremely special. And when you hear that from the field, I mean, that’s pretty exciting. So when the installer sees that name and has a great experience on it, it will spill over, and is spilling over. And so we’ll continue, I think, to see strong sales. I think we’re going to see strong sales clearly from Quality-Built across the professional installer market across all of our product lines. And certainly, will help all of that and depending on which one leads, we have a portfolio of excellent products. So any experience with the Quality-Built brand should add to experience in other product lines for the Quality-Built brand. And I also want to say, while I got you, Bill, and I appreciate you just giving me the floor here a little bit, but the growth in the Mexican opportunity for us is proving to be significant and we’ll get more granular later as we go into the year. But the growth there continues to be very, very exciting. And we think there’s a big opportunity for us there. And then not last, but a couple more things is, the Diagnostic business is now pretty much being embraced by every major chain out there. And so we’re going to see further growth and high margin out…

Selwyn, it did hit my questions, but did create two others. Relative to the call that you’ve received that the renewal rate with the installers and the quality built brand is very high. Was that specific to the break pad and rotors? Or was it broader than that or on a different product line?

Specifically to the pad and rotor program. So very, very encouraging there. I will say one of the things that’s happening in the industry around pads and routers is that, there’s a general significant softness in the tire industry. I’m hearing that it’s getting a little bit better, but still very soft. And what happens is – when that happens is that the installer usually – they get the opportunity to replace all four tires in the vehicle will cross-sell the brake program. What’s happening is the consumer is just electing to go with the least expensive repair and only repair the one tire or whatever they need. And so the cross-selling opportunity on these brake jobs is much slower than it has been in a while. And that’s providing some headwind in those categories. Having said that, we’re coming off a very small base. And we expect that to continue to grow despite that. But that will change as well as tires don’t last forever, and consumer is going to need to replace them.

And the second question – I’m sorry, Selwyn, go ahead.

No. About the pads, as you had mentioned, just summarizing back, that’s where extreme satisfaction on the pad rotor program.

Great. And then relative to the opportunity in Mexico, I’ve been a little unclear how to think about that opportunity because the installed base of vehicles is much smaller than the U.S. My impression, this is not – I don’t know this to be factually correct, but my impression is that the average age of the vehicles in Mexico would be older than the U.S. So how are you thinking about this? If my perception is correct that the fleet is smaller, but the age is higher, which would lead to more repairs. What’s the right way to be thinking about Mexico?

Yes. So you’re correct. I mean, the fleet is definitely smaller than the United States. It’s still a pretty significant fleet, and the average age continues to get older there. But disposable income, I mean – and this is a bad thing for us is minimum wages in Mexico keep going up. Disposable income in Mexico keeps going up and the market is evolving there. And so historically, you’ve had what I would classify as an R&R market where something that went wrong with the car, if an alternator went bad, they tow it off and the mechanic would rebuild it or they would replace componentry in it. Today, you’re seeing the AutoZone’s and the O’Reilly’s of the world, who are leading the U.S. charger to Mexico selling finished goods, and so the average price point of pads for the these vehicles has fallen out, people are spending more money and they’re more concerned about how they repair that vehicle. And the amount of penetration – formal penetration – the market there is defined as other. There’s so many small players that have been in that market. Now you’ve got big consolidators that are rolling into that market and opening up significant stores. I’d encourage you just to listen to both O’Reilly and AutoZone’s public announcements on Mexico. And we’re playing – and not only that, I mean, we’re playing – we have a great product lineup for the Mexican market. We’re in Mexico. We have state-of-the-art capabilities right there. And we’re doing well, and we’re going to do a lot better in Mexico. It’s going to turn out to be a great business. I mean, I do think it’s a north of a $100 million opportunity for us.

Great. Thank you for taking all my questions.

Thank you. 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. So just to summarize, we are bullish, as I’ve just spoken, as we begin our new fiscal year. We’re laser-focused on further efficiencies, and I accentuate that, and we are laser-focused on further efficiencies and fully benefiting from a not easily duplicated global platform, where we can meet demand for non-discretionary products as well as from our diagnostic testing capabilities. We are leveraging our expertise in solid customer and supplier partnerships. These include our recently launched Supply Chain Vendor Finance program and that benefits our supplier significantly. Our liquidity is strong. We have in excess of $90 million, and we have the resources, capacity and professional expertise to capitalize on significant market opportunities in all of our product lines, particularly our brake related businesses, which are gaining solid momentum. In closing, I’ve got to recognize the contributions of all of our team members. We are continuously focused on providing the highest level of service. They are outstanding. We are all committed to being the industry leader for parts and solutions that move our world today and in the future. I would also like to extend best wishes to Rudy and Jamie, who are retiring from our board. We significantly appreciate the great contributions of the [indiscernible]. We also appreciate the continued support of our shareholders. I thank everyone again for joining us on the call. We look forward to speaking with you when we host our fiscal 2025 second quarter call, which is in November and at various investor conferences and meetings this fall. Thank you very much.

And this concludes today’s conference call. You may now disconnect.