Hello, and thank you for standing by. My name is Regina, 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 Third Quarter Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Gary Maier, Vice President, Corporate Communications and Investor Relations at Motorcar Parts of America. Please go ahead.

Thank you, Regina. Thanks, everyone, for joining us for our call this morning. Before I begin, I will turn the call over to Selwyn Joffe, Chairman, President, and Chief Executive Officer, and David Lee, the company's Chief Financial Officer. Let me 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 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 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 company's business, I refer you to the various SEC filings. With that, I'd like to begin the call and turn it over to Selwyn Joffe.

Thank you, Gary. I appreciate everyone joining us today. We are certainly encouraged by our record sales, gross margin improvement, and solid cash flow generation for the fiscal 2025 third quarter. Our initiatives to enhance profitability are gaining traction. Our team continues to be focused on continuous improvements, and we are excited by the opportunities for the balance of fiscal 2025 and beyond. We generated approximately $34.4 million of cash from operating activities during the fiscal third quarter, primarily due to strong operating profits. We remain focused on initiatives to enhance profitability, including gross margin expansion and neutralizing working capital, which should continue to result in strong cash flow generation. With regard to our balance sheet, our positive cash flow and related initiatives enabled us to reduce net debt by $30.3 million for the fiscal third quarter, resulting in a 26% reduction to $84 million from $114 million. In addition, as highlighted in our earnings press release this morning, we repurchased 268,130 shares or $2.1 million at an average price of $7.82 under our current reauthorized repurchase authorization program. We anticipate further opportunities to enhance shareholder value through strong cash generation and the neutralization of working capital. I should mention that rotating electrical, a 50-plus year flagship category, continues to generate solid performance. We expect further opportunities to add retail and traditional customers despite some recent market softness. As I've mentioned many times, the replacement of alternators and starters cannot be deferred. If these products are broken, your car is not drivable, and the aging car park remains a favorable tailwind with multiple replacement opportunities for the life of the vehicle. We are also particularly excited by the continued success of our emerging and second-largest category, brake-related products. We expect continued success in this category based on our quality, customer…

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 the fiscal 2025 third quarter that we highlighted in this morning's news release. Net sales increased 8.3% for a fiscal third quarter record of $186.2 million. Gross profit increased 49.4% to a record $44.9 million. Net income for the quarter was $2.3 million. We generated cash from operating activities of $34.4 million and reduced net bank debt by $38.3 million. We repurchased 268,130 shares for $2.1 million. Non-cash items reduced net income by $5 million and gross profit by $3.4 million for the quarter, as detailed in the exhibit. Net sales for the fiscal 2025 third quarter increased 8.3% to a third quarter record of $186.2 million from $171.9 million in the prior year. Gross profit for the fiscal 2025 third quarter increased 49.4% to a record $44.9 million from $30 million a year earlier. I should mention that gross profit for the quarter was impacted by non-cash expenses. The non-cash expenses reflect core and finished good premium amortization and revaluation of core on customer shelves, which are unique to certain of our products and required by GAAP. The total for these non-cash expenses in the quarter was approximately $3.4 million or a 1.8% impact on gross margin. Gross margin for the fiscal 2025 third quarter was 24.1% compared with 17.5% a year earlier. Aside from higher sales volume, particularly from certain of our newer product offerings, which supports increased absorption of costs, we are also focused on other initiatives to enhance gross margin. Predominantly due to a $2.5 million non-cash mark-to-market foreign exchange loss compared with a $3.1 million non-cash…

We will take our first question from the line of Derek Soderbergh with Cantor Fitzgerald. Please go ahead.

Yeah. Good morning, guys. Thanks for taking my questions. Just wanted to start with the tariff environment quickly. Selwyn, you've sort of been through a similar tariff environment before. Can you sort of clue us in on what conversations you're having with suppliers and customers, and how we should think about the potential impact of tariffs on the business? And then, given your fairly global manufacturing footprint, is there a scenario where you shift around manufacturing at all?

Okay. So let me, let me, there's a lot there, and obviously, it's very fast-evolving and a lot going on. Just to start with the general environment, there are hundreds of suppliers that are implementing tariff surcharges for the Chinese tariffs, and we're one of them. So we have implemented tariff surcharges. I'm sure, and again, this is speculation, but I've listened to various public forums where our customers are talking about passing these tariffs on to consumers. You know, we have been somewhat fortunate in that over the last number of years, we've become less dependent on China, even though we still do have a relatively decent-sized tariff base that we'd have to pay tariffs on, but we don't believe that our out-of-pocket will be material. And so, you know, at this point, again, we're managing through it, but, you know, we think we're gonna be fine.

Got it. That's helpful. And then just on the gross margins, it looks like the story is playing out really nicely here. Is there any way you could maybe quantify some of the gross margin expansion? Quite a big step up year over year. You know, it sounds like you've gotten some favorable scale pricing, accretion. Is there any way to quantify those that drove that expansion?

Yes. And then let me deal with that one. We can only talk about the segments, and you know, we have limited. But I think the story is, you know, on a simplistic basis, which nothing is simple, is wherever we have product revenue, we have initiatives going to implement more and more efficiencies. And as our revenue continues to grow, you know, the overhead absorption is a natural, and we talked about production and efficiencies. It all comes naturally as well as us working through it and various automation initiatives and all sorts of initiatives to continue, and they're paying off. And, you know, we relocated a Torrance facility that is, you know, essentially, there's no more production or distribution there. So that's all into Mexico right now. As far as changing our footprint, I think you'd asked that. I don't think we're any worse off than anybody, but I will come as I think we're better off than the general competitor. It seems that, you know, there's a floor of 25% tariffs on Chinese goods right now, and now there's this extra 10% surcharge. So there's 35%, and if we look at our other main operating venues, Mexico, obviously, we came close to having tariffs there, but it looks like, and again, I don't know, but from my readings, it looks like the Mexican and US governments are cooperating. Canada is relatively minor for us. So I don't see us moving right now any production or anything.

Got it. That's helpful. And David, just, you know, looking at cash generation, it's been pretty strong here, paying down debt, like interest expense is gonna come down. You know, I guess, looking ahead, how do you plan on using cash? You know, you bought back some shares here. Is that the expectation to continue that? Can you just talk about the use of cash going forward?

Yes. You hit it on the nail. So we're gonna continue to generate good cash flow, pay down debt, be opportunistic with share purchases, and do all the right things to increase shareholder value.

Got it. That's helpful. It's all for me. Thanks, guys.

Thank you. Appreciate it, Derek.

Again, for any questions, press star one on your telephone keypad. Our next question will come from the line of Bill Dezellem with Tieton Capital Management. Go ahead.

Thank you. I also want to follow up on gross margin and hoping you can provide a bit more perspective. In this context, your sales in December were lower than they were in September. I think that's the normal seasonal pattern. And yet, your gross profit dollars were higher in December at nearly $45 million versus about $41 million in the September quarter. So you had lower sales and higher gross profit dollars. Would you talk in more detail about kind of that specific swing and the success there?

You know, we continue to be focused on every quarter being more efficient with our operating model. So in the December quarter, we were even more efficient than the September quarter. So all those initiatives we have to expand gross margin, dollars, and percentage are really paying off. And we will continue to be focused on expanding margins.

And following up on that, what initiative or initiatives were most impactful sequentially?

You know, people used to ask me that about the restaurant business. What does it take to have a successful business in the restaurant business? And I used to quote a famous restaurateur. It's not one thing. It's a thousand little things. And so, I mean, it's focused around production efficiencies is really where there's a lot of activity as we scale the production facilities. So when you have economies of scale and you're able to reallocate and allocate production volume in a more efficient manner, I mean, that's why you get these results. It's sort of like you're able to fill each of the channels of need for production in a different production arena. So volume, and we've been talking about this, volume is definitely part of that. And then the ability of us to have a seasoned workforce. We've never had a great workforce, a very knowledgeable workforce, and as they grow and get more seasoned on the new product lines, we're seeing tremendous inroads and great innovation in terms of, again, becoming more efficient. So there's no one thing. I mean, I think that our strategy is to eliminate waste wherever we can and neutralize working capital. That makes it easier.

And I think that's where my favorable were down even if seasonally the norm. And yet your gross profit was up. Nice. That just seemed extraordinary.

Yeah. Then it also relates to how much production you've got in the quarter. We had new business coming on for production. So the volume is not, you know, for manufacturing activities, mine volume for us is not directly related to sales always. I mean, we are ramping up for new business. So, again, the different initiatives take effect of producing initiatives and apply to volume and no volume, but having overall volume allows you to get those concessions.

And I think you all have talked on the last call or two about how you have additional brake business that would be ramping in calendar 2025. So this calendar year. So are we seeing the production benefits flow through the margin of that business that will then see the sales benefits in the March and following quarters?

Yeah. Actually, you're seeing a little bit of an intro. We do have new business that's being ramped up, but in the beginning, as you're building inventory for this new business, there's some inefficiencies because you're building some lower volume items. We should see those margins get better as we roll this business out, and that's going quite well. Thank you.

Alright. That's helpful. And relative to the brake caliper ramp-up to whatever normalized volumes are, where are we at in that ramp process?

I would say it's hard to tell that because, you know, to give you a number. I will give you a number in a moment. But one thing is you set out to begin a new category. You design a facility that you think can hit a certain benchmark. And as you operate it, you learn from it, and I'm happy to say that I think that our capacity will end up being greater than we anticipated it to be. So our expansion opportunities in that facility will be greater. But so it's a moving target as to what the denominator is. The numerator, we know what to do with it. But there's a lot of opportunity for growth that I, you know, so I don't want to, I mean, I can give you a percentage, but it's not a helpful percentage because we're more efficient at a lower percentage of capacity today than we thought we would ever be. And so, and what that means is that the factory opportunity has grown without additional, you know, CapEx, or we are able to produce more units, and then we'll even get more efficient out of that facility as time goes on. But we are a major player. I mean, I don't know if we're the second-largest brake caliper provider in the US today or not, but we're certainly up there.

And just to make sure I'm clear on all that, that's really helpful that you mentioned in your opening remarks that the rotating electrical business is operating efficiently. And that continues to be the case. And then historically, the brake caliper business has not been running efficiently simply because of the low volumes as you start to ramp that business. But as you're growing towards number two or number one in the country, you are having better margins or better efficiency even at the lower volume than you anticipated as your staff and employees have learned how to simply do things better. And this happens to be the quarter where a lot of that culminated and becomes more visible. Is that a fair characterization before I step offline?

No. Let me just clarify one thing is that we're still doing the higher volumes, but the point I'm trying to make is the capacity has actually grown from what our initial anticipation is. So, yes, we're getting these efficiencies. These efficiencies are still evolving. So they're not culminated. I mean, this is definitely an evolving program that we're doing. And again, as new product lines get more mature, they know they phone number. So it's mostly accurate, but we are producing higher volumes already. But we have what I would say is additional opportunity to take that capacity up even higher than we thought it could go.

Great. Thank you for the clarification. Congratulations.

Thank you. Appreciate the questions.

And that will conclude our question and answer session. I will now turn the meeting back over to Selwyn Joffe for closing remarks.

Okay. Well, in summary, we remain bullish about our outlook. We remain laser-focused on further efficiencies and fully benefiting from a not easily duplicated global platform to meet demand for nondiscretionary products as well as from our diagnostic testing. Recent proposals by the Trump administration about tariffs continue to make headlines. At this point, there's a lot of speculation. We will take appropriate action as necessary, including customer surcharges to offset the tariff on goods from Mexico and Canada, should they be imposed. With regard to China, we have notified our customers that we are implementing a surcharge to offset China's recently announced tariffs. We continue to leverage our expertise and solid customer and supply chain relationships. This includes our supply chain vendor finance program that benefits our suppliers. Our liquidity is strong. We have the resources, capacity, and capability to enhance shareholder value.

In closing, I must recognize the contributions of all our team members who are continuously focused on providing the highest level of service. We are all committed to being the industry leader for parts and solutions that move our world today and tomorrow. We also appreciate the continued support of our shareholders and thank everyone again for joining us for the call. We look forward to speaking with you when we host our fiscal 2025 fourth quarter call in June and at various investor conferences and meetings. Thank you.

That will conclude today's meeting. Thank you all for joining. You may now disconnect.