I believe they have a little presentation, right? Miles? Okay. So presenting next is Motorcar Parts of America, headquartered in Torrance, California. MPAA is a remanufacturer and manufacturer of automotive aftermarket products and a supplier to many of those presenting today. We have about 20 million shares at about $6, $120 million market cap, net debt of $170 million. Here with us today is CEO Selwyn Joffe. Selwyn, thank you very much.
Thank you. Appreciate it.
Welcome, everybody. I've just got to figure out the clicker on this. Yeah. Okay. So I'm Selwyn Joffe. Just a quick summary of Motorcar Parts of America. We were in the hard parts aftermarket business, the vast majority of our business. Our legacy products were. This is the safe harbor, but I'm going to move through that. Legacy products are rotating electrical, which is alternators and starters. Been in business, you know, 50-plus years. We are now, for a footprint, we've gone through a complete change of our footprint, and the majority of our manufacturing is, in fact, all of it is either in Mexico or Malaysia, and some outsourcing in China. We've got facilities for heavy duty as well in India, which is a smaller footprint, but headquarters in California and Torrance, but mostly just administrative.
This is an example of some of the parts that we're in: full brake system and rotating electrical. Really, it's the best way to summarize it. The brakes are a little more recent, but now moving on and becoming a pretty significant part of our growth. And there's one tester there that you see on the slide. That's JBT-1, we call it, and it's a tester that's being rolled out to every single retail store in North America right now, and probably including Mexico, and just beginning a little, probably $100 million revenue just in that one part number. This gives you an idea of a little bit. We're leaders in the world in lean manufacturing, which is basically no batches. Everything's processed one at a time. We can scale up or down based on how many people you actually put into the space. We've just recently completed that move.
We're going through. We've been through a transition. This is sort of the end of the transition now. We've got through putting everything in Mexico or Malaysia. I will tell you that people who've been there have rated it as the best remanufacturing facility in the world, probably the most productive remanufacturing facility in the world. This gives you some idea of the facility looks like this. Usually, the lights are on a little brighter than in this picture, but it looks like this on a regular basis. It is state-of-the-art. Quick summary of market share: rotating electrical, 49%-50% of that market. These are retail prices. The wheel hubs, we have 18%. Brake calipers, which is within the last five years, we have a 23% market share. By the way, we're growing in all of these spaces. Brake master cylinders is 12%, boosters 31%.
And we recently launched pads and rotors, which we expect to be a very significant revenue generator and margin generator as well, so quick look at the brake calipers. Huge opportunity, and we went in greenfield in that, and I'd say we're one of the largest couple of suppliers in the country and have significant new revenue opportunities going on in that as well. The rotors is a massive market, but our focus really is on the pads and the friction. We have unique formulations, some of the leading and tested formulations that are exclusive to us, and we're just rolling this out as part of our OE Plus only to the professional installer market, and so we sell to retail and to professional installer. Professional installer is only sold under our brand names.
I'm sure you've heard this all day long, but the fundamentals of the aftermarket, even though the general discussion is a little bit of softness in the market today, there's no real fundamental reason other than maybe some downtrading, slight delays, but the market is growing. So, you know, it continues to grow over 280 million vehicles on the road. The average age continues to go up. Replacement rates continue to go up as the cars get older. Miles driven continues to inch up. And combustion engine penetration remains very high. Sort of electric has slowed down. So the outlook on the fundamental combustion engine and hybrid technology continues to be extremely viable, even while electric will come into the marketplace and actually expand the opportunities. We sell pretty much everybody in the market.
We don't sell them all of our parts, so there's lots of growth within our own customer base. I can tell you that our service levels are probably industry-leading and with industry-leading quality products, so we're one of the most respected, most respected suppliers out there. Our brands are Quality-Built and Pure Energy for light-duty and medium-duty, and basically, those are professional installer brands. We sell private label to all the retailers, and then we've got two specialty brands, Dixie, which is a specialty heavy-duty, which we've recently launched, and we're seeing some tremendous growth coming out of that, and D&V Electronics, which has done a lot of work, mostly in rotating electrical, but does have an electric vehicle diagnostics part of their business as well. We're not just a parts company. I mean, we provide you the entire suite of services.
We call it the Street Smart Suite, and we basically will do everything for our customer that a consumer product company would do to go to market. And so we'll develop the business plan. We'll develop the training programs. We'll develop the catalogs. We'll develop the marketing merchandise material. We'll develop products to your specifications, develop packaging, etc., etc. We have field service teams that are out there. And so it's more than just a commodity supplier. And we're really proud of that. And when people do business with us, they get one taste of that. We usually almost always have a captive growth within our existing customer base. And so that was just a quick summary. I know that we want to do some Q&A, so I'll go back to you.
Great. Perfect. I think just to start with a few of the fundamentals, could you just give us a quick breakdown of who your customer is between the WDs, some of the larger distributors such as AutoZone and O'Reilly, and then any other customer basically?
Right. So 80% of our revenue is still with the Big Three retailers and about 20% now. And that's growing significantly on the—we've grown everywhere, but we're disproportionately growing in the professional installer market with our own brands, Quality-Built, and Powered by MPA, sort of the overriding brand. And I mean, those are the two main channels we sell into the USA, Canada, and Mexico right now. Canada and Mexico are pretty new for us.
Perfect. And then the other conversation we've had a lot today is kind of DIY versus DIFM. And then I think some more pressure on consumer discretionary type products. So can you just kind of elaborate on those categories that you really sell within?
Right, well, I mean, from our mixes that the DIFM, DIY is probably a 55, 45, 60, 40, depending on what numbers you look at, and we mirror that for the industry. I mean, that's where our revenue is. Clearly, the consumer seems to want to extend the dollar as much as they can. Most of our products are fully non-discretionary. So if an alternator goes out or a starter goes out, you've got to replace it. Where I see the effect on our products on deferral is really in the brake pad and rotor business, and where you have less tire jobs being done, and so the ability for the installer to cross-sell on a brake program is a little bit slower. But eventually, you can't drive without brakes. Eventually, you're going to have to replace them, so I mean, I'm very bullish on the future.
Our business is really strong. I know that in general, the market is, and I'm hearing you soften, but that's not the case for us right now. So we're excited to say that. And we're seeing, quote, great traction in our brake opportunities.
Yeah. And then I know you touched on one of the slides, but you have some new emerging product lines. Can you kind of talk about how they fit in with your traditional lines and the decision behind entering those?
Right. So I mean, we had such a high market share in rotating electrical, and we were looking at, you know, is it international expansion with the same category, which is alternators and starters, or do we leverage the relationships that we have with the channels locally? And it took us some time, and I think we're finally there, but we decided to stay local and launch into other categories that are somewhat technology agnostic, which is the whole brake system. And so today, we soup to nuts from a brake master cylinder, brake power booster, the anti-lock braking system on the wheel hub, the brake pad, the brake rotor. We offer a complete, and then we got shoes and drums that go with it. So we offer a complete solution, really, in the braking world. The brake business is huge. It's non-discretionary. It's technology agnostic.
And we're becoming a very major player in that space. And it's evolving. We've had some margin pressure come from that, but that's all changing now. So we're excited about our progress.
Great, and you have talked about it in your calls, just like where you are in terms of that process, the growth opportunity to go forward, and then maybe once you are at a more mature level, the margin opportunity.
Yeah. I think we're currently—we're sort of in the low 20s, we expect, and within the next quarters, sort of moving to the mid 20% margins and up from there. So mid- to upper-level 20s in our categories. We've finally reached a level where we're absorbing the overhead for these big new facilities. We've got 1.3 million sq ft that we're growing into. And we're now reaching those capacity levels. So I must say it's quite exciting to see what the hypothesis is actually starting to play out.
Within some of those product lines or your traditional lines, what are you most excited about? What are the growth opportunities that you are most excited about?
Yeah. I mean, the whole braking, we have a pretty high market share already in rotating electrical, and we continue to grow in that business. I mean, we certainly think there's a lot more to go. But in the braking system, we're still very small. And today, it's 20% of our revenues in just under five years, which is pretty incredible. And I think that that will quadruple in the near future. I mean, we have certainly significant interest in the product and a great visibility into high growth rates in that business.
Yep. And then another conversation that we've really talked about today is just how does the industry get hundreds of thousands of SKUs kind of pretty quickly across the vehicle park? I know you talked about the full service that you provide for your customers. Can you kind of help us elaborate on how you help with that?
So I mean, the key is to have the right inventory at the right place in the right place. I mean, I've had an experience where I called on a customer, customer no longer exists, got absorbed. But where I was in the Midwest in the Detroit area, and people were bragging to me how many Infiniti alternators they had there. And we looked at the vehicle registration. There was one at the time. So it's great to have all this incredible coverage, but if there are no vehicles that are located there, it makes no sense. So what we do is we understand the demographics, psychographics of the entire country. We have it all mapped out by zip code. And we can go down to street level. We know where all the stores are. We know what the registrations are. So you're overlaying that.
So we help our customers manage their inventory appropriately. And I think that's sort of part of the leadership role that we play in the industry. And then the second thing is that we are direct-to-consumer capable. So we do all for all of the major retailers, we're able to do overnight in case that part number's not available. We're all makes all models. You never know who the next person is, that next vehicle is that needs repair. And so we have that ability. Again, inventory management is part of our Street Smart Suite program, and then the ability to get overnight anywhere.
Great.
Selwyn, just maybe an industry question. Your business, you've said from a sales perspective, it's been tracking well. As you're talking to the major retailers out there, which are a big component of your business, are you seeing anything shift that may suggest we're starting to get towards that point of re-acceleration in their business?
You know, I can't speak for the retailers. I mean, so I would just say from what I'm seeing is that we've seen a trade down. We've seen a slowdown. But I think that if we can get some hot weather coming into or cold weather coming out of the summer and go into the upcoming summer, which is amazing, it's the end of the year already, with some decent weather that'll give a little bit of traction, we have the geopolitical system can settle down a little bit. Hopefully, we have an election that everybody accepts and whatever it may be, and people get back to living their lives. I think there's a significant tailwind for the aftermarket in general.
And there's no statistic other than what I can see as disposable income, high interest, the high interest rates that affect that a little bit, and uncertainty that are preventing people from spending money on their vehicle. And they're coming off a cycle where so much work was done in COVID, where everybody had their time, and then they pull back, and now you get back into your normal sort of cadence. So I personally, again, I'm not reciting retailer data. They will tell you that. But we believe that this will, that the lowest is sort of here, and we think that the tailwinds are in place.
And today, we've also talked about a global footprint for the aftermarket. The conversation really started back in 2017, 2018. We saw a round of tariffs. There was more reshoring and movement around. Can you talk about your footprint and how it kind of provides a competitive advantage, I think, for Motorcar Parts of America?
Well, I mean, again, we are big believers in making our own product as opposed to contracting it out all over the world. And that way, we are able to assure that we have the finest quality. And we are not the lowest cost provider, but we are the lowest, the best value for your money provider out there. And our facilities, and we'll see what happens again with the elections, but our facilities, all the remanufacturing is in low-cost market, mostly Mexico. And then new units are produced in Malaysia, which don't have the Chinese tariffs. And it's very efficient for shipping and very efficient labor market. And so we think that we've neutralized the competitive threat from the rest of the world, but especially if the tariffs are additional headwind to some of the other suppliers.
And you've built out Mexico, and that was a kind of a multi-year transition. Can you talk about the benefits of your center down there? Any margin kind of going through over the next few years?
Yeah. It's been incredible. I mean, some of the statistics we have now, a little over 5,000 people in Mexico, and our retention rate after the trial period of your employment, which is 90 days, is 98%, and the way we're set up and the things that we do for what we call our community are incredible, and so when you have people that you have sustainability in that, they become more proficient in the product. The products become better, and those factories, I would challenge anyone to see that there are any more productive factories of these types anywhere in the world. I mean, so we're pretty proud of them.
Great. You have talked about your leading position as a remanufacturer, which is an interesting concept that's been coming back in this conference, this conversation about reman. Can you kind of talk about that business line and why an end customer, let's say an AutoZone, would pick a reman product?
Well, there are a lot of reasons. I mean, and I'll leave the environmental to last. But first of all, if you really want the integrity of the OE, the original equipment part, you need to get that core back. It's not being produced new anywhere else. It's the original equipment that actually is remanufactured. And when we say remanufactured, it's not just rebuilt and put together again. All the components are remanufactured or replaced with the original equipment specifications or greater. So there are many commodity suppliers around the world that will try and knock off that original equipment. But it's not the same specification. It's not the same performance level. It's not the same metal content in the unit. And so the amount of design that goes into the original equipment is significant. And the only real way to recapture that is to remanufacture. So that's number one.
Number two is it's far more cost-effective than producing new because you don't have the cost of whatever. However cheap metal gets, remanufacturing gets cheaper because the core, which is the return, will get cheaper, and as long as you've neutralized labor, you'll always have a competitive advantage from a price perspective, and then last but not least, and I think we see this as a more accepted topic, is that from an environmental standpoint, I think we saved four (this number is probably wrong, but I'll throw it out). It's a crazy number: 400,000 trillions of BTU energy, and just in our recycling of our water, we save multiple swimming pools' worth of water every year, and so if everybody did their little bit on that, certainly we need the help, so I think it has added benefits besides just the value quotient.
And another thing we've discussed here at the conference is just the complexity in the vehicle population, increasing complexity in parts repair. Can you talk about how that might be an opportunity for Motorcar Parts of America or just that trend for your business?
The complexity is increasingly growing. Electronics become more complex. The amount of equipment that you have in the vehicle, whether it be all the sensors that are in there, but high-powered stereo systems, heated seats, vibrating seats, heated steering wheels, and there's so many varieties of work. Then the way the engines are designed to be more compact, it makes it much more difficult for the DIYer really to do the job. Really having a knowledge base today of an all-makes-all models, it's relatively easy to master making thousands of one-part number. It's very, very difficult to make onesies and twosies of hundreds of thousands of part numbers. That's what we're good at. The channel needs someone. There's a desperate need for us because you don't know what the next failure is going to be.
I mean, it could be that one Infiniti that I talked about. So you better have that if you got that opportunity. And it may not be. And so the installer's got a limited amount of rack. So they've got to have that part, as you said, in 30 minutes. And so if someone doesn't have the infrastructure or the know-how to supply that, you're not going to get there. Plus, the electronics, the uniqueness in the electronics, the specifications, even within one vehicle, one application throughout the varieties of accessories that are available in that vehicle are very intricate. Unless you know how to do that, you're not going to be able to compete. And we have that knowledge.
Great. Question.
Hi, Solwyn.
Hey.
You've done a terrific job of adding product lines. I'm curious what the evaluation process is like for those that no longer meet your level of either market demand or return on capital that you have installed? And what happens with those lines, whether they're shuttered or sold?
Right. That's a great question. I mean, I think most of our product lines are sort of, let's put Rotating Electrical separate because that's an established significant market share, great margins, great opportunity to continue on. We don't see that stopping for many, many years. In fact, we see growth in that business. The other product lines are still sort of emerging. I don't think we're at that point. The original premises on return on invested capital are a little bit slow because we've invested so much capital relocating our manufacturing. So at this point, we're not in the phase of looking at eliminating any of the existing product lines. We are not adding product lines. We're now maximizing the potential of each of our product lines.
I expect to see very significant increases in return on invested capital, especially as we absorbed. We went from nothing in Mexico, from about 40,000 sq ft in Malaysia, to a combined almost 1.5 million sq ft of manufacturing facility and shutting down facilities. We've just finished our last piece of doing that. Now we've got the product lines are absorbing the overhead. There's tremendous vibrancy in the demand for these product lines. So, in my opinion, what we're going to see going forward is you're going to see margin accretion across the board on a consolidated basis. You're going to see increased cash flow because you've got stabilized demand and not this inventory ramp-up, not heavy CapEx anymore. So all of the tailwinds that we need to resurrect the value in our organization is critical.
I don't think that we're going to have to shut down product lines. Shutting down product lines is not that easy. Your customers are dependent on that. And if you have multiple product lines within a major customer, it's pretty sensitive. But I don't think we have that problem right now.
Great. And then another topic, once again, at the conference has been the potential for electric vehicle penetration over time. Your thoughts on that and any exposure you might have kind of gained within the last few years?
So when we acquired D&V, we acquired some unique technology in the electric vehicle space. It still is very unique technology. The market has gotten far more choppy in terms of being able to predict where it's going. I mean, the technology is fun and certainly vibrant. For us, our focus is really on the combustion engine and the hybrid engine technology for now. We have the benefit in our business in the aftermarket is looking backwards to see where the demand is required. And wherever that demand is required, that's where we'll be. And we do have an electric vehicle diagnostic company. We're involved in helping develop the powertrains for some very, very exciting projects and cars that are on the road, which we're really not supposed to talk about publicly by name, but a lot that you've seen and a lot that you will see in the future.
But for us, our focus is really on the mainstream. We don't need that right now. But I do think longer term, EV will become an added opportunity.
Great. So two questions, maybe around your factoring programs, which have been part of the discussion. I guess, during one, if you could just give a little bit of an overview around them. The first question being, it does seem like the SOFR come in a little, if that presents a little bit of a bump in the near term for you. But then also, you have kind of come up with this innovative solution for yourself, if you could discuss that.
Right. Look, we do a significant amount of business with the retailers. And I don't think it's any secret they have this supply chain factoring program. We got into this at 2% interest rates. Interest rates went up to 7%, probably our biggest headwind that we've had. We haven't been able to get the price increases fast enough to compensate for that. We're still battling that. And I will say that I don't know if the retailers are here in the room, but they do a pretty good job of protecting that. But we are adamant that we want to get our fair share. Every point is $7 million to us in terms of what it costs us in terms of factoring. As interest rates come down, I mean, obviously, the challenge we've got to keep up pricing, which I know that I'm sure everybody's talking about.
We're going to try and take that away, but we're not going to give it back. That's that, I can tell you now. If the retailers are listening, they know that I've said that to them before, and we don't have everything that we should have got, and then the other side of that is we're doing the same thing, is that what we're doing is extending accounts payable days outstanding, and we've introduced our own supply chain factoring program, and that over time, we think we can get our inventory, I mean, our goal is to get inventory net payables to zero, and you see that in the retailers. In fact, some of them are negative, and if we neutralize working capital, that will facilitate additional categories that we can go into. There's an enormous opportunity.
We won't burn cash as we launch and grow our business, which we've done a pretty good job of. So neutralization of working capital and growth and gross margins are critical to us.
Great and just talking about those gross profit margins, if I kind of look at the three years pre-COVID, you were able to achieve above 20%. Tell us about what you're thinking going forward and kind of how we get somewhere?
Yeah. Again, I think we report next week. So a little awkward time for me to talk. But I think just in general, going forward, you're going to see an immediate increase in gross margins. And as we've already now, we've talked about getting into the absorption of all these new facilities. And so the revenue growth is there to support the facilities. And margin accretion is coming. I mean, I think our targets in the near term are in the mid-20s and going forward higher than that.
Great. And then just capital allocation around 2.3 times maybe net debt to EBITDA, including the convert. What are your thoughts?
We view the convert as probably becoming equity. Now, our stock price hasn't reflected that. But I mean, certainly, that was the intent on the convert. Depending on valuations, and we certainly believe that investment in our own assets, in our own stock, is something we'd look at. But capital allocation is something that myself, the finance group, and the board are continuously looking at. And so we'll see where we get. We have significant liquidity. And so on an adjusted basis, if you eliminate the non-cash items, we're a little about over one times. And excluding the convert, we're a little over one times leverage. So we have a lot of availability to be flexible.
Great. Well, we are up against a half hour, Selwyn. Thank you so much for being here again. It's a really informative conversation. Thank you.
Thank you so much. I appreciate being invited and always great to see everybody here. Thanks so much.