All right, so to round out the day today, we'll have a discussion about the aftermarket. So I'm excited to introduce Motorcar Parts of America, which is a supplier of aftermarket replacement parts. They have a portfolio spanning between rotating electrical products, braking systems, and other critical vehicle components. This includes the newly acquired brand and IP of Centric Parts brake business, which we believe provides a significant opportunity to expand its presence in the large and growing brake industry. So excited to talk about the business and opportunities ahead. Just as a market cap perspective, it's about a $200 million market cap and about $350 million total enterprise value. So excited to have Selwyn Joffe , Chairman, President, and CEO with us.
Are we ready to start?
It's going to be
Okay. Afternoon, everybody.
Maybe just starting off, if you can just give a quick overview of the business and somewhat the positioning of each of the products you sell.
Great. We are in the automotive aftermarket, focusing really in two super categories. One category is rotating electrical, which is alternators and starters. The other category is the brakes category, which includes a number of different components, starting with the brake power booster, where you put your foot on the pedal and you get power generation, to the hydraulics, the master cylinder, all the way down to the brake caliper, which then has the brake pad and then the brake rotor. So, pretty much a full. We also do the wheel hub, which contains the anti-lock braking system around the wheel. Most people call that around the wheel. We capture the wheel hub in our braking systems because a lot of that failure comes from the anti-lock braking mechanism that's built into the wheel hub. So, we've been in business probably close to 60 years.
I'm not sure the exact number. I should know that. Probably been in the brake category, in complete brake category, including calipers, just in the last five or six years, and it's become a very significant category for us.
So, we'll start there. Just to talk about kind of the bankruptcy of one of the big suppliers in the space, kind of creating some shakeup in the market, but also how you guys are using it as an opportunity to gain share in that market. Maybe just talk about kind of what you're seeing there as an opportunity and also touch on the acquisition of the brand and IP.
Yeah. I'll start with First Brands. I mean, that's sort of our most infamous, famous bankruptcy. Unfortunate, really, for the integrity of the industry, but certainly lots of opportunity from it. As a result of that, First Brands were the acquirer of the old Cardone business, and the Cardone business really had focused on brake calipers, brake boosters, were sort of the main areas that we overlapped with. Since that, we had gone into the brake caliper business about four years prior to that and had been very successful with that. Along with that bankruptcy, we ended up securing a significant amount of new brake caliper business from that bankruptcy and certainly a significant amount of brake booster business.
I would say today, we had opened up a brand new brake caliper factory, and we're getting close to filling capacity and starting to see the margin accretion coming out of that facility. Interestingly enough, it took us 50 years to get to where we were on rotating electricals. It's taken us five and a half years on brake calipers. It's been a great story. We make, we believe, the best product in the market, and a lot of our customers believe that as well. A great product.
In the background of all of this, First Brands had the Centric brand. Really, First Brands did something very unusual, and that we thought was very unusual, is they basically abandoned the actual brake pads that were in the First Brands in the Centric boxes, and they put a vastly inferior brake pad in there, and from a factory that they had owned. The installer was not told about that, and that went out into the marketplace, and certainly, I think they disappointed a lot of people with that product compared to what the original formulation was. At that point in time, we had a lot of interest in Centric, even back then. When that happened, we decided that we would secure the rights to the formulations for the Centric pad, and we did that, and we incorporated those formulations.
This is going back, probably three, four years now. We incorporated those formulations into our Quality-Built brand, and then we launched the Quality-Built brand brake pad and have had nothing but compliments on the formulations and the reliability of that product. While we were doing this, a lot of what was going on in the background for us is trying to understand what the actual attitude was towards the Centric brand while this was all going on with First Brands. We started digging into more and more of the research that's out there. Really, when you start seeing the breakdown of the loyalty of the commercial installer to the Centric brand, it's about as high as it gets.
I mean, it's a 95% I would use this product non-prompted. I would use this product if I knew that it had the original formulation and there was reliable distribution behind it. You just see that number pop up everywhere, almost cult-like. So, when the First Brands intellectual property came up, with the Centric intellectual property came up, we decided that we would try and acquire that, and we were successful in acquiring that. After I bought that and the announcement was made, I had a very unusual, but major players calling me about Centric. We have not settled anywhere yet on Centric, but we're excited about the opportunity.
I'm not sure where that opportunity will nest itself or its growth, but one thing that we're very excited about is that all the fundamental basics of blocking and tackling and understanding the actual brand are extremely positive and have maintained that, even though we've got some product in the marketplace that's not the real Centric. We will differentiate that. We've tried to stop it legally, but we will differentiate that. We feel that one way or another, the Centric brand has a lot of legs. Whether it goes faster initially with a strategic partner, whether it goes on a more traditional route of being rolled out, we think the revenue opportunity from our perspective over time, just looking at historics, is probably around $400 million for that brand.
I would say that if you looked at the brand in its peak, really their anchor was in rotors and pads. Really, their caliper booster programs were much, much, much smaller. Whereas I feel like if we consolidate our Quality-Built with the Centric name and the real formulations, it's the real deal. It's the new original Centric. It's not. So, we think that overall, that just gives us a tremendous edge in the professional installer brake market. We'll see from here. I mean, we're active, looking at the right way to launch it, but have not made any final decisions yet.
No, certainly excited to have the original formulation back with the brand. But thinking about kind of the structure of the deal and not assuming any of the operational liabilities, I guess, is there any incremental investment needed to bring on the Centric brand? I guess depending on how quick the ramp is, how you're thinking about your manufacturing capacity?
Well, I mean, that's a great question. I mean, it's an unusual situation in that the actual formulation is a manufacturing company that have the capacity to ramp significantly immediately. Making brake pads is sort of like baking bread. I mean, a lot of it goes into molds. Most of it is automated. I mean, you do have your side parts of your line which are not as automated because the volume's not there. But the scalability and the speed of the scalability, nothing's easy, but this one is pretty easy. The other side of it is the infrastructure we have, we have the capability today to take it through our infrastructure and supply the largest of the large in North America. The other side of it is the working capital with our supply chain, then the finance programs and the programs of our potential customers.
Potentially, the working capital load is not that significant. I mean, it's surprisingly lower than you would think.
Yeah, certainly, no shortage of opportunities on the brake side. Just moving towards the rotating electrical business where you have over 50% market share, can you just talk about that business and then where you see growth coming from the future, just given your scale there?
Yeah, I think we're a little below that, but around there. Rotating electrical, as of recent, has been a little softer. I think we're seeing some deferrals in the marketplace. I think that for us, I mean, we've got significant penetration in the U.S. on rotating electrical. We're the only company I'm aware of that has a full-blown remanufacturing and new unit capability. So, we were able to meet the market demands no matter what they are. We have factories for remanufacturing in Mexico, which are tariff exempt, and we have certified factories in Malaysia to making new units. So, I think we're significantly on our way to being a leader in both of those and have been a leader in both of those.
The big opportunity now is coming outside of the U.S. and North America. Mexico, Canada, and the rest of the world is really opening up with a big opportunity. Our catalog is very broad. I think we can pick up more share in the U.S., but the amount of rotating electrical on a global basis is significant. Our customers are expanding very rapidly into both Mexico and Canada. We are seeing quite a lot of success there, and we think that will continue.
Just rounding out some of your different product categories, you have a diagnostic business that you see some significant opportunity in coming in the future. Just talk about the business sizing now, and then where you see the opportunity and the growth there.
You know what is interesting is, we made an acquisition in the rotating electrical alternator starter diagnostic business, probably about 10 years ago. Very, very small acquisition. I would say today that 70% of every store has committed or is committing to carrying that product in their stores. There is still one holdout on that, which I think eventually every single store in the United States will have that. We are seeing that in both Mexico and Canada, being rolled out to all stores there, and including distribution warehouses. We are excited about add-ons to that in terms of the support and the overall services that we will continue to supply to these very interactive PC-capable testers that are in every location, so they can provide significant help to the owners of these units and from us.
In addition to that, we think, again, the rest of the world, we are the only ones in the world that can test the communication protocols of the alternator. So, you could have a false yes test if the unit just works without communication protocol testing, and you put it in your brand new Porsche and it is going to shut you down. So, you got to make sure you test those protocols. I think today, as best as I know, we are the only ones that are capable of doing that. So that will be expanded throughout the world. Clearly, we have just relocated our heavy-duty rotating electrical from Canada into our Mexico facilities, and along with that is an enormous amount of, first of all, synergies and efficiencies out of the heavy-duty rotating electrical, which we are very excited about the opportunities there.
But over and above that, there's diagnostics that are going to come on the back heel of that as well, and that's very much needed in the heavy-duty market. From a rotating electrical diagnostic perspective, we're very excited. We do have electric capability, and we're sort of looking at strategic alternatives on the electric capability. But that electric company has some of the most blue-chip companies that are out there as customers. Still very small, but very exciting technology that perhaps has some value.
That one? Oh, there we go. First of all, thank you again for being here, especially for number 50.
Yeah.
Inflation has been something that has been a constant for every business. The aftermarket has always been an area, at least at the retailer and distributor level, where they've been able to pass that along. Clearly, as a supplier, it's more difficult. Maybe talk about, outside of some of the footprint changes that you've made, what you're seeing and how you can best work to mitigate that, given all of the pressure that you're facing.
Well, I mean, the first sort of low-hanging fruit that's sort of coming from the outside is the tariffs. I mean, we've done whatever we've needed to do and continue to do to be a USMCA exempt on tariffs coming out of Mexico. That facility is fully exempt and is the big majority of what we manufacture. In addition, where we're not able to use Mexico USMCA, we focused on Malaysia. A number of years ago, we had decided to move a lot of our focus outside of China, for various concerns, but one of them being massive inflation, not even before tariffs even surfaced. And we were able to leverage what was sort of a legacy operation and legacy employee base, an extremely talented, experienced base of people in Malaysia to make new units so that we could be agnostic to reman and new.
We have been certified by CBP as a made-in-Malaysia product, so that in itself reduces the Chinese tariffs pretty significantly. There are other things that we can do to even take that cost down further on the tariff side, that is sort of dealing with managing regulation. I think the other thing that is happening, there are a few things that are happening on the cost side for us, is that the brake business is scaling. We built these brand new state-of-the-art factories five, six, seven years, and we always said, "Well, we hope we get to 6 million." We are there and more. So the absorption in these factories is going to get a lot better on the brake side.
There is also additional technology that we are researching to try and bring these costs down without changing the product really, in terms of changing where the real country of origin exists for these products. So, that is a big deal now. The other thing that is happening, and I think this is extremely beneficial to someone who has both new and remanufacturing capabilities, is commodity prices are going through the roof. I think in the last 12 months, copper may be up around 40%. I may be off on that. So to the extent that we can reuse scrap copper on remanufacturing and use copper on new units interchangeably, depending on how we decide to do that, the competitive nature of our products will be enhanced dramatically, and I think that is still to come.
We are very much involved in looking at the best utilization of the metals, and that has become a big thing. The other side of that is scrap regulations, where you selling scrap metal have become far more stringent. In fact, recently, Thailand put restrictions on scrap. So, being able to have sort of this global footprint and understand where to move the scrap to get your componentry produced is another, I think, competitive advantage that we are able to sort of inherit based on scale and global presence.
I think one theme when I hear you speak at conferences, and in particular yours, is just this idea in my head, if it was easy, everyone would do it. When I hear what Motorcar Parts of America is, it is not easy. So, when I think about the competitive environment, how much is your expertise potentially extending that competitive advantage that you have within your competitive or within the aftermarket against your primary competitors?
That's a great question. I don't know what I don't know about my competitors, but I do think that the versatility and the flexibility and the amount of resource that we have is larger and broader than any of our competitors. The ability to maneuver in and out of these different sectors, I believe, should be significantly better than our competitors. Again, with respect to them, I'm not involved in their businesses, and most of them are private companies, so I don't really want to get too far ahead of my skis on that. Having said that, there's a lot going on in terms of being able to be competitive. I think the world that we live in today, disposable income, energy costs, the costs of repairing your vehicle have gone up exponentially.
The players that are going to be able to keep repair cost affordable will have a significant competitive advantage.
Brian.
Hey, Selwyn. Thank you. So, a couple questions. One, you mentioned softness in the rotating electrical, so I guess maybe the question would be to contextualize that a little more, more recent. Probably more importantly, as you talk about the brake category, and we've been talking about this huge market share opportunity with Centric, how should we think about the ramp?
Yeah.
I guess one, because I think you and I have spoken about this before, and correct me if I'm wrong, but one of the nearer-term complications was some of your partners had a lot of inventory, and they had to burn through that before they could start buying from you. So, maybe just discuss the ramp.
Two very different, help me remember both of them. I am going to start with the rotating electrical because I think that is one. We went through a realignment of some of our rotating electrical business. I think that the ramp on the new business has been slower. I think it is not necessarily organic that we are seeing that. It may be a little more personal to MPA, we are seeing a little softness. I do think that in general, the DIY business, because of the disposable income, there is deferral wherever there is capability of deferral. That is going to, in my opinion, reverse, and quite frankly, I think I am starting to see that happen. People want to drive their cars, and if you do not repair your alternator, your starter, you are not driving your vehicle. I think I see that.
I see a lot of aggressive promotions out in the marketplace. Dealerships are promoting, trying to bring people into their bays. You see sort of strange pricing activities out in the marketplace. I think rotating electrical is a little unique, and it is soft, but I think it will reverse very quickly. The cars are not coming off the road. There is no economic sense in scrapping a vehicle when all you have got to do is change the alternator or starter. You may sell it, but it is not coming off the road. I feel very confident that we will see a resurrection in rotating electrical. Then we have so much new share coming on board, we will see it there as well. The brake question is a very different one and probably one that involves a couple different pieces.
On the brake calipers and the brake boosters, when First Brands went into bankruptcy, a number of their existing customers started buying inventory on liquidation. They accumulated a significant, I shouldn't use the word significant, but to us, significant amount of inventory that affected how quick we made our sales and ramped up. The awards were all there, and they still are there, and we are supplying them, and actually now we are seeing them. These customers had to work through that inventory that they bought on liquidation. If the market is softer, that took them longer to work through that inventory. Unfortunately, we saw that as well. That is, I think, behind us. Our business in those categories that we picked up looks like it is getting very strong. Now the question is, how do we see the ramp-up, right?
A lot of questions, Brian, in that one question. The ramp-up could take a couple of different forms, and right now, we are not sure, okay? I would tell you that if it ends up, and again, we have not made this decision, and I do not want to infer that anybody has or knows. If it ends up in a strategic relationship with a major player, the ramp-up is, it is probably a retail sales opportunity of $1 billion a year, which to us is probably $300 million-$400 million. That ramp-up is probably a couple of years. Again, I am a little speculating.
If we do it ourselves, which we are doing it ourselves anyhow, but assuming we do not have a big player that decides they want to get behind it, or that we do not allow it, because quite frankly, we are not anxious just to give away this valuable brand.
We would then go through a much more traditional way of rolling it out. I think you start seeing, I think there's certainly, on the low side, $50 million of incremental that's waiting for us, and certainly on the high side, up to $200 million, but in a couple of years. In a year, we'd get to the first level, and then from there out.
Just to be clear, does that mean there's some contemplation you could take the product exclusive to one retailer? Am I understanding that correctly?
Well, I won't say retail. I'll say there's a potential that we would give an exclusivity to a player. Yeah. Under that scenario, again, it would have to be big enough for us to be comfortable, and it would be pretty quick. That's definitely a possibility, but we don't know yet where that's going to go. I'm just trying to be as open and transparent, because the Centric opportunity is sitting out there, and if you get on the internet and you start doing some research on what the potential is, you'll see it pop up pretty quickly. We've got to get there. We're just not there, and maybe that's not a good thing for me to be saying, but it's pretty open in terms of where we are.
Just to round out the conversation, I wanted to touch on capital allocation. Leverage remains low, less than two times. What are your thoughts on priorities here? Obviously, Centric acquisition is a great opportunity, but anything else you're looking at?
Look, I think organic growth for all of our business, including Centric, is low-hanging fruit. We think the returns will be there, and we believe that investment in our own stock is a good investment. We have been buying back stock historically, and certainly, that is always part of the capital allocation discussion. We do have low leverage, and we are excited about that in this environment, to be honest. It is nice to have low leverage. Our competitors are very leveraged and very stretched, we believe.
You mentioned earlier expanding, investing to expand geographically into maybe some international markets. How should we think about the ramp or the investment moving forward? Is that specific to certain product categories, or is it more broad?
Well, we are seeing Mexico move fast. Our growth is in all categories, some more than others, but usually, we start with rotating electrical. We are seeing categories grow fast there. We are seeing the potential in Canada also go pretty fast. Right now, that is all we need. We will see just slowly as we take it further from there. We do have outside parties that have contacted us about some strategic distribution outside of North America, and we will see. That is, to me, phase two.
Got you. Wrapping up on time here, but just want to thank you for coming to the 50th Annual Symposium, and look forward to having you guys in the future.
I want to thank you. I miss seeing Mario here. I think I have been doing this for 30 years, I think, at this point, so it is an anniversary or whatever. I am dealing with What is the anniversary this year? It is 50, right?
50th, yeah.
Yeah, I think I have been doing it about 30. So, thank you again for including me. I appreciate it.
In the hearts of music.
Yeah.
Okay. That concludes our first day. Thank you to everyone who tuned in on the Zoom. For those of you who are attending our dinner tonight, we will be at PISCES at 5:30 for cocktails. Dinner is 6:15, 6:30 or so. Thank you very much. Look forward to a great day tomorrow, and thank you for all your attention today.