Motorcar Parts (MPAA) Q3 2026 Earnings Transcript

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Date

Monday, February 9, 2026 at 1 p.m. ET

Call participants

• Chairman, President, and CEO — Selwyn Joffe
• Chief Financial Officer — David Lee

Takeaways

• Updated Fiscal 2026 Sales Guidance -- Revised down to a $750 million-$760 million range, reflecting a $50 million reduction related to a large customer’s store closures and distribution center consolidation.
• Gross Margin -- 19.6% for the quarter, down from 24.1% a year prior, but sequentially higher than 18.0% in the first quarter and 19.3% in the second quarter.
• Operating Income Guidance -- Expected to be between $72 million and $79 million for fiscal 2026, excluding certain noncash and onetime expenses.
• Net Bank Debt -- Reduced by $10.9 million to $70.5 million as of December 31, 2025, after share repurchases totaling $8.4 million.
• Cash from Operating Activities -- $23.7 million generated over the 9-month period and $32.8 million for the trailing 12 months ended December 31, 2025.
• Total Liquidity -- $146 million in cash and availability as of December 31, 2025.
• Share Repurchases -- 669,472 shares repurchased for $8.4 million at an average price of $12.47 per share during the 9-month period.
• Net Bank Debt-to-EBITDA Ratio -- 0.84 as calculated using adjusted EBITDA of $84 million for the trailing 12 months ended December 31, 2025.
• Gross Margin Expansion Initiatives -- Management cited continued efforts to improve gross margin via efficiency, tariff mitigation, scrap sales, cost reductions, and relocating some operations to lower-cost facilities.
• EV Emulator Business -- The company is "exploring strategic alternatives" for this noncore asset with proprietary technology.
• Guidance for Fiscal 2027 -- Management plans to provide next fiscal year's guidance at the year-end call in June.
• Customer Reduction Impact -- CEO Joffe said, "this customer did close down a number of stores... numerically represent a 15% reduction," and guidance assumes this level of sales decline from the affected customer.
• Sequential Gross Margin Outlook -- CFO Lee stated, "We do expect gross margins in the fourth quarter to increase sequentially compared to the third quarter."
• Currency Impacts -- CFO Lee noted that a strengthening peso "will have an impact on our noncash impact of lease liabilities."

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Risks

• CFO Lee reported, "Gross margin was 19.6% compared with 24.1% a year earlier," primarily due to a significant sales decrease from a major customer, which negatively affected overall financial results.
• Sales guidance was revised down by $50 million for fiscal 2026 as a direct result of this customer's store closures and distribution center consolidation, with management noting a "15% reduction" in expected sales from this customer.

Summary

Motorcar Parts of America (NASDAQ:MPAA) reduced fiscal 2026 sales guidance by $50 million, now projecting $750 million–$760 million due to a material customer-related drop, while simultaneously expressing optimism about restored order momentum and improved gross margins in the upcoming quarter. Management emphasized recurring cash generation, meaningful debt reduction, and ongoing share repurchases, supported by strong liquidity of $146 million, and highlighted the pursuit of strategic alternatives for the EV emulator business as a noncore asset. Competitive advantages were linked to broad SKU coverage, operating efficiencies, and tariff mitigation, with plans to announce next year’s formal guidance at the June year-end call.

• Share repurchases reached 669,472 shares for $8.4 million at an average price of $12.47, with continued authorization signaled.
• Management connected higher returns as a percentage of sales to lower sales volume, impacting margins but described the driver as temporary amid recovery in customer orders.
• Operating income guidance was set at $72 million–$79 million for the year, exclusive of certain noncash and onetime expenses.
• CFO Lee flagged that working capital neutralization, inventory management, and supply chain finance expansion remain focus areas to support ongoing profitability.

Industry glossary

• SKU: Stock Keeping Unit; an identifier for each unique product and service offered for sale within a company's inventory.
• EV Emulator: Specialized test equipment simulating electric vehicle drivetrain components for development, diagnostic, and manufacturing applications.
• Net Bank Debt: The company’s total bank debt less cash and equivalents, indicating the net amount owed to lenders.

Full Conference Call Transcript

Selwyn Joffe: Okay. Thank you, Gary. I appreciate everyone joining us today. This is a day of contradictions for MPA, where our quarterly results were less than expected, but our outlook continues to gain favorable momentum. With the change in industry dynamics, especially related to the liquidation of the brake-related businesses of one of our competitors and the tailwinds of the growing age of our car population, we are well positioned. Results for the quarter were disappointing, particularly given our optimism in early November. As I noted at that time, one of our largest customers had reduced purchases. We believe that ordering activity from this large customer would resume faster. In fact, it did not.

And as a result, we did not achieve our targets in the third quarter. We are pleased that we are now seeing a recovery with regard to this particular customer's ordering activity. Nevertheless, we are adjusting our year-end sales guidance for fiscal 2026 due to lower sales to this customer in the third quarter and a less-than-expected full recovery in the fourth quarter. Our outlook continues to be positive. We have secured numerous commitments for new business with many more pending, Specifically, we believe the gains in our braking business will result in overall increased margins due to operating efficiencies and the utilization of our facilities.

We also expect to continue to generate positive cash flow on an annual basis and focus on deploying capital to maximize shareholder value, including share repurchases and debt reduction. I might add that the company has strong liquidity to take advantage of its opportunities. In short, the fundamentals of our business are strong. With regard to our [ EV emulator ] business, which is a highly regarded brand with proprietary technology and a long history of serving blue chip customers across the automotive, aerospace, electronics and research sectors, we are exploring strategic alternatives. We are focused and committed to being the leading supplier of nondiscretionary automotive aftermarket parts.

We believe our financial strength and reputation across the retail and professional industry provide distinct competitive advantages. We offer a well-respected portfolio of products and services and have the capacity and ability to benefit from our state-of-the-art North American operational footprint. We are well positioned to enhance our leadership position. As I've highlighted before, the average age of U.S. light vehicles continues to rise. Most recent industry data shows that the average age has risen to 12.8 years from 12.5 years in 2024. In addition, the number of vehicles on the road climbed to 295.9 million, from $291.1 million a year ago.

We expect increased replacement opportunities for the life of vehicles, particularly with customers holding on to their vehicles for longer. We continue to leverage our strengths, offering our customers great products, industry-leading SKU coverage and order fill rates, supported by value-added merchandising and marketing support. In short, we are all committed and focused on our customers, offering quality products and services with rational pricing. Our quality built brand name products are offered to the professional installer market through warehouse distributors and continue to gain name recognition and market share. With regard to our heavy-duty business, we continue to leverage our reputation and industry position in this market, focused on opportunities to further enhance operating efficiencies that enhance margins.

We anticipate continued momentum, particularly with regard to supplying alternators and starters to our channel partners who are leaders in the heavy-duty aftermarket segment. We are becoming an increasingly important supplier to the [ heavy-duty rotating electrical ] market. We are experiencing increased demand for our aftermarket parts in Mexico which complements our existing strategic operational and distribution footprint there. As a point of reference, there are approximately 36 million vehicles in the Mexico market, up 2.8% from last year. with an average age of 16.2 years. As our [ Eurospace ] retailers and warehouse distributor customers expand throughout Latin and South America, we are well positioned to benefit while supporting their growth.

With regard to our diagnostic business, our JBT-1 Bench Top Tester that leads the industry, and the installed base has continued to grow with additional service-related revenue related to software and database updates anticipated. We also expect more opportunities outside North America as the business evolves, including potential new applications that complement and leverage our technology. We believe the outlook is bright for nondiscretionary aftermarket parts, and we are focused on leveraging our capability and capacity to offer a broad range of SKUs, all makes and models with a newer or older vehicles. While the industry has experienced some recent headwinds due to consumers deferring certain repairs, deferment is not really a long-term option for our nondiscretionary products.

If your car doesn't start or stuck, you're not driving. We believe we have meaningful opportunities for further growth as the competitive landscape changes. I would now like to turn the call over to David.

David Lee: Thank you, Selwyn, and good morning, everyone. Let me begin by addressing the effect of the quarter on our fiscal 2026 year-end guidance. We now estimate sales for the fiscal year from the previously mentioned customer will be impacted by up to approximately $50 million through its disclosure of stores and consolidation of distribution centers. As a result, we are revising our fiscal '26 sales guidance down to between $750 million to $760 million. Operating income is expected to be between $72 million and $79 million, with depreciation and amortization of approximately $10 million and does not include certain noncash and onetime expenses.

While we are disappointed in revising guidance down, this is primarily a result of the magnitude of this event involving this customer. I might add that orders from this customer are rebounding and we are optimistic about this customer's growth. Moving on, let me outline several topics I want to discuss. We will go over analytics for the fiscal third quarter, sales momentum and opportunities. Gross margin expansion, cash flow, balance sheet, liquidity and debt leverage, share repurchases and potential strategic alternatives for our [ EV emulated ] business. Let's start with analytics for the fiscal third quarter.

Unfortunately, our fiscal third quarter included an unusual situation, as Selwyn noted, specifically the large sales decrease to one of our large customers. The reduced sales negatively impacted our gross margin and consequently our overall financial results. However, we believe this is temporary and sales activity is already beginning to regain momentum this current quarter, which is expected to also positively contribute to gross margin and results. Let's talk about sales momentum.

From a sales perspective, as we regain sales momentum for this customer, combined with new business commitments that Selwyn referenced earlier as well as other meaningful opportunities we believe the company will benefit in several ways near term, including gross margin expansion, continued annual cash flow generation, net bank debt reduction and opportunities to increase shareholder value. In short, the fundamentals of our business are strong. Now let's talk about gross margin in more detail. Gross margin was 19.6% compared with 24.1% a year earlier. I might add that gross margin on a sequential basis increased to 19.6% for the quarter compared with 18.0% for the fiscal first quarter and 19.3% for the fiscal second quarter.

For the fiscal third quarter, returns remained at historical levels, while sales temporarily decreased, which resulted in an increase of returns on a percentage basis of sales. Additionally, with lower sales volume, we experienced lower capacity absorption combined with product mix that impacted gross profit and gross margin. Gross margin is expected to continue to improve in the current fiscal fourth quarter on a sequential basis, benefiting from increased ordering activities from the large customer sales decrease we noted earlier. We remain focused on overall gross margin accretion, supported by strong momentum and greater utilization of brake-related capacity.

We're also focused on positive impacts to overall gross margin from further improvements in operating efficiencies supported by benefiting from our tariff mitigation initiatives, better pricing for scrap sales as we gain more market share for our products, additional opportunities to relocate certain operations to our low-cost facilities globally, including Mexico and additional cost reductions. These initiatives are expected to positively impact overall gross margin. We are planning to provide guidance for next fiscal 2027 and during our fiscal year-end call in June. Regarding our cash flow, balance sheet and liquidity. For the 9-month period, the company generated cash of $23.7 million with net bank debt decreasing by $10.9 million to $70.5 million from $81.4 million.

This net bank debt reduction was after share repurchases of $8.4 million. For the past 2 years through December 31, 2025, we have generated cash from operating activities of approximately $60 million or approximately $3.06 per share per outstanding share on average. And we reduced net bank debt by approximately $32.3 million. For the trailing 12 months ended December 31, '25, we have generated cash from operating activities of approximately $32.8 million. Our liquidity remains strong with total cash and availability of approximately $146 million as of December 31, 2025, enabling us to take advantage of the numerous opportunities that we have discussed.

We remain focused on increasing operating profit and gross margin and generating positive cash flow supported by growth and operating efficiencies from our global footprint. In addition to our goal of generating increased operating profits, including benefits from our gross margin expansion initiatives previously explained, we expect further opportunities to neutralize working capital. Supported by customer product demand planning, enhanced inventory management and extending our vendor payment terms, including growing our supply chain finance program offered to our vendors. Regarding our debt leverage, based on information in our filings, EBITDA for the trailing 12 months ended December 31, 2025, was $68.1 million. EBITDA before the impact of noncash and onetime cash expenses was $84 million for the same period.

To recap, our net bank debt was $70.5 million at December 31, 2025, and compared with EBITDA before the impact of noncash and onetime cash expenses mentioned above, of $84 million for the 12 months ended December 31, 2025. Resulting in a net bank debt-to-EBITDA ratio of [ 0.84 ]. As Selwyn stated earlier, we are also committed to further opportunities to enhance shareholder value, including share repurchases. For the 9-month period, the company repurchased 669,472 shares for $8.4 million at an average share price of $12.47. With regard to our [ EV emulator ] business, which is a noncore asset, we plan to explore strategic alternatives to capitalize on its proprietary industry-leading technology.

Let me mention that for the 9 months ended December 31, 2025, we have invested in research and development for the state-of-the-art next-generation [indiscernible] emulator, which we believe will be a significant product for the EV market. For further details on the results, please refer to the earnings press release issued this morning. I would now like to open the line for questions.

Operator: [Operator Instructions] Your first question comes from the line of Brian Nagel from Oppenheimer.

Brian Nagel: So first I want to raise the topic want [indiscernible] with the sales disruption that came as a result of the buying patterns of the customer you're calling out. So completely announced I guess this is the second quarter we've seen this impact. You talked about rebound in purchasing I guess the question I want to ask is, how should we think about where we go from here? Was this a one-type reset? Or do you expect that purchasing from this customer will be more subdued going forward?

Selwyn Joffe: I think for the most part, it's onetime, but this customer did close down a number of stores, and so the number of stores you numerically represent a 15% reduction. And so our outlook is to assume a 15% reduction. However, we are optimistic that the changes and that this customer made will result in positive things happening to them. But for our outlook, we're remaining conservative and have pulled back our expectations by 15%.

Brian Nagel: Okay. Then someone, I guess, maybe you started to answer this question right, but as you look at just an overall healthy sector, right, healthy demand trends out there. With this customer having closed stores, presumably there's been some market share shift. Does that give you an opportunity then to cater better to the stores that are now taking up the market share where these competitive stores were closed?

Selwyn Joffe: No question. We have our relative share in that market and there's no question that we will see getting fair share there as well. . So I'm not sure where it goes, but we're across the board with coverage on market share in those marketplaces.

Operator: Your next question comes from the line of Derek Soderberg from Cantor Fitzgerald.

Derek Soderberg: So David, just looking at the implied guidance, it looks like for 4Q on an operating income basis, seems like we're stepping up a bit here. And just kind of wondering if you can walk us through how to get to some of that math. Gross margins, it feels like are going to step up a little bit sequentially, just assuming some of the G&A and sales and marketing is going to be flattish. I guess I'm curious if anything is going to be happening in the FX impact bucket for OpEx I'm just trying to see if you can guys can break down some of the OpEx numbers for 4Q. Help us better understand that.

David Lee: Good question. So we do expect gross margins in the fourth quarter to increase sequentially compared to the third quarter. And we're also looking at reductions in total operating expenses, all those metrics and cost reductions will help us get into the guidance range.

Derek Soderberg: Got it. And then anything with the currency? I know the peso has been strengthening against the dollar. Anything sort of unusual that maybe you guys are seeing happening in 4Q that we should be aware of or might potentially be an impact to 4Q numbers?

David Lee: The 4Q as the peso gets strong, it will have an impact on our noncash impact of lease liabilities. So we break that out on a separate line item and it's noncash. So it will have an impact there. .

Derek Soderberg: Got it. Got it. And then, Selwyn, there was a part in the press release on nonstrategic assets. I was wondering if you could talk a bit about what sort of assets maybe plan on doing a divestiture or kind of stepping away from some of these nonstrategic aspects of the business. I was wondering if you wanted to provide any detail on that?

Selwyn Joffe: Yes, I'm happy to do that. We have an [ electric vehicle emulation ] business, which syncs in with simulation, emulation and testing of the electronic drivetrain and it's state-of-the-art technology, which I think David mentioned, we've continued -- we're actually launching, as we speak, a new generation of that, which even makes it more unique. But the challenge for us is that, that distribution channel is on the OE side of the business. And we focus really on OES, regional equipment service to the aftermarket. So we don't really -- that's not really where we deal and so I think that strategically, there may be some better opportunities for that business in the right distribution patch.

It's an outstanding product, very unique product and an exciting product, but just doesn't fit with our continued focus on the aftermarket.

Operator: And there are no further questions at this time. I will now turn the call back over to Selwyn Joffe for closing remarks.

Selwyn Joffe: Okay. Thank you very much, and I appreciate the questions. Just would say in summary, we are very bullish about our outlook, notwithstanding this temporary headwind, which we experienced in the quarter. We remain laser-focused on further efficiencies and fully benefiting from a not easily duplicated global platform. to meet demand and grow market share for our nondiscretionary products as well as for our exciting diagnostic testing business. Our liquidity is strong. Our leverage is low, and we have the resources, capacity and capability to further enhance shareholder value.

Let me reiterate a few key strategic initiatives: growing sales of our existing product lines. continuous operational efficiency improvements to further enhance margins mitigating tariffs and increasing cash conversion by increased profitability and neutralizing working capital. In closing, we appreciate the contributions of all of 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 2026 year-end results in June and at various investor conferences and meetings in the interim. Thank you so much.

Operator: This concludes today's conference call. You may now disconnect.

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