Motorcar Parts of America, Inc. Q3 FY2026 earnings call

• Results for the third quarter were disappointing due to a large customer reducing purchases, but ordering activity from this customer is recovering. - Year-end sales guidance for fiscal 2026 is adjusted down due to lower sales to the large customer and less-than-expected fourth-quarter recovery. - The company has secured new business commitments, and gains in the braking business are expected to increase margins. - Strong liquidity allows deployment of capital for share repurchases and debt reduction. - The average age of U.S. light vehicles is rising, creating replacement opportunities. - The heavy-duty business is focused on enhancing operating efficiencies and is an important supplier to the heavy-duty rotating electrical market. - The diagnostic business's installed base is growing with anticipated service-related revenue. - The EV emulator business is a noncore asset with strategic alternatives being explored.

The company has multiple segments. The braking business is expected to increase margins due to operating efficiencies and facility utilization. The EV emulator business is a noncore asset with strategic alternatives being explored. The heavy-duty business is leveraging its reputation, seeing momentum in supplying alternators and starters to heavy-duty aftermarket leaders, and experiencing increased demand in Mexico where there are ~36 million vehicles with an average age of 16.2 years. The diagnostic business's JBT-1 Bench Top Tester has a growing installed base with anticipated service-related revenue from software and database updates. Revenue contribution details weren't explicitly given in absolute terms with percentages, but each segment has its own performance aspects as described.

• Revised fiscal 2026 sales guidance to between $750 million to $760 million. - Operating income expected to be between $72 million and $79 million. - Orders from the large customer are rebounding, and the company is optimistic about the customer's growth. - Fiscal fourth quarter gross margin is expected to improve sequentially due to increased ordering activities from the large customer.

• Expectations about future growth and opportunities with customers may not be achieved. - Impact of a large customer's store closures and distribution center consolidation negatively affected third-quarter results and led to revised guidance.

Q: 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?

A: 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% Q: 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?

A: 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 Q: 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.

A: 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 Q: 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?

A: 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.

Q: 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?

A: 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