Thank you for standing by and welcome to the Motor Car Parts of America Inc. Fiscal 2026 third quarter conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star one. Thank you. I now like to turn the call over to Gary Mayer, Vice President, Corporate Communications and investor relations. You may begin.

Thank you, Rob. Thanks, everyone, for joining us for our call today for our fiscal 2026 third quarter. Before I turn the call over to Selen Jaffe, Chairman, President, Chief Executive Officer, and David Lee, Company's Chief Financial Officer, I'd like to 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 Motor Car Parts of America. Actual results may differ from these 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 it's a result of new information. For a more detailed discussion of some of the ongoing risks and uncertainties, I refer you to our area's filings with this. I would now like to turn the call over to Selwyn, Jaffe, and to… 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, that 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. The 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 breaking 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, based electronics and research sectors, we are exploring strategic alternatives. We are focused and committed to being the leading supplier of non-discretionary automotive aftermarket products. 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. 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 onto 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 we are experiencing increased demand for aftermarket products in Mexico which complements our existing strategic operational and distribution footprint there as a 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 US-based retailers and warehouse distributive customers expand throughout Latin and South America, we are well positioned to benefit while supporting their growth. With regard to our diagnostic business, our JVT1 benchtop test that leads the industry, and the installed bases continue 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 non-discretionary 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 hindwinds due to consumers deferring certain repairs, deferment is not really a long-term option for our non-discretionary products. If your car doesn't start or stop, 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.

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 due to its closure 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 non-cash and one-time 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, fees, 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 someone 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 someone 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 and 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 during our fiscal year-end call in June. Regarding our cash flow balance sheet and liquidity, for the nine-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 two years, through December 31st, 2025, we have generated cash from operating activities of approximately $60 million or approximately $3.06 per outstanding share on average, and we reduced net bank debt by approximately $32.3 For the trailing 12 months ended December 31st, 2025, 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 31st, 2025, was $68.1 million. EBITDA before the impact of non-cash and one-time cash expenses was $84 million for the same To recap, our net bank debt was $70.5 million at December 31st, 2025, compared with EBITDA before the impact of non-cash and one-time cash expenses mentioned above of $84 million for the 12 months ended December 31st, 2025, resulting in a net bank debt to EBITDA ratio of 0.84. As someone stated earlier, we are also committed to further opportunities to enhance shareholder value, including share repurchases. For the nine-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 non-core asset, we plan to explore strategic alternatives to capitalize on its proprietary industry-leading technology. Let me mention that for the nine months ended December 31st, 2025, we have invested in research and development for the state-of-the-art next generation 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 issues this morning. I would now like to open the line for questions.

Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star 1 in your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Your first question comes from a line of Brian Nagel from Oppenheimer. Your line is open.

Hey, guys. Good morning, Brian. So the question I want to ask, or just the topic I want to probe further is this, you know, with the sales disruption that came as a result of the buying patterns of the customer you're calling out. So, you know, clearly now, I guess this is the second quarter we've seen this impact. You talked about, you know, rebounding purchasing. I guess the question I want to ask is how should we think about where we go from here? You know, was this a one-time reset or will, you know, do you expect that purchasing from this customer will be, you know, more subdued going forward?

I think for the most part it's one time, but this customer did close down a number of stores. And so, you know, the number of stores numerically represent a 15% reduction. And so, our outlook is to assume a 15% reduction. However, we are optimistic that the changes 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%.

Okay, so maybe you started to answer this question, Ray, but as you look at this, you know, an overall healthy sector, right, healthy and healthy demand trends out there, you know, with this customer having closed stores, you know, presumably there's been some market share shift. Does that give you an opportunity then to, you know, to cater better to, you know, the stores that are now taking up the market share when these competitive stores were closed?

No question. No question. We have our relative share in that market, and there's no question that we, you know, that we will see, you know, getting fair share there as well. So, I'm not sure where it goes, but, you know, we're across the board with coverage on market share in those marketplaces. I appreciate the color. I'll leave it there. Thanks, Brad. Appreciate it.

Your next question comes from a line of Derek Soderberg from Cantor Fitzgerald. Your line is open.

Yeah. Thanks for taking the question. Hey, guys. So, David, just looking at the implied guidance, looks like, you know, 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, you know, gross margins, it feels like. They're 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's going to be happening in this FX impact bucket for OPEX. I'm just trying to see if you guys can break down some of the OPEX numbers for 4Q to help us better understand that.

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

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, you know, we should be aware of, or might potentially be an impact to 4Q numbers?

The 4Q, as the PISO gets strong, it will have an impact on our non-cash, 4-inch impact of lease liabilities. So, you know, we break that out on a separate line item, and it's non-cash. So it will have an impact there.

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

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

Got it. That's helpful. Appreciate it.

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

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 non-discretionary 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.

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