Dorman Products, Inc.

Good morning and thank you for standing by. Welcome to the Dorman Products First Quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. I'd now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead.

Good morning, everyone. Welcome to Dorman's First Quarter 2025 earnings conference call. I'm joined by Kevin Olson, Dorman's Chief Executive Officer, and David Heschen, Dorman's Chief Financial Officer. Kevin will share updates on the business and address the tariff situation. Then David will review our quarterly results and reaffirm guidance. Kevin will then close our prepared remarks before opening the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available on the investor relations portion of our website at dormanproducts.com. Before we begin, I'd like to remind everyone that our prepared remarks, earnings release, and investor presentation, including forward-looking statements within the meeting of federal securities laws. We advise listeners to review the risk factors and cautionary statements in our most recent 10Q, 10K, and earnings release for important material assumptions, expectations, and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. We'll also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and in the appendix to this earnings call presentation, both of which can be found on the investor relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves to one question with one follow-up and to rejoin the queue if they have additional questions. With that, I'll turn the call over to Kevin.

Thanks, Alex. Good morning, and thank you for joining our first quarter 2025 earnings call. As Alex mentioned, I'll start with a high-level review of the results, and then cover the actions we've taken over the last several years to position us well to address tariffs. I'll also touch on the observations we're seeing within each of our segments. Turning to slide three, I wanted to briefly touch on the quarter. David will provide more detail, but we had an outstanding first quarter with strong top and bottom line results. Consolidated net sales for the quarter grew 8% year over year to $508 million. Our team continues to do a great job on the new product development front, which contributed to our growth. We also delivered solid margin expansion in the quarter. Adjusted operating margin for Q1 2025 was 17%, expanding 310 basis points compared to the same period last year. This margin performance was again led by our light duty business, which drove solid margin improvement over last year's first quarter. Lastly, adjusted diluted EPS increased over last year's first quarter by an impressive 54% to $2.02. The free cash flow in the quarter was $40 million, allowing us to repay $20 million of debt and repurchase $12 million of our common stock. Overall, we began the year with strong results that support our expectations for continued growth this year. On slide four, we thought it would be valuable to discuss some of the investments we've made in our business over the last several years, which position us well to perform in situations of economic uncertainty like we currently face. I'd like to caveat that the situation has been highly fluid, as you all know, and we are following it closely. I've been extremely impressed with our team and their ability to pivot and navigate through the -to-day challenges. It speaks to the level of we have across the organization. First, as we discussed on our last call, we've taken significant steps to diversify our supply chain since the Section 301 tariffs on Chinese imports went into effect in 2018 and 2019. Entering 2025 and before the new tariffs were put into effect, we had been executing a plan to continue to reduce our share of product source from China. In 2025, we estimate that approximately 30 to 40 percent will be sourced from partners in China, approximately 30 percent from the U.S., and the remainder from various regions around the world. We will continue to remain focused on optimizing our supply chain strategy. We believe this level of diversification gives us a competitive advantage, and it's not just an to capture cost savings. Our asset-like manufacturing strategy and expertise stand out as competitive advantages, allowing us to identify and partner with leading manufacturers around the globe to drive redundancy, flexibility, and resiliency within our supply chain. The end result is better products at better prices for our customers and end users. Through our strategic sourcing investments, we've developed a strong relationship to our supply partners. Our scale often makes us a strategic customer for our vendors. In many instances, we're one of their largest customers. This scale and strategic position fosters deep partnerships with our suppliers that ultimately benefit our customers and end users. Next, the products that we sell play an essential role in everyday life. Our products help people get to work, get their kids to school, take vacations, and visit friends and family. Our products also help businesses keep their goods flowing from point A to point B and provide everyday services to local communities. The majority of our product portfolio is non-discretionary in nature, so if you are in need of one of our parts, odds are your vehicle is not operating or not operating safely. Non-discretionary parts have historically done well in uncertain economic times, and for decades we have successfully navigated various diverse economic environments. Furthermore, we believe our innovation strategy and the strength of our brands positions well to succeed. Our innovative solutions are core not only to our success, but also to the success of our customers and technicians who rely on our new products for their own growth and profitability. We've also strategically invested in our brands over the last several years, which has led to the Dorman, Dayton, and Super ATV brands being sought after in their respective segments. And finally, our financial profile serves as a significant benefit to our investors and customers. We have a strong balance sheet and liquidity position, allowing us to manage higher costs from tariffs in the short term, to invest in inventory to support our customer needs, and to capitalize on strategic growth opportunities along the way. We expect our strong financial foundation will stand out as a key competitive advantage compared to our peers. In the end, we have the experience and playbook and the right set of solutions, suppliers and customers, along with the financial strength to navigate the changing trade environment. Before I turn it over to David, let me touch on the observations we're seeing across our segments on slide five. These observations include what we've experienced leading up to the recent tariff announcements and what we see looking forward in the new trade and economic environment. Starting with light duty, as I mentioned, positive macro trends continued into the year. Vehicle miles traveled, climbed higher year over year, and we expect that used vehicles will continue to stay on the road longer, both of which are key contributors to the success of the after market. During the quarter, customer demand was strong, a trend that followed through from the end of 2024. In particular, we had a strong season with our patented oil filter housing product that discussed in previous calls. This, along with the success of our other recent new products, were key contributors to our growth. In our heavy duty segment, the soft market conditions that impacted trucking and freight markets in 2024 continued through this year's first quarter. While the early signs of stabilization we spoke of on our last call continued the first few months of 2025, the announcement of tariffs and the impact on demand for trucking and freight began creating additional uncertainty in the market late in the quarter. We're watching it closely and will continue to position the business for long-term success through portfolio expansion productivity initiatives. The specialty vehicle remained encouraged with the enthusiasm behind the UTV and ATV markets. The feedback we get from end users is that they are very engaged and positive. We're not seeing a pullback in ridership. However, consumer spending softened during the quarter, maybe ahead when moving forward. We remain focused on expanding our portfolio of non-discretionary parts, capturing share, and expanded dealer network as the market rebounds. With that, I'll hand it off to David to review our Q1 financial performance.

Thanks, Kevin. As we turn to slide six, I'd like to point out that we maintained our positive momentum from the fourth quarter. Consolidated net sales in the first quarter were $508 million, up 8% year over year, driven by strong customer demand. Light duty again drove above-market sales growth on positive macro trends and the success of our new products. I'll cover each of our segments more in just a moment. Adjusted gross margin for the quarter was 40.9%, a 220 basis point increase compared to the prior year period. Margin expanded on the strong sales growth and favorable mix of new products, coupled with cost savings generated from supplier diversification, as well as productivity and automation initiatives. Adjusted SG&A expense as a percentage of net sales was 23.9%. Down 100 basis points compared to the first quarter of 2024. Adjusted operating income with $86 million in the first quarter, up 33% compared to the same period last year. Adjusted operating margin expanded 310 basis points to 17%, largely from the gross margin I just discussed. Finally, adjusted diluted EPS in the first quarter was $2.02, up 54% compared to last year's first quarter. Along with increased adjusted operating income and lower interest expense as a result of our debt repayments over the last 12 months, our effective tax rate benefit from a timing difference in the quarter. Finally, our share repurchase program activity over the last year contributed to positive EPS growth. Next, let me provide updates on each of our business segments, starting with light duty on slide 7. Light duty's performance in the first quarter was outstanding, with net sales increasing 14% year over year. The growth was driven by strong customer demand, especially for our new products, with foundationally positive macro trends continuing through the first quarter. POS was up high single digits versus shipments that were up low teens in the quarter. Light duty also drove strong margin improvement, with segment operating margin increasing to .9% for the quarter, a 380 basis point increase compared to the same period last year. This margin expansion benefited from new product mix and cost savings from our ongoing automation and productivity initiatives, along with higher leverage on our volume. Turning to slide 8, heavy duty net sales were again impacted by continued market pressures in freight transportation and the trucking aftermarket. Net sales were down 11% year over year, and segment operating margin turned slightly negative as the business has a larger fixed cost manufacturing footprint in our U.S. manufacturing plants compared to our other segments. While the early signs of stabilization that we mentioned on our last call continued to play out through the first few months of the year, the uncertainty that tariffs inject into the trucking and freight market gave us further pause to call for a rebound in our business. That said, we'll continue to invest in new product development and commercialization initiatives to capture share and best serve our customers when the market does turn. Moving to slide 9, UTV and ATV ridership in the specialty vehicle segment remains healthy, but in the first quarter, net sales declined 9% year over year, which proved to be a notable shift from the growth we saw at the end of last year. We expect this turn was a result of consumer sentiment changing after the holiday season, and as uncertainty around tariffs took hold. This weakened confidence level in the economy will likely continue given general uncertainty and tariffs, but we expect demand to return once the economy restabilizes. To best serve our customers and riders, we'll continue to invest in product offerings through our internal innovation funnel and through tuck-in acquisition of value-added brands. We'll also continue to expand our dealer network to further broaden our market share. On the margin front, segment operating margin declined to .2% in the fourth. The main driver of this decline was the de-leverage of our fixed cost as sales declined. Similar to the heavy duty business, we manufacture a portion of our products internally in the U.S. Within our operations, we are taking appropriate actions to mitigate margin degradation should the market's office continue in the future. Turning to our cash flow on slide 10, our cash flow in the quarter was solid on strong earnings growth offset by investments we made in inventory. Free cash flow in the first quarter was $40 million, essentially in line with the same period last year. During the quarter, we deployed $11 million in capital expenditures, repaid $20 million in debt, and repurchased $12 million of our common stock. The cash flow we've generated in our use of cash over the last eight quarters have positioned us with the liquidity to manage increased costs as a result of the tariffs. I'll touch on our liquidity in just a minute, but I wanted to highlight that our capital allocation strategy has proved to be a key value driver for Dorman. As we look forward, our long-term strategy doesn't change. We will continue to look at our debt and leverage targets first and then utilize our cash to invest internally, as that is where we get our greatest return. We'll then look to invest in strategic growth opportunities and opportunistically repurchase shares. That said, in the short term, we'll be utilizing a portion of our cash in balance sheet flexibility to fund the higher costs of inventory resulting from the tariffs. On slide 11, we highlight much of what we've already covered, which is that we believe we have the balance sheet capacity and liquidity to help finance the cash needed for the significant increase in inventory costs we anticipate as a result of the tariffs. As you can see, net debt was reduced to $402 million and our net leverage ratio was 1.01 times adjusted EBITDA, down from 1.12 times at the end of last year. Additionally, our total liquidity increased to $660 million at the end of the quarter, up from $642 million at the end of 2024. In the end, we expect the strength of our balance sheet will be a competitive advantage against the market conditions we currently face. Turning to slide 12, I'd like to cover our guidance for 2025. Given our performance in the first quarter and the future outlook for our underlying business, we are reaffirming our 2025 net sales growth guidance of 3% to 5% and adjusted diluted EPS guidance range of $7.55 to $7.85. Please note that this guidance does not include any impact related to U.S. tariffs enacted or proposed in 2025 or any potential retaliatory measures from U.S. trade partners. As you know, the situation remains highly fluid and negotiations between various countries and the administration are ongoing. Adding to the fluidity, our conversations and negotiations with our suppliers and customers are ongoing as well. With this level of uncertainty, we felt it was prudent to continue providing our positive view of the underlying business and not include any impact from increased pricing or higher costs associated with the tariffs. As the situation gains more clarity, both at the macro level and for Dorman, we'll look to provide an updated view with the impacts to our expected results. And finally, for modeling purposes, we continue to expect a 24% effective tax rate. With that, I'll now turn it back over to Kevin to conclude. Kevin? Thanks, David.

I'll just reinforce what we've said throughout. First and foremost, we had an outstanding first quarter that positions us well for growth this year. While there is significant level of uncertainty that exists with tariffs, we have the experience and talent to address the challenges ahead. Additionally, we have a stronger supplier base, a more diversified customer base, and a stronger financial foundation than we've ever had before. We'll continue focusing on the needs of our customers and users and look to capitalize on the opportunities we see in the marketplace. With that, I would now like to open the call up for questions. Operator?

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And our first question comes from the line of Scott Stamber with Roth Capital Partners. Your line is open.

Good morning, guys. Thanks for taking my questions. Morning, Scott. Morning,

Scott.

Very strong performance in heavy duty, very strong high single digit POS. A few ticks below the sell-in. So I guess the first question is, have you seen any of your bigger customers buying ahead to get ahead of tariffs? And if not, is this just a function that the difference of you guys gaining shelf space with some of your bigger, faster growing partners that are expanding rapidly?

Yeah, good. It's Kevin. Good question, Scott. You know, the light duty business was very strong in the quarter. It followed a very strong fourth quarter as well. Our POS, as we noted in the prepared remarks, was up high single digit, very similar to what we were seeing last year, really driven by our new product performance. And the macros continue to be favorable as well, as we mentioned. Our sell-in growth actually did exceed our POS growth in the quarter, really as a result of an easier comp in the quarter. If we look back and you look at the two-year stack in the quarter, kind of more in line with what the POS growth that we saw, is just some timing issues last year in the first quarter versus the fourth quarter of 2023. To answer your question around the buy ahead, we haven't seen any indications at this point yet of customers getting ahead of the tariffs, at least from ordering from us. That could potentially happen, but as of now, we haven't seen any meaningful

evidence of that. Got it. And, you know, on tariffs, obviously, appreciate there's a lot of uncertainties here, and it's hard to predict anything. But clearly, with 145% as it stands right now, some folks are concerned of what impact it will have on your business. So it sounds like you're in a lot better position than you were the last time around with tariffs. But could you just, again, remind us of some of the mitigation efforts that you have in place, and then timing of when we would actually start to see anything hit your results?

Yeah, sure. You know, I mean,

as

you mentioned, Scott, again, and Kevin, it's really too early to tell. It's a very fluid situation that the 232 auto tariffs just went into effect a couple days ago. And as we talked about, we do have a very diverse supply chain, much more diverse than it was, say, five, six years ago. And that's intentional. And I'll just reiterate what our footprint looks like across Dorman. Roughly 30 to 40% is sourced from China in 2025, we estimate, and that's obviously depending on product mix. Approximately 30% is in the US, and the balance is really spread around the rest of the globe. You know, I also want to point out, you know, keep in mind that the vast majority of our parts, Scott, are non-discretionary in nature. And it's really been fairly inelastic, you know, historically, as we've gone through periods like this. And just to hit on your point is when it impacts us. Again, you know, we're on FIFO inventory, and it all depends on when, you know, some of these tariffs have started to come into effect. But in general, we won't see, you know, a lot of these tariffs for, you know, roughly six months or so after we start recurring them just because of FIFO. You know, in regards to your question on mitigation, I mean, look, we've been down this road before. We feel like we have a really good playbook to deal with this. You know, we're, you know, obviously we're going to look to negotiate with both our supply base in terms of cost concessions, driving further productivity initiatives in the business, and then obviously look to offset any difference through price changes.

Great. That's all I have for now. I'll get back in the queue. Thank you. Thanks, Scott.

Our next question comes from the line of Brett Jordan with Jefferies. Your line is open.

Hey, guys. Good morning. Morning, Brett. On that EVIT margin in Life Vehicle, you talked about product mix versus leverage on the volume. Could you sort of break out what was product mix versus leverage on the volume? You talked about new to the aftermarket and the oil filter housing. Could you just sort of talk about where that pretty solid margin expansion came from?

I mean, Brett, if you look back, we've been generating these type of operating margins in light duty for quite some time now. Really, it is mostly due to our product mix. We don't spike out much. We don't have to go to the market to see exactly how much is due to just core business. A lot of it is due to the new product mix. As we've talked about before, we've had some really successful new products come to market. Also, the macros have improved. If you look at the sweet spot, the seven to -year-old vehicle, which is where we really target new product development, that vehicle cohort has really grown over the last couple of years. We see that cohort continuing to grow over the next three to four years. Those two factors have really enabled us to expand margin in light duty side.

Okay. Then I guess when you think about the more commoditized mix in the portfolio, maybe chassis, and your supply chain footprint versus competition, is there any material difference or is everybody pretty much exposed in the same countries? Have you thought about yourself versus maybe the Tentaco chassis businesses or the Mevatec chassis businesses? Is there any risk that someone will be advantaged given their geographic mix or is pretty much everybody the same?

Yeah. Good question, Brett. I'm not going to comment on any specific category, but I think overall, you're going to see some of that in terms of depending on where all the settle out, which I don't think anyone really knows at this point, there will be situations where someone may be advantaged versus somebody else. I'll just say that as we look at our footprint, and if you look at the exposure to the highest tariff region now, hard parts is still very indexed China. If we look at our exposure, we think we're a lot less exposed than most. Given our balanced footprint around the globe, overall, we see ourselves in a competitive

advantage situation. Okay. Great. Then on pricing, in the event we do get tariffs, the conversations with your large retail customers, does it sound as if everybody is still expecting to be able to pass most of these through or is just the magnitude of the tariff something that some place along the line of the supply chain or the retailers that have to eat some of this higher cost?

Yeah, Brett. I'm not going to comment on what our customers are going to do, but I'll just say that from our perspective, we're pretty comfortable that we can offset the net impact at the end of the day. Keep in mind, again, our portfolio is mostly non-discretionary repair parts, hard parts. Our customers, we're a strategic partner to all of our customers. We have a strong brand, both to our customers and the end users, and we have a proven playbook. We've done this before, back in the 2018 timeframe. At the end of the day, we think we'll be successful wherever this ends up. Great.

Thank you. You got it.

Next question comes from the line of Gary Prestapino with Barrington Research. Your line is open.

Good morning, everyone. Morning, Gary. David, just a couple of questions on the income statement. It looked like your interest expense really stepped down sequentially, and I'm wondering, is that it looks like net interest was about $7.4 million or something like that. Is that a good number to use throughout the rest of the year on a quarterly basis, or was there something in there that caused that step down?

Yeah, Gary. It's David. We've been focused, as you know, on paying down our debt since the acquisition, and we've paid down close to $270 million over the last couple of years, which has brought our leverage down to one time, indeed it does. So the balance sheet is as strong as it's ever been. We feel really confident about our ability to navigate in this current situation. As far as the interest expense, Gary, I think using the current order is probably a good assumption for your model.

Okay, great. That's very helpful. And then could you maybe, just getting back to this whole issue with the tariffs and all that, versus when this happened before, which was I think 2018, 2019, I believe, how much of your product was then sourced from China? And then what takeaways did you get from that experience that you could definitely use in this current environment if the tariffs start really impacting the price of products?

Yeah, Gary, it's Kevin. Good question. I think six, seven years ago, when we went through that before, I believe we disclosed roughly 70 plus percent was China, Taiwan, of which a vast majority of that was China. I think that was the disclosure back then. So we're in a materially different place as we look at Dorman today. When we think about mitigation efforts, what have we learned? I think at the end of the day, that event six, seven years ago caused us to really look at diversifying the supply chain, building a more resilient supply chain, and we've been very successful doing that. So we have kind of a core base of knowledge of these other regions. We know where there's capacity. We know where we can source quality parts at the right value around the globe. So we have experience, folks, in all these regions at this point. At the end of the day, we've also spent a lot of time driving productivity throughout our business. We've talked about it before. We undertook an automation exercise or strategy initiative where we have automated our distribution facilities, and we're going to continue to look to drive costs out of the business. Whatever net cost we have left, we look to

offset that in price. Okay, and then if I could just sneak one more in, and it's a real easy one. You cited new products as driving growth in the quarter. Would you be able to maybe not quantify the actual numbers, the level of sales, but how many basis points within a range of the growth of the quarter was contributed by new products?

Yeah, Gary, we don't break that out, but I will tell you that if you look at the overall market growth across the industry, you're looking at low single digit growth. That's kind of compared to high single digit POS growth that we experience. For the most part, that differential is driven by new products. That has been our business model and will continue to be the business model. We've been very comfortable saying historically that we're able to significantly outperform market growth because of our business model. We think that's going to continue.

No, thank you. That's very helpful explanation. Appreciate it. Thank you.

Next question comes from the line of Justin A. with CJS Securities. Your line is open.

Hi, good morning, all. Morning. Appreciate the color on how much is sourced from China. Can you give us any indication how that splits up amongst the segments of that 30 to 40 percent? Is the majority going to light duty or any color on that would be helpful?

Yeah, Justin, good question. We're not going to get into the details or disclose the impact in our different segments, mainly because frankly it's too fluid at this point and for competitive reasons. I will make a couple of comments though on each individual segment. In light duty, as I mentioned before, we believe we have a very diversified supply chain and footprint. We have less exposure, as I mentioned before, to the overall hard parts market in the aftermarket. We think significantly so. So overall, we view that we have a competitive advantage in relation to the competitive set in light duty. You'll get look at heavy duty, very modest impact from tariffs. We believe, again, as we look around the competitive landscape that we're well advantaged there. In specialty vehicle, we do have some exposure to China, but we also have a large manufacturing footprint in the U.S., in Madison, Indiana. If we look at that entire industry, it's very heavily indexed to China. So again, we think we're well positioned as we look against the competitive set. Also keep in mind, Justin, that we do have a pretty good footprint here in the U.S. As I mentioned before, we do source roughly 30% of our products here in the U.S., some of that through our own plants. We do have six dormino and manufacturing plants in the U.S. and obviously we look to leverage them as much as we can where it makes sense.

All right, that's very helpful. I appreciate you taking the question.

You got it, Justin. Thank you.

And we have a follow-up question from Scott Stember with Roth Capital Partners. Your line is open.

Hey, guys. Just one follow-up. These 232 tariffs, I'm just trying to figure out if you guys have been able to ascertain whether there'll be any exemptions and also talking about, you know, the president talking about on auto parts there being some kind of a clawback. I'm not sure if that is related to just the OEM and OEM production or is there some benefit or offset for the pure aftermarket?

Yeah, Scott, we're still working through that, but in general, you know, the auto part, the 232 tariffs is really tied to, you know, the HTS code and, you know, where we have parts that fall under those codes are obviously subject to that tariff. And there's a bunch of other tariffs as well, and they all interplay. But, you know, for the most part, it's that exemption was for the OE, but we're still evaluating the impact on dormancy.

Got it. Thanks again.

Got it. Ladies and gentlemen, that concludes the question and answer session. Thank you all for joining, and you may now disconnect.