Dorman Products, Inc.

Good morning, and thank you for standing by. Welcome to the Dorman Products second 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 Whitelum, Vice President of Investor Relations, Thank you, sir. Please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's second quarter 2025 earnings conference call. I'm joined by Kevin Olson, Dorman's chief executive officer, and David Heshen, Dorman's chief financial officer. Kevin will provide a quick overview of our recent performance, share our views across the business, and provide our updated guidance. Then David will review the quarterly results, and Kevin will then provide closing 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 dormantproducts.com. Before we begin, I'd like to remind everyone that our prepared remarks, earnings release, and investor presentation include forward-looking statements within the meaning of federal security 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 states. 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. And with that, I'll turn the call over to Kevin.

Thanks, Alex. Good morning, and thank you for joining our second quarter 2025 earnings call. As Alex mentioned, I'll start with a high-level review of the results along with observations within each of our segments and then provide our updated guidance for 2025. Turning to slide three, I would like to briefly discuss our recent performance. David will provide more details, but we had another outstanding quarter. The top and bottom line results that exceeded our expectations. Consolidated net sales for the second quarter grew 8% year over year to $541 million. Strong volume growth from increased customer demand, especially within the light duty business, led our top line growth. We also saw positive signs in our heavy duty business with slight year-over-year growth resulting from new business wins. Weak consumer sentiment persisted through the second quarter, impacting our specialty vehicle business, but the team continues to do an excellent job managing through this downturn and positioning the business' future sales growth. We also delivered solid margin expansion in the quarter. Adjusted operating margin for Q2 2025 was 16.3%. 70 basis point increase over last year's second quarter. Light duty business was also the primary driver behind this margin improvement, largely due to strong demand in the quarter, as well as ongoing supplier diversification, productivity, and automation initiatives. The net sales growth and margin expansion we achieved resulted in a 23% year-over-year increase in adjusted diluted EPS, which was $2.06 for the quarter. And finally, operating cash flow in Q2 was $9 million, which was impacted by higher tariff costs and additional investments in inventory to support demand. David will discuss this in more detail shortly. So overall, we're pleased with our results in the second quarter and through the first half of 2025. It's helped shape our expectations for continued momentum through the full year. Let me take a few minutes to cover our observations across each of our segments. I'll start with the light duty business on slide four. As I mentioned, the underlying macro trends remain positive. Vehicle miles traveled climbed higher year over year. And according to the latest industry reports, the average age of light duty vehicles has increased to 12.8 years. These underlying factors led to strong volume growth year over year. We continue to see strong performance out of the new products that we've recently launched. especially those that are new to the aftermarket or address flaws in OE parts. These products typically drive higher sales and margins, and in some cases, include patented features to provide a competitive advantage. Also, keep in mind that the majority of our product portfolio is non-discretionary in nature, which has enabled us to perform well throughout various economic cycles. Additionally, we view our asset light model and the flexibility of our diversified supply chain to be key competitive advantages as we navigate through uncertainty in various trade and economic environments. In our heavy duty segment, market pressures impacting the trucking and freight industry continued through the second quarter, especially as tariffs created uncertainty in the broader economy. Despite these market pressures, we achieved positive net sales growth in the quarter with new business wins. Looking forward, we remain cautious as market indicators continue to fluctuate and the trucking and freight industry remains somewhat unpredictable. That said, we believe the long-term investments we've made in our product portfolio and productivity initiatives, as well as improvements we're making in the customer's front-end experience, will help drive sales growth and margin expansion when the sector begins to stabilize. In specialty vehicle, Reluctant consumer spending continued to impact our performance through the second quarter. However, as we saw in the first quarter, we continue to see strong engagement with our UTV and ATV ridership, especially at the enthusiast events across the country we attend throughout the year. We expect that as the broader economy strengthens over time, the specialty vehicle business will continue to outpace the market of our expanded product portfolio include non-discretionary parts and new dealer relationships. Next, let's move on to slide five. I'll spend some time talking about our updated guidance for 2025. Considering the impact of tariffs on our financials, we are covering guidance upfront in our discussion today. Before we get into the numbers, we felt it was important that we reiterate the actions we're taking to mitigate tariffs. As we discussed on our last call, our approach to managing tariffs is multifaceted and largely aligned with the approach we've taken and faced with inflationary environments in the past. First, we continue to diversify our supplier base, accelerate tariff cost reductions to our sourcing strategies. Second, we're driving solid savings by leveraging our scale and the deep relationships we have with our suppliers around the globe. Third, We're continuing to drive cost savings internally through automation and productivity initiatives. And finally, we've been deliberate in our approach to implementing price increases to cover the net remaining costs from tariffs. We've been surgical on this front, keeping in mind the impact such price increases could have on our customers, their business, and our end users. These price increases will go into effect in the third quarter. In light of our strong performance through the first half of the year, our improved outlook for the remainder of 2025, and the expected impact of pricing costs resulting from tariffs, we have increased our net sales and EPS guidance for the year. Please keep in mind that while we stand on more solid ground today compared to our earnings call last quarter, the trade situation remains fluid. Our updated guidance for 2025 is based on the tariffs that are currently enacted. may update our annual guidance in the future should any material changes to tariffs or trade disruptions significantly impact our business or alter our expectations starting with the top line we now expect net sales growth to be in the range of seven percent to nine percent over 2024. this is an increase from our previous growth guidance of three percent to five percent the increase in the range is comprised of three factors first Our performance through the first half of the year has outpaced our original expectations, driven by strong volume demand and the positive underlying light duty macro trends. Second, we are expecting incremental year-over-year volume growth through the remainder of the year based on continuing positive market conditions for our light duty business. Finally, as I just mentioned, part of our approach to mitigating the impact of higher tariff costs was working directly with our customers on pricing. This was a critical step in the process to help maintain our high level of service and fund the higher cost of inventory that was capitalized on our balance sheet immediately at purchase. Keep in mind there are customer notification periods when a price increase goes into effect. So we'll see the contribution of higher prices begin to make an impact in the third quarter 2025. Next, on the earnings front, we now expect adjusted diluted EPS to be in the range of $8.60 to $8.90, an increase from our previous guide of $7.55 to $7.85. Let me spend a few minutes on the nuances around this increase, including the timing dynamics and the role tariffs play in the change. As a reminder, we utilize a FIFO accounting methodology and our inventory turns approximately twice a year. This generally results in a six-month timing lag between when cash is used to pay for inventory and when the higher cost is recognized in our profit and loss statement. As it relates to this year, while the increase in tariff costs on the inventory we purchased in Q2 had an immediate impact on our cash flow and balance sheet, the increase in cost of goods sold for this inventory isn't expected to start impacting our P&L until Q4. Unlike cost of goods sold, net sales are recognized when incurred. As we mentioned, new pricing on tariffs will go into effect in Q3. Therefore, we expect tariff pricing to have a positive effect on net sales in Q3 without the impact of tariffs on cost of goods sold, resulting in a higher than normal gross margin level. Then in Q4, we expect to see gross margin come back down as we begin to recognize tariff costs and cost of goods sold to counter the effect of tariff pricing. As a result, we expect that the increase in our EPS range will be slightly weighted more to Q3 than Q4. Please note this additional color is to help align our view of the next two quarters with our analysts and investors for clarity. given the highly nuanced nature of tariffs and our current situation. With that, I'll turn it over to David to cover our results in more detail. David?