Dorman Products, Inc.

Good morning, and thank you for standing by. Welcome to the Dorman Products Board 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 would now like to turn the conference over to Alex Whitelamp. Vice President of Investor Relations. Thank you, sir. Please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's fourth quarter 2025 earnings conference call. I'm joined by Kevin Olson, Dorman's Chief Executive Officer, and David Heschen, Dorman's Chief Financial Officer. Additionally, Charles Rayfield, who will officially step into the role of Chief Financial Officer following our upcoming filing of the 2025 10-K, is in attendance. Kevin will provide a quick overview along with an update on each of our business segments and their respective markets. Then David will review the consolidated results before turning it back over to Kevin for our outlook and closing remarks. After that, we'll open the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available in 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 include forward-looking statements within the meaning of federal securities laws. We advise the 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. And with that, I'll turn the call over to Kevin.

Thanks, Alex. Good morning, and thank you for joining our fourth quarter 2025 earnings call. As Alex mentioned, I'll start with our achievements in 2025, a high level review of the results for Q4, and updates for each of our segments before turning it over to David. Let me start on slide three. As you'll recall, in last year's Q4 earnings call, we laid out a clear set of strategic priorities for 2025. critical areas where we plan to commit time, resources, and investments to advance our long-term goals. I'm pleased to report that we delivered on what we said we would do. First, innovation. We had an exceptional year, record sales from new products, launching thousands of new SKUs, including some home runs like the electronic power steering rack, along with many singles, doubles, and triples. We also made meaningful investments in our product development function, Our current new product pipeline is as strong as it's ever been, with a growing mix of opportunities involving complex electronic solutions, an area where we believe we have a distinct competitive advantage. Innovation remains the lifeblood of Dorman, and the progress we made this year positions us extremely well for the future. Second, operational excellence. We advance productivity across the organization, including deploying new automation technologies in our distribution centers. These initiatives improve service levels for customers, enhanced availability for end users, and generated tangible savings. We see continued opportunity here and will keep driving efficiency and performance across our facilities. Third, supply chain excellence. Despite a complex tariff environment, we executed as planned. In 2025, we further diversified our global sourcing footprint, meeting our goal to reduce supply from China to below 40%. Strengthening supply chain resilience remains a key priority. We continue to build deep strategic relationships with suppliers around the world. 2026, we expect our supply from China will further be reduced to approximately 30% of our total spend. Fourth, channel expansion. In both heavy-duty and specialty vehicle, we expanded our reach in one new business. With Dayton, we drove wins by leaning into categories where we had competitive advantages. And with Super ATV, we expanded our dealer network and non-discretionary portfolio. And finally, strategic growth. While M&A activity in the aftermarket was quiet overall in 2025, We capitalized on organic growth opportunities across each of our segments and in markets with category and customer wins. On the M&A front, we deepened relationships with potential sellers and continue to evaluate new opportunities. We're hopeful that the coming quarters will bring more activity to the M&A market. Overall, our priorities were clear and we executed with discipline. We're proud of what we achieved in 2025 and even more confident in the foundation we built for continued growth and value creation. Turning to slide four, these accomplishments translated into outstanding financial performance for the year. Let me cover a few of the highlights. Net sales reached 2.13 billion, up 6% year over year. Growth was driven by strong demand in our light duty segment during the first half, as well as successful execution of our tariff-related pricing initiatives in the back half. While broader market conditions presented some headwinds for heavy duty and specialty vehicle, the teams executed on their commercialization initiatives during the year. We also delivered meaningful margin expansion and earnings growth for 2025. Although cash flow was impacted by increased tariffs, our earning strength and cash management strategy allowed us to continue investing in the business, further strengthen the balance sheet, and return capital to our shareholders. Our achievements and performance in 2025 are the direct result of the hard work and dedication that our contributors bring to Dorman every day. So I'd like to take a minute to thank and recognize everyone across the organization who worked tirelessly to navigate through the dynamic changes and challenges faced throughout the year. all while driving innovation, delivering operational improvements, and putting our customers and end users at the forefront of everything we do. I'm proud of the talented team we have at Dorman and what we've accomplished together. I look forward to building on the success in 2026. Speaking of talent, I also wanted to welcome Charles Rayfield as our new CFO. Charles comes to Dorman with extensive CFO experience in both privately held and publicly traded companies. I know a few of you have had the opportunity to make quick introductions, and we're looking forward to having Charles on our future calls and getting him out on the road in coming quarters. Next on slide five, let me touch on the high-level results for the fourth quarter. Consolidated net sales were $538 million, up slightly from Q4 2024, but below our internal expectations. Our tariff-related pricing actions supported modest growth, However, shipment volume was down year over year due to a larger customer adjusting their ordering patterns in the quarter, which I'll cover in a moment. Despite lower than expected net sales in the fourth quarter, gross margins exceeded our expectations, allowing us to deliver adjusted diluted EPS for the year at the high end of our guidance range. A couple of factors I'll highlight contributed to this result. First, we shipped more pre-tariff, lower cost inventory, driven in part by lower than expected volume in the quarter. Second, our team did a nice job managing expenses across the organization. Together, these drivers allowed us to report adjusted diluting earnings per share of $2.17 for the quarter. As we anticipated, cash generation improved sequentially, with $42 million in operating cash flow in Q4. Additionally, we further strengthened our balance sheet and returned $25 million to shareholders through share repurchases. Finally, we are issuing 2026 guidance that demonstrates our confidence in delivering strong top-line growth through innovation and commercialization initiatives and reflects the timing impacts relating to tariffs. I'll walk through that outlook in more detail shortly. So while there are several moving parts in the quarter, I'm pleased with our year-end results and have confidence in our team's ability to continue executing on our strategy and drive strong, long-term, profitable growth. Next, let me provide our results and market observations for each of our business segments while highlighting some of our recent accomplishments in each. Turning to slide six, I'll begin with our light-duty business. Net sales in the fourth quarter were $429 million, up slightly over the same period in 2024. We estimate that POS at our large customers was up mid-single digits year over year for the fourth quarter. And when you look at POS over the entirety of 2025, it directionally aligned with net sales. As I just mentioned, the team did an excellent job executing on our pricing initiatives. This helped offset lower shipment volume resulting from a larger customer that significantly shifted their ordering pattern during the quarter to reduce inventory. Also, keep in mind that last year's fourth quarter was exceptionally strong with execution on a number of large programs. As it relates to the specific customer ordering change, we expect to see continued order fluctuations in the first quarter of 2026, with stabilization returning in the second quarter. Overall, we believe the non-discussionary nature of our product portfolio and our new product development strategy will allow us to drive outperformance over the long term. Next, we drove stronger than expected gross margin. Given more lower cost pre-tariff inventory shipped during the quarter, partially as a result of lower than expected volume. We also drove continued savings with our ongoing supplier diversification and productivity initiatives. Operating margin was down slightly year over year, largely because of the higher factoring costs related to tariffs. Looking more broadly at the light duty market, macro trends continue to remain positive, with VIO and vehicle miles traveled increasing year over year. Additionally, OEM platform changes continue to present opportunities for our new product development strategy, especially in complex electronics. On this point, we continue to invest in our complex electronic capabilities as EV, hybrid, and ICE vehicles are increasingly being equipped with more digital systems. We have the infrastructure and expertise to address complex electronic failures. With more than 15 years of experience with data logging, electronics design, and code development to provide our customers with sophisticated software-enabled solutions. Our current new product pipeline includes the highest proportion of complex electronics in our history. As an example of this, we recently launched a fuel pump driver module for a wide range of Toyota and Lexus models. Assembled in the U.S., this solution is precision engineered to replace the original equipment module which can fail after exposure to heat and environmental elements. Fuel pump driver module showcases Dorman's ability to apply OEM level electronics engineering and manufacturing in high volume applications. With more than two and a half million vehicles in operation across Toyota and Lexus platforms, this module allows us to bring our advanced power electronics capabilities to drivers looking for extended vehicle life with an easy-to-install, cost-effective solution. Great job by our product development team for identifying and bringing this opportunity to market. Next, let me turn to slide seven for our heavy-duty business. Net sales grew 6% year-over-year in the fourth quarter, despite continued pressure in the trucking and freight industry. The heavy-duty team did a nice job executing on the pricing front, while also driving more business wins. Operating margin expanded 130 basis points year over year as a result of the timing around tariffs, similar to our light duty business. We remain focused on improving both our commercial and operational execution in the heavy duty segment to achieve our long term goal of mid teams operating margins. Looking across the sector, the great freight recession continued in the fourth quarter, where tariff and general market uncertainty continue to add pressure on the trucking and freight industry. That said, softer new vehicle sales across the last several years have led to an increase in the average heavy-duty vehicle age, a trend which we expect to continue for the next several years. All in all, there continues to be mixed signals within the market, making it hard to predict the timing of rebounds. but we're tracking it closely, controlling what we can control, and investing where appropriate to capitalize on business wins. One example of this would be the recent expansion of our medium-duty product offering and omnichannel approach. Medium-duty vehicles are typically part of larger fleets focused on last-mile delivery. They're used in ports, large campuses, industrial settings, and for deliveries to our homes and businesses. These are high mileage vehicles making many stops, so they experience quite a bit of wear and tear. Historically, fleet managers rely on their dealer relationships for key repairs in their medium duty fleet. However, through our wholesale distribution network and direct sales relationships, we're approaching this channel with improved focus to provide fleet managers with more optionality and cost savings while maintaining these critical assets. On slide eight, I'll provide an overview of the specialty vehicle segment. Top line growth in the fourth quarter was flat year over year, with pricing initiatives on certain categories offsetting softer spending in the overall segment. Operating margin was down year over year in the fourth quarter, primarily due to increased wage and benefit expenses. I'd note that the overall change in profit dollars is relatively low, And the team did a nice job managing expenses in specific areas of the business that are more controllable. Again, longer term, we are targeting a high teens margin profile for the business, supported by expanding new product pipeline, especially with non-discretionary parts. While market challenges persist, UTV and ATV ridership remain strong. This condition remained consistent through 2025. So we're not seeing an impact to overall end-user demand for these products, just timing delays and purchases. New machine sales are also rebounding the 2024 and 2025 levels, and dealers have generally right-sized their vehicle inventory positions. We expect that as economic conditions improve, riders will resume enhancing and repairing their vehicles. On the new product development front, Super ATV continues to demonstrate its speed and agility in bringing solutions to the evolving aftermarket. We recently launched a four inch and six inch portal gear lift for the CFMOTO U-Force U10. As CFMOTO's newest high demand UTV hit the market, Super ATV was the first and currently the only manufacturer to deliver portal lift solutions for this model. Our portals enable riders to customize and elevate performance with the durability and capability Super ATV is known for. This patented early-to-market position reinforces our strategic advantage, the ability to evaluate new vehicle platforms quickly, engineer high-quality components, and release fully tested products ahead of competitors. Congrats to the Super ATV team on another successful launch. With that, I'll turn it over to David to cover our results in more detail.