Dorman Products, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Quarterly Results: Consolidated net sales for the quarter grew 8% year-over-year to $508 million. Adjusted operating margin for Q1 2025 was 17%, expanding 310 basis points compared to the same period last year. Adjusted diluted EPS increased by 54% to $2.02. Free cash flow in the quarter was $40 million, allowing repayment of $20 million of debt and repurchase of $12 million of common stock.
• Supply Chain: Took steps to diversify supply chain since 2018-2019 tariffs, with 30%-40% sourced from China, 30% in US, remainder from various regions. Asset-light manufacturing and strong supplier relationships.
• Product Nature: Most products are nondiscretionary, performing well in uncertain economic times.
• Innovation/Brands: Strong innovation strategy and brand investments (Dorman, Dayton, Super ATV) position the company well.
• Financial Strength: Strong balance sheet, liquidity, and capital allocation strategy to navigate challenges.

Segment Performance

• Light duty: Net sales increased 14% year-over-year. Segment operating margin was 19.9% for the quarter, a 380 basis point increase compared to the same period last year.
• Heavy duty: Net sales were down 11% year-over-year, and segment operating margin turned slightly negative due to market pressures in freight transportation and the trucking aftermarket.
• Specialty Vehicle (UTV and ATV): Net sales declined 9% year-over-year. Segment operating margin declined to 10.2% in the quarter, driven by sales decline and fixed cost deleverage.

Guidance

• Reaffirmed 2025 net sales growth guidance of 3% to 5% and adjusted diluted EPS guidance range of $7.55 to $7.85. Guidance does not include impact from U.S. enacted or proposed tariffs in 2025.

Risks

• Uncertainty around tariffs, including potential retaliatory measures and fluid negotiations with suppliers and customers.

Question and Answer

Q: Good morning, guys, and thanks for taking my questions. 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?

A: Yes. Good question, Scott. 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. 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.

Q: Hi, guys. Good morning. On that EBIT margin in light 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 a lot of new to the aftermarket and the oil filter housing. And -- could you just sort of bucket where that pretty solid margin expansion came from?

A: I mean, Bret, if you look back, we've been generating these type of operating margins in light duty for quite some time now. And really, it is mostly due to our product mix, we don't spike out exactly how much is due to just core business, but a lot of it is due to the new product mix. And as we've talked about before, we've had some really successful new products come to market. But also the macros have improved, right? I mean if you look at the sweet spot, the 7- to 14-year-old vehicle, which is where we really target, new product development that vehicle cohort has really grown over the last couple of years, and 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 the light-duty side.

Q: Good morning, everyone. 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 for the rest -- throughout the rest of the year on a quarterly basis? Or is there something in there that caused that step down?

A: Yes, Gary, it's Dave. We've been focused, as you know, on paying down our debt since the acquisition, and we paid down close to $270 million over the last couple of years, which has brought our leverage down to 1x EBITDA. 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 quarter is probably a good assumption for your model.

Q: Hi. Good morning, all. I appreciate the color on how much is sourced from China. Can you give us any indication how that split out amongst the segments like -- of that 30% to 40%, is the majority going to light duty? Or any color on that would be helpful.

A: Yes, 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. If you 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. And 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 Dorman-owned manufacturing plants in the U.S. And obviously, we'll look to leverage them as much as we can where it makes sense.

Q: Hi, guys. Just one follow-up, these 232 tariffs. Just trying to figure out if you guys have been able to ascertain whether there'll be any exemptions and also talking about -- 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?

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