Dorman Products, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Overall Performance: Consolidated net sales were $544 million for Q3, up 7.9% year-over-year. Adjusted operating margin for Q3 2025 was 20.5%, a 340 basis point increase over last year's third quarter. Adjusted diluted EPS grew 34% year-over-year to $2.62. Operating cash flow was $12 million, and free cash flow was $2 million in the quarter.
• Light Duty Highlights: Launched an electronic power steering rack for specific Ram truck models, a first aftermarket part with complex electronics and design for long reliable service life.
• Heavy Duty Highlights: Launched redesigned website with improved e-commerce platform to better serve heavy-duty repair professionals.
• Specialty Vehicle Highlights: Introduced 4-inch long travel kit for Polaris XD 1500 models, designed for utility application to expand nondiscretionary utility-focused product portfolio.

Segment Performance

• Light Duty: Net sales increased 9% year-over-year in Q3. POS grew mid-single digits year-over-year. Operating margin delivered a 470 basis point gain, driven by tariff-related pricing and supplier diversification initiatives. Revenue contribution: Strong due to positive macro trends and new product launches like the electronic power steering rack for specific Ram truck models.
• Heavy Duty: Net sales grew 6% year-over-year. However, lower manufacturing productivity impacted margins, which were flat year-over-year. Revenue contribution: Affected by mixed market signals but with volume growth from new business wins.
• Specialty Vehicle: Top line growth was relatively flat year-over-year. Operating margin was impacted by lower manufacturing productivity. Revenue contribution: Market pressures and weak consumer sentiment, but UTV and ATV ridership remains strong, and new products like the 4-inch long travel kit for Polaris XD 1500 models were introduced.

Guidance

• Net sales growth is expected to be in the range of 7% to 9% over 2024.
• Adjusted diluted EPS is expected to be in the range of $8.60 to $8.90, an increase of 21% to 25% compared to last year.
• Expect Q4 to see a reduced gross margin percentage compared to Q3 as tariffs impact cost of goods sold.
• Full year tax rate will land at approximately 23.5%.

Risks

• Tariff and Trade Uncertainty: Impact on parts of the business, affecting cash flow and margin expectations.
• Supply Chain Risks: Uncertainties related to sourcing from different regions and potential disruptions affecting manufacturing productivity and costs.

Q: Last week, one of your bigger customers commented that they were starting to see some elasticity issues, notably on the DIY side. Are you seeing any change in behavior, whether it's DIY or DIFM related to elasticity? Or is it too soon to say at this point?

A: Scott, it's Kevin. I'm not going to comment on what our customers say. But I will tell you how we're looking at it, really solid quarter, growth up 9% in Light Duty, 8% overall. POS was solid in the quarter. New continues to be a strong driver of growth. Macros continue to look solid in terms of the sweet spot of the vehicle, miles, age of the vehicle. But keep in mind that our portfolio differs quite a bit from a lot of our customers and a lot of our other folks in the supplier community, we have a heavy nondiscretionary majority of our parts. So either your car is not going to run or it's not going to run safely. So we have some benchmarks as well. We went through the 2018 and '19 time frame where we had some inflation. We went through the time period of 2023 and -- 2022, '23 when we had that inflationary period, and we raised prices and what we generally see over time is our portfolio is generally inelastic and performs pretty well because of the nondiscretionary nature of it.

Q: Congrats on a nice quarter. Kevin, I was wondering if you could just maybe address the trajectory of Light Duty, up 9.3%, with price increases relative to the 10.1% and 13.8% it was up the previous 2 quarters. Just any additional color, clarity on what was driving that?

A: Look, it was -- Jeff, we view it as a very solid quarter in Light Duty, 9% sales growth. POS was very solid in the quarter. New products continue to drive exceptional growth there. We don't see that stopping. As I mentioned before, the macroeconomic environment still looks very good there in terms of the sweet spot of the 7- to 14-year-old vehicle continues to rise. Miles driven continue to increase. I think the age of the vehicle now is around 12.8 years old. So when we step back and we look at it, given the nondiscretionary nature of our portfolio there, we feel really good about driving future growth.

Q: First Brands has been all over the news. How should we think about kind of like product overlap or any other overlap? And then what could it be potentially in terms of the opportunity for you guys?

A: Thanks for the question, Tristan. I'll start out by saying that we don't view ourselves as a comparison to First Brands. And then I'll also point out from the Dorman perspective, we have a very healthy balance sheet and liquidity. And I think we're carrying less than 1x leverage at this point. We don't engage in any off-balance sheet financing. We only participate in the customer-sponsored factoring programs with our largest customers, and frankly, we've been doing that for decades. We do have publicly secured debt, but we haven't speculatively financed our receivables or frankly, any other working capital assets. And to kind of address your question straight on. I mean, we do have some categories that overlap with First Brands, but not in a material way. It's really around the edges. And of course, we stand ready to help our customers that if they need help from this situation as we always do.

Q: I think you said that your POS was up mid-single digits. Is that units or is that POS dollars out the door of the customer? I guess if we can sort of look at the Q3, how much of the growth was price versus pieces?

A: Yes, Bret, that's dollars. And we've always quoted POS in dollar terms. Hope you can appreciate that we don't and have never disclosed unit growth for competitive reasons. It could really put us in a situation with some customers that they could triangulate price increases. So we don't disclose that. I'll only say that POS growth in the quarter was very solid, particularly as we look at it compared to Q2. And look, as I said before, the nondiscretionary nature of our portfolio bodes well in a period of increasing inflation. We've seen it before. It's not our first time going through a period like this.

Q: Considering strong Light Duty sales and a sequential improvement in Heavy Duty and Specialty Vehicle trends, curious if you could just talk about your share position across those segments in Q3.

A: Yes. Sure. I mean, listen, in Light Duty, we continue to believe we're taking share. If you look at the overall market growth statistics that we look at over the years, anywhere between 3% and 4% historically. We've consistently outperformed that. And that's really driven by our new product efforts, particularly new to the aftermarket, where that part only exists in the OE channel the day before we launch it. And that's been a huge driver of growth. I'd say in Heavy Duty, we did see some nice growth in the quarter. So some positive signs. Some of that growth was driven by tariff pricing, but we also had some key customer wins. That -- we have a very small share in a large TAM and heavy duty. So we feel we have a lot of runway to go in that space. And in specialty, again, when you look at our overall share position, it's pretty small in a fairly large market. So we like the runway. It's why we like the space. And I would tell you that just in terms of share performance, we believe we're outperforming the overall market, although we're not happy with flat sales growth, we believe that the rest of the market has been down. So we do believe we're taking share. We think it's a combination of the initiatives that we've undertaken, whether that be expanding our nondiscretionary repair portfolio or geographic expansion. We've seen a lot of success in that regard.

Q: I wanted to follow up on the comment about First Brands. So I think we're aware about the customer-sponsored factory. Have you seen any or had any conversations about terms that you guys -- the terms that might be changing as a result of that? Or completely unrelated and then the terms are pretty clear set?

A: Yes. Just the terms are pretty clear, and we don't see any indication that there's going to be any change in the terms.

Q: Could you guys give us some idea on specialty, what the mix is of nondiscretionary versus discretionary and at this point and how that has shifted since the acquisition?

A: Gary, sure, absolutely. It's roughly about 50-50 right now, and it was materially less than that when we acquired the business. So it's moved up quite a bit. And I think we're very well positioned for when that market does recover. The pure accessory side and then the brake fix or nondiscretionary repair to drive oversized growth compared to market when we do start seeing the recovery and the geographic expansion, which I talked about before, too, we've seen some great progress there as well.

Q: Just a quick follow-up on tariffs. Has there been any meaningful change to your exposure from a geographic standpoint, whether it's India, China or any other country, since the last time you guys gave an update?

A: Boy, Scott, that's a great question. I'm not -- I think the answer is yes. from last quarter. Certainly, we've seen some changes. But there's a lot of headline news around tariffs that actually haven't made their way into law or implementation. So it's hard for me to -- it's changed so much. It's been so fluid, Scott. It's hard for me to pinpoint an exact date. But look, I'll just summarize it this way. Where we sit right now, we feel well positioned to handle the current tariff environment or any other potential changes that might come down the pipe, particularly as we look at how we compare competitive set. We feel like we have a footprint that is as competitive as anyone else out there in the aftermarket. And so I think we can handle any changes that come our way. And I'll characterize it as manageable at this point.