Q4 2023 Dorman Products Inc Earnings Call

Operator: Good morning, and thank you for standing by. Welcome to the Dorman Products fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode.

Good morning, and thank you for standing by welcome to the Dorman products fourth quarter. Two when do you twenty-three earnings conference call. At this time all participants are in a listen only mode. A question and answer session will fall we'll follow the former presentation. Please note. This conference is being recorded.

Operator: A question and answer session will follow the first presentation. Please note this conference is being recorded. I'd like to turn the conference over to David Hessen, Dorman's Chief Financial Officer. Thank you, sir.

I'd like to turn the conference over to David Hatfield dormant Chief Financial Officer. Thank you. Please go ahead.

David Hessen: Thank you. Good morning, and welcome to Dorman's fourth quarter 2023 earnings conference. I'm joined today by Kevin Olson, our Chief Executive Officer. First, Kevin will provide a business update, and I will review the quarterly and full-year financial results and provide our 2024 outlook, and then Kevin will provide 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 went out yesterday after the market closed. The documents are available on the investor relations portion of our website at DormanProducts.com.

Good morning, and welcome to Dorman fourth quarter 2023 earnings Conference call.

I'm joined today by Kevin Olson, our Chief Executive Officer.

First Kevin will provide a business update and I will review the quarterly and full year financial results and provide our 2020 for outlook and Kevin will provide 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 went out yesterday after the market close.

These documents are available on the Investor relations portion of our website at Dorman products Dot com.

David Hessen: Before we begin, I would like to remind everyone that our prepared remarks, earnings release, and investor presentation include forward-looking statements within the meaning of federal securities law. We advise listeners to review the risk factors and cautionary statements in our most recent 10Q, 10K, and yesterday's 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 are contained in the schedules attached to our press release and in the appendix to this earnings call presentation, both of which can be found in 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 will turn the call over to Kevin. Thanks, David. Good morning.

Before we begin I would like to remind everyone that our prepared remarks earnings release and Investor presentations include forward looking statements within the meaning of federal Securities laws.

We advise listeners to review the risk factors and cautionary statements in our most recent 10-Q10-K and yesterday's release, so 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 will 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 press release and in the appendix to this earnings call presentation, both of which can be found on the Investor Relations section performance website.

Finally during the Q&A portion of today's call.

That participants limit themselves to one question with one follow up and to rejoin the queue. If they have additional questions.

That I will turn the call over to Kevin.

Thanks, David Good morning, and thank you for joining us on our fourth quarter 2023 earnings call today, I will discuss our strategy operating highlights and business activity.

Kevin Olson: And thank you for joining us for our fourth quarter 2023 earnings. Today I will discuss our Strategy, Operating Highlights, and Business Activities. Please turn to slide three if you're following along on our deck.

Please turn to slide three if you're following along in our deck in Q4, we realigned our business long three segments consistent with the sectors of the motor vehicle aftermarket in which we operate light duty heavy duty and specialty vehicles.

Kevin Olson: In Q4, we realigned our business along three segments consistent with the sectors of the motor vehicle aftermarket in which we operate, light duty, heavy duty, and specialty vehicles. In connection with our transition to segment reporting, we are initiating live, quarterly conference calls to provide additional insight into these segments and the overall company before we dive into Q4 performance. We thought it would be helpful to step back for a moment and review who we are as a company and what we do. Some of you have likely followed our story for years. But there are many listeners who are just getting to know Dorman.

In connection with our transition to segment reporting we are initiating live quarterly conference calls to provide additional insight into.

Into these segments and the overall company.

Before we dive into Q4 performance, we thought it would be helpful to step back for a moment and review of who we are as a company and what we do.

Some of you have likely followed our story for years.

But there are many listeners who are just getting to know dorman.

Kevin Olson: We are known as one of the leading innovators of repair solutions for the motor vehicle aftermarket. We deliver products from bumper to bumper across our legacy light duty business, commercial vehicle-focused heavy duty business, and our UTV and ATV focused specialty vehicles. We are an engine of continuous innovation across each of these segments, and while our heavy-duty and specialty businesses are relatively new additions to the portfolio, resulting from our acquisitions of Dayton Parts and Super 8 TV. We're very excited about what the future holds. Moving on to slide four.

We are known as one of the leading innovators of repair solutions for the motor vehicle aftermarket, we deliver products from bumper to bumper across our legacy light duty business, our commercial vehicle focused heavy duty business.

Our UTV and ATV focused specialty vehicle business.

We are an engine of continuous innovation across each of these segments.

While our heavy duty and specialty businesses are relatively new additions to the portfolio.

<unk> from our acquisitions to date in parts and Super ATV.

We're very excited about what the future holds moves.

Moving on to slide four.

Kevin Olson: As I mentioned, we're leading the charge on innovation, and we think the capabilities and approach of our new product development team are unique. Over decades, our ideation team has built an immense network of relationships, repair technicians, and end customers in the field that enable us to continuously cultivate a robust new product pipeline. Over the last three years, we've brought over 19,000 new SKUs to market, across our three segments, such as our patented oil filter housing, a number of electronic control modules, and an OE fix line of pre-pressed axles, many of which have enhanced features designed to solve repair problems created by the original. The technical capabilities and experience of our new product development team enable us to provide a comprehensive suite of aftermarket solutions, bumper-to-bumper and across different drivetrains from ICE to hybrid to BEV. We are truly agnostic about power.

As I mentioned <unk>.

Leading the charge on innovation and we think the capabilities and approach of our new product development team are unique over decades. Our ideation team has built an immense network of relationships with repair technicians at end customers in the field to enable us to continuously cultivating a robust new product pipeline.

Over the last three years, we brought over 19000, new skus to market.

Across our three segments.

Such as our patented oilfield their housing number of electronic control modules and in OE fixed line of prepress actions many of which have enhanced features designed to solve repair problems created by the original equipment.

The technical capabilities and experience of our new product development team enable us to provide a comprehensive suite of aftermarket solutions.

Bumper to bumper across different drivetrains from ice to hybrid to be EV, we are truly agnostic to powertrain type.

Kevin Olson: Our product development capabilities are further enhanced by our asset-light model that leverages our network of hundreds of suppliers globally. We utilize this diverse network to manufacture the vast majority of our products. With this approach, our team is able to work closely with our suppliers to ensure products meet our designs and specifications, and we have the ability to efficiently and effectively flex production up or down as needed to best serve the needs of our market. Moving on to slide five, we leverage our new product innovation engine across an expansive, total addressable market of $165 billion. We have a significant opportunity to grow our share of Wallet with a wide range of leading aftermarket customers. Also, while our heavy duty and specialty vehicle segments collectively contribute a quarter of our top line today, we're targeting growing those businesses to approximately 15% of our top line each by the end of 2028.

Our product development capabilities are further enhanced by our asset light model that Leverages, our network of hundreds of suppliers globally.

We utilize this diverse network to manufacture the vast majority of our products.

With this approach our team is able to work closely with our suppliers to ensure our products meet our designs and specifications.

Have the ability to efficiently and effectively flex production up or down as needed to best serve the needs of our markets.

Moving on to slide five we leverage our new product innovation engine.

Cross an expansive total addressable market of 165 billion.

We have a significant opportunity to grow our share of wallet with a wide range of leading aftermarket customers also while our heavy duty and specialty vehicle segments collectively contribute a quarter of our top line today, we're targeting growing those businesses to approximately 15% of topline each.

By the end of 2028.

Kevin Olson: On slide 6, you will find our strategy for driving growth and profitability by leveraging our innovation capabilities to bring thousands of new products to market. In light duty, there's a significant focus on growing IP-centric categories like our Advanced Electronics to have a large current OE share and premium margin potential. We see opportunities that draw on the digital investments that we've made in our customers' omni-channel selling approach, continue to broaden our distribution reach, and are also taking actions to improve supply chain efficiency and optimize our distribution operation. In heavy duty, we're implementing the same Dorman playbook that's been effective in our light duty.

On slide six you will find our strategy for driving growth and profitability by leveraging our innovation capabilities to bring thousands of new products to market.

In light duty, there's a significant focus on growing IP centric categories like our advanced electronics, which had a large current OE share premium margin potential.

We see opportunities that draw on the digital investments that we've made.

Support our customers' omnichannel selling approach to continue to broaden our distribution reach.

Also taking actions to improve supply chain efficiency and optimize our distribution operations.

In heavy duty, we're implementing the same dorman playbook, it's been effective in our light duty business, we're investing in new product capabilities to drive innovation and in our digital infrastructure to enable omnichannel presence and were optimizing our manufacturing operations and supply network.

Kevin Olson: We're investing in new product capabilities to drive innovation and in our digital infrastructure to enable an omni-channel presence, and we're optimizing our manufacturing operations and supply network. Turning to specialty vehicles, the acquisition of Super 8 TV gave us access to high-margin and rapidly expanding market specialty specialized transport vehicles. We've increased our focus on growing non-discretionary parts categories, including repair parts, which account for approximately 50% of this segment's net sales. We'll also continue to invest in the upgrade accessory categories that Super 8 TV is known for. Finally, we're focused on growing our presence with vehicle dealers, particularly in regions where we're under penetrated, such as the West Coast. As we look back on our performance over the last few years, on slide seven, we've demonstrated a trend of top line growth, discipline, investment, and cost. From 2019 to 2023, our top line grew at an 18% CAGR. While we're also improving operators as demonstrated by adjusted operating income growth above our peers, before I hand it over to David, I wanted to provide you with my thoughts on our results.

Turning to specialty vehicle the acquisition of Super ATV gave us access to high margin and rapidly expanding market specialty specialized transport vehicles.

We've increased our focus on growing non discretionary parts categories include repair parts, which approximate 50% of this segment's net sales.

We'll also continue to invest in the upgrade accessory categories at Super ATV is known for.

Finally, we're focused on growing our presence with the vehicle dealers, particularly in regions, where we're underpenetrated such as the West coast.

As we look back on our performance over the last few years on slide seven we've demonstrated a trend of top line growth disciplined investment and cost control.

In 2019 to 2023, our top line grew at an 18% CAGR.

We're also prudent operators as demonstrated by adjusted operating income growth above our peers.

Before I hand, it over to David I wanted to provide you with my thoughts on our results. We ended the year with strong Q4 financial results, which were in line with our guidance, we delivered record net sales and EPS and significantly improves our margins for the year, we generated record free cash flow.

Kevin Olson: The end of the year with strong Q4 financial results, which were aligned with our guidance. We delivered record net sales and EPS. Significantly improves our market. For the year, we generated record free cash flow, and continued to pay down our debt and repurchase shares. Our innovation engine launched thousands of new products and solutions across all three segments, and we drove efficiencies into and costs out of our operations during the quarter. I'm proud of our contributors, who were the driving force behind our strong performance, as they come to work each day focused on how we can deliver innovative solutions to the community. I want to thank them for their ingenuity, dedication, and hard work.

We need to pay down our debt and repurchase shares.

Our innovation engine launched thousands of new products and solutions across all three segments, and we drove efficiencies into and costs out of our operations during the quarter I'm proud of our contributors who are the driving force behind our strong performance as they come to work each day focused on how we can deliver innovative solutions to the app.

Awesome.

Alright, Thanks, Tim for the ingenuity dedication and hard work.

Kevin Olson: Gross margin was a heightened focus area of the company in 2023. I'm pleased to report that our adjusted Q4 gross margin increased 640 basis points year over year and was up 180 basis points sequentially compared to Q3. Throughout the year, we managed through significant inflation and implemented productivity measures in our operations to enable us to push our margins back up to 2018 levels. Gross Margin Improvement was also the engine behind the strong Q4 free cash flow that we used to pay down our debt and repurchase our shares. Overall, Dormer continues to stand on strong financial... As I look forward, I'm optimistic about 2020. Industry fundamentals remain strong, and while there is a level of macro uncertainty in global markets, that have the potential to impact near-term results. I believe we have the team and plans in place to deliver strong results in 2024.

Gross margin was a heightened focus area of the company in 2023 and I'm pleased to report that our adjusted Q4 gross margin increased 640 basis points year over year and was up 180 basis points sequentially compared Q3.

Throughout the year, we managed through significant inflation and implemented productivity measures in our operations, which enabled us to push our margins back up to 2018 levels.

Gross margin improvement was also the engine behind the strong Q4 free cash flow that we used to pay down our debt and repurchase our shares overall dorma continues to stand on strong financial footing as.

As I look forward I'm optimistic about 2024.

Industry fundamentals remained strong and while there is a level of macro uncertainty in global markets.

The potential to impact near term results I believe we have the team and plans in place to deliver strong results in 2024.

David Hessen: At this point, I'd like to turn things over to David so he can provide some deeper perspectives on our financial... Thanks, Kevin. I'll begin by discussing Q4 2023 results to move to our balance sheet and capital allocation strategy, followed by our 2024 guidance. One note, our 2022 Q4 and full year results included a 53rd week. To make our results comparable, I'm going to reference our Q4 and full year results against 2022 results, adjusted to remove the extra week. The table reconciling reported results, the results excluding the 53rd week, is included in the appendix to the earnings presentation. Turning to slide 8.

At this point I'd like to turn things over to David So he can provide some deeper perspective on our financial performance. Thanks.

Kevin ill begin by discussing Q4, and 2023 results then move to our balance sheet and capital allocation strategy, followed by our 2024 guidance. One note. Our 2022 Q4 and full year results included a 50 <unk> week make.

To make our results comparable I'm going to reference our Q4 and full year results against 2022 results adjusted to remove the extra week of.

A table reconciling reported results and results excluding the 50 <unk> week is included in the appendix of the earnings presentation deck.

Turning to slide eight Q.

David Hessen: Q4 net sales were $494 million, a record in up 3% year over year. Sales growth was primarily driven by higher volume, including the introduction of new products to the market and price increases to offset inflation. Moving to Gross Margin, this is the third straight quarter we've seen Gross Margin improve. Q4 Adjusted Gross Margin was 39.3%, a 640 basis point increase compared to last year. The year-over-year margin improvement is primarily due to lower cost inventory as a result of the Cost Savings Initiative. Pricing Actions to Offset Inflation

Q4, net sales were $494 million.

A record and up 3% year over year.

Sales growth was primarily driven by higher volume, including the introduction of new products to market and price increases to offset inflation moves.

Moving to gross margin. This is the third straight quarter, we've seen gross margin improvement.

Our Q4 adjusted gross margin was 39, 3%, a 640 basis point increase compared to last year.

The year over year margin improvement was primarily due to lower cost inventory cost savings initiatives and pricing actions to offset inflation.

David Hessen: Our Q4 Adjusted Gross Margin gets us back to margin levels we had in 2018 for tariffs and inflation. Shifting to SG&A, adjusted SG&A expense was 23.9% of net sales, an increase of 90 basis points compared to last year. Higher wages, benefits, and variable compensation expenses were the primary drivers of the increase.

Our Q4 adjusted gross margin gets us back to margin levels, we had in 2018 for tariffs and inflation.

Shifting to SG&A adjusted SG&A expense was 23, 9% of net sales an increase of 90 basis points compared to last year higher wages benefits and variable compensation expenses were the primary drivers of the.

David Hessen: Our Q4 Adjusted Operating Income was $76 million, a 59% increase, and the adjusted operating margin was 15.4%, up 550 basis points year over year. Finally, Adjusted Diluted DPS in Q4 was $1.57, a record. 69% increase versus last year. The growth was mainly due to an increase in adjusted operating income, partially offset by a higher tax rate and higher interest expense, resulting from an increase in the variable rate of our credit facility. Please turn to slide 9.

Our Q4, adjusted operating income was $76 million or 59% increase adjusted operating margin was 15, 4% up 550 basis points year over year.

Finally, adjusted diluted EPS in Q4 was $1 57.

And a 69% increase versus last year.

The growth was mainly due to the increase in adjusted operating income, partially offset by a higher tax rate and higher interest expense, resulting from an increase in the variable rate of our credit facility.

Please turn to slide nine full.

David Hessen: Full-year net sales of $1.93 billion were a record, an increase of 13% year-over-year. Sales growth was primarily driven by the addition of the super ATV, price increases to offset inflation, and the introduction of new products to the market. Net sales growth, excluding the impact of acquisitions, was 3.5%.

Full year net sales of $1 $93 billion were a record and an increase of 13% year over year sale.

Sales growth was primarily driven by the addition of Super ATV price increases to offset inflation and the introduction of new products to market.

Net sales growth, excluding the impact of acquisitions was 3%.

David Hessen: Whole year, adjusted gross margin increased 290 basis points to 36.1%. The same drivers that powered Q4 Margin Improvement also drove the full year margin, at www.dormanproductsinc.com, an increase in interest rates on our factoring programs, as well as the addition of SuperATV. Our 2023 Adjusted Operating Income was $233 million, an increase of 14%. And finally, our adjusted diluted EPS was $4.54, a 3% decrease due to the higher interest expense and a higher tax rate.

Full year adjusted gross margin increased 290 basis points to 36, 1%.

The same drivers that power in Q4 margin improvement also drove our full year margin expansion.

Adjusted SG&A as a percentage of net sales was 24% up 280 basis points year over year.

Percentage was due to the inflationary impact on wages benefits and incentive compensation expenses and increase in interest rates on our factoring programs as well as the addition of Super ATB.

Our 2023, adjusted operating income was $233 million.

An increase of 14%.

And finally, our adjusted diluted EPS was $4 $4 50 for.

A 3% decrease due to the higher interest expense and a higher tax rate.

David Hessen: Let's move on to review our segment results, starting on slide. Q4 Light Duty Net Sales were $386 million, a 4% increase. Overall, Light Duty Industry fundamentals remain strong, and we're encouraged by our performance in the quarter, recognizing we're up against a strong prior year comparison. Compared to 2021, Q4 net sales were up 13%, and user demand for our products remained healthy. Based on our estimates, our customer point of sale outpaced our shipments in the quarter. Light Duty Adjusted Operating Margin was 16.6% in Q4, a 750 basis point improvement year-over-year.

Let's move on to review our segment results starting on slide 10.

Q4 light duty net sales were $386 million, a 4% increase.

Overall <unk> industry fundamentals remain strong and we're encouraged by our performance in the quarter, recognizing youre up against a strong prior year comparison.

Compared to 2021 Q4, net sales were up 13% and.

End user demand for our products remained healthy.

Our estimates are customer point of sale outpaced our shipments in the quarter.

Light duty adjusted operating margin was 16, 6% in Q4 750 basis point improvement year over year high.

David Hessen: High-cost inventory due to rapid inflation in 2022 created margin pressures that lasted into Q1 of 2023 but have abated over the last three quarters. Pricing actions and cost savings initiatives to cover these inflationary costs also contributed to the margin improvement. After a challenging first half, the light-duty business had a strong rebound.

High cost inventory due to rapid inflation in 2022 created margin pressures that lasted into Q1 of 2023 that have abated over the last three quarters.

Pricing actions and cost savings initiatives to cover these inflationary costs also contributed to the margin improvement.

After a challenging first half light duty business had a strong region.

David Hessen: Moving on to heavy duty, on slide 11, net sales were $57 million in Q4, a 9% reduction year over year against a strong prior year comparison. During Q4 of 2022, we benefited from customers restocking inventory. Global Supply Chains Rebounded from the Impact of the Global Pandemic

Moving onto heavy duty on slide 11, net sales were $57 million in Q4, a 9% reduction year over year against a strong prior year comparison.

During Q4 of 2022, we benefited from the customers restocking inventories as global supply chains rebounded from the impacts of the global pandemic.

David Hessen: In addition, we believe trucking demand will be lower in 2023, resulting in reduced demand for replacement parts. Heavy Duty Adjusted Margin was 6.8%, a 240 basis point decrease year-over-year. Margin continued to be negatively impacted by the sell-through of high-cost inventory that was sourced during peak inflationary times. As we work our way through this inventory and the cost savings and pricing actions taken to offset these inflationary costs go into effect, we expect to see margin expansion like the 380 base point increase we saw in Q4 compared to Q3. Finally, as Kevin discussed earlier, we've made investments to grow sales and improve margins long term, which may negatively impact operating margin in the near term. Shifting to specialty vehicles on slide 12, our Q4 net sales were $51 million, up 3% year over year.

In addition, we believe trucking demand was lower in 2023, resulting in reduced demand for replacement parts.

Heavy duty adjusted margin was six 8%, a 240 basis point decrease year over year.

Margin continued to be negatively impacted by the sell through of high cost inventory that was sourced during peak inflationary times.

As we work our way through this inventory and the cost savings and pricing actions taken to offset these inflationary costs go into effect.

We expect to see margin expansion like the 380 basis point increase we saw in Q4 compared to Q3.

Finally, as Kevin discussed earlier, we've made investments to grow sales and improve margins long term, which may negatively impact operating margin in the near term.

Shifting to specialty vehicle on slide 12, our Q4 net sales were $51 million.

Up 3% year over year.

David Hessen: 2023 was our first full year of ownership of Super 8 TV, and we're proud of its performance. 2023 was a challenging year for the specialty vehicle industry overall. That's particularly true for the sales of discretionary accessories, which we estimate make up 50% of this segment's sales. Discretionary accessory sales are partially driven by dealer sales of new machines, which we estimate were slightly down year over year.

2023 was our first full year of ownership of Super ATV and we're proud of its performance.

2023 was a challenging year for the specialty vehicle industry overall.

Particularly true for the sales of discretionary accessories, which we estimate make up 50% of this segment sales.

<unk> accessories sales are partially driven by dealer sales of new machines, which we estimate was slightly down year over year.

David Hessen: So while we experienced softness due to these market factors, we grew 3% against these headwinds. We accomplished this growth through initiatives focused on growing our non-discretionary repair parts business. Capturing share in the retail channel through promotional initiatives and expanding our dealer network, specifically in the western region. Specialty Vehicle Operating Margin is 15.7%, a 150 basis point decline year-over-year due to one-time non-cash charges. Absent these charges, operating margin has been consistent year over year.

So while we experienced softness due to these market factors, we grew 3% against these headwinds.

We accomplished this growth through initiatives focused on growing our non discretionary repair parts business capturing share in the retail channel through promotional initiatives and expanding our dealer network specifically in the Western region.

Especially vehicle operating margin was 15, 7%, a 150 basis point decline year over year due to onetime noncash charges.

These charges operating margin would have been consistent year over year.

David Hessen: Switching our attention to cash flow, as you can see on slide 13, Q4 free cash flow of $49 million, a healthy increase from the $2 million of cash used last year. The improvement was driven by a $32 million increase in net income compared to 2022. Capital expenditures in the quarter of $11 million, or $3 million lower than last year, which included investments to fit out our new distribution center in Whiteland, Indiana. Full year free cash flow of $165 million was a record, a $161 million increase over 2020. The primary driver for the improvement was inventory, which decreased $119 million. Lower freight and material costs, combined with a reduction in our safety stock levels made possible by a rebound in the global supply chain, drove our inventory low. I'll turn next to our balance sheet and liquidity on slide 14. During the year, we used our record operating cash flows to pay down $159 million of debt.

Switching our attention to cash flow as you can see on slide 13, Q4 free cash flow was $49 million.

A healthy increase from the $2 million of cash used last year.

The improvement was driven by a $32 million increase in net income compared to 2022.

Capital expenditures in the quarter of $11 million with $3 million lower than last year, which included investments to fit out a new distribution center and white in Indiana.

Full year free cash flow of $165 million was a record at <unk>.

$161 million increase over 2022.

Primary driver for the improvement was inventory, which decreased $119 million.

Lower freight and material costs.

And with the reductions our safety stock levels made possible by a rebound in the global supply chain drove our inventory lower.

I'll turn next to our balance sheet and liquidity on slide 14.

During the year, we used our record operating cash flows to pay down $159 million of debt.

David Hessen: As of December 31st, our net debt was $540 million. Our Net Leverage Ratio is 1.87 times adjusted. Additionally, we had $543 million of total liquidity, including cash on hand. We believe our strong balance sheet positions us well to execute our strategic initiatives and provides us with flexibility in the event of unforeseen challenges. As shown on slide 15, our capital allocation strategy strikes a balance between reinvestment in the business..., in organic growth and return of capital to shareholders. Our longer-term goal is to maintain leverage below two times adjusted EBITDA or less than three times in the first year following an acquisition will continue to support our product innovation as a primary investment objective by funding necessary R&D and capital expenditures. We remain opportunistic regarding M&A but ultimately consider it a core supplement to our organic growth. In addition, we believe using some of our free cash flow to opportunistically repurchase shares is a good use of our capital if other higher return opportunities aren't available.

As of December 31, our net debt was $540 million and our net leverage ratio was 187 times adjusted EBITDA. Additionally.

Additionally, we had $543 million of total liquidity, including cash on hand, we.

We believe our strong balance sheet positions us well to execute our strategic initiatives and provides us with flexibility in the event of unforeseen challenges.

As shown on slide 15, our capital allocation strategy strikes a balance between reinvestment in the business inorganic growth and return of capital to shareholders.

Our longer term goal is to maintain leverage below two times adjusted EBITDA are less than three times in the first year following an acquisition.

We'll continue to support our product innovation is our primary investment objective by funding necessary R&D and capital expenditures.

We remain opportunistic regarding M&A, but ultimately consider it a core supplement to our organic growth.

In addition, we believe using some of our free cash flow to Opportunistically repurchase shares as a good use of our capital of other higher return opportunities aren't available.

David Hessen: Before I shift to guidance, I have one final point on our performance. We're proud of our strong results in 2023 but are always striving to do better. Following the integration of two sizable acquisitions over the last two years, combined with being more efficient now that we're back to more normal operating conditions, we determined there was an opportunity to drive further efficiencies across. As a result of that assessment, in the first week of February, we enacted a company-wide reduction in workforce program to streamline our business. We don't expect this program to have a negative impact on our innovation, new product efforts, The estimated charge for this program is $5 million, and we forecast that it will yield $10 million of annualized savings. The expected partial year savings impact of this program is included in our 2024 guidance. The one-time $5 million charge will be included in our Q1 diluted EPS but excluded from adjusted diluted EPS.

Before I shift to guidance at one final point on our performance for.

We're proud of our strong results in 2023, but are always striving to do better.

Following the integration of two sizable acquisitions over the last few years.

Fine with being more efficient now that we're back to more normal operating condition we.

We determined there was an opportunity to drive further efficiencies across the company.

As a result of that assessment in the first week of February we enacted a companywide reduction in workforce program to streamline our business.

We don't expect this program to have a negative impact on our innovation new product efforts, our ability to service our customers. The estimated charge for this program is $5 million.

And we forecast that we have $10 million of.

With annualized savings.

The expected partial year savings impact from this program is included in our 2020 for guidance.

The onetime $5 million charge will be included in our Q1 diluted EPS, but excluded from adjusted diluted EPS.

David Hessen: Now I'd like to share our 2024 guidance, included on slide 16. We expect continued strong fundamentals in the light duty market in 2024, with shipments and customer POS more closely aligned as we move through the year, but still lagging in Q1. Q1 is also the light-duty segment's lowest quarter of the year. Because of these factors, we anticipate relatively flat sales growth in Q1 before we see improvement in Q2 and through the second half of the year.

Now I'd like to share our 2024 guidance included on slide 16.

We expect continued strong fundamentals in the light duty market in 2024 with shipments and customer Pos more closely aligned as we move through the year, but still lagging in Q1.

Seasonally Q1 is also the light duty segment lowest quarter of the year.

Because of these factors, we anticipate relatively flat sales growth in Q1 before we see improvement in Q2 and through the second half of the year.

David Hessen: For heavy duty, after a challenging 2023, we expect the soft market to continue through the first half of 2024. In this environment, we're focused on taking share and growing our business with trucking fleets who rely on us to help improve their bottom line. Driving new product growth will also be a key area of focus. Finally, we expect to see a similar first half trend play out in the specialty vehicle market. The Dealer Channel is expecting a slow rebound in sales through the first half of 2024, and we also expect demand in the direct-to-consumer business to be relatively flat in the first. However, the Specialty Vehicle Team is focused on taking shares from new product launches geared around non-discretionary repair, adding new direct-to-consumer customers Targeting consolidated full-year net sales growth of three to five, we expect our 2024 Adjusted Diluted EPS to range from $5.40 to $5.70 a share, or a 19 to 26 percent increase.

For heavy duty after a challenging 2023, we expect a soft market to continue through the first half of 2024.

In this environment, we're focused on taking share and growing our business with trucking fleets, who rely on us to help improve their bottom lines.

Driving new product growth will also be a key area of focus.

Finally, we expect to see a similar first half trend play out in specialty vehicle market the.

The dealer channel is expecting a slow rebound in sales through the first half of 2024, and we also expect demand in the direct to consumer business, we relatively flat in the first half.

However, the specialty vehicle team is focused on taking share through new product launches geared around non discretionary repair parts, adding new direct to consumer customers and building new dealer relationships.

Based on these expectations, we're targeting consolidated full year net sales growth of 3% to 5%.

We expect our 2024 adjusted diluted EPS to range from $5 40 to.

To $5 70, a share or 19% to 26% increase.

Kevin Olson: Over the course of the year, we expect operating margin improvement as savings from the Q1 Reduction in Workforce Program and other cost savings initiatives take hold. However, benefits of these programs are expected to be partially offset by investments we're making to further diversify our supply chain, as well as higher inflationary costs such as ocean freight and employee benefits. Participating, the question may be forthcoming, but I'll get out ahead of it and let you know that we're not issuing guidance at the segment level. With that, I'll turn it back over to Kevin to conclude. Thanks, David.

Over the course of the year, we expect operating margin improvement as the savings from the Q1 reduction in workforce program and other cost savings initiatives take hold.

The benefits of these programs are expected to be partially offset by investments, we're making to further diversify our supply chain as well as higher inflationary costs, such as ocean freight and employee benefit costs.

Anticipating the question may be forthcoming.

Get out ahead of it and let you know that we're not issuing guidance at the segment level.

With that I'll turn it back over to Kevin to conclude Kevin.

Thanks, David as we close out our fourth quarter and lean forward into 2024.

Operator: As we close out our fourth quarter and lean forward into 2024, confident in our ability to continue to drive innovation, Capitalize on the breadth of our diverse portfolio across segments and draw on the many strengths and deep commitment of our team members. As we've proven year after year, we've continually found new ways to grow our business through new product categories, new markets, and customer channels. And we are operating just fine. We'd now like to open the call to questions. Operator.

Confident in our ability to continue to drive innovation.

To capitalize on the breadth of our diverse portfolio of cross segments and to draw on the many strengths in deep commitment of our team members.

As we've proven year after year, we've continually found new ways to grow our business through new product categories, new markets and customer channels and our operating discipline.

I would now like to open the call for questions operator.

Operator: Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star one. We also ask that you limit yourself to one question and one follow-up, and for any additional questions, please re-queue. Your first question comes from the line of Scott Stember from Roth MKM. Please go ahead. Good morning, gentlemen, and thanks for taking my question.

Thank you.

If you would like to ask a question. Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Crestar. One we also ask that you limit yourself to one question and one follow up for any additional questions. Please re queue.

First question comes from the line of Scott timber from Roth.

Please go ahead.

Good morning, gentlemen, and thanks for taking my questions.

Kevin Olson: Could you guys maybe talk about the cadence of end demand throughout the quarter? We heard from some retailers, a competitor of yours, talking about how December things started to dip, but it seems like things are coming back in January. And again, this is on the light-duty side. Sure, Scott, great question. Yeah, we actually saw a very stable cadence as we move through the fourth quarter.

Could you guys, maybe talk about the cadence of end demand throughout the quarter, we heard from some retailers a competitor of yours talking about.

How December things started to dip, but seems like things are coming back in January and again. This is on the light duty side, maybe just comment on that.

Sure Scott Great question, Yes.

We actually saw a very stable cadence as we move through the fourth quarter.

Kevin Olson: Our POS, or out of the door sales of our products to our customers, was actually up about six and a half percent in the quarter. And if you look at December, it was roughly around that same amount. So we didn't, we kind of saw the same cadence.

Our.

POS are out the door sales of our products to our customers was actually up.

About six 5% in the quarter.

And if you look at December it was roughly around that same amount. So we didn't we kind of saw the same cadence.

Kevin Olson: I'd also point out that, you know, on the LD side, our sales growth was only 4%, so we're still running a gap of POS to sell-in growth as a result of inventory adjustments, you know, kind of across our customer base. And next question, that's six and a half percent. Is that on a same-day basis adjusting for the extra or one last week this year? And if not, what would that have been on a same-day basis?

I'd also point out that <unk> side our.

Our sales growth was only 4% so we're still running a gap.

Pos to sell in growth.

As a result of inventory adjustments.

Across our customer base.

Got it next question that six 5%.

Is that on a same day basis adjusting for.

The extra week.

One last week this year.

And if not what would that have been on a same day basis.

Kevin Olson: And no, that's adjusted, Scott. OK. So it's apples and apples.

And now Thats adjusted Scott Okay.

So, it's apples to apples and apples on that.

Operator: All right, I'll get back into the queue. Thank you. Your next question comes from the line of Brett Jordan from Jefferies. Please go ahead. Hey, good morning, guys.

Perfect.

Alright, I will get back into the queue. Thank you.

Your next question comes from the line of Bret Jordan from Jefferies. Please go ahead.

David Hessen: Hey Brad, on the sales growth forecast for 24, three to five, could you talk about what you expect to be priced in that? Yeah, good question, Brett. You know, there's certainly solid growth in the three to 5%. But, you know, there's some volume in there, there's some price in there. But for competitive reasons, Brett, we don't break out the split.

Hey, good morning, guys.

Hey, Brian Hey, Brett on the sales growth forecast for 24 or three to five could you talk about what you expect to be price and that.

Yes, good question Brad.

There is certainly.

Solid growth in the 3% to 5% but.

Yes, there is some volume in there there is some pricing there but for competitive reasons, Brad we don't break out the.

David Hessen: But, included in the three to five is some volume along with some price. And I'll just add to that, Brett. As we kind of look at 2023, we saw roughly the same thing. There was clearly some price growth across the industry in 2023, but we actually saw unit growth both for the full year and for the fourth quarter. Great.

The split, but but included in the three to five.

Some volume along with some pricing.

I'll just add to that.

I'll just add to that Brad.

As we kind of look at 2023, we saw roughly the same thing that was clearly.

Some price growth.

Across the industry in.

In 2023, but we actually saw unit growth.

Both for the full year and for the fourth quarter.

Okay, Great and then on the light duty business.

David Hessen: And then on the light duty business, could you talk about in that mix how much is new to the aftermarket sort of proprietary product versus, you know, things like full line products more in line with your chassis business? You know, because we can break out what's a higher margin mix versus sort of more of the middle of the road. Yeah. We don't break out kind of different categories in that fashion, Brett, publicly.

Could you talk about in that mix, how much is new to the aftermarket sort of proprietary product versus.

Things like full line product more in line with our chassis business.

Because just so we can break out whats.

At a higher margin mix versus sort of more of the middle of the road.

We don't we don't break out kind of the different categories in that fashion breath publicly I will say, though that.

David Hessen: I will say, though, that, You know, if you kind of look at the SKUs that we launch in a year, like take 2023, for example; we launched just over 6,000 parts; roughly 30% of those SKUs would be considered new to the aftermarket. Okay, want to tell me what the gross margin spread is on that 30% versus the balance? Yeah, no, Brad, we don't we don't break out the margins again either by customer or by category. I thought we're doing calls now. We're going to get all this new information. I appreciate it, guys. Thanks, Brett.

If you kind of look at the Skus that we launch in a year like 2023 for example.

Launched just over 6000.

Parts, roughly 30% of those skus would be considered new to the aftermarket.

Okay.

Tell me, what the gross margin spread in that 30% versus the balances.

Yes, no Brett we don't we don't breakout again margins either by customer or by by category and how we're doing calls now because you've got all this new information.

I appreciate it guys.

Thanks, Brett.

Operator: If you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Gary Prestopino from Barrington Research. Please go ahead. Good morning, Kevin and Dave.

If you'd like to ask a question. Please press star one on your telephone keypad.

Next question comes from the line of Gary Presto Pinot from Barrington Research. Please go ahead.

Hi, good morning, Kevin and Dave.

David Hessen: Hey Dave, one thing you didn't touch upon in your commentary was factoring in the quarter. Could you give us some idea of how much you factored and what was the cost to SG&A for the factoring? Sure Gary, and as you know, that will all be included in the K, but the factoring in the quarter was $12.6 million in 24-23 compared to 14-2 last quarter, so down $1.6 million. And it's basically all volume, Gary.

Dave One thing you didn't touch upon in your commentary was <unk>.

Factoring in the quarter.

Could you give us some idea of.

How much you factored and what was the.

Cost into SG&A for the factoring.

Sure Gary and as you know that will all be included in the K, but factoring in the quarter was $12 $6 million in Q4 dollars 23, compared to 14, two last quarter, so down $1 million six.

It's basically all volume Gary the rate was essentially the same year over year, but we factored $236 million, which was down $34 million from last year.

David Hessen: The rate was essentially the same year over year, but we factored $236 million, which was down $34 million from last year. OK. And then, as we go forward, if you... to say hypothetically, keep the same factoring level on a quarterly basis. If you get a 25 basis point decline in interest rates, how is that going to impact the expenses related to factoring? Yeah, so I can give you if you get a 1% change in factoring costs on an annual basis, it's about $8 million, Gary. So you know, a quarter point would be roughly $2 million.

Okay.

And then as we go forward.

<unk>.

Just say hypothetically keep the same factoring level on a quarterly basis.

If you get a 25 basis point decline in interest rates, how is that going to impact the expenses related to factoring.

Yes, so I can give you if you get a 1% change in.

Factoring costs on an annual basis, it's about $8 million Gerry so quarter point would be roughly $2 million. Okay. That's really helpful. Thank you I'll get back in the queue sure.

David Hessen: Okay, that's really helpful. Thank you. I'll get back in the queue. Sure, www.

Operator: DormanProducts.com: Your next question comes from the line of Scott Stembler from Roth MKM. Please go ahead. Just a quick follow-up, just looking at the guidance from an operating margin standpoint. You guys were running, I guess, north of 15% coming out of the fourth quarter and coming out of the year, but if you look at your guidance. It looks like it's expecting less than that, a couple hundred bases. Are you guys just being conservative, or is there anything else out there that we should be aware of?

Okay.

Your next question comes from the line of Scott Stemler from Roth Heng can please go ahead.

Just a quick follow up.

Just looking at the guidance.

From an operating margin standpoint.

You guys were running I guess north of 15% coming out of the fourth quarter coming out of the year, but if you look at your guidance.

It looks like.

It is expecting less than a couple of hundred basis points.

Are you guys just being conservative or is there anything else out there that we should be aware of.

David Hessen: Now, Scott, I think if you look at the guidance, right, the top line, three to five percent growth. And as we said in the prepared remarks, we expect there to be some operating margin improvement as well. You know, if you look at that, there's going to be the benefit of the reduction in the workforce and the cost savings initiatives, you know, that'll be partially offset by some of the investments we're making to diversify our supply chain as well as some inflationary pressures, particularly ocean freight and benefits. But no, there's growth included in the guide. Got it. Thank you. Your next question comes from the line of Gary Prestopino from Barrington Research. Please go ahead.

No Scott I think if you if you look at the guidance right at the top line, 3% to 5% growth and as we said in the prepared remarks, we expect there to be some operating margin improvement as well.

If you look at that there's going to be the benefit of the reduction in workforce.

And the cost savings initiatives that will be partially offset by some of the investments, we're making to diversify our supply chain as well as some inflationary pressures, particularly ocean freight and benefits but.

No.

Theres a theres growth included in the guide.

Got it thank you.

Your next question comes from the line of Gary Presto P&L from Barrington Research. Please go ahead.

Kevin Olson: Yeah, I think I'm going to try and ask this question on new SKUs in a different way than what was asked. Historically, about 17% of your sales have come from new SKUs over the last three years. Did that change materially in 2023, and are you expecting that to kick up in 2024 given your ability to get new products out in the market? Hey, Gary, it's Kevin.

Yes, I think I'm going to try and ask this question on new Heska use a different way than what was asked.

Historically about 17% of your sales have come from new Skus over the last three years did that change materially throughout <unk>.

2023, and are you expecting that to kick up in 2024 given your.

Ability to get new products out in the market.

Hey, Gary it's Kevin Good question, Yes, we haven't disclosed that number.

Kevin Olson: Good question. Yeah, we haven't disclosed that number in a few years. But I would say, you know, the model has not changed, nor has the cadence of new products as a percent of our total business. I mean, I would say that, you know, the one factor that has changed over the last few years is that, you know, our chassis business, which is, you know, a large, mature, slower growing line, is a much bigger portion of our total business. But in terms of our focus on kind of the small niche categories, new the aftermarket focus, that has not changed, and frankly, the volume has not changed. Okay, and then just from what you were saying about... with your guidance on the quarterly sequence.

A few years, but I would say the model has not changed nor the cadence of new products as a percent of our total business.

I would say that the one the one factor that has changed over the last few years.

Our chassis business, which as you know.

A large mature slower growing line is a much bigger portion of our total business, but in terms of our focus on kind of the small niche categories, new the aftermarket focus that has not changed and frankly, the volume has not changed.

Okay, and then just from what Youre, saying about about.

With your guidance with the quarterly sequence.

Kevin Olson: Stronger top line in the back half of the year and continued growth and adjusted EPS in the back half of the year, despite some, you have some challenging comps there, because in 2023 you pulled off some good numbers in the back half of the year. Yeah, Gary, I think if you look at light duty, you know, we said it's going to be relatively flattish in Q1, and the improvement in Q2 into the second half. And then, both heavy and specialty, we expect to see a softer first half with improvements coming in the second half. So yeah, I think if you look at that, the pacing is going to be the growth is going to come more in the second half than in the first half. Okay, thank you. Okay. Your next question comes from the line of Brett Jordan from Jeffries. Please go ahead.

Stronger.

Top line in the back half of the year.

And continued growth in adjusted EPS in the back half of the year. Despite some <unk>.

Have some challenging comps there is because in 2023.

Pulled up some good numbers in the back half of the year.

Yes, Gary I think if you look at light duty, we said, it's going to be relatively flattish in Q1 improvement in Q2 into the second half and then both Abbvie and specialty we expect to see a softer first half with improvements coming in the second half. So yeah. I think if you look at that the pacing is going to be the.

The growth was going to come more in the second half over first half.

Okay. Thank you.

Sure.

Your next question comes from the line of Bret Jordan from Jefferies. Please go ahead.

David Hessen: Hey, on that same topic, I guess we look at flat light duty at the start of the year. And I think you said heavy duty was challenging, especially slow in the first half. Should we not factor in EBIT expansion in the first half, most of this growth is going to come when you get sales leverage going into the second half of the year. Yeah, Brett, the first quarter is typically our lowest quarter, mainly driven by the late duty segment. Now, the margin growth will be after the first quarter, and it will be ratable over the course of the balance of the year, but obviously coming a little bit heavier in the second half. Okay. And then you talked about $119 million in inventory safety stock reduction. Are your fill rates, or I guess how you measure your fill rates, consistent? Is your flow of product improved enough that you don't need to carry that, or has it had any impact on your availability? Yeah, I mean, Brad, it's Kevin.

On that same topic I guess, if we look at flat light duty and the start of the year and I think you had said heavy duty challenging, especially slow in the first half should we not factor in EBIT expansion in the first half most of this growth is going to come when you get sales leverage going into the second half of the year.

Yes, Brian the first quarter is typically our lowest quarter, mainly driven by the SEC.

Light duty segment, but.

Now the margin growth will be after the first quarter will be ratable over the course of the balance of the year, but obviously come at a little bit heavier in the second half.

Okay, and then you talked about $119 million in inventory safety stock reduction or your fill rates are in Europe, because as you measure your fill rates consistent.

Flow of product improved enough that you don't need to carry that or has it had any impact on your availability.

Yeah, I mean, Brad it's Kevin I mean, our fill rates are back to kind of pre supply chain disruption levels.

Kevin Olson: I mean, our fill rates are back to kind of pre-supply chain disruption levels. You know, the reason that we had to take on additional inventory was because our lead times had just grown so much. You know, getting a product from Asia, manufactured on a boat, on a container, on the ocean, getting to the ports, getting to our locations, was taking a lot longer than the pre-supply chain disruption. So that's kind of back to normal. So we're able to just reduce back to our normal safety stock level. Plus you also had a lot of costs running off the balance sheet as well; that inflation that gets hung up on the balance sheet and inventory has rolled off as well.

The reason that we had to take on.

Additional inventory was because our lead times.

Has just grown so much.

Getting a product.

From Asia manufactured on a BOE finding container on the ocean getting through the ports getting to our locations was taking a lot longer.

And kind of the pre supply chain disruption that is kind of back to normal. So we were able to just reduce.

Back to our normal safety stock levels, plus you also had a lot of costs running off the balance sheet as well that inflation.

Gets hung up on the balance sheet and inventory has rolled off as well.

Kevin Olson: Okay, and on that same supply chain question you talked about, I think some investment in possibly sourcing from New York. Yeah, I mean, it's ongoing, right? It's been ongoing for a couple years now, you know. We talked about the investments, which I would categorize as moderate, and those investments have been going on for the better part of two to three years. We have reduced our exposure to China and Taiwan over the last couple years, and we expect to continue to do that. We're not going to give any details in terms of, you know, what percentage, what country, but I'll just tell you that, wide-ranging, whether it's PAC-RIM or India or Mexico or Turkey or other locations around the globe, we continue to look to de-risk our supply chain.

Okay, and I guess on that same supply chain question, you talked about I think some investment in and possibly sourcing from.

From new markets is that something I guess could you give us some updates as far as where we are alternative low cost supply markets versus where you are today geographically.

Yes, I mean.

It's ongoing right its been ongoing for a couple of years now we did talk about the investments, which I would categorize as moderate and those investments have been going on for the better part of two to three years.

We have reduced our exposure exposure to China, Taiwan.

Over the last couple of years, and we expect to continue to do that.

Not going to give any details in terms of.

What percentage what country I will just tell you that.

Its wide ranging whether its a pac rim, or India, or Mexico, or Turkey, or other locations around the globe. We continue to look to de risk our supply chain.

Kevin Olson: Great, thank you. That does conclude our question and answer session, and that does conclude our conference call for today. Thank you for your participation, and you may now disconnect.

Great. Thank you.

Yeah.

That does conclude our question and answer session and that does conclude our conference call for today. Thank you for your participation and you may now.

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Yes.

[music].

Yes.

Okay.