Q1 2024 Dorman Products Inc Earnings Call
Okay.
Operator: Good morning, and thank you for standing by. Welcome to the Dorman Products 1st Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. I'd now like to turn the conference over to David Hession, Dorman's Chief Financial Officer. Thank you, sir. Please go ahead.
Speaker Change: Good morning, and thank you for standing by and welcome to the Dorman products first quarter 'twenty 'twenty four earnings conference call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: You didn't answer session will follow the formal presentation.
Speaker Change: Please note that this conference is being recorded.
Speaker Change: I'd now like to turn the conference over to David Hession, Chief Financial Officer. Thank you. Sir. Please go ahead.
David M. Hession: Thank you, good morning, and welcome to Dorman's first quarter of 2024 earnings conference. I'm joined today by Kevin Olsen, our Chief Executive Officer. First, Kevin will provide a business update, then I will review the quarterly results, followed by closing remarks from Kevin. After that, we'll open the call for questions.
David M. Hession: Thank you good morning, and welcome to <unk> first quarter 2024 earnings Conference call.
David M. Hession: I'm joined today by Kevin Olson, our Chief Executive Officer.
David M. Hession: Kevin will provide a business update and I will review the quarterly results followed by closing remarks from Kevin and after that we'll open the call for questions.
David M. Hession: By now, everyone should have access to our earnings release and earnings call presentation, which we published earlier today. These documents are available on the investor relations portion of our website at DormanProducts.com. 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 10-Q, 10-K, 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 will also reference certain non-GAAP measures.
David M. Hession: Now everyone should have access to our earnings release and earnings call presentation, which we published earlier today.
David M. Hession: 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 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.
David M. Hession: These documents are available on the Investor relations portion of our website at Dorman products Dot com.
Kevin M. Olsen: Thanks, David. Good morning.
David M. Hession: 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 laws.
David M. Hession: We advise listeners to review the risk factors and cautionary statements in our most recent 10-Q10-K 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.
David M. Hession: We will also reference certain non-GAAP measures.
David M. Hession: Reconciliations of these non-GAAP measures the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and the appendix to this earnings call presentation, both of which can be found on the Investor Relations section of <unk> website.
David M. Hession: 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.
David M. Hession: That I will turn the call over to Kevin.
Kevin M. Olsen: And thank you for joining us on our first quarter 2024 earnings call. Today, I will discuss the highlights of the quarter across our three operating segments to provide a deeper dive into Dorman's new-to-the-after-market innovation edge, which is the core capability that links our three-segment strides used together. Turn to slide 3 if you were following along with our deck.
Kevin M. Olsen: Thanks, David Good morning, and thank you for joining us on our first quarter 2024 earnings call.
Kevin M. Olsen: Today, I will discuss the highlights of the quarter across our three operating segments.
Kevin M. Olsen: Provide a deeper dive into dormancy due to the aftermarket innovation engine.
Kevin M. Olsen: Which is a core capability that links our three segment strategies together.
Kevin M. Olsen: Turn to slide three if you're following along with our deck Q1 was another consecutive strong quarter for dorm.
Kevin M. Olsen: Q1 was another consecutive strong quarter for Dorman, as we delivered financial results in line with our expectations. We delivered net sales of $469 million and achieved a 660 basis point improvement in adjusted operating margins, led by the consistent gross margin recovery that we have driven over the last few quarters. As a result, adjusted diluted EPS increased 134% over the prior year.
Kevin M. Olsen: As we delivered financial results in line with our expectations.
Kevin M. Olsen: We delivered net sales of $469 million and achieved a 660 basis point improvement adjusted operating margin led by the consistent gross margin recovery that we have driven over the last few quarters.
Kevin M. Olsen: As a result, adjusted diluted EPS increased to 134% over prior year.
Kevin M. Olsen: Free cash flow of $41 million was very strong, and we used the cash to repay $15 million of debt and repurchase $27 million of our shares. And finally, our new product teams, across all three segments, continue to drive new product growth by introducing over 1,400 new products to the market, many as aftermarket. Moving on to slide 4, I'll begin with some segment observations, and Light Duty. We continue to be encouraged by the positive overall market. Vehicle miles driven continue to increase, and the average age of vehicles continues to increase. Both are significant tailwinds for the aft.
Free cash flow of $41 million was very strong.
Kevin M. Olsen: We deployed cash to repay $50 million of debt and repurchased $27 million of our shares.
Kevin M. Olsen: Finally, our new product teams across all three segments continue to churn out new product growth by introducing over 1400, new products to the market many adapt to market excuse.
Speaker Change: Moving on to slide four I'll dig into some segment observations.
Speaker Change: The light duty, we continue to be encouraged by the positive overall market trends.
Speaker Change: Vehicle miles driven and the average age of vehicles continues to increase.
Speaker Change: Both are significant tailwind for the aftermarket.
Kevin M. Olsen: We believe U.S. VIO of vehicles aged 8 to 13 years, what we call the prime VIO for Dorman, is in the early innings of substantial growth and has fully lapped the Great Recession period where fewer new vehicles entered the market. POS growth accelerated through the quarter, finishing March in high single digits after starting the year off slowly. New products continue to benefit the business, including our patented oil filter housing, which proved to be a top performer for the quarter.
Speaker Change: We believe U S V I O vehicles, aged eight to 13 years, what we call the prime Vio Dorman.
Speaker Change: As in the early innings of substantial growth.
Speaker Change: It has fully lapped the great recession period, where fewer new vehicles entered the market.
Speaker Change: Pos growth accelerated through the quarter, finishing March up high single digits after.
Speaker Change: After starting the year off slowly new products continued to benefit the business, including our patented oilfields or housing which proved to be a top performer for the quarter.
Kevin M. Olsen: Finally, our operations initiatives continue to drive significant value. Our investments in automation and optimization enable our contributors to move product through our DCs more efficiently, while our investments to diversify our global supplier base have enhanced the resiliency of our supply chain. Turning to heavy duty, the freight industry continued to be challenged. Many industries have reduced their shipping volumes over the last several quarters, as the economy has slowed down from its post-COVID fever pace.
Speaker Change: Finally, our operations initiatives continued to drive significant value.
Speaker Change: Our investments in automation and optimization enabled our contributors to move product through our Dcs more efficient.
Speaker Change: While our investments to diversify our global supplier base have enhanced the resiliency of our supply chain.
Speaker Change: Turning to heavy duty the freight industry continued to be challenged many industries have reduced their shipping volumes over the last several quarters as the economy has slowed down from its post COVID-19 fever pace.
Kevin M. Olsen: This naturally leads to fewer vehicle repairs. As expected, we also saw the de-stocking of inventory that started in the second half of 2023 continue into the first quarter of 2025. This environment, coupled with a strong Q1 2023 comparison, led to negative first quarter growth versus the prior year.
This naturally leads to fewer vehicle repairs.
Speaker Change: As expected. We also saw the destocking of inventory that started in the second half of 2023 continued into the first quarter of 2024.
Speaker Change: This environment, coupled with a strong Q1 2023 comparison.
Speaker Change: Negative first quarter growth versus prior year.
Speaker Change: Sequentially. However, Q1 sales were slightly higher than Q4 2023.
Kevin M. Olsen: Subsequently, however, Q1 sales were slightly higher than Q4 2023. We take this sequential improvement as a positive sign, but remain cautious in our outlook for the remainder of the year. In terms of initiatives, we expect good traction in the implementation of Dorman's new product fundamentals from the light-duty business to the heavy-duty business. We're also taking actions that we expect will result in more efficient operations in our plants and distribution. Finally, in specialty vehicles, we're pleased to have generated modest growth as initiatives to drive dealer penetration and new non-discretionary product introductions have more than countered a soft end market for new machines. We believe that these market share growth initiatives will yield solid returns and that sales of accessories for new vehicles will increase, owing to financing rates for new vehicles. Consumer sentiment has improved.
Speaker Change: Take this sequential improvement is a positive sign.
Speaker Change: We remain cautious in our outlook for the remainder of the year in terms of initiatives. We're.
Speaker Change: We're seeing good traction in the <unk>.
Speaker Change: Implementation of <unk>, new product fundamentals from the light duty business to the heavy duty business.
Speaker Change: We're also taking actions that we expect will result in more efficient operations and our plants and distribution centers.
Speaker Change: Finally in specialty vehicles, we're pleased to have generated modest growth as initiatives to drive dealer penetration and new non discretionary product introductions at more than encountered a soft end markets new machines.
Speaker Change: We believe that these market share growth initiatives will yield solid returns net sales of accessories for new vehicles will increase once financing rates for new vehicles and consumer sentiment improves overall.
Kevin M. Olsen: Over the long term, we're confident that demand for new vehicles, accessories, and repair parts will remain robust. On slide 5, as I mentioned in my opening remarks, we want to take the opportunity to focus some discussion on what we consider the fuel for Dorman's growth engine, our new product innovation capability. We're proud of our innovation model and the value it creates for our contributors, customers, and our shareholders. As we discussed during our fourth-quarter call, it all starts with ideation, which means being the first to identify a failure-prone part, and the first to imagine and re-engineer a solution that yields not only a repair but also a solution that simplifies the repair challenges of the technician and gets the vehicle back on the road
Speaker Change: Over the long term, we're confident that demand for new vehicles accessories and repair parts remains robust.
Speaker Change: On slide five as I mentioned in my opening remarks, we want to take the opportunity to focus some discussion and what we consider the fuel for dormant growth engine.
Speaker Change: Our new product innovation capabilities.
Speaker Change: We're proud of our innovation model and the value it creates for our contributors customers and our shareholders.
Speaker Change: As we discussed during our fourth quarter call. It all starts with ideation, which means being the first to identify a failure probe card first to imagine and reengineer solution that yields not only repair part, but also a solution that simplifies repair challenges of the technician.
Speaker Change: It gets the vehicle back on the road quickly.
Kevin M. Olsen: Our approach to redesign often allows us to fix the original flaws and generate intellectual property around the novel aspects of our solutions. Our operating model also allows us to be one of the first to deliver OE alternative products to market.
Speaker Change: Our approach to redesign often allows us to fix the original clause generate intellectual property around that novel aspects of our solutions.
Speaker Change: Our operating model also allows us to be one of the first to deliver OE alternative products to market.
Kevin M. Olsen: We have both advanced in-house capabilities in all vehicle systems, which allows us to quickly engineer solutions. A vast network of supply provides us with the ability to scale volume in high-demand parts quickly. Maybe most importantly, we've systematized our new product development in such a way that it allows us to export these capabilities from Dorman's light-duty legacy business to the other parts of our business. As you'll see, we've had great success implementing our innovation approach in our heavy-duty and specialty vehicle business.
Speaker Change: We have both advanced in house capabilities in all vehicle systems, which allows us to quickly engineered solutions and a vast network of supply partners, which provides us with the ability to scale volume in high demand parts quickly.
Speaker Change: Maybe most importantly, we systematize, our new product development in such a way that allows us to export these capabilities from dormant light duty legacy business to the other parts of our business.
Speaker Change: As you'll see we've had great success implementing our innovation approach and our heavy duty and specialty vehicle businesses.
Kevin M. Olsen: We view our new product innovation engine as a competitive advantage that we can use to drive value through synergies with current and future acquired companies. Over the last three fiscal years, we've brought over 19,000 new SKUs to market across our three sectors. Roughly 30% of those parts are new to the Afton Martins, meaning at launch they were only available from Dorman or the OEM. Next on slide six.
Speaker Change: We view, our new product innovation engine as a competitive advantage that we can use to drive value through synergies with current and future acquired companies.
Speaker Change: Our new product innovation engine is yielding results over the last three fiscal years.
Speaker Change: Brought over 19000, new skus to market across our three segments with roughly 30% of those parts new to the aftermarket.
Speaker Change: Many at launch they were only available from Dorman are the OEM.
Speaker Change: Next on slide six we'd.
Kevin M. Olsen: We'd like to highlight some recent examples of new-to-the-aftermarket success. Starting on the far left, you'll find our patented oil filter housing, which has quickly become one of the most successful products in Dorman's history. Our ideation team discovered that the original part had a high failure rate in the field and, most importantly, several points of failure that were fundamental to the original product's design. Our engineers redesigned the part to address the failure points, and their work has led us to being awarded several patents on our proprietary design.
Speaker Change: We'd like to highlight some recent examples of new to the aftermarket success stories.
Speaker Change: Starting on the far left you'll find our patented oil filter housing, which has quickly become one of the most successful products in dormancy history.
Speaker Change: Our aviation team discovered that the original part at a high failure rate.
Speaker Change: The deployment in the field. Most importantly, several points of failure that was fundamental to the original product design. Our engineers redesigned the part to address the failure points in their work has led us to being awarded several patents.
Speaker Change: Proprietary designs.
Kevin M. Olsen: The original failure-prone oil filter housing can be found on over 10 million vehicles on U.S. roads today. Our next example is a heavy-duty clutch cylinder. Our ideation team discovered that this part was being sold at rates in excess of its predicted replacement rate, prompting the product team to invest. The heavy-duty product team evaluated the part and determined its failure modes, and also discovered that the part is so difficult to service that technicians were replacing it prior to failure as a preventative maintenance action.
Speaker Change: The original failure fraud oilfield to housing can be found on over 10 million vehicles on U S roads today.
Speaker Change: Our next example is the heavy duty class shoulder.
Speaker Change: <unk> team discovered at this part was being sold at rates in excess of its predicted replacement rates, prompting the product team to investigate the heavy duty product team evaluated that apart.
Speaker Change: Determined its failure modes and also discovered that the part is so difficult to service that technicians, we're replacing it prior to failure as a preventative maintenance actions.
Kevin M. Olsen: Our team redesigned the part with higher quality components, and built a fully operational test transmission to quality test and prove that the Dorman part lasted beyond the OE parts listed performance. As a result of the team's innovation, truck owners are now able to reduce the number of replacements over the truck's life, saving substantial repair time and money. Next is an example of our innovation deployed to create a feature set that better fits a product's application than the incumbent part.
Speaker Change: Our team redesign the PARP higher quality components and built a fully operational <unk> transmission the quality test and prove that the Dorian part lasted beyond the OE parts listed performance as a result of the team's innovation truck orders are now able to reduce number of replacement over the trucks light.
Speaker Change: Savings substantial repair time and money.
Next is an example of our innovation deployed to create a feature set that better fits our products application and the incumbent part.
Kevin M. Olsen: UTV riders in certain driving conditions prefer glass windshields because they are more resistant to scratches and less attractive to dirt and dust. However, while the fixed or manual opening glass windshields that are available today have their place, consumers have quickly embraced the improved fit, finish, and function of the newly released power-actuated windshield. From the driver's seat, this windshield can be easily adjusted as weather conditions or terrain changes.
Speaker Change: UTV riders and certain driving conditions preferred glass windshields, because they are more resistant to scratches and less attractive to dirt and dust. However, while the fixed or manual opening glass windshield that are available today have their place.
Speaker Change: Tumors have quickly embraced the improved fit finish in function of the newly released power actuated windshields.
Speaker Change: From the driver's seat this windshields can be easily adjusted as weather conditions or terrain changes the modular design can be retrofit to many UTV applications already in service.
Kevin M. Olsen: The modular design can be retrofitted to many UTV applications already in service. Finally, I would also like to highlight an electronics module that we've redesigned from scratch that incorporates proprietary electronics designed by our engineers. This fuel injector driver module is found on a widely deployed engine and has design issues in its housing and electronics that can lead to high failure rates. Our OE fix product upgrades the electronics and provides a weatherproof case that extends the life cycle of the part.
Speaker Change: Finally, I would also like to highlight electronics module that we redesigned from scratch that incorporates proprietary electronics designed by our engineers with software code written by our engineers.
Speaker Change: This fuel injector driver module is found on a widely deployed engine and has design issues. It's housing electronics that can lead to high failure rates are.
Speaker Change: Our OE fixed product upgrades, the electronics and provides a weather proof case that extends the lifecycle of the park. We provide this module as a new not rent remanufactured part.
Kevin M. Olsen: We provide this module as a new, not re-manufactured part, and are the exclusive aftermarket provider for this product in a new form. We believe that there are very few aftermarket competitors that are capable of releasing a completely new electronic mod, including proprietary Electronics Designing Software. These are just a few examples of the thousands of new parts that we release every year. We think they provide a strong cross-section of our new product innovation capability. Powered Dorman's growth to provide Dorman with competitive advantages today.
Speaker Change: And are the exclusive aftermarket provider for this product in a new form.
Speaker Change: We believe that there are very few aftermarket competitors that are capable of releasing a completely new electronic module.
Speaker Change: <unk> proprietary electronics designing software code.
Speaker Change: These are just a few examples of the thousands of new parts that we release every year, but we think they provide a strong cross sample of our new product innovation capabilities that powered dormant growth engine and provide dorian with competitive advantages today and into the future.
Speaker Change: Now I'll hand, it off to David to review, our Q1 financial performance.
David M. Hession: Kevin turning to slide seven Q1, net sales were $469 million.
David M. Hession: Turning to slide 7, Q1 net sales were $469 million, up modestly year over year. This growth was accomplished in the face of the market headwinds that Kevin described in his remarks and was primarily driven by the growth of new products recently introduced to the market. Moving to gross margin, our Q1 adjusted gross margin was 38.7%. 630 basis point increase compared to the same quarter last year. The year-over-year margin improvement follows the last few quarters trend of improvement from lower-cost inventory, cost-savings initiatives, and pricing actions to offset inflation. Shifting to SG&A, adjusted SG&A expense was 24.9% of net sales, an improvement of 30 basis points compared to Q1 of 2023. Cost Savings Initiatives were the primary driver of the impact.
David M. Hession: Up modestly year over year.
David M. Hession: This growth was accomplished in the face of the market headwinds that Kevin described in his remarks and was primarily driven by the growth of new products recently introduced tomorrow.
David M. Hession: Moving to gross margin our Q1 adjusted gross margin was 38, 7% of <unk>.
David M. Hession: 630 basis point increase compared to the same quarter last year.
David M. Hession: Year over year margin improvement follows the last few quarters trend of improvement from lower cost inventory cost savings initiatives and pricing actions to offset inflation.
David M. Hession: Shifting to SG&A adjusted SG&A expense was 24, 9% of net sales an improvement of 30 basis points compared to Q1 of 2023.
David M. Hession: Cost savings initiatives were the primary driver of the improved.
David M. Hession: Our Q1, adjusted operating income was $65 million or 92% increase from the same quarter last year adjusted operating.
David M. Hession: Our Q1 adjusted operating income was $65 million, a 92% increase from the same quarter last year; adjusted operating margin was 13.9%, up 660 basis points year over year. And finally, Adjusted Diluted EPS in Q1 was $1.31, a 134% increase versus last year. The growth was mainly due to an increase in adjusted operating income, coupled with a lower interest expense after four consecutive quarters of debt repayments, partially offset by a higher tax rate. Let's move on to a review of our segment results, starting on slide 8.
David M. Hession: Operating margin was 13, 9% up 660 basis points year over year.
David M. Hession: And finally adjusted diluted EPS in Q1 was $1 31 a.
David M. Hession: 134% increase versus last year.
David M. Hession: The growth was mainly due to the increase in adjusted operating income coupled with lower interest expense after four consecutive quarters of debt repayments, partially offset by a higher tax rate.
Speaker Change: Let's move on to a review of our segment results starting on slide eight.
David M. Hession: Q1 Light Duty Net Sales were $359 million, a 3% increase year over year. Sales started the year soft, but they strengthened through the quarter as customer POS growth accelerated while the gap between POS and shipments narrowed. We also saw some customer destocking on the border as they continue to reduce their inventory after loading up during the pandemic. As Kevin highlighted, new products, including the oil filter housing product, had a very strong quota.
Speaker Change: Q1 light duty net sales were $359 million.
Speaker Change: A 3% increase year over year.
Speaker Change: Sales started the year soft, but strengthened through the quarter as customer Pos growth accelerated while the gap between Pos and shipments narrowed and.
Speaker Change: We also saw some customer destocking in the quarter as they continued to reduce their inventory after loading up during the pandemic.
As Kevin highlighted new products, including the oil filter housing product had a very strong quarter.
Speaker Change: Light duty adjusted operating margin was 16, 1% in Q1 of 990 basis point improvement year over year.
David M. Hession: The Light Duty Adjusted Operating Margin was 16.1% in Q1, a 990 basis point improvement year-over-year. As I described for the overall business, sales of lower-cost inventory and the results of cost-saving initiatives contributed to the margin improvement. Moving on to heavy duty, on slide 9, net sales were $58 million in Q1, a 15% reduction year over year. However, Q1 was up against a strong prior year comparable that was driven by the tail end of the COVID-driven inventory restocking by customers, as in the light duty business.
Speaker Change: As I described for the overall business sales of lower cost inventory and our results of cost saving initiatives contributed to the margin improvement.
Speaker Change: Moving onto heavy duty on slide nine net sales were $58 million in Q1, a 15% reduction year over year.
Speaker Change: Q1 was up against a strong prior year comparable that was driven by the tailwind of the COVID-19 driven inventory restocking by customers.
Speaker Change: As in the light duty business the trend was positive through the quarter.
David M. Hession: The trend was positive through the quarter, with the year-over-year sales gap in March smaller than in January. We believe we're beginning to see signs of abatement of some of the headwinds we're facing, including customer inventory de-stock, and have cautious optimism for a second half recovery in trucking demand. Heavy Duty Adjusted Operating Margin was breakeven, down from 7.9% in Q1 last year.
Speaker Change: With the year over year sales gap in March smaller and in January.
Speaker Change: We believe we are beginning to see signs of abatement of some of the headwinds, we're facing including customer inventory destocking and have cautious optimism for a second half recovery and trucking demand.
Speaker Change: Heavy duty adjusted operating margin was breakeven down from seven 9% in Q1 of last year.
David M. Hession: Heavy-duty margin was affected by the sell-through of high-cost inventory. The Deleverage of Fixed Costs on Lower Net Sales Volumes and the Impact of Investments We Have Made to Grow Sales and Improve Margins Long-Term. Shifting to specialty vehicles on slide 10, our Q1 net sales were $52 million, an increase of 1%. We continue to see consumers putting off the acquisition of new vehicles as financing interest rates remain high and economic confidence remains mixed.
Speaker Change: Heavy duty margin was affected by the sell through of high cost inventory the deleverage of fixed costs on lower net sales volumes and the impact of investments we have made to grow sales and improve margins long term.
Speaker Change: Shifting to specialty vehicle on slide 10, our Q1 net sales were $52 million an increase of 1%.
Speaker Change: We continue to see consumers, putting off the acquisition of new vehicles as financing interest rates remained high and economic confidence remains mixed.
David M. Hession: This dynamic impacts the dealer channel, which remains a challenging market, particularly for accessories and first-fit uppers. However, we remain confident in the prospects for steady, long-term growth in the overall vehicle park as enthusiasm for alternative transport vehicles remains high, so we believe this is a temporary challenge for the market overall. Despite this end market challenge, our specialty vehicle business was able to deliver growth. We believe that our initiative to expand our dealer footprint and drive sales to new dealers enabled us to capture share in a flat market.
Speaker Change: This dynamic impacts the dealer channel, which remains a challenging market, particularly for accessories and first fit upgrades.
Speaker Change: We remain confident in the prospects for steady long term growth in the overall vehicle park as enthusiasm for alternative transport vehicles remains high. So we believe this is a temporary challenge for the market overall.
Speaker Change: Despite this end market challenge, our specialty vehicle business was able to deliver growth.
Speaker Change: We believe that our initiative to expand our dealer footprint and drive sales to new deal has enabled us to capture share in a flat market.
David M. Hession: Further, our initiative to drive new product sales, particularly our focus on non-discretionary repair parts and parts for utility vehicles where spending is less discretionary, remains very much on track. Q1 specialty vehicle operating margin was 13.9%, flat year over year. Please turn now to slide 11, where we will discuss cash. Q1 free cash flow was $41 million, an increase of $26 million from prior years. The improvement was largely attributable to a $27 million increase in net income, countered slightly by timing-driven movements of some working capital.
Speaker Change: Further our initiatives to drive new product sales, particularly our focus on non discretionary repair parts and parts for utility vehicles, where spending is less discretionary remains very much on track.
Speaker Change: Q1 specialty vehicle operating margin was 13, 9% flat year over year.
Speaker Change: Please turn now to slide 11, where we will discuss cash flow.
Speaker Change: Q1 free cash flow was $41 million, an increase of $26 million from prior year the.
Speaker Change: The improvement was largely attributable to a $27 million increase in net income countered slightly by timing driven movements of some working capital issues.
Speaker Change: In line with our capital allocation strategy during the first quarter, we made capital expenditures of $11 million consistent with prior year.
David M. Hession: In line with our capital allocation strategy, during the first quarter, we made capital expenditures of $11 million, consistent with prior years. We also repaid $15 million on our credit facility and returned $27 million to shareholders through the repurchase of our shares at an average price of $85 per share. I'll turn next to our balance sheet and liquidity on slide 12. As of March 30th, our net debt was $528 million, a reduction of $12 million from Q4, and our net leverage ratio was 1.61 times the adjusted EBITDA, down from 1.87 times in Q4.
Speaker Change: We also repaid $15 million on our credit facility and returned $27 million to shareholders through the repurchase of our shares at an average price of $85 per share.
Speaker Change: I'll turn next to our balance sheet and liquidity on slide 12.
Speaker Change: As of March 30, <unk>, our net debt was $528 million a.
Speaker Change: A reduction of $12 million from Q4, and our net leverage ratio was 161 times adjusted EBITDA down from 187 times in Q4.
David M. Hession: Our current leverage is comfortably below our long-term target ceiling of two times or less than three times in the first year following an acquisition. Additionally, we have $552 million of total liquidity, including cash on hand. We remain confident in the strength of our balance sheet and the capacity we have available to execute our strategic initiatives. Now, I'd like to discuss our previously provided 2024 guidance, included on slide 13. Our first quarter performance was in line with our expectations.
Speaker Change: Our current leverage is comfortably below our long term target ceiling of two times or less than three times in the first year following the acquisition. Additionally.
Speaker Change: Additionally, we had $552 million of total liquidity, including cash on hand.
Speaker Change: We remain confident in the strength of our balance sheet and the capacity, we have available to execute our strategic initiatives.
Speaker Change: Now I'd like to discuss our previously provided 2024 guidance included on slide 13.
Speaker Change: Our first quarter performance was in line with our expectations.
David M. Hession: Light duty experienced 3% growth, but shipment still lags customer POS, a gap we expect to align more closely over the remainder of the year. Meanwhile, our heavy-duty business is still negatively impacted by a soft trucking market. We expect this softness to continue into the second quarter before a modest rebound in the second half of the year. And finally, specialty vehicles and markets will continue to face challenges, but the team is focused on taking share from new product launches geared around non-discretionary repair parts at a new direct-to-consumer customer and building new dealer relations.
Speaker Change: Light duty experienced 3% growth, but shipments still lags customer Pos a GAAP, we expect to align more closely over the remainder of the year.
Speaker Change: Our heavy duty business is still negatively impacted by a soft trucking market. We expect this softness to continue into the second quarter before a modest rebound in the second half of the year.
Speaker Change: And finally specialty vehicles and markets will continue to face challenges, but the team is focused on taking share from new product launches geared around non discretionary repair parts at a new direct to consumer customers and building new dealer relationships.
David M. Hession: Based on these expectations, we are confirming our consolidated full-year net sales growth guidance of 3% to 5%. We also confirm our 2024 adjusted diluted EPS range of $5.40 to $5.70 a share, for a 19% to 26% increase over the prior year. Savings from the Q-Run, the Reduction in Workforce Program, and other cost savings initiatives are on track to hit plan, and we still expect these savings 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. With that, I'll turn it back over to Kevin to conclude. Kevin
Speaker Change: Based on these expectations, we are confirming our consolidated full year net sales growth guidance of 3% to 5%.
Speaker Change: We also confirm our 2024 adjusted diluted EPS range of $5 40.
Speaker Change: $5 70, a share or 19% to 26% increase over the prior year.
Speaker Change: Savings from the Q1 reduction in workforce program and other cost savings initiatives are on track to hit plan and we still expect these savings 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.
Speaker Change: With that I'll turn it back over to Kevin to conclude Kevin.
Kevin M. Olsen: We're proud of our first quarter results and our start to the year, we're countering headwinds in our markets by doing what we do best.
Kevin M. Olsen: We're proud of our first quarter results and our start to the year. We're countering headwinds in our markets by doing what we do best. Delivering new and innovative product solutions that our customers rely upon to profitably grow their business and their end users rely upon for a satisfying repair or upgrade experience. Where there will continue to be challenges in our markets in the next three quarters, I'm confident that the initiatives we have underway and the Dorman contributors who are leading them will be able to execute and drive success in any environment. I would now like to open the call for questions. Operator? Thank you.
Kevin M. Olsen: Delivering new and innovative product solutions that our customers rely upon to profitably grow their businesses.
Kevin M. Olsen: And you'd or end users rely upon for a satisfying repair or upgrade experience.
Kevin M. Olsen: While there will continue to be challenges in our markets in the next three quarters I'm confident that the initiatives, we have underway and.
Kevin M. Olsen: And the Doormen contributors, who are leading them, we'll be able to execute and drive success in any environment.
Speaker Change: I would now like to open the call for questions operator.
Speaker Change: Thank you.
Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the Q&A. If you would like to redraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press the star 1 to join the queue. Your first question comes from the line of Scott Stember with MKM Partners. Your line is open.
Speaker Change: Now begin the question and answer session.
Speaker Change: You have dialed in and we would like to ask a question. Please press star one on your telephone keypad to raise their hand and trying to queue.
Speaker Change: If you would like to withdraw your question simply press Star one again.
Speaker Change: If you are called upon to ask a question and are listening the speaker phone device. Please pickup your handset to ensure that their phone is not on mute when asking a question again.
Speaker Change: <unk> wanted to join the queue.
Speaker Change: Your first question comes from the line of Scott <unk> with MK and partners. Your line is open.
Scott Lewis Stember: Good morning guys, and thanks for taking my question. Morning, Scott. David, you were talking about there being some de-stocking in the quarter in light vehicles, but it sounds like, and Demand is still very, very strong. When do you expect to be back to a one-for-one setup, sell-in to sell-through, like...
Scott: Hey, good morning, guys and thanks for taking my questions.
Scott: Good morning, Scott.
Scott: David you were talking about.
Scott: There are being some destocking in the quarter and light vehicle, but it sounds like.
Scott: And demand is still very very strong when do you expect to be back to a one for one set up sell in to sell through in light duty.
Scott: Hey, Scott, it's Kevin I'll handle that one.
Kevin M. Olsen: Hey, Scott, it's Kevin. I'll handle that one. You know, we definitely saw we had a difficult start to the year for sure. In January, we saw POS kind of in that low single-digit range. But we did see that pick up as we moved through the quarter, and as we said in the prepared remarks, we exited March in the high single-digit range. Overall, shipments still lagged POS for the entire quarter, and we did see some inventory rebalancing as expected. However, the gap was certainly a lot tighter in March than we saw in January. We continued to see that into April. So I would characterize it, Scott, as late April.
Kevin M. Olsen: Really saw we had a difficult start to the year for sure January we saw Pos kind of in that low single digit range.
Kevin M. Olsen: While we did see that pick up as we move through the quarter.
Kevin M. Olsen: And as we said in the prepared remarks.
Speaker Change: <unk> March in.
Speaker Change: In the high single digit range.
Speaker Change: Overall shipments still lag pass for the entire quarter.
Speaker Change: And we did see some inventory rebalancing is expected.
Speaker Change: However, the gap was certainly a lot tighter in March than we saw in January we continued to see that into April so I would characterize it Scott is as late innings.
Speaker Change: Okay.
Kevin M. Olsen: in terms of having that guy. And then, next question on the specialty vehicles. You've been talking about your break fix initiative, I guess, trying to sell more pure aftermarket sales. Could you just give us an update on the percentage of sales that break fix compared to when you first acquired Super ATV?
Speaker Change: In terms of having that gap.
Speaker Change: Okay.
Speaker Change: And then next question on the specialty vehicles.
We've been talking about Euro break fix initiative I guess trying to sell more pure aftermarket sales could you just give us an up to date about.
Speaker Change: As a percentage of sales that break fixes where it was when you first acquired through productivity.
Speaker Change: Sure when we acquired Super ATV, Scott, we saw the opportunity to.
Kevin M. Olsen: Sure, when we acquired Super 8 TV, Scott, we saw the opportunity to not only build out some kind of non-discretionary repair parts but also expand the business, you know, geographically. I would characterize the last 18 months as we've executed on those initiatives, and we've actually exceeded what we had laid out pre-acquisition in terms of those, you know, executing on those. Roughly right now, Scott, about half the business we would characterize as non-discretionary repair, and that is up from pre-acquisition. I got it.
Speaker Change: Not only build out.
Speaker Change: Non discretionary repair parts, but also expand the business geographically.
Speaker Change: I would characterize.
Speaker Change: The last 18 months is that we've executed.
Speaker Change: On those initiatives and we've actually.
Exceeded what we had laid out pre acquisition in terms of executing on those.
Speaker Change: And.
Speaker Change: Roughly right now Scott about half the business, we would characterize as non discretionary repair parts.
Speaker Change: And that is up from pre acquisition.
Speaker Change: Got it thanks, I'll jump back in the queue.
Scott Lewis Stember: Got it. Thanks. I'll jump back in the queue.
Speaker Change: Thanks.
Speaker Change: Our next question comes from the line of Bret Jordan with Jefferies. Your line is open.
Bret David Jordan: Our next question comes from the line of Bret Jordan with Jefferies. Hey, good morning, guys.
Bret David Jordan: Hey, good morning, guys.
Bret David Jordan: Hey, good morning guys. Hey, Bret. Hey, Bret.
Bret David Jordan: Alright, Brad Hey, Brad.
David M. Hession: Could you talk about inflation in the period, how much pricing has impacted, particularly on the light duty side, and then sort of what you're expecting for the year?
Bret David Jordan: Could you talk about inflation in the period, how much pricing impact, particularly on the on the light duty side, and then sort of what youre expecting for the year.
Brad: Yes, Brian.
David M. Hession: Yeah, as you know, we don't disclose the breakout of price volume, but I would characterize it as you know, we definitely saw some price in the overall market growth last year in 2023, which continued into 2024. However, we do expect modest unit growth here in 2024, but there will be a component of price in the overall growth equation this year in the industry.
Brad: Disclose the breakout of price volume, but I would characterize it is as you know we definitely saw some price in the overall market growth in last year in 2023.
Brad: Which continued into 2024.
Brad: However, we do expect modest unit growth here in 2024, but there will be a component of price and the overall.
Brad: Growth equation this year in the industry.
David M. Hession: Okay, great. And then, on slide four, you talked about signs of a market reset, I think, in the specialty vehicle market. Is that something that you see coming as far as OE production levels, or is that something that's sort of already reflected in what's going on in specialty vehicle sales? Well, I would say, Brett, that, you know, we see it.
Speaker Change: Okay, Great and then I think on slide four where you talked about signs of market reset I think in the specialty vehicle is that something that you see coming as far as the OE production levels or is that something that's sort of already reflected in what's going on in specialty vehicle sales.
Speaker Change: Well I would say Brett that we see it coming in terms of new vehicle sales. So there's still a meaningful portion.
Kevin M. Olsen: Well, I would say, Brett, that, you know, we see it coming in terms of new vehicle sales. There's still a meaningful portion of our sales that go on vehicles that are less than two years old. So obviously, when new unit sales are depressed, that is going to be a headwind. And we did see that, you know, unit sales were down in 23 versus 22. We believe that, as inventory levels in the channel have really increased and are at, probably over optimum levels, that discounting will ensue. And so we do expect it; new machine set sales will start to accelerate here as
Speaker Change: Of our sales that go on vehicles that are less than two years old. So obviously when new unit sales were depressed that is going to be a headwind for us.
Speaker Change: And we did see that unit sales were down 23 versus <unk> 22.
Speaker Change: We believe that.
As inventory levels in the channel have really increased in <unk>.
Speaker Change: At <unk>.
Speaker Change: Probably over optimum levels.
Speaker Change: That discounting will ensue and.
Speaker Change: So we do expect it.
Speaker Change: Machine, New machine sales will start to accelerate here as we move through the year.
Speaker Change: Okay great.
Speaker Change: Thank you.
Speaker Change: Thanks, Brett.
Speaker Change: Okay.
Scott Lewis Stember: Our next question comes again from the line of Mr. Scott Stember with MKM Partners. Your line is open.
Speaker Change: Our next question comes from the line again of Mr. Scott timber with MTN partners. Your line is open.
Kevin M. Olsen: Yeah, just circling back to heavy duty. You guys made comments about, I guess, that there's signs that we could be hitting a bottom and being cautiously optimistic about a 2H rebound. Is that just based on restocking completing itself and getting past the tough comparison, or are there other signs that actual end demand in the aftermarket is there?
Speaker Change: Yes.
Scott Lewis Stember: Just circling back to heavy duty you guys made comments about I guess that there are signs that we could be hitting a bottom and cautiously optimistic about our two H well.
Scott Lewis Stember: Rebound is that just based on restocking completing itself and getting past the tough comparisons or is there are there signs of the actual end demand in the aftermarket there are rebounding.
Speaker Change: I think it's a combination of both Scott clearly, we we believe that the inventory.
Kevin M. Olsen: I think it's a combination of both, Scott. Clearly, we believe that the inventory..., you know, the kind of reductions are starting to ease. We're seeing that our sequential sales were up from Q4. But you know, and frankly, we have a lot of market intelligence, we talk a lot to our customers, and the feel that we're getting is the second half will be a slight rebound over the first half, but to be honest, we're being very cautious in our approach, and we're really focused on cost initiatives, efficiency and productivity initiatives, and taking share initiatives on the commercial side. So we're well positioned when it does rebound.
Speaker Change: What kind of reductions are starting to ease.
Speaker Change: Seeing that there are.
Speaker Change: Sequential sales were up from.
Speaker Change: From Q4.
Speaker Change: But and frankly, a lot of market Intel we talk a lot to our customers.
Speaker Change: The feel that we're getting is the second half will be a slight rebound over the over the first half but to be honest, we're being very cautious.
Speaker Change: And our approach.
Speaker Change: And we're really focused on.
Speaker Change: Cost initiatives efficiency and productivity initiatives and taking share initiatives on the commercial front. So we're well positioned when it does rebound.
Speaker Change: Got it.
David M. Hession: In this last question on capital deployment, it looks like you guys are back in the market, buying back stock but also paying down debt. What's your optimal leverage ratio that you want to be at? And should we expect the share of purchases to increase as you get closer to that optimal leverage?
Speaker Change: And this last question on capital deployment. It looks like you guys are back in the market.
Speaker Change: Buying back stock, but also paying down debt, what's your optimal leverage ratio that you're one of the at and should we expect.
Speaker Change: Share repurchases to increase as you get closer to that optimal leverage ratio.
Speaker Change: Yes, Scott our capital allocation strategy has been pretty consistent with.
David M. Hession: Scott, the capital allocation strategy has been pretty consistent with where we've been historically. So, the first thing we'll look at is leverage. In the quarter, we finished at 1.61, down from 1.87 last quarter.
Speaker Change: Where we've been historically so first thing we will look at it leverage during the quarter. We finished at $1 six one.
Speaker Change: Down from 187 last quarter.
David M. Hession: That's the first place we'll look. The second place is internal investment. We invested some cash in CapEx there in the quarter. M&A is next. No M&A this quarter. Then we'll look to see what we do with the excess cash. We'll look at our models. We thought it was a good opportunity this quarter to invest some money in a share buyback. We bought $27 million back at about 310,000 shares at $85. I thought that was a pretty good return for our shareholdings. So we look for a balanced approach, Scott. That's what we did in the quarter. As we move forward, we'll use the same approach.
Speaker Change: The first place, we'll look second places internal investment.
Speaker Change: Some cash in that Capex there in the quarter.
Speaker Change: M&A snacks no M&A this quarter and then we will look to see where do we what do we do with the excess cash we'll look at our models and we thought it was a good opportunity this quarter to invest some money in.
Speaker Change: Share buyback.
Speaker Change: We bought $27 million back.
Speaker Change: 310000 shares at $85 thought that was a pretty good return for our shareholders. So we look for a balanced approach Scott is what we did in the quarter as we move forward, we'll use the same approach.
Speaker Change: Got it Thats all I have thank you.
Scott Lewis Stember: Got it. That's all I have. Thank you.
Speaker Change: Thanks Scott.
Bret David Jordan: Another question comes from the line of Bret Jordan with Jeffries. Your line is open.
Speaker Change: Another question comes from the line of Bret Jordan with Jefferies. Your line is open.
Bret David Jordan: Hey, guys I think you've commented about investing in supply chain diversification as well could you maybe give us an update what you're seeing there and what markets are seeming attractive and when you might begin to sort of drive.
Bret David Jordan: Hey guys, I think you've commented about investing in supply chain diversification as well. Could you maybe give us an update on what you're seeing there and what markets are seeming attractive, and when you might begin to sort of source from markets outside of your traditional channel?
Bret David Jordan: The source from markets outside of your traditional channel.
Bret David Jordan: Yes, Brad Good question, Kevin Yes, we.
Kevin M. Olsen: Yeah, Bret, good question. It's Kevin.
Brad: We took on that initiative, Brett a few years ago, where we really started to look strategically at our supply chain.
Kevin M. Olsen: Yeah, we took on that initiative, Bret, a few years ago where we really started to look strategically at our supply chain. Obviously, COVID and the supply chain disruptions really accelerated our efforts there. We are, I would characterize it still as the early innings in terms of diversifying our supply chain. We've made significant progress, really, there isn't any one area that we're focused on; it's really around the globe, other Pacific Rim countries, Eastern Europe, Mexico, India, there's a lot of places that we have successfully moved supply to, but it's going to be a, it's going to be But I would tell you that, to date, we're very pleased with the progress that we've made. Great, I appreciate it, thank you.
Bret David Jordan: Great, I appreciate it. Thank you.
Brad: Obviously COVID-19 in the supply chain disruptions really.
Brad: Accelerated our efforts there.
Brad: We are I would characterize as still as early innings in terms of diversifying our supply chain, we've made significant progress.
Brad: Really there are no.
Brad: There isn't any one area that we're focused on is really around the globe. So.
Brad: Other pack room.
Brad: Countries Eastern Europe, Mexico.
Brad: India, There's a lot of places that we have successfully moved supply too.
Brad: But it is going to be it's going to be a long.
Brad: Long haul.
Brad: I would tell you that to date, we are very pleased with the progress that we've made.
Speaker Change: Great appreciate it thank you.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for China, you may now disconnect.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining us. You may now disconnect.
Speaker Change: Okay.