Q2 2025 Dorman Products Inc Earnings Call
Alex Whitelam: Good morning, and thank you for standing by. Welcome to the Dorman Products Q2 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. I would now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead.
Good morning, and thank you for standing by, welcome to the dormant products. Second quarter 2025 earnings conference call.
Alex Whitelam: Thank you. Good morning, everyone. Welcome to Dorman's Q2 2025 earnings conference call. I am joined by Kevin Olsen, Dorman's Chief Executive Officer, and David Hession, Dorman's Chief Financial Officer. Kevin will provide a quick overview of our recent performance, share our views across the business, and provide our updated guidance. Then, David will review the quarterly results. Kevin will then provide closing remarks before opening the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which 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 laws.
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 Alex Whitman, vice president of investor relations. Thank you sir. Please go ahead.
Thank you. Good morning everyone. Welcome to Dorman's. Second quarter 2025 earnings conference call. I'm joined by Kevin Olsen Dorman's, chief executive officer and David hessen Dorman's. Chief Financial Officer. Kevin will provide a quick overview of our recent performance. Share our views across the business and provide our updated guidance. Then David will review the quarterly results and Kevin will, then provide closing remarks before opening the call for questions.
By now, everyone should have access to our earnings release and earnings. Call presentation which are available on the investor relations portion of our website at dormanproducts.com.
Alex Whitelam: 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. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and in the appendix to this earnings call presentation, both of which can be found on the Investor Relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves to one question with one follow-up and to rejoin the queue if they have additional questions. With that, I will turn the call over to Kevin.
Before we begin, I'd like to remind everyone that our prepared remarks earnings release and investor presentation include forward-looking statements within the meeting of federal Securities laws.
We advise listeners to review the risk factors and cautionary statements in our most recent 10q, 10K and earnings release for important material assumptions, expectations and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking States.
We'll also reference certain non-gaap measures, reconciliations of these non-gaap measures to the most directly comparable. Gaap measures are contained in the schedules attached to our earnings release, and in the appendix, to this earnings call presentation, both of which can be found on the investor relations section of Dorman's website.
Kevin Olsen: Thanks, Alex. Good morning, and thank you for joining our Q2 2025 earnings call. As Alex mentioned, I will start with a high-level review of the results, along with observations within each of our segments, and then provide our updated guidance for 2025. Turning to slide three, I would like to briefly discuss our recent performance. David will provide more details, but we had another outstanding quarter with top and bottom line results that exceeded our expectations. Consolidated net sales for the second quarter grew 8% year-over-year to $541 million. Strong volume growth from increased customer demand, especially within the light-duty business, led our top-line growth. We also saw positive signs in our heavy-duty business, with slight year-over-year growth resulting from new business wins.
Finally, during the Q&A portion of today's call, we ask that participants limit themselves to 1 question with 1, follow-up and to rejoin the queue. If they have additional questions and with that, I'll turn the call over to Kevin.
Thanks Alex. Good morning, and thank you for joining our second quarter 2025 earnings call. As Alex mentioned, I'll start with a high-level review of the results along with observations, within each of our segments, and then provide our updated guidance for 2025.
Turning to slide 3. I would like to briefly discuss our recent performance.
David will provide more details, but we had another outstanding quarter, the top and bottom line results that exceeded our expectations.
Consolidated, net sales for the second quarter, grew 8% year-over-year with 541 million.
Strong volume growth from increased customer demand, especially within the light duty business LED our Topline growth.
Kevin Olsen: Weak consumer sentiment persisted through the second quarter, impacting our specialty vehicle business, but the team continues to do an excellent job managing through this downturn and positioning the business for future sales growth. We also delivered solid margin expansion in the quarter. Adjusted operating margin for Q2 2025 was 16.3%, a 70 basis point increase over last year's second quarter. The light-duty business was also the primary driver behind this margin improvement, largely due to strong demand in the quarter, as well as ongoing supplier diversification, productivity, and automation initiatives. The net sales growth and margin expansion we achieved resulted in a 23% year-over-year increase in adjusted diluted EPS, which was $2.06 for the quarter. Finally, operating cash flow in Q2 was $9 million, which was impacted by higher tariff costs and additional investments in inventory to support demand. David will discuss this in more detail shortly.
We also saw a positive signs in our heavy duty business with slight year-over-year growth resulting from new business wins.
Weak consumer sentiments. Persisted through the second quarter impacting our Specialty Vehicle business, but the team continues to do an excellent job managing through this downturn and positioning the business future sales growth
They also delivered solid margin expansion in the quarter.
Adjusted operating margin for Q2 2025 with 16.3% 70, basis point increase over last year's, second quarter,
Light duty business was also the primary driver behind this margin Improvement. Largely due to strong demand in the quarter, as well as ongoing Supply diversification productivity and automation initiatives.
The net sales, growth and margin expansion will be achieved, resulted in a 23% year-over-year, increase in adjusted diluted EPS, which was $2.66 for the quarter.
And finally, operating cash flow in Q2 was 9 million, which was impacted by higher tariff, costs and additional investments in inventory to support demand.
Kevin Olsen: Overall, we are pleased with our results in the second quarter and through the first half of 2025. This helps shape our expectations for continued momentum through the full year. Let me take a few minutes to cover our observations across each of our segments. I will start with the light-duty business on slide four. As I mentioned, the underlying macro trends remain positive. Vehicle miles traveled climbed higher year-over-year, and according to the latest industry reports, the average age of light-duty vehicles has increased to 12.8 years. These underlying factors led to strong volume growth year-over-year. We continue to see strong performance out of the new products that we've recently launched, especially those that are new to the aftermarket or address flaws in OE parts. These products typically drive higher sales and margins and, in some cases, include patented features that provide a competitive advantage.
David will discuss this in more detail shortly.
Let me take a few minutes to cover our observations across each of our segments.
I'll start with the light duty business on slide 4.
As I mentioned, the underlying macro Trends, remain positive vehicle miles, traveled climbed higher year-over-year and according to the latest industry reports, the average age of light duty Vehicles has increased to 12.8 years.
These underlying factors led to strong volume growth year-over-year.
We can continue to see strong performance out of the new products that we've recently launched, especially those that are new to the aftermarket or address flaws in OE parts.
Kevin Olsen: Also, keep in mind that the majority of our product portfolio is nondiscretionary in nature, which has enabled us to perform well throughout various economic cycles. Additionally, we view our asset-light model and the flexibility of our diversified supply chain to be key competitive advantages as we navigate through uncertainty in various trade and economic environments. In our heavy-duty segment, market pressures impacting the trucking and freight industry continued through the second quarter, especially as tariffs created uncertainty in the broader economy. Despite these market pressures, we achieved positive net sales growth in the quarter with new business wins. Looking forward, we remain cautious as market indicators continue to fluctuate and the trucking and freight industry remains somewhat unpredictable.
These products typically Drive higher sales and margins. And in some cases include patented features that provide a competitive advantage.
Also keep in mind that the majority of our product portfolio is non-discretionary in nature.
Which has enabled us to perform well throughout various economic Cycles.
Additionally, we view our asset light model and the flexibility of our Diversified supply chain to be key competitive advantages as we navigate through uncertainty, in various trade and economic environments.
In our heavy duty segment Market pressures, impacting the trucking and Freight industry continued through the second quarter.
Especially as tariffs created uncertainty in the broader economy.
Kevin Olsen: That said, we believe the long-term investments we've made in our product portfolio and productivity initiatives, as well as improvements we're making in the customer's front-end experience, will help drive sales growth and margin expansion when the sector begins to stabilize. In specialty vehicle, reluctant consumer spending continued to impact our performance through the second quarter. However, as we saw in the first quarter, we continue to see strong engagement with our UTV and ATV ridership, especially at the enthusiast events across the country we attend throughout the year. We expect that as the broader economy strengthens over time, the specialty vehicle business will continue to outpace the market with our expanded product portfolio, including nondiscretionary parts and new dealer relationships. Next, let's move on to slide five, and I'll spend some time talking about our updated guidance for 2025.
Despite these Market pressures, we achieve positive, net sales growth in the quarter, with new business wins looking forward. We remain cautious as market indicators continue to fluctuate and the trucking, and Freight industry remains somewhat unpredictable.
That said, we believe the long-term Investments we've made in our product portfolio and productivity initiatives as well as improvements, we're making in the customer's front-end experience.
Will help drive sales growth and margin expansion as the sector begins to stabilize.
And especially vehicle reluctant. Consumer spending continued to impact our performance in the second quarter. However, as we saw in the first quarter, we continue to see strong engagement with our UTV and ATV ridership.
Especially at the Enthusiast events across the country, we attend throughout the year.
We expect that as the broader economy strengthens over time, especially the vehicle business, it will continue to outpace the market of our expanded product portfolio, which includes non-discretionary parts and new dealer relationships.
Kevin Olsen: Considering the impact of tariffs on our financials, we are covering guidance upfront in our discussion today. Before we get into the numbers, we felt it was important that we reiterate the actions we're taking to mitigate tariffs. As we discussed on our last call, our approach to managing tariffs is multifaceted and largely in line with the approach we've taken when faced with inflationary environments in the past. First, we continue to diversify our supplier base and accelerate tariff cost reductions through our sourcing strategies. Second, we are driving solid savings by leveraging our scale and the deep relationships we have with our suppliers around the globe. Third, we are continuing to drive cost savings internally through automation and productivity initiatives.
Next, let's move on to slide 5 and I'll spend some time talking about our updated guidance for 2025.
Considering the impact of tariffs on our financials. We are covering guidance. Upfront in our discussion today.
Before we get into the numbers, we felt it was important that we reiterate. The actions we're taking to mitigate
Tariffs.
As we discussed on our last call, our approach to managing tariffs is multifaceted and largely in line with the approach we've taken with inflationary environments in the past. First, we continue to diversify our supplier base and accelerate tariff cost reductions to our sourcing strategies.
Second we're driving, solid savings, by leveraging our scale and the Deep relationships we have with our suppliers around the globe.
Kevin Olsen: Finally, we have been deliberate in our approach to implementing price increases to cover the net remaining cost from tariffs. We have been surgical on this front, keeping in mind the impact such price increases could have on our customers, their business, and our end users. These price increases will go into effect in the third quarter. In light of our strong performance through the first half of the year, our improved outlook for the remainder of 2025, and the expected impact of pricing and costs resulting from tariffs, we have increased our net sales and EPS guidance for the year. Please keep in mind that while we stand on more solid ground today compared to our earnings call last quarter, the trade situation remains fluid. Our updated guidance for 2025 is based on the tariffs that are currently enacted.
Third, we're continuing the drive cost savings internally through Automation and productivity initiatives. And finally, we've been delivering in our approach to implementing price increases cover. The net remaining cost from tariffs
We've been surgical on this front, keeping in mind the impact. Such price increases could have on our customers, their business, and our end users.
These price increases will go into effect in the third quarter.
In light of our strong performance through the first half of the year, our improved outlook for the remainder of 2025, and the expected impact of pricing and cost resulting from tariffs, we have increased our net sales and EPS guidance for the year.
Please keep in mind that while we stand on more solid ground today compared to our earnings call last quarter, the trade situation remains fluid.
Kevin Olsen: We may update our annual guidance in the future should any material changes to tariffs or trade disruptions significantly impact our business or alter our expectations. Starting with the top line, we now expect net sales growth to be in the range of 7% to 9% over 2024. This is an increase from our previous growth guidance of 3% to 5%. The increase in the range is comprised of three factors. First, our performance through the first half of the year has outpaced our original expectations, driven by strong volume demand and the positive underlying light-duty macro trends. Second, we are expecting incremental year-over-year volume growth through the remainder of the year based on continuing positive market conditions for our light-duty business. Finally, as I just mentioned, part of our approach to mitigating the impact of higher tariff costs was working directly with our customers on pricing.
Our updated guidance for 2025 is based on the tariffs that are currently enacted.
We may update our annual guidance in the future should any material changes to tariffs or trade disruptions significantly, impact our business or alter our expectations.
Starting with the top line, we now expect net sales growth to be in the range of 7% to 9% over 2024.
This is an increase from our previous growth. Guidance of 3% to 5%. The increase in the range is comprised of three factors.
Volume demand and the positive, underlying light duty macro trends.
Second. We are expecting incremental year-over-year, volume growth to the remainder of the Year. Based on continuing positive market conditions for our light duty business.
Kevin Olsen: This was a critical step in the process to help maintain our high level of service and fund the higher cost of inventory that was capitalized on our balance sheet immediately at purchase. Keep in mind there are customer notification periods when a price increase goes into effect, but we will see the contribution of higher prices begin to make an impact in the third quarter of 2025. Next, on the earnings front, we now expect adjusted diluted EPS to be in the range of $8.60 to $8.90, an increase from our previous guide of $7.55 to $7.85. Let me spend a few minutes on the nuances around this increase, including the timing dynamics and the role tariffs play in the change. As a reminder, we utilize a fight-full accounting methodology, and our inventory turns approximately twice a year.
Finally, as I just mentioned part of our approach to mitigating the impact of higher tariff costs was working directly with our customers on pricing.
This was a critical step in the process to help maintain our high level of service and fund the higher cost of inventory that was capitalized on our balance sheet immediately at purchase.
Keep in mind, there are customer notification periods when a price increase goes into effect.
So, we'll see the contribution of higher prices begin to make an impact in the third quarter of 2025.
Next on the earnings front. We now expect the Justice diluted EPS to be in the range of 8.6 to 8.90 and increase from our previous guide of $755.
$7.85.
Let me spend a few minutes on the nuances around this increase, including the timing Dynamics, and the role of tariffs play in the change.
Kevin Olsen: This generally results in a six-month timing lag between when cash is used to pay for inventory and when the higher cost is recognized in our profit and loss statement. As it relates to this year, while the increase in tariff costs on the inventory we purchased in Q2 had an immediate impact on our cash flow and balance sheet, the increase in cost of goods sold for this inventory is not expected to start impacting our P&L until Q4. Unlike cost of goods sold, net sales are recognized when incurred. As we mentioned, new pricing on tariffs will go into effect in Q3. Therefore, we expect tariff pricing to have a positive effect on net sales in Q3 without the impact of tariffs on cost of goods sold, resulting in a higher-than-normal gross margin level.
As a reminder, we utilize a fifo accounting methodology. In our inventory turns, approximately twice a year.
This generally results in a six-month timing lag between when cash is used to pay for inventory and when the higher cost is recognized in our profit and loss statement.
As it relates to this year, while the increase in tariff costs on the inventory repurchased in Q2 had an immediate impact on our cash flow and balance sheet, the increase in the cost of goods sold for this inventory is expected to start impacting our P&L until Q4.
Unlike cost of goods sold, net sales are recognized when incurred.
And as we mentioned, new pricing on tariffs will go into effect in Q3.
Kevin Olsen: Then in Q4, we expect to see gross margin come back down as we begin to recognize tariff costs and cost of goods sold to counter the effect of tariff pricing. As a result, we expect that the increase in our EPS range will be slightly weighted more to Q3 than Q4. Please note this additional color is to help align our view of the next two quarters with our analysts and investors for clarity, given the highly nuanced nature of tariffs and our current situation. With that, I will turn it over to David to cover our results in more detail. David?
therefore, we expect tariff pricing to have a positive effect on net sales and Q3 without the impact of tariffs on cost of goods, sold resulting in a higher than normal gross margin level.
Then in Q4, we expect to see gross margin come back down as we begin to recognize tariff costs and cost of goods sold to counter the effect of tariff pricing.
as a result, we expect that the increase in our EPS range will be slightly weighted more the Q3 and Q4,
Please note this additional color is the help. Align our view of the next 2 quarters with our analysts and investors for clarity.
Given the highly nuanced nature of tariffs, and our current situation.
David Hession: Thanks, Kevin. Let me kick off with our results for the second quarter on slide six. Consolidated net sales in the second quarter were $541 million, up 8% year-over-year. As Kevin mentioned, our net sales growth was driven by solid customer demand in our light-duty business, fueled by continuing positive macro trends and the strength of new products. Adjusted gross margin for the quarter was 40.6%, a 100 basis point increase compared to last year's second quarter. This margin expansion was a result of higher sales and a favorable mix of new products, along with our cost savings across the enterprise, driven by our supplier diversification, productivity, and automation initiatives. Adjusted SG&A expense as a percentage of net sales was 24.3%, up 30 basis points compared to the same period last year.
With that, I'll turn it over to David to cover our results in more detail. David.
Thanks Kevin. Let me kick off with our results for the second quarter on slide 6.
Consolidating that, sales in the second quarter were $541 million, up 8% year-over-year.
As Kevin mentioned, our net sales, growth was driven by solid customer demand in our light duty, business fuel by continuing positive macro Trends and the strength of new products.
Adjusted gross margin for the quarter was 40.6%, a 100 basis point increase compared to last year's second quarter.
This margin expansion was a result of higher sales and a favorable. Mix of new products along with our cost savings. Across the Enterprise driven by our supplier diversification productivity and automation initiatives.
David Hession: Adjusted operating income was $88 million for the second quarter, up 12% compared to the second quarter of 2024. Adjusted operating margin expanded 70 basis points to 16.3%, largely from the gross margin improvement I just discussed. Finally, adjusted diluted EPS in the second quarter was $2.06, up 23% compared to last year's second quarter. In addition to our operating income expansion, lower debt, a slightly favorable tax rate, and share count reduction from share repurchases over the last 12 months have all positively contributed to our adjusted diluted EPS growth. Next, let me provide updates on each of our business segments, starting with light duty on slide seven. Our light-duty business had another strong quarter, with net sales increasing 10% year-over-year in Q2. The growth was driven by strong customer demand, especially for our new products, with positive macro trends continuing through the second quarter.
Adjusted SG&A expense as a percentage of net sales was 24.3%, up 30 basis points compared to the same period last year.
Adjusted operating income was 88 million for the second quarter of 12%. Compared to the second quarter of 2024,
Adjusted operating margin expanded, 70 basis, points to 16.3% largely from the gross margin Improvement. I just discussed
Finally, adjusted diluted EPS in the second quarter was 2 dollars of 23% compared to last year's second quarter.
In addition to our operating income expansion, lower debt, a slightly favorable tax rate and share, count reduction, from share repurchases. Over the last 12 months have all positively contributed to our adjusted diluted EPS growth.
next, let me provide updates on each of our business segments, starting with light duty on slide 7,
Year in Q2.
David Hession: During the quarter, we delivered on certain customer programs, which resulted in higher shipment growth in the quarter compared to POS. That said, we are not seeing any significant overstocking from the inventory stock level data we received from our top customers. On the margin front, light duty did a nice job expanding margin. Segment operating margin increased to 18.5% for the quarter, a 140 basis point improvement over last year's Q2. This margin improvement was driven by supplier diversification, new product mix, and cost savings from our ongoing automation and productivity initiatives, along with higher leverage from our net sales growth. Now I will turn to heavy duty on slide eight. Market conditions broadly remain soft across the freight and trucking industry as tariffs continue to prolong the economic uncertainty that has weighed on the heavy-duty sector. Despite these market pressures, our business grew 1% for the quarter.
The growth was driven by strong customer demand, especially for our new products with positive. Macro Trends, continuing through the second quarter.
During the quarter, we delivered on certain customer programs which resulted in higher shipment growth in the quarter compared to POS.
That said, we're not seeing any significant overstocking from the inventory stock level data we received from our top customers.
On the margin. Front, light duty did a nice job, expanding margins segment, operating margin increased to 18.5% for the quarter. A 140 basis point improvement over last year's Q2
This margin Improvement was driven by supplier diversification. New product mix and cost savings from our ongoing Automation and productivity initiatives.
Along with higher leverage from our net sales growth.
Now, I'll turn to heavy duty on slide 8.
Market conditions, broadly remains soft across the freight and trucking industry as tariffs continue to belong to the economic uncertainty that is weighed on the heavy duty sector.
David Hession: This growth was largely the result of new business wins in categories where we believe we are gaining share. While we have seen positive signs within our customer base, uncertainty remains in the broader freight and trucking industry. Segment operating margin was slightly positive in the quarter at 80 bps, down year-over-year, largely on lower volume from the trucking and freight recession, along with the investments we have made in the business to drive long-term growth. While we were pleased with the new business wins in the second quarter, we expect we will see more significant margin improvement once a higher level of sales return as the market rebounds. We believe the investments we have made in new product development, productivity initiatives, and enhancing the front-end experience for our customers position us well to drive market share gains and margin expansion as the business operates with greater efficiency.
Despite these Market pressures, our business grew 1% for the quarter.
This growth was largely the result of new business wins in categories where we believe we're gaining share.
While we've seen positive signs within our customer base uncertainty remains in the broader Freight and trucking industry.
Segments, operating margin was slightly positive on the quarter at 80 basis points down. Year-over-year, largely on lower volume from the trucking and Freight recession. Along with the Investments we've made in the business to drive long-term growth
while we were pleased with the new business wins in the second quarter, we expect we will see more significant margin Improvement once higher level of sales returned as the market rebounds
We believe the investments we've made in new product development, productivity initiatives, and enhancing the front-end experience for our customers position us to drive market share gains and margin expansion as the business operates with greater efficiency.
David Hession: Moving to slide nine, the specialty vehicle team did a nice job managing market challenges with weakened consumer sentiment from tariffs and economic uncertainty. While net sales declined 3% compared to last year's second quarter, we continue to see participation at various enthusiast events and UTV and ATV ridership activity and engagement remaining strong overall. We expect that as the broader economy stabilizes and as consumer borrowing rates improve, riders will come off the sidelines to invest in new machines requiring upgrades and in retooling and repairing their existing machines. We also expect our expanded portfolio of new products, along with our broader access across the dealer channel, will help us better reach our customers and continue to capture market share. Despite market pressures in the quarter, the specialty vehicle team did an excellent job on the margin front.
Moving to slide 9 the Specialty Vehicle. Team did a nice job managing Market challenges with weakening consumer sentiment from tariffs and economic uncertainty.
On net sales decline 3% compared to last year's second quarter, we continue to see participation at various Enthusiast events in UTV and ATV ridership activity and engagement remaining strong overall.
We expect that as the broader economy stabilizes. And as consumer borrowing rates improve Riders will come off the sidelines to invest in new machines. Requiring upgrades and retooling and repairing their existing machines.
We also expect our expanded portfolio of new products. Along with our broader access across the dealer channel, will help us better reach our customers and continue to capture market. Share
David Hession: We remain focused on continuing to drive higher volume, diversifying our supply chain, and executing on our productivity initiatives to expand our margins in this business. Turning to cash flow on slide 10. During the quarter, our cash flow was impacted by the investment we made in additional inventory to support our customers, along with higher costs resulting from tariffs. As Kevin mentioned, higher tariff costs that started in April were immediately capitalized in our balance sheet. This led to operating cash flow of $9 million compared with $63 million in Q2 2024 and $51 million in Q1 2025. Given the uncertainty created in the market at the beginning of the quarter due to tariffs, we paused share repurchases to preserve our cash position. We also saw slightly reduced capital expenditures in the quarter as a result of timing, which led to slightly positive free cash flow.
Despite Market pressures in the quarter, the Specialty Vehicle team. Did an excellent job on the margin front.
We remain focused on continuing to drive higher, volume diversifying our supply chain, and executing on our productivity initiatives to expand our margins in this business.
Turning to cash flow on slide 10.
During the quarter, our cash flow was impacted by the investment. We made in additional inventory. To support our customers along with higher costs. Resulting from tariffs.
As Kevin mentioned, higher tariff costs that started in April were immediately capitalized in our balance sheets.
This led to operating cash flow of $9 million, compared with 63 million, in Q2 2024, in 51 million, in q1 2025.
Given the uncertainty created in the Market. At the beginning of the quarter, due to tariffs, we paused share repurchases to preserve our cash positions.
David Hession: I think it's important to note that the liquidity position that we've built up over the last several years has positioned us well to manage this significant cost increase while maintaining our ability to fund the business. Please note that our long-term capital allocation strategy has not changed. We'll continue to manage our debt levels and leverage ratio, then look to invest internally, as that is where we get our greatest returns. We'll also continue to pursue strategic growth through mergers and acquisitions. Finally, we'll continue to opportunistically repurchase shares to return capital to our investors. On slide 11, we highlight much of what we've already covered over the last two quarters, which is that we believe we have the balance sheet capacity and liquidity to manage higher tariff costs and continue to invest in strategic growth opportunities.
We also saw slightly reduced Capital expenditures in the quarter, as a result of timing, which led to slightly positive free cash flow.
I think it's important to note that the liquidity position that we've built up over the last several years has positioned us well to manage this significant cost increase while maintaining our ability to fund the business.
Please note that our long-term capital. Allocation strategy has not changed. We'll continue to manage our debt levels and leverage ratio then look to invest internally. As that is where we get our greatest returns.
Investors.
David Hession: As you can see, net debt was $406 million, and our net leverage ratio was one times adjusted EBITDA at the end of the quarter. Additionally, our total liquidity was $656 million at the end of the quarter, up from $642 million at the end of 2024. Again, we expect the strength of our balance sheet will prove to be a competitive advantage and a key driver of our success as we work our way through this current cycle. With that, I'll now turn it back over to Kevin to conclude. Kevin?
On slide 11, we highlight much of what we've already covered over the last two quarters, which is that we believe we have the balance sheet capacity and liquidity to manage higher tariff costs and continue to invest in strategic growth opportunities. As you can see, net debt is $406 million, and our leverage ratio was 1 times adjusted EBITDA at the end of the quarter.
Additionally, our total liquidity was 656 million at the end of the quarter up from 642 million at the end of 2024.
Again, we expect the strength of our balance sheet will prove to be a competitive advantage and a key driver of our success as we work our way through this current cycle.
Kevin Olsen: Thanks, David. I'll finish up on slide 12 before we move into Q&A. Just to reiterate what has already been said, we had a strong second quarter and were pleased with our performance through the first half of the year. While uncertainty exists, we believe our business is well-positioned to deliver significant growth in 2025, and we're excited for what lies ahead. With a more diversified supply base, strong relationships with our customers and end users, a leading product portfolio, and a strong financial profile, we feel as though Dorman Products has never been better positioned for the future. We'll continue focusing on what we can control and driving long-term growth. With that, I would now like to open up the call for questions. Operator?
With that, I'll now turn it back over to Kevin to conclude Kevin.
Thanks, David. I'll finish up on slide 12 before we move into Q&A.
Just to reiterate, what was already been said.
We had a strong second quarter and we're pleased with our performance to the first half of the year.
While uncertainty exists. We believe our business is well positioned to deliver significant growth in 2025.
Ever excited for Elise ahead.
With a more Diversified Supply base, strong relationships with our customers and end users, a leading product portfolio and a strong financial profile.
We feel as though, dormant has never been better positioned for the future. We'll continue focusing on what we can control and driving long-term growth with that. I would now like to open up the call for questions, operator.
Alex Whitelam: At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We will pause for just a moment to compile the Q&A roster. Your first question comes from Scott Stember with ROTH Capital Partners. Please go ahead.
at this time, if you would like to ask a question, press star, then the number 1 on your telephone keypad,
To withdraw your question, simply press star 1 again.
We will pause for just a moment to compile the Q&A roster.
Jack (for Scott Stember): Hey, guys. Good morning. This is Jack on for Scott. I wanted to ask about the heavy-duty segment, specifically about what are the incremental margins for every dollar of sales recovery, as I see it turn positive this quarter. Also, what are normalized heavy-duty margins? When do you kind of expect this to get back to the normalized level? Thank you.
Your first question comes from Scott, stember with Roth Capital Partners, please go ahead.
Hey guys. Good morning. This is Jack on for Scott. Um, I wanted to ask about the heavy duty segment. Um, specifically about what the incremental margins are for every dollar of sales recovery. Um, as I see it, it turned positive this quarter.
Kevin Olsen: Thanks, Jack. It's Kevin. Great question. I believe we've talked a little bit about this in the past, but in our heavy-duty business, we're weighted more on the manufacturing side versus being much more asset-light in the other two segments. So when volume is challenged in heavy-duty, we do face more absorption issues. So when we do have growth, like you mentioned in the quarter, we will leverage that very well. When we get back to kind of normalized levels, we expect this business to be a mid-team operating profit business. We have, before the downturn, we were demonstrating those levels.
Um, and also like what our normalized. Um, heavy duty margins, when do you kind of expect? Um, this to get back to the normalized level. Thank you.
Thanks, Jack. It's Kevin, great question. I believe we've we've talked a little bit about this in the past but in our heavy duty business, uh, were weighted more, uh, on the manufacturing side versus being uh, much more asset light and the other 2 segments,
Uh, so when volume is challenged and heavy-duty, we do face more absorption issues.
Um so when we do have growth like like you mentioned in the quarter, we will leverage that uh, very well. You know, when we get back to kind of normalize levels, um we expect this business to be a mid team operating profit business.
Uh and we have, you know, before the downturn we we were demonstrating those levels.
Jack (for Scott Stember): Great. Then just on tariffs, what do you see the impact, by segment, if you can break that out? I guess notably in specialty and heavy-duty, has that been more difficult to get price increases through, more than light-duty?
Great. Um, and then just on terrorists. Um, what do you see kind of the impact? Um, by segment, if you can break that out, um, I guess notably in specialty, and heavy duty, has that been more difficult to, um, get prices, uh, price increases through, um, more than light duty?
Kevin Olsen: Let me just characterize. It is Kevin again. I will just characterize the tariff impact by the segments. We are not disclosing the specific impacts by segment. I would say that on the light-duty side, we have a very diversified supply chain there. So, we believe we have less exposure than the overall aftermarket in general. So, we think compared to a comp set, we are in a competitive advantage because of that. Heavy-duty really is a very modest impact from tariffs. So, when we kind of look at around the industry and who we compare to, we believe we are very well positioned. A similar situation in the specialty vehicle segment. We do have exposure to China, but we also have a large manufacturing footprint in Madison, Indiana.
I let me just character as as Kevin again, jack. I'll just characterize the Tariff impact, uh, by the segments. We're not disclosing. The the specific impacts by segment. I would say that, you know, on the light duty side um,
We have a very diversified supply chain there, so we believe we have less exposure than the overall aftermarket in general. Um, so we think, you know,
Compared to a comp set, we were in a competitive advantage because of that.
Heavy duty, uh, really is a very modest impact from tariffs.
Um, so when we kind of look at around the the industry and who we compared to we we believe we're very well positioned.
Kevin Olsen: When we look at that industry, it is very heavily weighted to China, so we think we are in a good competitive situation there as well.
Um, in a similar situation in the Specialty Vehicle segment, you know, we do have exposure to China. Uh, but we also have a large manufacturing footprint in Madison, Indiana.
Um, and when we look at that industry, uh, it's very heavily weighted to China. So we think we're in in a good competitive situation there as well.
Jack (for Scott Stember): Very helpful. Thank you, guys.
Very helpful. Uh, thank you, guys.
Alex Whitelam: Your next question comes from Bret Jordan with Jefferies. Please go ahead.
Bret Jordan: Hey, good morning, guys.
Your next question comes from Brett. Jordan with Jeffrey's, please go ahead.
Jack (for Scott Stember): Morning, Brett.
Hey, good morning, guys.
Bret Jordan: Good morning. Could you talk a little bit more about light-duty, customer POS sort of sell-in versus sell-out? I think you said it wasn't dramatically different, but was there any bias to buy inventory ahead of price increases?
Did you did you talk a little bit more about light duty? Uh, customer POS sort of sell in versus sell out. I think you said it wasn't dramatically different, but was there any bias to buy inventory ahead of price increases?
Kevin Olsen: Overall, Bret Jordan, POS in the quarter, we did have a gap in terms of sell-in and sell-out. Sell-out or POS, as we've talked about in the past, was actually low single digit in the quarter. But there was a lot of nuance to that. We had a very difficult comp as we look at last year. It was very strong in the second quarter last year. But when you look at it for a kind of a sequential basis, POS was very similar in dollars to where it's been the last few quarters. When you adjust for that comp issue, Bret Jordan, POS was more in line with the sell-in growth, which has been obviously very strong. I mentioned inventory. As you know, we do receive customer inventory data, and it really tells us it's in line with historical levels, particularly when you look at the inventory turns.
So, uh, overall, Brett PS in the quarter. Um, we did have a gap in uh, in terms of sell in, and sell out.
Sell out or POS as we talked about in the past it was actually low single digit in the quarter. Um but there was a lot of a lot of nuance to that. We had a very difficult comp as we look at last year was it was very strong in the second quarter last year. But when you look at it for, you know, kind of a
A sequential basis. PS was very um similar in dollars to where it's been the last few quarters.
when you adjust for that comp issue, Brett, um, PS was, was more in line with the sell and growth, which has been obviously very strong
Mentioned inventory. As you know, we do receive. Um,
Kevin Olsen: We haven't seen any major changes there. We haven't seen any significant buy-ahead of the tariffs so far.
Uh, customer inventory data uh and it really tells us it's it's in line with historical levels. Particularly when you look at the the inventory turns. Um, so we haven't seen any major changes there. We haven't seen any significant
Bret Jordan: Okay, great. Then I think you commented on new to the aftermarket product launch. I mean, talk about sort of the.
Um, buy ahead uh, of the tariffs so far.
Great. And then I think you commented on a new to the aftermarket product launch, and I mean talk about sort of the
Kevin Olsen: We lost you, Bret Jordan. I missed that question.
there.
Uh, we lost you Brad, I missed that question.
Bret Jordan: The cadence, the electronics.
Yeah, the
electronics.
Kevin Olsen: Yeah, Bret Jordan, could you try repeating that again? You're not coming through.
Bret Jordan: Okay. The Starlink systems don't work as well. We should talk to you.
Kevin Olsen: Yeah, I guess.
Bret Jordan: New to the aftermarket. Can you hear me okay?
Yeah. Brett still. Could you try repeating that again? You're not coming through. Oh okay, the Starling systems don't work as well. We should talk to you. Yeah.
I guess new to the aftermarket.
Can you hear me, okay?
Kevin Olsen: A little bit. Yeah. Go ahead. Try it again.
Bret Jordan: The pipeline of new to the aftermarket, the OE fixed product and complex electronics.
Kevin Olsen: Yeah. All right. Great question. When we look ahead, the funnel of new products is very robust. It is as strong as we have seen it. When we look at the composition of that funnel, obviously, as we have talked many times in the past, the composition of that funnel is becoming more and more complex, a lot more complex, a lot of electronic components, which for us, we obviously like to see. We believe that is a significant competitive advantage for us. So it remains a big part of our strategy to go after complex electronic components.
A little bit. Yeah, go ahead. Try it again. The the pipeline of new to the aftermarket uh the OE, fixed product and complex Electronics.
Yeah. All right. Great question. Um, when we look ahead uh The Funnel of new products.
Uh, is very robust. It's as strong as as we've seen it.
Um, and when we look at the composition of that funnel, um, obviously as we've talked many times in the past, the composition of that funnel is becoming more and more complex, a lot more complex, a lot, electronic components.
Which for us, we obviously like to see. We believe that is a significant competitive advantage for us.
Uh, so it remains a big part of our strategy, uh, to go after complex electronic components.
Bret Jordan: Great. Thank you.
Kevin Olsen: Got it.
Great. Thank you.
Alex Whitelam: Your next question comes from Justin Ages with CJS Securities. Please go ahead.
Got it.
Your next question comes from Justin Aegis with CGS Securities. Please go ahead.
Jeremy (for Justin Ages): Hi. It's actually Jeremy on for Justin Ages. Thanks for taking the time to answer questions. Another solid quarter in margin growth for light-duty. I know you guys touched on it briefly, but can you elaborate a little more on some of the initiatives that continue to drive this margin growth?
Hi. It's actually Jeremy on for Justin. Thanks for taking the time to answer questions. Um, another solid quarter and, uh, margin growth for light duty. I know you guys touched on it briefly, but can you elaborate a little more on some of the initiatives that continue to drive this margin growth?
David Hession: Yeah. Hey, it's David. The margin growth for the business has been a strong focus over the last several years, and we've had great progress. The drivers of it are supply chain diversification. It's diversifying our supply chain, productivity in our distribution centers and across the organization, as well as automation effort. Pretty consistent with what we've been talking about the last several quarters, and we continue to drive solid results.
Kevin Olsen: Yeah. I'll also add that new product has been a significant driver. It's a huge focus for us, particularly new to the aftermarket parts, which again, are only available through Dorman and the OE dealer network. Those typically are our highest margin products when we bring them to market, or it can be OE fixed where we're actually designing out the original flaw in the OE part. So that continued focus and the continued growth of the sweet spot, which is the 8 to 7 to 14-year-old vehicle, has continued to be able to drive accretive margins for us.
Yeah. Hey, it's uh, it's David. Yeah, the um margin growth is for the business, been a strong Focus over the last several years, and we've had great progress, the uh, the drivers of it are supply chain diversification. It's diversifying our supply chain, uh, productivity in our, um, distribution centers and across the organization as well as automation effort. Um pretty consistent with what we've been uh talking about the last several quarters. And uh we continue to drive a solid results.
Yeah, I I'll also add that new product uh has been a significant driver. Um, you know, it's a it's a huge Focus for us particularly uh new to the aftermarket parts, which again are only available through doorman in the OE dealer, uh, Network those typically are a higher highest margin.
Uh, products when we bring them to market, um, or it can be OE fix where we're actually. Um,
Of The Sweet Spot which is, you know, the 8 to 4 the 7, the 14 year old vehicle uh has continued to be able to, you know, drive a creative margins for us.
Jeremy (for Justin Ages): I appreciate it. Switching gears a little, would you just talk and give us some more detail on how you guys are thinking about the capital allocation strategy?
I appreciate it. And then, Switching gears a little, would you just talk? Uh, and give us some more detail on how you guys are thinking about the capital allocate allocation strategy.
David Hession: Yeah, it's a great question. The capital allocation strategy is consistent with what it's been over the last several years. The first thing we do is look to manage our debt, our leverage targets up against our internal target of two times, three times in the first year following an acquisition. After we look at that, the first place we'll look is internal investment where we get our greatest returns. Second is strategic in M&A, mergers, and acquisitions. Then third, opportunistically, we look to buy back shares and get capital back to our shareholders. Like I said, that's the allocation strategy, pretty consistent with what it's been.
Yeah, it's a great question. So the capital allocation strategy is consistent with what? It's been over the last several years. Got the first thing we do is look to manage our debt and our leverage targets up against our uh internal Target of 2 times, 3 times in the first year following an acquisition. So after we look at that, the first place, we'll look is internal investment to where we get our greatest returns. Uh, second is uh, is strategic uh, in m&a mergers and Acquisitions. And then third opportunistically, we look to get shares uh, to buy back shares and get Capital back to our shareholders. So like I said, the that's the allocation strategy, pretty consistent with what it's been.
Jeremy (for Justin Ages): Super helpful. Thank you. Congrats on a good quarter.
Kevin Olsen: You got it. Thank you.
Super helpful. Thank you. Congrats on a good quarter.
You got it. Thank you.
Alex Whitelam: Ladies and gentlemen, we have reached the end of the question and answer session. This will conclude today's call. Thank you all for joining. You may now disconnect.
Ladies and gentlemen, we have reached the end of the question and answer session. This will conclude today's call, thank you all for joining you may now disconnect