Good morning and thank you for standing by. Welcome to the Dorman Products First Quarter 2024 Earnings Conference Call. 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.

Thank you. Good morning and welcome to Dorman's First Quarter 2024 Earnings Conference Call. 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. 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 laws. 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'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 the appendix to this earnings call presentation, both of which can be found on the Investor Relations section of Dorman's website.

Thanks, David. Good morning 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 and provide a deeper dive into Dorman's new-to-the-aftermarket innovation engine, which is the core capability that links our three segment strategies together. Q1 was another 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 margin, 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 prior year. Free cash flow of $41 million was very strong, and we deployed cash to repay $15 million of debt and repurchased $27 million of our shares. Our new product teams across all three segments continued to turn out new product growth by introducing over 1,400 new products to the market, many as aftermarket exclusives. Moving on to segment observations, in Light Duty, we continue to be encouraged by the positive overall market trends. Vehicle miles driven and the average age of vehicles continues to increase. Both are significant tailwinds for the aftermarket. 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 up high-single digits after starting the year off slowly. New products continued to benefit the business, including our patented oil filter housing, which proved to be a top performer for the quarter. Finally, our operations initiatives continue to drive significant value. Our investments in automation and optimization enabled 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. This naturally leads to fewer vehicle repairs. As expected, we also saw the destocking of inventory that started in the second half of 2023 continue into the first quarter of 2024. This environment, coupled with a strong Q1 2023 comparison, led to negative first quarter growth versus prior year. Sequentially, however, Q1 sales were slightly higher than Q4 2023. While we take this sequential improvement as a positive sign, we remain cautious in our outlook for the remainder of the year. In terms of initiatives, we're seeing 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 centers. Finally, in Specialty Vehicle, 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 once financing rates for new vehicles and consumer sentiment improve. Over the long term, we're confident that demand for new vehicles, accessories and repair parts remains robust. 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 capabilities. We're proud of our innovation model and the value it creates for our contributors, customers and our shareholders. It all starts with ideation, which means being the first to identify a failure-prone part, first to imagine and reengineer a solution that yields not only a repair part, but also a solution that simplifies the repair challenges of the technician and gets the vehicle back on the road quickly. 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. We have both advanced in-house capabilities in all vehicle systems, which allows us to quickly engineer solutions, and a vast network of supply partners, which 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. We've had great success implementing our innovation approach in our Heavy Duty and Specialty Vehicle businesses. Our new product innovation engine is yielding results. Over the last three fiscal years, we brought over 19,000 new SKUs to market across our three segments, with roughly 30% of those parts new to the aftermarket, meaning at launch, they were only available from Dorman or the OEM.

Thanks, Kevin. Turning to our Q1 financial performance, 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 market. Our Q1 adjusted gross margin was 38.7%, a 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 improvement. 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. Finally, adjusted diluted EPS in Q1 was $1.31, a 134% increase versus last year. The growth was mainly due to the increase in adjusted operating income, coupled with the lower interest expense after four consecutive quarters of debt repayments, partially offset by a higher tax rate. Moving to a review of our segment results, starting with Light Duty, net sales were $359 million, a 3% increase year-over-year. Sales started the year soft but strengthened through the quarter as customer POS growth accelerated, while the gap between POS and shipments narrowed. 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. Light Duty adjusted operating margin was 16.1% in Q1, a 990 basis point improvement year-over-year. Sales of lower-cost inventory and the results of cost saving initiatives contributed to the margin improvement. Regarding Heavy Duty, net sales were $58 million in Q1, a 15% reduction year-over-year. Q1 was up against a strong prior year comparable driven by the tail end of the COVID-driven inventory restocking by customers. As in the Light Duty business, the trend was positive through the quarter, with the year-over-year sales gap in March smaller than in January. Shifting to Specialty Vehicle, 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. This dynamic impacts the dealer channel, which remains a challenging market, particularly for accessories and first-fit upgrades. We believe that our initiatives to expand our dealer footprint and drive sales to new dealers enabled us to capture share in a flat market. Next, our Q1 free cash flow was $41 million, an increase of $26 million from the prior year. The improvement was largely attributable to a $27 million increase in net income, countered slightly by timing-driven movements of some working capital accounts. We made capital expenditures of $11 million, consistent with the prior year. 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. As of March 30, our net debt was $528 million, a reduction of $12 million from Q4. Our net leverage ratio was 1.61x adjusted EBITDA, down from 1.87x in Q4. Our current leverage is comfortably below our long-term target ceiling of 2x, or less than 3x in the first year following an acquisition. Additionally, we had $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. Our first quarter performance was in line with our expectations. Light Duty experienced 3% growth, but shipments still lagged customer POS, a gap we expect to align more closely over the remainder of the year. Our Heavy Duty business is still negatively impacted by a soft trucking market, and 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 end markets will continue to face challenges, but the team is focused on taking share through new product launches geared around nondiscretionary repair parts, adding new direct-to-consumer customers, and building new dealer relationships. 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, or 19% to 26% increase over the prior year.

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 businesses and that end users rely upon for a satisfying repair or upgrade experience. 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 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.

Your first question comes from the line of Scott Stember with MKM Partners.

David, you were talking about there being some destocking in the quarter in light vehicle, but it sounds like end demand is still very, very strong. When do you expect to be back to a 1-for-1 setup, sell-in to sell-through in Light Duty?

Scott, it's Kevin. I'll handle that one. We definitely had a difficult start to the year. January, we saw POS in that low-single-digit range. But we did see that pick up as we moved through the quarter. 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 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 innings in terms of closing that gap.

Next question on the Specialty Vehicles. You've been talking about your brake fix initiative, I guess, trying to sell more pure aftermarket sales. Could you just give us an update about the percentage of sales that brake fix is, where it was when you first acquired SuperATV?

Sure. When we acquired SuperATV, Scott, we saw an opportunity to build out nondiscretionary repair parts and expand the business geographically. I would say that the last 18 months we executed on those initiatives and exceeded what we had laid out pre-acquisition in terms of execution. Roughly right now, about half the business we would characterize as nondiscretionary repair parts, which is up from pre-acquisition.

Our next question comes from the line of Bret Jordan with Jefferies.

Could you talk about inflation in the period, how much pricing impacted, particularly on the Light Duty side, and what you're expecting for the year?

Yes, Bret, as you know, we don't disclose the breakout of price-volume, but we definitely saw some price growth in the overall market in last year, 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.

On Slide 4, you talked about signs of market reset in the Specialty Vehicle. Is that something that you see coming as far as the OE production levels? Or is that something that's already reflected in what's going on in Specialty Vehicle sales?

We see it coming in terms of new vehicle sales. There's still a meaningful portion of our sales that go on vehicles less than 2 years old. So obviously, when new unit sales are depressed, that's going to be a headwind for us. We believe that as inventory levels in the channel have really increased and are at optimal levels, discounting will ensue. We expect new machine sales to start to accelerate as we move through the year.

Our next question comes from the line of Mr. Scott Stember with MKM Partners.

Circling back to Heavy Duty, you guys made comments about there being signs that we could be hitting a bottom and cautiously optimistic about a second-half rebound. Is that based on restocking completing itself and getting past the tough comparisons? Or are there other signs that actual end demand in the aftermarket are rebounding?

I think it's a combination of both, Scott. Clearly, we believe that the inventory reductions are starting to ease. We're seeing that. Our sequential sales were up from Q4. A lot of market intel indicates that the second half will show slightly improved performance over the first half. But we remain cautious and focused on cost initiatives, efficiency, productivity initiatives, and taking share initiatives on the commercial front.

Last question on capital deployment. It looks like you guys are back in the market buying back stock while also paying down debt. What's your optimal leverage ratio that you want to be at? And should we expect share repurchases to increase as you get closer to that optimal leverage ratio?

Yes, Scott, the capital allocation strategy has been pretty consistent with where we've been historically. We first look at leverage; we finished the quarter at 1.61x, down from 1.87x last quarter. Next is internal investment. We invested cash in CapEx during the quarter. M&A is next; we had no M&A this quarter. Then we look to see what to do with the excess cash. We decided this quarter to invest in share buyback and bought back $27 million, approximately 310,000 shares at $85. That was a strong return for our shareholders. We look for a balanced approach.

Another question comes from the line of Bret Jordan with Jefferies.

You commented about investing in supply chain diversification as well. Could you give us an update on what you're seeing there and what markets seem attractive and when you might begin to source from markets outside of your traditional channel?

Yes, Bret, good question. We've been working on diversifying our supply chain for a few years, and COVID really accelerated our efforts. I would say we are still in the early stages of this initiative, but we've made significant progress. We are looking globally at various regions such as other Pac Rim countries, Eastern Europe, Mexico, and India. We have successfully moved supply to these areas, but it's going to be a long haul. I'm pleased with the progress we've made to date.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.