Good morning, and thank you for standing by. Welcome to the Dorman Products Third Quarter 2025 Earnings Conference Call. Please note that this conference is being recorded. I'd now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's Third Quarter 2025 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chief Executive Officer; and David Hession, Dorman's Chief Financial Officer. Kevin will provide a quick overview, along with an update on each of our business segments and their respective markets. Then David will review the consolidated results and our guidance before turning it back over to Kevin for closing remarks. After that, we'll open the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available on the Investor Relations portion of our website at dormanproducts.com. Before we begin, I'd 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 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 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 third quarter 2025 earnings call. As Alex mentioned, I'll start with a high-level review of the results along with an update on our segments and market observations for each before turning it over to David. Let me start on Slide 3. First, I'd like to thank our contributors for all their hard work and dedication this year, which allowed us to execute exceptionally well and deliver for our customers. In the third quarter, we drove strong top and bottom line growth. Consolidated net sales were $544 million for Q3, up 7.9% year-over-year. This growth was primarily driven by tariff-related pricing actions that took effect in the quarter, which we covered in detail during our last earnings call. Additionally, we saw solid POS growth in the quarter which was up mid-single digits year-over-year. As we expected and discussed previously, we delivered strong margin growth in the quarter. This was largely driven by the timing dynamics of pricing and costs associated with tariffs. As a reminder, while the majority of our price increase went into effect in the third quarter, the inventory that we purchased in Q2 comes with higher tariff-related costs that will begin to impact our income statement in the fourth quarter of this year. As a result, we expect a lower gross margin in Q4 compared to Q3. Adjusted operating margin for Q3 2025 was 20.5%, a 340 basis point increase over last year's third quarter. Adjusted diluted EPS grew 34% year-over-year to $2.62 which, again, was driven by our growth, margin expansion and the timing dynamics of pricing and costs related to tariffs. Finally, operating cash flow was $12 million, and free cash flow was $2 million in the quarter. While this is a slight improvement over Q2, our cash flow continues to be impacted by higher tariff costs. David will discuss this in more detail shortly. So while there were some timing subtleties within the quarter, we're pleased with our performance and expect to continue delivering strong year-over-year growth for our shareholders. Next, I'll provide our results for each of our business segments. I'll also dive into our market observations and share some highlights for each. Starting on Slide 4, our Light Duty business had another strong quarter with net sales increasing 9% year-over-year in Q3. The growth was primarily driven by tariff-related pricing actions that took effect in the third quarter. POS more closely aligned with our net sales up mid-single digits year-over-year. And similar to last quarter, we're not seeing any significant oversupply in the inventory data we have from our largest customers. On the margin front, Light Duty delivered a 470 basis point gain in operating margin, driven primarily by tariff-related pricing as well as the impact of our supplier diversification initiatives. Looking across the Light Duty market, macro trends continue to remain positive. The vehicle miles traveled increasing year-over-year. However, uncertainty in the market related to tariffs and trade dynamics continues to persist. We're closely monitoring the environment and continue to work with our suppliers and customers as part of our overall tariff mitigation strategy. And while it appears that inflationary pricing has started to reach our end users, we remain confident in our ability to drive long-term growth as nondiscretionary repair parts have historically performed well through various economic cycles. We also thought it would be helpful to provide some business insights and highlight new products and updates across our segments. In the Light Duty business, we recently launched an electronic power steering rack for specific Ram truck models from 2013 to 2024. This is a first aftermarket part and the only available option in the independent aftermarket that is manufactured new. This product is a great example of our capabilities within complex electronics given the functionality and integration of various systems throughout the vehicle. The EPS rack is an OE fixed component with significant upgrades compared to the original manufacturer's part and designed to ensure a long, reliable service life. Electronics within have been redesigned with added service protection and an improved layout to reduce heat and electrical interference. Additionally, protective coatings have been applied to resist contamination from water, salt dust and other harmful contaminants. It has also been designed for simple, seamless installation with no dealer programming needed. This product is a culmination of extensive complex cross-functional work with our engineering teams. So I'd like to congratulate everyone involved. Next, let me turn to Slide 5 for updates on our Heavy Duty business. Net sales grew 6% year-over-year in the third quarter. While market conditions continue to pressure the segment, the team executed on the pricing front and drove volume through new business wins. The benefit of higher net sales growth in the quarter was offset by lower manufacturing productivity, impacting margins, which were flat year-over-year. Longer term, we remain focused on driving a mid-teens operating margin profile for the Heavy Duty segment. Digging more into the broader trucking and freight market, it remains difficult to predict an inflection point. While we're pleased with the recent net sales growth over the last two quarters, we continue to see mixed signals across our customer channels, but we're hopeful that the worst is behind us, and we’ll see a turn in the coming quarters. Despite the headwinds, we continue to execute key initiatives to best position the business for the eventual rebound of the trucking and freight market. As an example, we just launched our redesigned website with an improved e-commerce platform that helps customers identify the right parts for the right applications and get our products to the right locations on time. We expect a new site, which has been designed with the next generation of heavy-duty repair professionals in mind will enable us to scale and be even more competitive with the help of its user-friendly interface and modern look and feel. On Slide 6, I'll provide an overview of the Specialty Vehicle segment. Top line growth was relatively flat year-over-year with continued market pressures in the quarter, including weak consumer sentiment from tariffs and interest rates remaining at higher levels. Operating margin was impacted by lower manufacturing productivity in the quarter as we proactively reduced production in our Chinese manufacturing facility in Q1 following a ramp-up of production in Q4 of 2024 to get ahead of tariffs. Long term, we are targeting a high-teens margin profile for the business. We remain focused on our innovative strategy and continuing to develop new products for both the current park and next-generation vehicles. Despite the challenging consumer sentiment during the quarter, UTV and ATV ridership remains strong, which is a continuation of the positive trends we've seen in prior quarters. We expect that as the economy continues to stabilize and interest rates further decline, riders will increase their spending on their vehicles. OEs have also commented that machine inventory is starting to normalize, which should bring stability to the end market. Speaking of new products, I wanted to highlight the 4-inch long travel kit that we introduced for Polaris XD 1500 models. This bundle widens the vehicle's wheelbase by a total of 8 inches, providing more stability and control on rough terrain. The kit is designed for more of a utility application, allowing operators to improve the rides that fit the work they do on a daily basis. This is a great example of a solution designed for those utilizing their vehicles for work, not just play. We continue to expand our portfolio of nondiscretionary utility-focused products to broaden our reach with new users. With that, I'll turn it over to David to cover our results in more detail. David?

Thanks, Kevin. Let me start with our consolidated results for the third quarter on Slide 7. Net sales in the third quarter were $544 million, up 7.9% year-over-year. As Kevin outlined, our net sales growth was driven primarily by tariff-related pricing initiatives. Positive macro trends in our Light Duty business and the success of our innovation strategy across all three segments remain foundational to the strong momentum of the overall business. Adjusted gross margin for the quarter was 44.4%, a 390 basis point increase compared to last year's third quarter. As Kevin mentioned, this margin expansion was driven by the timing dynamics of when price and costs related to tariffs are recognized in our income statement. Additionally, our supplier diversification efforts contributed to margin improvement in the quarter. We remain on track to reach our goal of reducing our overall supply from China to 30% to 40% as we exit 2025. Adjusted SG&A expense as a percentage of net sales was 23.9%, up 50 basis points compared to the same period last year. Adjusted operating income was $111 million for the third quarter, up 30% compared to last year's third quarter. Adjusted operating margin expanded 340 basis points to 20.5%, primarily from the improvement in gross margin I just discussed. Finally, adjusted diluted EPS in the third quarter was $2.62, a 34% increase year-over-year. In addition to the increase in operating income, lower interest expense positively impacted our adjusted diluted EPS growth, offsetting a higher comparable effective tax rate, given favorable discrete items in last year's third quarter. Turning to our cash flow on Slide 8. For the third quarter, our cash flow was impacted by the higher cost inventory, affected by tariffs. This led to operating cash flow of $12 million and free cash flow of $2 million in the quarter, which was a decline from last year, but a modest improvement from last quarter. We expect that free cash flow will rebound in the coming quarters. With tariff and trade uncertainty impacting parts of our business, we maintained our pause on share repurchases through the quarter. As always, we'll continue to monitor market conditions, along with the cash needs of the business and opportunistically repurchase shares to return capital to our shareholders as part of our broader capital allocation strategy, which remains unchanged. We also believe we remain well positioned to fund our strategic growth initiatives, given our strong liquidity position, which I'll cover on the next slide. Slide 9 reiterates what we've been saying for a number of quarters now. Our asset-light nature and long track record of generating strong levels of cash flow have enabled the liquidity position and balance sheet capacity that allow us to manage higher cost inventory while still investing in strategic growth opportunities. As you can see, at the end of the quarter, net debt was $401 million and our net leverage ratio was 0.92x adjusted EBITDA. Additionally, our total liquidity was $654 million at the end of September, up from $642 million at the end of 2024. Again, we expect the strength of our balance sheet will stand as a competitive advantage and a key driver of our success going forward. Finally, let me discuss our guidance for 2025 on Slide 10. With our strong performance through the first nine months, we have reaffirmed our net sales and EPS guidance ranges for the year. Our guidance for 2025 is based on the tariffs that are currently enacted. Should any material changes to tariffs or trade disruptions significantly impact our business or alter our expectations, we may look to update our guidance prior to year-end. Starting with the top line, we expect net sales growth to be in the range of 7% to 9% over 2024. And for adjusted diluted EPS, we expect a range of $8.60 to $8.90 or an increase of 21% to 25% compared to last year. Finally, for modeling purposes and additional clarity on the final quarter of the year, we expect that Q4 will see a reduced gross margin percentage compared to this quarter as tariffs begin to impact our cost of goods sold. Also, we expect the full year tax rate will land at approximately 23.5%. With that, I'll now turn it back over to Kevin to conclude.

Thanks, David. Just to finish up, I'd like to commend the team on delivering strong top and bottom line performance in the quarter and year-to-date. Our results reflect the hard work and dedication of our contributors all around the globe who are managing exceptionally well in the dynamic economic environment. Our business is well positioned to deliver strong performance in 2025, and we're pleased with the opportunities ahead. With that, I would now like to open the call up for questions. Operator?

Your first question comes from the line of Scott Stember of ROTH Capital.

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

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

Got it. And then last question before I jump back into the queue on margins. Typically, when price increases go through to cover tariffs, usually there's some optical distortion on the margin line. But it seems that you guys at least recently have been comfortable that you could keep margins relatively flat because of some of the self-help stuff that you have going on. Is that narrative still in play? And just trying to get a sense of where we should look at margins as we go forward in the next couple of quarters.

Yes. Look, really strong quarter for margins. We've reached a 20% operating margin. But as David said in his prepared remarks, we do expect some compression as we move into the fourth quarter with the dynamic of the tariffs coming through COGS, cost of goods sold. But there are a lot of activities that we've also talked about that we anticipate reading through, whether that be cost initiatives, whether that be productivity improvements in our DCs and throughout the business, frankly. And longer term, we continue to see this business as a high-teens operating margin business.

Your next question comes from the line of Jeff Lick of Stephens Inc.

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

We consider it a very strong quarter in Light Duty, with a 9% sales growth. Point of Sale was impressive during the quarter, and new products continue to contribute significantly to growth. We expect this trend to continue. As I mentioned earlier, the macroeconomic environment remains favorable, particularly with the increasing number of vehicles between 7 to 14 years old. The miles driven are on the rise as well, and the average age of vehicles is currently about 12.8 years. Overall, when we evaluate the situation, we are optimistic about future growth due to the essential nature of our portfolio.

And Jeff, to add a little color. I'm sorry, to add a little color there. The Q3 was 9.3% was real consistent with the second quarter, and it's pretty consistent with the first quarter as well because if you look at the first quarter, it had a very easy comp. So pretty consistent growth through the year on Light Duty business.

I have a quick follow-up regarding how price increases work. I'm wondering, if you decide to implement a 4% price increase, how does that impact your customers who then pass it on to the end users? Do your customers typically transfer that price increase at the same percentage, or is there a different dynamic at play?

I can't comment on how our customers will react to potential price increases from us or any other supplier. However, I can explain how we handle it. We take a multifaceted approach that aligns with our historical practices. We have navigated similar situations before in previous years. Our strategy involves diversifying our supply chain significantly, which we've improved over the years. We negotiate with our suppliers globally to obtain the best price-value combination. Additionally, we continue to explore productivity initiatives across the company. Once everything is finalized, we will work with our customers to strategically implement price increases, but I can't predict how our customers will respond to that.

Your next question comes from the line of Tristan Thomas-Martin of BMO Capital Markets.

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

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

Okay. And then just one on specialty vehicles. I was just wondering you introduced the new long travel suspension for the XD1500. Do you see any change in aftermarket attachment rate on newer vehicles, such as the XD 1500, that OEMs are focused a little bit more on factory accessories versus maybe some older more mature vehicles that don't have the same OEM kind of accessory split?

Yes, having fewer contented models is beneficial for us. With prices having risen significantly over the years, we see positive dynamics ahead, anticipating more entry-level models in the future. The specialty vehicle market remains strong, and we are enthusiastic about our business. Rider enthusiasm is still high, supported by our ongoing surveys of dealers and riders. However, the discretionary segment of our business, which accounts for about half of it, has felt more pressure. That's why we are focusing more on nondiscretionary repair parts, expanding that portfolio since our acquisition a few years ago.

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

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

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

Yes. When considering your customers, there has been some inflation in the same-SKU range between 2.5% to at least 3% and then 4%. Where do you think that low mid-single digit is the appropriate figure?

You broke up a little bit there, Bret. I think I got the gist of your question, though. At the end of the day, I can't comment on what our customers, who are publicly available, have very different product offerings than we do in terms of DIY, and we tend to focus on hard parts, which is much more DIFM, professional content. So it's not a good comparison to try to align some of our customers with our portfolio.

Okay. I have a question about the supply chain. You mentioned that you expect to be 30% to 40% China by year-end. What will the supply chain map look like? A few years ago, you were at 70% China. Are there other countries that are heavily concentrated as well?

Currently, we have approximately 30% to 40% of our operations in China, around 30% in the U.S., and the remainder spread across the rest of the world. As we progress, it's likely that our reliance on China will decrease slightly. However, we feel confident about our current operational structure. Despite the changing situations regarding tariffs, our diversification is strong, and our supply chain is more robust than it was six or seven years ago. We are prepared to manage any challenges that arise from trade issues, and we have the necessary experience and resources to adjust if needed.

Your next question comes from the line of David Lantz of Wells Fargo.

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

In Light Duty, we continue to believe we're gaining market share. Historically, the overall market growth has been between 3% and 4%, and we have consistently outperformed that, largely due to our new product launches, especially those that were previously only available in the OE channel. This has significantly contributed to our growth. In Heavy Duty, we experienced some nice growth this quarter, with positive indicators. While part of this growth was influenced by tariff pricing, we also achieved key customer wins. Our share in Heavy Duty is quite small compared to the large total addressable market, which gives us considerable room for expansion in that area. In the specialty sector, our market share remains minimal within a sizable market, which we find encouraging for potential growth. Although we are not satisfied with flat sales growth, we believe we are outperforming the overall market and that the rest of the market has declined. We attribute our share gains to various initiatives, including the expansion of our nondiscretionary repair portfolio and geographic growth, where we have seen considerable success.

Got it. That's helpful. And then the balance sheet is really healthy. So curious if you could talk about your appetite for M&A and what the pipeline looks like today?

Yes, that's a great question. We have various acquisition strategies tailored to different segments. In Light Duty, we're focused on potential technology acquisitions as vehicles evolve. We want to be at the forefront of these advancements, as we have been in previous years, and geographic expansion is also a key priority for this segment. In Specialty Vehicle, the market is quite fragmented, and we currently hold a small market share. Therefore, we see opportunities for brand and product portfolio acquisitions. For Heavy Duty, we remain a small player in a vast market, and there are many channel opportunities available where acquisitions can significantly enhance our penetration. Our acquisition funnel looks strong, and we are actively working on it, though the number of actionable targets has decreased somewhat due to the tariff situation. Many potential sellers seem to be waiting to see how tariffs will affect their pricing, margins, or demand. Once that situation is resolved, we expect there will be increased activity on the acquisition front.

And just a little comment on the balance sheet. The leverage right now in the quarter was 0.92x. So strong balance sheet. We view that we've got the dry powder to not only absorb the higher cost of inventory but also execute against the M&A program, which Kevin outlined.

Your next question comes from the line of Justin Ages of CJS Securities.

I wanted to follow up on the comment about First Brands. Are you aware of any customer-sponsored factory commitments? Have there been any discussions regarding potential changes to the terms as a result of that, or are the terms already clearly established and unrelated?

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

Okay. That's helpful. And then on the Light Duty, can you give us some color on the amount of time, like the lead time for the power steering product that you outlined. Just want to get a sense of from idea to get to market how long that took?

That's a complex question, but it's also an important one. Regarding that specific product, we began marketing an electronic power steering rack for a different make and model about 18 to 24 months ago. However, the overall development time for a component like this is quite significant. It's certainly much longer than for a purely mechanical part, as one could expect. There is a safety aspect to this component, as well as a complicated electronics element. Therefore, the development cycle is longer for this part, resulting in a higher selling price compared to a purely mechanical component.

Your next question comes from the line of Gary Prestopino with Barrington Research.

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

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

Yes, that's what I wanted to hit on, too. I mean the geographic expansion, as I recall, you said you were west of the Mississippi, you were pretty light with dealerships. Can you maybe help us out as to how that is going in terms of picking up new dealerships without getting too specific, I mean, overall growth in dealership would be helpful.

Yes, that's a great question, Gary. We have been very focused on that. We've added a significant number of new dealer relationships out West. Now our focus is on increasing our share of wallet within those dealerships. The first step was establishing our relationships with the dealers, and now we're working on gaining a larger share of wallet there.

Your last question comes from the line of Scott Stember of ROTH Capital.

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

That's a great question, Scott. I think the answer is yes, there have been changes since last quarter. However, although there is a lot of news about tariffs, many of those headlines haven't actually resulted in any new laws or implementations. It's been quite fluid, making it difficult to pinpoint an exact date. To summarize, we feel well positioned to manage the current tariff environment or any potential changes that may arise, especially when considering our competitive position. We believe our footprint is as strong as anyone else's in the aftermarket, so we anticipate being able to handle any changes that come our way, and I would describe the situation as manageable at this point.

There are no further questions at this time. Ladies and gentlemen, this concludes today's earnings call. We thank you for participating. You may now disconnect.