Good morning and thank you for standing by. Welcome to the Dorman Products Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I'd 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 fourth quarter 2023 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 and full year financial results and provide our 2024 outlook. And then Kevin will provide closing remarks. After that, we'll open the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which went out yesterday after the market closed. 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 yesterday's release for important material assumptions, expectations and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. We'll also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our press release and in the appendix to this earnings call presentation, both of which can be found on the Investor Relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves to one question with one follow-up and to rejoin the queue if they have additional questions. And with that, I will turn the call over to Kevin.

Thanks, David. Good morning and thank you for joining us on our fourth quarter 2023 earnings call. Today, I will discuss our strategy, operating highlights and business activity. Please turn to Slide 3 if you're following along in our deck. In Q4, we realigned our business along three segments consistent with the sectors of the motor vehicle aftermarket in which we operate light duty, heavy duty and specialty vehicle. In connection with our transition to segment reporting, we are initiating live quarterly conference calls to provide additional insight into these segments and the overall company. Before we dive into Q4 performance, we thought it would be helpful to step back for a moment and review who we are as a company and what we do. Some of you have likely followed our story for years, but there are many listeners who are just getting to know Dorman. We are known as one of the leading innovators of repair solutions for the motor vehicle aftermarket. We deliver products from bumper to bumper across our legacy light duty business, our commercial vehicle focused heavy duty business and our UTV and ATV focused specialty vehicle business. We are an engine of continuous innovation across each of these segments. And while our heavy duty and specialty businesses are relatively new additions to the portfolio resulting from our acquisitions of Dayton Parts and SuperATV, we're very excited about what the future holds. Moving on to Slide 4. As I mentioned, we're leading the charge on innovation and we think the capabilities and approach of our new product development team are unique. Over decades, our ideation team has built an immense network of relationships with repair technicians and end customers in the field that enable us to continuously cultivate a robust new product pipeline. Over the…

Thanks, Kevin. I'll begin by discussing Q4 and 2023 results and move to our balance sheet and capital allocation strategy, followed by our 2024 guidance. One note, our 2022 Q4 and full year results included a 53rd week. To make our results comparable, I'm going to reference our Q4 and full year results against 2022 results, adjusted to remove the extra week. A table reconciling reported results and results excluding the 53rd week is included in the appendix to the earnings presentation deck. Turning to Slide 8. Q4 net sales were $494 million, a record and up 3% year-over-year. Sales growth was primarily driven by higher volume, including the introduction of new products to market and price increases to offset inflation. Moving to gross margin. This is the third straight quarter we've seen gross margin improvement. Our Q4 adjusted gross margin was 39.3%, a 640 basis point increase compared to last year. The year-over-year margin improvement was primarily due to lower cost inventory, cost savings initiatives and pricing actions to offset inflation. Our Q4 adjusted gross margin gets us back to margin levels we had in 2018 for tariffs and inflation. Shifting to SG&A. Adjusted SG&A expense was 23.9% of net sales, an increase of 90 basis points compared to last year. Higher wages, benefits and variable compensation expenses were the primary drivers of the income. Our Q4 adjusted operating income was $76 million, a 59% increase. Adjusted operating margin was 15.4%, up 550 basis points year-over-year. And finally, adjusted diluted EPS in Q4 was $1.57, a record and a 69% increase versus last year. The growth was mainly due to the increase in adjusted operating income, partially offset by a higher tax rate and higher interest expense resulting from an increase in the variable rate of our credit facility.…

Thanks, David. As we close out our fourth quarter and lean forward into 2024, I'm confident in our ability to continue to drive innovation, to capitalize on the breadth of our diverse portfolio across segments and to draw on the many strengths and deep commitment of our team members. As we've proven year-after-year, we've continually found new ways to grow our business through new product categories, new markets and customer channels and our operating discipline. I would now like to open the call for questions. Operator?

Thank you. [Operator Instructions] Your first question comes from the line of Scott Stemper from ROTH MKM. Please go ahead.

Good morning, gentlemen, and thanks for taking my questions. Could you guys maybe talk about the cadence of end demand throughout the quarter. We heard from some retailers, a competitor of yours talking about how December things started to dip, but seems like things are coming back in January. And again, this is on the light duty side. Maybe just comment on that.

Sure, Scott. Great question. Yeah, we actually saw a very stable cadence as we moved through the fourth quarter. Our POS or out the door sales of our products through our customers was actually up about 6.5% in the quarter. And if you look at December, it was roughly around that same amount. So we didn't -- we kind of saw the same cadence. I'd also point out that on the LD side, our sales growth was only 4%, so we're still running a gap of POS to sell in growth as a result of inventory adjustments, you know, kind of across our customer base.

Got it. And next question. That 6.5%, is that on a same day basis, adjusting for the extra or one last week this year? And if not, what would that have been on a same day basis?

No, that's adjusted, Scott.

Okay.

So it's apples and apples.

Perfect. All right, I'll get back into the queue. Thank you.

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

Hey, good morning, guys.

Hey, Bret.

Hey, Bret.

On the sales growth forecast for 2024. 3% to 5%, could you talk about what you expect to be price in that?

Yeah. Good question, Bret. There's certainly solid growth in the 3% to 5%, but there's some volume in there. There's some price in there, but for competitive reasons, Bret, we don't break out the split, but included in the 3% to 5% is some volume along with some pricing.

I'll just add to that -- I'll just add to that, Bret that, you know, as we kind of look at 2023, we saw roughly the same thing. There was clearly some price growth across the industry in 2023, but we actually saw unit growth both for the full year and for the fourth quarter.

Okay. Great. And then on the Light Duty business, could you talk about in that mix how much is new to the aftermarket, sort of proprietary product versus things like full line product more in line with your chassis business, you know, because just we can break out what's, you know, higher margin mix versus sort of more of the middle of the road.

Yeah, we don't -- we don't break out kind of different categories in that fashion, Bret publicly. I will say though that, you know, if you kind of look at the SKUs that we launch in a year like take 2023 for example, we launch just over 6,000 parts. Roughly 30% of those SKUs would be considered new to the aftermarket.

Okay. Want to tell me what the gross margin spread in that 30% versus the balances?

Yeah. No, Bret, we don't -- we don't break out again margins either by customer or by category.

Well, now we're doing calls now we're going to get all this new information.

I appreciate it, guys.

Thanks, Bret.

[Operator Instructions] Your next question comes from the line of Gary Prestopino from Barrington Research. Please go ahead.

Hi. Good morning, Kevin and Dave. Hey, Dave, one thing you didn't touch upon in your commentary was factoring in the quarter. Could you give us some idea of how much you factored and what was the cost into SG&A for the factoring?

Sure, Gary. And as you know, that'll all be included in the K, but the factoring in the quarter was $12.6 million in Q4 2023 compared to $14.2 million last quarter. So down $1.6 million. And it's basically all volume, Gary. The rate was essentially the same year-over-year, but we factored $236 million, which was down $34 million from last year.

Okay. And then as we go forward, if you just say hypothetically, keep the same factoring level on a quarter basis, if you get a 25 basis point decline in interest rate how is that going to impact the expenses related to factoring?

Yeah. So I can give you, if you get a 1% change in factoring costs on an annual basis, it's about $8 million, Gary. So quarter point would be roughly $2 million.

Okay. That's really helpful. Thank you. I'll get back in the queue.

Sure.

Your next question comes from the line of Scott Stemper from ROTH MKM. Please go ahead.

Just a quick follow-up. Just looking at the guidance from an operating margin standpoint, you guys were running, I guess, north of 15% coming out of the fourth quarter and coming out of the year. But if you look at your guidance, it looks like it's expecting less than that, a couple of hundred basis points. Are you guys just being conservative or is there anything else out there that we should be aware of?

No, Scott, I think if you -- if you look at the guidance right, the top line is 3% to 5% growth, and as we said in the prepared remarks, we expect there to be some operating margin improvement as well. If you look at that there's going to be the benefit of the reduction in workforce and the cost savings initiatives that will be partially offset by some of the investments we're making to diversify our supply chain, as well as some inflationary pressures, particularly ocean freight and benefits. But there's growth included in the guide.

Got it. Thank you.

Perfect.

Your next question comes from the line of Gary Prestopino from Barrington Research. Please go ahead.

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

Hey, Gary, it's Kevin. Good question. Yeah, we haven't disclosed that number in a few years, but I would say, you know, the model has not changed nor the cadence of new products as a percent of our total business. I mean, I would say that the one -- the one factor that has changed over the last few years is that our chassis business, which is a large, mature, slower growing line, is a much bigger portion of our total business. But in terms of our focus on kind of the small niche categories knew the aftermarket focus, that has not changed, and frankly, the volume has not changed.

Okay. And then just from what you're saying about, with your guidance, with the quarterly sequence, stronger top line in the back half of the year and continued growth in adjusted EPS in the back half of the year, despite some -- you'll have some challenging comps there, because in 2023 you pulled off some good numbers in the back half of the year.

Yeah. Gary, I think if you look at Light Duty, we said it's going to be relatively flattish in Q1, the improvement in Q2 into the second half and then both Heavy and Specialty, we expect to see a softer first half with improvements coming in the second half. So, yeah, I think if you look at that, the pacing is going to be the -- the growth is going to come more in the second half than the first half.

Okay. Thank you.

Perfect.

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

Hey, on that same topic, I guess, as we look at flat light duty in the start of the year, and I think you said heavy duty challenging and specialty slow in the first half. Should we not factor in EBIT expansion in the first half? Most of this growth is going to come when you get sales leverage going into the second half of the year.

Yeah. Bret, the first quarter is typically our lowest quarter, mainly driven by the Light Duty segment. But now the margin growth will be -- after the first quarter will be ratable over the course of the balance of the year, but obviously coming a little bit heavier in the second half.

Okay. And then you talked about $119 million in inventory safety stock reduction. Are your fill rates or I guess, as you measure your fill rates consistent? Is your flow of product improved enough that you don't need to carry that? Or has it had any impact on your availability?

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

Okay. And I guess on that same supply chain question you talked about, I think some investment in possibly source from new markets. Is that something, I guess, could you give us some updates as far as where we are, alternative low cost supply markets versus where you are today geographically.

Yeah. I mean, it's ongoing, right? It's been ongoing for a couple of years now. We did talk about the investments, which I would categorize as moderate, and those investments have been going on for the better part of two to three years. You know, we have reduced our exposure -- exposure to China, Taiwan over the last couple of years and we expect to continue to do that. We're not going to give any details in terms of what percentage and what country. I'll just tell you that it's wide ranging, whether it's a Pac-Rim or India or Mexico or Turkey or other locations around the globe. We continue to look to de-risk our supply chain.

Great. Thank you.

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