Good morning and thank you for standing by. Welcome to the Dorman Products First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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. [Operator Instructions] And with that, I will turn the call over to Kevin.

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 3 operating segments and provide a deeper dive into Dorman's new-to-the-aftermarket innovation engine, which is the core capability that links our 3 segment strategies together. Turning to Slide 3, if you are following along with our deck, Q1 was another consecutive strong quarter for Dorman as we delivered financial results in line with our expectations. We delivered net sales of $469 million and achieved a 660 basis point improvement in adjusted operating 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. And finally, our new product teams across all 3 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 Slide 4, I'll dig into some 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,…

Thanks, Kevin. Turning to Slide 7, Q1 net sales were $469 million, up modestly year-over-year. This growth was accomplished in the face of the market headwinds that Kevin described in his remarks and was primarily driven by the growth of new products recently introduced to market. Moving to gross margin, 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. And 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 4 consecutive quarters of debt repayments, partially offset by a higher tax rate. Let's move on to a review of our segment results, starting on Slide 8. Q1 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…

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 3 quarters, I'm confident that the initiatives we have underway and the Dorman contributors who are leading them will be able to execute and drive success in any environment. I would now like to open the call for questions. Operator?

[Operator Instructions] 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 saw -- we had a difficult start to the year for sure. January, we saw POS kind of in that low-single-digit range. But we did see that pick up as we moved through the quarter. And as we said in the prepared remarks, we exited March in the high-single-digit range. Overall, shipments still lagged POS for the entire quarter, and we did see some inventory rebalancing as expected. However, the gap was certainly a lot tighter in March than we saw in January. We continued to see that into April. So I would characterize it, Scott, as late innings in terms of [ halving ] that gap.

And then, 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 the opportunity to not only build out kind of nondiscretionary repair parts, but also expand the business geographically. I would characterize the last 18 months as that we've executed on those initiatives, and we've actually exceeded what we had laid out pre-acquisition in terms of executing on those. And roughly right now, Scott, about half the business we would characterize as nondiscretionary repair parts, and that 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 then sort of what you're expecting for the year?

Yes. Bret, as you know, we don't disclose the breakout of price-volume, but I would characterize it as, as you know, we definitely saw some price in the overall market growth in last year in 2023, which continued into 2024. However, we do expect modest unit growth here in 2024, but there will be a component of price in the overall growth equation this year in the industry.

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

Well, I would say, Bret, that we see it coming in terms of new vehicle sales. There's still a meaningful portion of our sales that go on vehicles that are less than 2 years old. So obviously, when new unit sales are depressed, that is going to be a headwind for us. And we did see that unit sales were down in '23 versus '22. We believe that as inventory levels in the channel have really increased and are at probably over optimum levels that discounting will ensue. And so, we do expect that machines -- new machine sales will start to accelerate here as we move through the year.

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

Yes. Just circling back to Heavy Duty, you guys made comments about, I guess, that there are signs that we could be hitting a bottom and cautiously optimistic about a 2H rebound. Is that just based on restocking completing itself and getting past the tough comparisons? Or is there other signs that actual end demand in the aftermarket there are rebounding?

I think it's a combination of both, Scott. Clearly, we believe that the inventory kind of reductions are starting to ease. We're seeing that. Our sequential sales were up from Q4. But -- and frankly, a lot of market intel, we talk a lot to our customers and the feel that we're getting is, the second half will be a slight rebound over the first half. But to be honest, we're being very cautious in our approach, and we're really focused on cost initiatives, efficiency and productivity initiatives, and taking share initiatives on the commercial front. So we're well positioned when it does rebound.

Got it. And just last question on capital deployment. It looks like you guys are back in the market buying back stock, but also paying down debt. What's your optimal leverage ratio that you want to be at? And should we expect 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. So first thing we'll look at is leverage at -- in the quarter, we finished at 1.61x, down from 1.87x last quarter. It's the first place we'll look. Second place is internal investment. We invested some cash and CapEx there in the quarter. M&A is next; no M&A this quarter. And then, we'll look to see what do we do with the excess cash? We look at our models, and we thought it was a good opportunity this quarter to invest some money in share buyback. We bought $27 million back at -- about 310,000 shares at $85. Thought that was a pretty good return for our shareholders. So we look for a balanced approach, Scott. That's what we did in the quarter. As we move forward, we'll use the same approach.

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

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

Yes, Bret, good question. It's Kevin. Yes, we took on that initiative, Bret, a few years ago, where we really started to look strategically at our supply chain. Obviously, COVID and the supply chain disruptions really accelerated our efforts there. We are -- I would characterize it still as early innings in terms of diversifying our supply chain. We've made significant progress. Really, there are no -- there isn't any one area that we're focused on. It's really around the globe, so other Pac Rim countries, Eastern Europe, Mexico, India. There's a lot of places that we have successfully moved supply to, but it's going to be a long haul. But I would tell you that to date, we're very pleased with the progress that we've made.

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