Good morning, and thank you for standing by. Welcome to the Dorman Products Third Quarter 2024 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'd now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations and Risk Management. Thank you, sir, please go ahead.

Thank you. Good morning, everyone. Welcome to Dorman's third quarter 2024 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 business update, then David 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 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 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 one 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 2024 earnings call. As Alex mentioned, I'll start with highlights of our performance in the quarter then provide an overview of our segment results. I'll also spend some time discussing how Dorman is differentiating itself with a set of competencies in a growing suite of next-generation solutions within the complex electronic space. Turning to Slide 3, if you're following along in the deck. Our positive momentum this year carried through the Q3 with solid top line growth and operating margin expansion leading to a significant increase in adjusted diluted EPS. Consolidated net sales increased 3.2% year over year to $504 million. Adjusted operating margin was 17.1%, expanding 290 basis points compared to the same period last year. Margins improved on easing inflationary pressures in the quarter and favorable mix from higher new product sales, along with returns in the productivity initiatives that we have been discussing throughout the year. As a result, adjusted diluted EPS increased 40% over last year's Q3 to $1.96 Free cash flow was solid at $36 million allowing us to repay $11 million of debt and repurchase $27 million of our shares during the quarter. Given our results year to date as well as our positive outlook and visibility into the Q4, we've narrowed our sales and increased our earnings guidance ranges for the year. David will cover guidance in a moment. Moving to Slide 4, let me provide some observations across our three segments. In our Light Duty segment, the same positive trends we've highlighted in the first half of the year continued in the Q3. Vehicle miles traveled were again higher year over year. POS was solid, up low to mid-single digits in the quarter and generally consistent with customer shipments. Our…

Thanks, Kevin. Turning to slide 7. Consolidated net sales in the Q3 of $504 million up 3% year over year. Similar to the second quarter, the growth was driven by the light duty business, which was fueled by increased customer demand and sales of new products that were launched this year. While market headwinds impacting our heavy duty and specialty vehicle businesses persisted through the quarter, both businesses drove margin improvement. I'll cover each of the segments in just a moment. Gross margin for the quarter was 40.5%, a 300 basis point increase compared to the prior year period. This improvement was driven by inflationary pressures easing across our segments and favorable mix from higher sales of new products bolstered by the operational efficiency initiatives we've been executing throughout the year. Adjusted SG&A expense as a percentage of net sales was flat year over year at 23.4%. Adjusted operating income was $86 million for the 3rd quarter, up more than 24% compared to the same period last year. Adjusted operating margin expanded 290 basis points to 17.1% largely on gross margin improvement. Finally, Q3 adjusted diluted EPS was $1.96 up 40% compared to the prior year period. Along with increased adjusted operating income, lower interest expense, tax rate, and share counts contributed to our EPS growth. Next, let me provide updates on the quarter for each of our business segments, starting with light duty on slide eight. Net sales for light duty were $394 million in the third quarter up 5% compared to last year. Shipments were generally aligned with customer POS during the quarter and year to date. As we've discussed throughout the year, our new products and the strength of Dorman’s brand continue to drive significant growth for light duty. Segment profit margin in Q3 was 19%, up…

Thanks, David. I'd like to echo your comments regarding our team. We've implemented a number of changes across the organization this year, and our contributors have done an outstanding job adapting and improving upon the initiatives we put in place. We're proud of our results through the year and look forward to finishing 2024 strong, delivering significant growth over last year. We remain committed to driving long term growth by investing in our people, our processes and the innovation need to design and deliver next generation solutions. With that, I would now like to open the call up for questions. Operator.

Thank you. [Operator Instructions]. Our first question confirmed the line of Scott Stember with ROTH MKM. Scott, your line is now open.

Good morning, guys and thanks for taking my questions. Maybe we could just touch first on light duty. Some of your customers have been talking about some softening even in the professional side of the business or do it for me. But you guys continue to outperform. Just trying to get a sense of, how much is being driven by new products and what things look like on the same SKU basis on a year over year basis.

Yeah, good question, Scott. Yes, I mean, if you look across kind of what's been going on in the aftermarket, there certainly seems to be a stronger growth profile than in the commercial side of the business. Based on what our customers are saying and DIY, seems to be a bit softer from a total growth perspective. If you look at Dorman, Scott as we're more indexed toward the DIFM or commercial side of the house, more non-discretionary parts. And so, we're not as tied to the DIY trends that seem to be out there in the market now. I mean, obviously, one of the major growth drivers for us has been new products and it continues to be, it's why we focus so much on innovation and new to the aftermarket solutions. That has and will continue to be the major growth profile and lever for the company going forward.

Got it. And then next question before I get back into the queue. Talked about signs of things stabilizing in heavy duty. I'm trying to get a sense of where we can look for margins, operating margin in heavy duty to go when things do finally start to hit their stride once again.

Yeah, great question Scott. I mean, look, heavy duty, it seems to be, that market seems to be stabilized. Certainly, bumping off the bottom as we see it today. It's as I said in the prepared remarks, it's difficult to call when that market is going to inflect. We certainly hope, there seem to be some signs that 2025 you might see an inflection up, that business for us obviously is not as asset light as our specialty or light duty business. So, it's obviously impacted more from volume decreases, with the overhead that they carry from manufacturing operations. So, from our perspective, we're going to continue to focus on innovation, in that side of the house and productivity initiatives. So, we think we're well positioned when that market does come back. In terms of the actual target that business for us before the downturn was generating mid-teen operating profit margins. And so, we expect to be back at that level when the market does inflect.

Got it. Thank you.

Our next question comes from the line of Brett Jordan with Jefferies. Brett, your line's now open.

Could you talk about in the specialty segment, how much is, and now in the repair space as opposed to the discretionary mix. Have you guys developed that break fix product line?

Yes. We're actually slightly above half the business is non-discretionary repair, Brett. It's it was less than that when we acquired the business a little bit more than 18 months ago. As we've talked previously, we are tied to new vehicle sales because there is a high attach rate to new vehicle sales. That's why the focus on nondiscretionary repair, we've made a lot of progress on that initiative and we continue to do so. So, it's going to continue to be a focus and that kind of balance of sale will continue to increase.

Okay, great. And then a question on complex electronics margin. You say obviously that the new product margin exceeds the average. Do complex electronics new product margins exceed the average new product margin? Is it a more profitable segment overall?

Well, I'll just say it this way. I mean, we don't give specifics around that category in terms of margin or the size of it. But what I will say Brett is a lot of those parts are new to the aftermarket, okay, which means that part did not exist in the aftermarket the day before we launched it, okay. So those parts, generally have a higher margin profile than a part that's been in the aftermarket or is not new to the aftermarket. It's the highest margin for us, it's the highest margin for our customers. So obviously, it's new to the aftermarket or complex electronics is mainly new to the aftermarket, it's going to carry a higher margin profile than the balance of the business.

Okay. And then one quick follow-up question, I guess, on margin impact. If we do see tariffs change, you guys have talked about some supply chain, reevaluating supply chain, but obviously if there's going to be a big tariff increase next year, how do you see that impacting the business?

Yes. We're obviously watching that very closely, Brett. I would say that we're much better positioned now than we were back in say 2018. As you referenced, our supply chain is much more diverse. I'd also say, I think we're better positioned in that we have a playbook. So, we know how to handle it. We know what we have to do. We'll do what's right for the if tariffs do come on, we'll do what's right for our business and we'll do what's right for our customers and the ultimate end user at the end of the day. So, I think that's how we're going to view it. I don't really want to go more into it at this point. We're just going to continue to watch and see what happens.

Our next question comes from the line of Justin Ages with CJS Securities. Justin, your line is now open.

Hi, good morning. It's Pete Lucas for Justin. You covered a lot of my questions. Thanks for that. Just in terms of electric vehicle parts, what are you seeing now and kind of what is where do you see it going in the future? I know you touched on it in the prepared remarks in terms of the breakdown, but just where are we today and kind of where do you see it going in the short term?

Well, I think it depends on what you mean by electronic vehicles, right, electric vehicles. I mean, how we view it is obviously pure plug in electric and there's hybrid. As we mentioned in the prepared remarks, I mean, the car park is going to remain heavy ice through 2035. There will be a continued increase in the car park in the repair age that we target for pure plug in electric and hybrid. Look, we view it just like ICE we have the capability to address parts on any electric vehicle out there. A lot of them are complex electronics. Hence that's why we focus and invest so much in those categories. So as those categories do increase over time, we'll continue to increase our content, but it's going to be quite some time before there's a meaningful portion of the car park in our, in the repair age that are pure plugin electric.

Oh, very helpful. Thanks.

Our next question comes from the line of Gary Prestopino with Barrington's Research. Gary, your line is now open.

David, what was that $1.6 million other income, positive number in the quarter,

On the other income and expense, Gary, that was the impact of our joint venture income. That's where that shows up.

Okay, thanks. And then Kevin, maybe you could help us out here. You're citing that new products are helping to drive growth and increase the margins, but could you maybe slap some metrics around that in terms of, how much, what percentage of sales were coming from new products, over the last nine months or in the quarter versus where they were last year? Just so we can kind of get an idea of how that is, moving to the positive for the company.

Hey Gary, we don't release metrics in terms of, what portion of our sales dollars are tied to new products. We do release, the new SKUs as SKUs in the quarter were roughly flattish to where they were a year ago. That'll come out in the disclosures, but I would tell you that it was up, last year it was up against a very difficult comp. The two-year stack for SKUs in the quarter was actually up 70% from where it was back in the same quarter in 2022. So, look, new to the aftermarket continues to be, again, we're always going to have line extensions, applications that retire, new applications, but where the growth is going to be driven is new to the aftermarket. And that continues to be a strong driver of growth for us, Gary, and it's going to continue to be, but we don't specifically break out the number. I'd also say that even though the SKUs were flat in a quarter, the total new product sales dollars versus the same quarter last year were actually up. And that's going to happen from a function of not only just units being up, but also average selling prices are up as we continue to focus on more complex parts.

Okay. I mean, that's helpful. And then getting back to the heavy duty, are you're hearing that the market is stabilizing, so is the thought process that versus what's happened in 2024 that it'll be flattish in ‘25 and then maybe increasing to 2026 as these new emission requirements, especially in Europe, come in for 2027?

We haven't released guidance for 2025 at this point yet, Gary, but what I will say is that we're not going to plan on a significant inflection or growth, in 2025. We, it's just too cloudy right now. We do hope that it's going to inflect. So, our focus right now is to continue to work on new product development, which is again get that flywheel of new product into the market, which will drive growth for years to come and productivity initiatives across the business. So, when it does inflect, we'll be well positioned to ride that wave up.

There's no further question at this time. That concludes today's call. Thank you all for joining, and you may now disconnect.