Dorman Products Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

Key Takeaways

  • Doorman’s Q1 performance featured net sales of $469 M, a 660 basis point increase in adjusted operating margin, adjusted EPS up 134%, $41 M free cash flow, $15 M debt repayment and $27 M share repurchase.
  • Light Duty segment sales rose 3% despite customer destocking, with POS growth accelerating to high single‐digits by March and segment margin improving by 990 basis points.
  • Heavy Duty net sales declined 15% year-over-year due to freight industry slowdown and ongoing inventory destocking, though sequential Q1 sales slightly improved versus Q4 and a modest second‐half rebound is forecasted.
  • Doorman’s innovation engine delivered over 19,000 new SKUs in three years (30% new to the aftermarket), including patented and exclusive designs like an improved oil filter housing and advanced electronics modules.
  • Full-year 2024 guidance was reaffirmed with expected consolidated net sales growth of 3-5% and adjusted EPS of $5.40-$5.70, reflecting continued headwinds offset by cost savings and innovation.
AI Generated. May Contain Errors.
Earnings Conference Call
Dorman Products Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning and thank you for standing by. Welcome to the dormant products First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Please note that this conference is being recorded. I'd now like to turn the conference over to David Hession, Doorman's Chief Financial Officer.

Operator

Thank you, sir. Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Doorman's Q1 2024 earnings conference call. I'm joined today by Kevin Olson, our Chief Executive Officer. First, Kevin will provide a business update and I will review the quarterly results followed by closing remarks from Kevin. After that, we'll open the call for questions.

Speaker 1

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 doormanproducts.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 ks 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.

Speaker 1

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 Doorman's website. Finally, during the Q and 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,

Speaker 2

I will turn the call over to Kevin. Thanks, David. Good morning, and thank you for joining us on our Q1 2024 earnings call. Today, I will discuss the highlights of the quarter across our 3 operating segments and provide a deeper dive into Dormant's new to the aftermarket innovation engine, which is the core capability that links our 3 segment strategies together. Turn to Slide 3, if you are following along with our deck.

Speaker 2

Q1 was another consecutive strong quarter for Dormant as we delivered financial results in line with our expectations. We delivered net sales of $469,000,000 and achieved a 6 60 basis point improvement 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 $41,000,000 was very strong, and we deployed cash to repay $15,000,000 of debt and repurchased

Speaker 3

$27,000,000 of

Speaker 2

our shares. And finally, our new product teams across all three segments continue to turn out new product growth by introducing over 1400 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 in the average age of vehicles continues to increase, both are significant tailwinds for the aftermarket.

Speaker 2

We believe U. S. VIO of vehicles aged 8 to 13 years, what we call the prime VIO for dormant, 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 continue to benefit the business, including our patented oil filter housing, which proved to be a top performer for the quarter.

Speaker 2

Finally, our operations initiatives continue to drive significant value. Our investments in automation and automation enabled our contributors to move product through our DCs more efficient, 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.

Speaker 2

As expected, we also saw the destocking of inventory that started in the second half of twenty twenty three continue into the Q1 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 Dormin's new product fundamentals from the light duty business to the heavy duty business.

Speaker 2

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. On Slide 5, 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.

Speaker 2

We're proud of our innovation model and the value it creates for customers and our shareholders. As we discussed during our Q4 call, it all starts with ideation, which means being the 1st to identify a failure prone part, 1st to imagine and reengineer a solution that yields not only a repair part, but also a solution that simplifies repair challenges of the technician to get 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 in a vast network of supply partners, which provides us with the ability to scale volume in high demand parts quickly.

Speaker 2

Maybe most importantly, we systematized our new product development in such a way that it allows us to export these capabilities from Doorman's light duty legacy business to the other parts of our business. As you'll see, we've had great success implementing our innovation approach in our Heavy Duty and Specialty Vehicle businesses. We view our new product innovation engine as a competitive advantage that we can use to drive value through synergies with current and future acquired companies. Our new product innovation engine is yielding results. Over the last 3 fiscal years, we brought over 19,000 new SKUs to market across our 3 segments, with roughly 30% of those parts new to the aftermarket.

Speaker 2

Many at launch, they were only available from Doorman or the OEM. Next on Slide 6, we'd like to highlight some recent examples of new to the aftermarket success stories. Starting on the far left, you'll find our patented oil filter housing, which has quickly become one of the most successful products in Dorman's history. Our ideation team discovered that the original part had a high failure rate, high deployment in the field and most importantly, several points of failure that were fundamental to the original product's design. Our engineers redesigned the part to address the failure points and their work has led us to being awarded several patents on our proprietary design.

Speaker 2

The original failure prone oil filter housing can be found on 10,000,000 vehicles on U. S. Roads today. Our next example is the heavy duty clutch cylinder. Our ideation team discovered that this part was being sold at rates in excess of its predicted replacement rate, prompting the product team to investigate.

Speaker 2

Heavy duty product team evaluated the depart and determined its failure modes and also discovered that the part is so difficult to service that technicians were replacing it prior to failure as a preventative maintenance action. Our team redesigned the part with higher quality components and built a fully operational test transmission. The quality test improved that the dormant part lasted beyond the OE parts listed performance. As a result of the team's innovation, truck owners are now able to reduce the number of replacement over the truck's life, saving substantial repair time and money. Next is an example of our innovation deployed to create a feature set that better fits the product's application than the incumbent part.

Speaker 2

UTV riders in certain driving conditions prefer glass windshields because they are more resistant to scratches and less attractive to dirt and dust. However, while the fixed or manual opening glass windshields that are available today have their place, consumers have quickly embraced the improved fit, finish and function of the newly released power actuated windshield. From the driver's seat, this windshield can be easily adjusted as weather conditions or terrain changes. The modular design can be retrofit to many UTV applications already in service. Finally, I'd also like to highlight an electronics module that we've redesigned from scratch that incorporates proprietary electronics designed by our engineers, the software code written by our engineers.

Speaker 2

This fuel injector driver module is found on a widely deployed engine and has design issues in its housing and electronics that can lead to high failure rates. Our OE fixed product upgrades the electronics and provides a weatherproof case that extends the life cycle of the part. We provide this module as a new not remanufactured part and are the exclusive aftermarket provider for this product in a new form. We believe that there are very few aftermarket competitors that are capable of releasing a completely new electronic module, including proprietary electronics designing software code. These are just a few examples of the thousands of new parts that we release every year, and we think they provide a strong cross sample of our new product innovation capabilities that power Doorman's growth engine and provide Doorman with competitive advantages today and into the future.

Speaker 2

Now I'll hand it off to David to review our Q1 financial performance.

Speaker 1

Thanks, Kevin. Turning to Slide 7. Q1 net sales were $469,000,000 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 6 30 basis point increase compared to the same quarter last year.

Speaker 1

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 and A, adjusted SG and A expense was 24.9 percent 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 $65,000,000 a 92% increase from the same quarter last year. Adjusted operating margin was 13.9%, up 660 basis points year over year.

Speaker 1

And finally, adjusted diluted EPS in Q1 was $1.31 a 100 and 34% 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 review of our segment results starting on Slide 8. Q1 Light Duty net sales were $359,000,000 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.

Speaker 1

We also saw some customer destocking in the quarter as they continue 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. As I described for the overall business, sales of lower cost inventory and the results of cost saving initiatives contributed to the margin improvement. Moving on to Heavy Duty on Slide 9.

Speaker 1

Net sales were $58,000,000 in Q1, a 15% reduction year over year. Q1 was up against the strong prior year comparable that was 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. We believe we're beginning to see signs of abatement of some of the headwinds we're facing, including customer inventory destocking and have cautious optimism for a second half recovery in trucking demand. Heavy duty adjusted operating margin was breakeven, down from 7.9% in Q1 of last year.

Speaker 1

Heavy duty margin was affected by the sell through of high cost inventory, the deleverage of fixed costs on lower net sales volumes and the impact of investments we have made to grow sales and improve margins long term. Shifting to Specialty Vehicle on Slide 10. Our Q1 net sales were $52,000,000 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.

Speaker 1

We remain confident in the prospects for steady long term growth in the overall vehicle park as enthusiasm for alternative transport vehicles remains high. So we believe this is a temporary challenge for the market overall. Despite this end market challenge, our specialty vehicle business was able to deliver growth. We believe that our initiative to expand our dealer footprint and drive sales to new dealers enabled us to capture share in

Speaker 4

a flat market. Further,

Speaker 1

our initiative to drive new product sales, particularly our focus on non discretionary repair parts and parts for utility vehicles where spending is less discretionary remains very much on track. Q1 Specialty Vehicle operating margin was 13.9% flat year over year. Please turn now to Slide 11, where we will discuss cash flow. Q1 free cash flow was $41,000,000 an increase of $26,000,000 from prior year. The improvement was largely attributable to a $27,000,000 increase in net income countered slightly by timing driven movements of some working capital accounts.

Speaker 1

In line with our capital allocation strategy, during the Q1, we made capital expenditures of $11,000,000 consistent with prior year. We also repaid $15,000,000 on our credit facility and returned $27,000,000 to shareholders through the repurchase of our shares at an average price of $85 per share. I'll turn next to our balance sheet and liquidity on Slide 12. As of March 30, our net debt was $528,000,000 a reduction of $12,000,000 from Q4 and our leverage ratio was 1.61 times adjusted EBITDA down from 1.87 times in Q4. Our current leverage is comfortably below our long term target ceiling of 2 times or less than 3 times in the 1st year following an acquisition.

Speaker 1

Additionally, we had $552,000,000 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. Now I'd like to discuss our previously provided 2024 guidance included on Slide 13. Our Q1 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.

Speaker 1

Our heavy duty business is still negatively impacted by a soft trucking market and we expect this softness to continue into the 2nd 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 non discretionary 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. The savings from the Q1 reduction in workforce programs and other cost savings initiatives are on track to hit plan.

Speaker 1

We still expect these savings to be partially offset by investments we're making to further diversify our supply chain as well as higher inflationary costs such as ocean freight and employee benefit costs. With that, I'll turn it back over to Kevin to conclude.

Speaker 4

Kevin? We're proud

Speaker 2

of our Q1 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 Doorman 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

Thank you. We will now begin the question and answer Your first question comes from the line of Scott Stember with MKM Partners. Your line is open.

Speaker 3

Good morning, guys, and thanks for

Speaker 4

taking my questions. Good morning, Scott. Good morning, Scott.

Speaker 3

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 one for 1 setup sell into sell through in light duty?

Speaker 2

Hey, 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

Speaker 1

we move through the quarter.

Speaker 2

And as we said in the prepared remarks, we exited March in the high single digit range. Overall, shipments still lag 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 continue to see that into April. So I would characterize it, Scott, as late innings in terms of having that gap.

Speaker 4

Got it.

Speaker 3

And then next question on the specialty vehicles. You 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 break fixes where it was when you first acquired SuperATV?

Speaker 2

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 is 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 non discretionary repair parts. And that is up from pre acquisition.

Operator

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

Speaker 4

Hey, good morning guys.

Speaker 1

Hey, Bret. Hey, Bret.

Speaker 5

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?

Speaker 2

Yes. Brad, as you know, we don't disclose the breakout of price volume, but I would characterize it 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.

Speaker 5

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?

Speaker 2

Well, I would say, Brett, 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.

Speaker 2

And so we do expect that new machine sales will start to accelerate here

Speaker 4

here as we move through the year. Okay, great. Thank you.

Speaker 2

Thanks, Brett.

Operator

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

Speaker 3

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?

Speaker 2

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.

Speaker 2

So we're well positioned when it does rebound.

Speaker 3

Got it. And this 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?

Speaker 1

Yes, Scott. Capital allocation strategy has been pretty consistent with where we've been historically. So first thing we'll look at is leverage. In the quarter, we finished at 1.61, down from 1.87 last quarter. The 1st place we'll look, 2nd place is internal investment.

Speaker 1

We invested some cash and CapEx there in the quarter. M and A is next, no M and A this quarter. And then we'll look to see where do we what do we do with the excess cash. We'll look at our models and we thought it was a good opportunity this quarter to invest some money in share buybacks. We bought $27,000,000 back at about 310,000 shares at $85 thought that was a pretty good return for our shareholders.

Speaker 1

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.

Speaker 3

Got it. That's all I have. Thank you.

Speaker 1

Thanks, Scott.

Operator

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

Speaker 5

Hey, guys. 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?

Speaker 2

Yes, Brett. Good question. It's Kevin. Yes, we took on that initiative, Brett, 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.

Speaker 2

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 pack room countries, Eastern Europe, Mexico, India, there's a lot of places that we have successfully moved supply to.

Speaker 2

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.

Speaker 5

Great. Appreciate it. Thank you.

Operator

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

Powered by Quartr