DORM

Good morning, everyone. Welcome to Dorman's first quarter 2026 earnings conference call. I'm joined by Kevin Olsen, Dorman's Chairman, President, and Chief Executive Officer, and Charles Rayfield, Dorman's Chief Financial Officer. Kevin will begin with a high-level overview of the quarter and share our segment-level performance and market trends. Charles will walk through our first quarter financial results in more detail, discuss capital allocation, and then turn it back 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 in 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 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 one question with one follow-up and to rejoin the queue if they have additional questions. With that, I'll turn the call over to Kevin.

Thanks, Alex. Good morning, everyone. Thank you for joining us today. I'll begin with a brief overview of our first quarter results. Then provide commentary on the performance and key trends we're seeing across our business segments. Turning to slide 3, we delivered solid performance in the first quarter with results that were largely in line with our expectations. Consolidated net sales were $529 million, representing an increase of 4% compared to the first quarter of last year. The year-over-year growth was primarily driven by pricing actions implemented across the business, partially offset by lower volumes compared to the exceptionally strong first quarter we experienced in 2025. Adjusted operating margin for the quarter was 12.1%, down 490 basis points compared to the prior year period.

This margin performance reflects the highest levels of tariff-related cost that we expect to see in 2026. Again, due to our use of FIFO, the cost recognized in this year's first quarter are associated with the inventory we purchased last year when tariff rates peaked in the earlier stages of the tariff implementation. Similarly, the sourcing, productivity, and automation initiatives that we executed over the last several months and continue to drive today are expected to support improved margin performance as we move through the balance of the year. Adjusted EBITDA margin, a new metric we've included this quarter, was 15.2%, down 440 basis points compared to the same period last year. This decrease is driven by lower operating margins as I just covered. Please see the reconciliation in our appendix for details on this metric.

Adjusted diluted earnings per share for the quarter was also in line with expectations at $1.57, down approximately 22% year-over-year. As we've discussed over the last several quarters, this decline was primarily driven by higher levels of tariff-related costs that were recognized in our cost of goods sold during the quarter. Cash generation continued to improve sequentially as expected, with operating cash flow in the quarter of $44 million. We also invested in opportunistic share repurchases, deploying $51 million in the quarter, a record for our company. Charles will cover this in more detail shortly. Overall, we began the year with solid performance and met our expectations. Combined with our positive outlook for the remainder of the year, we have reaffirmed our 2026 guidance.

Turning to slide 4 in our light-duty segment, net sales increased approximately 4% year-over-year, driven primarily by the pricing actions we undertook in 2025. Volume was lower compared to last year's first quarter, but let me highlight a few driving factors. First, this year's performance was up against a difficult comparison to last year's first quarter, where we drove exceptionally strong 14% year-over-year growth in net sales. Looking back over the last 2 years combined, we delivered 18% growth in net sales. Second, ordering patterns with the customer we discussed on our last call began to normalize during the quarter. Lastly, I call out that we estimate POS with our large customers was up mid-single digits in the quarter.

While there was inflation embedded in that growth, we remain confident in the nondiscretionary nature of our portfolio and will continue to monitor the overall economic conditions of our end users and the impact that the ongoing geopolitical tensions are having on the broader economy. Operating margin performance in the quarter was consistent with our outlook as Q1 2026 reflected the highest level of tariff expense. As the ongoing benefits of our supplier diversification, productivity, and automation initiatives are recognized, we expect light duty's margin performance to improve as the year progresses. From a market perspective, underlying light duty fundamentals remain positive. vehicle miles traveled increasing year-over-year in the first quarter. Also, higher used vehicle values are impacting consumers' buying decisions, which we believe will result in extended vehicle life and support sustained aftermarket demand for repair and replacement parts.

Light-duty trucks and SUVs continue to represent a growing portion of the VIO, providing further opportunity for product portfolio expansion with higher average selling prices. A good example of how our innovation strategy supports this opportunity is our OE FIX air suspension compressor for a broad set of GM SUV models. This product addresses a common OEM failure mode caused by overheating, which can lead to cascading failures throughout the air suspension system. Our patent-pending design improves heat dissipation by approximately 25%, incorporates thermal protection, and utilizes proprietary software to optimize performance and reliability. By delivering an upgraded repair solution designed to last longer and at an attractive aftermarket price point, products like this not only create value for installers and end users, but also reinforce Dorman's leadership in product innovation. Just an excellent job by our light duty team to deliver another OE FIX solution.

Turning to slide 5 in our heavy duty segment, net sales increased approximately 12% compared to last year's first quarter, driven by pricing initiatives and the year-over-year impact of certain commercialization initiatives we have installed in the business. While the dollar change is relatively small, operating margin improved 110 basis points versus the prior year. I'll also point out that the lower overall margin reflects tariff-related costs that were elevated in the first quarter of 2026. With the impact that tariffs will have on our margins this year, along with the infrastructure investments we've made in the business, we're not expecting significant year-over-year incremental operating margin improvement in 2026. That said, we'll continue to appropriately manage the business in the short term while executing on our strategy to drive a significantly improved operating margin profile for heavy duty over the long term.

On the broader sector, market conditions remain challenged. Great freight recession continued through the first quarter, and geopolitical tensions created further economic uncertainty for consumer demand. As a result, near-term visibility remains limited, and we are not expecting meaningful growth in freight tonnage throughout the year. However, we continue to capture market share in certain channels, such as the OE dealer network, where there has been an increased appetite for aftermarket solutions. Overall, we continue to see opportunities for growth. We remain focused on balancing our approach with cost discipline and strategic investment that will allow us to continue capitalizing on these opportunities when the market improves. As a great example, we are encouraged by the opportunity we see within our diesel aftertreatment portfolio, which we believe represents a meaningful long-term growth driver for the heavy-duty segment.

Modern diesel engines rely on diesel exhaust fluid, or DEF systems, to meet increasingly stringent emissions regulations. These systems are subject to high failure rates due to harsh operating conditions, temperature extremes, and sensor degradation, making reliable aftermarket solutions critical for fleet uptime. Through our Dayton Parts brand, we offer one of the most comprehensive portfolios of replacement parts for diesel aftertreatment, including DEF heaters and pumps. Our solutions provide plug-and-play installation and meet or exceed OE performance at an aftermarket price. These products are built with durable materials, subjected to extensive testing, and incorporate best-in-class sensor technology designed for long service life. As the installed base of DEF-equipped vehicles continues to age and fleet acceptance of aftermarket solutions increase, we believe our leadership in aftertreatment systems positions us exceptionally well to serve fleet customers and capture incremental share over time.

Congratulations to our Dayton Parts team for bringing this opportunity to market. Turning to slide 6 in our specialty vehicle segment, net sales were flat year-over-year as pricing actions in certain categories offset slightly lower volume year-over-year. Keep in mind that from a seasonality standpoint, Q1 is typically the slowest quarter of the year. Operating margin performance was in line with our expectations, reflecting higher tariff-related costs. We're also investing in our expanded dealer network to drive more wallet share and optimize our footprint. From a market perspective, we are seeing early signs of stabilization as we enter the 2026 riding season, with new vehicle sales increasing year-over-year in the first quarter. We also continue to see strong engagement with our ridership as attendance at the national UTV ATV events remain high.

Additionally, we're seeing new lower-cost entry-level vehicles entering the market that offer improved opportunities for aftermarket enhancements. One new product that illustrates this opportunity well is the power steering kit developed for the new Polaris Ranger 500 platform. As many of you know, Polaris recently introduced the Ranger 500 as a more stripped-down, cost-effective utility vehicle designed to appeal to a broad customer base, including fleet users, recreational riders, and first-time buyers. By design, this platform ships with more basic features, which creates an attractive opportunity for the aftermarket to enhance functionality and performance through accessories and add-on components. Power steering is a good example. While the Ranger 500 does not include power steering as standard equipment, demand for steering assist remains high, particularly among users operating in rough terrain or using the vehicle for work applications.

SuperATV power steering kit provides a bolt-on solution that significantly reduces steering effort and feedback, improving control and reducing operator fatigue. This system is engineered for easier installation and features sealed input and output shafts, along with watertight connectors designed to withstand harsh riding environments. Congratulations to the team at SuperATV for being the first to bring this solution to market. With that, I'll turn over to Charles to cover our results in more detail. Charles?

Thanks, Kevin. First, let me say it's been great getting to know a number of our analysts and investors since joining the company in January, and I'm looking forward to spending more time with all of you in the future. Turning now to slide 7, I'll walk through our consolidated financial performance for the first quarter. Total net sales for the quarter were $529 million, up 4% compared to the prior year period. The increase was primarily driven by pricing actions across our segments, partially offset by volume declines versus last year, where we had an exceptionally strong quarter from a volume standpoint. As Kevin mentioned, compared to Q1 of 2024, our two-year net sales growth rate was a strong 18%.

Adjusted gross margin was in line with our expectations at 36%, down 490 basis points compared to last year's first quarter. As the company has previously covered, our pricing initiatives have been implemented to address a range of incremental costs, including tariffs, while considering the competitive dynamic of our parts in the marketplace. This has resulted in a negative impact to our overall margin profile in the short term. That said, we expect our margin profile will meaningfully improve as the year progresses for two main reasons. First, as we discussed previously, this first quarter had the highest level of tariff expense we'll see in 2026. Given the inventory we sold was associated with the highest level of duties that were levied in 2025.

Second, we anticipate that our supplier diversification, productivity, and automation initiatives will make significant contributions to our margin profile as the year moves forward. While our teams did an excellent job managing discretionary costs during the quarter, our adjusted operating income margin was 12.1%, down in conjunction with our gross margin. Adjusted diluted EPS was $1.57, driven by lower operating income, partially offset by lower interest expense and lower shares due to repurchases. Turning to slide 8, operating cash flow for the quarter was $44 million, and free cash flow was $35 million. As you can see on this slide, our cash flow improved sequentially from Q4 2025 and has rebounded nicely from this time last year when our cash payments for tariffs peaked in the middle of 2025.

I'll add that we've reduced inventory significantly year-over-year. We remain on track to generate a more normalized level of free cash flow for the year. On the capital allocation front, we deployed more than $51 million in the quarter to retire approximately 435,000 shares at an average price of approximately $118 a share. This represented a quarterly record level of repurchases for our company and also our view that there was a dislocation in the market valuation for our stock, which prompted us to utilize our strong balance sheet to return capital to our shareholders. We currently have $408 million remaining in share repurchase authorization, which extends through 2027. Turning to slide 9, our long-term capital allocation strategy remains unchanged.

We first review our debt levels and leverage ratios, then we deploy capital on internal initiatives, as this is where we see our greatest returns. We invest in M&A, which continues to be a key component of our growth strategy. Finally, we will continue to return capital to our shareholders through opportunistic share repurchases. With this consistent approach, we've deployed $1.8 billion of capital since 2020 and expect that our overall strategy will continue to drive long-term growth. Turning to slide 10, our balance sheet remains a significant strength for Dorman. We ended the quarter with net debt of approximately $413 million and total liquidity of $627 million.

Our total net leverage ratio at the end of the quarter was 0.99 times our adjusted EBITDA, demonstrating our ample flexibility to support the business, manage through tariff-related working capital demands, and continue investing in strategic growth opportunities. As we highlighted on the previous slide, our target net leverage ratio is less than 2 times adjusted EBITDA and approximately 3 times for the 12 months following an acquisition. Turning to slide 11, we are reaffirming our full year 2026 guidance. We continue to expect net sales growth in the range of 7%-9%, driven by the full year impact of our pricing initiatives, along with a modest level of volume growth that we expect to be primarily in the back half of the year. Looking across the segments, we expect all 3 segments to directionally perform within this range.

We also continue to expect adjusted operating margin to be in the range of 15%-16% for the full year, with a more normalized high teens rate as we exit the year. Adjusted diluted EPS for 2026 is expected to be in the range of $8.10-$8.50. This guidance includes the expected impact of tariffs enacted as of May 4, 2026. Due to uncertainty around the recovery of IEEPA tariffs previously paid, our guidance excludes any impact from the potential IEEPA tariff refunds. Our guidance does not include any potential tariff changes after May 4, 2026, future acquisitions or divestitures, or additional share repurchases. We continue to expect a full year tax rate of approximately 23.5%. With that, I'll now turn the call back over to Kevin to conclude. Kevin?

Thanks, Charles. I'll just reiterate what we've said throughout the call. Our first quarter performance was solid and in line with our expectations. While uncertainty persists in the broader economic landscape, we remain confident in our strategic positioning, our ability to navigate near-term challenges, and our long-term growth opportunities driven by innovation, operational discipline, and our leadership position in the aftermarket. We appreciate your continued interest and support. With that, we'll open the call up for questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the Q&A session. At this time, I would like to give the instructions for Q&A. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. In the interest of time, we ask that you please limit your questions to 1 question and 1 follow-up. Afterwards, you may rejoin the queue. Our first question comes from the line of Jeff Lick with Stephens. Please go ahead.

Good morning, and thanks for taking my question. Kevin, I was wondering if you could maybe just elaborate a little more, provide a little more color, as the year plays out. Obviously, this is probably one of the trickier quarters you're gonna face, you know, selling the, you know, the most tariff-affected inventory from last year with the FIFO, and then obviously you had the added wrinkle of the major customer disruption. I was wondering as you just think through as you step, Q2, Q3, Q4, how that's gonna progress. Then maybe if you could weave in anything with regards to complex electronic parts and product innovation, that'd be great.

A lot there, Jeff, let me give that a shot. Good, good questions. Jeff, let me start with the sales progression. You mentioned the dislocation we had with a large customer that we mentioned in the fourth quarter. I'll just comment that, you know, as we entered the quarter, we saw some dislocation continued. As we exited the quarter, it was more normal rates, and ordering patterns kind of fell more in line with, you know, the out-the-door POS sales. When you look at the overall growth rate, you know, you gotta keep in mind that last year, particularly in the first half, was an extremely strong volume growth period for us.

Light duty grew 14% in the first quarter last year, so a very difficult comp. The first half of the year was up about 12% in light duty. We know that the growth from a year-over-year perspective will be challenged in the first half. As we exit the back half, you know, we're still very comfortable with our 7%-9% full-year guide, as, you know, we have a full year of the pricing initiatives in play. We also have a lot of new business coming online as well as continued new product launches. We still feel very comfortable with that guide.

In terms of the margin progression, you know, as we've said multiple times that, you know, Q1 was gonna be our most difficult quarter, as the tariff rates coming through our P&L because of FIFO will be the highest. As we move through the year, you know, those tariff rates reduce, you know, because they were the highest when they first implemented starting back in April of last year. Also, all the initiatives that we undertook since April of last year in terms of further diversification, productivity initiatives, you know, dealing with our supplier community, you know, those also have to go through FIFO. So we have very good visibility to what that looks like going forward because of FIFO. We feel confident that we'll continue to see margin progression as we move through the quarters.

You know, we should, as we said in the guidance, operating margin should be in that 15%-16% for the full year, and we expect to exit Q4 at a higher rate in the high teens area, which is kind of back to normal levels.

Anything further on just the complex parts and innovation? You know, is the environment kind of just moving along at a linear pace, or are you seeing it maybe step up a little more exponential?

Yeah, great question, Jeff, I didn't address that first time through. Complex electronics in the first quarter met our expectations. You know, it's a category that continues to, you know, the growth continues to outpace our overall portfolio, and we expect that to continue. We did highlight a few new products that we launched in the quarter that were, you know, have complex electronics embedded in them. Yeah, it's a, it's a category we're gonna continue to invest in, and it'll continue to grow at an outsized pace in the overall portfolio. That is our expectation.

Awesome. Thanks very much for taking my multiple questions. Look forward to talking to you later.

You got it.

Our next question comes from the line of Scott Stember with Roth Capital. Please go ahead.

Good morning, and thanks for taking my questions as well.

Morning.

Maybe to talk about the heavy duty. We've seen, granted, coming off of a low base, but we've seen a nice recovery here in sales. You talked about the margin recovery just really not being there for the most part for this year. Maybe just give us an idea of when you're putting through price increases for tariffs, are you able to get all of it in this segment like you are in light duty? Then maybe just talk about the level of investments that we should expect in new product development there.

Yeah, good question, Scott. I tell you that the tariff, you know, we continue to pass tariffs through in all 3 of our segments. Heavy duty is no different. We will see, you know, early on in the process of passing through some margin dilution. You know, we have to continue to be competitive where we have competitors, and you just get some margin % compression if you pass through dollar for dollar. In general, that's been our approach. We're able to recover the tariffs, but you do see some margin depression, and we did kind of call that out in prepared remarks. Growth in the quarter was very strong, up 12%.

Some of that was due to tariff pricing, but we also did see some nice share gains in the quarter. We expect that to continue. However, as we also said in our prepared remarks, we're not expecting the market to recover at this point, just based on kind of some of the freight indexes that we're looking at. You know, we don't have any major expectation. We're gonna continue to focus on taking share where we can take share, and working on driving productivity initiatives throughout the business and driving new product launches and commercialization through that channel. Which we've had some good success, but we still have a long road ahead of us there.

Got it. Related to tariffs, a lot has changed in the first quarter with the IEEPAs going away, the 232s changing, and the 122s coming in. It sounds, at least, from the tenor of your comments regarding guidance that the changes there were essentially net neutral. Is that correct?

Yeah, Scott, that's correct. When the IEEPAs went away, the Section 122s, which is essentially 10% across the board, came into play and there just wasn't a major change either way just based on how the HTS codes are applied. Most of our codes now are, you know, Section 232, whether that's the steel, the steel aluminum tariff or the auto parts tariff on top of the 122 tariffs. You know, as everyone knows, that there will be a new tariff regime coming into place when the Section 122s expire later in the summer. We don't know what that's going to look like. Our assumption is basically, it's going to be roughly in the same neighborhood as it is today.

Got it. That's all I have. Thanks.

You got it.

Our next question comes from the line of David Blents with Wells Fargo. Please go ahead.

Hi. Good morning, guys. Thanks for taking my questions. Like, you know, POS for large customers grew mid-single digit in Q1, but curious if you could talk about how that trended through the quarter, what you're seeing quarter to date and expectations for 2026.

Question, David. I'd say the progression was very similar, of POS, up mid-single digit in the quarter. You know, frankly, it's been very similar to what we saw in Q3 of last year and Q4 of last year. Not a lot of change. Just continues to be very solid out-the-door growth at our customers. No real change in progression. I'll say that April is very much in line with what we saw in the first quarter. You know, to answer the second question, our expectation is similar as we move through the rest of the year.

Got it. Thank you. Then considering the really healthy balance sheet, curious how you're thinking about M&A through the balance of 2026 with potential tuck-ins or geographic expansion.

I mean, M&A is, as we talk quite a bit about, it continues to be a large part of our strategy, our growth strategy. And I would tell you that, you know, as we look at our pipeline today across all three segments, it continues to be very healthy. I would say that deal activity was muted or has been muted since, you know, kind of Liberation Day, at least in our industry. I think we're now starting to see that loosen up a little bit as there's more understanding of the impact of tariffs on different companies, different parts of the industry. You know, we expect deal activity to pick up as we move through 2026 and into 2027. Our strategy in terms of the segments has not changed.

I mean, when we look at light duty, we're very interested to continue to geographically expand our business there, and continue to enhance our technological capabilities. You know, in specialty vehicle, we continue to look to expand geographically. We also look to grow our portfolio of brands through a series of tuck-ins. Still very highly fragmented space. In heavy duty, kind of similarly, where there are opportunities in the heavy duty market, we're a very small player in a very large market, for us to enter different segments of that space via tuck-in acquisitions.

Thanks so much.

Got it.

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

Hey, good morning, guys.

On the-

Go ahead, Bret

this single-digit POS, could you sort of carve out what is actual price versus units? I guess specifically within units, could you comment on the chassis category? Did it benefit from any seasonal demand creation this winter?

Bret, I'll first answer. I mean, we, you know, we don't historically, we've never broken out price versus units for competitive reasons. I will say, look, the POS, there's certainly inflation embedded in those numbers just based on the tariff impact across the industry. There's no question about that. I would say that it's remained relatively steady the last 3 quarters and into April. We don't specifically comment on any specific category, I will say, you know, in regards to your chassis question, look, it was a good solid year in terms of the weather. Weather, as you know, does, you know, impacts certain categories more than others and under car chassis is certainly one of those.

You know, that season really starts late in the 1st quarter into the 2nd quarter, and so far, we feel really good about that category, and I think we had, certainly a good winter with a lot of precipitation, that helps that category from a growth perspective.

Okay, great. Most of my questions were answered, but, could you give us a sort of idea of what you paid on IEEPA last year just in case we could get a windfall out of that this year?

Yeah. Look, I'll tell you that we just started the process of recovery on IEEPA, and it's still too early to tell how everything's gonna settle out and whether or not there'll be any appeals. It doesn't appear that there's gonna be at this point. You know, at this point, we're not gonna disclose it because we need to work through the process, and we don't wanna get ahead of ourselves and, you know, because it's just such a unprecedented situation. More to come, Bret, as that plays out.

All right. Thank you.

Our next question comes from the line of Justin Ages with CJS Securities. Please go ahead.

Hi, this is Will on for Justin. A lot of my questions have been asked, but you noted light trucks and SUVs is a growing portion of prime vehicles in operation. Can you give us some more color on how that breaks down further with electric vehicles?

Well, let me just clarify. For electric vehicles, are you talking about in heavy and specialty or?

Yeah.

light duty?

Light, light duty.

Light duty, yeah, certainly. You know, light duty right now, from a VIO perspective in North America, light duty is still less than 2% of the VIO. A slightly larger portion of that would be we would consider alternative drivetrains like hybrid. The vast majority is still ICE, and it's gonna take a very long time for that mix to change substantially. Regardless, we continue to be drivetrain agnostic, right? Our technologies and our capabilities could address any drivetrain. We see a lot of opportunities across the new drivetrains. Obviously in a hybrid there's 2 drivetrains, there's a lot more addressable content. We're comfortable with whatever drivetrain becomes prevalent in the future from a VIO perspective.

Thank you.

Got it.

Ladies and gentlemen, this concludes our Q&A session and today's conference call. We would like to thank you for your participation. You may now disconnect.