First-time appearances. It's my pleasure to introduce Dorman Products, who is a leading supplier of replacement aftermarket parts, so they market approximately 138 distinct parts, and then additionally, every year, they're able to introduce thousands of new products given their R&D capacity and innovation. Dorman is about a $4 billion market cap and about $300 million , sorry, $400 million of net debt. It's my pleasure to introduce CEO Kevin Olsen and CFO David Hession.
Thank you.
Good morning, and thanks for joining us today. This is actually our first time presenting at this conference, so we appreciate the invite. Get right into it. On slide two here, we'll just cover the non-GAAP disclosures. You can look at that at your own time. Dorman, what we do. For those of you who aren't familiar with Dorman, just to give you a little bit of what we do. We design, manufacture, and distribute innovative solutions for the aftermarket. We primarily do that through three segments. Our Light Duty Passenger Vehicle segment, our Heavy Duty segment, and our Specialty Vehicle segment. With more than $2 billion in sales, we have a leading product portfolio of over about 138,000 unique SKUs. Our portfolio is nondiscretionary in nature. So we like to say that. If you need a Dorman part, your car isn't running or it's not running safely.
I'll cover just the three segments in a minute. But we do serve multiple customer channels, some of the companies that are presenting at this conference today. So if there's one thing I'd like you to take away from our presentation today is that we're an innovation company. We launch about 5,000-6,000 new SKUs per year. Which equate to about 20 products a day. So we really are a product innovation house. A lot of those SKUs are what we call new to the aftermarket. So they did not exist in the aftermarket the day before we launched it. And our customers weren't able to sell that part the day before we launched it. Second, we have a large TAM, total addressable market. And for a lot of opportunity for share gains in those markets. Third, as the aftermarket continually evolves with new technologies, we believe we're well positioned.
To take advantage, particularly given our capabilities around complex electronics. And next, we have a global presence. With talent really around the world. And we're also focused on expanding geographically through acquisitions in the future. And finally, we have a very strong financial profile with a strong balance sheet and liquidity position. This, along with our operating model, has enabled us to really outperform our peers in the industry. So what really differentiates us from other folks in the space is our ability to innovate at scale. We design development manufacturing capabilities for solutions really across the entire vehicle. We kind of touch on it a little bit here in future slides, but anything from very small parts all the way up to very complex electromechanical parts across the vehicle. We have an asset-light model, which allows us to kind of come in and exit lifecycle-prone parts or categories.
This is actually very critical. We do do some manufacturing of our own parts where there's IP or know-how or where it just doesn't set up to work with a supply partner. And all this really enables us to be a strategic partner to all the customers that we serve in our markets. So our total addressable market here has been expanded quite a bit in the last few years. Back in 2020, we were primarily a light passenger vehicle-focused company. Did an acquisition in 2021 of Dayton Parts. We were in the Heavy Duty space, but not in a big way. And we really needed Dayton Parts to give us that platform to provide future growth. And then in 2022, we did the acquisition of Super ATV, which established our Specialty Vehicle platform.
So in a Light Duty segment overview, we are a strategic supplier to all the customers that we serve in the space. Around 250 categories. The thing to take away here is really bumper to bumper. There isn't really a technology on a vehicle today that we can't address. 60% of our sales in this segment go through the retail channel, and about 35% go through the traditional WD channel. Our Heavy Duty segment. About 100+ categories. Really heavy focus today on below the frame, which is what Dayton Parts brought. And that gives us a lot of ability in the future to expand above frame. Not only do we deal with class 7 and 8 vehicles, but also a lot of vocational applications. Think garbage trucks, refuse, cement trucks, mixers, things of that nature.
I think as you look forward, new product development and new product development growth will be a bigger part of the story here as our flywheel is really in the early days of cranking up. And while the Heavy Duty sector has been going through what's now being called the Great Freight Recession, we've really invested in this business to position us well for when that market turns. And then finally on slide nine here, our specialty vehicle business is really focused on ATVs and UTVs. So this would be the side-by-sides. Strong category coverage here as well as half our business goes to what we would call more utility-focused. Think construction, schools, ag, things of that nature. And roughly half the business supports recreational vehicles. We're also a house of leading brands here with more than half of our sales direct-to-consumer here.
So a little bit different model through our website, superatv.com. A little bit of our historical financial performance. I won't cover all these, but from 2019 to 2024, we drove a 15% CAGR top-line growth. And we've outpaced our peers over the last three years in key top and bottom-line metrics displayed on the chart. I also wanted to hit on our most recent results here. Last week, we reported an 8% sales increase in net sales and a 34% increase in adjusted diluted EPS. And while there were some timing subtleties in the quarter around tariffs and tariff dynamics, which I'm sure we'll talk about in the Q&A, we had very strong performance in the third quarter. And then we reaffirmed our guidance in our recent last week in our earnings release. So with that, I will.
Thank you for that. That was a great overview. Just to start off, can you discuss how just Dorman differentiates itself from competitors and how you guys are able to outpace the market on a consistent basis, especially during downturns?
I would say the key thing there in terms of how we've been able to differentiate ourselves is our innovation engine. Our ability to identify failure-prone parts that are on the road today in the car park, and our ability to design and develop those parts, bring them to our customers, and allow them to sell parts that they weren't able to sell the day before. It gives our technicians the ability to not have to buy parts from their competitor, the OE dealer.
So you guys push out about 5,000 - 6,000 new SKUs a year. Can you just discuss your ideation process and how that sets you guys apart?
Yeah, we do. So the ideation process at Dorman is what we consider really our secret sauce. There are various ways that we identify which parts are failing and design and develop those parts. We're in shops around the country, actually all throughout North America every day. We're scraping blogs. We're on the internet. We have ASE-certified technicians that work at Dorman that take calls every day. We have a technician council of about 40,000 technicians that are continuously giving us feedback. So yeah, that over the year has really been the differentiator.
Can you talk about the inventory management when it comes to just the amount of new products you guys come out with?
Yeah, I mean. I'd say that's a challenge, but it's also kind of core to what we do. So we want to make sure that our customers have the right amount of coverage. And the ability to say yes when they have to say yes to a customer that needs a part.
So can you touch on your asset-light model, and the network of over 400 suppliers you have around the world?
Yeah, look, vehicle technology is constantly changing. And parts are lifecycle-natured in this industry. So what asset-light allows us to do is really kind of come into a category or into a product, but not be tied to that manufacturing base if that technology changes over time. So we're able to rapidly come in and out, not stuck to any fixed overhead. A lot of folks with a lot of manufacturing overhead work to fill those plants up. We're not constrained by that.
In an environment like we've had with tariffs and trade being basically front page for the better part of the last year, how challenging does that get from a supplier-driven organization like yourself to relying on outside partners?
I would say that we've become pretty good at it because it's not a new phenomenon. Actually, we kind of started dealing with trade disruption back in 2018, 2019 with the original 301 tariffs. That's when, as a company, we really started to think about what our global footprint really needed to look like, which we've made some drastic changes over the years on that front. We've been through the COVID. We've been through the global supply chain crisis. What our diversification efforts have led us to is a much more robust supply chain around the globe. We don't have all our eggs in too few baskets.
If I'm thinking about this from a company perspective, what does that sourcing look like for you from an origination standpoint?
So right now, well, I'll go back a little bit. 2018, 2019, before the first round of tariffs, we were heavily indexed to China and Taiwan, almost about 80%. We made a decision then to really look at what our footprint needed to be. Today, we're estimating to be below 30%. We've got about 30% here in the U.S. today. And the rest is all around the world, whether that's India or Malaysia, Thailand, Indonesia, Vietnam.
The U.S. portion, is that, I would imagine, a higher margin product, a more value-added product?
Not necessarily. For instance, we would manufacture drive shafts. We have a drive shaft manufacturing facility in Virginia Beach. There is some IP and know-how in manufacturing drive shafts, and that does not set up for sourcing.
When it comes to sourcing your products versus manufacturing them in-house, what's the decision like on which one to go?
There's a whole bunch of things that go into that decision. It's cost. It's the whole value proposition. It's the quality. Is there IP, know-how? Lead times. There's a lot of different things that go into that equation.
So, given some recent bankruptcies, First Brands in the space. Can you talk about the use of factoring programs and how you expect any changes?
We've had a lot of questions on the First Brands situation. So. Just from a competitive standpoint, we really don't consider First Brands a competitor. We do have some overlapping categories on the fringes, but it's really not a material amount at all. Secondly, you look at Dorman's balance sheet. We have a very strong balance sheet, strong liquidity. Leverage is less than one times EBITDA. So we're in a little bit different of a position financially. And I'd also say that we don't participate in any off-balance sheet financing. We do participate in customer-sponsored factoring programs. And we've done that for decades where we have elongated terms with our largest customers. And then through their partner bank, we can then decide if we want to sell those receivables to them to shorten our DSO cycle, which we'd normally take advantage of.
You've talked about how you are able to log data and write your own code, which is unique within the aftermarket space. Can you just provide us more details on this and how it helps?
Yeah. I mean, we're the only pure-play aftermarket company that we know of that has that capability. So we're able to take an electromechanical part, a part that's enabled with software, and data log it, like you mentioned. And that ability allows us to understand everything that software is making that part function. We're then able to recreate our own software, write our own code, which is then copyrighted, and put it on board the vehicle. Yeah. And it's a key differentiator for us. And as we look out into the future, more and more parts on vehicles are software-enabled. And if we look at our funnel, more and more parts in that funnel are what we would call a complex electronic part.
Maybe of all the suppliers that are out there, you compete most with the OE service channel. In light of that, talk about right to repair and what that does for you. Because I think your situation is unique relative to other suppliers that are taking maybe a part of the value chain that is much more independent to begin with.
Yeah. I mean, right to repair is a big issue for the industry. It's definitely a consumer rights issue, and I think every time it's been put to ballot, it's an 80-20-90-10 issue, and right now, there's multiple strategies going on, whether that's a state-by-state ballot initiative or federal initiatives to get a right to repair bill passing in Congress, which we're actually making a lot of progress on, so I think it's important. I think customers need the right to have access to the data on the vehicle that these vehicles are producing, and it's not just cars. It's most everything else that we buy today as well, so, I mean, the consumer rights are on our side, so I think in the long run, it's going to turn out in a good spot.
On vehicle complexity, can you talk about how that's benefiting your guys' business?
Yeah. As I mentioned before, as these vehicles continue to become more and more complex, even if it's a pure plug-in electric vehicle or a hybrid, our ability, our engineering capabilities, are kind of what we view as our competitive moat. And so our ability to data log parts, create our own software that interacts with the vehicle network, is a huge differentiator for us. It's going to become a bigger and bigger part of our business.
What does that look like from an employment standpoint? How are you finding that talent that's able to and wants to work in the aftermarket? And how do you retain that sort of coder that might otherwise be looking at other industries?
The profile is pretty interesting. These are young folks that love to reverse engineer software, gamers, and people of that nature. And we've been pretty successful over the years. I mean, this isn't an initiative that we just started. We've been doing this for 10, 15 years, 15 years easily. So I think we've got the profile down. I wouldn't want to let out one of our corporate secrets, but it's one of our core competencies.
You've been able to rapidly expand margin and have achieved over a 40% gross margin percentage at this point. Can you talk about the ability to maintain that and where you see it going from here?
Yeah. So the margin's been a real focus of the team over the last several years, and we've been very successful expanding it. Kevin talked a lot about the supplier diversification. That was certainly a driver of it. Productivity initiatives, automation. And then we also get a benefit from new products. They tend to have higher margin. And as they accelerate with growth, it has a margin benefit. So we think that there's room to continue to grow. And from a long-term perspective, as we look at the three segments, we're looking for high-teens margin, operating margin for light duty, mid-teens for heavy duty, and high-teens, again, for specialty vehicle.
Scott Stember from ROTH. Just talking about margins, I think. Recently you guys have talked about how, when you're putting through price increases for tariffs, usually there's a little bit of erosion. But it sounds like you guys are in a better position this year coming up to be able to offset that and be essentially neutral. Can you maybe just talk about some of the things in play?
Yeah, Scott, great question. I mean, I think we're in a different spot than we were, call it, seven years ago in 2018 with the first round of tariffs. We didn't really have the ability to move into lower tariffed regions like we do today. If I look at our global engineering and supply chain capabilities, it's in a different spot. So we have the ability to look for different supply partners in different parts of the region to help us maintain margin over a longer haul.
You've acquired into both the Heavy Duty and Specialty Vehicle segments. Via Super ATV and Dayton Parts. Can you talk about the strategic decision to do so and then what growth opportunities you see in each?
Yeah. I mean. Years ago now, we looked at, and we constantly look at adjacent segments to our Light Duty business. And Heavy Duty was our first natural extension for us. We were tangentially already in the space with a few parts. And we viewed that market really as the Light Duty market probably about 20-25 years ago today. So we see a lot of the same attributes. The OE concentration where an aftermarket guy could come in and really take a lot of share with the right value proposition. And we also love the Specialty Vehicle segment. In all three of these segments, we're able to leverage our unique engineering and new product development capabilities. And that's what we really like about the three segments. And the three platforms now are really positioned for future growth.
So net debt to EBITDA just over 1%, I believe, or one time. What are the capital allocation plans going forward?
Yeah. I mean, the good news is we're in a good spot, have dry powder that's going to enable us to execute against our strategic plan. If you look at the capital allocation strategy, it hasn't changed in several years. First thing we'll look at is where we stand on our leverage target, which is two times adjusted EBITDA, three times in the first year following an acquisition. And assuming there's capital to spend, we'll look first to internal investment to get our greatest returns there. Second would be M&A. And then third would be returning cash to shareholders. And we do that opportunistically through share buyback.
When it comes to M&A, is this more of a tangential business or more bolt-on? And then within each, where in the business would you see the most opportunity?
Yeah. I think we have a little bit different of a strategy when we look at the three different segments. And in Light Duty, I mean, any acquisition for us is really a make versus buy decision because we could pretty much develop any parts that we want. So there, it's more about regional expansion because we primarily are a North America player there in technology acquisition. As vehicles continue to advance in technology, we want to make sure we stay ahead of the curve. Heavy Duty really comes down to continuing to build out the portfolio. As I mentioned earlier, we're heavy underframe. And we have a lot of opportunity to expand above frame. Plus, we probably could access some additional channels in the Heavy Duty space with the right acquisitions.
And on the Specialty Vehicle side, we do believe we have the strongest brand house of brands, if you will, in that space, highly fragmented, a lot of great products, a lot of great brands still out there, smaller companies, bolt-on, tuck-in type acquisitions where we would acquire the brand and the product and leave everything else behind.
Maybe a little bit looking down the road, but how do you view the adoption of lenses for electric vehicles and how you might participate or not in the EV aftermarket world?
Yeah. That's a great question. It's a question I used to get a lot a few years ago. I would tell you that. First of all, the car park today in the U.S. is going to remain highly ICE-concentrated for the next 10 years. I mean, we can start with that. But as we see the adoption of pure plug-in electric, there is a lot of opportunities for us. There's less content in terms of the amount of parts in the drivetrain, but there's actually a higher dollar content. We actually have four to five hundred parts at least now for pure plug-in electric vehicles. And that just continues. With our engineering capabilities, we're really drivetrain agnostic. Again, we're not category-focused. We follow the failure. Okay? But what's really playing out here, it looks like that.
Hybrids will become a large part of the picture and the story here in the next 5-10 years. And for us, that's just fantastic because there's two drivetrains.
I think we're bumping up on time here, but Kevin and David, just want to thank you guys for coming here and making the first appearance. And hopefully, we see you in future years.
Thanks, guys. Thanks for the time.
Thank you very much.