All right. Keep the ball moving. It is an honor to introduce Dorman Products, which is a leading supplier of replacement and auto aftermarket parts, with a focus on developing solutions for vehicle components that are often difficult to source or repair. It is a broad product portfolio, and they have an ideation process that have helped differentiate the company within the aftermarket. Excited to talk about the business and strategy, and opportunity ahead for all three of its businesses. Today, we have Kevin Olsen, Chairman, President, CEO, and Charles Rayfield, Senior Vice President and Chief Financial Officer.
Thank you.
I guess just to get started, I guess for those who may be unfamiliar with Dorman, just start with a quick overview of the business and
Sure
positioning it in the market.
Sure. As you mentioned, we're in the automotive aftermarket for mobility. We operate in three segments. The light-duty segment, which is our largest segment by far, it's about 80% of the business. We're in commercial vehicle or heavy-duty truck, it's about 10% of our business. Then specialty vehicle, which think about side-by-sides and ATVs. We operate, we're about $2 billion in sales. We have a very wide portfolio, about 150,000 unique SKUs. What makes Dorman special is really our ability to identify failure-prone parts in the aftermarket. We then design and develop those parts and offer them to our customers. Usually when we launch these parts, they weren't available in the aftermarket the day before, so we call those aftermarket exclusives.
In the light-duty business, we operate through the normal channels, so our customers would be like the folks who were here before us, the GPCs, AutoZones, O'Reillys, Advances of the world, plus what we would call the traditional channel, warehouse distributor channel. In heavy-duty truck, we operate through primarily the warehouse distributor channel. In specialty vehicle, a little bit of a mixed model there where we go to market through direct to consumer, through our website, but also through the dealer network.
Thinking about the three businesses together, can you talk about the synergies between the three of them and why it makes sense to keep the three together?
They're very similar. Innovation is at the front of all three of those businesses in terms of our ability to create new opportunities and new solutions for the folks hanging the parts on the vehicles. If you kind of step beyond that, step beyond the engineering and product development side, we obviously have the whole backend of the businesses that are very similar. From supply chain, operations, distribution, those are the areas that we have high level of synergy in.
How are you thinking about the priority of each of the segments and where you are seeing the most white space opportunity for you?
Well, I think all three of them offer a wide range of growth opportunities for Dorman. Obviously, the specialty vehicle segment, we started that segment back in 2023 with the acquisition of SuperATV, so we have a long runway to go there. As I said, it is only about 10% of the business. We see an opportunity that is a highly fragmented market to consolidate that market. Same with heavy duty. We look at the heavy-duty space as kind of the light-duty space of 30, 40 years ago. Today, the OEs control a wide portion of that aftermarket, kind of like the light-duty space did a long time ago. Our opportunity there is to bring unique solutions to fleets or to warehouse distributors at a high level of quality at a lower cost point than the OE. Then in light duty, I mean, for us, the opportunity just continues.
In North America, we look at our opportunity funnel. These would be repair opportunities over the next few years, and that funnel has been as large as it has been in our history. We continue to see a lot of high-dollar failures on vehicles coming off the line today, which sets up the aftermarket very well for the future.
On that, thinking about the light vehicle and duty, VIO, where do you see the most opportunity from an age perspective?
Yeah
with your customers?
Well, historically, our customer, we like to say our sweet spot is that 7- 14 year-old vehicle. We'll usually catch a vehicle after it's coming out of the warranty cycle, and then that vehicle transitions and find its way into the independent aftermarket. Could be a second, third owner. For us, that's where our sweet spot is. We try to pick up the part as early as we can in the failure cycle and ride it throughout its life cycle.
I really want to hone in on your ideation process, as that is one of the biggest differentiator for you guys. Just talk about how that differs from some of your competitors and how you view that as a competitive advantage.
Yeah, I mean, that is our competitive advantage. It's our secret sauce. There's a variety of different methods that we use to be able to identify failure parts in the market. We have things like a repair tech council. We have 4,000 independent repair techs that we communicate with. We basically view them as an extension of our engineering team. They're constantly feeding ideas, what they're seeing in their shops. We're in shops all around North America every day. Usually back in the old days, we used to call it dumpster diving, where we'd find what boxes they were throwing away, and that would give us ideas about what's failing. Today is a totally different thing. We walk into a shop today, and there'll generally be a pile of parts in the corner that they put aside for the Dorman team.
We have ASE-certified technicians on our technician support line, helpline, gathering information. We are on blogs. We are on all different methods. We glean a lot of information from the dealers themselves. We actually purchase a lot of parts, so we get to see what they are buying, so we know what is failing in the warranty cycle. We get reports from all of our major customers that essentially, when there is a missed lookup, when a customer calls into one of our customers and is looking for a part and they do not have it, we get all those reports.
We will take all this information and bring it down into an ideation funnel, which then, once we find a part and we understand what the failure mode is, we understand where that part is being deployed on the vehicle, what other makes and models are utilizing this technology, and then we will design and develop that part if it meets an ROI.
If you think about the pipeline for new product introductions and how you are able to use the introduction of new products as a strategic lever, has the strategy changed at all in recent years, as you think about higher technology products that come at a higher margin. Does that impact the pace of new product introductions?
Yeah. I would tell you that one of the things that has changed is vehicles continue to become more and more complex, obviously. You see it in your own vehicles. One of the things that we have done as a company is we have invested heavily in complex electronics. These are parts that have software embedded on them that communicate with the central vehicle network. We have been developing complex electronics now for, I do not know, 12 or 15 years. We believe we are the only truly independent aftermarket company that has that capability. It is a clear differentiator for us. As we look at our repair funnel, as you mentioned, out into the future, a bigger and bigger portion of those repair opportunities are complex electronics, as you would imagine. For us, we love that dynamic.
So another competitive advantage you talk about frequently is your asset-light model and your reliance of over 400 third-party manufacturers globally. Just talk about the benefits of this model versus in-house manufacturing.
Yeah. We're in 200 This is in light duty only. We're in 200+ categories, so we're literally all over the vehicle, anything from very small plastic parts up to very large complex metal parts, complex electronic parts. Our model of being asset-light allows us to move in and out of categories very quickly as technologies change without being tethered to overhead. It served us well, and we think that is the model for our company going forward.
It looks a little differently between each segment. There is some in-house manufacturing on the heavy-duty side and the specialty vehicle side. Just talk about what differs there and if you see that as an opportunity.
We do do some manufacturing on the light-duty side where it makes sense, where there's IP that we really want to protect or where a product or a category doesn't really set up well for sourcing. But as you mentioned, we do do a little bit more manufacturing on the heavy-duty side. Again, a very large, heavy product that doesn't set up well for global sourcing, and there is some IP and know-how in those products. The same with specialty vehicle. Specialty vehicle, our model there is we will be typically one of the first acquirers of new equipment, new machines that hit the market. We'll then tear those machines down and look for any opportunities that we can to address, whether it's an accessory or component. We will then rapidly engineer, design, develop, and manufacture those parts, because in that industry, we really want to be first to market.
First to market is very important. A lot of times, we will have a new part to market within a week after we have identified the opportunity.
Shifting gears a little bit towards the current environment and what you are seeing in terms of consumer demand, just talk about the difference between the two channels you serve on the DIFM side and the DIY side.
Yeah. We obviously, like most others in our space, service both the professional, the DIFM channel, and the DIY side of the house as well. Our portfolio skews much more toward the professional, the DIFM side, but we obviously do have folks who do their own repairs on the DIY side. So we do service both. I would tell you that, but most of our parts, we like to say your car isn't running safely or it is not running at all if you need a Dorman part. There are obviously some exceptions to that. But look, the non-discretionary DIFM-centric part has definitely been stronger performance this year from the economy standpoint. As we have said in our public comments, we have seen more pressure on the DIY-focused consumer.
Typically, if we look at what a typical DIY end customer looks like for us, this is someone who owns a 13 year-old vehicle, which is the average today, the car park in the U.S. That person typically has household income of $75,000 or less. So clearly, the inflationary environment we have seen over the last couple years has impacted that consumer more.
Thinking about tariffs and the pass-through of price and cost increases, I guess just first, how are you thinking about the residual impact within the cost structure as we've seen IEEPA tariff rollbacks, but also seeing Section 232 still in play? Just how you're viewing the cost structure on a forward-looking basis.
Yeah. I would tell you, we kind of woke up to our supply chain back in 2018. We were very, very China-centric, where a very vast majority of our manufacturing partners were in China. We then really decided to diversify our footprint in that timeframe, and today we're much more diversified. I would tell you that we really feel good about what our footprint looks like today. The tariff environment, again, we've kind of lived with it now for the last eight years, so it's not anything new for us. IEEPA coming off back in, I guess it was late last year, has been good for us and for the industry as a whole. But there still is, as you mentioned, the auto part tariff that we're subject to on a lot of our parts and the steel and aluminum Section 232 tariffs. But overall, it's very manageable.
We view tariffs as another input cost, just like any other cost that we deal with, and we typically pass them through dollar for dollar when we see new tariffs come.
Kevin, you made some relatively significant changes to the leadership at the beginning of the year, including adding a COO role. Can you maybe talk about the impact that that has had, and what are the biggest opportunities to improve with that COO role, whether it's distribution, manufacturing, logistics, et cetera?
Yeah. Supply chain and operations is just fundamental to what we do. It is so critical, particularly given the macro environment with the trade environment. We have to be very flexible, nimble, and we have to execute at a very high level. I think adding that position has really tightened our focus on that. We have really spent a lot of time, energy, resources on improving our operations over the years, automating them. I would kind of characterize that we are still in the middle innings on that journey, but it has really helped us over the years to be able to absorb a lot of these costs, because we have been able to offset them with productivity in our business.
Charles, I think that is a good segue into you entering the role as CFO. Talk about your background and how that helps-
It is a long time ago. I joined Dorman in 2016, and then sometime in 2018, I took over to run the organization. I have been the CEO since. It has been a phenomenal run for the company, but we have a long way to go, and we have an exciting future as a company. With our new CFO here sitting beside me, we are really excited about the leadership team that we have.
Yeah, maybe I will just give a little bit of background on myself. Prior to coming to Dorman, I joined the company earlier this year. Prior to that, I was the CFO of a technology hardware company, Lutron Electronics. Private company, but similar size to what Dorman is. Prior to that, I was the CFO at Knoll Incorporated, which was a publicly traded company that we ultimately ended up selling to a competitor in 2021 for a very nice premium. I have had a lot of similar experiences to what Dorman goes through in terms of selling to large retailers, selling to warehouse distributors. I have had a lot of interactions with the operations groups of the companies I have been with, as well as involved in the strategic matters around M&A.
But it's been a great ride so far, like Kevin said, and very, very happy to be with the company.
You all mentioned that you're predominantly looking for failure products or basically close to failure. But we have seen, and we'll hear it from one of our presenters on the service side, that there is quite a bit of maintenance that's being deferred wherever possible, and in a lot of cases on the tire side and brakes, et cetera. How is that impacting Dorman Products? Do you see it through your channels, and how do you adjust for that with your own inventory and working capital?
Yeah, I mean, there's no question that some of that is going on in the industry. But if, again, I'll point you back to how our portfolio is consisted. It's vastly skewed toward the DIFM professional non-discretionary repair item.
Yeah.
That being said, we do have some DIY-centric items clearly in our portfolio, and we have seen the same thing. We've talked about it publicly. I would mention that historically, when these dynamics have presented themselves in the industry, those repairs and maintenance will come back down the line, and usually with a higher price tag, right? Because the maintenance didn't get done or the repair didn't get done really when it was supposed to get done. So, those usually come back at a higher price tag. So yeah, I think there's definitely been a consumer that's been impacted, for sure.
You changed your pricing expectations for the year as a result of some of the tariff refunds you guys have received. First, just touch on the pricing expectation changes, and then how that could potentially change your expectations on volume.
Yeah. We talked a lot about, starting, I think, a couple quarters ago, that as the tariff environment has come down, the amount of tariffs that we're exposed to as an organization has come down. We've reduced our pricing accordingly. As I said, we treat tariffs basically like a pass-through item. When we get a dollar tariff, we'll usually pass it through at a dollar, and vice versa. So accordingly, we lowered our prices. That being said, we don't control the ultimate end price that our customer charges to the person actually hanging the part on the vehicle. So, although we would like to see prices go down over time, we don't control that, and we haven't really made any predictions whether or not that's going to happen in the industry.
Can you talk about what you're doing on the heavy and specialty side? You've brought on new leadership within heavy duty. What are you looking for within the heavy space that rhymes or mirrors what you've done on the auto side?
Yeah. Great question. I think we look at the heavy-duty channel, as I said before, as a lot of parallels to the light-duty space years ago, and we're still very early days there. We need to build out our portfolio. We have really kind of ported over our engineering and product development capabilities of light duty into the heavy-duty space. So, we are in the process of building out a portfolio. Then we really have to expand our presence in a lot of the different channels that are in the heavy-duty space. Today, we're really focused on the warehouse distributor, but the largest channel there, the OE dealer, we're not really penetrated yet. So, between that and building above-the-frame portfolio is where we're focused.
Is this primarily within the engine? Are you looking for wear parts there?
Yeah, the engine, the aftertreatment, the emissions in the cab, all around the cab, yeah.
How much does there's an engine manufacturer that has a massive share in the North American engine market. How difficult is it to try to take share from such an embedded?
Well, there's repair opportunities on all vehicles and drivetrains.
Okay.
Thinking about the cost structure for the business as a whole, you have been investing in supplier diversification, productivity, automation initiatives. We have talked about the supplier diversification and with some of the lower exposure to China, but just talk about some of the other initiatives you are implementing.
That is a lot. We continue to be focused on, first and foremost, organic growth opportunities through innovation and new product development. That is our number one priority as an organization, has been, it will continue to be. As I talked about earlier, the backend of the organization, driving productivity, driving efficiency, continues to be of high importance because it allows us the flexibility to invest so much in the front end of the business and gives us flexibility in an uncertain cost environment, kind of like we have had. Since 2020, our industry has changed drastically, just from an inflationary standpoint. I can remember, I think it was 2023 and 2022, shipping containers were up to $30,000 a container at one point. So it has been a rollercoaster from an inflationary standpoint.
We have made it a core competency of how to deal with that from a pricing standpoint, but also a supplier partner negotiation, and then productivity would be the third leg of that stool, where that really gives us the flexibility as an organization to continue to invest.
As we think about the gross margin rate of the business, there has been some fluctuation this year with the IEEPA tariffs, but you have talked about exiting the year at a 40% gross margin rate. How should we view that as a long-term rate? Is that kind of a ceiling, a floor, or is that what we should view as a normalized rate?
Yeah, that's a good question. If you look back historically, I mean, the business typically operates at a gross margin level in the high 30%s to low 40%s. What we said is, as we exit the year here, there's been a lot of noise coming through 2025 and 2026. If we exit the fourth quarter, we're anticipating a gross margin rate of about 40%, which we would view as neither a floor or a ceiling. It's more of a structural base to enter 2027 with. Obviously, you've got some of the factors that Kevin talked about just a little bit ago, some of the input costs, such as fuel prices, materials costs, et cetera, that we have to take into account as we think about pricing actions that you mentioned before as well.
As we go into next year, 40% is really the structural base for which we're going to move forward with, and that's pretty consistent with our historical performance.
Thinking about capital allocation, the movement in the share price has You've seen an opportunity to increase buybacks recently, more than the historical rate, but you've also described a, I'll call it, a booming M&A environment. How are you thinking about the balance between buybacks and M&A?
Well, why don't I start with that one, Kevin? Our capital allocation strategy has been pretty consistent with how we handled it in the past. First off, we're looking at debt levels. We currently sit here at the end of the third quarter under 0.7 x EBITDA with debt levels. We just went through a refinancing in June and have a little bit over $900 million of capacity to do the things that Kevin was mentioning earlier from an M&A perspective. First off, we're looking at debt levels, not an issue currently. The second priority is putting the money back into the business to do the new product development that we talked about earlier. We think we get our highest returns from developing new products and launching them. Third is M&A. 2025 was a bit of a quiet year in the aftermarket.
There were a few deals that got done, but they were typically larger in size. They'd been in progress prior to some of the cost changes. Those deals got done, but it was relatively quiet otherwise. As Kevin Olsen mentioned on our call in the third quarter, seeing a lot more activity happening here in 2026. I'll let Kevin touch on some of the M&A priorities here in a moment. But then last, we're looking at share buybacks on an opportunistic basis. Through the third quarter, we purchased about $112 million of our shares back and returned value to shareholders. We have not put any kind of a target out in terms of what our share buyback levels would be. As we start to look more into M&A, those levels will probably come down a little bit.
Absent M&A, we leaned a little bit more into share repurchases earlier in the year.
Maybe just touch on the M&A environment you're seeing, which of the businesses, where you're seeing the healthiest pipeline, and any sense of size of any opportunity.
Yeah. I would tell you that the M&A pipeline is probably as strong as I've seen it in my eight, nine years running the company. I think as we've gotten through these inflationary cycles, digested tariffs, people have, I think, realistic expectations for multiples out there now. Both buyer and seller have an idea of how tariffs have impacted their business and their end demand and customers and so forth. I think there's a lot more certainty on that front. We're really excited about what we're seeing on the funnel side.
Bumping on the time here, but I appreciate Kevin and Charles for presenting.
Thank you.
here at the 50th Annual.
Thank you all.
Thank you.