Dorman Prods (NASDAQ:DORM) held its second-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.
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Summary
Dorman Products reported record Q2 2026 sales of $545 million, a 1% increase year-over-year, driven by a strong performance in the Heavy Duty segment.
Adjusted diluted EPS reached $3.08, a 50% increase from the prior year, positively impacted by IEEPA tariff refunds.
The company updated its full-year 2026 guidance to expect net sales growth of 3% to 5% and adjusted EPS between $8.50 and $8.80.
Key strategic moves include targeted price reductions due to a more stable tariff environment and continued investment in light and heavy-duty product innovation.
The Light Duty segment maintained flat sales but experienced margin expansion due to tariff refunds, while Heavy Duty saw a 7% sales increase.
Operational highlights include significant new product launches and business wins in both Light Duty and Heavy Duty segments.
Future outlook anticipates mid-single-digit growth in the second half of 2026, driven by new business wins and product introductions.
The company is exploring increased M&A activity, supported by a strong balance sheet and expanded liquidity following debt refinancing.
Full Transcript
Nikki, Conference Operator
Good morning. My name is Nikki and I will be your conference operator today. At this time I would like to welcome everyone to the Dorman Prods second quarter 2026 earnings conference call. All participant lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. Please be advised that today's conference is being recorded.
Lastly, if you should require operator assistance, please press 0. I will now turn the call over to Alex Whitelam, Vice President of Investor Relations. Please go ahead.
Alex Whitelam, Vice President
Thank you. Good morning everyone. Welcome to Dorman Prods' second quarter 2026 earnings conference call. I'm joined by Kevin Olson, Dorman Prods' Chairman, President and Chief Executive Officer, and Charles Rayfield, Dorman Prods' Chief Financial Officer. Kevin will begin with a high-level overview of the quarter and current business environment, along with our segment-level performance and market trends. Charles will walk through our second quarter financial results in more detail, discuss cash flow and capital allocation, as well as our updated guidance, before turning 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 on our website at investors.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 on our website. Throughout the presentation we'll discuss the impact of IEVA tariff refunds that we received in the second quarter.
I point everyone to the schedule we've included in the appendix of our presentation which details the refund's impact on our results. 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. And with that, I'll turn the call over to Kevin.
Eric Luftig, President
Thanks, Alex, and good morning, everyone. Thank you for joining us today. I'll begin with a brief overview of our second quarter results, spend some time on the current business environment, and provide commentary on the performance and key trends we're seeing across our business segments. I'll then turn it over to Charles. Turning to Slide three, we delivered a strong second quarter with record sales, earnings, and robust cash flow generation. Our results were positively impacted by the recovery of IEEPA tariff costs, which Charles will cover in just a moment.
We continue to be well positioned to make strategic investments that will allow us to drive medium- to long-term growth. Following recent developments, we believe the tariff landscape has stabilized, which is positive for Dorman Prods and our customers. With an overall lower tariff environment, we began making targeted price reductions in the quarter, which we expect will continue through the back half of the year. Consolidated net sales were 545 million in the second quarter, up approximately 1% compared to the same period last year.
Net sales were impacted by the pricing actions I just mentioned, which we started in the quarter. High level, the fundamentals of our industry and our leadership position within the aftermarket remain strong. I'll cover our end markets in the coming slides. Jumping to the bottom line, adjusted diluted earnings per share for the quarter was a record $3.08, up 50% compared to the second quarter of 2025. Given our performance through the first half of the year and the targeted pricing actions we are taking as a result of a more stable tariff environment, we are updating our full year 2026 guidance.
We now expect year-over-year net sales growth of 3% to 5% and adjusted diluted earnings per share to be in the range of $8.50 to $8.80. Charles will walk through the guidance change in more detail in a moment. Turning to slide four and our Light Duty segment. Net sales were flat year over year at 424 million as we started reducing pricing with tariff costs coming down. Volume was lower in the quarter, but keep in mind we were comparing against a strong 10% year-over-year growth in Q2 of 2025.
Looking more broadly across our top customers, POS from a total dollars perspective was again up in the mid-single-digit range, which includes inflation embedded in the overall price at the counter. I'd also mention that the Light Duty business has done an excellent job recently capturing business wins in new categories. We expect this will drive increased volume growth in the back half of the year and through 2027. Operating margin expanded 620 basis points year over year to 24.7% driven by refund dynamics.
Year to date, operating margin was 19.4%, which is more in line with our normalized rate as the IEEPA refund impact was less significant. From an industry perspective, the foundational drivers of the Light Duty aftermarket remained positive. The average age of light duty vehicles now sits at 12.9 years, and vehicle miles traveled continue to increase for the quarter and trailing 12-month periods. Overall, these fundamentals support sustained demand for repair and replacement parts over the long haul.
In addition to these macro trends, we continue to keep a close eye on our broad end user base. During the quarter we saw some modest pressure continue on categories that tend to be DIY-focused and are relatively discretionary, but keep in mind this is a smaller portion of our overall portfolio as we skew more to the DIFM customer and the vast majority of our product portfolio is nondiscretionary in nature. This larger makeup of our portfolio was more stable and again POS was consistent in the quarter.
Stepping back, our innovation strategy continues to drive significant value for our customers and end users. One recent product launch that highlights this is our new aluminum oil pan for a broad set of Ford F-150s. The original OE part is made with plastic and prone to warping and leaking, creating a well-defined pain point for end users and technicians. Our patented OE Fix solution is built from rugged high-pressure die-cast aluminum, delivering a more durable, longer lasting repair at an attractive aftermarket price.
Additionally, we've included a convenient magnet drain plug which helps prevent harmful metal debris from damaging the engine, and we've designed the plug with an angled mount boss that enables a complete drain. This is exactly the type of product that reinforces Dorman Prods' leadership in aftermarket innovation, and I want to congratulate the Light Duty team on another excellent OE Fix launch. Turning to Slide 5, in our Heavy Duty segment, net sales increased approximately 7% year over year to 66 million, driven by the full-year impact of last year's pricing actions along with business wins in certain categories and channels.
Operating margin improved 340 basis points to 4.2%. Excluding the refund benefit, Heavy Duty's comparable operating margin of 2.3% was up 150 basis points on net sales leverage. While the commercialization and infrastructure investments we've made over the last several years position the Heavy Duty segment for long-term growth, they also create an inherent hurdle on the margin front. We expect those investments will help us drive higher volume when an eventual freight market rebound offsets increased costs and allow us to return to our targeted margin profile for the business.
On the broader sector, market conditions remain challenged. The great freight recession continued through the second quarter, with higher fuel costs and general inflation further weighing on consumer sentiment and freight demand. While freight rates have begun to rebound as fewer fleet operators remain in the market, we do not expect meaningful trucking mileage or tonnage growth in 2026. That said, and as we highlighted on our last call, we continue to see OE dealers increasingly focused on improving revenue and profitability through their service centers.
With new and used vehicle sales lower year over year, aftermarket partnerships allow these dealers an opportunity to drive improved margin, which is a prime opportunity for us to offer high-quality solutions at aftermarket price points. Needless to say, we're leaning into this channel. Further, we're also leaning into product and category expansion within our Heavy Duty segment, especially for solutions above the frame. We recently launched a number of new-to-the-aftermarket products, including a hydrocarbon injection nozzle that is designed to restore critical dosing functionality within the vehicle's emission system.
We've also broadened our fluid reservoir portfolio with the introduction of new power steering and windshield washer reservoirs, providing additional coverage for high-population applications. And finally, we introduced two new LED headlight assemblies for a broad range of International models. These are three great examples where we're diversifying our portfolio and providing more solutions to expand our relationship with fleets across North America.
Congrats to the Dayton team for driving innovation across the business. Turning to Slide 6 in our Specialty Vehicle segment, net sales were down 1% year over year to 54 million. Slightly softer customer demand was partially offset by pricing initiatives in certain categories. Consumer sentiment in our Specialty Vehicle business remains sensitive to macroeconomic conditions, and we believe higher fuel prices along with broader inflationary pressures weighed on volume during the quarter.
Operating margin expanded 880 basis points to 26.1%. Excluding the refund benefit, comparable adjusted operating income margin for Specialty Vehicle was 17.8% in the quarter, or 50 basis points above the same period last year, which highlights that the team did a nice job improving their overall margin profile. We're also expanding SuperATV's presence outside the United States, which we believe will support growth over the long term. While this initiative will take some time to materialize, we're encouraged with our trajectory and the opportunities ahead of us.
On the broader Specialty Vehicle market, we continue to see consumer demand shift across the overall sector. Specifically for the second quarter, new vehicle sales continued to increase, but the growth came from two different types of vehicles and different consumers. First, more affluent riders are driving growth with cab models, which come with more features pre-installed and typically have lower attachment rates at the dealer. At the same time, we're seeing continued growth in newly launched models that are geared towards entry-level and less affluent riders.
As we highlighted on our last call, these models offer significant opportunities for upgrades and repairs. Overall, our large and growing set of solutions allows us to win with all types of riders and vehicles. I'd also mention that ridership remains strong and riders are holding onto their vehicles longer. To that end, we're purposely expanding our portfolio of nondiscretionary, repair-oriented solutions for older models still in service, given the elongated repair cycle occurring today.
Finally, we're seeing some of the new OEs who have entered the market in recent years continue to launch new models. This broader field of machines provides SuperATV with opportunities to expand their portfolio. One new product that highlights this opportunity well is the SuperATV vented windshield developed for the CFMoto Z10 platform. CFMoto continues to offer riders lower price point vehicles with reputable quality. Recently, CFMoto launched a new Sportline with their Z10 platform and our team was one of the first to market with a purpose-built, highly desired upgrade in a vented windshield.
The vented design offers comfort, especially in the summer riding months, for riders looking for protection from dust and debris in demanding conditions. Speed to market continues to be one of SuperATV's core strengths. Congratulations to the team on another strong product launch. With that, I'll turn it over to Charles to cover our results in more detail.
Charles Rayfield (Chief Financial Officer)
Thanks, Kevin. Turning to Slide 7, I'll walk through our consolidated financial performance for the second quarter. Total net sales for Q2 were a record at $545 million, up approximately 1% compared to the prior-year period. As Kevin noted, top-line growth was driven by the heavy-duty segment, partially offset by lower volume in light duty and specialty vehicle. Year to date, our sales were up 2% compared to the same period in 2025. Adjusted gross margin in the quarter was 46.1%, up 550 basis points compared to last year's second quarter.
Excluding the refund benefit, comparable gross margin in the quarter was 38%. Year to date, gross margin was 41.1%. Adjusted FCA expense as a percentage of net sales was 23.8%, down 50 basis points year over year. Adjusted operating income in the quarter was $122 million and adjusted operating margin was 22.3%, up 600 basis points compared to the prior-year period. Excluding the refund benefit, comparable adjusted operating margin was 14.2%, down 210 basis points from prior year largely on volume deleverage in light duty.
Year to date, the adjusted operating income margin was more in line with our normalized performance given the IEEPA refund impact was less significant. Looking forward, we remain focused on driving margin improvements through our supplier diversification, productivity, and automation initiatives. Adjusted diluted EPS was $3.08, up 50% year over year. The one-time impact of the IEEPA refund contributed approximately $1.18, representing the recovery of IEEPA tariff costs recognized in Q4 2025 and Q1 2026.
Excluding this impact, comparable adjusted diluted EPS was $1.90 for the quarter. Again, our year-to-date performance was more in line with our prior year. As mentioned previously, there are some schedules in the appendix section of the investor presentation that outline these impacts. In addition, lower interest expense and a reduction in shares outstanding were also positive contributors to our EPS growth. On Slide 8, operating cash flow for the quarter was $153 million and free cash flow was $144 million.
The business did an excellent job driving working capital improvements, which delivered comparable free cash flow of approximately $62 million exclusive of the IEEPA refund. The strong underlying cash generation and expanded balance sheet capacity provides us with flexibility to reduce costs and deploy capital to drive strategic growth over the medium and long term. On the capital allocation front, we deployed $47 million during the quarter on opportunistic share repurchases that retired approximately 398,000 shares at an average price of approximately $118 per share.
Going forward, we have $363 million remaining on our share repurchase authorization which extends through 2027. Turning to Slide 9, our balance sheet remains strong and during the quarter we further expanded our liquidity position and balance sheet capacity by refinancing our debt instruments. As previously announced, in early June we amended our credit agreement to increase our revolving credit facility from $600 million to $800 million, which extends maturity to 2031.
We also used the proceeds from the issuance of $450 million in senior unsecured notes due in 2034 to repay our prior term loan which was slated to mature in October of 2027. Refinancing provides us with substantial capacity to make meaningful investments in our long-term growth strategy. Following the debt refinancing, we ended the quarter with net debt of approximately $318 million and total liquidity of $931 million. Our total net leverage ratio at the end of Q2 was 0.69 times our adjusted EBITDA, which positions us extremely well to invest in the business, pursue strategic M&A opportunities, and return capital to shareholders through opportunistic share repurchases. Turning to Slide 10, as Kevin mentioned, we are updating our full-year 2026 guidance. I'd also point you to our schedules in the appendix that cover our guidance in more detail, which include reconciliations of the comparable figures discussed today. On the top line, we now expect net sales growth of 3% to 5%, compared to our prior guidance of 7% to 9%. The reduction reflects our performance for the first half of the year and the targeted pricing actions we are taking as a result of a more stable tariff environment.
On the bottom line, we now expect total adjusted diluted EPS to be in the range of $8.50 to $8.80, up from our prior range of $8.10 to $8.50. The increase to our guidance range is primarily due to the one-time refund benefit of approximately $0.30. This represents the recovery of IEEPA tariff costs recognized in the fourth quarter of 2025. Excluding this benefit, our comparable adjusted diluted EPS range is $8.20 to $8.50. The midpoint of this range of $8.35 is up 10% over last year's comparable base of $7.62 and up 17% on a two-year stack.
Let me also provide some additional color on the remainder of the year, which we believe provides a strong foundation for 2027 and beyond. For net sales, we expect our second-half growth rate to be in the mid-single-digit range compared to the same period in 2025. This growth will largely be volume-driven from the new business wins that Kevin mentioned earlier. Across the segments, we expect light duty to be in this range with heavy duty slightly above and specialty vehicles slightly below.
On the margin front, we're now targeting a full-year adjusted operating income margin of approximately 15.5% to 16.5%, up from our previous expectations of 15% to 16%. Given the timing dynamics around our pricing actions, we now expect gross margins to exit the year at a more normalized rate of approximately 40%. And finally, we expect adjusted diluted EPS for the back half of 2026 to be in the range of $3.85 to $4.15, up 9% to 17% over the comparable second-half adjusted diluted EPS of $3.54 in 2025.
Again, barring any unforeseen market challenges, we expect these rates will serve as a structural base to grow from in 2027. With that, I'll now turn the call back over to Kevin to conclude. Kevin.
Kevin Olson (Chairman, President and Chief Executive Officer)
Thanks, Charles. Let me close by reinforcing a few points. First, we're pleased with our second quarter results which included record earnings and exceptionally strong cash generation. More importantly, our long-term outlook remains unchanged. The structural drivers of aftermarket demand—growing vehicle age, rising vehicle miles traveled, and the largely non-discretionary nature of our portfolio—remain firmly in place. In addition to the stabilizing tariff environment, we believe our diversified supplier network, our innovation engine, and the strength of our balance sheet position us well for the future.
We appreciate your continued interest and support, and with that we'll open the call up for questions.
Nikki, Conference Operator
Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star two. We remind you to please pick up your handset and please limit yourself to one question and one follow-up question. We will take our first question from Scott Stenberg with Roth. Please go ahead. Your line is open.
Scott Stenberg, Analyst
Good morning, and thanks for taking my questions.
Kevin Olson (Chairman, President and Chief Executive Officer)
Thanks, Scott.
Scott Stenberg, Analyst
Maybe we could take a step back and just talk about the price reductions that are going to your customers. That just made give a little sense of, you know, is it just related to the IEEPA refund that you received? And also you talked about this continuing through the end of this year. Is this a transitory type of thing? Just to address the IEEPA benefit that you got and just trying to get a sense of for '27 how we should be thinking about pricing, whether we go back to a normalized range.
Kevin Olson (Chairman, President and Chief Executive Officer)
Good question. Scott, it's Kevin. Hey, just let me high level talk a little bit about the tariffs. You know, I'll kind of walk back to 2018, '19. Our tariff philosophy has always been to treat this as a pass-through cost. Whether that's, you know, going up, we mitigate what we can, we pass along the balance, and vice versa. If tariff costs come down, we pass those back to our customers. We have kind of always taken that approach when it comes to IEEPA.
You know, when we got into the second quarter, refunds started being issued to us for the IEEPA refund and it became clear that the replacement tariff was going to be a Section 301 tariff. And just, you know, as a reminder, Section 301 tariffs have been with us for a very long time, back to 2018 and 2019. So we're very familiar with that tariff. The difference being, you know, IEEPA was what we would consider a stacking tariff. So a large portion of our portfolio is subject to 232 tariffs, which are the auto parts tariff and the steel and aluminum tariff.
IEEPA stacked on top of that. Section 301 is different, whereas if a part is subject to 232, it doesn't apply. So when we step back, that for us meant, you know, a much lower tariff environment going forward. So in the second quarter we started to reduce pricing. To your question as to, you know, it's a one time, you know, kind of price reduction to reflect the ongoing tariff cost. We still have tariffs in the business—Section 232—and there is a component of the business that is subject to Section 301.
The pricing will remain in place for those tariffs, but not for IEEPA, which allowed us to reduce pricing. So I think if you kind of go back to the prepared comments as you think about 2027, as Charles mentioned, you know, the financial profile of business as we move through the back half of the year will be much more normalized than what you're all used to. And in terms of growth, as we look at the back half of the year, if you take kind of the implied guidance division we put out there for the full year of 3% to 5% growth in a lower price environment, that would imply that unit growth will be fairly strong in the back half of the year.
And that's being driven by, you know, new business wins that we've talked about in the past that we kind of won late last year, early this year that will come online here in the back half, and new product launches which continue to be very strong. So that will continue through 2027. Hope that answers your question.
Scott Stenberg, Analyst
Thanks. And just a quick follow-up before I jump back into the queue. You know, if you look at DIY versus DIFM, you did talk about—this is the first time you probably mentioned that your DIY product is seeing a little bit more softness. Is there an accelerating trend there and is there anything that we should be concerned about going forward on that front?
Kevin Olson (Chairman, President and Chief Executive Officer)
Yeah. Another good question, Scott. I'd first kind of take you back to our overall POS rates kind of going back at least three quarters now have been relatively stable. So I don't think anything that we're seeing is an accelerating trend. But certainly I would say that the DIFM channel has been more resilient. As our consumer, the owner of a 13-year-old vehicle, our view is they are under pressure with all the inflationary aspects going on in the economy right now.
That's been in place now for quite some time. And, you know, when you look—when you step back and look at our portfolio, the vast majority, as we said before, is non-discretionary. And we like to say that, you know, for the most part your car isn't running or it isn't running safely for most of our hard part repairs.
Scott Stenberg, Analyst
Great. That's all I have for now. Thank you.
Kevin Olson (Chairman, President and Chief Executive Officer)
You got it.
Nikki, Conference Operator
Thank you. Our next question comes from Jeff Lick with Stephens. Please go ahead.
Jeff Lick, Analyst
Thanks very much for taking my question. Congrats on a nice quarter. Managing a pretty dynamic environment here, Kevin. Just kind of building on some of Scott's themes. I was wondering if the 3 to 5% growth versus the 7, 9% prior, I was wondering if you'd be, you know, obviously the 7 to 9 was based on a pricing structure that doesn't exist. So I'm just kind of curious on an apples to apples basis if you'd give any color as to, you know, what changed there, if at all.
And then as it relates to the lower pricing, obviously that's good. In terms of elasticity, how long do you think that might take where you might actually see some benefits and things like DIY? Because you do have lower prices throughout the chain, throughout the ecosystem now.
Charles Rayfield (Chief Financial Officer)
Yeah, thanks, Jeff. This is Charles. Maybe I'll start with the first part of your question. So to your point, we took the guide down from 7 to 9% to 3% to 5% for the full year. That reduction reflects a couple of things. One, the performance in the first half that includes some lower volume and, as Kevin mentioned, some pricing reductions that we just discussed in response to some of the tariff environment coming down. Secondly, it's reflective of the pricing reductions that we're expected to take through the back half of the year.
Again, that's a response to the reduction in tariff costs that we've seen as those costs are largely passed through. So we're guiding second-half sales growth to the mid-single-digit range which is largely volume-driven from the new business wins that Kevin mentioned earlier as well as new product introductions.
Kevin Olson (Chairman, President and Chief Executive Officer)
Yeah, in terms—Jeff, it's Kevin—in terms of the elasticity question, look, I mean obviously our hope would be that prices do come down for our ultimate end user: the guy hanging the parts on the vehicle and the person that needs the vehicle repaired so they can get to work every day. But ultimately, you know, you need to understand we don't control that, right. We set pricing to our customers who then control end-user pricing. So we don't control that.
However, you know, hypothetically, if pricing does come down in the market at the end-user level, we do expect an uptick. I mean, there are certain categories and parts that are more discretionary in nature that will be more elastic. But for the most part, the vast majority of our portfolio is what we would consider inelastic. Jeff, and another point there, you talked a little bit about the guide. I'll just add on to what Charles said. I mean, we continue to kind of see mid-single-digit POS for the portfolio.
And, you know, as we think about the back half, we don't anticipate that changing in terms of the overall business environment. However, our unit growth will be aided by the things that we mentioned with new business wins and new product launches.
Jeff Lick, Analyst
And then just a quick follow-up here you haven't mentioned yet, but any updates on the large customer that was kind of retrenching and how that—is that kind of out of the system now and how's that going?
Kevin Olson (Chairman, President and Chief Executive Officer)
Yeah, that's become more normalized. I believe that was back in the fourth quarter, Jeff. And we've seen more normalized kind of order rates in comparison to sellout.
Jeff Lick, Analyst
Thanks very much and best of luck in Q3.
Kevin Olson (Chairman, President and Chief Executive Officer)
You got it. Thanks, Jeff.
Nikki, Conference Operator
Thank you. We will move next with David Luntz with Wells Fargo. Please go ahead.
David Luntz, Analyst at Wells Fargo
Hi, good morning, guys, and thanks for taking my questions. So, curious if we can just dive into gross margin in a little more detail and talk about some of the Q3 and Q4 puts and takes. And then just one clarification: you mentioned the 40% exit rate for gross margins. Just want to confirm that that's a Q4 comment as opposed to 26.
Charles Rayfield (Chief Financial Officer)
Yeah, sure. So, hey David, thanks for the question. So I'll take that one. So, yeah, on a comparable basis, excluding the refund for the second quarter, gross margins were 38%. Kevin talked a little bit about some of the tariff environment here. As we talked about in previous quarters, we expected Q1 to be the highest tariff load we had. We expected it to start coming down in Q2, which we saw. And so we're seeing much more normalized rates. There are still tariffs in the business, but at lower levels as we go through the back part of the year.
So as we talk about exiting the year—and Kevin mentioned exiting the year at 40%—that's a fourth-quarter comment. We think that's a structural rate as we exit the year and enter into 2027, and so we feel pretty positive about that aspect.
David Luntz, Analyst at Wells Fargo
That's helpful. And then just on the SG&A front, 50 basis points of leverage in the quarter is really strong. So, curious if we can talk through kind of assumptions for the back half in light of the mid-single-digit top line expectation.
Charles Rayfield (Chief Financial Officer)
Yes, so good question. So, yeah, we had some, you know, some good operational leverage in SG&A as we came through the second quarter. I think as we look through the back half of the year, you know, with the sales guide that we gave, there's likely to be a little bit of SG&A deleverage but not a meaningful change in dollar spend. So I think, you know, dollars are relatively consistent and that will normalize as we go into 2027, but likely to see some deleverage in the back part of the year.
David Luntz, Analyst at Wells Fargo
Thank you.
Nikki, Conference Operator
Thank you. We come up next with Brett Jordan with Jefferies. Please go ahead.
Brett Jordan, Analyst at Jefferies
Good morning, guys.
Kevin Olson (Chairman, President and Chief Executive Officer)
Hey Brett. Morning.
Brett Jordan, Analyst at Jefferies
The $82 million in free cash contribution from the tariff refund—do your customers ask you for outright cash back on your refunds, or can you make it up just on pricing as you sort of get through the lower XI rate?
Kevin Olson (Chairman, President and Chief Executive Officer)
Yeah, good, good question, Brad. I mean, you know, we don't disclose specific commercial actions or agreements with any specific customers. As you know, we continue to partner closely with all of our customers. But I will say that beginning in Q2 and through the second half, we're going to have lower pricing on a go-forward basis to match the current tariff environment. And it's going to, you know, definitely provide us more certainty. Hopefully, you know, we see less of the tariff changes on a day-to-day, week-to-week basis that we've seen, and that's all baked into the guide.
I'm not going to talk specifically about, you know, specific customer agreements.
Brett Jordan, Analyst at Jefferies
And then on M&A, obviously the balance sheet's pretty well liquid and operations on the core business seem pretty solid. What are you thinking? I mean, is there M&A activity sort of heating up? Is that more interesting to you, and sort of what scope would you be considering in the current environment?
Kevin Olson (Chairman, President and Chief Executive Officer)
Yeah, good question. I'd say we're definitely seeing more pipeline activity now than we've seen in the last few years. I think a couple reasons. I think the tariff environment being a little bit more stable at this point has definitely contributed to that. Interest rates seem to have settled in as well. It seems also that, you know, potential sellers have kind of reset with more rational valuations. So we view that as favorable going forward. So, you know, ultimately our M&A strategy has not changed in terms of how we think about it across the portfolio and it continues to be a pretty big piece of our capital allocation strategy.
Brett Jordan, Analyst at Jefferies
Great, thank you.
Kevin Olson (Chairman, President and Chief Executive Officer)
You got it.
Nikki, Conference Operator
Thank you. Our next question comes from Tristan Thomas Martin with BMO Capital Markets. Please go ahead.
Tristan Thomas Martin, Analyst at BMO Capital Markets
Good morning. Thanks for all the tariff kind of appendixes and stuff in the press. Maybe just on a high level, can you kind of go through the kind of the moving pieces of how the $18 tariff refund in the quarter translates to a $0.30 kind of increase on guidance?
Charles Rayfield (Chief Financial Officer)
Yeah, good question. Tristan, this is Charles. I'll take that one. So I think the best way to think about the $18 is those are— that's related to refunds we received for charges that we took prior to Q2 of 2026. So as Kevin talked about in some of the earlier comments, you began paying tariffs throughout 2025. We capitalized a lot of those costs into inventory, started to see that flow through the P&L at the very back part of 2025, and in 2026, as we talked about previously, we saw some of the heavier loads come through in the first quarter.
So that $18 is attempting to back out the prior-period components, and so all that remains in Q2 is a more comparable cost basis. And then the $0.30 is related to the time period before 2026. That's really related to the fourth quarter of 2025 and the costs that were incurred in that time period.
Tristan Thomas Martin, Analyst at BMO Capital Markets
Okay. And then just two more quick ones. For light duty, when you called out lower volume, does that mean down year over year or a deceleration from prior quarters?
Kevin Olson (Chairman, President and Chief Executive Officer)
No, I think, Tristan, it's Kevin. I think how you need to think about that is, you know, we've been talking about this for quite some time that the first half was going to be a difficult comp. The key point there is POS kind of remained steady in the mid-single-digit range. But last year we had 10% growth in light duty. And so, you know, we had a shipment dynamic last year that was just strong and we knew that was going to ease as we moved into the back half.
Actually, as we mentioned in the prepared remarks, Q2 is actually a high watermark for us from a total shipment standpoint. It's a tough comp.
Tristan Thomas Martin, Analyst at BMO Capital Markets
Okay. And then just one more on specialty vehicles. I kind of get the high-end dynamic, but I'm just curious what you're seeing with attach rates at some of the new entry-level products the OEMs are spitting up.
Kevin Olson (Chairman, President and Chief Executive Officer)
Well, we're seeing, you know, on the—I mean, without risk of stating the obvious—I mean we're seeing more attach rate with the lower-end machines, obviously, that are more decontented, and we're seeing a lower attach rate with the higher-end machines. And I think, you know, so it's a pretty broad spectrum out there right now. I think the high-end consumer continues to purchase higher-level machines that come with full enclosures and more accessorized.
But the lower-end consumer—it's why you're seeing, I think, a lot of new entrants come in with Segway and CFMOTO, and they're making a lot of noise early on which, which obviously is a good dynamic for us over the long term. As you know, we believe price points will make their way back down over time to address that lower-end segment. But we have a broad portfolio, as you know, to address a wide spectrum of vehicles, whether it's high end or lower end.
Tristan Thomas Martin, Analyst at BMO Capital Markets
Thank you.
Nikki, Conference Operator
Thank you. We will move next with Justin Ages with CJS Securities. Please go ahead.
Willem, Analyst at CJS Securities
Hi, this is Willem for Justin. Thanks for taking our questions. Could you please elaborate on some of the heavy-duty wins that you noted in the quarter, and then are you seeing any indications of things beginning to improve in heavy duty in general?
Kevin Olson (Chairman, President and Chief Executive Officer)
Yeah, good question. I'd say, you know, we highlighted some new products there and some wins. That has really been our focus and we're starting to get traction. It's really above the frame. I mean we're very, very strong below the frame in the undercarriage of the commercial vehicle. And a large part of our strategy has been to really penetrate the above-frame market, which we're starting to successfully do and we're starting to see that in the results.
I'd say just in terms of the overall market, I mean, you know, freight rates, you know, I think we've all read in the news that are starting to rebound, which is a good thing. But I would say that there is no forecasted or meaningful forecast increase for either mileage driven or tonnage for 2026. So we continue to remain focused on what we can control, which is, you know, become a better, more productive operator and to continue to really prime the flywheel of new products and above frame.
And, as we also mentioned in prepared remarks, attacking new channels we're not very penetrated today. So the opportunity as we view it is large and it's bright.
Willem, Analyst at CJS Securities
All right. Thank you.
Kevin Olson (Chairman, President and Chief Executive Officer)
You got it.
Nikki, Conference Operator
Thank you. This concludes our Q and A session and today's conference call. Thank you for your participation. You may now disconnect.
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