Lowe's Companies, Inc.

The Douglas Dynamics Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Chief Financial Officer Sarah Lover. You may begin.

Thank you. Welcome, everyone, and thank you for joining us on today's call. A few quick items before we begin. First, please note that some of the information that you will hear during this call will consist of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. Such statements express our expectations, anticipations, beliefs, estimates, intentions, plans, and forecasts. Because these forward-looking statements involve risks and uncertainties, our actual results could differ materially from those in the forward-looking statements. For more information regarding such risks and uncertainties, please see the sections titled Risk Factors, Forward-Looking Statements, and Management Discussion and Analysis of the Financial Condition and Results of Operations, included in our Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission, and the impending updates to these sections in our quarterly reports on Form 10-Q. Second, this call will involve a discussion of adjusted EBITDA, adjusted net income, and adjusted earnings per share, all non-GAAP financial measures which, under SEC Regulation G, were required to reconcile with the most directly comparable GAAP measure. Reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at douglasdynamics.com. Joining me on the call today is Bob McCormick, our President and Chief Executive Officer, and Jim Janik, our Executive Chairman, who will be available to answer questions. Bob will begin by providing an overview of our performance, then I'll review our financial results and our 2019 outlook before turning it back to Bob. After that, we'll open the call for your questions. Bob?

Thanks, Sarah. Good morning, everyone. Thank you for joining us. Due to the hard work of everyone at Douglas Dynamics, we produced robust annual results, including record net sales in 2018 of $524 million and adjusted diluted earnings per share of $2.04. This positive performance is based on broad and continued strong demand in both segments. While the chassis availability issues continue, we are pleased at how well our teams are navigating through the supply chain to meet our customers' expectations. We experienced below average snowfall across the country during the fourth quarter of 2018. As such, sales of our commercial snow and ice control equipment were negatively impacted by weather. but this was partially offset by increased demand for recently introduced non-truck mounted equipment, such as plows for skid steers and ATVs. This is a nice growing market for us, albeit at lower margins than our truck mounted products. As a reminder, we benefited from strong performance in the first three quarters of 2018, Snowfall levels reverted to historical averages during the winter and did March 2018 after two previous years of below-average snowfall across North America, which created stronger demand and robust preseason orders. Overall, 2018 was a solid year for our commercial snow and ice products. As we look into the first quarter of 2019, we will have tougher comparisons based on the late heavy snowfall we experienced in the first quarter of 2018. Additionally, the other secondary demand drivers remain generally positive. In January, we completed our regular dealer field inventory, and the data indicated inventories were slightly elevated, which is in line with our expectations. Also, sales of select pickup trucks continue to be favorable, increasing 2% in 2018 when compared to full year 2017. During the fourth quarter, sales of our municipal products exceeded expectations and margins improved based on continued strong demand, which helped end the year on a positive note. Chassis availability remains an issue, but we have seen improved visibility and predictability in the delayed supply for most OEMs. While lead times continue to run nine to 12 months, the improved predictability is helping our team plan ahead, and they did a fantastic job of adjusting and managing around the constraints in the fourth quarter. While exact timing is difficult to predict, at this stage, We believe the long lead times for Class A chassis will continue in 2019, but begin returning towards normal levels during 2020. Assuming the improved predictability we are seeing continues in 2019, we are well positioned to drive improved margins for these products as our teams can plan ahead. The work truck solution segment generated a positive revenue increase this quarter based on stronger order patterns. I'm pleased to report that demand and backlog continue to grow. While chassis supply for Class 4 through 6 trucks is generally less constrained than it is for Class 7 and 8 trucks, it is unpredictable in both quantity and types of products, mainly due to supply line issues and component shortages at all major OEMs. We expect this situation to continue in 2019 and start to improve in 2020. It is important to remember that as a key partner to the OEMs, Tijana is well-placed to receive chassis as soon as they become available. The key factor to remember is that we're very encouraged by the robust demand, backlog, and order trends, which we expect will continue to grow in the coming months. The bottom line is this. The industry-wide limitations do not impact the long-term growth prospects for the municipal products or the solutions business. I'd now like to turn to DDMS activities. We often highlight significant changes, but every customer issue is important to us, no matter how small. DDMS is used every day to solve a myriad of problems that have a cumulative effect of improving overall quality and customer satisfaction. In mid-2018, we received customer feedback regarding some of our commercial snow and ice products, which were experiencing premature corrosion of several small components prior to the package being opened. Logic would lead most teams to assume that there was a water leak in the packaging, but not our team. Applying DDMS principles, we found the root cause of the problem was premature corrosion on one small component. which was being damaged during the manufacturing process on a microscopic level by the installation tool, virtually impossible to spot. Our team outlined possible solutions and set up several experiments to test their hypotheses. We were able to modify the installation tool and remove the root cause of the failure, resulting in improved quality, happier customers, and even fewer warranty issues. And that is just one of 100 small examples I could give. With that complete, I'd like to turn to our cash usage priorities. To begin, we paid a dividend of 26.5 cents per share of our common stock at the end of December. In addition, yesterday we announced that the dividend will increase to 27.25 cents per share in the first quarter of 2019, which equates to a projected full year annual increase of 3 cents. After thorough review, we believe the best use of our capital is to maintain and grow the dividend in a sustainable manner. Additional priorities continue to be paying down our debt, which Sarah will mention later, and strategic acquisitions. We are currently not focused on near-term acquisitions, as we believe there is plenty of opportunity to drive revenue and earnings growth within our current operations. Finally, I want to reiterate one important point. While it isn't fully evident in our financial results yet, mainly due to external headwinds, we firmly believe the foundation of continuous improvement we are establishing through DDMS with our Henderson team and at Work Truck Solutions will pay off in the long run. Now I'll hand the call to Sarah to discuss our financial results and guidance.