Douglas Dynamics, Inc.

Good morning, ladies and gentlemen, and welcome to the Douglas Dynamics First Quarter 2020 Earnings Conference 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. I would now like to turn the call over to Sarah Lauber, Chief Financial Officer of Douglas Dynamics. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us on today's call. Before we begin, I would like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among other matters that we have described in yesterday's press release and in our filings with the FCC. Joining me on the call today is Bob McCormick, our President and Chief Executive Officer. In a moment, Bob will provide an overview of our performance. Then I'll review our financial results and our thoughts around guidance. After that, we'll open the call for your questions. With that, I'll hand the call over to Bob.

Thanks, Sarah. Good morning, everyone. Before we begin, I'd just like to note that today marks the 10-year anniversary of our IPO. Our company has evolved significantly over the past 10 years and we are proud of the changes we've implemented and the growth we've produced over that time. Outside of the stock price increases, we're proud of the diversity of our business, the exciting new markets we now serve, and the long-term prospects for growth. We've made a lot of progress in the past 10 years, but there's a lot more to do. I'm confident that we are aligned and focused on expanding our leadership position in the truck equipment market, ultimately driving the long-term plans we outlined last year. Our strategy is sound, our balance sheet is strong, and our talent is second to none. While the pandemic will undoubtedly impact our timeline, it won't sway us from our task, and we have the right team in place to achieve our goals. Now, turning to the near term. Everyone is going to remember this quarter, which presented both familiar challenges and unique challenges that no one could have predicted to start the year. These challenges impacted our financial results and the ability to operate effectively in the first quarter. For the quarter, we generated sales and earnings lower than our internal expectations due to three main factors. Significantly below average snowfall, chassis supply constraints for class four through six trucks, and like everyone else, the operational and economic impact of the COVID-19 pandemic starting in March. Let's start with the topic that is top of mind for everyone, the pandemic. Our business model is built on dealing with and adapting to significant business drivers outside of our control, namely snowfall. So while the coronavirus pandemic is a unique and challenging situation, our teams have been able to respond in a measured, thoughtful, and disciplined fashion. In early March, when it was clear that the U.S. would be impacted by the pandemic, our senior leadership team met and quickly established three priorities that would serve as guideposts. Protect the health, safety, and financial security of employees. Provide seamless service to our customers. and exit this situation stronger than when we entered. As you probably saw, we temporarily closed all of our U.S. facilities on March 18 to protect the health and safety of employees, partners and the surrounding communities. Knowing that it would take time for government assistance programs to reach our employees, we provided them financial security by paying all full-time employees through the end of March. Additionally, we paid the employee portion of health insurance premiums through April to ensure employees and their families would utilize the healthcare system while waiting to return to work. We did this because it was the right thing to do and because people matter at Douglas Dynamics. Trust me, decisions like these will strengthen our culture and further enhance the already strong relationship we have with our employees. As soon as the shutdown was complete, we began preparing for a safe return to work environment for all 20 facilities. Over the past week, our team put in countless hours planning and adapting our facilities to the new reality to create a safe and productive workplace for everyone. To provide seamless service to our customers, we began bringing people back to the facilities and ramping up production levels in mid-April. We have several hundred people back at work in our facilities today, meeting the essential service needs of our customers. At this point, we are confident we will be fully staffed and 100% operational by the end of May. We will also remain focused on our development projects and making the necessary investments in the business that are critical to delivering our long-term profitable growth plans. When coupled with the DD mantra of getting better every day, we fully expect to emerge from this situation stronger than when we entered. Now let's look at each segment. First, the attachment segment. Sales were down year over year, as we expected them to be, given the poor snowfall in Q1. In fact, the 2020 snow season marked the second lowest snowfall in the past 10 years. and was the second consecutive year of below average snowfall. As we've stated before, low snowfall two years in a row usually has a multiplier effect and increases the negative impact on our preseason. Our preseason started two weeks later than normal and with the overall economic disruption from the pandemic, our dealers will be capital constrained and probably more conservative when placing their preseason orders delaying some purchases until Q4 when the snow season begins. On a positive note, our new product launches are being well received in the market, specifically our half-ton V-plow offering. Orders for these products are exceeding expectations, and this bodes well for driving incremental growth in the attachments segment over the long term. Reacting to the poor snowfall, our attachments team was already flexing its business model down and putting short-term cost-cutting measures in place in March before the coronavirus pandemic hit. Remember, the mindset and business model for attachments is built to change rapidly every year, responding to factors outside of their control. This year, we will be doing so because of the pandemic as well as snowfall. While 2019 was a banner year for attachments, clearly 2020 will not be. But that can happen when navigating two significant headwinds, snowfall and coronavirus. Long-term, our attachment segment will rebound, protecting and growing our market-leading performance and improving our already robust levels of profit through DDMS. In work truck solutions, as we mentioned last quarter, Class 4-6 chassis supply has been increasingly constrained recently due to tight supply lines and component shortages at most of the truck OEMs. These issues will only be compounded by the pandemic, and at the current time, all the OEMs remain shut down and the ability to effectively source equipment and components for upfits is also unknown. While more than 50% of the dealerships we work with on the East Coast and in the Mid-Atlantic regions are open for business today, most of them are operating with skeleton crews well below their usual capacity, while they wait to see when and where demand will return. In our Class 7 and 8 focused operations at Henderson, our order book, backlog, and demand was strong going into the pandemic, and so far the long-term contracts we have in place are not being canceled. If we are able to procure the supply of chassis, equipment, and components we need, we anticipate performance for the second half of the year will be solid overall. As the world waits to return to work, there will undoubtedly be delays at OEMs and component suppliers, which we cannot accurately foresee today. that will have an impact on our ability to meet customer demand. However, that will be true of all companies. And the good news is that going into mid-March, the solutions segment was in good shape, giving us confidence in the long-term prospects for these operations. With that complete, I'd like to turn to our cash usage priorities. We announced an increase in our dividend on our last earnings call, the 12th increase in the past 10 years. The dividend has always been a top priority for capital deployment, and I want to take this opportunity to firmly reiterate our commitment today. We also remain committed to make the necessary investments in the business that position us for sustained success and are critical to delivering long-term profitable growth. While the pandemic may impact the timing of some of these projects, it won't change the approach and long-term direction. Finally, we have the financial flexibility to pursue strategic acquisitions that will add important products and services to our portfolio in the years ahead, and will continue to carefully explore the market for attractive opportunities at logical valuations. Our team is more than capable of navigating through this adversity, and while we can't accurately predict how this will play out, We have full confidence in our ability to overcome this unique combination of external headwinds. We believe that we are better positioned than many companies to thrive during a downturn. Most companies simply batten down the hatches and try to weather the storm. That's not our mindset. To be certain, we have pulled out our short-term cost-cutting playbook and in fairly short order have pulled levers to maximize cash flow. but our DDMS mindset means we quickly embark on finding creative solutions to the unique problems that confront us. It's simply part of our DNA. At the same time, we focus on expanding our competitive advantages, doubling down on driving continuous improvement initiatives which improve quality and shorten lead times. In conclusion, I am proud of our team and the leadership they have demonstrated in responding to this unique set of challenges. While navigating this situation, we remain laser-focused on serving our customers and getting better every day. Bottom line, we'll exit stronger and be positioned to drive long-term profitable growth. With that, I'll hand the call to Sarah.