Douglas Dynamics, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Douglas Dynamics third quarter 2020 earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Sarah Lauber, CFO. Thank you, and please go ahead, Madam.

Thank you. Welcome, everyone, and thank you for joining us on today's call. Before we begin, I'd 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 others, matters that we have described in yesterday's press release and in our filings with the SEC. 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. 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 I discuss our quarterly performance, I wanted to highlight two important topics. First, we are very pleased that the vast majority of Douglas' employees have remained healthy since we came back to work in May. We've had a handful of isolated cases at some locations, and people who have tested positive have contracted COVID outside the workplace. In all cases, we have responded quickly, and we've avoided any large outbreaks at this point. Heading into the winter months, we're likely to have more positive tests, especially as cases expand across the country. We do remain vigilant, working to ensure no one lets their guard down. Our protocols are effective, and we're ready to handle any outbreaks that occur. Additionally, I'd like to take this opportunity to welcome Lisa Rojas-Bacchus to our board. Lisa has a proven track record of leadership with greater than 30 years of experience across a diverse set of industries. She focuses on marketing, strategic planning and data analytics at Cigna, American Family Insurance and Ford Motor Company, bringing invaluable experience in the years ahead. We're looking forward to having her as part of our team. At the same time, we'd like to recognize Jim Packard for his numerous contributions to Douglas Dynamics. Jim will retire from the Board at the end of his current term at the 2021 Annual Meeting. We are grateful for his contributions and guidance over the past decade and wish him all the best for the future. Okay, turning to the results for the quarter. In short, we are pleased with our results. All of our facilities operated throughout the quarter, albeit under pandemic conditions, Attachments performed well, with a strong finish to the preseason. Solutions rebounded from the second quarter shutdowns and executed well, all things considered. Let's talk about the segments in more detail. First, attachments. We had a solid quarter, actually outperforming third quarter 2019, with revenue EBITDA and EBITDA margin all increasing. If you recall, We saw a late start to preseason, and dealers were understandably conservative with their orders given the uncertainty that existed in April and May and the below-average snowfall in recent winters. We hope to see dealer orders strengthen as we got closer to the end of Q3 and the beginning of the retail selling season, and that's exactly what happened. This led to an approximate 50-50 ratio between second and third quarter preseason shipments compared to previous expectations of a 55-45 split and the prior year split of 60-40. Even with the uptick in Q3 orders, field inventories are down to prior year at the end of September, another positive that will influence demand as the retail season begins. It is worthy to note that landscapers are in a relatively strong financial position right now because they were able to work all spring and summer, and this may translate into early retail activity as well. On the product front, the half-done B-plow we launched this spring has been well-received. We are optimistic about the long-term potential for this product. In other positive news, the health of our dealer credit remains in good shape. Collections are coming in as expected and we are pleased that the financial health of our dealer network remains on par with previous years. Overall, we are encouraged by the trends and are well positioned heading into the snow season. Of course, we are now keeping a close eye on the weather channel and our ability to deliver products during the snow season remains as strong as ever. In short, our attachment segment continues to prove its resilience once again and our team is executing its operational plan flawlessly as we've come to expect. Turning to solutions. As we discussed during our call last quarter, many of our Dejana facilities are in the East Coast and Mid-Atlantic, areas that were particularly hard hit early during the pandemic. After a difficult second quarter, we saw Q3 quoting and order activity increase across the board. In fact, Incoming orders October year-to-date 2020 at Dejana have just surpassed the same period in 2019, which was a record year. Considering everything that has happened this year, we are very encouraged by this development, and I want to commend the Dejana sales team that has worked strategically to adapt and engineer this dramatic rebound in a very challenging market environment. So on the demand side, we feel much better today than we did a few months ago. However, the ramp-up of OEMs and component suppliers will still be unpredictable in the near term, especially as we see a second wave of COVID cases across the country. This is certainly true with chassis availability for Class 4 through 6 trucks. While OEM production continues to ramp up, we do believe chassis availability for Class 4 through 6 trucks will be a challenge for the balance of the year. However, it is worth remembering that we have a long track record of being the number one recipient of pool chassis from our largest OEM partner. Additionally, the number of chassis received has almost doubled since our acquisition of the Janna, confirming that our OEM partners have been supporting our growth plans. I'll close with this statement on chassis. Our competitors would give anything to be in the same position as the Janna. Moving on to Henderson's municipal snow and ice control business, where our team turned in a good quarter. As expected, availability for Class 7 and 8 chassis is much improved, with lead times declining to just 9 to 12 weeks at the moment, after being closer to 9 to 12 months in recent years. This is certainly great news. On the incoming order front, we are clearly paying attention to how the municipal customers are dealing with tax revenue challenges. to date we haven't seen and don't expect to see orders being canceled. It is important to note that Henderson has built a strong backlog over the past two years as we set new records for incoming orders in both 2018 and 2019. We'll be working our way through a portion of that backlog and we'll continue to monitor the sales cycle and commentary from our municipal customers. As a reminder, historically, snow and ice control budgets are the last thing to be cut to ensure public safety and to ensure commerce can continue. We'll keep you posted on the municipal order trends as we turn the corner into 2021. All in all, we are continuing to make our way back from a difficult second quarter and remain confident in the long-term future growth prospects at Work Truck Solutions. Looking ahead, despite the challenges that we've encountered in 2020, our commitment to return in value to our shareholders has not wavered. We remain fully committed to our dividend, which was paid as usual at the end of the quarter. We have increased our dividend many times over the past decade, during good times and bad, and I envision this being true for many years to come. When it comes to M&A, We know the limited list of blue chip companies that we would talk to if they became available, and we receive information on other deals on a regular basis, although far fewer this year because of the pandemic. We will continue to build relationships and will conduct due diligence on the logical opportunities that are presented, but don't see major deals on the horizon. You've heard me say on many occasions, we will exit stronger than we entered. As we near the end of the year, it's worth taking a moment to reflect on that statement and call off some of the successes in 2020 which helped position Douglas to achieve its long-term profitable growth objectives. There are certain areas we were able to excel. First, as we mentioned last quarter, Sarah and her team were able to secure an excellent new debt deal in June, providing us the financial flexibility to support and grow the dividend, invest in future growth initiatives, all while creating enough dry powder to execute strategic acquisitions down the road. Next, while March and April were tough, we are extremely proud of our response to the pandemic, from the rapid decisions we made in March to the planning and execution of our safe return to work plan. If there was a silver lining to this situation, it was that we were able to demonstrate our commitment to our people by looking after them before, during, and after the shutdowns, which helped accelerate our cultural transformation in solutions. Also, investments in vertical integration remained on track and were not slowed down significantly by the pandemic. These investments will support key long-term growth initiatives in a post-pandemic environment. Finally, as I mentioned earlier, we are very pleased that the order PACE at the JANA has already met and will surpass the prior record year. Given this took place on the eastern seaboard in what was a major pandemic hotspot region, the turnaround has been nothing short of remarkable. However, because of the pandemic and other factors out of our control, there were also areas we weren't able to address as thoroughly as we originally planned. For example, following our success at the Rhode Island facility last year, We had plans in 2020 to significantly expand our DDMS efforts in solutions to several other facilities. Obviously, these plans were curtailed due to COVID travel restrictions on the East Coast. We are poised and ready to execute these plans as soon as business travel restrictions are lifted. Overall, I couldn't be more pleased with the way we are executing in an uncertain environment. Our teams are doing an outstanding job and will continue to do so. At its core, our business model is built to adapt to dynamic external conditions, make the necessary adjustments to overcome these challenges, and utilize our continuous improvement mindset to get better every day. Will we exit the pandemic stronger than we entered? Absolutely. There's no doubt about it. There are a lot of reasons to be excited for our growth prospects over the long run, and we continue to push toward our long-term goals to deliver shareholder value in the years to come. Now I'd like to pass the call to Sarah.