Douglas Dynamics, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Douglas Dynamics fourth 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 conference 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. Please go ahead, ma'am.

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 will review our financial results and 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. I'm very pleased with our Q4 results. In fact, it's our second consecutive quarter of positive results. Despite the difficult and unusual circumstances presented in 2020, our teams have endured, remaining focused on serving our customers and improving performance. Attachments Group performed well with a strong finish to the year, which met our expectations. Solutions improved the bottom line with particularly strong performance at Henderson. If you had shown me our fourth quarter 2020 results in April of last year, I would have said I'll take it. While pandemic and the related economic headwinds will present some short-term challenges in 2021, Douglas Dynamics is on a path to exit stronger, reaching towards our long-term financial goals. Now a quick health and safety update. From a pandemic perspective, all of our facilities remained operational throughout the quarter. We have seen an increase in absenteeism, as people are making good personal decisions staying home when sick, protecting not just themselves, but their teammates. We remain vigilant, our protocols are effective, and we're ready to handle any outbreaks that occur. I'm very proud of the way our people have adapted to and operated in this pandemic environment, ultimately driving performance without compromising team safety. Let's talk about the segments in more detail. First, the attachments group. It's actually pretty simple. The team executed strongly, outperforming Q4 2019 across the board. As we said earlier in the year, we knew this year would be different due to below average snowfall in the previous two winters and our preseason order period coinciding with the start of the pandemic. Having said that, we were still somewhat optimistic for three reasons. Number one, the landscapers were not heavily impacted by the pandemic. Number two, products such as the half-ton V-plow were very well received. And number three, despite the pandemic, dealer credit remained strong. So as previously stated, we expected dealers would be more conservative with their preseason orders, which would place more emphasis than usual on the fourth quarter. And that's exactly what happened. Dealer orders began strengthening at the end of Q3 and into Q4, which was helped by some psychological snowfall early in the season. For the fourth quarter, net sales increased 4%. and adjusted EBITDA increased 13% over the prior year, with EBITDA margins pushing 29%. As reorders came in, while at the same time we kept the lid on discretionary spending under our income protection plan. Of course, I've been glued to the weather channel since October, and this snow season certainly has been interesting. This season started off slow. with snowfall totals under the 10-year average at the end of January. Having said that, the first three weeks of February have been very strong. At this point, I'm guessing we'll be back above average at the end of the month. It is worth noting, though, that while we've seen headline-grabbing storms across the country in recent weeks, we really focus on our core markets in the more heavily populated areas of the Midwest and the East Coast. Assuming the month of March falls in line with historical patterns, we should see the snow season finish slightly above average, which is good news after the previous two years of below average snowfall. Keith Hagelin and his team have a long track record of maximizing performance of attachments in good times and bad, without fail. We do not take their outstanding, consistent performance for granted. They sometimes make it look easy, but we know that is not the case. Turning to solutions, very pleased with our solution segment results this quarter. Despite lower revenue overall, we were more profitable and produced even at the margins of 12.2%. The JANAs incoming orders were strong in 2020 when compared to 2019, despite the pandemic. Class 4-6 chassis supply is still unpredictable. with component availability, including computer chip shortages, potentially impacting OEM production. Bottom line, as the number one recipient of pool chassis from our largest OEM partner, we will continue to grow with them. Henderson's business produced an excellent quarter as chassis flow was consistent and we worked off a portion of our strong backlog. We are paying close attention to how the municipal customers are dealing with tax revenue challenges. Municipal snow and ice control budgets are vital to ensure public safety and to allow commerce to continue. But like everything else over the past year, nothing is guaranteed. And as expected, we have seen some softness in order patterns. And while customer quotes remain strong, incoming orders will likely continue to be soft for the first half of 2021. We will continue working our way through the backlog built over the past few years and will monitor the sales cycle and order trends as the year unfolds. The important takeaway this quarter is how Henderson can perform when demand and supply align. Overall, solutions turned in a great quarter given the ongoing environment and have found ways to operate effectively in the pandemic. With the review of the quarter complete, I'd like to continue to focus on Henderson for a moment, but shift our focus to the vertical integration strategy, which we first outlined in October 2019, followed shortly thereafter by breaking ground on a greenfield manufacturing site in Milwaukee, Wisconsin. As you know, Henderson and their engineering team are laser focused on designing, building, delivering custom solutions for the heavy-duty Class 7 and 8 municipal snow and ice control market. That's their core offering. The reason they are the market leader. And while the heavy-duty trucks tackle snow and ice control on highways, interstates, municipalities also run smaller, medium-duty trucks that take care of public parking lots, schools and libraries, etc. Henderson's always had a medium-duty truck offering but it is an underserved market for us. Here's where the vertical integration strategy comes into play. The engineering teams at attachments and solutions collaborated to design a total product solution to serve this medium duty market. The result is a high feature content, high performance product offering at a competitive price point. It's called the medium duty municipal first responder. Designed from the ground up, it's operated as a complete integrated package, not just a plow and a spreader. It includes a dump body, scissor lift, and universal handheld controller. Some of you joined our first virtual investor event last month, got a peek at this new product. Why is this important? Work Truck Solutions is the long-term, top-line growth engine for Douglas. This product offering will provide a nice organic revenue growth stream for Henderson. We expect to deliver the first units mid-year, gaining traction for the full year 2022. Many of these vertical integration projects will be singles and doubles, but all will contribute to organic long-term growth. And while this is the first vertical integration project launched, there's more in the pipeline, so stay tuned. With that, I should outline our capital allocation priorities. although I'm not quite sure that I need to do that at this point. Despite all the changes in the world over the past year, one thing remains the same, our commitment to the dividend. We increased our dividend again this year, as we have before, in both good times and bad, and that will remain our plan for the foreseeable future. We will also continue to use our strong free cash flow to pay down debt and maintain appropriate leverage, providing future flexibility for capital deployment. Looking ahead, we are seeing a few more M&A opportunities today compared to last year, and we would certainly like to see one of the blue chip companies on our list become available. In the meantime, we will continue to build relationships and conduct due diligence on the logical opportunities that come our way, but we'll remain cautious regarding valuation and won't chase deals. As I've stated before, we will undoubtedly exit the pandemic stronger than we entered. and we firmly believe we are a stronger company today than we were a year ago. The pandemic has temporarily impacted our growth and progress with some initiatives, but it has also accelerated progress in other projects. Overall, we are pleased with the way we are operating in an uncertain environment. Our teams are doing an outstanding job of adapting as the environment continues to change. We remain focused on our customers, our products, and our people, all while getting better every day at what we already do best and driving profitable growth along the way. Now I'd like to pass the call on to Sarah.