Douglas Dynamics, Inc.

Good day and thank you for standing by. Welcome to the Douglas Dynamics 3rd Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 assistance during the conference, please press star 0. I would now like to hand the conference over to your speaker today, Sarah Lauber, CFO.

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've 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 guidance. After that, we'll open the call for your questions. With that, I'll hand the call to Bob.

Thanks, Sarah. Good morning, everyone. Under the circumstances, we are pleased with our results for the quarter and are especially proud of our year-to-date performance. I'm sure our comments today will echo what you've heard from many other companies during this earnings season. Demand trends continue to be strong. Macroeconomic supply headwinds have intensified in recent months. On a year-to-date basis, both segments have shown improved performance over last year, with attachments in particular producing strong results. The well-documented macroeconomic challenges are hindering our ability to effectively address the robust demand we are seeing across our businesses. First, supply chain disruption and shortages have intensified, particularly as truck OEMs all pulled down their production numbers in recent months. Second, material price inflation continues to impact our margins as these unprecedented increases are outpacing our ability to pass through these costs in a timely fashion. but we are confident we will recapture it over the longer term. And third, the churn and entry-level shop floor positions has increased in recent quarters and continue to be a challenge. We've increased entry-level wages across the board and are starting to see an increase in job applicants recently. We will definitely be feeling the impact of these items well into 2022. I would like to give a shout out to our division leadership teams who have been navigating these uncharted waters. They've done an outstanding job. Special recognition to our sourcing teams who have done an amazing job keeping production flowing while strengthening our supplier relationships. And to our HR teams who are battling the hiring challenges across the country, yet leading the charge to ensure that we remain the employer of choice in our communities. As these unprecedented headwinds continue, remember that our problem-solving DDMS mindset means we are better equipped to handle these challenges than many companies. And we are continuing to implement short-term cost control measures, including rolling plant shutdowns at certain of our solutions locations. The strong demand outlook in both segments means we are well-positioned for long-term success and are focused on factors within our control while limiting the negative impact of macroeconomic issues wherever we can. Now let's look at each segment, beginning with work truck attachments where we had another strong quarter. Following the unusual third consecutive below-average snow season, we produced $81.4 million of net sales and $14.8 million of adjusted EBITDA for the third quarter. As expected, we did see a shift back towards the historical 55-45 split in preseason shipments between second and third quarter, rather than the 50-50 split we saw last year, which was impacted by the pandemic. So that created a tougher comparison for us this year. Additionally, if it weren't for labor constraints, we could have shipped more plows this quarter. Increasing material costs and labor issues impacted margins for the quarter, leading us to implement additional price actions as we entered the fourth quarter. More importantly, we entered the snow season in great shape. Dealer sentiment remains positive, retail activity over the summer months was strong, and dealer inventories are currently at six-year lows. The resiliency of the attachment business cannot be understated. When you look at it on a year-to-date basis, the attachments team is turning in a fantastic year, even with the economic and weather headwinds. Turning to our work truck solution segment. Net sales of $46.3 million and adjusted EBITDA of $0.7 million both decreased compared to the prior year as global supply chain constraints impacted our ability to upfit trucks. We embarked on a 30-day rolling shutdown facility strategy earlier in the year, and that continued in the third quarter. Utilizing rolling shutdowns not only reduces short-term labor costs, but also helps long-term employee retention. These shutdowns last only 30 days, so employees can collect unemployment benefits and retain their health insurance. This helps us to retain this group of highly skilled installers, which will be increasingly important for the long-term health of the business, despite the temporary negative impact on margins. We have implemented multiple price increases in solutions to combat material cost inflation, and we expect to fully cover the inflation over the longer time horizon. The great news is demand continues to be strong at both Henderson and DeJana. We entered 2021 with record backlog levels, which have only increased as this year has progressed. Records are being broken almost every month, and backlog is now more than 1.4 times where we started in January. The Henderson team worked through the gap in production schedules earlier this year, but rolling shutdowns have continued at several facilities because of supply chain constraints. The big change in recent months was that chassis supply deteriorated further, and we expect the second half of 2021 to have fewer chassis than the first half of the year as supply chain constraints really start to bite the truck OEMs. and component and chip supply remains constrained. However, we haven't seen, and don't expect to see, orders being canceled. At Dijana, the strength of demand across our broad customer base bodes well for the future. We know we are always at the front end of the line for chassis, and orders will be fulfilled, but the limited supply of chassis and components is frustrating to all. It bears repeating With record backlog in solutions, we are well positioned for long-term success. Let's turn to capital deployment priorities. We continue to invest in the business to fund our long-term growth initiatives. As our vertical integration strategy continues, we are lining up projects that, when combined, will help drive long-term organic growth. And we remain committed to our dividends. When it comes to M&A, our list of blue-chip company targets has not changed, and those companies remain top of mind as we look to execute our long-term strategy. We will continue to forge strong relationships with these companies and will conduct due diligence on the logical opportunities that are presented. We are ready to execute on deals should we find the right opportunity at the right valuations. The valuations we see do seem high, and we will always take a logical look at price versus long-term growth potential and strategic importance. In summary, overall we are executing well under the circumstances and are positioning ourselves for success over the long term. Demand trends remain very positive, but we continue to adapt to the rapidly changing conditions. We continue to play the long game, while managing the short game. With our roots in an industry that is influenced by weather, we are used to managing through uncertainty and entering each year not knowing if market conditions will be strong or weak. From supply chain, labor, and inflation, we have seen more uncertainty in the last 18 months than ever before, but our teams are built to manage through the unknown. and use our continuous improvement mindset to exit this period stronger than we entered. While we do this, we are maintaining our focus on the long game, implementing the strategies that will ensure we build our industry-leading position, from investments in vertical integration and new product development to doubling down on talent and organizational development. Although supply-related headwinds will impact our short-term results, we remain confident about our long-term future potential. With that, I'd like to pass the call to Sarah to discuss our financial results in more detail.