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spk00: 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.
spk02: 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.
spk03: 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.
spk02: Thanks, Bob. Overall, our financial performance for the third quarter reflects robust demand dynamics limited by the economic realities facing all companies today. Inflationary pressures, supply chain constraints, and the availability of skilled labor are From a consolidated perspective, we generated third quarter net sales of 127.6 million and gross profit of 30.6 million, compared to net sales of 133.8 million and gross profit of 36.7 million during the third quarter of 2020. Net sales were lower compared to the same period last year due to global supply chain constraints impacting production and delivery in the solution segment, partially offset by positive price realization in all businesses. We recorded GAAP net income of 7 million or 30 cents per diluted share compared to 9.2 million and 39 cents respectively in 2020. On an adjusted basis, we generated net income of $7 million and $0.29 per diluted share compared to adjusted net income of $9.8 million and $0.42 per diluted share. Similarly, we generated consolidated adjusted EBITDA of $15.5 million compared to $23.1 million in the corresponding period of the prior year. Profitability decreased year-over-year due to the material and freight inflation versus the timing of price realization, production constraints due to supply chain shortages, and higher costs due to temporary shutdowns and a tight labor market. SG&A expenses, including amortization expense, were 20.3 million, approximately 1.1 million higher than the prior year. due to wage and benefit inflation, plus the return of more normalized travel and marketing spend in our attachment segment. These increases were slightly offset by a decrease in incentive-based compensation based on operating performance in the quarter. Interest expense was $2.2 million for the quarter, which was lower than the $5 million incurred in the same period in the prior year. The decrease is due to lower interest on the term loan, resulting from the June 2021 refinancing. The effective tax rate was 14.6% for the quarter, considerably lower than the 26% rate for the third quarter of 2019, due to discrete tax benefits related to favorable state income tax audit results. Now let's turn to information for the two segments. Within our work truck attachment segment, we generated net sales of $81.4 million compared to net sales of $76.9 million. The 6% increase was primarily attributable to pre-season price actions. Adjusted EBITDA was $14.8 million during the third quarter, lower when compared to $20.2 million recorded in the prior year. due to inflation on input costs outpacing the earlier price actions and inefficiencies in manufacturing due to the tight labor market. Following the initial price increases taken at the start of preseason, we instituted an additional price increase at the start of the fourth quarter to address the higher inflation. Despite coming off another season of below average snowfall, our overall preseason shipments were very strong. Third quarter shipments were comparable to 2020, which is a difficult comparison as the pandemic had increased the emphasis on the third quarter. This year, our preseason orders returned to a more traditional 55-45 split between the second and third quarters, compared to a 50-50 split last year. As Bob mentioned, dealer inventories remain at a six-year low today, and some of our third quarter orders were pushed into the fourth quarter due to labor constraints. That brings us to Work Truck Solutions, where we reported net sales of 46.3 million and adjusted EBITDA of 700,000, compared to net sales of 56.9 million and adjusted EBITDA of 2.9 million in the same period last year. The declines are primarily due to supply chain constraints, which impacted production and led us to implement rolling shutdowns at several facilities during the quarter to mitigate the impact. We will continue to utilize this approach as needed to maximize efficiency while doing whatever we can to preserve our skilled workforce despite the short-term impact we're seeing on margins. Adjusted EBITDA was also negatively impacted by the acceleration of inflationary pressures. Price increases have been implemented at both businesses, but the rapid escalation of costs exceeded the price realized in the quarter. We remain very encouraged by the strong demand and ordering trends we are seeing across the segment, which have created record backlog at both Henderson and Vagena. Turning to the balance sheet and liquidity figure, net cash used in operating activities during the first nine months of 2021 was 19.5 million, compared to 27.1 million for the same period last year. The improvement was driven by the year-to-date improved operating performance, which was slightly offset by an increase in accounts receivable due to increased sales and higher inventories due to inflation. Free cash flow for the first nine months of 2021 increased substantially to negative 26.8 million compared to negative 36.5 million during the same period in 2020, as we used less cash in operating activities and had lower capital expenditures. We saw a 6.4 million increase in inventory to 100.1 million at the end of the quarter, when compared to third quarter of last year, driven primarily by inflation. Accounts receivable at the end of the quarter were $124.1 million, right in line with the $123.2 million reported at the end of the third quarter last year. Total liquidity, which is comprised of $7.3 million in cash and $62.1 million in borrowing capacity under our revolver, was approximately $69.4 million at the end of the third quarter, compared to $93.9 million at the end of the third quarter of 2020. Capital expenditures for the first nine months of 2021 totaled $7.3 million, lower than the $9.5 million in the same period in 2020 due to timing of capital investments related to strategic growth projects. At the end of the quarter, we had a net debt leverage ratio of 2.4 times, lower than 3.7 times at the same point last year. Finally, as you probably saw in our release, we're lowering the top end of our guidance ranges due to supply chain shortages we're experiencing in solutions. Previously, we had thought that July was the trough on supply chain constraints, and we would see sequential improvements monthly through the end of 2021. Now, however, we anticipate that our supply chain constraints, inflationary pressures, and labor shortages will continue to negatively impact our business in the fourth quarter and into 2022. For 2021, we now expect net sales to be between 525 million and 565 million. Adjusted EBITDA in the range of $75 million to $90 million. And adjusted earnings per share in the range of $1.40 to $1.90. Also, our effective tax rate is now expected to be approximately 15% to 17% for the year, due to the discrete tax benefits mentioned earlier. Of course, our Q4 results, especially in attachments, will be influenced by the timing, location, and amount of snowfall as it does every year. As we look to 2022, we expect the current operating environment to continue into the new year. A few comments on what we're seeing today, and of course, we'll have more commentary when we provide guidance in February. We are pleased with the demand dynamics that we are experiencing in all businesses and expect to enter 2022 with record backlog in solutions. We also expect some attachments delivery will be pushed to the first quarter 2022. Supply chain constraints are expected to continue into the first half of 2022 for solutions. as the OEMs continue to navigate their supply chain issues. We expect price realization will improve next year over 2021, and we're hopeful that steel pricing seems to have peaked in August. That being said, we expect the back half of 2022 to be better than the front half. We continue to monitor the external factors that will influence our results next year. We have the right team in place to work through these obstacles, and as the macroeconomic situation improves, we will be ready to take advantage of the improving conditions and ramp up further production to deliver on our record backlog. With that, we'd like to open the call for questions. Operator?
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the KNA roster. Your first question comes from the line of Tim Boyce from Barrett.
spk06: Yeah, good morning, everybody. Morning.
spk01: Morning, Tim.
spk06: Maybe just to start on pricing and cost inflation. I guess, how are you thinking about the timing in terms of when price is able to kind of catch up to inflation at this point? I guess, in attachments, do you think you can kind of exit the year being price-cost neutral? And I guess as you convert to backlog and solutions, how would you expect kind of pricing there to perform relative to inflation?
spk02: Yeah, absolutely. Let me take a step back, and I repeat something you've heard me say many times. We will cover the inflation dollar for dollar. The timing we knew this year would be a question. We have had multiple price increases in all of our businesses. I think the one that is probably highlighted more in the first quarter is attachments. And so when we look at attachments, we essentially had two increases prior to preseason. And I guess the way we think about preseason and the way we manage our business, we don't change pricing during preseason. So second quarter and third quarter pricing stays the same. Now, as we enter preseason, we do the best to predict I guess, what we're going to see. What we saw, though, from the beginning of preseason through the end, steel more than increased more than 50%. So that's what led to the fourth quarter price increase. So as we exit the year, Tim, I would say I think we're going to be close but it's going to be very dependent on getting all the production out the door. I am not worried from an attachment standpoint on covering it. Going into next year, there may be a little bit of lag that goes into the first quarter. On the solution side, you pretty much hit the nail on the head there. We change our quotes as the costs are changing. We've gone back in many areas of our backlog. Price will lag more so there because of the significant backlog that we have in those businesses. And I know we will enter 2022 with that lag, and it's too hard for me to predict right now because of the chassis when that will actually happen. get all caught up.
spk06: Okay. Okay. But you have been able to go back on maybe some of your longer dated orders and you have been able to kind of reprice for some of the inflation.
spk02: Yeah, absolutely. It's imperative based on what we've been seeing from an inflation standpoint.
spk06: Okay. Okay. And then on the labor side, just do you feel like you've made the necessary improvements now to kind of normalize the labor pool and attachments? And I guess in solutions, because of the rolling shutdowns, you have been able to kind of keep existing employees so that you're ready to convert that backlog when you can?
spk03: Yeah, we've taken across the board. wage increases in our attachments business. I mentioned that early on. We immediately saw an increase in job applicants and we're a little early in that process yet to say that we've solved it, but we are on a path to doing so. We've also made sure that those adjustments to permanent labor rates will get reflected in the price increases that we're taking to the market so that we cover both material cost inflation and wage inflation. On the solution side, the rolling shutdowns have been pretty successful so far. We've got a pretty good, loyal group of folks that are hanging in there with us. But having said that, we are still making wage rate adjustments on that side of the business as well. I don't know that anybody can predict that. what this labor pool is going to look like or what the prevailing wage compensation is going to look like when this thing finally settles down, Tim. But I will tell you that we're all over it and we've made permanent adjustments already and are positioned to do more if that's what's required. And again, that will all be reflected ultimately in the price of our products and the value proposition of our customers.
spk06: Okay. Okay, great. And then Just the last question, I mean, I know there's a lot of, you know, moving pieces here in the environment near term, but, you know, you had an animal estate two years ago, and you outlined, you know, longer-term financial, you know, targets. I mean, in your eyes, has any of that structurally changed?
spk03: No, not at all. Sarah and I are both looking at each other. Both of us wanted to shout, no, not at all, at the same time. That's what's exciting for us, right? We keep our eye on the long game while we manage the short game, and in fact, there's more reason for us to be optimistic about those long-term financial targets because of the work we've been able to do behind the scenes to prepare ourselves for those things. They're just pushed out a year or two. Sarah, you can add your own comments as well.
spk02: Yeah, no, I think you covered it well. There's absolutely nothing structurally You know, and the demand environment is there. It's really just navigating through these short-term headwinds.
spk07: Okay. Okay, thanks. I'll hop back in queue. Good luck, guys.
spk03: Thank you.
spk00: Your next question comes from the line of Chris McGinnis from Sidoti & Co.
spk05: Good morning. Thanks for taking my questions. I guess just to follow up on – I'm sorry. Just to follow up on the labor, obviously, you know, a tough environment, but given the vaccine mandates, especially in New York, are you seeing any, you know, how is that impacting you? And do you think that's a, you know, a long-term issue for you at some of your facilities? Thanks.
spk03: Yeah, let me, that's a great question. Let's see. We haven't talked about COVID proactively for a while. So let me just start there. As we sit here today across all of our Douglas locations, we are seeing very few COVID cases and absenteeism due to quarantines and that sort of thing has not been an issue. We are very thankful for that. The other thing that we're paying close attention to are the OSHA regulations, which we just saw yesterday. While we thought they were supposed to come out in early October, it looks like we may see something on that this week. Our stance has been and will be we have always complied with OSHA directives, and this will be no different. We've been communicating with our workforce. letting them know what may be coming down the pipe in terms of vaccination requirements and proof and testing capabilities and those sorts of things. So we're poised to make a run at complying with those regulations when they do come out. Having said that, New York has an example, right? You know, we've got some up-fit locations in the Long Island area. And those, as of yet, haven't fallen under some of the directives that you've seen that relates to firemen and policemen and city workers and those kinds of things. So we haven't had to make any unusual adjustments there that have cost us anything. that have negatively had an impact on the labor force or have resulted in people leaving Douglas and going to work somewhere else. Not quite sure what the impact of that's going to be when the OSHA regulations come into play. But as we sit here today, while the COVID health crisis is still reasonably serious, it hasn't impacted our business like it has 6, 9, 12 months ago.
spk05: Great. I appreciate that. And then just one more, just around solutions, obviously you've done a lot of work on DDMS. As hopefully at some point in the future chassis get better, you know, what's the level of throughput, you know, through those facilities? And then I guess, you know, is there any risk of timing of getting those out the door versus your backlog? Thanks.
spk03: Yeah, look, one of the things I was hoping to be able to add some color on, again, we talk about exiting stronger than we entered. This past January, we showcased our Illinois upfit facility on the Henderson side. for the awesome DDMS flow improvements that they made in that particular business model. And what we've done since then, while we're implementing the rolling shutdowns and waiting for the chassis supply to come back, is we are replicating that successful throughput model in our Ohio facility and in our New York facility. We had open houses in both of those facilities just a couple of months ago, invite a lot of our end user customers to see the changes that we've made, and it was exciting all the way around. We have strong relationships with our end users to begin with, and nothing but positive feedback from those folks. So I am confident we are well positioned when chassis start to flow again, and they will, that we're going to see some nice margin improvement and profit improvement on the work truck solution side these facilities to respond once we start moving chassis through them again.
spk05: Great. I appreciate that. Thanks for taking my questions, and good luck in Q4.
spk00: Thank you.
spk02: Thanks, Chris.
spk00: Your next question comes from the line of Mike Schleske from DA Davidson.
spk08: Hey, good morning, guys.
spk01: Welcome, Mike.
spk08: Thank you. I guess I kind of wanted to ask first about the risk of cancellations across your snow businesses due to the fact that it's a seasonal product. Can you maybe talk about, in Henderson, the fact that some of those sales are meant to go to government customers that might have budget timing issues, and then across the main attachments business, if you can't get things in by December, January, will people either cancel or say we found a plow from a different brand?
spk03: Got it. Okay, a couple things there. Let me hit the municipal side first, okay? We are still seeing very strong orders. As we both mentioned, their backlog is at record levels. Having said that, right, we went through a period of Q4 of last year into the first quarter this year, we weren't sure how the municipal budgets were going to shake out. And it turns out that some of the government spending bills and some of the support for those things pretty much put those fears to bed, and so government budgets are back on track. Now, what we are paying attention to has to do with inflation's impact on that, right? So if your budget is X, and, you know, you buy 10 trucks a year and you pay Y, if those 10 trucks a year, now the price goes up 10%, 15%, does that mean that their budgets have gone up 10%, 15% and it all fits in nice and neat? We're not sure, right? There could be a period of time where the pricing on that side results in, I used to buy 10 trucks a year, I'm going to buy 9. We're not quite sure, so we're paying close attention to that, Mike. Now, on the attachment side, this is really kind of interesting and fun. Let me back up just a bit. Lots of people, lots of businesses have been hurt by the pandemic, and there's a few businesses that have benefited. The landscape business has benefited from day one. With everybody at home doing home improvement projects, They've had a record year in 2020 and have another record year in 2021. We are seeing that even in a below-average snowfall environment, we are seeing some pretty robust demand from those end users. Okay, so they are replacing equipment because they got a lot of cash in their pocket. We don't get a sense... that if we carry a little larger backlog in the 2022 than we normally do, that we're going to see cancellations. I think they'll be happy to get the product whenever it becomes available, and they're in a pretty cash-rich position at this point to be able to still make that spend.
spk09: Okay.
spk08: Can I also ask, across the business about chassis, Are you getting any sense, whether it's in DeGeneres or even in the other businesses, whether you're seeing customers willing to switch chassis? If they were not only going to get a Ram, if they would switch to a Ford, if that's what's available that day, or are people still staying very loyal to their current fleet brands?
spk03: Yeah, that's a terrific question. By and large, what we see, regardless of the situation we're operating in, is a loyalty to the chassis that is part of their spec. A lot of that has to do with performance and maintenance, right? They know how to maintain those vehicles. They know how to operate on those vehicles from a repair perspective. And so the idea of a new chassis configuration and the implications and the ripple effect that has through the rest of their business model typically is not worth any short-term timing investment. improvement that you may get in terms of truck delivery. So we haven't seen much of that. I would also just add, though, that we also haven't seen cancellations. And it's interesting as the lead times lengthen, right, and everybody understands it, we are still seeing very robust demand there. So I also don't expect We don't know that any one chassis supplier is going to substantially outperform anybody else from a lead time perspective as this chip thing improves. But who knows, right? If we see something, then maybe what you're asking about will be something to pay closer attention to. But right now, they're all kind of lumped in that same bucket.
spk08: Got it. Can I ask one last quick one? Sarah, I should book you guys. I didn't hear the word mentioned. The price increase that you put in there earlier in the year and here in the fourth quarter, they are not surcharges. These are permanent increases that will go through next year, even if you see the price of steel or other costs come down?
spk02: Yeah, we actually have a mix of price and surcharge in all of our businesses. I would say, as I mentioned, we've had multiple price increases at all businesses. it appears as if we go to the next price increase, more gets rolled from surcharge into price every time. But we've still been utilizing kind of a mixture.
spk08: Okay. That's it for me, guys. Thanks so much. I appreciate it.
spk01: Thanks, Mike.
spk00: Once again, if you wish to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 on your telephone keypad. I'm showing no further questions at this time. I'd now like to turn the conference back to Bob McCormick, President and CEO.
spk03: Thanks. Thank you for your time today. We appreciate, as always, your ongoing interest in Douglas Dynamics, and we look forward to speaking with some of you at the Baird Conference next week. Have a great day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you. Thank you. good day and thank you for standing by welcome to the douglas dynamics third 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 zero I would now like to hand the conference over to your speaker today, Sarah Lauber, CFO.
spk02: 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.
spk03: 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 $.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.
spk02: Thanks, Bob. Overall, our financial performance for the third quarter reflects robust demand dynamics limited by the economic realities facing all companies today. Inflationary pressures, supply chain constraints, and the availability of skilled labor are From a consolidated perspective, we generated third quarter net sales of 127.6 million and gross profit of 30.6 million compared to net sales of 133.8 million and gross profit of 36.7 million during the third quarter of 2020. Net sales were lower compared to the same period last year. due to global supply chain constraints impacting production and delivery in the solution segment, partially offset by positive price realization in all businesses. We recorded GAAP net income of $7 million or $0.30 per diluted share, compared to $9.2 million and $0.39, respectively, in 2020. On an adjusted basis, we generated net income of $7 million and $0.29 per diluted share compared to adjusted net income of $9.8 million and $0.42 per diluted share. Similarly, we generated consolidated adjusted EBITDA of $15.5 million compared to $23.1 million in the corresponding period of the prior year. Profitability decreased year-over-year due to the material and freight inflation versus the timing of price realization, production constraints due to supply chain shortages, and higher costs due to temporary shutdowns and a tight labor market. SG&A expenses, including amortization expense, were 20.3 million, approximately 1.1 million higher than the prior year. due to wage and benefit inflation, plus the return of more normalized travel and marketing spend in our attachment segment. These increases were slightly offset by a decrease in incentive-based compensation based on operating performance in the quarter. Interest expense was $2.2 million for the quarter, which was lower than the $5 million incurred in the same period in the prior year. The decrease is due to lower interest on the term loan, resulting from the June 2021 refinancing. The effective tax rate was 14.6% for the quarter, considerably lower than the 26% rate for the third quarter of 2019, due to discrete tax benefits related to favorable state income tax audit results. Now let's turn to information for the two segments. Within our work truck attachment segment, we generated net sales of $81.4 million compared to net sales of $76.9 million. The 6% increase was primarily attributable to preseason price action. Adjusted EBITDA was $14.8 million during the third quarter, lower when compared to $20.2 million recorded in the prior year. due to inflation on input costs outpacing the earlier price actions and inefficiencies in manufacturing due to the tight labor market. Following the initial price increases taken at the start of preseason, we instituted an additional price increase at the start of the fourth quarter to address the higher inflation. Despite coming off another season of below average snowfall, our overall preseason shipments were very strong. Third quarter shipments were comparable to 2020, which is a difficult comparison as the pandemic had increased the emphasis on the third quarter. This year, our preseason orders returned to a more traditional 55-45 split between the second and third quarters, compared to a 50-50 split last year. As Bob mentioned, dealer inventories remain at a six-year low today, and some of our third quarter orders were pushed into the fourth quarter due to labor constraints. That brings us to Work Truck Solutions, where we reported net sales of $46.3 million and adjusted EBITDA of $700,000, compared to net sales of $56.9 million and adjusted EBITDA of $2.9 million in the same period last year. The declines are primarily due to supply chain constraints, which impacted production and led us to implement rolling shutdowns at several facilities during the quarter to mitigate the impact. We will continue to utilize this approach as needed to maximize efficiency while doing whatever we can to preserve our skilled workforce despite the short-term impact we're seeing on margins. Adjusted EBITDA was also negatively impacted by the acceleration of inflationary pressures. Price increases have been implemented at both businesses, but the rapid escalation of costs exceeded the price realized in the quarter. We remain very encouraged by the strong demand and ordering trends we are seeing across the segment, which have created record backlog at both Henderson and Vagena. Turning to the balance sheet and liquidity figure, net cash used in operating activities during the first nine months of 2021 was 19.5 million, compared to 27.1 million for the same period last year. The improvement was driven by the year-to-date improved operating performance, which was slightly offset by an increase in accounts receivable due to increased sales and higher inventories due to inflation. Free cash flow for the first nine months of 2021 increased substantially to negative 26.8 million compared to negative 36.5 million during the same period in 2020, as we used less cash in operating activities and had lower capital expenditures. We saw a 6.4 million increase in inventory to 100.1 million at the end of the quarter, when compared to third quarter of last year, driven primarily by inflation. Accounts receivable at the end of the quarter were 124.1 million, right in line with the 123.2 million reported at the end of the third quarter last year. Total liquidity, which is comprised of 7.3 million in cash and 62.1 million in borrowing capacity under our revolver, was approximately $69.4 million at the end of the third quarter, compared to $93.9 million at the end of the third quarter of 2020. Capital expenditures for the first nine months of 2021 totaled $7.3 million, lower than the $9.5 million in the same period in 2020 due to timing of capital investments related to strategic growth projects. At the end of the quarter, we had a net debt leverage ratio of 2.4 times, lower than 3.7 times at the same point last year. Finally, as you probably saw in our release, we're lowering the top end of our guidance ranges due to supply chain shortages we're experiencing in solutions. Previously, we had thought that July was the trough on supply chain constraints, and we would see sequential improvements monthly through the end of 2021. Now, however, we anticipate that our supply chain constraints, inflationary pressures, and labor shortages will continue to negatively impact our business in the fourth quarter and into 2022. For 2021, we now expect net sales to be between 525 million and 565 million. Adjusted EBITDA in the range of $75 million to $90 million. And adjusted earnings per share in the range of $1.40 to $1.90. Also, our effective tax rate is now expected to be approximately 15% to 17% for the year, due to the discrete tax benefits mentioned earlier. Of course, our Q4 results, especially in attachments, will be influenced by the timing, location, and amount of snowfall as it does every year. As we look to 2022, we expect the current operating environment to continue into the new year. A few comments on what we're seeing today, and of course, we'll have more commentary when we provide guidance in February. We are pleased with the demand dynamics that we are experiencing in all businesses and expect to enter 2022 with record backlog in solutions. We also expect some attachments delivery will be pushed to the first quarter 2022. Supply chain constraints are expected to continue into the first half of 2022 for solutions. as the OEMs continue to navigate their supply chain issues. We expect price realization will improve next year over 2021, and we're hopeful that seal pricing seems to have peaked in August. That being said, we expect the back half of 2022 to be better than the front half. We continue to monitor the external factors that will influence our results next year. We have the right team in place to work through these obstacles, and as the macroeconomic situation improves, we will be ready to take advantage of the improving conditions and ramp up further production to deliver on our record backlog. With that, we'd like to open the call for questions. Operator?
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Team Voice from Barry.
spk06: Yeah, good morning, everybody. Morning.
spk01: Morning, Tim.
spk06: Maybe just to start on pricing and cost inflation. I guess, how are you thinking about the timing in terms of when price is able to kind of catch up to inflation at this point? I guess, in attachments, do you think you can kind of exit the year being price-cost neutral? And I guess as you convert to backlog and solutions, how would you expect kind of pricing there to perform relative to inflation?
spk02: Yeah, absolutely. Let me take a step back, and I repeat something you've heard me say many times. We will cover the inflation dollar for dollar. The timing we knew this year would be a question. We have had multiple price increases in all of our businesses. I think the one that is probably highlighted more in the third quarter is attachments. And so when we look at attachments, we essentially had two increases prior to pre-season. And I guess the way we think about pre-season and the way we manage our business, we don't change pricing during pre-season. So second quarter and third quarter pricing stays the same. Now as we enter pre-season, we do the best to predict I guess what we're going to see. What we saw, though, from the beginning of preseason through the end, steel more than increased more than 50%. So that's what led to the fourth quarter price increase. So as we exit the year, Tim, I would say I think we're going to be close. but it's going to be very dependent on getting all the production out the door. I am not worried from an attachment standpoint on covering it. Going into next year, there may be a little bit of lag that goes into the first quarter. On the solution side, you pretty much hit the nail on the head there. We change our quotes as the costs are changing. We've gone back in many areas of our backlog. Price will lag more so there because of the significant backlog that we have in those businesses. And I know we will enter 2022 with that lag and it's too hard for me to predict right now because of the chassis when that will actually get all caught up.
spk06: Okay. Okay. But you have been able to go back on maybe some of your longer dated orders and you have been able to kind of reprice for some of the inflation.
spk02: Yeah, absolutely. It's imperative based on what we've been seeing from an inflation standpoint.
spk06: Okay. Okay. And then on the labor side, just do you feel like you've made the necessary improvements now to kind of normalize the labor pool and attachments? And I guess in solutions, because of the rolling shutdowns, you have been able to kind of keep existing employees so that you're ready to convert that backlog when you can?
spk03: Yeah, we've taken across the board... wage increases in our attachments business. I mentioned that early on. We immediately saw an increase in job applicants and we're a little early in that process yet to say that we've solved it, but we are on a path to doing so. We've also made sure that those adjustments to permanent labor rates will get reflected in the price increases that we're taking to the market so that we cover both material cost inflation and wage inflation. On the solution side, the rolling shutdowns have been pretty successful so far. We've got a pretty good, loyal group of folks that are hanging in there with us. But having said that, we are still making wage rate adjustments on that side of the business as well. I don't know that anybody can predict... what this labor pool is going to look like or what the prevailing wage compensation is going to look like when this thing finally settles down, Tim. But I will tell you that we're all over it and we've made permanent adjustments already and are positioned to do more if that's what's required. And again, that will all be reflected ultimately in the price of our products and the value proposition of our customers.
spk06: Okay. Okay, great. And then Just the last question, I mean, I know there's a lot of, you know, moving pieces here in the environment near term, but, you know, you had an animal estate two years ago, and you outlined, you know, longer-term financial, you know, targets. I mean, in your eyes, has any of that structurally changed?
spk03: No, not at all. Sarah and I are both looking at each other. Both of us wanted to shout, no, not at all, at the same time. That's what's... exciting for us, right? We keep our eye on the long game while we manage the short game, and in fact, there's more reason for us to be optimistic about those long-term financial targets. Because of the work we've been able to do behind the scenes to prepare ourselves for those things, they're just pushed out a year or two. Sarah, you can add your own comments as well.
spk02: Yeah, no, I think you covered it well. There's absolutely nothing structurally You know, and the demand environment is there. It's really just navigating through these short-term headwinds.
spk07: Okay. Okay, thanks. I'll hop back in queue. Good luck, guys.
spk00: Thank you. Your next question comes from the line of Chris McGinnis from Sidoti & Co.
spk05: Good morning. Thanks for taking my questions. I guess just to follow up on – I'm sorry. Just to follow up on the labor, obviously, you know, a tough environment, but given the vaccine mandates, especially in New York, are you seeing any, you know, how is that impacting you? And do you think that's a, you know, a long-term issue for you at some of your facilities? Thanks.
spk03: Yeah, let me, that's a great question. Let's see. We haven't talked about COVID proactively for a while. So let me just start there. As we sit here today across all of our Douglas locations, we are seeing very few COVID cases and absenteeism due to quarantines and that sort of thing has not been an issue. We are very thankful for that. The other thing that we're paying close attention to are the OSHA regulations, which we just saw yesterday. While we thought they were supposed to come out in early October, it looks like we may see something on that this week. Our stance has been and will be we have always complied with OSHA directives, and this will be no different. We've been communicating with our workforce. letting them know what may be coming down the pipe in terms of vaccination requirements and proof and testing capabilities and those sorts of things. So we're poised to make a run at complying with those regulations when they do come out. Having said that, New York as an example, right? You know, we've got some up-fit locations in the Long Island area. And those, as of yet, haven't fallen under some of the directives that you've seen that relates to firemen and policemen and city workers and those kinds of things. So we haven't had to make any unusual adjustments there that have cost us anything. that have negatively had an impact on the labor force or have resulted in people leaving Douglas and going to work somewhere else. Not quite sure what the impact of that's going to be when the OSHA regulations come into play. But as we sit here today, while the COVID health crisis is still reasonably serious, it hasn't impacted our business like it has 6, 9, 12 months ago.
spk05: Great. No, I appreciate that. And then just one more, just around solutions, obviously you've done a lot of work on DDMS. As hopefully at some point in the future chassis get better, you know, what's the level of throughput, you know, through those facilities? And then I guess, you know, is there any risk of timing of getting those out the door versus your backlog? Thanks.
spk03: Yeah, look, one of the things I was hoping to be able to add some color on, again, we talk about exiting stronger than we entered. This past January, we showcased our Illinois upfit facility on the Henderson side. for the awesome DDMS flow improvements that they made in that particular business model. And what we've done since then, while we're implementing the rolling shutdowns and waiting for the chassis supply to come back, is we are replicating that successful throughput model in our Ohio facility and in our New York facility. We had open houses in both of those facilities just a couple of months ago, invite a lot of our end user customers to see the changes that we've made, and it was exciting all the way around. We have strong relationships with our end users to begin with, and nothing but positive feedback from those folks. So I am confident we are well positioned when chassis start to flow again, and they will, that we're going to see some nice changes margin improvement and profit improvement on the work truck solution side, given how we've positioned these facilities to respond once we start moving chassis through them again.
spk05: Great. I appreciate that. Thanks for taking my questions, and good luck in Q4.
spk00: Thank you.
spk02: Thanks, Chris.
spk00: Your next question comes from the line of Mike Schleske from D.A. Davidson.
spk08: Hey, good morning, guys.
spk01: Welcome, Mike.
spk08: Thank you. I guess I kind of wanted to ask first about the risk of cancellations across your snow businesses due to the fact that it's a seasonal product. Can you maybe talk about in Henderson the fact that some of those sales are meant to go to government customers that might have budget timing issues and then across the main attachments business, you know, if you can't get things in by December, January, we'll Will people either cancel or say we found a plow from a different brand?
spk03: Got it. Okay, a couple things there. Let me hit the municipal side first, okay? We are still seeing very strong orders. As we both mentioned, their backlog is at record levels. Having said that, right, we went through a period – Q4 of last year into the first quarter this year where we weren't sure how the municipal budgets were going to shake out. And it turns out that some of the government spending bills and some of the support for those things pretty much put those fears to bed. And so government budgets are back on track. Now, what we are paying attention to has to do with inflation's impact on that, right? So if your budget is X, and, you know, you buy 10 trucks a year and you pay Y, if those 10 trucks a year, now the price goes up 10%, 15%, does that mean that their budgets have gone up 10%, 15% and it all fits in nice and neat? We're not sure, right? There could be a period of time where the pricing on that side results in, I used to buy 10 trucks a year, I'm going to buy 9. We're not quite sure, so we're paying close attention to that, Mike. Now, on the attachment side, this is really kind of interesting and fun. Let me back up just a bit. Lots of people, lots of businesses have been hurt by the pandemic, and there's a few businesses that have benefited. The landscape business has benefited from day one with everybody at home doing home improvement projects and They've had a record year in 2020 and have another record year in 2021. We are seeing that even in a below-average snowfall environment, we are seeing some pretty robust demand from those end users. Okay, so they are replacing equipment because they got a lot of cash in their pocket. We don't get a sense... that if we carry a little larger backlog in the 2022 than we normally do, that we're going to see cancellations. I think they'll be happy to get the product whenever it becomes available, and they're in a pretty cash-rich position at this point to be able to still make that spend.
spk09: Okay.
spk08: Can I also ask, across the business about chassis, Are you getting any sense, whether it's Indigena or even in the other businesses, whether you're seeing customers willing to switch chassis? If they were not only going to get a RAM, if they would switch to a 4, if that's what's available that day, or are people still staying very loyal to their current fleet plans?
spk03: Yeah, that's a terrific question. By and large, what we see, regardless of the situation we're operating in, is a loyalty to the chassis that is part of their spec. A lot of that has to do with performance and maintenance, right? They know how to maintain those vehicles. They know how to operate on those vehicles from a repair perspective. And so the idea of a new chassis configuration and the implications and the ripple effect that has through the rest of their business model typically is not worth any short-term timing investment. improvement that you may get in terms of truck delivery. So we haven't seen much of that. I would also just add, though, that we also haven't seen cancellations. And it's interesting as the lead times lengthen, right, and everybody understands it, we are still seeing very robust demand there. So I also don't expect We don't know that any one chassis supplier is going to substantially outperform anybody else from a lead time perspective as this chip thing improves. But who knows, right? If we see something, then maybe what you're asking about will be something to pay closer attention to. But right now, they're all kind of lumped in that same bucket.
spk08: Got it. Can I ask one last quick one? Sarah, actually both you guys, I didn't hear the word mentioned The price increase that you put in there earlier in the year and here in the fourth quarter, they are not surcharges. These are permanent increases that will go through next year, even if we see the price deal or other costs come down?
spk02: Yeah, we actually have a mix of price and surcharge in all of our businesses. I would say, as I mentioned, we've had multiple price increases at all businesses. it appears as if we go to the next price increase, more gets rolled from surcharge into price every time. But we've still been utilizing kind of a mixture.
spk08: Okay. That's it for me, guys. Thanks so much. I appreciate it.
spk00: Thanks, Mike. Once again, if you wish to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 on your telephone keypad. I'm showing no further questions at this time. I'd now like to turn the conference back to Bob McCormick, President and CEO.
spk03: Thanks. Thank you for your time today. We appreciate, as always, your ongoing interest in Douglas Dynamics, and we look forward to speaking with some of you at the Baird Conference next week. Have a great day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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