Douglas Dynamics, Inc.

Good morning and welcome to the Douglas Dynamics fourth quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Sarah Lauber, Executive Vice President and Chief Financial Officer. Please go ahead.

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. With that, I will turn the call over to Bob McCormick.

Thanks, Sarah. Good morning, everyone. Overall, 2022 was a good year for Douglas Dynamics, and we delivered significantly improved full-year results. 2022 net sales increased approximately 14% when compared to 2021. and net income and diluted earnings per share both increased around 26%, and both segments produced improved year-over-year results. While external headwinds persisted and progress is slower than we'd like, I am pleased with how our teams are managing the factors within our control. Demand remains strong in 2022, and our teams are able to find ways to deliver for our customers while implementing profit improvement initiatives and controlling costs. The trend for the first three quarters of the year was a very strong performance from attachments in each quarter, while solutions showed small improvements, but were still being impacted by inflation and supply chain issues. That changed somewhat in the fourth quarter. Although our financial performance improved across the board, it was driven by continued price realization at both segments and higher volumes in work truck solutions. Now let's talk about the segments in more detail. First, attachments. Our work truck attachment segment had a tremendous year overall, introducing innovative new products and taking advantage of changing industry dynamics. Full year net sales increased 17%, primarily due to pricing actions, as well as the strong preseason. Despite slightly below average snowfall for the season ending in March 2022, we received record preseason orders, as dealers were attempting to get ahead of any potential supply chain issues with stronger than normal owners. In an effort to preserve and enhance our industry-leading service levels, our teams pulled every lever possible to meet these increased pre-season shipment expectations, resulting in high labor, overtime, and outsourcing costs. And while these actions temporarily negatively impacted adjusted EBITDA margins, We are confident our margins will return to mid to high 20s in the medium to long term in alignment with our long term financial targets. The headline so far this snow season is that we're seeing significantly below average snowfall in some of our core markets. As always, it is the timing and location of snowfall, not just the amounts, that impact our business. So far this winter, we've seen a lack of snow in our core markets along the East Coast, particularly cities with large populations where more people are inconvenienced by three or more inches of snow. In fact, New York City usually gets its first winter snow in mid-December, but had to wait until the first of February this season, breaking a 50-year record. It was a similar story in cities such as Boston, Philadelphia, and Baltimore. The Midwest hasn't fared much better, with cities like Chicago and Detroit also seeing below-average snowfall so far. Having said that, in the Twin Cities, it has already been the fourth snowiest winter on record, and they're expected to get another one to two feet yet this week. And some of our secondary markets, such as Buffalo, Denver, and Salt Lake City, are seeing significant snowfall this winter. Let's go back to Buffalo for a minute. This is the best example of how snowfall can be dramatically different from city to city. As you've probably seen, Buffalo has been inundated with snow so far this season, getting more than 10 feet. While just 75 miles east, Rochester, New York has seen less than 10 inches of snow, well below their usual totals through mid-February. There are still five weeks of winter left, and a lot can still happen. but at the moment it seems likely we will end up with below-average snowfall in some of our core markets for the season. These snowfall trends are reflected in field inventory we took with dealers as usual in January. Inventory levels are higher than we'd like them to be and above the five-year average. If historical trends hold true, dealers will be ordering somewhat cautiously during the preseason. However, I'm happy to report that dealers remain optimistic and are ready for some late-season snowstorms, but that window is starting to close. And while snowfall hasn't been in our favor so far this year, we have seen a continuation of the demand trends we started to talk about last spring. Once again, there have been snow and ice events causing disruption in the south, helping to confirm the gradual expansion of the snow belt that we've seen in recent years. And we believe the growing demand for non-truck snow and ice control equipment will continue in the years ahead as well. We are continuing to invest in this piece of our business, evidenced by our recent introduction of a new upgraded push and plow. When combined with consumer demand for immediate satisfaction for snow and ice to be removed, plus concerns about liability and lawsuits, the long-term trends in the industry remain positive. Turning to solutions. 2022 net sales increased 8% primarily based on price increase realization, as well as a more stable and predictable Class 7A chassis supply, somewhat offset by component shortages leading to lower production volumes. Adjusted EBITDA increased significantly due to price realization, favorable sales mix, and profit improvement initiatives. This was somewhat offset as we continue to battle the inflationary pressures and supply chain constraints that are causing manufacturing and upfit inefficiencies. Solutions realized impressive gains in the fourth quarter, both sequentially and over the prior year, and our team delivered improvements in sales and adjusted EBITDA. Demand at the Janna and Henderson remained positive, and we are entering 2023 with record backlog for the second year in a row. Those who track and predict chassis supply indicate 2023 will look similar to 2022, and the timetable for a return to normal supply levels remains unpredictable. Overall, we are not expecting significant near-term improvements in chassis supply, but believe our teams can deliver positive results based on a continuation of our profit improvement initiatives new product introductions, plus the positive consumer sentiment we see today. The fact is work trucks are being used and many are overdue to be replaced. Thanks to our team in solutions, we are best positioned in the industry to meet that demand. As we look to the future, our vertical integration strategy continues to drive opportunities for growth. Our focus in 2023 will be more on extending the product lines we launched last year. For attachments, the pusher plow we launched last year has been very well received, and we will be launching additional models to round out the product line. And for solutions, the DynaPro dump body line is expanding to include a landscape body. Ramping up and expanding our production capabilities will keep our vertical integration team very busy this year. Looking at other avenues for growth, We are well positioned to execute on the acquisition front should any of our blue-chip targets become available. Our near-term priority will be in the attachment segment, focused on search for companies with complex products that are up to fit onto work trucks for a work purpose. We won't be focusing much of our time on the solutions acquisition opportunities in the near term until that segment has had time to deliver more consistent results and live up to its considerable potential that we know is So in summary, there are a lot of positives to take from 2022. While the headwinds we have been facing did not really dissipate last year, we also didn't see any new headwinds appear either as we had in the previous two years. That meant we were able to learn and adapt to the existing challenges and deliver improved performance. As we look at 2023, our teams continue to see opportunities to grow and improve our operations and we maintain a positive long-term outlook on both segments. I am truly grateful for the dedication and resilience of our teams. Across the board, we have seen our people produce creative solutions to the challenges we face, improving our operations over the long term, and using our continuous improvement mentality across the company. We simply get better every day. One silver lining to the pandemic is that in many ways it has brought our teams closer together with technology changes allowing easier collaboration across geographies and a shared sense of spreading the Douglas best practices and culture across all teams and locations. While the series of challenges we faced are remaining with us longer than anyone could have predicted and are likely to continue for the time being, we are confident we have the right strategy in place to deliver sustainable growth over the long term. Finally, we continue to strive towards our goal of delivering $3 per share of BPS in 2025, which remain on track based on our organic growth projections. With that, I'll hand the call to Sarah.