Douglas Dynamics, Inc.

Hello, and welcome to the Douglas Dynamics Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star, then one on your touch-tone phone. To withdraw your question, please press the star, then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to Nathan Elwell, Vice President of Investor Relations. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us on today's call. Before we begin, I would 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, matter 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, President and CEO, and Sarah Lauber, EVP and CFO. Bob will provide an overview of our performance, followed by Sarah reviewing our financial results and guidance. After that, we'll open the call for questions. With that said, I'll hand the call over to Bob. Please go ahead. Thanks, Nathan. Good morning, everyone.

We are pleased with our results for the second quarter. Our team delivered improved year-over-year results in both segments and across virtually every metric. The attachment segment delivered stronger than expected results following a difficult snow season. And our solutions team delivered noteworthy improvements as well. Consolidated second quarter 2023 net sales increased by 11% to a record $207.3 million this year. mainly driven by increased volumes and pricing adjustments in both segments. The impact of higher volumes and pricing adjustments continue to flow through to the bottom line as net income increased 35% to $24 million, adjusted even to increase 27% to $43.3 million compared to the same period last year. Overall, the numbers are improving, but there is still a long way to go before we are back to normal operating conditions and normal results. Right now, our tasks are more straightforward than they have been in recent years. We are heads down, working hard, and chipping away at the challenges in front of us, preparing for improved external business conditions we believe will be here in 2024. With that said, let me provide an update on the headwinds we've been facing recently. Chassis supply, while still inconsistent, is showing some initial signs of improvement To be clear, OEMs remain cautious and aren't making any bold statements about the timing of a return to pre-pandemic supply levels. Having said that, we are hopeful that chassis supply will continue to gradually improve during the second half of the year, leading to a more consistent, improved supply in 2024. For components, while the situation is improving, some products are still in short supply. We've also seen a notable improvement in labor markets, with our teams reporting generally high retention rates, plus more and higher quality candidates are applying for crucial open positions. Overall, while significant uncertainty still exists, the situation is starting to look brighter over the medium to long term, and in the meantime, we'll continue to find creative solutions to ongoing macroeconomic challenges. Okay. Let's turn to the segment's results. Beginning with work truck attachments where we delivered a strong quarter, especially under the circumstances. As expected, pre-season order demand for our products was softer than normal following the snow season that was below average overall and extremely below average in our core markets along the eastern seaboard from Baltimore to Boston. As you know, our pre-season orders are shipped in Q2 and Q3, with a historical shipment mix of approximately 55-45. This year, due to outstanding execution from our team, we shipped more orders in Q2 and expect the pre-season shipment mix to be closer to 60-40. Attachments produced record net sales based on these higher volumes, pricing, and improved production efficiencies. Adding in the impressive profitability, delivering 30% EBITDA margins, I'm glad to say that after three years of unprecedented headwinds, it's great to see the attachment segment firing on all cylinders again from an operational standpoint. I'm also pleased to say that both dealer sentiment and financial health remain positive. Like us, our dealers have dealt with low snowfall before and know the number of plows they need going into the snow season. And while their preseason orders did reflect their desire to reduce inventory levels after last snow season, we believe there may be some level of retail inventory correction still to come. The question of how much of a correction is needed and whether it will come in late third quarter reorders or in the fourth quarter. As a reminder, our team quickly implemented our low snowfall playbook during the first quarter to mitigate the financial impact of the poor snow season. Teams have been successful in controlling and delaying spending and managing costs while still making the really necessary investments to fuel long-term growth. Based on our leading market position and the changing demand dynamics we've talked about previously, the medium to long-term outlook for our attachments business remains strong. Let's turn to the work truck solution segment, where net sales increased approximately 16%, on pricing adjustments, higher volumes, and a slight improvement in chassis supply of certain types of work trucks. While adjusted EBITDA improved compared to second quarter 2022, performance continues to be impacted by supply chain inefficiencies, and we clearly still have much work ahead of us. As we said last quarter, progress will not be linear. After three years of limited supply, has created some bottlenecks as our teams ramp up and flex up fit muscles they haven't had to use in some time. Minor improvements in profitability are expected in the second half of 2023, heavily weighted toward their seasonally strong fourth quarter. The goal of delivering improved mid-single-digit EBITDA margins for the full year remains intact. And while chassis and supply chain constraints continue, there are three positive trends that bode well for the long term. One, demand for our products and services remains positive. Two, we are still maintaining a near-record backlog. And three, we continue to focus on baseline profit improvements, which will drive improved EBITDA percentages when chassis flow returns to historical levels. Today, we are a long way from what we consider normal conditions. but we are hopeful that the situation is now more stable and will slowly improve as we work through the balance of 2023 and into 2024. When chassis supply does return to historical levels, much like the attachments group, we believe the solutions team will start firing on all cylinders again from an operational perspective. It's been a while since I've given the DDMS update and I have an exciting project that I'd like to highlight today. We've recently talked more about our desire to identify revenue streams and solutions that are not dependent on chassis. The project I want to outline today is from our Henderson team that will not only drive incremental revenue, but will be very well received by our DOT customers. In addition to manufacturing and upfitting snow and ice control equipment, Henderson also provides parts and accessories to the DOTs during the snow season, and that's where the opportunity lies. There are literally thousands of state, county, and local municipalities in the snow belt, all needing in-season parts and accessories to keep their equipment running and the roads clear. Historically, it has been a real challenge for the entire industry to have the right P&A products at the right location throughout the snow season. The Henderson team sees an opportunity to improve its parts availability during the snow season, driving additional revenue in a high margin product category while improving our in-season customer experience for our DOT customers. A team was assembled and input was sought from a broad group of stakeholders, from customers to sales and marketing, product management and tech service, our parts team, customer support, global sourcing operations, and finance. CDMS principles were used to define, measure, and analyze the current state and to build a future state to meet our objectives. The result is what we call the Dependable Parts Program, or DPP. The team conducted research, identifying the top 100 parts, the items most critical to keeping DOT trucks up and running during a snowstorm. Once identified, We used our DDMS principles to simplify the process, which resulted in faster times from order to delivery, create a plan for every part that standardized our warehousing and reduced inventories of excess material. We're utilizing visual management on the shop floor to ensure that parts are kept at targeted inventory levels, and we're implementing a scorecard to track performance and measure improvement. I'm pleased to say the team has created a future state that improves our already industry-leading lead times for critical service parts while reducing inventories and growing a higher margin segment of our business. Great work, Henderson team.