Douglas Dynamics, Inc.

Hello and welcome to the Douglas Dynamics third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by 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 star then one on your telephone keypad. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nathan Elwell, VP 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 risk 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. Please note, earlier this morning, we filed a short supplementary set of slides to accompany this call, which can be found in the IR section of our website, DouglasDynamics.com, and in our SEC filings. 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, I'll hand the call over to Bob. Please go ahead.

Thanks, Nathan. Good morning, everyone. At first glance, this quarter's results don't look so positive. but if you look beneath the surface, the positives are there. The best news is that our solution segment improved its top and bottom line results significantly. Solution sales increased double digits, and adjusted EBITDA margin improved to 7.3%, a big jump compared to the same period last year. The team was able to increase the velocity of upfits moving through our facilities and operate more effectively, especially at our Dijana operations. As expected, as this year's preseason shipment mix shifted more heavily towards the second quarter, the attachment segment had a difficult comparison to a relatively strong third quarter 2022. However, when combined, the second and third quarter attachments results were comparable to recent years. With that said, let me provide an update on the external headwinds facing our businesses over the past few years. The good news is we continue to see improvement in both component supply and labor availability. When it comes to the supply of components, we're in good shape for the most part at attachments. And while there still are issues with some products that our solutions teams use in their up fits, the situation is much improved. The labor market situation is significantly better than it was in previous years. We are seeing higher retention rates, plus more and higher quality candidates applying for open positions. So having said that, the most significant remaining headwinds for us are chassis supply, and more recently, weather. Let's talk about those in more detail. While we saw some improvement in chassis supply in the third quarter, we believe this was a temporary change, and partly due to the OEM's sensibly building inventory ahead of the UAW strike. The tentative agreements that are now in place to end the strike are great news for the entire industry. To date, we have not seen an impact of the strike on our operations, but the truck plants going out on strike in October will have an impact on our business at some point in the future. At the moment, our best guess is in the first quarter of 2024. Trying to predict when chassis supply will return to historical levels has been a real challenge. The experts are now projecting that 2024 chassis supply will be similar to 2023. At this point, we think it's prudent to assume no material improvement in chassis supply over the next few years. This really underlines the importance of our internal growth initiatives to achieving our long-term goals. Let's move on to weather, which has significantly impacted our financials in 2023. As you all know, our business has always been influenced by weather. Although the addition of the solutions business has lessened this influence, attachments is still the main profit driver at Douglas. This past winter was unique, and we are still navigating its impact on our business both this year and next. As you can see on slide four in the deck Nathan mentioned earlier, weather patterns are changing. For the last four years, we have seen a La Nina weather pattern, which is not ideal as it tends to produce less precipitation in key regions of the snow belt. Now we are shifting into an El Nino pattern, which is projected to be in place for the next three years. And the weather experts we follow confirm these are typical trends that have been seen many times before. Now, while we know better than most that nothing is guaranteed with winter weather, an El Nino pattern typically brings more precipitation overall during the winter, which increases the odds of returning to average snowfall or better at some point during the El Nino cycle. We're proud of the fortitude being demonstrated consistently by our teams and continue to implement cost control initiatives as part of the low snowfall playbook, plus continuous improvement projects making the right moves internally to limit the impact of the snowfall headwinds wherever we can. Okay, let's look at each segment. Beginning with work truck attachments. Sales were down compared to last year, due largely to lower volumes, which impacted profitability. As expected, preseason order demand for our products was soft following a snow season that was one of the worst on record in our core markets along the eastern seaboard from Baltimore to Boston. For the 2023 preseason, the mix was very unusual, coming in at approximately 65 to 35 compared to 2022 where the quarterly mix was a more typical 55 to 45. However, when you look at the second and third quarters combined, the story is different. Adjusted EBITDA in 2023 was only slightly lower than the preseason last year and considerably higher than 2021. And even though our dealers corrected their retail inventories through softer preseason orders, we suspected that additional inventory corrections may take place in Q3 and even into Q4. Our recent dealer checks indicate overall inventory levels still remain above the five-year average and are highest in the East Coast cities, which saw very little snow last winter. This is a direct result of a quiet start to the retail selling season late in the third quarter. Remember, a snow plows replacement cycle gets lengthened when the blade doesn't hit the pavement in low snowfall environments. thus impacting retail sales at the beginning of the next season. So not only did we see reorder softness late in Q3, but expect to see additional softness in Q4 as well. I am pleased to say that both dealer sentiment and financial health remain positive. Like us, our dealers have dealt with low snowfall before, and one of the great things about this business is that each snow season stands on its own. We are ready to execute and look forward to the start of the 2023-24 winter season. Our teams have been successfully 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 the attachments business remains very strong. Turning to our work truck solution segment, with third quarter sales increased 18%, and we were pleased with the margin improvements, which were due to improved pricing, volumes, chassis supply, and operating efficiencies. The same applies on a year-to-date basis, with net sales increasing 15% and adjusted even to approximately doubling compared to the previous year. We did see higher volumes this quarter, and more predictable supply of chassis, and we were able to drive greater efficiency, particularly at our Dijana operations. As we previously said, improvements in profitability are expected for the full year, and we have now entered the Solutions Businesses seasonally strong fourth quarter. And while we're delivering on those short-term profit improvements, there are still several positive trends that bode well for the long term. demand remains strong as trucks get worn out, negatively impacting their productivity, and are even in more need of being replaced. We still have a massive backlog to work through and cancellations are minimal. And finally, we continue to drive baseline profit improvements, a key component of reaching our long-term financial targets. This quarter shows that our solutions teams continue to battle through headwinds And our hard work being done behind the scenes does pay off as we drive more velocity through our facilities. In summary, we are executing well on the factors we control under challenging conditions. As you can see in our supplemental slides, overall, our internal growth drivers are on track to contribute significantly to EBITDA growth in 2023. These drivers include pricing actions, new product introductions, and baseline profit improvement projects. On aggregate, the internal growth drivers contributed almost 50% more than we initially planned. We are incredibly proud of the entire team that worked hard to make this happen. Now, let's go back to the two most significant external drivers, snowfall and chassis. Snowfall is clearly impacting our 2023 results, essentially negating the positive impact of our internal growth drivers. It's also the reason we are lowering our guidance this year. If chassis supply remains stuck in neutral, it may take longer than we planned to get to our $3 EPS target. Sarah will speak to this later in the call. I would like to finish with these three thoughts. One, while external headwinds are hindering our success, Our internal initiatives are driving earnings growth. Two, in solutions, we're meeting our objective of delivering margin improvement each quarter compared to the last year. Demand and backlog remain strong, positioning us for long-term growth. And three, the impact of low snowfall is temporary. And as our attachments group has done many times over the years, they're improving their long-term profit profiles. Bottom line, ladies and gentlemen, our $3 EPS targets are achievable, and we are laser-focused on getting there. With that, I'd like to pass the call to Sarah to walk through the financials.