Douglas Dynamics, Inc.

where snowfall came in well below historical averages, we determined that we needed to take more aggressive and permanent cost reduction measures to align our cost structure with current demand trends, which we call the 2024 Cost Savings Program. Sarah will discuss the details later, but in summary, we expect $8 to $10 million in annualized savings. Frankly, these are some of the hardest decisions we've had to make in our careers, but they were the right move for the long-term financial and operational health of the company. I'm so proud of our leadership teams for how they have responded in this situation. They acted swiftly and decisively. What's even more important is that while making these decisions, they never lost sight of our key long-term growth initiatives, ensuring that we stay focused on protecting and growing not only our market share, but our competitive advantages in the market. From a weather perspective, we have seen a mild El Nino pattern in the first quarter, which is not as strong as we hoped for. I am glad to say that weather conditions were stronger in January, with snowfall totals above average across the snow belt. In fact, we set a record for parts and accessories orders in the month of January, which is a good sign. In early February, we saw the first nor'easter in two years. Having said that, the back half of February has been pretty quiet. While the winter weather season isn't over yet, at this point, it seems likely we'll finish the season with below average snowfall totals. On a more positive note, while our dealer checks at the end of January confirmed inventory levels remain above the five-year average, they have begun to moderate, so they are starting to come down. I'm pleased to say that both dealer sentiment and financial health remain positive. Lastly, We are gearing up to launch some exciting new products at the NTA Work Truck Show in Indianapolis in a couple of weeks. More to come on that topic next quarter. So there is no doubt it's been a difficult year in the attachments group. But as always, we'll edit this environment stronger, knowing our team will be ready to drive profitable growth again when conditions allow. Let's turn to Work Truck Solutions. The solutions segment completed a strong finish to 2023, delivering on its goal of mid-single-digit EBITDA margins. Again, we want to thank our DeGene and Henderson teams for driving higher volumes through their output centers and improving the baseline profitability of their businesses. Our recent performance bodes well for the coming year, especially as overall demand remains positive and we still have a strong backlog to work through. All in all, a good year at solutions and more to come. So as we look to the future, what do we see? First, we see a solution segment that is building on momentum generated by media's profit improvement objectives in 2023. In 2024, we're focused on driving revenue with non-chassis channels, penetrating new markets with new product introductions. Additionally, our focus on internal profit drivers continues, driven by product redesigns, sourcing improvements, and DDMS continued improvement initiatives on the shop floor and in our upgrade centers. From a chassis perspective, we expect to see some impact from the UAW strike in the first quarter of 2024, which has been taken into account with our guidance. Overall, we are not projecting significant near-term improvements in chassis supply. We do enter 2024 with strong backlogs. If chassis supply does improve during the year, We're poised to move increased velocity through our business model. Second, looking at the attachments group. While the lengthening replacement cycle will impact demand and attachments this year, the team has repositioned itself to manage through these conditions, staying focused on factors we can control. These include the 2024 cost savings program, new product launches, baseline profit improvement projects that our teams were so successful with in 2023. Our people are using our DDMS continuous improvement mentality to produce creative solutions, improving our operations in the near term, and providing considerable benefits over the long term. Looking ahead at M&A opportunities, our near-term focus is on the attachment segment products that need to be professionally up-fit onto work trucks. We are starting to expand the parameters of our search to include a broader range of companies in certain sectors. Having said that, our criteria for potential acquisition candidates remains intact. They must have strong brands, have significant potential for growth, and would be a good cultural fit with Douglas. We will maintain our disciplined approach, but we always try to look ahead and see a round corner. To be clear, we are not looking to pull the trigger on any deals in the near term. It's important that we have the right strategy and targets in place, which will allow us to execute when our balance sheet is back to normal and we have multiple financing options to consider. Finally, let me say this. We've navigated through some tough external headwinds in recent years, It's situations like this that really test the strength of your leadership teams. Quite frankly, you find out what you're made of. I couldn't be more pleased with how our teams have responded in this environment, finding creative solutions to difficult challenges. Our continuous improvement and getting better every day mentality has shown themselves like never before. The main benefit of navigating through difficult circumstances is that it allows us to take a step back challenge what we do and how we do it, and find ways to improve. Trust me, ladies and gentlemen, we will emerge from these challenges stronger and smarter than before. With that said, I'll hand the call to Sarah.

Thanks, Bob. Now, the simple story for 2023 was that work solutions produced significantly improved results, while work truck attachments was hindered by unprecedented weather trends. Clearly, 2023 did not unfold as we expected, but collectively, we made the right decisions and implemented the right policies to adapt to these unusual challenges successfully. I want to thank our teams for stepping up, identifying issues, and more importantly, finding solutions as we manage through the year. With that said, let me walk through the numbers for you. On a consolidated basis, net sales were $568.2 million for the year compared to $616.1 million in 2022. The approximate 8% decrease was due to low snowfall impacting volumes and attachments, which was partially offset by higher volumes and better price realization and solutions. Growth profit of $143.3 million or 23.6% of sales compared to 151.5 million or 24.6% last year, as the impact of lower volumes and higher margin attachment segments negatively affected our mix. SG&A expenses, including intangibles amortization, decreased 3.6% to $89.4 million for 2023. compared to $92.7 million for the prior year. The decrease was primarily due to lower incentive-based compensation and the impact of curtailing spending as part of our low snowfall playbook. Adjusted EBITDA for 2023 was $68.1 million, or 12% of sales, compared to $86.8 million, or 14.1% of sales in 2022. We remain focused on improving EBITDA margins and solutions made significant improvement in the year. Interest expense increased to $15.7 million for 2023 compared to $11.3 million in 2022 due to higher interest on our revolver of $3 million based on higher borrowings and higher variable interest rates compared to last year. Our combined tax rate for 2023 was 18.9% compared to 18.5% for 2022. Both rates are lower than typical, with the 2023 rate being impacted by a tax benefit related to the purchase of investment tax credit, and the 2022 rate being impacted by a discrete tax benefit related to state income tax rate changes. Net income for the year was $23.7 million compared to $38.6 million for 2022. Again, due to low snowfall in the first and fourth quarters of the year, impacting volumes at attachments, which was partially offset by improved performance at solutions. Now let's look at the results for the two segments. Net sales at our attachment segment were $2,291.7 million for 2023, compared to $382.3 million in the prior year. The significant decrease was due to unprecedented low snowfall in our core markets during the 22 and 23 snow season and the beginning of the 23-24 snow season. This translated into adjusted EBITDA of 50.6 million, or 17.3% of net sales for 2023, compared to 78.2 million, or 20.5% of net sales in 2022. The severe lack of snowfall and its impact on demand led us to implement the previously announced 2024 Cost Savings Program, which focused on both attachments and corporate functions primarily in the form of headcount reduction. We expect the program to produce annualized pre-tax savings of $8 to $10 million, with 75% of the savings expected to be realized this year, and $2 million in pre-tax restructuring charges, primarily in the first quarter. The story was more positive at Solutions. 2023 net sales increased 18%, to $276.5 million when compared to the prior year due to higher volumes on improved chassis availability and improved price increase realization. In the fourth quarter of 2023, we began to see the significant improvement in pricing action on our longer-term municipal contracts, which we took to mitigate the inflationary factors experienced over the last couple of years. The impact of higher volumes and pricing improvements fell through to adjusted EBITDA, which more than doubled from 8.6 million in 2022 to 17.6 million in 2023. In all four quarters of 2023, solutions delivered margin improvement compared to the previous year and delivered mid-single-digit EBITDA margins for the year. making progress towards our long-term margin target of double-digit to low teen margins. As we previously stated, we're still assuming that chassis supply in 2024 will be similar or slightly better than last year, but we don't expect dramatic improvements. Finally, we ended 2023 with $296 million in backlogs, compared to a record $369 million a year ago. Although not a record, the current backlog is still well above the 10-year average and reinforces our positive outlook for solutions for 2024. Now let's look at our balance sheet and liquidity. Net cash provided by operating activities was 12.5 million for the year compared to 40 million in 2022. The decrease was due to a $3.3 million reduction in earnings and $24.2 million in unfavorable working capital changes due to an increase in cash used for accounts payable, which was related to the timing of supplier payments. These working capital changes in the year resulted in free cash flow of $1.9 million compared to $28 million in 2022. Accounts receivable at the end of the year were $83.8 million, $3 million lower than 2022. Inventories were $140.4 million at year end, slightly higher than the $136.5 million at the end of 22. Compared to last year, we ended 2023 with higher levels of snow and ice control equipment inventory due to the lack of snowfall in the fourth quarter. while solutions made progress in reducing their inventory levels that have been elevated due to long lead times and chassis delays. Turning to capital allocation. We paid our dividend of 29.5 cents at year end. We announced today our first quarter 2024 dividend, which is unchanged from last quarter. While the dividend remains our top capital allocation priority, Our aim is to continue our track record and increase it again when conditions allow. At year end, our total liquidity comprised of approximately $24 million in cash and approximately 103 million of borrowing capacity on the revolver. Net debt of $212 million at year end compares to $187 million at the end of 22. As our earnings are reflective of historically low snowfall trends, we are comfortable that our year-end net debt leverage ratio of 3.5 times is above our targeted range temporarily and will return to our targeted range as we return back to average demand in attachments. As you saw in our press release, we amended our credit facility by increasing the leverage ratio to provide us more financial flexibility in the front half of the year. We are confident that we will be able to manage the balance sheet and pull levers we need to so that we are operating within our credit facility guidelines in the back half of the year. Capital expenditures for 2023 total $10.5 million. $1.5 million lower than 22, as we curtailed certain investments as part of our expanded low snowfall playbook during the year. While we expect our 2024 CapEx to be higher than 2023, we will be on the lower end of our range of 2% to 3% of revenue, and we will be prudent with timing of the investments, as spending will remain somewhat constrained as part of our 2024 cost savings program. Now let's turn to our outlook. As you saw in the release, we expect 2024 net sales to be between $600 and $660 million. Adjusted EBITDA is predicted to range from $70 to $100 million, which would produce adjusted earnings per share in the range of $1.20 to $2.10 per share. The effective tax rate is expected to be approximately 24% to 25%. The adjusted EPS range of $1.20 to $2.10 indicates growth over 2023 results. This is driven by continued ongoing baseline profit improvement, the implementation of the 2024 cost savings program, and projected higher volumes and attachments. Solutions enters 2024 in the best position since before the pandemic, with continued positive demand and backlog trends combined with improved operating performance. The largest assumption of our 2024 guidance relates to the replacement cycle of snow and ice equipment in the field. Given the unprecedented weather patterns experienced in our core markets, the equipment replacement cycle for attachments is elongated. We are assuming approximately half of the weather-driven volume decline in 2023 will be recovered in 2024, assuming we see a return to average snowfall in the fourth quarter. When we enter our preseason ordering in April, we will have further indications on this assumption this assumption and I plan to provide an update to our guidance with our first quarter call if we find orders are trending up or down at that point. When we look longer term, our segment financial targets remain consistent. For attachments, we believe we can deliver low to mid single digit sales growth and adjusted EBITDA margins in the mid to high 20s. In 2024, the 2024 cost savings program alone is expected to drive attachment adjusted EBITDA margins back close to 20% with further improvement to margins as we progress through a multi-year return to average demand. For solutions, we expect to maintain mid to high single digit sales growth in 2024. along with continued improvement towards low double-digit EBITDA margins. The improvement expected in 2024 is driven by continued success on baseline profit improvements and greater price realization and keeps us on the path towards double-digit to low teen margins over the longer term. It's worth noting that our outlook includes underlying assumptions such as relatively stable economic conditions, stable to slightly improving supply of chassis and components, and that core markets will experience slightly below or better snowfall in the first quarter of 2024 and average snowfall in the fourth quarter of 2024. Despite the recent weather-driven challenges, we remain focused on the profit profiles of our two segments. We will continue to make the baseline profit improvements needed to meet the long-term potential of these businesses. With that, we'd like to open up the call for questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star and 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then two. Our first question today comes from Mike Schliske with D.A. Davidson. Please go ahead.