Douglas Dynamics, Inc.

Good day and welcome to the Douglas Dynamics first quarter 2025 earnings conference call. All participants will be in a 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 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 Nathan Elwell, VP of IR. 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 we 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 our 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 we have published a one-page fact sheet on our IR website that summarizes our results for the quarter. Joining me on the call today is Mark van Genderen, President and CEO, and Sarah Lauber, Executive Vice President and CFO. Mark 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 Mark. Please go ahead.

Thanks, Nathan, and welcome everyone to our call. My first is CEO of the company. I've been in the chair for about two months now, and we've been busy. I've had the chance to visit many of our facilities across the country, walk the manufacturing and up the floors. I've worked on attachments. They've seen me for years. In solutions, these were my initial visits, and I'm proud to say that I've been able to In both cases, it's great to see the engagement of the teams. Our business is running at a high level of efficiency and effectiveness right now. We continue to develop and nurture our corporate culture, which we see as a real differentiator that allows us to optimize during the tough times, as well as when things are going well, as they are now. One of my initial areas of focus has been to make sure we have the right leaders in place across the company. At the corporate level, Sarah and her team operate like a well-oiled machine. I'm pleased with the partnership she and I have created as we look to the future of Douglas Dynamics. Janet Vleeger has ramped up quickly in her role as Senior Vice President of People and Culture, and our latest addition to the team is Chris Bernhauer, who joined us in February as President of Work Truck Attachments. Pat Miller, President of the JANA, and Chad Barker, Vice President and General Manager of Henderson, round out our executive leadership team. I would also like to take a moment to thank Jim Janek and Bob McCormick, both former CEOs of the company and both incredibly knowledgeable about this business, given their years of experience at Douglas Dynamics. Their support and guidance over the past five years have been a reason I've been able to hit the ground running in this new position. As many of you recently read, Jim Janek has decided to step down as Chairman, but I'm glad to say will remain on as a board member. Don Sturtevant, formerly our lead director, is assuming the role of Board Chairman. I look forward to continuing working with Jim, Don, and our entire board in the future. So this really was an excellent quarter for our company across the board, with both segments executing successfully and delivering robust results. We rarely generate a profit in the first quarter because of the seasonality of our business, but this year we produced record revenue and record adjusted EPS. Truly a tremendous achievement. Work Truck Solutions delivered its fourth consecutive quarter of record results, and with more snow this winter compared to last, Work Truck Attachments delivered an excellent quarter as well, driven by strong parts and accessory sales. Before I jump into the performance by segment, however, let me address what is on everyone's minds these days, which are tariffs, and specifically how we think about them and their potential impact on Douglas Dynamics' future performance. Our operations, supply base, and sales are primarily domestic in nature, and in the near unchanged guidance for 2025 reflects a comfort in our ability to offset the impact of tariffs on our operations this year. As we look further out, we will continue analyzing the ways and to what extent the proposed tariffs would impact our business and act accordingly. For reference, our sales outside of the United States and our purchase components from outside of the United States are each less than 10%. Let me run through our performance in each segment, starting with Work Truck Attachments. Results improved significantly across the board, with net sales increasing just over 50%, led by higher sales of parts and accessories. These sales were driven by stronger winter weather conditions in certain core markets. This past winter saw notable cold spells and polar vortexes influenced by a weak La Nina. For example, during the coldest period in February, nearly 90% of the lower 48 experienced below freezing temperatures. This reinforces that we are often seeing more extreme weather at both ends of the spectrum these days. In aggregate, snowfall across the United States was mixed, as above average totals in the mountains out west and much of the east contrasted to parts of the Midwest that experienced below average snowfall. In total, the season ended with snowfall 12% down compared to the 10-year average. But importantly, the total was higher than last year, reversing a three-year trend. Furthermore, the number of ice events the country experienced was significantly above average. This, combined with the fact that we recently redesigned our hopper spreaders, means that a lot of interest and purchases from dealers and users around these ice mitigation products. And we'll have more exciting hopper product news to share at CIMA, the Snow and Ice Management Association Conference, coming up next month in Grand Rapids, Michigan, where our team and all of our snow and ice brands will, as the leaders in the industry, be very well represented. We also continue to see dealer plow inventories moderate and hopper inventories are generally low, which highlights that dealers were selling through product as we come off a stronger snow season than the last two. Let's talk about preseason. As a refresher, we receive a large percentage of our annual orders from dealers in the second and third quarters and ship during that time as well in advance of the upcoming snow season. While it's still early, preseason is off to a decent start. More specifically, P&A and hopper sales are trending slightly higher than anticipated and plows are somewhat mixed depending on geography. That said, the uncertainty for the remaining preseason sales period is heightened this year by the unknowns related to a weather-driven, elongated equipment replacement cycle, a more uncertain economic outlook, and the potential impact of tariffs. As I mentioned, like all companies, we are monitoring this closely and so far we aren't seeing major changes in our demand or supply chain related to the tariffs. Operationally, in work truck attachments, we are in a very strong position. Our operations have been adjusted to match market condition. Production plans are right in line and both our raw materials and finished goods inventory are in good shape. That said, our operating model leaves us well positioned to increase volume should demand ramp up beyond our current expectations. When looking at all of the factors we can influence, we are playing off our front foot. We remain cautious yet optimistic about the year. Turning to work truck solutions, the team exceeded expectations delivering another record performance for the fourth consecutive quarter. While we have seen some softening in the dealer business as our end users are approaching the current economic environment cautiously, our fleet business continues to perform well and our municipal business is on a roll. The supply of chassis is stable and our backlog is robust. We continue to maintain strong relationships with all of our OEM partners while also continuing to adroitly adjust our business to match evolving marketplace conditions. In general, OEMs have been allocating a higher percentage of truck chassis to their fleet customers and directly to dealers. There are several examples that come to mind which illustrate our continued focus on driving demand and growth in the solution segment. Our Baltimore facility has been the focus of operational optimization, focused on improving our cargo truck business while we are consistently delivering more trucks at a higher margin. Our municipal service parts business continues to perform well and grow due to both our investments and optimization efforts and because of stronger demand due to the improved conditions last winter. Finally, backlog and solutions remains near record levels. We are booking production dates into 2026 and are currently in the process of investing in additional capacity to come online next year. We are proactively positioning well for the foreseeable future. So overall, continued strong performance in the solution segment. With our current operations cohort, I'd like to touch on the future for a moment. I've had a chance to meet with many of you, our owners and potential shareholders, since becoming COO last year and more recently in my new role. I've often been asked about my specific thoughts on our capital allocation strategy. I am a strong believer that as a company, our focus needs to be on operational cash generation to cover the dividend. Yet, as we have become a more efficient organization, we are also focused on managing our financial performance to incorporate select acquisitions in the future. Specifically, we are in a position to consider and act on small and medium sized acquisitions when we find the right opportunity. Ideally, these opportunities would be in the work vehicle attachment space, have strong brands and growth potential, as well as being a good cultural fit. To be clear, as a leadership team, we will maintain our disciplined approach, but we are investing more time and energy on the search today. So to conclude, while there is uncertainty about the economic overall outlook, our company is well positioned with a U.S. focused business and operational flexibility, and we will stay ahead of any tariff related impacts to the business. This past winter, while not quite an average snowfall winter, was better than the last from a snowfall perspective, and much better than average from an ice perspective. Our work truck attachments business has weathered the last couple of years of low snowfall and has emerged lean and agile, and our work truck solutions business, while seeing some softness in the dealer business, continues to see strength in our fleet business and a solid backlog in our municipal business. We have a fantastic team in place to address the opportunities, and that is a strong position to be in. I'm tremendously proud to be leading this amazing company, and our leadership team is working together to do one thing, find ways to deliver profitable, sustainable growth over the long term. With that, I'd like to pass the call to Sarah to walk through our financials. Sarah.

Thanks, Mark. I will start with a summary of this great quarter, and then more around our guidance, which will include a discussion on the impact of tariffs. Q1 results are a great start to the year. Solutions delivered their fourth consecutive quarter of record results on higher volumes, primarily on the municipal side. And thanks to a closer to normal winter across North America, attachments results significantly improved on increased sales of both equipment and parts and accessories. Before jumping into the numbers, please note that unless stated otherwise, all the comparisons I'll make today are between the first quarter of 2025 and the first quarter of 2024. Consolidated net sales increased .3% to a record 115.1 million, and the gross margins improved by 470 basis points to 24.5%. SG&A expenses increased by 1.9 million to 23.4 million, as our improved performance led to higher stock-based compensation. This translates to break even on a gap earnings per share basis, a significant improvement compared to negative 37 cents in 2024. As a reminder, in the first quarter of last year, we recorded restructuring and impairment charges of 2.1 million as part of the implementation of the 2024 cost savings program. Now in its second year, we continue to expect the 2024 cost savings program to deliver annualized savings of 11 to 12 million in 2025. Interest expense decreased by approximately one-third to 2.4 million following the debt reduction and lower revolver borrowings following last year's sale leaseback transaction. Adjusted EBITDA increased significantly to 9.4 million, and adjusted net income improved by 8.7 million to 2.2 million. This created a record adjusted earnings per share of 9 cents and an adjusted EBITDA margin of 8.2%. Major improvements all around. Now I'll walk through the results for the two segments. Mark discussed the market conditions earlier, but suffice to say results at work truck attachments improved significantly across the board. Net sales increased .9% to 36.5 million, and adjusted EBITDA increased 4.8 million to 300,000. Increased snowfall in core markets plus above average ice events led to higher sales of both equipment and parts and accessories. A much better quarter and well executed by the attachments team. Now as I mentioned earlier, work truck solutions continues to set records. Net sales increased .5% to 78.6 million based on higher municipal volume and improved price increase realization. Adjusted EBITDA for the quarter increased .7% to 9.1 million. Margins increased 320 basis points to 11.6%, which is a record first quarter margin for the segment. This is the fourth consecutive quarter of record results at solutions, and it's great to see the team sustain their improved profitability. The team has come a long way in the last few years, driving operational efficiency and taking advantage of more favorable market conditions. However, it's important to remember that 2024 was a record year for solutions, and we will start to face more difficult comparisons in the coming quarters. I want to reiterate our previous comments that we expect solutions 2025 results to be roughly similar to 2024 or slightly better. Overall, our backlog remains near record levels and demand remains solid overall. Municipal demand remains strong and we have great visibility for that business into 2026. As Mark mentioned earlier, at DeGena the situation is more complex, with our fleet business continuing to show strength and other areas showing some softness based on end user hesitancy and price sensitivity. With segment results covered, I'll turn to the balance sheet and liquidity. We paid our dividend of 29.5 cents per share as usual at the end of the quarter. Net cash used in operating activities decreased substantially from 21.6 million last year to 1.3 million this quarter. This was primarily due to improved earnings as well as favorable changes in working capital. In March, we successfully amended our credit agreement, which now includes a $115 million senior secured term loan and a $125 million senior secured revolving credit facility due in 2030. Total inventory was $171.5 million at the end of the first quarter, similar to the $174.8 million last year. However, although it looks similar at first glance, it's worth noting that our inventory mix has changed between the segments. Attachments have significantly reduced its inventory over the past year and is in really good shape headed into preseason. Their reductions were offset by a planned increase in inventory and chassis in the solution segment. These changes relate to several large projects that require us to take ownership of chassis and equipment inventory. That isn't something we've done to a material level historically, but our backlog in 2025 and 2026 includes some large contract wins that were made possible with this chassis supply. It's worth pointing out that the effective tax rate looks unusual at .8% this quarter compared to 16% last year. The percentage is high because we're so close to break even for the quarter, so please don't read too much into these numbers. We expect the situation will return to normal in the coming quarters and we still expect our 2025 effective tax rate to be between 24 and 25%. Capital expenditures so far this year returned towards more typical levels, increasing to 2.2 million. As a reminder, our capex was artificially low in 2024 as we curtailed spending given the environment. We still expect capex to be towards the higher end of our usual range of 2 to 3% of net sales in 2025 for two reasons. One, we're catching up on some projects postponed from last year and two, we're accelerating some projects based on the sale-leaseback agreement. I am pleased to report the leverage ratio at the end of the first quarter was 2.1 times, much lower than the 3.3 times at the same point in 2024 and well within our goal range of 1.5 to 3 times. Clearly, our work to improve the balance sheet plus improved earnings means our leverage is at a very manageable level today. As we stated last quarter, we plan to stay well within our goal range this year and at this point, I would expect it to hover around two times for the remainder of the year. Now, let's review our outlook for the year. Clearly, 2025 is off to a strong start. We're pleased with our results. So, you may be wondering why we aren't raising our guidance. There are several reasons. One, the elongated equipment replacement cycle and the potential impact on our preseason demand. Two, we're seeing some areas of softening demand in our commercial solutions business. And three, the uncertainty of the economic outlook and tariffs. Therefore, with these unknown factors, we think it's prudent to maintain our guidance, which we issued in late February. Our range typically encompasses a wider range of scenarios and demand levels at this time of year and we plan to narrow the ranges later in the year as we usually do. Let me go a little deeper into what we're seeing right now. While there still remains some uncertainty to deal or demand in light of the elongated replacement cycle, the midpoint of our range assumes attachments, shipments in 2025 will be similar to 2023. As far as early indications of preseason, we would categorize the first month as off to a good start. The initial phase of orders is mostly in line with our expectations with plow mixed, depending on geography, we are seeing more robust hopper orders. We expect the mix of preseason shipments to be 55% in Q2 and 45% in Q3, which is a departure from last year's mix of 65% in Q2 and 35% in Q3. Within solutions, municipal demand remains strong and we have good visibility from our backlog into 2026. However, we are carefully monitoring commercial order trends as this part of our business is most influenced by GDP and the recent economic uncertainty could negatively impact demand. As far as margin expectations, we expect Douglas' EBITDA margins to remain relatively flat to 2024 for the year. We will start to see more difficult comps in Q2. With the hard work in solutions and the cost savings program in attachments, we have helped stabilize our margins in light of an elongated replacement cycle. Let me take a step back and talk tariffs. As Mark mentioned, we believe we are better positioned than most companies to manage through current tariffs uncertainty for the following reason. Approximately 95% of our net sales are in the U.S. The vast majority of our steel is sourced in the U.S. Less than 10% of our direct materials are sourced from China, Mexico, or Canada, and we manufacture all our products in the U.S. The most material impact of the announced tariffs is on our China-sourced products, which was less than 5% of our direct materials spend in 2024. We have not yet fully mitigated this impact, but we'll work to have it mitigated on a run rate basis by the end of 2025. But for 2025, our current guidance does include our expected exposure for the tariffs currently in place. That all being said, our guidance for 2025 is net sales expected to be between $610 million and $650 million. Adjusted EBITDAs predicted to range from $75 million to $95 million. Adjusted earnings per share is expected to be in the range of $1.30 to $2.10 per share. The effective tax rate is expected to be approximately 24% to 25%. This outlook assumes three things, relatively stable economic and supply chain conditions, and that core markets will experience average snowfall in the fourth quarter of 2025, and that the tariff situation does not escalate significantly. To summarize, despite the uncertain macroeconomic outlook, we remain cautiously optimistic. We are in a great position of stabilized margins and ready to leverage the attachments business as demand returns. In the solution segment, we delivered record results driven by strong municipal performance, solid overall demand, and a robust backlog. With that, we'd like to open up the call for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Mike Schulski with D.A. Davidson. Please go ahead.

Good morning. Yes, good morning. Wanted to touch on your comments, Sarah, on the solutions business in 2025 versus 2024. You had mentioned by the time the year is over, when all is said and done, it might look relatively similar to the prior year. But I was curious whether there could be… Is that what your goal was for the entire year? I guess I always thought you wanted to really break past that 10% level and get to at least double digits or margins, and you seemed well-posed to do that if you guys are past the hump in a lot of ways. I guess what's holding that business back from breaking through past 10% or 11% here?

Absolutely. And you're right, Mike. We're in a great position. I mean, we landed really close to 10% at the end of last year, with our goal being double digits to low teams. I still fully expect that solutions can achieve that longer-term target. For 2025, what we have planned is some additional investment in growth that we will be bringing in, layering in later in the year. I would also say there's some uncertainty that I have factored in there on the commercial side, just from a demand perspective. So it hasn't slowed us down to working hard on that longer-term low teams. But I would say this year has a little bit of mix of some risk and some investment.

Okay. Also, your comments. I think it was big book you made, but Mark, you kind of started off with it about M&A. That looks interesting as well. If the right target doesn't come along, I'd be curious as to what your cash priorities might be after that. I'm guessing that the difference is going to at least stay stable or possibly grow a little for the first time in a couple of years here. But if no M&A candidate shows up, do you have additional R&D you're planning? Suggested, Sarah, is that a lot of money? Or would you consider a shared buyback or other use of capital?

Yeah, I would say it's a combination of both of those. Our primary focus is really, right now when I talked about it, we've emphasized it in some of our discussions, but I think there's some real opportunity out there with the just the overall operational excellence that I think we have in the attachment space of bringing additional brands and companies in under that fold. And we're in a financial position to be able to do that. And as we continue to have these type of results, it'll enable us in the future to really focus on acquisitions. That being said, we said we're not going to chase anything. We're not going to be dumb. In that event, we'd have to evaluate. We've got open buybacks right now of what's the total we have? 40 million. So that's available. That would be something that we could potentially look at. We haven't increased the dividend. We'd look at doing that. So there's a couple of different opportunities that we would have.

Great. Excellent.

The next question comes from Bobby Schultz with Baird. Please go ahead.

Hey, guys. Thanks for taking the questions this morning. First, I just noticed on the press release that it's noted that we're off to a strong start this year, but partly related to the timing of certain projects. Is there any way to quantify the timing benefit and anything we should consider from a timing perspective as we think about Q2 and the rest of the year?

I would say I have not quantified it. There are some projects that are going to be lumpy for solutions, depending on when we actually get the trucks out. That has been pretty consistent for solutions for many years. I would say this quarter, some of the volume that we had in municipal would have been pulled from the second quarter. In addition, we have some small pull ahead from a Canadian dealer. So there was some, but I wouldn't say it was overly material,

Bobby. Got it. And then from a tariff perspective, do you think most of your competition has a pretty similar manufacturing footprint? At this point, have you seen meaningful price increases in the market to offset any tariff impact from competition?

I can take that one. I would say that if you look at the different divisions, you look at attachments, what we've seen from competitive pricing is in line with what we've done. I can't speak specifically to their manufacturing or sourcing footprint, but it's been consistent. As I noted, for this year, Sarah talked to it as well. We're committed and have figured out ways that within our current guidance to cover if the existing tariffs were to go into place and stay as they are right now. Solution side of the business, we look at Henderson and think that one of the reasons they're on a roll right now is because they're based in the United States, U.S. customers, municipalities really like the fact that Henderson is here, American company. We have made some pricing adjustments there as well to cover our tariffs, but overall, I think in the case of Henderson, we're in a very, very good competitive spot right now.

Awesome. Thanks, guys. I'll leave it there.

The next question comes from Greg Burns with Sudoti. Please go ahead.

Morning. I just wanted to ask maybe a little bit about the plan capacity expansion you have for the solution side of the business. What is the timing of that coming online and I guess maybe what is the impetus for that? The strong demand you're seeing, are lead times too long? Are you capacity constrained now as you look at the business?

Great question, Greg. As we look at the Henderson business and where we are and the contract that we have, we have some pockets where we would like to expand. We've started those plans. We would say call it a 10% additional capacity. We will be very prudent in adding any fixed costs to the business and capacity and ensure that we've got the backlog and the contracts in place before we do that.

Okay, great. Then you mentioned maybe some of the new product line extensions maybe you were talking about on the hopper line. Can you just maybe talk about new product development, anything else that is in the pipeline that might be coming to market and any areas where you think you might be able to fill out the product line or take market share with new products?

Yeah, I think it's a great question and certainly a tenant of my background coming in and I know the work truck attachments teams right now is very focused on not just this year but over the next three and five years and looking at where the market is going. Can't get into the specific details but I would say a trend that we're seeing in the market from end users and attachments is how they can more efficiently use product and whether that's reducing overall manpower, whether it's equipment that moves snow better, faster, with more accuracy. Those are all I'd say the main tenants that we're focused on and when you look at our product pipeline over the next few years it's certainly reflective of that. A good recent introduction that we had, we mentioned the upgrade to the hopper lines which have been received well, the introduction of our pusher plow line. Similarly, the feedback from dealers is saying hey there's some cases where we're looking for bigger plows that attach to front end loaders and skid steers and so understanding the market coming out with those types of new products. Wish I could share more but yeah

stay tuned.

That's

great, thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mark VanGenderen with President and CEO for any closing remarks.

Yeah thank you and thank you all for your time today. We appreciate your continued interest in Douglas Dynamics and we look forward to talking with you all soon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.