Good day and welcome to the Douglas Dynamics Third Quarter 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Sarah Lauber, Chief Financial Officer. Please go ahead, Ma'am..

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. Joining me on the call today is Bob McCormick, our President and Chief Executive Officer.

In a moment, Bob will provide an overview of our performance, then I'll review our financial results and guidance. After that, we'll open the call for your questions. With that, I'll hand the call over to Bob..

Thanks, Sarah. Good morning, everyone. Before we begin, I would like to welcome Joher Akolawala to our Board of Directors. Joher has a track record of strong leadership at Bluechip, multinational companies over 30 years across a diverse set of industries.

Importantly, he brings a focus on finance, information technology, and cyber security and we look forward to working with him. We also want to thank Jim Staley for his contributions to the company. Jim will retire from the Board at the end of his current term at the 2023 Annual Meeting.

Jim has been a trusted advisor to Douglas for many years and we are grateful for the great advice he has given us on many occasions. We will miss his counsel and wisdom and wish him all the very best for the future. Turning to the quarter. We are justifiably proud of our results for the third quarter.

Demand for our products and services remained strong. Macroeconomic supply headwinds continue and the predicted increase in chassis and component supply has yet to materialize in a significant way. However, both segments delivered across the board improvements, compared to the same quarter last year.

The strong demand outlook in both segments bodes well for the future. And we are simultaneously focused on delivering on the factors within our control while constantly trying to see around corners to limit the impact of macroeconomic challenges wherever possible.

In the third quarter, net sales increased by 30% based on increased volumes and pricing adjustments in both segments. The revenue dropped through the bottom line with net income up 89% and adjusted EBITDA increasing 62%, due to higher volumes and improved price realization somewhat offset by operational inefficiencies due to supply chain constraints.

We feel good about our position today and also raised and narrowed our 2022 guidance, which Sarah will talk through later. Overall, our team is making the right moves internally to maximize our performance externally and to ensure we remain the leader in the markets we serve. Okay, let's look at each segment.

Beginning with work truck attachments where we had another strong quarter. Net sales increased 33% and adjusted EBITDA increased 55% over the prior year.

Our team delivered a strong conclusion to the pre-season order period based on increased volume, price realization, and inflationary pressures stabilizing, which was partly offset by increased labor costs.

As expected, we again saw the historical 55/45 split in pre-season shipments between second and third quarter after pandemic disruptions in the previous years. Importantly, we are entering the snow season in great shape, despite the potential for order pull ahead from the fourth quarter to preseason.

[Dealer segment] [ph] remains positive and retail inventories are in good shape. When you look on a year to date basis, the attachments team has turned in another amazing year, partly driven by the shifting demand trends we talked about at our events in May and partly driven by the strong execution from our team in difficult circumstances.

Now, I'll talk to our Work Truck Solutions Segment. Net sales increased approximately 25%, compared to the corresponding period of last year. Adjusted EBITDA improved compared to the third quarter of 2021, although our efficiency continues to be impacted by chassis and component supply plus inflationary pressures on material labor and freight costs.

We did see higher volumes, compared to last year on more predictable, but still constrained supply of chassis. We aren't seeing any strong signals from OEMs that we will see a dramatic improvement and chassis supply anytime soon. Demand, however, continues to be strong at both HENDERSON and DEJANA.

We entered 2022 with record backlogs and demand has not subsided and customer order cancellations remained minimal. While it's logical to assume a potential economic downturn we’ll have some impact on our demand over the medium-term, the short-term outlook remains positive for three reasons.

First, with the ongoing chassis constraint issues, trucks down the road today are aging, negatively impacting their productivity and are in even more need of being replaced. Additionally, our municipal customers in particular don't tend to be impacted by economic changes. And finally, we have a massive backlog to work.

Because of this, we are confident that customers will maintain their orders even if the predicted recession occurs. We know we are always at the front of line for chassis and we will work through our backlog as quickly as possible. But the limited supply chassis end components remains a frustrating fact of life for everyone in the industry.

Our solutions team continues to battle these headwinds and the hard work being done behind the scenes will pay off when we can move more velocity through our facilities in the years ahead. Turning to our ongoing investments in the business. We continue to pursue long-term growth initiatives, particularly our vertical integration strategy.

Today, I want to provide an update on two exciting projects we've been working on for some time. First, we launched our new redesigned, reengineered [pusher plow] [ph] this summer.

As we talked about at our Investor event in May, we are seeing shifting demand trends in snow and ice control with the common denominator that our end users need to move more snow faster and often with fewer people.

Unlike our truck mounted plows, a [pusher plow] [ph] is attached to heavy duty equipment like skid-steers, wheel-loaders, tractors or backhoes. The pusher plows are large pieces of equipment, ranging anywhere from 8 feet to 16 feet in length and are often used in large parking lots, shopping malls, etcetera.

The vertical integration team has done a fantastic job of reengineering the product to improve its productivity, efficiency, and its durability.

The new pusher plow is just one of a number of new product introductions scheduled to launch over the next two years resulting in those increasing our organic growth targets for the attachments segment earlier this year. Second, we also launched a brand new product for DEJANA a few months ago.

The DynaPro dump body, which is also manufactured at our new facility here in Milwaukee. This product has been well received in the market, having already become the standard dump body we use at DEJANA. Before its recent launch, we used to source 100% of these types of products from outside providers.

There are several benefits for us producing this product ourselves. The design for upfit concept means our engineers worked with upfitters to ensure the product was optimally designed from the ground up to be upfit more efficiently saving time materials and ultimately leading to a better product.

With our own engineers on the case, we were able to maximize quality, durability, and functionality for our customers. Using our expertise developed at Work Truck Attachments, we were able to develop our own hydraulic systems for the dump body lift.

And finally and increasingly, importantly, this is another example of us getting more control over our supply chain. These are good examples of the types of projects that will help drive long-term organic growth and I applaud the efforts of the many teams across the entire company to successfully launch these products.

Of course, it goes without saying that these kinds of investments will be made in additions to funding our dividend, which we will continue to maintain and grow as we have since we went public. We also are definitely open to acquisitions today and are in a strong financial position to take on opportunities.

Our Bluechip targets are mostly private family health companies, making the timing of deals difficult to judge. We will continue to forge strong relationships with these companies and are ready to execute on deals should we find the right opportunity at the right valuation.

We're also in the process of improving our acquisition and our integration capabilities using lessons learned from previous deals. So in summary, overall, we are executing well under challenging conditions, all with an eye to exiting in a stronger position to ensure success over the long-term.

Demand trends remain positive and we are constantly adapting and improving our operations. Our company is built to manage through uncertainty given our heritage and a weather focused business, and we will continue to use our continuous improvement mindset to get better every day and maintain our focus on the long game.

Implementing the strategies at will ensure we build upon our industry leading position. The results we've delivered despite the external conditions are a testament to our collaborative problem solving culture.

While we expect these headwinds will persist into 2023, we remain on track to deliver our long-term financial targets and remain confident about our long-term future potential. With that, I'd like to pass the call to Sarah to discuss our financial results in more detail.

Sarah?.

Thanks Bob. As you saw in our release, we delivered strong year-over-year improvements across the board this quarter, despite the ongoing macroeconomic headwind.

From a consolidated perspective, third quarter net sales increased approximately 30% to 166.1 billion and gross profit increased approximately 35% to 41.3 million when compared to the third quarter of 2021 due to increased volume and pricing adjustments.

We recorded GAAP net income of 13.3 million or $0.56 per diluted share, an approximate 89% increase when compared to $7 million [and] [ph] $0.30 respectively in 2021. These improvements were based on higher volumes in both segments and improved price realization, somewhat offset by operational inefficiencies due to supply chain constraints.

We also controlled cost effectively with SG&A expenses increasing by just 1.6 million to 19.2 million during the third quarter based on higher labor costs and other discretionary spending returning to more normalized levels.

Similarly, we generated stronger consolidated adjusted EBITDA of 25.1 million, compared to 15.5 million in the corresponding period of 2021. Interest expense increased by 1.1 million to 3.3 million, primarily due to higher interest on increased revolver borrowings compared to the prior year, plus higher interest rates on the term loan.

The effective tax rate was 17.9% and 14.6% for the third quarters of 2022 and 2021, respectively.

Effective tax rates for both quarters were lower than historical averages due to a discrete tax benefit of 800,000 in the third quarter of 2021 related to favorable state income tax audit results and a discrete tax benefit of 900,000 in the third quarter of 2022 related to favorable state tax rate changes.

Based on these factors, we now expect the effective tax rate for the year to be approximately 24% to 25%, compared to our original guidance range of 25% to 26%. Now let's turn [to information] [ph] for the two segments.

Within our Work Truck Attachments segment, we generated net sales of 108.2 million during the quarter, compared to net sales of 81.4 million last year. The 33% increase was primarily attributable to increased volumes with a strong conclusion to the pre-season order period and higher pricing, compared to last year.

Adjusted EBITDA was 22.9 million during the third quarter, 55% higher than the 14.8 million recorded in the prior year, due to increased volume, price realization, and inflationary pressures stabilizing, which was partly offset by increased labor costs. The themes Bob mentioned earlier are evident in our results.

Despite another season of below average snowfall, our pre-season shipments were very strong and our attachments team worked extremely hard to deliver for our customers. We continue to monitor for the potential that some fourth quarter re-order sales were [pulled] [ph] into the pre-season this year, but overall we feel positive going into winter.

That brings us to Work Truck Solutions where we reported net sales of 57.9 million and approximate 25% increase on net sales, up 46.3 million in the third quarter of last year, due to higher volumes on more predictable, but still constricted supply of chassis and price realization.

Adjusted EBITDA improved to 2.2 million, compared to 700,000 in the same period last year, but continues to be impacted by constructive supply of chassis and components impacting efficiency, plus inflationary pressures on material labor and freight costs. Overall, demand trends remain positive, backlog remains very strong.

We earned expecting significant cancellations as customers place their orders several quarters ago, so their trucks are only getting older and need to be replaced even more urgently. Turning to the balance sheet and liquidity figures.

Net cash used in operating activities for the first nine months of 2022 increased significantly in the quarter to 74.5 million from 19.5 million in the same period of 2021.

There are several factors involved, including increased accounts receivable of 41.2 million due to higher sales, as well as 33.7 million increase in inventory due to higher input costs and the pulling forward of purchases in anticipation of supply chain disruption. It's important to note two things for accounts receivable.

One, our DSO remains in-line with historical collections. And two, the increase in accounts receivable is in-line with our internal expectations based on projected sales this period and is a function of the increase driven by both price and volume.

In addition, for inventory, half of the increase in inventory is due to inflation, while the other half relates to strategically bringing in inventory to ensure we can effectively satisfy customer demand given the potential for supply chain disruption.

As with all of these working capital changes, free cash flow for the first nine months of 2022 decreased to negative 83.4 million, compared to negative 26.8 million during the same period in 2021.

At the end of the third quarter, we had 18.3 million of total liquidity comprised of 2.8 million in cash and cash equivalents and [15.5 million] [ph] of borrowings availability under our revolving credit facility, which is primarily due to the seasonality of our business, and is in-line with our expectations.

We expect to reduce our revolving credit balance in-line with historical levels by year-end consistent with our normal [annual] [ph] working capital cycle.

Capital expenditures for the first nine months of 2022 totaled 8.9 million, 1.6 million higher than the 7.3 million in the same period in 2021 as we continue to invest in projects to drive long-term growth, including our vertical integration efforts.

At the end of the quarter, we had a net debt leverage ratio of approximately 3x at the top end of our targeted range of 1.5x to 3x and higher than 2.4x at the same point last year. As usual, we paid our quarterly cash dividend of $0.29 per share at the end of the quarter.

Unlike recent quarters, we did not repurchase shares this quarter as we have met the goal we set out earlier this year when the program was launched, which was to offset shares awarded under equity based compensation plans during the year.

We focused our third quarter cash deployment on the necessary changes within working capital to support the business. Finally, as you probably saw in our release, we are raising and narrowing our guidance ranges given our robust performance so far this year, plus a positive demand trends we see.

For the full-year, we expect net sales to be between 600 million and 630 million; adjusted EBITDA to range from 80 million to 95 million and adjusted earnings per share to be in the range of $1.65 per share to $2.05 per share.

The outlook assumes sequential consistency for economic conditions and supply chain performance and as typical that our core markets will experience average snowfall levels in the fourth quarter.

As we look further out, we don't see any dramatic improvements to the headwinds starting in January and are waiting for more directional information from the OEMs regarding chassis supply. However, we are pleased with the demand dynamics we're seeing across the board and our team's ability to navigate the challenges more consistently.

We will enter 2023 with unusually strong backlog and solutions and the broader demand trends and attachments that we discussed at our event in May bode well for the future. Of course, we will talk in more detail on 2023 when we provide guidance in February.

Finally, I want to thank our teams involved with finance and planning in all of the businesses through diligent work to test and scrub the numbers have allowed us to accurately predict and meet our guidance [in recent years] [ph]. With that, we'd like to open up the call for questions.

Operator?.

Thank you. [Operator Instructions] And the first question will come from Mike Shlisky with D.A. Davidson. Please go ahead..

Good morning and thank you for taking my question. Sarah, I want to follow-up on your comments on some of the balance sheet items there. You made it clear, yes, you have a very high consumable out there. It's growing quarter-over-quarter. It does typically grow quarter-over-quarter, but it's so much higher than normal.

How confident are you like in past years you will generally collect almost all of those [durables] [ph] by the end of the fourth quarter here?.

Yes. Good morning, Mike. Great question. Yes, it is up two-fold, much higher sales and the pricing impact that we've had, particularly at attachments. And again, the fourth quarter is when we generate all of our free cash flow. That is a significant quarter for us and collecting all of our pre-season receivables.

There is nothing unusual from the balance sheet. As far as what's in the AR, there's no reason to expect that the collection would follow a different pattern. It really is just more out there to collect in the quarter..

Okay. Your comments on – you didn't make many on 2023, but I had a quick one that might be able to – this might be able to answer for us. In Q1 of 2022, the margins in attachments particular were pretty rough. I mean, it was a pretty rough quarter for you. It was probably the [trough] [ph] quarter for chassis supply as well.

Can you at least tell us whether you think you're in [that] [ph] position for a more normalized margin range in the first quarter, it's always the – among the lower quarters of the year, but do you feel you'll be back to just prior to 2022 other first quarters in previous years by 2023 here?.

Yes, I guess I can speak to some anomalies that we had in the first quarter of this year, which impacted our margins pretty significantly. In attachments, we had quite a bit of COVID cases in the first quarter of this year that we basically just were not operating effectively with the [indiscernible] that we had. So that was a significant impact.

You're right on the chassis that was also a really tough quarter on the chassis constraints. So, as I look to how we think about entering next year, not necessarily providing any guidance from a quarterly perspective, but our teams have been navigating these headwinds. And we're more consistent in the efficiency at all of the locations and everything.

So, I don't see anything magical from the standpoint of headwinds dissipating, but I do think that we are now navigating them in a much more consistent manner, which certainly helps us from a margin perspective..

Okay.

I also want to ask about the chassis situation in the third quarter, if chassis were so challenged, how did you have so much more shipments over the prior year? It couldn't have been all pricing, but just share with us how you were able to make that happen despite having an appreciable increase in chassis?.

Well, pricing is certainly part of it [I can] [ph]. And the other thing that I would suggest building on what Sarah said, we've been navigating these headwinds long enough now that we're doing it more efficiently, more effectively. Obviously, our DDMS continuous improvement initiatives are at play here.

I can speak to our Henderson business, the efficiency and productivity and their upfit centers is up dramatically versus a year ago. So, you put all those factors together and that is an impact. Now, have we seen some slight improvements in chassis? Yes, we have. Has it been consistent? No, it hasn't.

So, there's a little bit of chassis flow that's helping us well, but I would say most of that is attributable to the teams getting more productive and more efficient in the chassis that we do move through the business model..

Okay. Let me just squeeze one last one in here.

I'm curious if you have any planned expansion and capacity at DEJANA at any point in the somewhat near future to eventually work through that high backlog when chassis try to flow or is it not worthy to invest in any additional real estate there? If you can't do that, can you do anything on a temporary basis at least to work through that giant mountain of orders there?.

You're thinking about it the right way. As we've studied it, we do believe in the [10 DEJANA] [ph] locations that we have, that when chassis flow improves.

Now again, when it improves, it isn’t going to be something where it’s like somebody turns the faucet at, right? It's going to be a consistent level of moderate to slow improvement over time that we can ramp up.

We are highly confident within those facilities that we have enough capacity and enough personnel to be able to move that volume through and generate the incremental profits that we have in our financial models. Shouldn't have to add any more fixed cost to that business model..

Got you. Perfect. I appreciate the color, guys. I'll pass it along..

Thanks, Mike..

The next question will come from Tim Wojs with Baird. Please go ahead..

Hey, everybody. Good morning.

Maybe just on margins, this is probably the first quarter since maybe early last year where you saw margin expansion in both of the segments and I guess, I'm just curious if you, kind of look internally, I mean, do you think you've really turned a corner on things like price cost and some of the inefficiencies and we can continue to kind of see that margin expansion in the fourth quarter in both the segments and into 2023?.

Yes. Specific to solutions, Tim, we certainly saw better price cost in the third quarter and that will continue to improve. I've been saying for solutions this year that I expect the full-year in the low single digits for EBITDA margins. Fourth quarter is typically our seasonal best. And so, I would still expect that to occur for 2022..

Okay.

And can you give us a sense of what the pricing contribution was in both of the segments?.

I can give you some sense on the top line. The top line, when you look at solutions that increases pretty much a split price being half of that and volume being the other half. In attachments, the increase in the top line 20% is due to price and the rest is due to volumes. .

Okay.

And then so what, I guess if you just kind of [snap the line now] [ph], I mean, how much of that price, kind of carries over into next year? Is it something like 5% to 10%?.

It's continuing to come in, so I probably can't give you a real precise answer on that. I would probably estimate probably close to 10%, but there are still moving pieces and parts with surcharges and different contracts..

Okay. Okay. No, no. I know there's moving parts, but the color is definitely appreciated.

And then, I guess on the solutions business, I mean, can you give us a little bit of an idea of what maybe book-to-bill look like in the quarter? So, just trying to understand if backlog, even though you're able to ship more this quarter, I mean, did backlog actually grow sequentially? And maybe if you could just frame the size of the backlog for us? I don't know if it – dollar terms or something like that might be helpful?.

Yes, let me speak to backlog in total for Douglas. We did not grow sequentially. But our backlog is still very high and probably close to 15% higher than it was when we exited 2021..

Okay, good.

And then just, I guess, on the supply chain, I mean, has anything really changed, Bob, over the last 60 to 90 days? I'm just trying – I mean, I know supply chain is kind of a broad term, but anything kind of with [Class 8] [ph] or 4-6 or any of the components to really kind of call out or is it still kind of pretty choppy?.

Yes. I would say that the Class 3-6 is still fairly choppy. And Class 7 and 8, interestingly, we’ve talked about this on our last call. It is more stable and it's more predictable, but the lead times are still long. So, we have yet to see the lead time shrink there and we're not seeing anything consistently on the [Class 3-6] [ph].

Obviously, we're talking to the OEMs every day and they're not rushing up to the microphone and sending any clear signals as to what to expect in 2023, and I don't blame them.

So, as we look at 2023, we're not expecting to see a significant move back to some semblance of normal chassis supply, but we hope to see positive improvement as we turn the corner. .

Okay. And then I guess just the last one.

What if the [faucet] [ph] did turn on? I mean, would there – if all of a sudden truckloads of chassis showed up at your facilities, I mean would you still be able to handle that or would there be inefficiencies if there's too much?.

No, absolutely. I'd be out there with Sarah [indiscernible]..

Cool. All right. Good. Well, nice job, guys. I'll turn it over..

Thanks..

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bob McCormick for any closing remarks. Please go ahead, sir..

Thanks and thank you for your time today. I'd like to leave you with these thoughts. One, demand remains positive and our teams are doing everything possible to adapt to the ongoing headwinds. Two, the fundamentals of our business haven't changed and we are well-positioned for long term success.

And three, we remain laser focused on driving profitable growth and are committed to our long-term financial goals of $3 of earnings per share by 2025. Thank you and we look forward to seeing some of you at the Baird Conference next week Chicago. Have a terrific day..

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