Good day, and welcome to the Douglas Dynamics First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Nathan Elwell, Vice President of Investor Relations. Please go ahead..

Thank you, Rocco. 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, 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, 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..

First, customers are more demanding and pay more for immediate snow and ice removal. Secondly, the snow belt is expanding further south and finally, the growing market for non-truck equipment. These positive trends create avenues of revenue growth that didn’t exist just 5 years ago.

We have a much broader product offering these days and continue to deliver the most productive, most efficient and most durable equipment, allowing us to maintain and grow our industry-leading market share. So the medium to long-term outlook for the Attachments business remains strong.

That brings us to our Work Truck Solutions segment, where we delivered improved performance compared to Q1 ‘22. We not only produced 11% revenue growth this quarter, adjusted EBITDA almost doubled, and we demonstrated year-over-year margin improvement. This is due to a combination of higher volumes and baseline profit improvements.

While we continue to be impacted by restricted chassis flow and other components, the situation is more stable than last year. In addition, our teams have found ways to work around or find alternatives as they endeavor to minimize the impact of shortages.

Looking ahead, despite the mixed economic outlook, demand remains positive and backlog remains at near record levels, giving us confidence that the segment is moving in the right direction. When supply chain disruptions do subside, we’re well positioned to drive growth.

As it stands, we continue to expect the situation to slowly start to improve late this year and into 2024. I noted earlier that baseline profit improvements were a key driver to solutions year-over-year performance improvement. Let me expand on that point a bit.

Our teams at both Henderson and Dejana are focused on what they can control, which includes engineering product redesigns to improve quality, durability and efficiency, ensuring products are optimized for upfit as well as our customers, component sourcing initiatives, taking advantage of the skills of our world-class sourcing teams, manufacturing shop floor productivity improvements and upfit efficiency gains as we continue to expand and perfect DDMS in a custom environment.

Our DDMS continuous improvement principles have been applied to every aspect of our operations, pushing decision-making deep in the organization, empowering people to make improvements and eliminating waste, simply getting better every day.

Baseline profit improvements are the single largest component of our Solutions group performance improvements this year. My hat is off to the Henderson and Dejana team. They’re laser focused on what can be control will impact both near-term results and position their businesses for long-term success.

When chassis velocity increases through our upfit facilities, they will do so in a much more productive manner, driving us towards our long-term targets. To conclude, despite the recent weather, we are encouraged with where both segments stand today.

Although the economic follow-up of the pandemic has dragged on longer than any of us could have predicted, there is light at the end of the tunnel. Demand signals remain positive and solutions are starting to show improvements.

While some investments have been delayed, this is definitely a temporary measure, and we plan to continue to invest and innovate for the foreseeable future. We will be ready to deliver for our customers as supply chains start to improve and are well positioned to drive towards our long-term financial targets. I’ll end how I started.

This is a short-term issue, and one snow season doesn’t impact our ability to reach our long-term targets. With that, I’d like to pass the call to Sarah to walk through our financials.

Sarah?.

Net sales are expected to be between $620 million and $650 million. Adjusted EBITDA predicted to range from $85 million to $100 million. Adjusted earnings per share are expected to be in the range of $1.55 per share to $2 per share. The effective tax rate is expected to be approximately 24% to 25%.

This outlook assumes relatively stable economic conditions, a slightly improvement – improving supply of chassis and components and that our company’s core markets will experience average snowfall levels in the fourth quarter of 2023. We remain focused on what we can control.

Our baseline profit improvements and solutions are starting to show themselves and our growth projects will continue to gain momentum. We’ve navigated through some tough headwinds in recent years. And while low snowfall in 2023 is a disappointment, it’s an issue we know how to navigate well.

We remain confident in our long-term top and bottom line growth targets, which will propel us to $3 per share – of earnings per share in 2025. With that, I’d like to open up the call for questions..

Thank you. [Operator Instructions] Today’s first question comes from Tim Wojs with Baird. Please go ahead..

Hey, everybody. Good morning..

Good morning..

Maybe just to start off, maybe bigger picture. Obviously, the snowfall is kind of a near-term issue, and you’re kind of reiterating the – kind of your long-term guidance around getting to $3 per share in 2025.

Is there a way maybe relative to ‘23 to kind of bridge that kind of gap of improvement for investors just as they kind of look over the next couple of years, how do you kind of get from ‘23 guidance to 2025?.

Sure, absolutely. So $3 in 2025, when we look at kind of what our midpoint of guidance for 2023 is now with the low snowfall. I would say there are four kind of main factors that are the key drivers. I mean, there is many drivers, but four key drivers against the $3. First would be a return to average snowfall.

So clearly, that’s impacting our earnings in the year and getting back to average would have an impact.

And then there are three things that we control more of, which is new product introductions, our baseline profit improvement, and that’s predominantly – it is across the board at the company, but will really show itself in Solutions on getting to their low teens EBITDA margins. And then price versus cost, we expect to continue to improve..

Okay. Okay. Good.

And then maybe just on the near-term, could you just give us or maybe remind us a little bit how big the East Coast is as a percentage of the Attachments business? And then any sort of, I guess, feedback or expectation around how you’re thinking the preseason does develop? Because I think historically, you’ve probably seen a little bit more activity in the second quarter than the third quarter.

So how would you expect that to kind of phase this year?.

Yes. Okay. Let me make a few comments here, Jim, and then Sarah can talk about how we think the preseason quarters might be laying out.

One thing that we know happens in the snow and ice industry is by the time we get to the fall and a brand new snow season starts, dealers will have adjusted their inventories to historical levels, and it’s kind of like you’re starting the game from scratch, right? So with the elevated inventory levels that we saw during this season, you’re going to see those adjustments come in two different timeframes.

We took quite a sizable hit in Q1, okay. So, that’s already an indicator of dealers lowering their orders in Q1 to start balancing out their inventories.

We expect to take another hit, if you will, during the pre-season order period so that by the time we get to the end of Q3 and into Q4, dealer inventories are back where they historically start the season.

So, a decent amount of that hit, we already took in Q1, probably another component of it to come by the time of pre-season order period finishes itself. I will let Sarah to expand a little bit more..

Yes. I guess just to talk to the split, we usually talk to pre-season being around 65% of our years of Q2 and Q3. That’s not far off our current expectation. When we look at Q2 versus Q3, we expect that to go back closer to traditional norms. So, 55%, 45% would be the thought process for the year..

Okay. And then maybe just the last one.

Just how would you describe maybe the sequential improvement over the last three months to six months or just a sequential trends on the chassis side because this is probably – it sounds like there are still constraints, but this is probably the first quarter and maybe 2 years where you haven’t specifically called out chassis constraints, maybe as much as you have, so just maybe an update on kind of the trends and just the delivery opportunity there..

Sure. I think the best way to describe the current situation is it’s still not very predictable. We have seen pockets of improvements in certain types of chassis. Not all the chassis that are core to our business, so it’s still fairly choppy. Logic tells you that the situation will continue to improve as the year progresses.

As I have said a number of times, I don’t blame the OEMs for not standing up and shouting from the rooftops, you are going to see significant improvement in ‘23. They have got supply chain challenges just like everybody else. The way to think about it for Douglas is it an important component of us reaching our 2025 targets, sure.

It’s an element of solutions group maximizing their performance that will happen at some point. But the thing I noted earlier is probably the most important thing to hang your hat on. And that is that while we are waiting for the trend to show improvement over a longer period of time, we are focused on what we can control.

We are focused on improving the baseline profitability of our solutions businesses so that when that chassis velocity improves and moves through that higher profit cost model, that’s when you are going to see this thing take off.

So, I think it’s wise for us at this point, not to be counting on significant near-term chassis improvement, we will take anything we can get. We do expect it though, we will improve as the year progresses, and we will see what ‘24 and ‘25 bring..

Okay. Great. Thanks for the updates and the color..

Thank you. And our next question today comes from Mike Shlisky with D.A. Davidson. Please go ahead..

Good morning. This is David Johnson on for Mike this morning..

Good morning David..

Good morning. Quick question.

Does reducing your near-term earnings outlook change your attitude towards paying and raising the dividend going forward?.

Absolutely not, I mean we have prioritized our dividend for many, many years, and we have also weathered low snowfall before, and we have always had the dividend as a priority. So, I don’t see that changing anytime in the near future..

Couldn’t agree more..

Great. Then maybe a last one. If for whatever reason in the fourth quarter, the snowfall is very weak.

Do you still anticipate you could reach the low end of your guidance range?.

Yes. I mean we do our best to have a range that can encompass different outcomes of snowfall. I mean clearly, when you look at the guidance this year, we have had to narrow our guidance sooner than we typically do just because of the first quarter results and the impact on the pre-season.

So, our guidance does assume that we have average snowfall in Q4. I think there is ample room in the guidance to account for low snowfall, but clearly we didn’t expect the Q1 impact that we had, so..

Great. Thank you. I will pass it on..

[Operator Instructions] Our next question comes from Greg Burns with Sidoti & Company. Please go ahead..

Good morning. When we look at your inventory levels, how should we think about that evolving over the course of this year? And what’s your outlook for cash flow this year, given where the inventory levels are currently at? Thank you..

Yes. So, I will start out with free cash flow. I mean we still have a projection of decent free cash flow for the year, well above the dividend requirement and above last year. When you look at inventory, we are up, call it, $40 million versus a year ago. And I will put that into two main buckets.

One being, work-truck attachments inventory increase, that’s 70% of the increase. And then the other 30% is in solutions. When you think about the attachment increase in inventory, it is by and large, attributable to the low snowfall that we experienced in Q4 of last year and Q1 of this year.

So, that puts us in a great position for pre-season and navigating through the rest of this year. So, that will naturally work itself back down to more traditional levels.

On the other 30%, that’s really related to supply chain, I would say disruption, timing of receipts of both chassis and components, that’s going to take a little bit longer to work through.

We have inventory reduction plans in place that get us quite a bit of improvement in the year, but a lot of that will be willing to be based on what the supply chains deal with. In addition, I guess I will just throw out there, the inventory is also more expensive.

So, it embedded in that increase as the inflation that we have experienced, which is call it, 5% to 10% of the increase..

Okay. Thanks. And then when you were talking about your longer term $3 target, you mentioned new product initiatives.

Can you maybe just give us an update on some of the ones you have talked about in the last couple of quarters, non-truck attachments, maybe some of the cross-selling opportunities into the solutions business? And then given the current the environment that we are in, does that slow down some of the investments or some of the projects maybe you had planned in terms of new product introductions?.

Sure. Probably the one that I would focused on most would be the introduction of the pusher plow that we started speaking to last summer. That has been very well received in the marketplace.

And even in this below average snowfall environment, we are continuing to like the order pace that we are seeing there, and we expect that to be a very nice contributor to our path, the $3 a share. Now, have we – from a low snowfall playbook perspective, have we temporarily peeled back a little bit of investment in new product development we have.

That’s just being good business people in the short-term. Having said that, we have made sure that those temporary spending holds don’t impact our ability for the new product introductions that are key to us reaching $3 a share in 2025, we have to make sure that we are still on track with those things. So, we are pulling some levers.

This is a multi-dimensional chess at this point. But rest assured that the key drivers of our longer term success, we are still on track to reach those targets..

Okay. Great. Thank you..

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to President and CEO, Bob McCormick. Please go ahead, sir..

Thanks Rocco. Thank you for your continued interest in Douglas Dynamics. Let me finish with these brief thoughts. While the weather didn’t help us this past winter, that happens in this business. We pulled our short-term levers to minimize the impact. And as always, we will exit this temporary situation stronger than we entered.

We are encouraged by both segments position in the market today and our long-term growth prospects remain intact. The roadmap for the future is in place, and we will continue to execute on our key initiatives as we march towards $3 per share of adjusted EPS in 2025. Thank you and we look forward to seeing all of you soon..

Thank you. Ladies and gentlemen, this concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day..