Hello, and welcome to the Douglas Dynamics Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. 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 risks that could cause actual results to be materially different. Those risk 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.

I 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..

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 remains 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 profile. 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..

First are the baseline profit improvement and growth projects that our teams are focused on to get to the margin profile we have targeted in attachments and solutions. In 2023, we have been outperforming for our internal plans as we have been laser-focused on the things we can control.

We will not slow down in these areas; Second is the assumption around chassis. Our initial long-term goals assumed consistent chassis supply, which we just haven't seen in recent years.

Probably more importantly, industry prognosticators are now predicting that chassis supply in 2024 is not expected to grow back to pre-pandemic levels, but rather expect supply to be flat to 2023. And although we applied the tentative agreement to end the strike, it's too early to tell what the OEM shutdown impact will have on our supply in 2024.

We expect to know more in February when we lay out our 2024 guidance; Third is the assumption around average snowfall, which was significantly lower in this last snow season. Just returning to average snowfall should have a significant year-over-year earnings impact.

To provide some initial context around this discussion in light of the many moving variables, I will say that with the assumptions that chassis supply is expected to be flat to 2023 and an assumed return to average snowfall, our expected 2024 guidance will be at or above our February 2023 guidance.

This would be a greater than 30% increase at the midpoint from our current guidance. This is only to put context around how we're currently thinking about 2024. We will provide our actual 2024 guidance in February. Finally, I want to talk to the positive. From an operational standpoint across the board, we executed effectively.

The Solutions segment is showing strong improvement on a year-to-date basis and remains on track to show margin growth in 2023 versus a year ago. The ongoing positive demand dynamics we see in Solutions, coupled with the still strong backlog we have to work through, bodes well for the medium- to long-term.

We're incredibly proud of what our team has accomplished under difficult circumstances. We know what we have to do with the internal growth drivers to accomplish our goals. With that, we'd like to open the call for questions..

[Operator Instructions]. Today's first question comes from Mike Shlisky with D.A. Davidson..

Sarah, 1 of your last comments there -- yes. Hey, Sarah, so one of your last comments there was about, if snowfall was back to average again, the 2024 guidance would be quite a bit above 2023 guidance. I'm curious let's say, 2020 -- let's say the snowfall this year is, again, really, really low.

And you have a similar snowfall this, when you're the last winter, when you -- if you were to give guidance again in February, given some of the operational issues that you've made, do you think you'd have to be at a higher base in 2024, just on some of the internal efforts that you've made in some growth areas like your non-truck, non-snowfalls, et cetera?.

Yes. Great question, Mike. Yes, I don't want to lose sight of the internal growth drivers that we've been working so hard on and over-delivering this year. When we think about going forward, the growth drivers that we've been focused on, that's what's working towards improving the solutions margins and improving our attachment margin longer term.

And those projects are embedded in the business. So it's very logical to think that the base is going to be higher. I would say the hesitation at this point because we're not at February of 2024. So we have a lot of moving variables. And with the strike just occurring, that is why I am saying at or better.

We just need to navigate through some of these unknowns between now and -- now and February..

Okay. Then I also wanted to ask about the dividend.

You just -- you did mention in your comments there in passing, but I'm curious what's your confidence level? What's the Board's thought and your thought about the dividend for next year? Do you have the confidence on, let's say, a base level or what you think will be average snowfall you have confidence that you can keep the cash flow going to keep that dividend at or above, where it is today?.

Absolutely, Mike. There's no shift in the philosophy of the dividend. We have had a sustainable dividend and we've increased it 15x. The expectation would be that we continue to prioritize the dividend and keep it sustainable and increase it as we can. So that has not changed..

Yes, let me echo what Sarah just said. It is the #1 cash deployment priority for Douglas, and that's not changing..

Okay. Great. And then lastly, great progress at Dejana.

Could you give us some comments on understanding how business is progressing there for the season?.

Sure, absolutely. So Henderson has had a little bit different dynamic, as you know, Mike, on the chassis side. So Class 7 and 8 maybe a little bit more predictable, still very long lead times, and we are experiencing a little bit of what I would call, late changes on chassis. But the team has been navigating through that very well.

We improved in the third quarter, expect to improve further in the fourth quarter. also another big piece of the solutions improvement expected for the year comes out of Henderson from a price realization perspective. As you know, we have a very large backlog at Henderson.

And so as we were going through the inflation that we experienced we were implementing pricing, but much of that is dependent on when we get the chassis to build the truck. So that will continue to improve and improve this quarter, and I expect it to improve again next quarter and into next year..

The next question comes from Tim Wojs with Baird..

Maybe just on Q4 in attachments.

I guess what are you kind of embedding in -- for maybe growth in EBITDA in the fourth quarter in that business? And -- it wasn't clear to me if you're assuming average snowfall in Q4 at this point or if you're assuming something kind of below average just given the slower start to the retail season?.

Sure. Yes, it is a little bit different this year as we're talking about the slower retail at the end which also translates into, I guess, the beginning of Q4. So when I think about our fourth quarter forecast, we're absolutely assuming average so far.

It's very important that we do see the snowfall in, call it, November, December, when it's more typical to snow, and I say that as I look out the window, and it's snowing like crazy here in Milwaukee. But -- so from that standpoint, we are assuming average snowfall, although we have accounted for the fact that the retail season started out slower.

So it's also maybe a little bit more compounded confusing, I guess, Tim, when you think about fourth quarter last year was a very low comparison because we had very low snowfall then. So when it comes to EBITDA growth, we're still expecting to grow in the fourth quarter as we compare it to that low snowfall comp.

But we have accounted for what we've talked about with the guidance change..

Okay. Okay. So just having average snowfall in the guide relative to low snowfall last year, you did get some growth out of that should be the base expectation..

Yes, correct..

Okay. Okay. Got you.

And then I guess on the Solutions business, just I mean how big of a gap or like an air pocket could you see in some of the chassis-related kind of issues from the strikes? I mean has anything actually been communicated to you guys? And I guess, just any detail around how long you were shut for and just kind of how you would think about the puts and takes to that in '24?.

Yes. I would say there's one facility that's probably the most impactful to us, which was the facility in Kentucky for Ford. So the amount of time that, that was shut down we know it's going to have an impact.

We do not have any communication from the OEMs on what that impact will be, which is why we are saying we do expect something is probably going to be closer to early '24 than late '23, but it still remains to be seen..

Yes, I guess I would also add, I made a comment that we saw some increased chassis supply coming our way late in the third -- in the second quarter and early in the third quarter, which is just what the OEMs ought to do, and that is they're going to build a little bit of inventory ahead of the strike just in case.

So we're able to work through that inventory now. The question becomes when they turn the spigot back on, they start ramping back up, how long is that process going to be? And how long will our little temporary positive movement in terms of chassis supply last us before it runs into issues, Tim.

And I think we're feeling pretty good about the first part of the fourth quarter. We get into the month of December, and that's when we start to see some potential challenges.

And again, I think they've got to get their business model back in place, when all the contracts are signed and then they'll start communicating with us as to what the future looks like, but we should expect an impact in Q1. We just don't know how to quantify that at this point..

Okay. Okay. Understood. And then I guess just last question I have. Just Page 3 of the presentation that you sent out.

Can you just maybe -- I know there's no numbers here, but could you actually add some numbers to what maybe some of these internal initiatives are kind of contributing? Just to give people a feel of like what the kind of the baseline profit improvement or some of the things that you're doing on a core basis are kind of generating this year?.

Yes. I'm chuckling a little bit, Tim, because there's no numbers there. We usually don't get that specific on these things. But I guess I'll put some context around it.

When you think about the margin improvements that we're expecting in Solutions to get to mid-single digits, a lot of that is driven by a lot of the initiatives that are shown pictorially on that page. In addition to the price realization that we've been talking about, which really is across our entire business. It is also in that.

When you think about the snowfall piece, the negative impact, we're being very clear that the two changes that we had to make to guidance was really all due to snowfall. So you can get kind of a context of the impact that, that has had negatively, which has been offsetting the internal drivers. The good news is snowfall is temporary.

The internal growth drivers that we've completed are going to be part of the business going forward..

The next question comes from Greg Burns with Sidoti & Company..

Just in terms of the outlook for the Solutions segment. I know the impact of the strike is kind of unknown. But if you're expecting chassis supply to be relatively similar to this year.

What does that imply for your growth outlook for that business next year? Will you be able to still drive growth there even if chassis supply doesn't improve meaningfully?.

Well, there's two elements to our growth plans within the Solutions group. Things that we control, which we've talked about quite a bit today, the internal profit drivers, and we've made some excellent progress there in 2023. We've got additional plans in the solutions and the attachment side on those initiatives in '24 and '25.

So we ought to continue to see EBITDA and profit growth on the solutions side, driven by things under our control. The question is, what's the -- what impact will chassis supply have on that.

Sarah just talked about whether negating a fair amount of the internal growth drivers, the question will be how does chassis supply impact solutions profit growth next year. So we're going to get the internal growth factors there. It's going to continue. We got the plans. We know what the initiatives are. The teams are executing.

If we get -- if chassis in '24 in total look like they did in '23, you're going to continue to see sequential solutions profit improvement, right, Sarah? I mean, I think that's a fair way to look at it.

What we're trying to do here, I'll go back to a comment I made, right? One of the external assumptions on getting to $3 a share in '25 was we get some consistent chassis supply, and it returns to some level of historical norms. At this juncture, we do think it's prudent to say, you know what, let's just say that's not going to happen for a while.

So now we can go back and our teams can work on trying to determine what additional internal profit driver initiatives that we have to put in place to try and make up for whatever earnings gap that, that creates. We're early in our planning process right now.

By the time we get to the February call, we'll be in a much better position to speak to what that looks like. I just think it's good business. Not to sit back and keep your fingers crossed, keep hoping for something that every 12 months, they push it out another 12 months.

I know it's a long-winded answer, but we're just -- we're going to get on with -- get on with life. We're going to figure out ways to continue to get to the $3 target even as these headwinds persist..

All right. And then on the attachment side, with some of the new products like the non-truck attachments and some of the other things you're doing to expand your addressable market there. How are those initiatives impacted by low snowfall.

Is that -- is demand down there? Or can you continue to still grow there just because there are more greenfield and you're able to take gain market share in those new areas?.

Yes. It really is a mixture of both, Greg. We do have new products that we don't necessarily sell a lot of today that have more runway for growth, but they are impacted by low snowfall for sure. And then some of the other products that we've been growing successfully over the last several years, we expect that to continue.

But what we're seeing right now in 2023 is clearly more of an impact of loan snowfall. We expect getting back to average will certainly show up on those growth projects then going forward..

Okay. And then just lastly on the margin profile of the Attachments business. I know you mentioned that mid- to high-20% target there.

But with all the underlying improvements and initiatives you have going on, if volume recovers, is there margin upside there from where you've -- where you've been historically, like could you see that going to the 30s? How should we think about the longer-term profitability of that business if volumes do recover?.

Yes. I mean we were at that higher level a number of years ago prior to all of the inflationary pressures that we've experienced I would say right now, the mid- to high-20s is the right place to be with the high-20s being what we would experience with more volumes coming through.

I noted in the script the preseason for us in total we were at the mid, the 25% level. And think about that, that's still like on a lower volume base than what's typical during an average snowfall year. So there's definitely a room to go quickly from mid-to-high just with recovery of snow.

And that's probably, where I would say right now just to be conservative..

Yes, I think I would add just something that we've spoken to before. Our core business there is obviously -- it's a pickup out a snow to ice control equipment. Very, very profitable, and that's what drives the near 30% EBITDA margins.

The growth opportunities that exist in the non-truck space, while still nicely profitable will not rise to those same 30% high-20s EBITDA. So as we see some top-line growth there, we will take the incremental earnings and the incremental earnings per share all day long, even if it doesn't reach those historical wonderful levels of profit..

[Operator Instructions]. Seeing no further questions in the queue. I would like to now hand the call back to Bob McCormick, President and CEO, for closing remarks. Thanks..

Thank you for your time today. I'd like to leave you with a couple of short thoughts. To our long-term investors, thank you for your support during challenging times. Our company is built to manage through uncertainty and that's exactly what we're doing. The medium- to long-term demand trends remain positive.

Recent results show that when headwinds subside, we deliver improvements. The future is at Douglas Dynamics, our teams are driving earnings growth in 2023 and which has been completely offset by one of the worst snowfall seasons in the last decade. When weather comes back and it always does, you're going to like what you see from Douglas Dynamics.

Thank you very much. We look forward to seeing some of you at the Baird conference next week in Chicago. Have a terrific day..

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