Douglas Dynamics Q2 2024 Earnings Call Transcript

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July 30, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Douglas Dynamics Second Quarter 20 24 Earnings Call. All participants will be in listen only mode. After today's remarks, there will be an opportunity to ask Please note this event is being recorded. I'd now like to turn the conference over to Nathan Elwell. Please go ahead.

Speaker 1

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 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.

Speaker 1

Joining me on the call today is Jim Janek, Chairman and Interim President and CEO and Sarah Lauber, Executive Vice President and CFO. Jim 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 Jim. Please go ahead.

Speaker 2

Thank you, Nathan. I'm pleased to be back talking to you all today as Interim President and CEO following Bob McCormick's retirement. On behalf of everyone at Douglas, I want to reiterate our gratitude to Bob for his dedicated service to the company over the past 20 years as CFO, COO and most recently President and CEO. We wish him all the best in his retirement. Now many of you may already know me, but here's a reminder about my background for those who don't.

Speaker 2

I joined the company in 1992 as Director of Sales and served in several roles before becoming President and CFO in 2000. I led the company in that role for 18 years before retiring at the end of 2018. I joined the Board in 2000 and became Chairman in 2014. As Chairman, I've stayed very involved since I retired and it's been quite straightforward to step back into the CEO role. In fact, it's been a pleasure to reconnect with some people and meet others.

Speaker 2

I've traveled around many of our locations, have been invigorated by the quality of the people that I've talked to and the ideas being generated. I'm relishing the opportunities to collaborate with our world class team as we work to maximize our near term performance. It's worth reiterating that I am committed to staying in this role while we find the next CEO to lead the company. We are not focused on a specific timeline and everyone on the Board agrees it is most important to appoint the right person rather than complete a quick search. We are evaluating both internal and external candidates and are willing to take the time necessary to conduct the search to make sure we get the right person to lead Douglas into the future.

Speaker 2

With that said, let's talk about the Q2. The story is straightforward and a continuation of the trends we've seen recently. Under the circumstances, we turned in a positive performance driven by fantastic improvement at Work Truck Solutions. The teams at Dejana and Henderson did a great job of capitalizing on the opportunities and getting trucks through the facilities this quarter, producing our best second quarter results for the segment on record. The other important factor this quarter was the successful implementation of the 2024 cost savings program.

Speaker 2

As a public company, we have a duty to our stakeholders, including our investors and employees to make tough decisions when situations dictate. 2024 cost savings program is a great example of that. During the first half of the year, the team made difficult decisions to align our cost structure and attachments and in our corporate team in light of the demand outlook. The program initially implemented in the Q1 and expanded in the second quarter continues to prove its worth and is now expected to deliver $11,000,000 to $12,000,000 in sustainable annual savings. This program is one of the main reasons we improved our profitability in the 2nd quarter despite lower net sales.

Speaker 2

Overall, results for the Q2 were approximately in line with the same period last year. Adjusted EBITDA and margins increased, which highlights the recent improvements in throughput at solutions and the cost structure changes at Attachments. And we maintained our 2024 full year outlook, which Sarah will talk to later in the call. Now turning to the results in each segment starting with Attachments. Preseason orders were softer than expected with results continuing to be impacted by 2 years in a row of significant below average snowfall in our core markets, particularly on the East Coast.

Speaker 2

The most recent snow season was approximately 40% below the 10 year average, which led to difficult operating conditions during the first half of 2024. Frankly, we've not seen back to back low snowfall seasons of this magnitude since the late 1980s and is certainly going to have an ongoing impact on demand. Despite lower net sales because of the successful implementation of the 2024 cost savings program, adjusted EBITDA margins were an impressive 30% for the Q2 and in line with the same period last year. It is worth noting that margins were also positively impacted by the mix of the products this quarter. To be clear, we do not anticipate quite the same favorable mix in the 3rd quarter.

Speaker 2

Based on 2nd quarter shipments, the ratio of preseason shipments in 2024 will be closer to a 60 five-thirty 5 split between the 2nd and third quarters rather than the 50five-forty 5 that we had initially been expecting. Of course, the lack of snowfall in recent years negatively impacted preseason orders as we predicted due to the equipment not being used as much. This lengthens the equipment replacement cycle and rest assured we will be paying careful attention to order activity and dealer inventories in the 3rd quarter. Given these circumstances, we are pleased with our operational performance and cost control efforts. With the continued focus from end users in getting more jobs done faster, we are also focused on expanding our product lines.

Speaker 2

Our teams launched several innovative new products this year that have been well received by the dealers. And today, our equipment offering covers virtually every aspect of commercial snow and ice control with more exciting products in development. Finally, I'm pleased to say that both dealer sentiment and financial health also remain positive. Before going further, I want to briefly mention 2 new and interesting projects at Work Truck Attachments. First, the expansion of our strategic alliance with John Deere, which marks an important milestone in the ongoing partnership that began 4 years ago.

Speaker 2

This agreement expands the strategic sales alliance to include tractors and industrial equipment. Through this partnership, John Deere can now offer Western products, plows and spreaders for a wide range of Deere vehicles from the smallest UTVs to the largest tractors and wheel loaders, opening new sales channels and reinforcing the ongoing partnership efforts. But keep in mind, the traditional truck equipment dealer network remains the main focus of our distribution channels, while this alliance allows us to reach different customer groups that don't currently have access to our equipment. I'm also pleased to report that we also recently finalized a national partnership with a leading vehicle and equipment rental company, which designates Western Products as their preferred snow and ice partner. The primary goal of this collaboration is to equip our partner with our full line of snow and ice removal equipment for their network in the snow belt.

Speaker 2

This is a terrific job by our business development team at Attachments for securing these strategic partnerships. Okay. Turning to results at solutions. I'm pleased to confirm that the solutions team delivered a record 2nd quarter results with 24% net sales growth and adjusted EBITDA margin of 9.7%. This is the 8th consecutive quarter of improved performance demonstrates that our long term goals are very achievable when external circumstances allow.

Speaker 2

However, progress is not going to be linear and we expect margins to be flat in the 3rd 4th quarters when compared to the previous year. Our team at Dejana continues to focus their attention to match the industry trends and driving improvements in the fleet business where the supply of chassis are currently the strongest. While customers are becoming more price conscious, demand remains positive. We are working on new projects and initiatives to broaden our offering and drive sustainable long term growth. While we still don't have great visibility into future trends, I'm glad to report chassis availability no longer seems to be a major issue.

Speaker 2

At Henderson, the low margin contracts that have been a drag on our performance are virtually complete, which has definitely helped our profitability. Municipal demand remains positive and despite increasing the velocity of trucks being upfit, our backlog remains robust. These results bode well for the future and it's important to remember, in general, the supply of chassis is less constrained today than any point since the start of the pandemic. Demand remains positive at both municipal and commercial customers. We still have 12 months of backlog to work through and in some cases is growing due to order intake.

Speaker 2

And we continue to improve the efficiency of our operations. The goal of delivering improved mid to high single digit EBITDA margins for 2024 remains intact. However, we do expect to see some softness in profitability with adjusted EBITDA margins expected to be lower in Q3 than the first half of twenty twenty four and close to the same levels as Q3 2023. All of this reinforces our confidence that we can achieve our longer term growth and profitability goals in the years ahead. So in closing, we're encouraged by the progress made by the solutions team over the past 12 months and we see a positive future going forward.

Speaker 2

We're doing the things we need to do despite being painful, but today we see a clear path forward. Carefully managing our manufacturing operations is allowing us to maintain our market position. While we manage through the current situation, we are always keeping an eye on the future. We will continue to address opportunities and challenges in a logical and effective manner, making the tough decisions when we have to, as well as choosing when to stay the course and when to double down. I look forward to leading the company through this period until the new CEO is ready to take the reins.

Speaker 2

And with that, I'd like to pass the call to Sarah to walk through our financials.

Speaker 3

Thank you, Jim. I will jump right in and point out the 2 main takeaways from this quarter. 1, the hard work over the last few years in our Solutions segment is paying off as evidenced by the record second quarter results with significant top and bottom line growth. And 2, the tough decisions made earlier this year to adjust our cost structure were important for us to be able to maintain our strong financial position. During the Q2, we saw profitability improve on lower net sales based on the management of throughput, pricing realization and the successful implementation of the 2024 cost savings program.

Speaker 3

Overall, our consolidated results for the 2nd quarter were approximately in line with the same period last year across all metrics. Net sales were 190 $9,900,000 for the Q2 2024, a slight decrease compared to the same period last year due to lack of snowfall leading to lower volumes at Attachments, which was largely offset by strong shipments at Solutions. The 2024 cost savings program is now expected to deliver $11,000,000 to $12,000,000 in sustainable annualized savings, dollars 9,000,000 of which is expected to be realized in 2024. SG and A expenses including intangibles amortization decreased 6.7 percent to $25,000,000 compared to Q2 2023 primarily due to the 2024 cost savings program plus lower intangibles, amortization as well as lower stock and incentive based compensation. Interest expense increased slightly to $4,100,000 from $3,700,000 dollars GAAP net income for the Q2 2024 was $24,300,000 or $1.02 per diluted share, approximately in line with the same period last year.

Speaker 3

Adjusted EBITDA for the quarter increased to $43,700,000 when compared to $43,300,000 in for the Q2 of 2023. Adjusted EBITDA margin increased 100 basis points to 21.9%, highlighting the improved throughput at solutions and cost structure changes at Attachments. The effective tax rate was 24.2% and 22% for the 2nd quarters of 2024 and 2023 respectively. The effective tax rate was higher than the prior year due to the establishment of reserves for uncertain tax positions of $900,000 With that said, let's look at results in our 2 segments. First, Attachments net sales were $118,100,000 for the quarter compared to 141 point $2,000,000 in the Q2 of last year.

Speaker 3

Preseason orders were down after 2 years in a row significantly below average snowfall in our core markets, particularly on the East Coast. Due to the successful implementation of the 2024 cost savings program and favorable product mix. Adjusted EBITDA margins were robust at 30.3% for the quarter, in line with the same period last year. Based on the second quarter, we now expect preseason to be more heavily weighted towards the 2nd quarter and we anticipate an approximate 65 to 35 ratio between 2nd and third quarter preseason shipments compared to the range of 55 to 45 that we originally expected. While our margins were great this quarter, we know some of the strength means orders have been pulled forward from the 3rd 4th quarters.

Speaker 3

In addition, it's worth noting that we expect 3rd quarter EBITDA margins to be closer to the Q3 of last year, which were 16.2%. The main reasons for this are expected lower production volumes based on reducing production days and less profitable product mix in the Q3 of this year. Overall, the impact of unprecedented weather in recent winters is having the impact we expected, but our efforts to align our cost structure are working as we intended. Taking a look at Work Truck Solutions where the team delivered a very strong performance across the board this quarter with record second quarter results. Net sales increased 23.8 percent to $81,800,000 compared to the same period last year based on higher volumes on improved throughput and price increase realization.

Speaker 3

Adjusted EBITDA increased

Speaker 4

0.7%.

Speaker 3

The improvements were based on higher volumes and price increase realization as well as improved operating efficiencies and positive product mix. The good news is, it was a straightforward quarter for both Dejana and Henderson and both still maintain a very strong backlog and a positive demand outlook. With improved operating conditions, our teams remain fully focused on maximizing velocity in the coming quarters. Turning to the balance sheet liquidity figures. For the 1st 6 months of the year, net cash used in operating activities decreased 71 percent to negative $19,100,000 compared to the same period last year.

Speaker 3

The improvement was due to favorable changes in working capital of $40,100,000 related to inventory and accounts payable improvement. Free cash flow for the 6 months ended June 30, 2024 was negative $21,900,000 compared to negative $71,500,000 in the corresponding period in 2023, an increase of 49,600,000 dollars At the end of the second quarter, we maintained $90,700,000 of total liquidity comprised of $4,200,000 in cash, dollars 86,500,000 of capacity on the revolver compared to $700,000 in total liquidity at the end of 2023. The change is primarily due to the seasonality of our business as well as reductions in spending. Inventory at the end of the quarter was 139 point $4,000,000 lower than the $148,900,000 at the end of the Q2 of 2023. Accounts receivable at the end of the quarter were $140,200,000 right in line with the 139 point $4,000,000 recorded at the end of the Q2 2023.

Speaker 3

Capital expenditures in the first half of this year were $2,800,000 close to half of the $5,300,000 in the same period last year and in line with our expectations. We continue to expect total CapEx for the year to be on the low end of our targeted range of 2% to 3% of net sales based on our curtailed overall spending. As usual, we paid the dividend of 0.295 dollars per share at the end of the Q2. We expect to produce enough free cash flow during the year to cover the total cost of the dividend, which remains our top priority. Finally, our leverage ratio at June 30 was 3.3 times, which is within the covenant of our debt agreement and a couple points lower than the 3.5 times at the end of 2023.

Speaker 3

Over the medium term, we expect the leverage ratio to return to our target ratio range of 1.5 to 3 times. Let's turn to the outlook for the rest of the year. As I noted in the earnings release, pre season orders at Attachments came in softer than we originally expected. There will probably be tough year over year comparisons at Attachments in the 3rd quarter. We will continue to closely monitor reorder activity and dealer inventory, but we believe our aggressive efforts to reduce production plans will pay off as we navigate the elongated replacement cycle.

Speaker 3

As always, we're planning for average snowfall in the Q4, but given the elongated replacement cycle, average snowfall is unlikely to produce average volumes. The Solutions segment produced strong year over year improvements in the first half of the year. And as we previously noted, we expect the second half of 2024 to be similar to the second half of twenty twenty three. The tougher comparisons in the second half of the year are based on product mix and the timing of certain shipments. And for the year, we still expect our adjusted EBITDA margins in Solutions to be in the mid to high single digits.

Speaker 3

I'm pleased to say solutions still has a strong backlog and solid demand and remains on track to deliver improved full year results for the 3rd year in a row. Therefore, we are comfortable maintaining our 2024 guidance ranges based on the strong performance of solutions and the success of our 2024 cost savings program. Just to reiterate, our 2024 financial outlook indicates net sales between $600,000,000 640 dollars with adjusted EBITDA predicted to range from $70,000,000 to 90,000,000 delivering adjusted earnings per share in the range of $1.20 per share to $1.70 per share. Finally, the effective tax rate is expected to be approximately 24% to 25%. And it's worth reiterating the three assumptions behind this outlook.

Speaker 3

1, relatively stable economic conditions 2, stable to slightly improving supply of chassis and components and finally, that core markets will experience average snowfall in the Q4 of 2024. We firmly believe the ongoing improvements at solutions and the tough work implementing the 2024 cost savings program mean we are well positioned for the future and will yield improved earnings power over the long term. With that, we'd like to open up the call for questions. Operator?

Operator

Thank you. We will now begin the question and answer session. And our first question comes from Mike Schlosky from D. A. Davidson.

Operator

Please go ahead.

Speaker 4

Good morning. Thanks for taking my questions. I wanted to touch first on order activity in 8 solutions. So we're seeing stronger throughput. Is a lot of that due to existing backlogs?

Speaker 4

Or would you say that incoming orders are recovering what's coming out of the backlog and perhaps you're seeing a book to bill at or above 1 at the current time?

Speaker 1

Yes.

Speaker 2

It's pretty simple. What's coming out of the backlog is the current productions. We're also taking new orders, that are generally replacing those. So we're still seeing a very strong backlog that in a few cases is actually growing. So isn't diminishing the backlog very much at this particular point, which is good to have that visibility going into 2025 beyond.

Speaker 3

Yes. I'll just add to that, Mike. The backlog in solution is sequentially up quarter to quarter, but it's really only down 10% from the peak, which was a couple of years ago. So still strength in the backlog.

Speaker 4

Got it. I want to also ask about solutions margins as well. It's been a pretty long journey over the last 5 years, but it looks like this quarter you finally got back to that pre pandemic margin level and you're at least as of this quarter we're kind of knocking on the door of double digit EBITDA margins. That might change in the back half, but given the number of units going through facilities and what you've done over the last 5 years with efficiencies and implementation of DDMS principles and what's up what you've added since over the last couple of years. I kind of wonder if 10% income margins for that segment is an ending point.

Speaker 4

It sounds like you're nowhere near where you could be on throughput and you've got plenty of cost initiatives that haven't really shown up yet in the P and L. So can you just give us some reasonable assessment of where solutions margins could be in a truly normalized environment?

Speaker 3

Absolutely. No, it's a great question, Mike. And we are extremely pleased to see the results of all the hard work that we've put in over the last couple of years at Solutions. And this was a great quarter that really is demonstrating all of that. There was a lot that was firing on all cylinders in the second quarter.

Speaker 3

And as I said in my script, I expect the back half, to maybe not have all those things firing and we'll be closer to where we were last year in the back half. But bottom line, the improvements that we're seeing are sustainable improvements. And so as we navigate into 2025, I think we'll be closer to that double digit, to low teens long term target. And we're just going to continue to focus on the plans we need to continue to make improvement to get there.

Speaker 4

Got it. And turning to M and A, we saw a deal on the solution side in the operating world earlier this week, a pretty good sized deal. And part of the rationale from the buyer was more scale, more product breadth and more geographic reach for all their products. Can you discuss Dulles' desire to pursue similar growth in solutions, especially when you get past the extreme low and attachments and the cash flow that that normally brings. Just curious whether, A, you are pursuing or looking at things and solutions to add to your portfolio and B, Jim, if that is a job for the next CEO or if you're willing to kind of go that route in the near future?

Speaker 2

Yes. We're looking at longer term, we look at a lot of opportunities both in attachments and solutions. In 2024, we're not looking at anything specifically. There are a couple of things out there that might be interesting in 2025, but right now it sort of pencils down for us on acquisition or M and A.

Speaker 4

So Jim, just to clarify, is that a function of you're waiting for the next CEO to take that on? Is it the balance sheet question and the current business trends and attachments that's holding you back? Or what do you need to see that kind of gets up and going on the M and A side?

Speaker 2

Yes. I think first of all, it's we're looking for specific opportunities and those opportunities right now aren't available. And that's the primary hurdle for us. I think for the right opportunity, certainly it would either be the new CEO or it could be me depending on how long the search takes. But it really comes down to finding exactly the right property that we think fits our company.

Speaker 2

But I don't want to get into too much detail because that would probably not be a good place to go.

Speaker 4

Sure, sure. Well, I appreciate the color. I'll pass it along. Thank you.

Operator

The next question comes from Robert Schultz from Baird. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking the questions. Just starting off here, what do you think is really driving dealers to pull forward orders and attachments? I think we had a similar dynamic last year where Q2 had a higher split of total preseason orders than expected coming into the year. So what are you guys seeing there?

Speaker 3

I would say it's not necessarily dealers pulling ahead orders as it is. We have our pre season ordering period and then we have the ability to produce and ship the best way possible for our manufacturing facilities. And we were able to ship more out in June than we had expected. We are taking more production out in the Q3 than we did last year, because we have lower volumes than where we were last year. So I think it's really more a function of 1, us having the right inventory and the ability to ship and then 2, level loading and figuring out the best way to manage our production and our inventory levels based on these lower volume

Speaker 5

levels. Got it. And then more on Attachments. You guys called out the product mix was better there. More specifically, did you guys have higher P and A sales?

Speaker 5

Or did you have favorable mix within plows? And maybe why does that not continue into the Q3? Yes.

Speaker 3

We actually in the Q2, going back to what I was just talking about, so we did ship out quite a bit of truck mounted flows, which are higher margin plows. We also did have higher margin parts and accessories. And when you look at our parts and accessories for year to date versus last year, we're almost flat to last year, whereas our other volumes, can see the amount of volume that were down just after 2 low snow seasons. So I don't fully expect that we'll have the same level of orders to ship in those product categories in the Q3.

Speaker 5

Got it. And then we've seen steel prices come down since the start of the year. What are your expectations for price cost as we kind of think about the remainder of 2024 and into 2025?

Speaker 1

I can take that one. The

Speaker 2

cost of materials for the most part has been pretty flat with steel obviously to your point has come down. I think we'll enjoy that in the Q4 and in the Q1. But right now it's quite low, which we enjoy. But as you know, these things can change and a lot of that is based on lower demand in the Chinese market. So if that market picks up, certainly copper, aluminum, steel could go up too.

Speaker 2

So but we're looking forward to some stable pricing over the next few months for sure.

Speaker 5

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

Speaker 4

Thanks, Bobby. Thanks.

Operator

The next question comes from Greg Burns from Sidoti and Company. Please go ahead.

Speaker 6

Just looking for a little bit of clarity on the guidance around solutions for the second half. When you're talking about similar results the year ago period, is that from a margin perspective or is that also from a revenue perspective?

Speaker 3

From an EBITDA margin perspective, I don't expect the 2nd quarter margins to be linear. So what we've talked about in solutions is that we expect this year to have continued improvement to double digit for the full year. And so I still expect that. But when you look at the quarterly margins, I expect the EBITDA margins to be closer to Q3 and Q4 of last year, respectively.

Speaker 6

Okay. And then with the I guess, the throughput you saw in the Q2 and the backlog that you have, is there any reason to believe that was there anything special that occurred in this quarter that drives such high throughput and revenue this quarter? Or should we think about that continuing into the second half of the year?

Speaker 3

Yes. There was some favorable product mix. We had some larger, higher margin jobs that were Henderson standpoint, I guess the throughput improvement and then the contracts that we had in the Q2 were also favorable. So it really is it's not one big thing. It's kind of spread across both businesses, that brings me closer to last year margins.

Speaker 6

Okay. And then I guess in terms of the balance sheet and the leverage, I guess it's stepping back down at the end of the Q3. Are you comfortable with how the year is lining up staying within your covenant ratios?

Speaker 3

Yes, we are.

Speaker 6

Okay. All right. Thank you.

Operator

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Jim Janek, Chairman and Interim CEO for any closing remarks.

Speaker 2

Thank you for your time today and your interest in Douglas Dynamics. We're pleased that the hard work to improve our operations is starting to pay off and our consistent focus on continuous improvement will help ensure we maximize the potential of any situation. We know the weather will turn in our favor at some point and when it does, our attachments team will be ready to deliver for our customers. Until it does, we will effectively manage our operations to preserve profitability while still keeping an eye on the future. Our Attachments team has made significant moves to become right sized for the current environment.

Speaker 2

And with decent snowfall in the coming winters, we should experience some nice tailwinds in 2025 and beyond. Thank you and we look forward to talking to you all soon.

Operator

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

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