Douglas Dynamics Inc
NYSE:PLOW
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Douglas Dynamics Inc
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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.
Thanks, Nathan. Good morning, everyone. The story this quarter is simple. Snowfall was well below the 10-year average overall, and the East Coast saw its lowest snowfall season in decades. This really impacted volumes and attachments and caused our results to come in well below our initial expectations, hence, our pre-release and guidance update a few weeks ago. The silver lining is we have been successfully managing through weather-driven challenges for over 75 years. We know what needs to be done and how to do it. This one snow season doesn’t impact our commitment to reach $3 of EPS in 2025. This is a short-term issue, and we remain on track.
As far as other headwinds we are facing are concerned, chassis supply is still inconsistent and unpredictable. OEMs remain cautious when talking about the potential timing of chassis flow improvements, and we aren’t planning on any major increases this year. Overall, I would say component shortages have improved slightly, but it’s product specific. Certain items such as hydraulics are still an issue globally, which impacts our Solutions businesses.
However, I am pleased to report that while material price inflation remains a factor in some areas of the business, it has certainly improved when compared to recent years. Also, while labor markets continue to be challenging, we are seeing the benefits of ideas and programs, our amazing HR teams have implemented. Overall, while significant uncertainty still exists, the situation is starting to look brighter over the medium to long term. We have always prided ourselves on our determination and ability to adapt to changing business conditions, and we’ll continue to find creative solutions to these macroeconomic challenges.
Now, let’s discuss the segments in detail. Beginning with work truck attachments. The numbers speak for themselves. It was a difficult quarter for attachments, but nothing we haven’t dealt with before. You’ve heard us say this a lot, and many of you have experienced it yourselves, but it really didn’t snow in major cities along the East Coast this winter. Dealer inventories are above the 5-year average at the end of the season, which will impact preseason orders as they restack for next winter season. In talking with our dealers at the NTEA Work Truck Show in March, they are in good financial shape and their sentiment remains generally positive, because like us, they’ve managed through this situation before. Quite frankly, compared to the more atypical headwinds we faced in recent years, the pandemic, chassis and supply chain disruption and rapid inflation, low snowfall was at least a no entity and a temporary one at that.
As you would expect, we have already implemented our low snowfall playbook to mitigate the impact. In fact, Mark Van Genderen and his team are taking the low snowfall playbook to another level this year. Safe to say, we’re pleased with the execution and leadership shown by our team under the circumstances, especially the newer team members that haven’t been through a winter like this before. Our team is certainly proving their work during this tough time and the future remains bright.
Remember, there are new demand dynamics shifting in our favor in snow and ice control, driven largely by 3 factors: 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?
Thanks, Bob. As you saw in our pre-release in mid-April and full earnings release yesterday, our results this quarter came in below our initial expectations. The first quarter typically accounts for only 10% of attachments to annual net sales and is often slightly unprofitable as we level set our costs equally across the year. However, as Bob described, the significantly below average snowfall was the factor impacting results this quarter, which led to pre-release in mid-April and pull down the top end of our guidance range. The 2022 to 2023 snow season created a temporary situation impacting our expected results for 2023. However, we’ve navigated low snowfall years many times before the company’s long history and it doesn’t impact the medium to long-term outlook for the segment.
The Solutions segment, on the other hand, turned in a good quarter and continued to make progress improving profitability. With that said, let me walk through the numbers for first quarter 2023. On a consolidated basis, we delivered net sales of $82.5 million and gross profit of $11.3 million compared to net sales of $102.6 million and gross profit of $21.1 million during last year. Those numbers were lower based on lower volumes due to a lack of snow, which were only partially offset by volume and profitability improvement at Solutions.
SG&A expenses were $25.1 million, about $1 million higher when compared to $24 million during the first quarter of 2022. The increase was largely due to inflationary pressures with higher labor costs at the top of the list. Interest expense was $2.9 million for the quarter compared to $2.1 million incurred in the same period last year due to interest related to higher borrowings on the revolver.
We recorded GAAP net loss of $13.1 million or negative $0.58 per diluted share compared to a GAAP net loss of $3.9 million or negative $0.18 per diluted share in 2022. On an adjusted basis, we generated net loss of $12.5 million or negative $0.55 per diluted share compared to an adjusted net loss of $2.3 million or negative $0.11 per diluted share.
Similarly, we generated consolidated adjusted EBITDA of negative $7.4 million compared to positive $4.6 million in the corresponding period of the prior year. Again, the short story on profitability is that it was greatly impacted by lower sales volumes and attachments, partly offset by improvement in execution.
Let’s look a little closer into earnings information for the two segments. Work Truck Attachments segment generated net sales of $19.3 million compared to $45.8 million for the first quarter of 2022. Adjusted EBITDA was negative $10.2 million during the first quarter compared to adjusted EBITDA of $3 million recorded in the prior year. As Bob explained, results were impacted by low snowfall in our core markets, which leads to lower volume.
The snow season ends at approximately 14% below the 10-year average and our East Coast core market experienced the lowest snowfall season in decades. While the first quarter is the seasonal low point for attachment, this year’s snow was an anomaly, which will likely also impact our preseason orders as dealers respond to elevated inventory levels at the end of the snow season. Without diminishing the impact of the recent weather, the medium to long-term outlook for attachments remains very positive. We are implementing our low snowfall playbook to mitigate the impact wherever possible. This includes curtailing discretionary spending, limiting some hiring practices, including hiring freezes, setting a higher bar for spending approval and putting certain investments temporarily on hold.
Turning to Work Truck Solutions where net sales increased 11.4% to $63.3 million from $56.8 million in the same period last year based on higher volumes and improving price realization. Adjusted EBITDA almost doubled this quarter from $1.6 million in the first quarter last year to $2.9 million this quarter. Consequently, adjusted EBITDA margin increased from 2.8% in the first quarter of 2022 to 4.5% this quarter due to higher volume, better price realization and slightly favorable product mix over last year.
While our results were still impacted by inefficiencies from chassis and component supply shortages that hindered production, we’re pleased to see the improvements we’ve worked hard for start to show up in our financials. Demand remained positive in Solutions, and that we know the last quarter, we entered the year with record backlog. We still have a ways to go to double-digit EBITDA margin, but I’m pleased to say that demand remains positive, backlog is still at near-record levels and things are moving in the right direction at Solution.
Now I’ll turn to the balance sheet and liquidity figures. Net cash used in operating activities for the quarter was negative $56.9 million compared to negative $26 million in the first quarter of 2022. Free cash flow for first quarter of 2023 was negative $59.7 million compared to negative $28.2 million in the same quarter last year. The changes were driven by three things: one, less favorable operating results; two, higher inventories and attachments due to low reorder activity and solutions due to supply chain disruptions; and three, a decrease in trade payables.
Inventory increased to $184.6 million at the end of the quarter compared to $143.8 million at the end of the first quarter of 2022. At attachments, again due to the lack of reorder activity and in Solutions due to supply chain disruptions. Inventory typically grows in Q1 as attachment builds inventory in advance of preseason activity. All teams have a focus on inventory reductions that will play out in the coming quarters.
Accounts receivable at the end of the quarter were $48.2 million compared to $43.1 million at the end of the first quarter of 2022. Capital expenditures so far this year were $2.7 million, slightly higher than the $2.2 million that was incurred in the first 3 months of 2022, primarily due to inflation and timing of capital projects. We implemented our low snowfall playbook during the first quarter, and we expect total CapEx for the year to be on the lower end of our typical range of 2% to 3% of net sales. While we continue to make the necessary investments to fuel our long-term growth projects, we have curtailed or delayed some investments as part of the low snowfall playbook we always implement when the snow season is unfavorable.
After announcing another increase on our last call, we paid our quarterly cash dividend of $0.295 per share at the end of March. The effective tax rate was 21.1% for the quarter compared to 20.6% for the first quarter of 2022. At the end of the first quarter, we had a net debt leverage ratio of 3.4x higher than 2.6x at the end of 2022. Over the medium-term, we plan to maintain our goal of keeping the ratio between 1.5x and 3x, and we expect to be within that range by the end of the year.
Finally, I’ll walk through the guidance we updated in mid-April. We’ve lowered the top end of our guidance ranges to account for the lower first quarter volume and anticipated impact on preseason demand from the lack of snow in our core East Coast market. The Solutions segment, however, is showing improvement and remains on track to show continued margin growth in 2023 versus a year ago. As we look at the rest of the year, we are confident in our ability to manage through the temporary impact of low snowfall while focusing and delivering on our profit improvement initiatives that are within our control. I’d also like to reiterate that one snow season does not change our commitment to reach $3 of earnings per share by 2025.
Our 2023 financial outlook is as follows: 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.