DOUGLAS DYNAMICS, INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Segment Performances: Attachments were impacted by weather and elongated equipment replacement cycle; Solutions showed strong performance with record third-quarter results.
• Cost Savings Program: The 2024 cost savings program is expected to deliver $11 million to $12 million in sustainable annualized savings starting next year, on track for $9 million this year.
• Leadership Changes: Mark Van Genderen promoted to Chief Operating Officer, Linda Evans retiring, with Shannan Vlieger succeeding her.
• Sale Leaseback: Completed in September, raising $64.2 million, with $42 million used to pay down term loan debt. The incremental rent expense has an insignificant impact on EPS.

Segment Performance

• Attachments Segment: Net sales for the quarter were $60.2 million, slightly lower than expected due to lower reorder volumes in September and product mix. Adjusted EBITDA was $8.1 million. Preseason shipments in 2024 had a 65-35 split between second and third quarters vs. traditional 55-45. Adjusted EBITDA margins were close to 20% year-to-date. Impacted by softer preseason orders, elongated equipment replacement cycle, and product mix. The 2024 cost savings program helped preserve profitability.
• Solutions Segment: Net sales were $69.1 million, slightly higher than last year. Adjusted EBITDA increased 44% to $7.2 million, with margins of 10.4%, a 310 basis point improvement. Record third-quarter sales and earnings driven by price realization and improved efficiencies, especially at Henderson.

Guidance

• Lowered net sales guidance to $570 million to $600 million from previous $600 million to $640 million.
• Adjusted EBITDA guidance reduced to $70 million to $80 million from $70 million to $90 million.
• Adjusted EPS guidance revised to $1.20 per share to $1.60 per share from $1.20 to $1.70.
• Effective tax rate expected to be approximately 24% to 25%.

Risks

• Weather-related risks: Below-average snowfall impacting Attachments segment.
• Dependence on chassis and component supply.
• Economic conditions affecting customer spending decisions, especially in Dejana's market.

Question and Answer

Q: Update on off-highway Attachments business, such as wheel loader and tractor-based products.

A: Non-truck sales were relatively flat in the third quarter and down YTD similar to preseason. Non-truck sales represent less than 5% of total, but new products like pusher plows for skid-steers and front-end loaders are gaining attention.

Q: What are you doing for dealers to help until winter starts, like moving inventories or taking back inventories?

A: Most dealers have the equipment needed; moving inventory doesn't add much value. With average snowfall, inventory is expected to normalize by 2025.

Q: Expectation for reorder activity relative to average snowfall in December?

A: Dealers will work down elevated inventory first, so reorders expected to be softer than normal under average snowfall conditions.

Q: From a production standpoint, has cost savings affected ability to react to demand?

A: Improved production flexibility across facilities to react to demand, whether ramping up or adjusting production levels.

Q: Detail on Solutions volume, price vs volume, and backlog?

A: Price for Solutions in the quarter was low single digits. Volume down at Dejana but up at Henderson. Backlog is up from end of last year, with Dejana eating into some backlog and Henderson's backlog growing.

Q: Dejana demand environment, impact of election and interest rates?

A: Impact from interest rates and election uncertainty on local commercial customers, but optimistic for rebound in 2025 as conditions improve.

Q: Expected cash generation in Q4 and leverage exit?

A: Leverage at 2.6x at end of third quarter, expected to decline, with fourth quarter typically strong in free cash flow.

Q: Further cost reductions if snowfall below average next year?

A: 2024 cost savings program and sale leaseback already optimized the business; no immediate additional actions planned.