Q3 2022 Douglas Dynamics Inc Earnings Call
Good day and welcome to the Douglas dynamics third quarter 2022 earnings call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Ask any question you May Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to MS. Sarah Lauber Chief Financial Officer. Please go ahead ma'am.
Thank you welcome everyone and thank you for joining us on today's call before we begin I'd 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.
<unk> results to be materially different.
Those risks include.
Among other matters.
In yesterday's press release and in our filings with the FCC.
Joining me on the call today is Bob Mccormick, our President and Chief Executive Officer in a moment, Bob will provide an overview of our performance and then I'll review, our financial results and guidance. After that we'll open the call for your questions with that I'll hand, the call over to <unk>.
Thanks, Sara good morning, everyone.
Before we begin I would like to welcome her a call a wallet to our board of directors silver as a track record of strong leadership at Blue chip multinational companies over 30 years across a diverse set of industries.
Accordingly, he brings a focus on finance information technology, and cyber security and we look forward to working with them.
We also want to thank Jim Staley for his contributions to the company Jim will retire from the board at the end of his current term at the 2023 annual meeting.
Jim has been a trusted advisor to Douglas for many years and we are grateful for the great advice. He has given us on many occasions, we will miss his counsel and wisdom and wish him all the very best for the future.
Turning to the quarter.
We are justifiably proud of our results for the third quarter.
Demand for our products and services remains strong.
Macroeconomic supply headwinds continue and the predicted increase in chassis and component supply is yet to materialize in any significant way.
However, both segments delivered across the board improvements compared to the same quarter last year.
The strong demand outlook in both segments bodes well for the future.
And we are simultaneously focused on delivering on the factors within our control while constantly trying to see around corners to limit the impact of macroeconomic challenges rubber costs.
In the third quarter net sales increased by 30% based on increased volumes and pricing adjustments in both segments.
The revenue dropped through to the bottom line with net income up 89% and adjusted EBITDA, increasing 62% due to higher volumes and improved price realization somewhat offset by operational inefficiencies due to supply chain constraints.
We feel good about our position today and also raised and narrowed our 2022 guidance, which Sarah will talk through later.
Overall, our team is making the right moves internally to maximize our performance externally and to ensure we remain the leader in the markets we serve.
Okay, let's look at each segment.
Beginning with work truck attachments, where we had another strong quarter.
Net sales increased 33% and adjusted EBITDA increased 55% over the prior year.
Our team delivered a strong conclusion to the preseason order period based on increased volume price realization and inflationary pressures stabilize which was partly offset by increased labor costs.
As expected we again saw the historical 50 545 split in pre season shipments between second and third quarter. After a pandemic disruptions in the previous years.
Importantly, we are entering the snow season in great shape. Despite the potential for order pull ahead from the fourth quarter's pre season.
Your sentiment remains positive.
And retail inventories are in good shape.
When you look on a year to date basis. The attachments team is turning in another amazing year.
Partly driven by the shifting demand trends, we talked about at our event in may and partly driven by the strong execution from our team in difficult circumstances.
Now I'll talk to our work truck solutions segment.
Net sales increased approximately 25% compared to the corresponding period of last year.
Adjusted EBITDA improved compared to the third quarter of 2021, although our efficiency continues to be impacted by chassis and component supply plus inflationary pressures on material labor and freight costs.
We did see higher volumes compared to last year on more predictable, but still constrained supply of chassis.
We arent seeing any strong signals from Oems that we will see a dramatic improvement in chassis supply anytime soon.
Demand, however continues to be strong up with Henderson and the shadow.
We entered 2022 with record backlogs and demand has not subsided and customer order cancellations remains minimal.
Well, it's logical to assume a potential economic downturn will have some impact on our demand over the medium term. The short term outlook remains positive for three reasons.
First.
With the ongoing chassis constraint issues trucks down the road today our agent.
<unk> impacting their productivity.
And they already even more need of being replaced.
Additionally, our mirror our municipal customers are in particular in particular tend to be impacted by economic changes.
And finally, we have a massive backlog to work.
Because of this we are confident that customers will maintain their orders even if their predicted recession occurs.
We know we are always at the front of line for chassis and we will work through our backlog as quickly as possible.
But the limited supply of chassis zinc components remains a frustrating fact of life for everyone in the industry.
Our solutions team continues to battle, the headwinds and the hard work being done behind the scenes will pay off when we can move more velocity through our facilities in the years ahead.
Turning to our ongoing investments in the business, we continue to pursue long term growth initiatives, particularly our vertical integration strategy.
Today I want to provide an update on two exciting projects, we've been working on for some time.
First we launched our new redesigned re engineered push for cloud this summer.
As we talked about at our Investor event in May we are seeing shifting demand trends in snow and ice control with a common denominator that our end users need to move more snow faster and often with fewer people.
Unlike our truck mounted ploughs, a pusher flowers attached to heavy duty equipment like skid steers wheel loaders tractors or backwards.
Sure plows or large pieces of equipment ranging anywhere from eight to 16 feet in length and are often used in large parkey large shopping malls et cetera.
The vertical integration team has done a fantastic job of reengineering the product to improve its productivity efficiency and just your ability.
The new pusher plough is just one of a number of new product introductions scheduled to launch over the next two years, resulting in us increasing our or organic growth targets for the attachment segment earlier this year.
Second we also launched a brand new product for <unk>, a few months ago.
The Dino Pro dump body, which is also manufactured at our new facility here in Milwaukee.
This product has been well received in the market having already become the standard dump body, we use it this year.
B for its recent launch we used to source, 100% of these types of products from outside providers.
There are several benefits for us producing this product ourselves.
The design for outlet concept.
Our engineers worked with up Fitters to ensure the product was optimally designed from the ground up.
To be up fits more efficiently saving time materials, and ultimately leading to a better product.
With our own engineers on the case, we were able to maximize quality.
Durability.
And functionality for our customers.
Using our expertise developed in work truck attachments, we were able to develop our own hydraulic systems for the dump body lift and finally and increasingly importantly. This is another example of us getting more control over our supply chain.
These are good examples of the types of projects that will help drive long term organic growth and I applaud the efforts of the many teams across the entire company to successfully launch these products.
Of course, it goes without saying that these kinds of investments will be made in addition to funding our dividend, which we will continue to maintain and grow as we have since we went public.
We also are definitely open to acquisitions today and are in a strong financial position to take on opportunities.
Our blue chip targets are mostly private family held companies, making the timing of deals is difficult to judge.
We will continue to forge strong relationships with these companies and are ready to execute on deals should we find the right opportunity at the right valuation.
We are also in the process of improving our acquisition and our integration capabilities using lessons learned from previous deals.
So in summary overall.
Overall, we are executing well under challenging conditions, all with an eye to exiting in a stronger position to ensure success over the long term.
Demand trends remain positive and we are constantly adapting and improving our operations are.
Our company is built to manage through uncertainty given our heritage in a weather focused business.
And we will continue to use our continuous improvement mindset to get better every day and maintain our focus on the long game.
Implementing the strategies that will ensure we build upon our industry leading position.
The results we've delivered despite the uncertain external conditions are a testament to our collaborative problem solving culture.
While we expect these headwinds will persist into 2023.
We remain on track to deliver our long term financial targets and remain confident about our long term future potential.
With that I'd like to pass the call to Sarah to discuss our financial results in more detail.
Sure. Thanks, Bob.
On our release, we delivered strong year over year improvement across the board this quarter, despite the ongoing macroeconomic headwinds.
From a consolidated perspective third quarter net sales increased approximately 30% to $166 1 million.
And gross profit increased approximately 35%.
$41 3 million when compared to the third quarter of 2021 due to increased volume and pricing.
We recorded GAAP net income of $13 3 million or <unk> 56.
Diluted share and approximately 89% increase when compared to <unk> 7 million respectively.
Respectively.
Okay.
These improvements were based on higher volume.
A man.
Great.
Somewhat offset by operational inefficiencies.
Why change constraint.
We also control cost effectively with SG&A expenses, increasing by just one 6 million to $19 2 million during the third quarter based on higher labor costs and other discretionary spending returning to more normalized.
Similarly, we generated stronger consolidated adjusted EBITDA of $25 1 million compared to 15 5 million in the corresponding period of 2021.
Interest expense increased by $1 1 million Q3 dollars 3 million, primarily due to higher interest on increased borrowings compared to the prior year plus higher interest rates on the term loan.
The effective tax rate was 17, 9% and 14, 6% for the third quarter 2022.
21, respectively.
And tax rates for both quarters.
Historical averages.
Okay, great tax benefit of 800000 in the third quarter of 2021 related to favorable income taxes on equity and a discrete tax benefit.
In the third quarter of 2022 related to favorable tax rate change that.
Based on these factors, we now expect yeah.
The effective tax rate for the year to be approximately 24, 25% compared to our original guidance range of 25 to 26.
Now, let's turn to information for the two segments.
Within our work truck attachments segment, we generated net sales of $108 2 million during the quarter compared to net sales of 81 4 million last year.
33% increase was primarily attributable to increased volume with strong conversion to the pre.
Preseason order period, and higher pricing compared to last year.
Adjusted EBITDA was $22 9 million during the third quarter, 55% higher than the 14 8 million recorded in the prior year due to increased volume price realization and inflationary pressure stabilizing which was partly offset by increased labor costs.
I think as Bob mentioned earlier are evident in our results.
Another season of below average snowfall our preseason shipments were very strong and our attachments team worked extremely hard to deliver for our customers.
We continue to monitor the potential that some fourth quarter reorder sales were pulled into the pre season. This year, but overall, we feel positive going into winter.
That brings us to work truck solutions, where we reported net sales of $57 9 million, an approximate 25% increase on net.
$46 3 million in the third quarter of last year due to higher volumes on more predictable, so constricted supply of chassis and price realization.
Adjusted EBITDA improved to $2 2 million compared to 700000 in the same period last year.
To be impacted by constructive supply of chassis and components impacting sufficiency.
That's inflationary pressure on material labor and freight costs.
Overall demand trends remain positive backlog remains very strong.
Arent expecting significant cancellations as customers place their orders several quarters ago on our trucks are only getting all their it needs to be replaced even more urgently.
Turning to the balance sheet and liquidity figure.
Net cash used in operating activities for the first nine months of 2022 increased significantly in the quarter to $74 5 million from $19 5 million in the same period of 2012.
Anyone.
There are several factors involved including increased accounts receivable of 41 2 million due to higher sale as well as $33 7 million increase in inventory due to higher input costs and the pulling forward of purchases in anticipation of supply chain disruption.
It's important to note two things for accounts receivable one our DSO remains in line with historical collections and to the increase in accounts receivable is in line with our internal expectations based on projected sales this period and as a function of the increase driven.
By both price and volume.
In addition for inventory accuracy.
The increase in inventory is due to inflation on the other half relates to strategically bringing in inventory to ensure we can effectively satisfy customer demand.
And then the potential for supply chain.
Okay.
Okay.
I believe all of these working capital changes free cash flow for the first nine months of 2022 decreased to negative 83, 4 million compared to negative $26 8 million during the same period in 2021.
At the end of the third quarter, we had $18 3 million of total liquidity comprised of $2 8 million in cash and cash equivalents and <unk>.
5 million of borrowing availability under our revolving.
Which is primarily due to the seasonality of our business and is in line with our expectations.
We expect to reduce our revolving credit balance in line with historical levels you're at.
With that with our normal annual working capital cycle.
Capital expenditures for the first nine months of 2022 totaled $8 9 million, one 6 million higher than the $7 3 million in the same period in 2021, as we continue to invest in projects to drive long term growth, including our vertical integration effort.
At the end of the quarter, we had a net debt leverage ratio was approximately three times at the top end of our targeted range of one and a half to three times and higher than 2.4 times at the same point last year.
As usual, we paid our quarterly cash dividend at <unk> 29 per share.
Sure at the end of the quarter.
Unlike recent quarters, we did not repurchase shares this quarter and we have met the goal we set out earlier this year. When the program was launched which wants to offset shares awarded under equity based compensation plans. During the year, we focused our second quarter cash deployment on the necessary changes within working capital.
To support the business.
Finally, as you probably saw on our release, we are raising and narrowing our guidance range given our robust performance. So far this year plus the positive demand trends we see.
For the full year, we expect net sales to be between 600 million at $630 million.
Adjusted EBITDA to range from 80 million to $95 million and adjusted earnings per share to be in the range of $1 65 per share and $2 per share.
The outlook assumes sequential consistency or economic conditions can supply chain performance.
And as typical that our core markets.
Average snowfall level in the fourth quarter.
As we look further out we don't see any dramatic improvements to headwind starting in January and are waiting for more directional information from the Oems regarding chassis supply. However, we are pleased with the demand dynamics, we're seeing across the board and our team's ability to navigate the.
Just more consistently.
We will enter 2023 with unusually strong backlog in solutions and <unk>.
Broader demand trend and attachment that we discussed at our events and May bode well for the future.
Of course, we will talk in more detail on 2023, when we provide guidance in February .
Finally, I want to thank our team involved with finance and planning and all of the businesses. It was diligent work to test them scrapped. The number has allowed us to accurately predict and meet our guidance and everything.
With that we'd like to open up the call for question.
Peter.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys and switchgear. All your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Mike Slutzky with D. A Davidson. Please go ahead.
Good morning, and thank you for taking my question.
So I wanted to talk to you on your comments on some of the balance sheet items there.
You made it clear, yes, you have a very high consumable out there it's growing quarter over quarter.
It does typically grow quarter over quarter, but it's still much higher than normal.
And are you like in past years, you will generally collect almost all of the receivables by the end of.
Ended the fourth quarter here.
Yeah. Good morning, Mike Great question, Yes, it is up.
Two fold much higher sales and the pricing impact that we've had particularly at attachment and again in the fourth quarter is when we generate all of our free cash flow.
That is a significant quarter for us and collecting all of our pre season receivable mm theres nothing unusual.
From the balance sheet as far as you know what's in the yard or there's no reason to expect that the collection would follow a different pattern. It really is just.
More and more out there to collect in the corner.
Okay great.
And your comments on the on you Didnt make money 2023, but I had a quick one that might be able to.
This might be okay to answer for us.
In Q1 of 2022, the margins in a test into a particular were pretty rough I mean, it was a pretty rough quarter for you is it pretty it was probably the trough quarter for tractor supply as well can you.
At least tell US whether you think you are in good position for a more normalized margin range in the first quarter.
It's always good.
Among the lowest quarters of the year, but do you feel that you'll be back to prior to 2022.
Other other first quarters in previous years by 2023 here.
Yeah, I guess I guess I can speak to some anomalies that we had in the first quarter of this year, which impacted our margins pretty significantly.
In attachments, we had quite.
Quite a bit of a COVID-19 cases in the first quarter of this year that we.
Basically just we're not operating effectively with them, but yeah.
So that was a significant impact youre right on the chassis is that was that was also a really tough quarter on the on the chassis constraint. So as I look to how we think about entering next year.
You know not not necessarily providing any any guidance from a quarterly perspective, but.
Our teams have been navigating these headwinds.
And we're we're more consistent and.
You know the.
It shouldn't be at all locations and everything so I don't see anything magical from the standpoint of headwinds.
Dissipating.
Do you think we are navigating them in a much more consistent banner, which certainly helps us from a margin perspective.
Okay.
That's why I asked about the chassis.
Situation in the third quarter.
With chassis for so challenged.
How did you have so much more shipments over the prior year couldn't have been all pricing, but can you share with us how you were able to make that happen. Despite having an appreciable increase in chassis.
Well pricing is certainly part of it like in the.
The other thing that I would suggest building up what Sarah said.
We've been navigating these headwinds long enough now that that we are doing it more efficiently more effectively obviously, our <unk> continuous improvement initiatives are at are at play here.
I can speak to our Henderson business, the efficiency and productivity and Theyre up fit centers.
It's up dramatically versus a year ago. So you put all those factors together and that has an impact now have we seen some slight improvements in chassis. Yes, we have has it been consistent.
No it hasnt.
So there is there's a little bit of of.
Oh of chassis flow, that's helping as well, but I would say most of that is attributable to the team is getting more productive and more efficient in the chassis that we do move through the business model.
Okay.
Squeeze one last one in here.
If you have any planned.
Expansion of capacity at the agenda at any point in the near future to eventually work through that high backlog when chassis try to flow or is it not worth it to invest in any additional real estate there.
Okay.
Can't do that things can you do anything on a temporary basis at least to work through that that's a mountain of orders there.
Youre.
Thinking about it the right way as we've studied it.
We do believe in the tenders Jana locations that we have that when chassis flow improves no again, what it improves isn't going to be something where it's like somebody turned to foster that right.
Right, it's going to be a consistent level of moderate to slow improvement over time that we can ramp up we are highly confident within those facilities.
That we have enough capacity is enough personnel to be able to move that volume through and generate the incremental profits that we have in our financial models.
Shouldnt have shouldn't have to add any more fixed cost to that to that business model.
Gotcha perfect I appreciate the color guys I'll pass it along.
Mike.
The next question will come from Tim <unk> with Baird. Please go ahead.
Hey, everybody good morning.
Okay.
Maybe maybe just on on margins.
So that's probably the first quarter since maybe early last year, where we're you saw margin expansion in both of the segments.
I'm just curious if have you.
Look internally I mean do you do you think you've really turned a corner on on things like price cost and in some of the inefficiencies and we can continue to kind of see that margin expansion in the fourth quarter in both the segments and into 'twenty three.
Yes.
And Tim we certainly are some better price cost in the third quarter and that will continue to improve I've been saying for solutions. This year, but I expect that all year.
Single digits for EBITDA margin.
Fourth quarter is typically our seasonal that.
And so I I would still expect that to occur for 2022.
Okay, Okay, and can you give us a sense of what.
The pricing contribution was in both of the segments.
Okay.
Yeah.
I can I can give you some sense on the top line.
The top line when you look at to loosen.
The increase is pretty much a split trace being half of that and following them being the other half.
Attachment.
The increase in the top line.
20%.
It's due to price.
Sure.
Okay.
And then so what I guess, if you just kind of snap the line now I mean, how much of how much of that price kind of carries over into next year is it something like 5% to 10%.
It's continuing to come in so I, probably can't give you.
Precise answer on that I would probably estimate.
Probably close to 10%.
But there are still moving pieces that apart with surcharges.
Different contracts.
Okay. Okay, no no I know, there's moving parts, but not at the colors definitely appreciate it and then I guess on on the on the solutions business I mean can you give.
Give us a little bit of an idea of what may be book to Bill look like in the quarter.
So just trying to understand if backlog, even though you were able to ship more than this this quarter I mean did the backlog actually grow sequentially and maybe if you could just frame the size of the backlog for us I don't know if it dollar terms or something like that might be helpful.
Yeah for me.
Can you speak to backlog in total for southwest.
He did not grow sequentially.
But our backlog is still very high and.
Probably closer to 15% higher than it was when we exited 2021.
Okay.
Hey, guys.
And then just.
I guess on the supply chain I mean.
Has it has anything really changed Bob over the last 60 to 90 days I'm just trying I mean, I know supply chain is kind of a broad term, but anything kind of you know with class eight or four through six or any of the components to really kind of call out or is it still.
Kind of kind of pretty choppy.
Yes.
Would say that the class three through six is still fairly choppy.
And class seven and eight interestingly, we've talked about this on our last call. It is more stable and its more predictable, but the lead times are still long.
So we have yet to see the lead times shrink there and we're not seeing anything consistently on the chest three through six obviously, we're talking to the Oems everyday.
And theyre not rushing up to the microphone and sending any any clear signals as to what to expect in 2023 and I don't blame them. So as we look at 2023, we're not expecting.
To see a significant move back to some semblance of normal chassis supply.
But we hope to see positive improvement as we as we turned the corner.
Okay.
And then and then I guess just the last one.
What if what if the faucet did turn on.
I mean would there.
If all of a sudden truckloads of chassis showed up at your facilities I mean would you still be able to handle that.
Would there be inefficiencies, if there's too much.
Absolutely I'd be out there with share of turning around.
Okay.
[laughter] cool all right good well nice job guys. So I'll turn it over.
Uh huh.
Again, if you have a question. Please press Star then one.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Bob Mccormick for any closing remarks. Please go ahead Sir.
Thanks, and thank you for your time today I would like to leave you with these thoughts.
One demand remains positive and our teams are doing everything possible to adapt to the ongoing headwinds.
To.
The fundamentals of our business haven't changed and we are well positioned for long term success.
And three we remain laser focused on driving profitable growth and are committed to our long term financial goals of $3 of earnings per share by 2025.
Thank you and we look forward to seeing some of you at the Baird Conference next week in Chicago have a terrific team.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Sure.
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Okay.
Thanks.
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Yes.