Q3 2023 Douglas Dynamics Inc Earnings Call
Hello, and welcome to the Douglas dynamics third quarter 2023 earnings Conference call.
All participants will be in listen only mode.
Need assistance, please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
A question you May Press Star then one on your telephone keypad.
Jonathan The question queue. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Nathan L. L V. P 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.
I was just include among others matters that we have described in yesterday's press release.
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 Douglas dynamics Dot 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'll provide an overview of our performance followed by reviewing our financial results and guidance.
After that we'll open the call for questions.
With that I'll hand, the call over to Paul. Please go ahead.
Thanks, Nathan good morning, everyone.
At first glance. This quarter's results don't look so positive but.
But if you look beneath the surface the positives are there.
The best News is that our solutions segment improved its top and bottom line results significantly.
Solution sales increased double digits, and adjusted EBITDA margin improved to seven 3% a big jump compared to the same period last year.
He was able to increase the velocity of bulk friendship moving through our facilities and operate more effectively especially at our tissue out of operations.
As expected as this year's preseason shipment mix shifted more heavily towards the second quarter. The attachments segment had a difficult comparison to a relatively strong third quarter 2022.
However, when combined the second and third quarter attachments results were comparable to recent years.
With that said, let me provide an update on the external headwinds facing our businesses over the past few years.
The good news is we continue to see improvement in both components supply and labor availability.
When it comes to the supply of components, we are in good shape for the most part and attachments.
And while there still are issues with some products that are solutions teams using their ups. It's the situation is much improved.
The labor market situation is significantly better than it was in previous years.
We are seeing higher retention rates, plus more and higher quality candidates applying for open positions.
So having said that the most significant remaining headwinds for us are chassis supply and more recently whether.
Let's talk about those in more detail.
While we saw some improvement in chassis supply in the third quarter. We believe this was a temporary change and partly due to the Oems sensibly building inventory ahead of the UAW strike.
The tentative agreements that are now in place to end the strike are great news for the entire industry.
To date, we have not seen an impact of the strike on our operations, but the truck plants going out on strike in October will have an impact on our business at some point in the future.
At the moment, our best guess is that the first quarter of 2024.
Trying to predict when chassis supply will return to historical levels has been a real challenge.
The experts are now projecting that 2020 for chassis supply will be similar to 2023.
At this point.
We think it's prudent to assume no material improvement in chassis supply over the next few years.
This really underlines the importance of our internal growth initiatives to achieving our long term goals.
Let's move on to weather.
Which has significantly impacted our financials in 2023.
As you all know our business has always been influenced by weather.
Although the addition of the solutions business has lessened this influence.
<unk> is still the main profit driver at Douglas.
This past winter what is unique and we are still navigating its impact on our business. Both this year and next.
As you can see on slide four in the in their in the deck Nathan mentioned earlier weather patterns are changing.
For the last four years, we have seen a lot of Nino weather pattern.
Which is not ideal as it tends to produce less precipitation in key regions of the snowbelt.
Now we are shifting into an el Nino pattern, which is projected to be in place for the next three years.
And the weather experts we follow confirm these are typical trends that I haven't seen many times before.
Now, while we know better than most that nothing is guaranteed with winter weather and the El Nino pattern typically brings more precipitation overall during the winter, which increases the odds of returning to average snowfall work better at some point during the El Nino cycle.
We're proud of the fortitude being demonstrated consistently by our teams and continue to implement cost control initiatives as part of our low snowfall playbook.
Plus continuous improvement projects and making the right moves internally to limit the impact of the snowfall headwinds wherever we can.
Okay, let's look at each segment.
Getting with work truck attachments.
Sales were down compared to last year, due largely to lower volumes, which impacted profitability.
As expected pre season order demand for our products was soft following a snow season that was one of the worst on record in our core markets along the eastern Seaboard from Baltimore to Boston.
For the 2023 pre season, the mix was very unusual coming in at approximately $65 to 35% compared to 2022, where their quarterly mix was a more typical 55% to 45.
Okay.
However, when you look at the second and third quarters combined the story is different.
Adjusted EBITDA in 2023 was only slightly lower than the pre season last year and considerably higher than 2021.
And even though our dealers corrected their retail inventories through softer preseason orders, we suspected that additional inventory corrections may take place in Q3 and even into Q4.
Our recent dealer checks indicate overall inventory levels still remain above the five year average and are highest in the east coast cities, which saw very little snow last winter.
This is a direct result of a quiet start to the retail selling season late in the third quarter.
Remember, our snow plows replacement cycle gets lengthened when the blade doesn't hit the pavement and low snowfall environments, thus impacting retail sales at the beginning of the next season.
So not only did we see reorders softness late in Q3.
But expect to see additional softness in Q4 as well.
I am pleased to say that both dealer sentiment and financial health remains positive.
Like us our dealers have dealt with low snowfall before and one of the great things about this business is that each snow season stands on itself.
We are ready to execute and look forward to the start of the $2023 20 for winter season.
Our teams have been successfully controlling and delayed spending and managing costs whilst.
While still making the really necessary investments to fuel long term growth.
Based on our leading market position and the changing demand dynamics, we've talked about previously the medium to long term outlook for the attachments business remains very strong.
Turning to our work truck solutions segment.
Third quarter sales increased 18% and we were pleased with the margin improvements.
Due to improved pricing.
<unk> chassis supply and operating efficiencies.
The same applies on a year to date basis with net sales increasing 15%.
And adjusted EBITDA of approximately doubling.
Compared to the previous year.
We did see higher volumes this quarter and more predictable supply of chassis and we were able to drive greater efficiency, particularly at our <unk> operations.
As we previously said improvements in profitability are expected for the full year.
We have now entered the solutions business is seasonally strong fourth quarter.
And while we are delivering on those short term profit improvements there are still several positive trends that bode well for the long term.
First demand remains strong as trucks get worn out.
Impacting their productivity and are even in more need of being replaced.
We still have a massive backlog to work through and cancellations are minimal.
And finally, we continue to drive baseline profit improvements are key component of reaching our long term financial targets.
This quarter shows that our solutions teams continue to battle through headwinds and our hard work being done behind the scenes does pay off as we drive more velocity through our facilities.
In summary.
We are executing well on the factors we control under challenging conditions as you can see in our supplemental slides overall, our internal growth drivers are on track to contribute significantly to EBITDA growth in 2023.
These drivers include pricing actions, new product introductions and baseline profit improvement projects.
In aggregate the internal growth drivers contributed to almost 50% more than we initially planned.
We are incredibly proud of the entire team that worked hard to make this happen.
Now, let's go back to the two most significant external drivers snowfall and chassis.
Snowfall is clearly impacting our 2023 results essentially negating the positive impact of our internal growth drivers.
It's also the reason we are lowering our guidance this year.
Gift chassis supply remains stuck in neutral it may take longer than we planned to get towards $3 EPS target.
Sharon will speak to this later in the call.
I would like to finish with these three thoughts.
<unk>.
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 are improving their long term profit profile.
Bottom line, ladies and gentlemen are $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.
Thanks, Bob.
Overall, our results this quarter were lower than the third quarter of 2022, driven by the impact of last winters snowfall in the attachments segment.
Importantly, the story with positive evolution, which delivered top and bottom line growth with margin improvements compared to last year.
On a consolidated basis, our third quarter net sales were $144 1 million compared to $166 1 million in the same period last year, driven by the lower volumes and attachment.
Gross profit margin declined slightly to 22, 3% compared to 24, 8% in the third quarter of 2022 as the margin impact of lower volumes in attachment was partially offset by improved operating results at <unk>.
SG&A expenses decreased six 2% and 18 million during the third quarter due to a decrease in incentive and stock based compensation.
And the impact of curtailing spending as part of our low snowfall playbook.
Interest expense increased to $4 6 million, primarily due to higher interest on revolver borrowing.
And the effective tax rate was 16, 4% for the third quarter of 2023 compared to 17, 9% in the same period last year.
Both rates are lower than typical with the 2023 right.
Impacted by a tax benefit related to the purchase of investment tax credit.
And the 2022 rate being impacted by a discrete tax benefit related to state income tax rate changes.
The impact of lower volumes that attachment.
So the bottom line with net income of $5 8 million, which equates to 24.
Diluted earnings per share both coming in lower than the same period last year.
Adjusted EBITDA also decreased $7 8 million to $17 3 million when compared to the third quarter of last year.
The decreases were driven by lower attachments volume, partially offset by pricing realization and baseline profit improvement in both segments.
Now, let's turn to the earnings information for the two segments for the third quarter of 2023 attachments net sales were $75 9 million lower than the $108 2 million in the prior year period.
Adjusted EBITDA also decreased to $12 3 million due to the lower volumes and unfavorable product mix, which impacted profitability.
Increases in shipments this year the mix was quite unusual at 65% to 35 compared to 55 to <unk> 45 in 2022.
While we knew the second quarter with the larger and more profitable than the third quarter. The swing was greater than we anticipated as a result of elevated dealer inventory and lower than expected reorder activity.
The shift to 65, 35 was driven by lower dealer demand not our results of operation.
The result of the dealer inventory survey matches, a lack of reorder activity, we saw especially when combined with our start to the retail season late in the third quarter.
However, it's important to remember that our second quarter was excellent and when you look at the combined second and third quarters in 2023, adjusted EBITDA was only slightly lower than the pre season last year and higher than the pre season period in 2021.
Our adjusted EBITDA margin in the combined period were also strong at 25, 2%, which is in line with our mid to high Twenty's margins at all.
Turning to solution solutions had a great quarter compared to last year with net sales, increasing approximately 18% to $68 2 million based on price realization and higher volume and improved chassis supply.
Adjusted EBITDA more than doubled to 5 million and adjusted EBITDA margin improved considerably by 350 basis points to seven 3%.
Again, this was due to improved pricing and volume plus operating improvements from labor efficiencies.
With the improved number of chassis available this quarter, our teams were able to drive greater efficiency, which drove improved in profitability.
Overall demand also remains positive and we still have a very strong backlog to work through.
Also it's worth noting that on a year to date basis. Our solutions segment has delivered margin improvement each quarter compared to last year.
At this point, we are on track to deliver mid single digit EBITDA margins for the year.
All in all great progress at <unk>.
Now, let's look at our balance sheet and liquidity.
Operator: Hello and welcome to the Douglas Dynamics third quarter 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance? Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star then one on your telephone keypad to withdraw from the question. Please press star then two.
Net cash used in operating activities for the first nine months of the year decreased $10 3 million to negative $64 1 million from negative $74 5 million last year.
The combination of elevated working capital and lower sales volume resulted in a lower seasonal increase of receivables and inventory.
On a year to date basis free cash flow increased to negative $71 9 million from negative $83 4 million for the first nine months of 2022.
Operator: Please note this event is being recorded.
Nathan Elwell: I would not like to turn the conference over to Nathan Elwell, VP of Investor Relations. Please go ahead. Thank you.
The increase of $11 5 million was largely due to the lower cash used in operating activities.
Nathan Elwell: 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 that filings with the SEC.
At the end of the third quarter, we maintained $59 6 million total liquidity comprised of $11 1 million in cash and $48 $5 million of capacity on the revolver compared to $122 million in total liquidity at the end of 2022.
The change versus the end of 'twenty two is primarily due to the seasonality of our business as well as an increase of $50 million in borrowing capacity on our revolver. Following the amendment implemented at the start of this year.
Nathan Elwell: 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, Douglas Dynamics.com and in our SEC violence.
Inventories were $147 3 million at the end of the quarter higher than the $133 8 million in the third quarter of 2002, but considerably lower than the $184 6 million at the end of the first quarter of 2023.
Robert McCormick: Joining me on the call today is Bob McCormick, President and CEO and Sarah Lauber, EVP and CFR. 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 out to Bob. Please go ahead. Thanks, Nathan. Good morning, everyone. At first glance, this quarter's results don't look so positive. But if you look beneath the surface, the positives are there.
Compared to last year, we exited the third quarter with higher levels of snow and ice.
Inventory due to the impact of snowfall.
Accounts receivable at the end of the quarter were $165 3 million almost exactly the same as at the same point in 2022.
Robert McCormick: The best news is that our solution segment improved this top and bottom line results significantly. Solution sales increased double digits, and adjusted even to margin improved to 7.3%. A big jump compared to the same period last year. He was able to increase the velocity of up fence moving through our facilities and operate more effectively, especially at our Dejana operations. As expected, as this year's preseason shipment mixed shifted more heavily towards the second quarter. The attachment segment had a difficult comparison to a relatively strong third quarter 2022. However, when combined, the second and third quarter attachments results were comparable to recent years.
Year to date capital expenditures were $7 7 million lower than the $8 9 million in the same period last year and in line with our expectations. After we deferred some investments as part of the low snowfall playbook.
As you know we implemented our low snowfall playbook earlier this year and expect total capex for the year to be on the lower end of our typical range of 6% to 3% of net sale.
At the end of the quarter, we had a net debt leverage ratio of approximately three two times temporarily above the top end of our targeted range of one five to three times.
Robert McCormick: With that said, let me provide an update on the external headwinds facing our businesses over the past few years. The good news is we continue to see improvement in both component supply and labor availability. When it comes to the supply components, we're in good shape for the most part in attachments. And while there still are issues with some products that our solutions teams use in their up fence, the situation is much improved. The labor market situation is significantly better than it was in previous years. We are seeing higher retention rates, plus more and higher quality candidates applying for open position.
We paid our quarterly cash dividend of $29 five a share at the end of the quarter and a dividend remains our top priority as it has been for the past 13 years.
Okay.
Turning to our outlook.
As you probably saw on our press release, we decided to reduce our guidance ranges for the year.
We reduced our net sales outlook by $10 million and now expect it to be between $610 million and $640 million.
Adjusted EBITDA is now predicted to range from $77 million to $92 million $8 million lower than the previous range.
Robert McCormick: So having said that, the most significant remaining headwinds for us are chassis supply and more recently weather. Let's talk about those in more detail. While we saw some improvement in chassis supply in the third quarter, we believe this was a temporary change, and partly due to the OEM's sensibly-building inventory ahead of the UAW strike. The tentative agreements that are now in place to end the strike are great news for the entire industry.
That means our adjusted earnings per share are now expected to be in the range of $1 37 per share from $1.70 per share 25 times lower than the previous range.
Finally, our effective tax rate is now expected to be approximately 24%.
It's important to remember that our outlook assumes relatively stable economic conditions stable to slightly improving supply of chassis and components and that our core markets will experience average snowfall levels in the fourth.
Robert McCormick: Today, we have not seen an impact of the strike on our operations, but the truck plans going out on strike in October will have an impact on our business at some point in the future. At the moment, our best guess is in the first quarter of 2024. Trying to predict when chassis supply will return to historical levels has been a real challenge. The experts are now projecting that 2024 chassis supply will be similar to 2023. At this point, we think it's prudent to assume no material improvement in chassis supply over the next few years.
Carter.
Let me walk through our reasoning there is one factor for the changes we've made for our guidance this year.
The impact of low snowfall drove the change we made for our guidance in April and the change we're making to the guidance today as we are now predicting further impact from the historically low snowfall on the east coast. This past winter.
Where snowfall totals were down up to 90% and some of our core markets.
The information we received in October from our dealer inventory checks indicated that despite our dealers, placing lower pre season orders their inventories still remain above the five year average, which we noted could happen on our last earnings call.
Robert McCormick: This really underlines the importance of our internal growth initiatives to achieving our long-term goals.
Robert McCormick: Let's move on to weather, which has significantly impacted our financials in 2023. As you all know, our business has always been influenced by weather. Although the addition of the solutions business has lessened this influence, attachments is still the main profit driver at Douglas. This past winter was unique, and we are still navigating its impact on our business both this year and next. As you can see on slide four in the deck Nathan mentioned earlier, weather patterns are changing.
Dealers are telling us that initial retail activity at the start of the season has been light, especially on the east coast.
Therefore, we believe there will be a further impact on the fourth quarter plowed retail season.
Always the extent of that impact will largely depend on the snowfall we experienced across our core markets east of the Mississippi through the end of the year.
Now that were into the last quarter of 2023 logical next question is can we still reach our goal of $3 of adjusted earnings per share in 2025.
Robert McCormick: For the last four years, we have seen a lightning of weather pattern, which is not ideal as it tends to produce less precipitation in key regions of the snow belt. Now, we are shifting into an L-Nineo pattern, which is projected to be in place for the next three years. And the weather experts we follow confirm these are typical trends that have been seen many times before. Now, while we know better than most that nothing is guaranteed with winter weather, an L-Nineo pattern typically brings more precipitation overall during the winter, which increases the odds of returning to average snowfall or better at some point during the L-Nineo cycle.
While it is still possible for us to get there when we look at our latest internal projections, we recognize that the ongoing headwinds continue to hinder our progress and our attorney but was an achievable goal into a stretch goal.
In short, while we remain confident we will get to $3 per share. The timing is now in question.
There are three key factors to discuss embedded in our longer term $3 target.
First are the baseline profit improvement and growth projects that our teams are focused on to get to the margin profile, we have targeted and attachments and solutions.
Robert McCormick: We are proud of the fortitude being demonstrated consistently by our teams and continue to implement cost control initiatives as part of the low snowfall playbook, plus continuous improvement projects making the right moves internally to limit the impact of the snowfall headwinds wherever we can.
In 2023, we have been outperforming for our internal plan as we have been laser focused on the things we can control.
We will not slow down in these areas.
Robert McCormick: Okay, let's look at each segment. Getting with work truck attachments. Sales were down compared the last year due largely to lower volumes, which impacted profitability. As expected, pre-season order demand for our products was soft. Following a snow season that was one of the worst down record in our core markets, along the eastern seabork from Baltimore to Washington. To the 2023 preseason, the mix was very unusual, coming in at approximately 65 to 35 compared the 2022, where the quarterly mix was a more typical 55 to 45.
Second is the assumption around chassis.
Our initial long term goals assumes consistent chassis supply, which we just haven't seen in recent years.
Robert McCormick: However, when you look at the second and third quarters combined, the story is different. Adjusted EBITDA in 2023 was only slightly lower than the preseason last year and considerably higher than 2021. And even though our dealers corrected their retail inventories through softer preseason orders, we suspected that additional inventory corrections may take placing Q3 and even into Q4. Our recent dealer checks indicate overall inventory levels still remain above the five-year average and our highest in the East Coast cities, which saw very little snow last winter.
Normally more importantly industry Prognosticators are now predicting that chassis supply in 2024.
Not expected to grow back to pre pandemic levels.
Rather expect supply to be flat to 2023.
Yeah.
And although we applaud the tentative agreement to end the strike, it's too early to tell what the OEM shutdown impacts will have on our supply in 2024.
We expect to know more in February when we lay out our 2020 for guidance.
Third is the assumption around average snowfall, which was significantly lower in this last season John.
Its return to average snow 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 assumption that chassis supply is expected to be flat in 2023.
And an assumed return to average snowfall.
Robert McCormick: This is a direct result of a quiet start to the retail selling season late in the third quarter. Remember, a snow plows replacement cycle gets lengthened when the blame doesn't hit the pavement in low snowfall environments, thus impacting retail sales at the beginning of the next season. So not only did we see reorder softness late in Q3, but expect to see additional softness in Q4 as well. I am pleased to say that both dealer sentiment and financial health remain positive.
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.
It is only to put context around how we're currently thinking about 2024, we.
We will provide our actual 2024 guidance in February.
Finally, I want to talk to the positive.
From an operational standpoint across the board.
Executed effectively.
Robert McCormick: Like us, our dealers have dealt with low snowfall before. And one of the great things about this business is that each snow season stands on its own. We are ready to execute and look forward to the start of the 2023-24 winter season. Our teams have been successfully controlling and delaying spending and managing costs while still making the really necessary investments to fuel long-term growth. Based on our leading market position and the changing demand dynamics we've talked about previously, the medium to long-term outlook for the attachment's business remains very strong.
Our solutions segment is showing strong improvements 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 solution 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.
Now what we have to deal with the internal growth drivers to accomplish our goal.
With that we'd like to open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys.
Robert McCormick: Turning to our work truck solution segment. With third quarter sales increased 18% and we were pleased with the margin improvements. It's reduced to improve pricing, volumes, chassis supply, and operating efficiencies. The same applies on a year-to-date basis, with net sales increasing 15% and adjusted even to approximately doubling compared to the previous year. We did see higher volumes this quarter and more predictable supply and chassis, and we were able to drive greater efficiency, particularly at our Dejan operations.
So it's all your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Mike Smith, Keith with D. A Davidson. Please go ahead.
Good morning, and thanks for taking my question.
Sorry, one of your last comments there.
Yes.
Sure.
So what are your last comment there was about <unk>.
Robert McCormick: As we previously said, improvements in profitability are expected for the full year, and we have now entered the solutions businesses seasonally strong fourth quarter. And while we're delivering on those short-term profit improvements, there are still several positive trends that both well for the long-term. First, demand remains strong, as trucks get worn out, negatively impacting their productivity, and are even in more need of being replaced, in this list. We still have a massive backlog to work through and cancellations are minimal.
Paul was back to average again with 2024 guidance would be quite a bit about 2023 guidance I'm curious.
2020, let's say the snowfall this year was again really really low.
And you have a similar snowfall this winter the last winter.
When you if you were to give guidance again in February.
Given some of the operational changes that you've made.
Do you think you'd be at a higher base in 2024, just on some of the internal efforts that you've made some growth areas like.
Robert McCormick: And finally, we continue to drive baseline profit improvements, a key component of reaching our long-term financial targets. This quarter show that our solutions teams continue to battle through headwinds and our hard work being done behind the scenes does pay off as we drive more velocity through our facilities. In summary, we are executing well on the factors we control under challenging conditions. As you can see in our supplemental slides, overall, our internal growth drivers are on track to contribute significantly to habitat growth in 2023.
Your non truck mounted snow Panther.
Right.
Yeah, Great question Mike.
I don't want to lose sight of the internal growth drivers that we've been working so hard on and 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 those projects are embedded in the business.
So it's very logical to think that the base is going to be higher.
Robert McCormick: These drivers include pricing actions, new product introductions, and baseline profit improvement projects. On aggregate, the internal growth drivers contributed almost 50 percent more than we initially planned. We are incredibly proud of the entire team that worked hard to make this happen.
I would say the hesitation at this point because we're not in February of 2024 that we have a lot of moving variables and what the strike just occurring.
That is why I am saying at or better and we just need to navigate through some of these unknowns between now and now in February.
Robert McCormick: Now, let's go back to the two most significant external drivers. Snowfall and chassis. Snowfall is clearly impacting our 2023 results. Essentially negating the positive impact of our internal growth drivers. It's also the reason we are lowering our guidance this year. If chassis supply remains stuck in neutral, it may take longer than we planned to get to our $3 EPS target. Sarah will speak to this later in the call.
Okay.
And then.
Also wanted to ask about the <unk>.
Yes dividend.
You did mention in your comments there in passing but I'm curious, what's your confidence level, what's what's the board's thought and your thoughts about the dividend for next year you have the confidence in let's say a base level or what do you think will be average snowfall.
I'm confident that you can keep the cash flow going to keep that keep that dividend.
At or above where it is today.
Absolutely Mike there's no shift in the philosophy of the dividend.
Robert McCormick: I would like to finish with these three thoughts. One, well, 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 remain 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.
We have had a sustainable dividend and we've increased it 15 times.
The expectation would be that we continue to.
Prioritize the dividend and keep it sustainable and increase it as we can so that that has not changed let me let me Echo what what what's your just said it is the number one cash deployment priority for Douglas and that's not changing.
Okay great.
Great.
And then lastly.
Great privacy.
Could you comment on Henderson, and how business is progressing there for the season.
Sarah Lauber: With that, I'd like to pass the call to Sarah to walk through the financials. Thanks, Bob. Overall, our results this quarter were lower than the third quarter of 2022, driven by the impact of last winter's low snowfall in the attachment segment.
Sure absolutely.
So Henderson has had a little bit different dynamic as you know Mike on the chassis side, So class seven and eight.
Maybe a little bit more predictable still very long lead time, and we are experiencing a little bit of.
Sarah Lauber: Importantly, the story was positive in solution, which delivered top and bottom line growth with margin improvement compared to last year. On a consolidated basis, our third quarter net sales were 144.1 million compared to 166.1 million in the same period last year, driven by the lower volumes in attachment. Growth profit margins declined slightly to 22.3%, compared to 24.8% in the third quarter of 2022. As the margin impact of lower volumes in attachment was partially offset by improved operating results at $1 EPS.
What I would call late changes on chassis, but the team has been NAMIC navigating through that very well, we improved in the third quarter expect to improve further in the fourth quarter also a big piece of the solutions improvement expected for the year comes out of Henderson.
And from a price realization perspective.
As you know we have a very large backlog on Henderson.
And so as we were going through the inflation that we experienced we.
We were implementing pricing, but 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.
Sarah Lauber: As GNA expenses decreased 6.2% to 18 million during the third quarter due to a decrease in incentive and stock based compensation and the impact of curtailing spending as part of our low snowfall playbooks. Interest expense increased to 4.6 million, primarily due to higher interest on revolver borrowing and the effective tax rate was 16.4% for the third quarter of 2023 compared to 17.9% in the same period last year. Both rates are lower than typical, with the 2020-23 rate being impacted by a tax benefit related to the purchase of investment tax credits and the 2022 rate being impacted by a discrete tax benefit related to state income tax rate changes.
Okay I appreciate the discussion thank you.
Thanks, Mike.
The next question comes from Tim Weiss with Baird. Please go ahead.
Hey, everybody good morning.
Good morning, Tim.
Maybe just on.
On Q4 in attachment.
I guess, what what are you kind of embedding.
In for maybe growth in EBITDA in the fourth quarter in that business.
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.
Sarah Lauber: The impact of lower volumes of attachments flowed through to the bottom line was net income of 5.8 million, which equates to 24 cents of the looted earnings per share, both coming in lower than the same period last year. Adjusted EBITDA also decreased 7.8 million to 17.3 million when compared to the third quarter of last year. These decreases were driven by lower attachments volume, partially offset by pricing realization and baseline profit improvements in both segments.
Sure Yeah. It is a little bit different this year, we're talking about the slower retail at the end of Q3.
Which also translates into I guess at the beginning of Q4, so when I think about our fourth quarter.
Forecast, we're absolutely assuming average snowfall it's very important.
We do see that snowfall.
In.
Call. It November December when it's more typical just.
No and I say that as I look out the window and it's snowing like crazy here in Milwaukee.
Sarah Lauber: Now let's turn to the earnings information for the two segments. For the third quarter of 2023, attachments net sales were 75.9 million, lower than the 108.2 million in the prior year period. Adjusted EBITDA also decreased to 12.3 million due to the lower volumes and unfavorable products mix, which impacted profitability.
So from that standpoint, we are assuming average snowfall.
Although we have accounted for the fact that that the retail season started out slower.
So it's also maybe a little bit more compounded.
Using I guess, Ken when you think about fourth quarter of last year was a very low comparison, because we had very low snowfall them. So when it comes to EBITDA growth, we're still expecting to grow in the fourth quarter and we as we compare it to that low snowfall.
Sarah Lauber: In pre-season shipments this year, the mix was quite unusual at 65 to 35 compared to 55 to 45 in 2022. While we knew the second quarter would be larger and more profitable than the third quarter, the swing was greater than we anticipated, as a result of elevated dealer inventory and lower than expected reorder activity. The shift to 65 to 35 was driven by lower dealer demand, not a result of operation. The result of the dealer inventory survey matches with the lack of reorder activity we saw, especially when combined with the quarter start to the retail season late in the third quarter.
Com.
But we have accounted for what we what we've talked about what's the guidance change.
Okay. Okay. So just having average snowfall.
And the guide relative to low snowfall last year, you did get some growth out of that as it should be the base expectation yeah correct. Okay. Okay got you.
And then I.
Yes on the <unk>.
The solutions business.
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 of a shut for and just kind of how you would think about the puts and takes to get to that in 'twenty four.
Sarah Lauber: However, it's important to remember that our second quarter was excellent and when you look at the combined second and third quarters in 2023, adjusted EBITDA was only slightly lower than the pre-season last year and higher than the pre-season period in 2021. Our adjusted EBITDA margins in the combined period were also strong at 25.2%, which is in line with our mid to high 20s margin goals.
Yeah, I would say.
The there's one facility that is 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 impactful to <unk>.
Sarah Lauber: Turning to solution, solutions had a great quarter compared to last year with net sales increasing approximately 18% to 68.2 million, based on price realization, higher volume and improved chassis supply. Ajust an EBITDA more than double to $5 million, and adjusted EBITDA margin improved considerably by 350 basis points to 7.3%. Again, this was due to improved pricing and volume, plus operating improvements from labor efficiencies. With the improved number of chassis available this quarter, our teams were able to drive greater efficiency, which drove improved in profitability.
Which is why we're saying we do expect something it's probably going to be closer check early 'twenty.
24, then in late 'twenty three but it is.
It still remains to be seen I guess that would I would also add I made I made a comment.
That we saw.
Some increased chassis supply coming our way late in the third quarter in the second quarter and early in the third quarter.
Which is just what the Oems ought to do with 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.
Sarah Lauber: Overall, demand also remains positive, and we still have a very strong backlog to work through. Also, it's worth noting that on a year-to-day basis, the solution segment has delivered margin improvement each quarter compared to last year. At this point, we are on track to deliver mid-single-digit EBITDA margins for the year. All in all, a great progress at solutions.
The question becomes when they when they turn the spigot back on to start ramping back up how long is that process going to be and and.
How long will are a little <unk>.
Temporary.
Positive movement in terms of chassis supply last us before it runs into runs into issues to them and I think we are.
We're feeling pretty good about the first part of the fourth quarter.
Sarah Lauber: Now let's look at our balance sheet and liquidity. Net cash used in operating activities for the first nine months of the year increased $10.3 million to negative $64.1 million from negative $74.5 million last year. The combination of elevated working capital and lower sales volumes resulted in a lower seasonal increase of receivables and inventory. On a year-to-date basis, free cash flow increased to negative $71.9 million from negative $83.4 million for the first nine months of 2022. The increase of $11.5 million was largely due to the lower cash used in operating activities.
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 they've got to get there.
Their business model.
Back in place.
When all of the contracts are signed and then they'll start communicating with us as to what the future looks like but we should expect that impact in Q1, we just don't know how to quantify that at this point.
Okay, Okay I understood.
And then I guess just last question I have just page three of the.
Presentation that that you sent out.
Could you just maybe I know, there's no numbers here, but could you could you actually add some numbers to what maybe some of these internal initiatives are all kind of contributing just just to give people a feel like what what the.
Sarah Lauber: At the end of the third quarter, we maintained $59.6 million of total liquidity comprised of $11.1 million in cash and $48.5 million of capacity on the revolver compared to $120.2 million in total liquidity at the end of 2022. The change versus the end of 2022 is primarily due to the seasonality of our business as well as an increase of $50 million in borrowing capacity on our revolver following the amendment implemented at the start of this year.
Kind of the baseline profit improvement or the some of the things that you're doing on a core basis are all kind of generating.
This year.
Yeah, I'm chuckling, a little bit because there's there's no numbers there, we usually don't get that.
Specific on these things, but I guess I'll.
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 better better.
Sarah Lauber: In Victoria, we're $147.3 million at the end of the quarter, higher than the $133.8 million in the third quarter of 2022, but considerably lower than the $184.6 million at the end of the first quarter of 2023. Compared to last year, we exited the third quarter with higher levels of snow and ice inventory due to the impact of low snowfall. Accounts receivable at the end of the quarter were $165.3 million, almost exactly the same as at the same point in 2022.
Shown pictorially on that page in addition to the price realization that we've been talking about which which really is across our entire business.
It is also in that when you think about the snowfall piece of 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 contact us.
The the impact that that has had negatively which has been offsetting internal drivers. The good news is snowfalls temporary.
Sarah Lauber: Here today, capital expenditures were $7.7 million, lower than the $8.9 million in the same period last year, and in line with our expectations after we deferred some investments as part of the low snowfall playbook. As you know, we implemented our low snowfall playbook earlier this year and expect total capital effects for the year to be on the lower end of our typical range of soon-to-three percent of net sales. At the end of the quarter, get a net debt leverage ratio of approximately 3.2 times, temporarily above the top end of our targeted range of 1.5 to 3 times.
The internal growth drivers that we've that we've completed are going to be part of the business going forward.
Okay. Okay no I appreciate the help.
We'll talk to you soon thanks.
Sure.
The next question comes from Greg Burns with Sidoti and company. Please go ahead.
Good morning.
Just in terms of the the outlook for the solutions segment I know the the.
The impact of the strike is kind of a known but if youre expecting chassis supply to be.
Relatively similar to this year, what does that imply for your your growth outlook for that business.
Sarah Lauber: We paid our quarterly cash dividend of $29.5 per share at the end of the quarter, and turning to our outlook.
Next year will you be able to still drive growth there, even if chassis supply doesn't improve meaningfully.
Well you know there's there's 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.
Sarah Lauber: As you probably saw in our press release, we decided to reduce our items ranges for the year. We reduced the net sales outlook by $10 million, and now expected to be between $610 million and $640 million. A job said EBITDA is now predicted to range from $77 million to $92 million. $8 million lower than the previous range. That means our adjusted range per share are now expected to be in the range of $1.30 per share to $1.70 per share, $25.10 lower than the previous range. Finally, our effective tax rate has now expected to be approximately 24%.
<unk> 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 'twenty four and 'twenty five.
So we ought to continue to see EBIT.
EBIT and profit growth on the solution side, driven by things under our control.
The question is.
Whats the.
What impact will will chassis supply have on that so we just talked about weather.
The gating a fair amount of the of the of the internal growth drivers. The question will be how does chassis supply impact solutions.
Sarah Lauber: It's important to remember that our outlook assumes relatively stable economic conditions, stable to slightly improving supply of chance in components, and that our core markets will experience average snowfall levels in the fourth quarter. Let me walk through our reasoning. There is one factor for the changes we've made for our guidance this year. Snowball. The impact of low snow drove the change we made for our guidance in April, and the change we're making to the guidance today.
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 and 24 in total it looks like they did in 'twenty three youre going to continue to see sequential.
Solutions profit improvement Alright, Sir I mean, I think that's I think that's a fair way to look at it.
What we what we're what we're trying to do here.
I'll go back to a comment I made right.
Sarah Lauber: As we are now predicting further impact from the historically low snowfall on the east coast this past winter, where snowfall totals were down up to 90% in some of our core markets. The information we received in October from our dealer inventory checks indicated that despite our dealers placing lower preseason orders, their inventory still remain above the five-year average, which we noted could happen on our last turning call. Dealers are telling us that initial retail activity at the start of the season has been light, especially on the east coast.
One of the external assumptions.
I'm getting to $3 a share of 25.
Once 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.
Rocket 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 in our planning process right now.
Sarah Lauber: Therefore, we believe there will be a further impact on the fourth quarter plow retail season. As always, the extent of that impact will largely depend on the snowfall we experience across our core markets east of the Mississippi through the end of the year.
By the time, we get to the February call, we'll we'll be in a much better position to speak to what that looks like.
Think it's good business.
So not to sit back and keep your fingers crossed.
Hoping for something that every 12 months they push it out another 12 months I know, it's a long winded answer but.
Sarah Lauber: Now that we're into the last quarter of 2023, the logical next question is, can we still reach our goal of three dollars of adjusted earnings for share in 2025? While it's still possible for us to get there, when we look at our latest internal projections, we recognize that the ongoing headwinds continue to hinder our progress and our turning what was an achievable goal into a stretch goal. In short, while we remain confident, we will get to $3 per share. The timing is now in question.
You know, we're just we're going to we're going to we're going to get on with get on with life and we're going to figure out ways to continue to get to the $3 target.
Even as these these these headwinds.
Assist.
Alright, and then on the attachment side and so some of the new products like the non truck attachments and some of the other things you're doing too.
Expand your addressable market there how are those initiatives impacted by low snowfall is that.
This demand down there or can you continue to still grow there just because.
Sarah Lauber: There are three key factors to discuss embedded in our longer term $3 target. First are the baseline 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.
There are more greenfield and you're able to take.
<unk> gained market share in those new areas.
Yeah. 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, it's clearly more of an impact of outflow snowfall.
Sarah Lauber: Our initial long-term goals assume 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. Although we applaud the tentative agreement to end the strikes, it's too early to tell what the OEM shutdowns impact will have on our supply in 2024.
We expect you know getting back to average.
Well, we'll certainly show up on those growth projects that in going forward.
Okay, and then just lastly on the <unk>.
Margin profile of the attachments business.
I know you mentioned that.
Mid to high 20%.
Target.
There, but you know with all the <unk>.
Underlying improvements in.
Sarah Lauber: 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 and light up the many moving variables, I will say that with the assumptions that chassis supply is expected to be flat to 2023, and in assumes returned 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.
The initiatives you have going on what if volume.
Recovers.
Is there margin upside there from where were you.
Where you've been historically like could you see that go into the thirties.
How should we think about the longer term profitability of that business.
<unk> do recover.
Yeah, 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 twenties.
<unk> is the right place to be with the high Twenty's being.
What we would experience with more volume coming through.
I noted in the script the pre season for us in total we were out there the mid the 25% level and think about that that is still like on a on a lower volume base and then what is typical during an average snowfall year.
Sarah Lauber: This is only a book context around how we're currently thinking about 2024. We will provide our actual 2024 guidance in February.
So there is there is definitely room to to go quickly from mid to high just with recovery of snow.
Sarah Lauber: Finally, I want to talk to the positives. From an operational standpoint across the board, we have executed effectively. A solution segment is showing strong improvements 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 both 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 goal.
And that's probably where I would I would say right now.
The sector.
The Conservative estimate I think I think I would I would I would add just.
Something that we've spoken to before.
Our core business. There is obviously, though it's a pickup mounted snow and 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.
Not rise to those same 30% high Twenty's EBITDA. So as we as we see some top line growth there we will take the incremental.
Operator: With that, we'd like to open the call for questions. We will now begin the question and answer session to ask a question you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star and two. At this time, we will pause momentarily to assemble our roster.
Earnings in the.
The incremental earnings per share all day long.
Even even if it doesn't reach those historical wonderful levels of profit.
Alright, great. Thank you.
Yeah.
As a reminder to ask a question you May Press Star then one.
Michael Shlisky: Today's first question comes from Mike Shlisky with DA Davidson. Please go ahead. Good morning and patient taking my question. Sarah, one of your last comments there. Yes, Sarah, the last comment there was about if no fall was back to average again, the 2024 guys would be quite a bit of 2023 guys. 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 winter to last winter.
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.
Michael Shlisky: 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 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 management, snowflags, etc.
The medium to long term demand trends remain positive.
Recent results show that when headwinds subside, we deliver improvements.
The future is bright at Douglas dynamics, our teams are driving earnings growth in 2023.
Which has been completely offset by one of the worst snowfall seasons in the last decade.
Sarah Lauber: Great question, Mike. Yeah, 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 margins longer term. And those, those projects are embedded in the business. So I, it's very logical to think that the base is going to be higher.
When weather comes back and it always does.
Youre 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.
Okay.
Yes.
Yes.
Yes.
Sarah Lauber: I would say the hesitation at this point because we're not February of 2024, that we have a lot of moving variables and with the stress 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 in February.
Yes.
Yes.
Yes.
Okay.
Okay.
[music].
Sarah Lauber: Okay, then I also want to ask about the, the dividend, you just, you did mention in your comments that are in passing, but I'm curious, you know, what's your confidence level, what's the board thought in your thought about the dividend for next year, you have the confidence and 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, keep that dividend at or above where it is today.
Sarah Lauber: Absolutely Mike, there's no shift in the, in the philosophy of the dividend. We have had a sustainable dividend and we've increased it 15 times. The expectation would be that we continue to prioritize the dividend and keep it sustainable and increase it as we can so that that has not changed. Yeah, let me let me echo what, what, what Sarah just said, it is the number one cash deployment priority for Douglas and that's not changing. Okay, great.
Robert McCormick: And then lastly, it's great progress at the Jenna, because I think it's the comments on Henderson and 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 seven and eight, maybe a little bit more predictable, still very long lead times. And we're experiencing a little bit of. What I would call late changes on chassis, but the team has been navigating through that very well.
Robert McCormick: We improved in the third quarter, expect from improved 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.
Michael Shlisky: Okay, I appreciate the discussion. Thank you.
Tim White: The next question comes from Tim White with Beard. Please go ahead. Hey everybody, good morning. Good morning, Tom. Maybe just on on key four in attachment. I guess what, what are you kind of embedding in, you know, for maybe growth in EBITDA in the fourth quarter of 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.
Tim White: Sure, yeah, it is a little bit different this year if we're talking about the slower retail at the end of Q3, which also translates into, I guess, the beginning of Q4. So when I think about our fourth quarter forecast, we're absolutely assuming average snowfall. It's very important, you know, that we do see the snowfall in, you know, call it November, December when it's more typical to snow. And I say that as I look out the window and it's knowing why crazy here in Milwaukee.
Tim White: But 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, him 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 as we compare it to that low snowfall comp.
Tim White: But we have accounted for what we've talked about with the guidance change. Okay, so just having average snowfall in the guide relative to low snowfall last year, you do get some growth out of that is should be the basic condition. Yeah, correct. Okay, gotcha. And then I guess on the, 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, and I guess.
Tim White: Just any detail around how long you were shut for and just kind of how, how you would think about, you know, the puts and takes to that in 24. Yeah, I would say, you know, 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. In fact, we do not have any communication from the OEMs on what that impact will be, which is why we are saying, you know, we do expect something is probably going to be closer to early 24 than late 23.
Tim White: But it is, it still remains to be seen. Yeah, I guess I would also add I made a comment that we saw some increased chassis supply coming our way late in the third quarter 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.
Tim White: The question becomes when they when they turn the spiket back on and start ramping back up, how long is the process going to be and and, you know, how long will our little temporary positive move in terms of chassis supply last us before it runs into runs into issues to him. And I think we're 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.
Tim White: And again, I think they've got it, you know, they've got to get their 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 want to find that at this point. Okay. No, I understood. And then I guess just last question, I have just page three of the of the presentation that you sent out.
Tim White: Could you just maybe I know there's no numbers here, but could you could you actually add some numbers to what maybe some of these internal initiatives are kind of contributing just just to give people a feel of like what what the, you know, kind of the baseline cost and improvement or the, you know, some of the things that you do on a core basis or are kind of generating, you know, this year. Yeah, I'm chocolate a little bit Tim because there's no numbers there.
Tim White: We usually don't get that that specific on these things, but I guess I'll put some some context around it. When you think about the margin improvements that we're expecting in solution to get to to miss single digits. A lot of that is driven by a lot of the initiatives that are that are shown pictorially on that page. In addition to the price realization that we've been talking about, which which really is a crop our entire business is also in that when you think about the snowfall piece, the negative impact.
Tim White: We're being very clear that the two changes that we've had to make to guidance was really all due to snowfall. So you can get kind of a contact of the impact that that has had negatively, which has been offsetting the internal drivers. The good news is snowfall temporary, the the internal road drivers that we've completed are going to be part of the business going forward. Okay. Now I appreciate the help. We'll talk to you guys soon. Thanks.
Greg Burns: The next question comes from Greg Burns with Sedoti in company. Please go ahead.
Greg Burns: Good morning. Just in terms of the outlook for the solution 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, you know, there's there's there's two elements to our growth plans within the solutions group.
Greg Burns: Things that we control, which we 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 attachments side on those initiatives in 24 and 25. So we ought to continue to see even in profit growth on the solution side driven by things under our control. The question is what impact will chassis supply have on that?
Greg Burns: Sarah just talked about whether negating a fair amount of the of the 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?
Greg Burns: I mean, I think that's a fair way to look at it. What we 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 it's prudent to say, you know what? Let's just say that's not going to happen for a while.
Greg Burns: 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 in our planning process right now. By the time we get to the February call will will be in a much better position to to speak to what that looks like.
Greg Burns: I just think it's good business to 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 lot of winded answer, but you know, we're just we're going to 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 these these headwinds persist.
Greg Burns: All right, and then on the attachment side, and some of the new products like the non-truck attachments and some of the other things you're doing to expand your dressable market there, how are those issues impacted by a low snowfall? Is that the man down there, or can you continue to still grow there just because they're more greenfield and you're able to gain market share in those new areas? Yeah, it really is a mixture of both Greg.
Greg Burns: 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 low snowfall. We expect, you know, getting back to average will certainly show up on those growth projects than going forward.
Greg Burns: Okay, and then just lastly on the margin profile, the attachments business, I know you mentioned that mid to high 20% target there, but you know, with all the underlying improvements and initiative you have going on, if volume recovers, is there margin upside there? From where you've been historically, could you see that going to the 30s? How should we think about the longer term profitability of that business if volumes do recover? Yeah, I mean, we were at that higher level a number of years ago prior to all of the inflationary pressures that we've experienced.
Greg Burns: And 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. You know, I noted in the script, the preseason for us in total, we were at the mid to 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 room to go quickly from mid to high just with recovery of snow.
Greg Burns: And that's probably where I would say right now to be conservative. I think I would add just something that we've spoken to before. Our core business there is obviously the pick up out is no nice control equipment, very, very profitable, and that's what drives the near 30% even to margins. The growth opportunities that exist in the non-truck space while still nicely profitable will not rise to those same 30% high 20s even does. 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.
Greg Burns: Thank you.
Operator: As a reminder, to ask a question, you may press star, then one.
Robert McCormick: 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.
Robert McCormick: 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 bright at Douglas Dynamics. Our teams are driving earnings growth in 2023, 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.
Robert McCormick: We look forward to seeing some of you at the Bear Conference next week in Chicago.
Operator: Have a terrific day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.