Good morning, ladies and gentlemen, and welcome to the Douglas Dynamics First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at this time. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to our host, Ms. Lauber, chief financial officer.

Thank you. Welcome, everyone. Thank you for joining us on today's call. A few quick items before we begin. First, please note that some of the information that you will hear during this call will consist of forward-looking statements. Within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, such statements express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, our actual results could differ materially from those in the forward-looking statements. For more information regarding such risks and uncertainties, please see the sections titled Risk Factors, Forward-Looking Statements and Management Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the year ended December 31, 2018. Filed with the Securities and Exchange Commission and the impending updates to these sections in our quarterly report on Form 10-Q. Second, this call will involve a discussion of adjusted EBITDA, adjusted net income, adjusted earnings per share and free cash flow. All non-GAAP financial measures which under SEC Regulation G, we're required to reconcile with the most directly comparable GAAP measures. Reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at douglasdynamics.com. 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 then I'll review our financial results and guidance before turning it back to Bob for final comments. After that, we'll open the call for your questions. But before we begin, I'd like to discuss our recent segment change. We reorganized our business segments to reflect our new operating structure. Essentially, the municipal snow and ice control operations are moving from the Attachments to the Solutions segment. And corporate expenses are now being fully allocated to both Work Truck Attachments and Work Truck Solutions. As announced earlier in March, John Sievert was appointed as president, Work Truck Solutions, and now has primary responsibility for both Dejana and Henderson. The Work Truck Attachments segment now consists of our commercial snow and ice control operations under the FISHER, SnowEx and WESTERN brands, which continue to be run by Keith Hagelin. We have provided information on the segment change including unaudited, quarterly restated, segment results for 2018 in an 8-K filed yesterday. With that, I'll hand the call over to Bob.

Thanks, Sarah. Good morning, everyone. Thanks to the continued hard work of everyone at Douglas Dynamics, we produced record first-quarter net sales of $93 million and gross profit of $23 million during the quarter, up 11% and 15% respectively when compared to the same period last year. The strength in our performance this quarter was driven by the improved results in Work Truck Solutions, which we were very pleased to see and bodes well for 2019. I'll now walk through my high-level thoughts on each segment, which reflects the new structure Sarah just outlined. In Work Truck Attachments, positive snowfall in certain key markets during the first quarter resulted in slightly increased sales of commercial snow and ice control products, particularly, parts and accessories when you compare it to the same period last year. However, we should note that North America experienced below average snowfall overall this past winter. While some key cities in the Midwest saw near record levels of snowfall, overall, location and timing of snowfall was generally less favorable when compared to 2018. In particular, key markets in the northeast and New England experienced significantly lower snowfall compared to both last year and to the 10-year average. While we are cautiously optimistic regarding our commercial snow and ice preseason, our expectation is that the below average snowfall for the entire season will negatively impact demand for commercial snow and ice control equipment. However, the secondary demand drivers such as economy, truck sales and dealer sentiment all remain generally positive. Additionally, we are continuing to see the impact of both material cost inflation and supply chain challenges. Nevertheless, I am confident that our team will continue to overcome these short-term obstacles, and would remind everyone that the first quarter is the least important for our commercial snow and…

Thanks, Bob. I'll begin with our consolidated earnings for the quarter followed by a look at the segments before providing commentary on our balance sheet, liquidity and guidance. I'd like to start off by saying, we have a very solid first quarter despite the noise of the segment change that I described earlier. When you look at our consolidated results with record sales and adjusted EBITDA margin improvement of 130 basis points, the segment breakdown tells two different stories. The results clearly reflect what's going on in our businesses, and the comparisons to prior year are not impacted by the segment change. With that, let me walk through the consolidated and segment results. We achieved record first-quarter net sales of $93.2 million, an 11% increase over the same period last year based mainly on the overall improved performance in our Solutions segment. Based on the increased sales, growth profit for the first quarter increased to $22.9 million compared to $20 million in the same quarter last year. Growth margin percentage increased to 24.6% compared to 23.9% during the first quarter of 2018. Our teams are laser focused on getting better for our customers, while also maintaining or increasing our margins With actions to improve efficiencies within our facility and lower our spending, first quarter gross margins improved 70 basis points. SG&A expenses were $16.6 million roughly in line when compared to the first quarter of last year, but reduced as a percentage of sales from 19.2% last year to 17.8% this year. We produced adjusted EBITDA of $9 million for the first quarter compared to $7.1 million for the first quarter of 2018. The 130 basis point improvement was primarily due to increased volumes and improved operational execution at Work Truck Solutions. Turning to net income. For the first quarter…

Thanks, Sarah. In closing, we are pleased with our results this quarter and believe we are well positioned to continue to execute our strategy. Despite the supply headwinds we continue to face, we remain confident that we will become a stronger and more efficient company because of these challenges. Once the chassis and supply chain constraints start to ease, we expect all of the hard work from our DDMS initiatives to fully take hold, driving improved performance across our operations. With our prepared remarks complete, we would now like to open the call for questions. Operator?

[Operator instructions] And your first question comes from the line of Josh Chan with Baird.

Hi good morning Bob and Sarah.

Good morning Josh.

Good morning Josh.

My first question is on, sort of, the organizational structural change, I was just wondering what was the impetus behind that. I mean both businesses are upfitters in nature, so that kind of makes sense. But just wanted to hear what drove that?

Sure. You're pretty much hit it right on the head Josh. Having had both of these companies under the Douglas umbrella for the past three to four-plus years, it's just becoming more and more obvious to us that there are synergies for these businesses to work closer together, and that if they are under the same umbrella, if you will, we can take two really terrific businesses and they can be even better with an opportunity to share both revenue synergies as well as operational DDMS synergies.

Okay, no, that's great to hear. And then on the Attachments business, in the press release you mentioned - you give some color about maybe, being a little bit more cautious because of the low snowfall last year. But then it also sounded like the actual preseason orders have been going pretty well. So, am I reading that right? Or how are you thinking about what you've see in the preseason so far?

Yes. That's a great question. Snowfall overall was below the 10-year average. Now if you lived anywhere in the Midwest, you would scratch your head at that one because it was really, really heavy there and hardly anything once you got out to the East Coast. But we adjust our preseason order expectations around that snowfall. And I would say, although it's early, we're only 30 days into taking our preseason orders, we are cautiously optimistic about the order pace that we've been seeing. We still have a long way to go. Recall, we'll take preseason orders through the middle of June, but early indications are that things are looking in line with our expectations and maybe even in some cases a little bit better.

Okay. And is there any regional variance among those orders that you would expect, maybe like a little bit weaker in the Northeast and that, you know - or is it pretty strong across the country?

No. It would again, we would adjust the expectations around snowfall, and so we are seeing lower-than-normal orders coming out of the East Coast and stronger orders coming out of the Midwest and that's what our projections allocate for, that's what Sarah's guidance comments include.

All right. That makes sense. And then lastly in the Solutions business, very strong growth there. Is there a way to kind of bucket how much of that growth came from the Henderson business, which seems to improve? And whether Dejana saw growth versus a pretty strong number last year?

Yes. I commented on that - in that - both businesses saw volume strength. And we've been talking now for a couple of quarters about very strong order and backlog in both businesses. So we expected to see the growth in both, I wouldn't differentiate between either. Also as we talked about last quarter, the predictability of chassis and getting the trucks out the door is much more predictable and manageable, which also helped us in the first quarter.

All right. Great. Thanks for your time and good luck the rest of the year.

Thank you Josh.

Thank you, Josh.

And your next question comes from the line of Steve Dyer with Craig-Hallum.

Good morning, Bob and Sarah. This is Ryan Sigdahl on for Steve Dyer.

Hi, good morning.

Just for a point of clarification in the Work Truck Attachments. Sarah, you mentioned that Q2, Q3 ordering season split both likely are expected to be similar to last year. So is that 60-40? That's what my math says versus kind of the more typical 55-45 or am I reading too much into that statement there?

No. No, you're spot on. If you look at the Attachments segment last year, it's higher than the 55-45 that we had been seeing for a number of years. We expect that with no changes to our preseason programs that, that they would be in line more with last year.

Great. Then flipping over to Work Truck Solutions, I mean 13% growth in Q1 is really good. Is that sustainable for the rest of this year and going forward? Or was there any kind of one timers in there where maybe you got some extra chassis coming through? Any color there would be helpful.

Yes. I would say, it's sustainable, you know, we're going to see quarterly differentiation as we go through the year very much driven by the chassis unpredictability in both businesses. But as we talked about, we have strong orders and backlog in both businesses, you now, and as long as we can continue to deliver and get the chassis, we can continue to see pretty good growth out of both businesses.

Yes. I think I would add on to Sarah's comments there, which are accurate. We certainly are going to be limited to any sort of straight-line trajectories due to the chassis constraints. But I just ask you to take a step back and think about what's taking place in Work Truck Solutions as it relates to some of our business philosophies that we have in our core commercial snow and ice control business. Remember, when it doesn't snow, something we can't control, what we do is we get better. We double down on continuous improvement, we double down on DDMS initiatives so that when the weather turns and comes back, we're much stronger and more profitable as a result. We've in essence taken that same philosophy to the Work Truck Solutions segment. Although, it's more difficult to unlock the formula for DDMS in a custom environment, we feel in the last six-plus months that we have indeed started to find a really good pace there as referenced by the Rhode Island example that I gave. So in essence, if you think about it, we're starting to see margin improvement in that segment. It'll only get better as the chassis is free up and become more available, and we start flushing some of that backlog through the income statement because in essence, Work Truck Solutions has been getting better and more productive while we're in this chassis headwind cycle. Does that make sense?

Yes. That's very helpful. And maybe one point of clarification there and then I'll turn it over. But on the margin improvement in Q1, could you maybe split that out at a high level between improved chassis supply toward visibility versus the DDMS driven improvements that you just mentioned or anything else?

Yes. I mean that's kind of a tough question just from the standpoint of the way the Bob has described it. They do kind of all blend together. But I would say it's both. When we look at the Henderson business and the margin improvement that we saw there, very much the predictability of chassis combined with the fact that we've been working on DDMS there for a longer period of time. On the Dejana business, we have that unpredictability that can hurt our margins, but we've been very focused on lower spending and operational efficiencies. Rhode Island, in particular, is the Dejana location. So they can kind of work against each other, but it will be to our benefit as we get more of that predictability.

Great. Thanks, guys. Good luck in Q2.

Thanks.

Thank you.

And your next question comes from the line of Chris McGinnis with Sidoti & Company.

Good morning. Thanks for taking my questions. Nice quarter. Just to touch on the Solutions. Is there a way to I think about, maybe like a utilization rate within the Dejana, and how quickly that's ramping as that improvement, obviously, is pretty strong?

Yes. I'll let Sarah chime in if she wants to add any extra color. But I would tell you that Dejana has 10 upfit locations. The success at the Rhode Island facility is important from a standpoint as they've been testing out a thesis again of how to apply continuous improvement concepts in an environment where you're never making the same thing twice. And it's been a long difficult process for them, and they really feel like they've found part of that formula. It's going to take time to replicate that throughout the rest of the divisions and throughout the rest of the locations. It's going to be a multi-year effort. But having said that, I think the -- there is no question that the groundwork has been laid for margin improvement within that particular business for 2019 and forward.

Yes. The only thing I'd add there is, we have the 10 locations that Bob mentioned, a certain level of capacity that will only improve as we improve our efficiency in this day with some of the chassis unpredictability. We do have to move things around and shift things around among locations a little bit more than we'd like, so that will only become more efficient as we get through these chassis constraints.

And this may not make sense, but I was just wondering, with the merging or bringing Henderson into the Solutions part of the business, whether that will make sense to bring them into the same facilities or work them on an operating basis at that level?

Yes. We don't have any plans for that at the moment. The way that we think about this is we're going to take a terrific stand-alone business in Dejana, another terrific stand-alone business in Henderson, and it will still operate as such, but have the opportunity to learn from each other and to work together on both revenue synergies and operational synergies. Could it lead to sharing up facilities at some point? That's certainly is a consideration. None of those decisions have been made nor have been contemplated at this point. It makes - it certainly makes some sense to investigate some of those things longer term.

Okay, thanks for taking my questions and good luck in Q2.

Thank you.

Thanks.

[Operator instructions] At this time, I would like to turn it back to the speaker for any further questions. Bob McCormick, President and CEO?

Thank you for your time today and your ongoing interest in Douglas Dynamics. 2019 is off to a good start, and we are focused on driving forward to deliver on our commitments to all of our stakeholders. Thank you and have a great day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect.