Ladies and gentlemen, thank you for standing by, and welcome to the Douglas Dynamics' Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. Thank you. I will now turn the conference call over to Sarah Lauber, CFO. You may begin at this time, ma'am.

Thank you. Welcome, everyone, and thank you for joining us on today's call. Before we begin, I'd like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we've described in yesterday's press release and in our filings with the SEC. 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. After that, we'll open the call for your questions. With that, I'll hand the call over to Bob.

Thanks, Sarah. Good morning, everyone. We are pleased with our results for the second quarter, which reflects both the continued strength of overall demand trends across our businesses, plus our team's commitment and creativity in addressing the various industry-wide supply challenges we continue to face. Both segments turned in positive results with a strong pre-season shipment period from Attachments and a very strong order book for our Solutions segment, creating record backlog at both Henderson and Dejana. The strong demand outlook in both segments means we are well positioned for long-term success. It would be a massive understatement to say that from a business perspective, our situation has improved dramatically from a year ago. We continue to adapt and learn how to operate most effectively within the constraints we are facing. The headwinds we outlined last quarter remain our biggest challenges today, similar to many other industrial companies. First, material price inflation has arguably moved to the top of the list. We've seen many suppliers bringing multiple price increases across all areas of the business during the quarter. Naturally, our margins will be impacted this year as these increases outpaced our ability to pass these costs through. And while we will recapture it over the long term, the pace of increases means this will take some time. Second, supply chain disruption and component shortages. We are still seeing uncertainty with the supply of many components. The issue was impacting any and all vehicles globally, not just the North American work truck industry, with chip shortages at the top of the list of factors. OEMs have cut back chassis production in Q2 and expect to continue to do so into Q3. There are signals that chip production may bottom out in the third quarter and then slowly improve. It's clear our…

Thanks, Bob. Given that in the second quarter of last year, we were still experiencing a complete shutdown and ramp-up of our facilities, from a comparison perspective, we expected this to be a stronger quarter, even though we experienced near-term headwinds with labor availability, input cost inflation and supply chain constraints. That being said, our second quarter financial results were a result of strong demand, record backlog, which drove improvements at both Attachments and Solutions, combined with ongoing economic improvements, which positively impacted both segments. From a consolidated perspective, we generated second quarter net sales of $157.5 million and gross profit of $48.8 million compared to net sales of $120 million and gross profit of $32.1 million during the second quarter of last year. Sales increased year-over-year as a result of strong pre-season shipments at Work Truck Attachments. In addition, the second quarter of 2020 was impacted by pandemic-related plant shutdowns that significantly impeded shipments across both segments and drove operational inefficiencies. SG&A expenses, including amortization expense were $24.7 million compared to $16.6 million during the second quarter of 2020. The increase was primarily due to an increase in stock-based compensation of $2.9 million and a $2 million earnout reversal last year. The remainder is due to increased employee incentive-based compensation and discretionary spending as business conditions returned more towards normal. For the second quarter, we generated consolidated adjusted EBITDA of $33.5 million compared to $20.3 million in the corresponding period of the prior year. Our performance improved significantly year-over-year as a result of the improved volume and not having the effect of prior year pandemic-related plant shutdowns. Interest expense was $4.4 million for the quarter, lower than the $5.7 million incurred in the same period last year. The $1.3 million decrease was due to a $600,000 loss recorded on…

[Operator Instructions] And our first question will come from the line of Tim Wojs of Baird.

Maybe just my first question, just on kind of the solutions business and some of the supply constraints. It sounds like we're kind of getting past some of the constraints in the context of, you saying that the supply chain should improve sequentially kind of from here on now. I mean, should we read that as we should start to see both sales and margins, also getting kind of stronger sequentially from Q2 levels?

Yes. I'll answer that, Tim. From the standpoint of sequential improvement, I mean, what we experienced late in this quarter and really kind of starting in Q3, is the computer chip shortage and its impact on Class 3 to 6 chassis. What we expect I guess and what we've seen in some areas is the expectation that that will continue to improve throughout the remainder of the year. So when you look at the third quarter for solutions from a margin perspective, I expect it to be flat kind of to 2020, maybe up a little bit and then sequentially improving into Q4 as that availability frees up a little bit more, but not getting back to the fourth quarter '20 levels that we had from a margin perspective.

Okay. Okay. So it sounds like solutions' margins could actually be up year-over-year in Q3 and then maybe down a little bit in Q4.

I would say more flat in the third quarter, possibly up, but it's going to be closer to flat is what I'd say.

Sure. But you'd be effectively doubling them sequentially. So that's pretty good. And then I guess, when you're thinking about pricing, is there a way to think about how much pricing is kind of either embedded in the second half of the year or maybe in kind of the full year guidance in totality?

Yes, probably the best way to speak to that is the change that we made to our guidance range in sales is predominantly for price for the year. Clearly, we have escalated price increases in all 3 businesses. Some of those have a bit of delay. So when you look at the entire shift of the sales range of $15 million, it definitely got more in the back half of the year. I would say, in total, just in thinking about price versus cost and what we're experiencing, it's coming at us pretty fast and we are reacting accordingly in all 3 businesses with changing price increases. I would expect that for the full year, we will have a delay in price covering the cost, so it will impact our margins in the back half of the year. That will be made up then in 2021, I'm sorry 2022.

Okay. Yes. That sounds good. Okay. And then, I guess, how do you feel about the momentum of the business relative to 3 or 6 months ago? Because I understand some of the external headwinds, but I mean, your attachments business on a first half basis is basically in line or better than 2019, which I think was a record level at that point. It seems like record -- you're seeing record backlog kind of build in both of your kind of Henderson and Dejana businesses. So I know we're kind of talking about some of these constraints, but I mean, could you just talk about how you're set up for '22 and '23? Because it does seem to be like you're building momentum really across the enterprise.

Yes. Tim, I'll make a couple of comments, and then Sarah can add on. It's interesting when you go through the last 18 months of all the unique challenges that we've had, it's sometimes easy to forget that the weather business is still the weather business and it by and large cuts through a lot of other business drivers. And so even though snowfall was a little below the historical averages last year, we are still seeing strength there. That's a positive reminder of the resiliency of that business model. And you're right, when we look at the incoming order pace, when we look at the backlog that's on the solutions side, when we look at being able to finally get people back out into our upfit locations and working on continuous improvement DDMS initiatives, when the production starts to flow through those locations again, we're feeling really good about 2022 and beyond. I'll let Sarah add any other comments she may want to at that point.

Yes. I would say, as many of us, we look back to pre-pandemic and for Douglas 2019 being a record year. When we think about the businesses, there's nothing that has structurally changed. And you're right, Tim, and that, we have momentum from a demand perspective. But once we can clear up these headwinds that we have in front of us, there's no reason why those businesses don't get back to those '19 levels and then focus on the growth that we have laid out for them.

And our next question will come from the line of Ryan Sigdahl of Craig-Hallum Capital Group.

I'm curious on since the rolling shutdowns at -- in the Solutions segment, how much of that is just operational efficiencies in the near term, just scale and volume, trying to maximize kind of free cash flow and margins in the near-term versus opportunity to really accelerate DDMS improvements at those facilities given kind of full shutdowns?

Yes. It actually really had to -- it had to do more initially, Ryan, with the slowdown in the municipal order intake in the second half of last year as the DOTs were nervous about their municipal budgets. And so, we had a pretty low backlog entering the year. And then with chassis being a little challenged because of some of the supply headwinds we've been discussing, it really created a gap late first quarter into the second quarter of chassis availability to keep those upfit facilities fully operational. So the initial concept of a rolling shutdown was to try and minimize short-term cost implications while hanging on to our long-term labor force. And then we get the added benefit, that as long as we've got the facilities shut down, let's get our continuous improvement people into those locations, it's the opportune time to work on realigning shop floors and bays and workflow and that sort of thing, so that when the production does come back and chassis begin to flow again, we'll be in a much better position. So it's really a combination of those 2 things.

Great. And then just on attachments, how much do you think is -- or if any, is pent-up demand from last year, maybe just less ordering given the uncertainty in COVID and everything else going on versus just kind of normalized just stronger business trends and industry trends here?

Yes, that's a terrific question that is so difficult to answer. I mentioned earlier that even with the below average snowfall for the season in total, again, it was slightly below average it wasn't significant. Remember, we just had -- February was just insane, right? I mean there was weather everywhere across the country, and we had a record first quarter there. And so demand was high. When we look at back into the early pandemic stages, dealers were certainly cautious. That made perfect sense, right? But the one thing -- again, the one thing that we did learn from last summer and are still seeing it this summer, the landscapers who are the largest end user of that particular product, they're having record years. So you've got all these variables that are in play, below average snowfall for the third year in a row, negative. The landscaper is having a bunch of cash in their pocket, positive, right? And when you mix it all up, as we see it now, it looks like it's coming out as more of a net positive for us as we get ready to head into the in-season for this next snow season. So a lot of moving pieces there, and we're pretty pleased with what the net result is at this point.

Great. 2 quick ones for Sarah, just on the modeling standpoint and then I'll turn it over to others. But with the new debt refi, what's the go-forward kind of current run rate for interest expense? And then secondly, stock-based comp, a little elevated in the quarter, though it increase there, is that structural or is that some onetime stuff?

Yes. Absolutely, Ryan. So when we look at our interest with the new refi, in total, as I mentioned in my script, on an annualized basis, we have savings of around $6.5 million versus our 2020 level, that's closer to a little bit below $4 million for 2021. And then on the stock-based compensation, yes, you saw an increase and there's a couple of things going on there. To get to your question on what's structural. The piece that's not structural is the fact that the comp that we're looking at right now last year is reversals, this year's accrual because of just the dynamics of looking at the longer term. They -- that is not structural. That's a piece of it. The other piece of it is us expanding our participation across a broader audience that is more structural. I would say, of the increase probably 80% of it is kind of what would stick. But I'll be able to provide more of that as we look to our full year guidance next year.

And the next question will come from the line of Chris McGinnis of Sidoti & Company.

Do you think any of the pre-seasonal strength that you saw lastly driven by -- or maybe you're going to have price increases coming up, do you think anyone bought -- that changed any of the buying habits or something?

Another great question. I should have added that as my third variable to the last question. We certainly think that that's possible, right? I mean, obviously, in this inflationary market, people are taking multiple price increases. We took one in the pre-season before the ordering period started, and I would expect many people are looking towards another round of price increases sometime between now and the time that the season starts. So there certainly could have been some of that for sure. Great point.

Okay. And then just on the vertical integration and the introduction of the wide offering on the muni side. Can you just maybe just talk about how that's being accepted as it gets a little bit further into the introduction of it?

Sure. It's a -- it was a summer time or a late spring launch, and it is being very well received. It did get caught up a little bit in the municipal budget crunch that we talked about, where they were sitting on orders for quite a while and trying to figure out how this whole thing was going to shake out from an economic standpoint. And so when that started to free up, they went back to focusing first on their core product lines, if you will, and on the vehicle that they already had. And so while it's been very well received and we're pleased with the initial orders, we really think that the bulk of the positive will be felt in this next snow season cycle. I will add though, and I made this comment earlier, as great of a first project as that one was, we've got 2 or 3 coming right behind it that will be equally, if not more impactful. And it just reinforces our thought to this strategy, Chris, that this vertical integration process will turn out to be a significant driver to the long-term top line work truck solutions growth that's in our financial models. So we are just beginning to see it and there are plenty more exciting things to come, and we will certainly give you more details when we're ready for the market to hear about them as well.

[Operator Instructions] And thank you, at this time, we'll return the call over to Mr. Bob McCormick, President and CEO. Sir, please go ahead.

Thanks. Listen, I've got one last comment before we sign off. It's certainly been a long and challenging 18 months for everybody, that's clearly an understatement. But I want everybody to know that at Douglas, when we talk about inside our 4 walls is playing the long game, while managing the short game. And when it comes to managing the short game, remember, we're in the weather business. We deal every year with ever-changing and uncertain business drivers, that's just part of our business model. And so this is what we know how to do. So when it comes to managing the short gain, from health and safety of our employees early on in this pandemic, to navigating the COVID headwinds in the supply chain and labor markets that we're currently dealing with, our teams are built to manage these kinds of variables, and they're doing a terrific job. But while we're doing that, we never lose focus on playing the long game. From investments in vertical integration and new product development to doubling down on talent development, both growing our internal talent and securing outside talent, to realign our debt structure to strengthen our balance sheet. These are all things that we've been focused on to ensure that we're playing the long game successfully. I just want to close with this. The future is bright at Douglas Dynamics. The unprecedented headwinds will subside at some point. And when they do, we are well positioned to drive towards our long-term financial targets. We thank you for your time today. We appreciate your ongoing interest in Douglas Dynamics, and look forward to providing more updates in the coming months. Have a great day.

Thank you, ladies and gentlemen, this concludes today's conference call. Please disconnect at this time.