Good day, and thank you for standing by. Welcome to the Douglas Dynamics Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded [Operator Instructions] I would now like to hand the conference over to your speaker today, Sarah Lauber, CFO. Please go ahead.

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 have 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 will review our financial results and guidance. After that, we will open the call for your questions. With that, I will hand the call over to Bob.

Thanks, Sarah, Good morning, everyone. I'll start with a quick review of the quarter. Attachments knock it out of the park, strong demand and equally strong execution from our team produced great results. Solutions segment also has seen strong demand, but performance continues to be stymied by external heads. Despite the difficult and unusual circumstances in 2021, our teams have endured and adapted to the ever-changing conditions, driving incremental continuous improvement initiatives while remaining focused on serving our customers. Looking back over the past two years from the emergence of the pandemic in the U.S., the first 12 months were health and safety-focused, adapting to the unprecedented situation, putting protocols in place, and getting back to work. The second 12 months saw the economic fall off from the first 12 months sit home, all while still dealing with new variants and surges of the ongoing pandemic. As we enter the third year of disruption, we believe the pandemic and the related economic headwinds will start to dissipate, but the exact timing is the big question. The factors impacting performance are similar to the issues faced by many sectors and companies today. Inflationary pressures, supply chain constraints, and labor shortages. Prices for raw materials, components, and products we source continue to rise with inflation at 40-year high. Those who track [unpredict] chassis supply indicate 2022 will produce a similar number of chassis to 2021 with supply remaining very tight in the first half, then starting to show some improvement in the second half of the year. The Omicron surge also led to an increase in absenteeism in the month of December. That continued in January, but like the rest of the country, the situation has dramatically improved recently. Finding and keeping skilled employees continues to be a challenge, but our team…

Thanks, Bob. I'll first cover the full year results, which include these highlights. One, we experienced record sales and attachments and overall double-digit top-line growth; two, we effectively covered inflationary costs for the full year on a consolidated basis; three, the demand in solutions remained strong, and our backlog grew to 2.5x over the record level at the end of 2020. Lastly, the strength in our free cash flow continues, and we just announced our 14th increase to our dividend and a Board approved $50 million share repurchase plan. I'll then move to the fourth quarter where we saw headwinds increase, particularly within our Solutions segment. This will then lay the foundation to talk about next year's guidance. First, the full year. Full-year net sales were $541 million, which is a 13% increase compared to last year when we generated $480 million. The improvement was driven by a combination of higher volumes at Work Truck Attachments and price increases implemented across both segments. Although we experienced direct pandemic-related disruption in 2020, which caused us to suspend operations for the first part of -- sorry, for the first half of last year, in 2021, we, unfortunately, experienced the resulting supply chain shortages and delays. Gross profit for 2021 was $141.9 million or 26.2% of net sales compared to $128.3 million or 26.7% of net sales in 2020. Although we saw a 50 basis point decline in gross margin in 2021, we're very pleased with our team's mitigation of inconsistent chassis and component supply, significant inflationary pressures across all input costs, and inefficiencies due to absenteeism. We strive to offset these headwinds where possible with pricing actions and cost savings initiatives. SG&A costs increased from $64.6 million in 2020 to $78.8 million in 2021. A large portion of the increase relates to…

[Operator Instructions] Our first question will come from the line of Josh Chan from Baird. You may begin.

Hi good morning Rob and Sarah. Thanks for taking my questions.

Good morning, Josh.

Good morning, Josh.

Good morning. I guess the first question, just a clarification. Sarah, your comment on ramping inflation in Q4, was that a solutions-only comment? Or does that apply for the whole company?

It implies for all input costs. I mean we saw steel kind of peak in September time frame, which is really the steel that we were using in the fourth quarter. But across the board, I would say that the price increases that we are realizing during the year, we saw a lot of those notices, I guess, coming to us in the fourth quarter.

Okay. Okay. And then -- so do you expect to continue to meet inflation on a dollar-to-dollar basis at least in the attachments business going forward?

Yes. Yes. So let me walkthrough, I guess, the way I'm thinking on the non-price versus inflation. So I said in the script that 2021, we effectively covered dollar for dollar across all of the outlets. I still expect that to happen for the longer term. But when we look at 2022, attachments will continue to follow their very diligent pricing process, and they will look at the market preseason and make changes accordingly. On the solutions side, -- we have implemented multiple surcharges and price increases on their close for new business. And there are some areas where we're working to regain some price on longer-term contracts. So that's really what's driving the lag of price versus inflation in the year for solutions, driven by the fact that chassis are pushed out further and further. So overall, we expect to cover it in the longer term. So to get specifically to your questions, yes, attachments will cover for the year and solutions will lag a bit.

All right. That's great color. And then I guess circling back to Bob's comments earlier about the non-truck business in attachments. Has that phenomenon been occurring gradually? Or is it more of a southern shift in how people are addressing that particular need? And then is there a way that you can ballpark how big of that business it might be for you, either last year or this year?

Yes. It has been growing gradually. And when you've got the market share that we have on the pickup mounted snow and ice control equipment, especially when you look at our long-term financial targets, we weren't expecting the Attachments group to have a significant amount of top line growth on an annual basis. But as this phenomenon continues to emerge and grow, it does present a new growth avenue for us, which we're excited about. We've talked about things like the John Deere program that we've done, we've hinted at some of these things over the past couple of years. So it's an exciting new revenue and earnings opportunity growth for us. We've got the right set of products, our brands matter. And we think all those things are going to result in us driving additional longer-term revenue and earnings growth through the Attachments group. I'm not going to speculate on what proportions that or anything like that. Sarah, you have anything you want to say there? No, I'd say '22, we definitely saw an uptick in non-truck sales, I'm not calculating the percentage off hand, but really over 20% and certainly, an area of focus that we've had for a long time and expect further growth going forward, especially when we look out to the long-term goal of $3 or more for earnings per share and you think about attachments, a big piece of their growth is continued expansion in this area.

Great. Thank you for the color and best wishes for '22. Thanks, Josh.

Our next question is from the line of Mike Shlisky from D.A. Davidson. You may begin.

Yes, hey guys how are you doing?

Good Mike, how are you?

Good Mike.

Good. I'd like to start with talking about your kind of long-term $3 per share outlook. Can you just remind us, does that assume -- is that the can average weather year assumption? Is there any M&A involved there? Is it kind of where you're hoping to be in the two segments over the long term? Just give us a sense as to what the demand level is you're talking about $3 a share in '25. Yes.

I would say, I mean, whenever we're looking at our guidance or any plans going forward, we're always looking to average snowfall. So certainly, we have the growth plans, margin improvement plans to reach the $3 without requiring further snowfall. I would say that the growth that we had laid out for attachments and solutions, there are still a lot of opportunities which you can see in just the growth in our backlog. And certainly, some of these other areas that we're just talking to now on non-truck and other vertical integration projects.

Yes. I would add, Mike, the way one way to think about it from a very simplistic point of view, is you have the attachments group, which is currently performing at or near record levels and has growth ahead of them. And then you're sitting on an unbelievable amount of backlog within the Solutions group. And we talk about the importance of moving velocity through that fixed cost model. When we get a chance to start eating into that backlog and you have the Attachments group growing at a faster pace than we had originally anticipated, you put those two things together, and that's largely how we get to that $3 target. Also, what's important to know, we don't bake acquisitions into any of those projections. We think that's a bad thing to do when you start thinking you have to do a deal for the sake of doing a deal, Douglas will never look at our financial targets that way.

Got it. Got it. I also wanted to ask, if you can just give us update and I assume it's not a problem, but just your dealer inventory situation? How is it going? And do you feel like there are folks starting for inventory at this point?

Yes, it's interesting. Even though we haven't had a breakout snowfall season for the last couple of years, last January dealer inventories were at six-year loads. Lowest we've seen them in a long time. We just took dealer inventory at the end of January this year, and it's up a tick, just a little bit. So still in a very terrific place. Retail activity continues to be strong. It's interesting, while it may snow a little more or a little less in certain parts of the country. We are seeing more ice events. If you think about the last two seasons in terms of ice that is moving farther and farther south within the United States. And so we've got a number of other drivers that are allowing our dealers to sell through their stocking inventory on a pretty regular basis. So we don't have any yellow lights or any red lights on that side of our business at all. Everything is green. Okay. Great. I just ask one additional question. I asked this last quarter. Can you just kind of flesh out for us whether you think there is a risk of gigantic backlogs of multiples year-over-year. Can any of them be canceled and folks sign it back out? Or is that not something that you think is a likely occurrence here?

We have seen none of that to this point. What's interesting is that even while we're sitting on this tremendous backlog, we are still -- as we sit here today, order intake thus far in the first six weeks of 2022 is stronger than it was in the first six weeks in 2021. So this isn't going away anytime soon. The thing that gives us renewed hope for optimism there, obviously, is that we still know at the end of the day, we get more work trucks than many of our competitors. So even as chassis start to flow again, -- and people are going to be hungry to get their vehicles. We're going to be first in line and our lead times are generally better than most of our competitors. So I don't think cancellations are a big risk for us at all. The other thing that I would point out, Mike, is we're not expecting the OEMs when this chip thing fixes itself. We're not going to get a surge of chassis in any 3-months to 6-months period. We think we're going to be blowing through this backlog in 2023 and even into 2024, which, from our standpoint, is perfect because it's going to give us a chance to grow earnings on a pretty consistent basis through those solutions business models. Thanks so much, guys. I Appreciate it.

Thank you.

Thanks, Mike.

Our next question comes from the line of Christopher McGinnis from Sidoti. You may begin.

Good morning. Thanks for taking my questions and for all the kind of insights in the release. I think just to start, maybe just off of the last question around backlog, and you talked a little bit about -- a little bit harder on the Henderson side. Has that pushed -- given the inflationary environment -- has that push the smaller class truck we introduced [indiscernible] recently?

I want to make sure I understand what -- were you asking about whether on the Henderson side, the situation where it creates any opportunities for some smaller sized municipal vehicles.

Right. Exactly. The newest introduction, I think you added around that 2019 timeframe.

Yes. Here's what's interesting. Municipal budgets are back to being in decent shape, but they are still fixed dollar budgets. So when inflation occurs and prices go up on the work trucks that they need, they still are operating within a fixed budget dollar amount. So a couple of things can happen, right? They can take -- if they wanted 10 trucks, they can say, what, next year, I'll take 9 -- or to your point, they can say, I'll take 9, but then give me a couple of the medium-duty trucks as well. So we certainly expect to see some more of that demand increase on those vehicles. We have yet to see the municipalities play that shell game, if you will. Right now, they're still sitting pretty firm on their large trucks, but we expect as they do some shuffling over the next business cycle or two that we will see some mix shift to those smaller vehicles.

Appreciate that. Just in relation to the now '25 outlook, is anything else in place other than it's just really the demand that's coming through. You've done all the other hard lifting you've talked about in terms of the plant efficiencies.

Exactly. That's what -- I mean you go back, I think that's where our long-standing business model of being part of a weather-driven situation where you never know what the next year is going to hold. So we are very well practiced and disciplined and when the hatches are batten down, still finding ways to improve so that when whatever headwind we have turns around, we are exiting stronger. And if you just look at the Henderson dialogue I had today, right, taking a successful upfit strategy, replicating it across three other facilities, we're going to be nothing but more efficient and more profitable exiting this thing as a result. So it really -- I'm excited to see what happens when these headwinds subside. I will tell you, we're as impatient as anybody on this point, right? I mean this is all taking longer than any of us would have hoped the headwinds are out of our control, but we feel very well positioned that when these things dissipate, it's going to be fun to watch what happens at Double Dynamics.

Great. I appreciate that. And then just two quick ones. Just on the non-truck attachment side, can you just talk about maybe the growth rate you're seeing there? I know you've talked about this for a number of years, but it sounds like it's garnering a larger percentage now.

Yes. I was just mentioning on the prior question, I don't have the exact percentage in front of me, but well over 20% to 25% this year from a growth perspective and projected to continue to grow. It's been a real focus area for the Attachments group.

We also -- I indicated in my script that you'll be hearing more on this topic from us as the year progresses. And we want to take the opportunity as we get a little deeper into the calendar year to highlight more specifically some of those product offerings and what the impact looks like longer term. It should be very exciting.

Great. And then just one last one around M&A. It sounds like there are some opportunities out there. What's the biggest hurdle at this point on completing a transaction in the environment?

Well, I would say two things. The first one is something that's on our target list becoming available. As you know, we have a very, very disciplined, thoughtful list of targets out there. And so obviously, number one, that needs to happen first. And then -- but as important to that, obviously, valuations, right? It's still a very robust multiple environment out there. And if and when one of our targets comes up, we're going to have to play to those market conditions, and we'll have to see where we land. But it is entirely possible that we may find ourselves in an environment where a desired property is up for bid, and we're going to have to determine if we can stretch and make the numbers still work. Again, we don't need M&A to get to the targets that Sarah has layed out.

I appreciate that. Thanks for taking my questions and good luck in Q1.

Thank you.

Thanks, Chris.

[Operator Instructions] And I'm not showing any further questions in the queue. I'd like to turn the call back over to Bob McCormick, CEO, for any closing remarks.

Thanks. Thank you for your time today. I'd like to leave you with a couple of thoughts. While pulling away from the economic impact of this pandemic is taking longer than any of us would like, -- we want you to know that three things remain true. Number one, we at Douglas Dynamics, we'll do everything within our control to improve and won't lose focus on the long-term profit drivers within our business while we manage through these short-term headwinds. Number two, the fundamentals of our business haven't changed, and we are well-positioned for long-term success. And number three, our team at Douglas Dynamics is driven to achieve our goals and to ensure that we meet long-term expectations. Thank you all for your time, and we look forward to seeing you in person at some point during the year. Have a terrific day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.