Earnings Labs

Douglas Dynamics, Inc. (PLOW)

Q3 2022 Earnings Call· Tue, Nov 1, 2022

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Transcript

Operator

Operator

Good day and welcome to the Douglas Dynamics Third Quarter 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Sarah Lauber, Chief Financial Officer. Please go ahead, Ma'am.

Sarah Lauber

Analyst · D.A. Davidson. 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'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.

Bob McCormick

Analyst · D.A. Davidson. Please go ahead

Thanks, Sarah. Good morning, everyone. Before we begin, I would like to welcome Joher Akolawala to our Board of Directors. Joher has a track record of strong leadership at Bluechip, multinational companies over 30 years across a diverse set of industries. Importantly, he brings a focus on finance, information technology, and cyber security and we look forward to working with him. We also want to thank Jim Staley for his contributions to the company. Jim will retire from the Board at the end of his current term at the 2023 Annual Meeting. Jim has been a trusted advisor to Douglas for many years and we are grateful for the great advice he has given us on many occasions. We will miss his counsel and wisdom and wish him all the very best for the future. Turning to the quarter. We are justifiably proud of our results for the third quarter. Demand for our products and services remained strong. Macroeconomic supply headwinds continue and the predicted increase in chassis and component supply has yet to materialize in a significant way. However, both segments delivered across the board improvements, compared to the same quarter last year. The strong demand outlook in both segments bodes well for the future. And we are simultaneously focused on delivering on the factors within our control while constantly trying to see around corners to limit the impact of macroeconomic challenges wherever possible. In the third quarter, net sales increased by 30% based on increased volumes and pricing adjustments in both segments. The revenue dropped through the bottom line with net income up 89% and adjusted EBITDA increasing 62%, due to higher volumes and improved price realization somewhat offset by operational inefficiencies due to supply chain constraints. We feel good about our position today and also raised and…

Sarah Lauber

Analyst · D.A. Davidson. Please go ahead

Thanks Bob. As you saw in our release, we delivered strong year-over-year improvements across the board this quarter, despite the ongoing macroeconomic headwind. From a consolidated perspective, third quarter net sales increased approximately 30% to 166.1 billion and gross profit increased approximately 35% to 41.3 million when compared to the third quarter of 2021 due to increased volume and pricing adjustments. We recorded GAAP net income of 13.3 million or $0.56 per diluted share, an approximate 89% increase when compared to $7 million [and] [ph] $0.30 respectively in 2021. These improvements were based on higher volumes in both segments and improved price realization, somewhat offset by operational inefficiencies due to supply chain constraints. We also controlled cost effectively with SG&A expenses increasing by just 1.6 million to 19.2 million during the third quarter based on higher labor costs and other discretionary spending returning to more normalized levels. Similarly, we generated stronger consolidated adjusted EBITDA of 25.1 million, compared to 15.5 million in the corresponding period of 2021. Interest expense increased by 1.1 million to 3.3 million, primarily due to higher interest on increased revolver borrowings compared to the prior year, plus higher interest rates on the term loan. The effective tax rate was 17.9% and 14.6% for the third quarters of 2022 and 2021, respectively. Effective tax rates for both quarters were lower than historical averages due to a discrete tax benefit of 800,000 in the third quarter of 2021 related to favorable state income tax audit results and a discrete tax benefit of 900,000 in the third quarter of 2022 related to favorable state tax rate changes. Based on these factors, we now expect the effective tax rate for the year to be approximately 24% to 25%, compared to our original guidance range of 25% to 26%. Now let's…

Operator

Operator

Thank you. [Operator Instructions] And the first question will come from Mike Shlisky with D.A. Davidson. Please go ahead.

Mike Shlisky

Analyst · D.A. Davidson. Please go ahead

Good morning and thank you for taking my question. Sarah, I want to follow-up on your comments on some of the balance sheet items there. You made it clear, yes, you have a very high consumable out there. It's growing quarter-over-quarter. It does typically grow quarter-over-quarter, but it's so much higher than normal. How confident are you like in past years you will generally collect almost all of those [durables] [ph] by the end of the fourth quarter here?

Sarah Lauber

Analyst · D.A. Davidson. Please go ahead

Yes. Good morning, Mike. Great question. Yes, it is up two-fold, much higher sales and the pricing impact that we've had, particularly at attachments. And again, the fourth quarter is when we generate all of our free cash flow. That is a significant quarter for us and collecting all of our pre-season receivables. There is nothing unusual from the balance sheet. As far as what's in the AR, there's no reason to expect that the collection would follow a different pattern. It really is just more out there to collect in the quarter.

Mike Shlisky

Analyst · D.A. Davidson. Please go ahead

Okay. Your comments on – you didn't make many on 2023, but I had a quick one that might be able to – this might be able to answer for us. In Q1 of 2022, the margins in attachments particular were pretty rough. I mean, it was a pretty rough quarter for you. It was probably the [trough] [ph] quarter for chassis supply as well. Can you at least tell us whether you think you're in [that] [ph] position for a more normalized margin range in the first quarter, it's always the – among the lower quarters of the year, but do you feel you'll be back to just prior to 2022 other first quarters in previous years by 2023 here?

Sarah Lauber

Analyst · D.A. Davidson. Please go ahead

Yes, I guess I can speak to some anomalies that we had in the first quarter of this year, which impacted our margins pretty significantly. In attachments, we had quite a bit of COVID cases in the first quarter of this year that we basically just were not operating effectively with the [indiscernible] that we had. So that was a significant impact. You're right on the chassis that was also a really tough quarter on the chassis constraints. So, as I look to how we think about entering next year, not necessarily providing any guidance from a quarterly perspective, but our teams have been navigating these headwinds. And we're more consistent in the efficiency at all of the locations and everything. So, I don't see anything magical from the standpoint of headwinds dissipating, but I do think that we are now navigating them in a much more consistent manner, which certainly helps us from a margin perspective.

Mike Shlisky

Analyst · D.A. Davidson. Please go ahead

Okay. I also want to ask about the chassis situation in the third quarter, if chassis were so challenged, how did you have so much more shipments over the prior year? It couldn't have been all pricing, but just share with us how you were able to make that happen despite having an appreciable increase in chassis?

Bob McCormick

Analyst · D.A. Davidson. Please go ahead

Well, pricing is certainly part of it [I can] [ph]. And the other thing that I would suggest building on what Sarah said, we've been navigating these headwinds long enough now that we're doing it more efficiently, more effectively. Obviously, our DDMS continuous improvement initiatives are at play here. I can speak to our Henderson business, the efficiency and productivity and their upfit centers is up dramatically versus a year ago. So, you put all those factors together and that is an impact. Now, have we seen some slight improvements in chassis? Yes, we have. Has it been consistent? No, it hasn't. So, there's a little bit of chassis flow that's helping us well, but I would say most of that is attributable to the teams getting more productive and more efficient in the chassis that we do move through the business model.

Mike Shlisky

Analyst · D.A. Davidson. Please go ahead

Okay. Let me just squeeze one last one in here. I'm curious if you have any planned expansion and capacity at DEJANA at any point in the somewhat near future to eventually work through that high backlog when chassis try to flow or is it not worthy to invest in any additional real estate there? If you can't do that, can you do anything on a temporary basis at least to work through that giant mountain of orders there?

Bob McCormick

Analyst · D.A. Davidson. Please go ahead

You're thinking about it the right way. As we've studied it, we do believe in the [10 DEJANA] [ph] locations that we have, that when chassis flow improves. Now again, when it improves, it isn’t going to be something where it’s like somebody turns the faucet at, right? It's going to be a consistent level of moderate to slow improvement over time that we can ramp up. We are highly confident within those facilities that we have enough capacity and enough personnel to be able to move that volume through and generate the incremental profits that we have in our financial models. Shouldn't have to add any more fixed cost to that business model.

Mike Shlisky

Analyst · D.A. Davidson. Please go ahead

Got you. Perfect. I appreciate the color, guys. I'll pass it along.

Bob McCormick

Analyst · D.A. Davidson. Please go ahead

Thanks, Mike.

Operator

Operator

The next question will come from Tim Wojs with Baird. Please go ahead.

Tim Wojs

Analyst · Baird. Please go ahead

Hey, everybody. Good morning. Maybe just on margins, this is probably the first quarter since maybe early last year where you saw margin expansion in both of the segments and I guess, I'm just curious if you, kind of look internally, I mean, do you think you've really turned a corner on things like price cost and some of the inefficiencies and we can continue to kind of see that margin expansion in the fourth quarter in both the segments and into 2023?

Sarah Lauber

Analyst · Baird. Please go ahead

Yes. Specific to solutions, Tim, we certainly saw better price cost in the third quarter and that will continue to improve. I've been saying for solutions this year that I expect the full-year in the low single digits for EBITDA margins. Fourth quarter is typically our seasonal best. And so, I would still expect that to occur for 2022.

Tim Wojs

Analyst · Baird. Please go ahead

Okay. And can you give us a sense of what the pricing contribution was in both of the segments?

Sarah Lauber

Analyst · Baird. Please go ahead

I can give you some sense on the top line. The top line, when you look at solutions that increases pretty much a split price being half of that and volume being the other half. In attachments, the increase in the top line 20% is due to price and the rest is due to volumes.

Tim Wojs

Analyst · Baird. Please go ahead

Okay. And then so what, I guess if you just kind of [snap the line now] [ph], I mean, how much of that price, kind of carries over into next year? Is it something like 5% to 10%?

Sarah Lauber

Analyst · Baird. Please go ahead

It's continuing to come in, so I probably can't give you a real precise answer on that. I would probably estimate probably close to 10%, but there are still moving pieces and parts with surcharges and different contracts.

Tim Wojs

Analyst · Baird. Please go ahead

Okay. Okay. No, no. I know there's moving parts, but the color is definitely appreciated. And then, I guess on the solutions business, I mean, can you give us a little bit of an idea of what maybe book-to-bill look like in the quarter? So, just trying to understand if backlog, even though you're able to ship more this quarter, I mean, did backlog actually grow sequentially? And maybe if you could just frame the size of the backlog for us? I don't know if it – dollar terms or something like that might be helpful?

Sarah Lauber

Analyst · Baird. Please go ahead

Yes, let me speak to backlog in total for Douglas. We did not grow sequentially. But our backlog is still very high and probably close to 15% higher than it was when we exited 2021.

Tim Wojs

Analyst · Baird. Please go ahead

Okay, good. And then just, I guess, on the supply chain, I mean, has anything really changed, Bob, over the last 60 to 90 days? I'm just trying – I mean, I know supply chain is kind of a broad term, but anything kind of with [Class 8] [ph] or 4-6 or any of the components to really kind of call out or is it still kind of pretty choppy?

Bob McCormick

Analyst · Baird. Please go ahead

Yes. I would say that the Class 3-6 is still fairly choppy. And Class 7 and 8, interestingly, we’ve talked about this on our last call. It is more stable and it's more predictable, but the lead times are still long. So, we have yet to see the lead time shrink there and we're not seeing anything consistently on the [Class 3-6] [ph]. Obviously, we're talking to the OEMs every day and they're not rushing up to the microphone and sending any clear signals as to what to expect in 2023, and I don't blame them. So, as we look at 2023, we're not expecting to see a significant move back to some semblance of normal chassis supply, but we hope to see positive improvement as we turn the corner.

Tim Wojs

Analyst · Baird. Please go ahead

Okay. And then I guess just the last one. What if the [faucet] [ph] did turn on? I mean, would there – if all of a sudden truckloads of chassis showed up at your facilities, I mean would you still be able to handle that or would there be inefficiencies if there's too much?

Bob McCormick

Analyst · Baird. Please go ahead

No, absolutely. I'd be out there with Sarah [indiscernible].

Tim Wojs

Analyst · Baird. Please go ahead

Cool. All right. Good. Well, nice job, guys. I'll turn it over.

Bob McCormick

Analyst · Baird. Please go ahead

Thanks.

Operator

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bob McCormick for any closing remarks. Please go ahead, sir.

Bob McCormick

Analyst · D.A. Davidson. Please go ahead

Thanks and thank you for your time today. I'd like to leave you with these thoughts. One, demand remains positive and our teams are doing everything possible to adapt to the ongoing headwinds. Two, the fundamentals of our business haven't changed and we are well-positioned for long term success. And three, we remain laser focused on driving profitable growth and are committed to our long-term financial goals of $3 of earnings per share by 2025. Thank you and we look forward to seeing some of you at the Baird Conference next week Chicago. Have a terrific day.

Operator

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.