Good morning and welcome to the Douglas Dynamics Second Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's remarks, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Nathan Elwell. 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 we 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 Jim Janik, Chairman and Interim President and CEO; and Sarah Lauber, Executive Vice President and CFO. Jim 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 over to Jim. Please go ahead.

Thank you, Nathan. I'm pleased to be back talking to you all today as Interim President and CEO following Bob McCormick's retirement. On behalf of everyone at Douglas, I want to reiterate our gratitude to Bob for his dedicated service to the company over the past 20-years. As CFO, COO, and most recently President and CEO, we wish him all the best in his retirement. Now, many of you may already know me, but here is a reminder about my background for those who don't. I joined the company in 1992 as Director of Sales and served in several roles before becoming President and CEO in 2000. I led the company in that role for 18-years before retiring at the end of 2018. I joined the Board in 2000 and became Chairman in 2014. As Chairman, I've stayed very involved since I retired. And it's been quite straightforward to step back into the CEO role. In fact, it's been a pleasure to reconnect with some people and meet others. I've traveled around. Many of our locations have been invigorated by the quality of the people that I've talked to and the ideas being generated. I'm relishing the opportunities to collaborate with our world-class team as we work to maximize our near-term performance. It's worth reiterating that I am committed to staying in this role while we find the next CEO to lead the company. We are not focused on a specific timeline and everyone on the Board agrees it is most important to appoint the right person rather than complete a quick search. We are evaluating both internal and external candidates and are willing to take the time necessary to conduct the search and make sure we get the right person to lead Douglas into the future. With that said,…

Thank you, Jim. I will jump right in and point out the two main takeaways from this quarter. One, the hard work over the last few years in our solutions segment is paying off, as evidenced by the record second quarter results with significant top and bottom line growth. And two, the tough decisions made earlier this year to adjust our cost structure were important for us to be able to maintain our strong financial position. During the second quarter, we saw profitability improve on lower net sales based on the management of throughput, pricing realization, and the successful implementation of the 2024 Cost Savings Program. Overall, our consolidated results for the second quarter were approximately in line with the same period last year across all metrics. Net sales were $199.9 million for the second quarter 2024, a slight decrease compared to the same period last year due to lack of snowfall, leading to lower volumes and attachments, which was largely offset by strong shipments at solutions. The 2024 Cost Savings program is now expected to deliver $11 million to $12 million in sustainable annualized savings, $9 million of which is expected to be realized in 2024. SG&A expenses including intangibles amortization decreased 6.7% to $25 million compared to second quarter 2023, primarily due to the 2024 Cost Savings Program plus lower intangibles amortization as well as lower stock and incentive-based compensation. Interest expense increased slightly to $4.1 million from $3.7 million. GAAP net income for the second quarter 2024 was $24.3 million, or $1.02 per diluted share, approximately in line with the same period last year. Adjusted EBITDA for the quarter increased to $43.7 million when compared to $43.3 million in -- for the second quarter of 2023. Adjusted EBITDA margin increased 100 basis points to 21.9%, highlighting the…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Mike Shlisky from D.A. Davidson. Please go ahead.

Good morning. Thanks for taking my questions. I wanted to touch first on order activity in [Technical Difficulty] Solutions. Certainly seeing stronger throughput is a lot of that due to existing backlogs, or would you say that incoming orders are covering what's coming out of the backlog and perhaps you're seeing a book to bill at or above one at the current time?

Yes, see -- it's pretty simple. What's coming out of the backlog is the current productions. We're also taking new orders that are generally replacing those. So we're still seeing a very strong backlog that in a few cases is actually growing. So it isn't diminishing the backlog very much at this particular point, which is good to have that visibility going into 2025 and beyond.

Yes, I'll just add to that, Mike. The backlog in Solution is sequentially up quarter-to-quarter, but it's really only down 10% from the peak, which was a couple of years ago. So still strength in the backlog.

Got it. Want to also ask about solutions in margins as well. You know, it's been a pretty long journey over the last five years, but it looks like this quarter you finally got back to that pre-pandemic margin level, and you're at least as of this quarter, were kind of knocking on the door of double-digit EBITDA margins. That might change in the back half, but given the number of units going through facilities and what you've done over the last five years with efficiencies and implementation of DDMS principles. And what you've added since over the last couple of years, I kind of wonder if 10% income margins for that segment is an ending point. It sounds like you're nowhere near where you could be on throughput, and you've got plenty of cost initiatives that haven't really shown up yet in the P&L. So can you maybe just give us some reasonable assessment of where solutions margins could be in a truly normalized environment?

Absolutely. No, it's a great question, Mike. And we are extremely pleased to see the results of all the hard work that we've put in over the last couple of years at Solutions. And this was a great quarter that really is demonstrating all of that. There was a lot that was firing on all cylinders in the second quarter. And as I said in my script, I expect the back half to maybe not have all those things firing and will be closer to where we were last year in the back half. But bottom line, the improvements that we're seeing are sustainable improvements. And so as we navigate into 2025, I think we'll be closer to that double-digit to low-teens long-term target, and we're just going to continue to focus on the plans we need to continue to make improvement to get there.

Got it. And turning to M&A, we saw a deal on the solution side in the up-turning world earlier this week, a pretty good-sized deal. And part of the rationale from the buyer was more scale, more product breadth, and more geographic reach for all their products. Can you discuss Douglas's desire to pursue similar growth in Solutions, especially when you get past the extreme low in attachments and the cash flow that normally brings? Just curious whether A. you are pursuing or looking at things and solutions to add to your portfolio. And B. Jim, if that is a job for the next CEO or if you're willing to kind of go that route in the near future?

No, Mike, we're looking at -- longer term, we look at a lot of opportunities both in attachments and solutions. In 2024, we're not looking at anything specifically. There are a couple of things out there that might be interesting in 2025, but right now it sort of pencils down for us on acquisition or M&A.

So, just to clarify, is that a function of -- you're waiting for the next CEO to take that on? Is it the balance sheet question and the current business trends and attachments is holding you back, but what do you need to see to kind of get something going on the M&A side?

Yes, I think, first of all, it's -- we're looking for specific opportunities and those opportunities right now aren't available. And that's the primary hurdle for us, I think, for the right opportunity, certainly it would either be the new CEO or it could be me, depending on how long the search takes. But it really comes down to finding exactly the right property that we think fits our company. But I don't want to get into too much detail because that would probably not be a good place to go.

Sure. Sure. Well, I appreciate the color. I'll pass it along. Thank you.

The next question comes from Robert Schultz from Baird. Please go ahead.

Hey, guys, thanks for taking the questions. Just starting off here, what do you think is really driving dealers to pull forward orders and attachments? I think we had a similar dynamic last year where Q2 had a higher split of total pre-season orders than expected coming into the year. So what are you guys seeing there?

I would say it's not necessarily dealers pulling ahead orders as it is, we have our pre-season ordering period. And then we have the ability to produce and ship the best way possible for our manufacturing facilities. And we were able to ship more out in June than we had expected. We are taking more production out in the third quarter than we did last year because we have lower volumes than where we were last year. So I think it's really more a function of, one, us having the right inventory and the ability to ship. And then two, level loading and figuring out the best way to manage our production and our inventory level based on our lower volume levels.

Got it. And then more on attachments, you guys called out the product mix was better there. More specifically, did you guys have higher P&A sales, or did you have favorable mix within plows? And maybe why does that not continue into the third quarter?

Yes, we actually in the second quarter going back to what I was just talking about, so we did ship out quite a bit of truck-mounted plows, which are higher margin plows. We also did have a higher merge in parts and accessories. And when you look at our parts and accessories for year to date versus last year, we're almost flat to last year. Whereas, you know, our other volumes, you can see the amount of volume that we're down just after two low snow season. So I don't fully expect that we'll have the same level of orders to ship in those product categories in the third quarter.

Got it. And then we've seen steel prices come down since the start of the year. What are your expectations for price cost as we kind of think about the remainder of 2024 and into 2025?

I can take that one. The cost of materials for the most part has been pretty flat with steel, obviously, to your point, has come down. I think we'll enjoy that in the fourth quarter and in the first quarter, but right now it's quite low, which we enjoy. But as you know, these things can change and a lot of that is based on lower demand in the Chinese market. So if that market picks up, certainly copper, aluminum, steel can go up, too. So -- but we're looking forward to some stable pricing over the next few months for sure.

Awesome. Thanks, guys. I'll leave it there.

Thanks, Bobby.

Thanks.

The next question comes from Greg Burns from Sidoti & Company. Please go ahead.

Just looking for a little bit of clarity on the guidance around solutions for the second-half. When you're talking about similar results to the year-ago period, is that from a margin perspective, or is that also from a revenue perspective?

From an EBITDA margin perspective, I don't expect the second-quarter margins to be linear. So what we've talked about in solutions is that we expect this year to have continued improvement to double digits for the full year. And so I still expect that. But when you look at the quarterly margins, I expect the EBITDA margins to be closer to Q3 and Q4 of last year, respectively.

Okay. Okay. And then with the, I guess, the throughput you saw in the second quarter and the backlog that you have, is there any reason to believe that? Was there anything special that occurred in this quarter that drives such high throughput and revenue this quarter? Or should we think about that continuing into the second-half of the year?

Yes, there was some favorable product mix. We had some larger -- higher-margin jobs that were shipped out in the second quarter that I don't expect to be in the third quarter. And then I would also say, just from a Henderson standpoint, I guess, the throughput improvement and then the contracts that we had in the second quarter were also favorable. So it really is -- it's not one big thing, it's kind of spread across both businesses. That brings me closer to last year margins.

Okay. And then I guess, in terms of the balance sheet and the leverage, I guess, it's stepping back down at the end of the third quarter. You're comfortable with how the year is lining up, staying within your covenant ratios?

Yes, we are.

Okay. All right. Thank you.

[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Jim Janik, Chairman and Interim CEO, for any closing remarks.

Thank you for your time today and your interest in Douglas Dynamics. We're pleased that the hard work to improve our operations is starting to pay off, and our consistent focus on continuous improvement will help ensure we maximize the potential of any situation. We know the weather will turn in our favor at some point, and when it does, our attachments team will be ready to deliver for our customers. Until it does, we will effectively manage our operations to preserve profitability while keep -- still keeping an eye on the future. Our attachments team has made significant moves to become right-sized for the current environment. And with decent snowfall in the coming winters, we should experience some nice tailwinds in 2025 and beyond. Thank you. And we look forward to talking to you all soon.

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