Good day, and welcome to the Douglas Dynamics Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nathan Elwell, VP of Investor Relations. Please go ahead.

Thank you, Nick. 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 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 Jim Janik, Chairman and Interim President and CEO; Sarah Lauber, Executive Vice President and CFO; and Mark Van Genderen, Chief Operating Officer and President of Work Truck Attachments. 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. Douglas Dynamics has a 75-year history of adapting and improving our operations. For our Attachment segment, this has been a year of adapting to very unusual weather conditions that we've seen. For our Solutions segment, it has been a year of delivering improvements following the challenging work put in over the past few years that is now paying off. This was a positive quarter for the company and I'm very impressed with the operational improvements that have been made. I want to recognize the dedication and resilience of our team which continually allows us to maximize our potential in all market conditions. With that said, let's talk about what happened in the third quarter. First, we saw an impressive performance from Work Truck Solutions, which is becoming a very nice trend. Our Henderson operations are outperforming expectations this year, helping to drive record double-digit adjusted EBITDA margins for the quarter in Solutions. Second, our results at Work Truck Attachments were more or less in line with our expectations. The other key factor this quarter was the 2024 cost savings program. As you may remember, earlier this year the team made difficult decisions to align our cost structure at Attachments and our corporate team in light of the demand outlook. The actions taken mean that Attachments is well positioned to succeed over the medium to long term in all market conditions. The program was implemented in the first quarter and expanded in the second quarter. And it is expected to deliver $11 million to $12 million in sustainable annualized savings starting next year. Importantly, we remain on pace to deliver $9 million of savings this year. Now, turning to results in each segment, starting with Attachments. As we noted, preseason orders were softer than previous years with demand…

Thank you, Jim. The explanation of our performance this quarter is relatively straightforward. The Attachment segment results were a little softer than our expectations as we managed through the elongated replacement cycle. But this was helped by the Solution segment which delivered a record third quarter performance and exceeded our expectations with a significant improvement in profitability. Of course, the sale leaseback has made things look more complex at first glance. As you probably saw, we completed the sale leaseback transaction in September, which delivered growth proceeds of $64.2 million. Cash taxes for the deal were $12.7 million, with transaction expenses of $5.3 million. $42 million of the proceeds were used to pay down our term loan debt, which in turn gives us more flexibility and allows us to better support our long-term growth plan. The incremental rent expense we now have, when weighted against the lower interest expense following the debt pay down, will have an insignificant impact on our earnings per share on an annual basis. The transaction was a great way to optimize our balance sheet and ensures we are well positioned to make investments in the business. The transaction included seven facilities with 780,000 square feet of manufacturing and upfitting space, and the initial leases are for 15 years with two 10-year options to renew. All seven facilities are critical to our operations, and these long-term leases reinforce our commitment to continue operating in these communities for decades to come. With that said, let's turn to the quarter. Although demand and attachments was lower this quarter, profitability remains flat based on the strong bottom line performance of Solutions and the impact of the 2024 cost savings program. On a consolidated basis, our third quarter net sales were $129.4 million compared to $144.1 million in the same…

We'll now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Michael Shlisky of D.A. Davidson. Please go ahead.

Hi, good morning. This is Linda [indiscernible] on for Mike Shlisky. Thank you for letting us ask questions. So my first question for you is on the Attachments segment. Can you update us on your off-highway Attachments business, such as your wheel loader and tractor-based products. Has this meaningfully contributed to growth in 2024?

Let me make sure that I understand your question. You're talking about the non-truck market. Is that accurate?

Yes, so it's the off-highway Attachments. So like the wheel loaders and tractor-based products. Yes.

Yes. They continue to have a very nice spot in the market. I would say some of the newer products are having some impact, but at this particular point, it's not material. But as we get into 2025 and beyond, we expect them to have a very good role within our profitability and our marketplace?

Yes, I can add a little bit of color to that. So for the third quarter, we were relatively flat when you look at non-truck sales. For the year, we are down similar to what we're down in preseason. So it just kind of follows the trend. And non-truck sales still represent less than 5%. But it is a large, large growing segment for us and Attachments.

Yes. This is Mark. I would add that from a product development standpoint some of the products that we brought to market over the last year or 18 months really starting to get into the groove right now. I was down in Louisville at a big show three weeks ago and our pusher plows, the big ones that go on skid-steers and front-end loaders, it's getting a lot of attention, it's got some great features, so we're pretty excited about that product in the future.

Oh, great. That's great color. Thank you. And then my next question would be, can you detail for us what you're doing for your dealers to help them until the winter starts? Are you offering to move inventories around to the dealers or even take back inventories if they ask for it?

Yes, this is Jim. I think for the dealers, most of them are typically have the equipment that they need. They're just waiting for the snow season to come around. It's not a mix issue for most of our dealers. It's a demand issue. So moving inventory around is a nice thought, but it doesn't add a lot of value or relief to any of our dealers. We do feel as if with any decent snow this coming year, inventory is going to be normalized by 2025.

Got it. Thank you for your time.

Thank you.

And our next question today comes from Tim Wise with Baird. Please go ahead.

Hey everybody. Good morning.

Hi Tim.

Hey. Maybe just in the Attachment segment, I guess you're expecting to have average snowfall in December. But I guess what is your expectation for reorder activity relative to average snowfall? I guess is that -- are you expecting reorders to be normal, or are you still expecting to see weaker reorders just as your dealer kind of start to flush inventory for any sort of initial [Multiple Speakers]?

Tim, I think you've hit the nail on the head. Your comment is that, with some elevated levels of inventory, many of the dealers will work down that inventory as they see retail activity and probably we won't see retail or reorder activity as you might otherwise see just because they're working down that inventory. So I think your point is the good one, is they're going to work down the inventory first and then reorder. So with average snowfall, we expect reorders to be, as we've indicated here, it would probably be a little softer than we would normally expect under the circumstances.

Our guidance has been fine. Even though we talk about average snow fall expected for now for a couple of quarters, we don't expect that to equate to average volume. So that's been embedded in our fourth quarter the way we're thinking about it.

Okay, okay. Good, that's helpful. And then, I guess from a production standpoint, I mean, you've always been -- you've always kind of heralded your ability to kind of react very quickly to changes in in-season demand. I mean, with the cost savings that you've kind of run through the organization, I mean, has anything changed from a production standpoint that would -- your ability to react to demand if it was better than expected?

Yes, Tim, this is Mark. I can take that one. I would say we're -- this year in particular, we've improved our ability to react accordingly. I mean, we know that the last 18 months with the snowfall, the last couple of years have been atypical. So, as a result, we really looked at operations across all of our facilities and, I'd say, improved our overall flexibility from a production standpoint, whether that means bringing it down to make sure that internal inventories are in line as we match those against dealer inventories, and at the same time if we need to ramp up. So we're in a pretty good spot right now, I think.

Okay, good. And then just on Solutions, I guess I was surprised that volume was down in the quarter. I guess I thought you guys still had a fair amount of backlog to work through. So I guess, is there a way to kind of break out price versus volume and then just kind of update us on where the backlog is? Because I guess the top line seems a little more variable now relative to maybe the backlog driven demand we've seen in the last couple quarters.

Yes, so it really is kind of a tale of two cities here when you look at the two businesses. So price for the quarter for Solutions is really in the low single digits. And the volume, it's up a little bit at Henderson, but more of the volume decline has been at Dejana. When you look at the backlog, in total, our backlog is up still from the end of last year. But we saw Dejana kind of eat into some of their backlogs, and Henderson's backlog has grown. I would say on the Dejana side, we have experienced some softness that we talked to a bit in the script from the standpoint of quarter volumes in the quarter. We're seeing some of that come through in the third quarter.

Okay. And then I'm going to squeeze one last one in. Just what are your free cash flow expectations for, I guess, the year in Q4?

Yes, our free cash flow expectations don't change a lot from what we walked through last quarter other than the impact of the sale lease back. So our cash taxes will still be in that 24% to 25% effective tax rate. But that has kind of doubled because of the gain that we experienced on the sale leaseback. And then we have experienced already in our results some positive flow through on working capital. So I used to think working capital was flat for the year and now I expect that to be slightly favorable. So the total free cash flow for the year after the sale leads back with all of that will still well exceed our dividend level.

Okay. Great. Thanks for the time.

Thank you, Tim.

And our next question today comes from Greg Burns with Sidoti & Co. Please go ahead.

Good morning. Just to follow up on the Dejana demand environment, what are you hearing or seeing in the market? Is it just maybe a pause because of election uncertainty or maybe some other short-term drivers? Or is there anything maybe more structural where you're seeing demand soften? Just trying to get a sense of where you feel that business might be in 2025 if you expect that maybe a rebound as interest rates come down and we get past the election?

Yes, terrific question. Thank you, [Nick] (ph). I think as we look at it, it's a little bit difficult to determine what specifically the impact of interest rates and the election are. We know it has some impact and we're seeing it particularly in the local commercial businesses. Businesses like plumbing contractors, electrical contractors who are local to our businesses. I think they're just being very reluctant to pull the trigger on orders at this particular point. Our hope is that it rebounds after the election and the impact of the reduction in interest rates starts to work through the channels. Overall, I think we're optimistic with the business. We're also seeing more of a shift towards weak business and a little less of the local market business. So there's some puts and takes, and I think as we go into 2025, we're optimistic, but we're not entirely sure which of these factors are playing the greatest role.

Okay, thanks. And then maybe in terms of expected cash generation in the fourth quarter and where you expect leverage to exit the year?

Yes, so we are at 2.6 times at the end of the third quarter, and I expect that to continue to decline through the end of the year. And as you know, the fourth quarter is by far the highest free cash flow generating quarter for us. And I expect it to go strong, to end strong.

Okay. And I know you're kind of operating under expectations of normal snowfall. But if it is another year of below-average snowfall, are there other -- do you have plans or maybe other measures, maybe in terms of further cost reductions or maybe other sale leaseback transactional opportunities, things like that, that can maybe help support the business if snowfall remains below average for this coming year?

Yeah, when we put together the 2024 cost savings program, We really spent a lot of time on optimizing the business for the run rate that we've seen over the last several years. The sale leaseback did the same with optimizing the balance sheet. I really feel like at this point in time, we have a runway of some lower snowfall from here and/or higher snowfall from here. I think the business is well set to deliver, depending on what the snow brings up. So I guess my answer to that is, at this point in time, no, not additional action.

Okay. Thank you.

[Operator Instructions] Seeing no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Jim Janik, Chairman, Interim President, and CEO, for any closing remarks.

Thank you for your time today. And going forward, our consistent focus on continuous improvement will help ensure we maximize the potential of any situation we are faced with. Our attachments team is ready for winter and right-sized for the current environment. If the weather cooperates and we see decent snowfall in the coming winters, we will be in a very good position to drive profits. Our Solutions team is now reaping the benefits of efficiency improvements implemented in recent years. And our company has a 75-year history of adapting and managing through uncertainty. And the only constraints are that the situations will arise and change will occur. We know how to manage through both the short term and the long term and recent results show when headwinds subside we deliver. Thank you and we look forward to seeing some of you at the Baird Conference in Chicago on November 12th. Thank you.

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