Q1 2024 Douglas Dynamics Inc Earnings Call

Participants

Nathan Elwell; VP of IR; Douglas Dynamics Inc.

Bob McCormick; President & CEO; Douglas Dynamics Inc.

Sarah Lauber; EVP & CEO; Douglas Dynamics Inc.

Robert Schultz; Analyst; Robert W. Baird & Co., Inc.

Presentation

Operator

Good day and welcome to the Douglas Dynamics first quarter 2024 earnings call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the call over to Nathan Elwell, VP of IR. Please go ahead.

Nathan Elwell

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 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, President and CEO, and Sarah Lauber, Executive Vice President and CFO. Rob will provide an overview of our performance, followed by Sarah reviewing our financial results and guidance. After that, we'll open up the call for questions. With that, I'll hand the call over to Bob. Please go ahead.

Bob McCormick

Thanks, Nathan. Our results for the first quarter 2024 reflect a continuation of trends we saw last year. Return solutions continues to deliver improved results, while work truck attachments has been hindered by unprecedented weather conditions. Having said that, we are pleased to report improved performance across the board this quarter compared to last year. The performance of our solutions segment was again, the highlight. This is the seventh consecutive quarter of improved performance versus the prior year same quarter. I'd like to thank the solutions teams for their continued hard work.
With chassis supply was at its worst, they stayed focused on what they could control and use DDMS to get better every day, knowing that when chassis supply improved, it exits stronger and more profitable, great job. Now let me run through our performance in each segment. Despite experiencing the second winter in a row with significantly below average snowfall all of our core markets, our work truck attachments team still managed to deliver improved results compared to last year.
Snowfall in the first quarter this year was better than the fourth quarter of 2023. And on the East Coast conditions were better than the previous winter. We were glad to break the record 700-plus day gap between measurable snowfalls, the important cities along the I-95 corridor. However, after a positive start to snowfall in the first quarter, with above average snowfall in many markets during January and the first nor'easter in two years in early February, there was a lack of snowfall through the rest of February and March. So the season ended as poorly as it began.
I should reiterate, we've never seen back-to-back seasons of this magnitude over the 75-plus years we've been in business, and we are in unchartered territory to some extent. While we already expected to finish this season with below average snowfall, the final totals were at the low end of our expectations and 40% below the 10-year average. Again, weather is the reason we are bringing down the top end of our guidance range, and Sarah will speak to that more later.
Given the deterioration in winter weather late in the season, we have expanded the 2024 cost savings program the with total annualized savings growing to $10 million-plus with $8 million to $9 million coming in this year. Our teams are committed to making the right decisions that will allow us to manage through this situation without compromising our ability to operate and grow. One bright spot during the quarter was the NTEA Work Truck Show in Indianapolis.
Our teams launched several innovative new products that were well received by dealers, including the straight-blade plow, a poly hopper spreader, and a hydraulic wind pusher plow, which is sitting in every one of our major product categories. It's also worth remembering that we expect the emerging industry demand dynamics to continue. First, customers are more demanding and willing to pay more for faster snow and ice removal. Second, winter weather continues to expand further south. And third, the landscapers need more equipment to get their jobs up faster and more efficiently and often with the same number of employees, which means they're expanding their fleets to include non-truck equipment. These positive trends are creating opportunity that just didn't exist in our industry five years ago.
Today, our broader product offering covers virtually every aspect of commercial snow and ice control with the leading brands and new products and opportunities on the horizon. Listen, there is no doubt it's been difficult recently for the attachments team, but as always, and just like our solutions team, with our focus on baseline profit improvements, new product development, and DDMS continuous improvement initiatives, we will exit stronger from this environment. Knowing our team will be ready to drive profitable growth again when more normal weather conditions return. The future possibilities for the attachments segment remain incredibly exciting.
Now let's talk about work truck solutions, where the recent results and outlook are very encouraging. After completing a strong finish to 2023, the solutions team continued to build upon that momentum, delivering another strong quarter to the start 2024. Our Dejana and Henderson teams are increasing the velocity of trucks through the upfit centers, which is really key to us improving our baseline profitability. There are several positive trends we are seeing, which collectively help driving our improved results.
Speaking about the Dejana, it's clear that our OEM partners are more focused on fleet and dealer business today. Our teams are adjusting our focus and business mix to match the industry trends, driving improvements in the fleet business where chassis are easier to come back today. So both our fleet truck and cargo truck business are growing, which we expect to be a trend that lasts throughout 2024. At Henderson, I'm pleased to report that the low margin contracts we've been battling through in recent years are virtually complete and are no longer a drag on our profitability.
Overall chassis supply is stable, it's starting to show signs of improvement in certain areas. Additionally, the dependable parts program we launched last year has been well received by our customer base and continues to gain traction. We continue our focus on internal profit drivers as we do every year, including product redesigns, sourcing improvements, and DDMS initiatives. As you would expect, the improved results we are starting to eat into our backlog, but I'm pleased to see new order trends also remain positive.
We still have a great backlog, significantly higher than historical averages, and if chassis supply improvements continue during the year, we are poised to move increased velocity to our other businesses. Our recent performance bodes well for the coming year, especially as overall demand outlook and backlog remain positive. While the progress may not always be linear, things are clearly moving in the right direction. In short, it's great to see the solutions group going from strength to strength.
In closing, we continue to navigate through external headwinds in a logical and effective manner. I'm so proud of our teams work together to find solutions to challenges while making improvements to the factors that are within our control. Our culture of continuous improvement will not only see us through these tough times, but ensure we emerge in a better position, stronger and smarter than before. I think the combination of our team's creativity, collaboration, and CI mindset is a recipe for long-term success and will be a key factor in driving progress towards our long-term targets.
With that, I'd like to pass the call to Sarah to walk through our financials. Sarah?

Sarah Lauber

Thanks, Bob. I'm pleased to report that when compared to the first quarter of last year are being called interest across all metrics. Net sales increased 16% to $95.7 million and growth profit increased 67.3% to $18.9 million. SG&A expenses decreased 4.3% to $21.5 million compared to first order of 2023. The improvement was driven by higher volume and price realization and solutions and higher persons accessory volumes at attachments.
In addition, extended payment lower based on the successful implementation of the 2024 cost savings program. This partially offset by related severance and impairment costs. In conjunction with the implementation of the 2024 cost savings program, we recorded restructuring and impairment charges of $2.5 million -- $2.1 million, which were in line with our expectations. Interest expense by $3.5 million for the quarter compared to $2.9 million incurred in the same period last year. We reported a GAAP net loss for the quarter, which is typical given the seasonality of our business.
The net loss for the first quarter 2024 was $8.4 million compared to net loss of $13.1 million last year, an improvement of $4.7 million. On an EPS basis, this translates to negative $0.37, a significant improvement compared to negative $0.58 in 2023. On an adjusted basis, we generated net loss of $6.5 million or negative $0.29 per diluted share compared to an adjusted net loss of $12.5 million or negative $0.55 per diluted share. Similarly, we generated a consolidated adjusted EBITDA up $1.5 million compared to negative $7.4 million in the corresponding period the prior year.
Let's review results for the two segments. work truck attachments results improved across the board compared to the prior year despite the sale increased from $23.9 million versus $23.8 million and adjusted EBITDA increased $5.7 million to negative $4.5 million. The improvements are driven by increased sales of parts and accessories, plus the implementation of the 2024 cost savings program. The above average snowfall in January led to record parts and accessory sales for that month.
Now I'm pleased to report that our results at work truck solutions continued to improve. Net sales increased approximately 13% to $71.8 million compared to the same period last year based on higher volume, improved chassis availability and increased price realization. This led to adjusted EBITDA margin increasing to 8.4%, which is the highest point in any first quarter since 2019. While some component supply issues linger, the overall situation to continue to stabilize and slowly improve.
With demand and backlog remaining positive, we're pleased to see the improvements we've worked hard for start to show up in our financials. While we still have a ways to go to reach our goal, things are moving in the right direction at solutions. With segment results covered, I'll turn to the balance sheet liquidity figure. Net cash used in operating activities improved by 62% to $21.6 million for the quarter, and free cash flow for first quarter 2024 was negative $22.9 million, an increase of $36.8 million compared to negative $59.7 million in the same quarter last year.
The improvement was primarily due to favorable changes in working capital, including a decrease in cash used in accounts payable and inventory and improved operating results. Inventory at the end of the quarter of $174.8 million was 5.3% lower than the $184.6 million at the end of first quarter 2023 as we held less finished goods at attachments this year compared to last. Inventory typically grows in the first quarter as attachments builds inventory in advance of pre-season activity, and this year, we are keenly focused on adjusting our manufacturing as needed to flex inventory.
Accounts receivable at the end of the quarter were $58.6 million compared to $48.2 million at the end of the first quarter 2023. The increase compared to last year is a holdover from the elevated at the end of 2023 and the current number is now much lower than the $83.8 million at year end. Capital expenditures in the first quarter were $1.3 million as expected, which is about half of the $2.7 million incurred in the same quarter last year, as we continue to curtail our spending as part of our 2024 cost-saving program. We expect to be on the low end of our targeted range of CapEx of 2% to 3% of revenue, and we will be prudent with the timing of the investments.
Turning to capital allocation, our priorities remain consistent. As always, we pay our quarterly cash dividend of $0.295 per share at the end of March. The dividend remains our top priority, and we expect to produce enough free cash flow during the year to cover the costs of the dividend, which is approximately $27 million. The effective tax rate was 16% for the quarter compared to 21.1% for the first quarter last year. Both rates are lower than typical based on discrete tax expense related to exempt tax from stock compensation.
At the end of the third quarter, we had a net debt leverage ratio of 3.3 times a couple of points lower than the 3.5 times at the end of 2023. The amended credit facility is providing us greater financial flexibility with a higher leverage ratio covenant at 4 times until June 30, 2024, returning the 3.5 times at September 30, 2024. We are well positioned to manage through this temporary situation.
Finally, I'll walk through our updated guidance. First, I'd like to revisit comments I made last quarter. I noted that the largest assumption in our 2024 guidance was at approximately half of the weather driven volume decline in 2023 would be recovered in 2024. As we saw on our earnings release, we are tightening our guidance ranges. Following the poor conclusion of the 2023, '24 snow season, and early indications of the pre-season at attachments, we've lowered our expectation pre-season orders. Although we are early in our pre-season ordering period, we are tracking to our revised lowered forecast.
We now expect 2024 volumes to be similar to 2023. However, we're expecting pre-season being closer to historical shipments of a 55-45 split between Q2 and Q3, while last year the pre-season split was closer to 65-35. This means we expect Q2 volumes to be lower than 2023. We've also found opportunities to expand the 2024 cost saving program, which is now expected to yield annual pretax savings of more than $10 million. We still expect to recognize approximately 75% of the expanded cost savings amount this year, which equates to $8 million to $9 million.
The outlook for solutions has not changed for the year and they remain on track to deliver improved top and bottom line full-year results for the 3rd year in a row with stronger improvements in the first half of this year when compared to last year with the back half of the year looking similar to 2023.
And finally, it's worth reiterating that dividend remains our top capital allocation priorities. So just to confirm the detail, our updated 2024 financial outlook is as follows; net sales are now expected to be between $600 million and $640 million compared to the previous range of $600 million to $660 million. Adjusted EBITDA is now projected to range from $70 million to $90 million versus the previous range of $70 million to $100 million. And adjusted earnings per share is now expected to be in the range of $1.20 per share to $1.70 per share compared to the previous range of $1.20 to $2.10.
The effective tax rate is expected to be approximately 24% to 25%. It's worth noting our outlook includes underlying assumptions such as relatively stable economic conditions, stable to slightly improving supply of chassis and components, and our core markets will experience average snowfall in the fourth quarter of 2024. However, looking longer term, our segment financial targets remain consistent. For attachments, we believe we can deliver low to mid-single digit sales growth and adjusted EBITDA margins in the mid to high-20.
For solutions, we expect to maintain mid to high-single digit sales growth, along with continued improvement towards double-digit EBITDA margin. In 2024, both segments are expected to improve over 2023 due to continued success on baseline profit improvements and greater price realization. These actions keep us on the path towards both segments achieving their margin profile over the longer term.
With that, we'd like to open up the call for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions)
Robert Schultz, Baird.

Robert Schultz

Hey, guys, good morning.

Bob McCormick

Good morning.

Sarah Lauber

Good morning.

Robert Schultz

Hey, so it's now been about two seasons now with lower snowfall totals in attachments, I just wanted to ask, during the past two seasons here, have you noticed any changes in the competitive environment or anything you'd call out from that perspective?

Bob McCormick

No. Terrific question. We do formal market share surveys with our dealer base every year. As you know, we've got 50% to 60% market share, and our market share is holding very solid. Our growth in some of our non-truck segments is adding to the market share in those areas. So we think that the competitive landscape is fairly stable, Bobby, even in this environment.

Robert Schultz

Got it. And then on the solution side, I think last quarter you guys had called out some expected impact from the UAW strike, were you guys able to quantify the impact on Q1 and maybe could have solutions performance even been a little bit better this quarter had you not seen any impact?

Sarah Lauber

Yeah. We actually saw very little impact from the UAW strike. I think from the standpoint of maybe some delayed chassis, those types of things, the teams were really creative, and we have enough backlog to work around some of those interruptions we experienced. It probably was no different than some of the other chassis' delays that we experienced prior to the strike, which was good.

Bob McCormick

Yes. I think to Sarah's point, certainly, we saw some chassis delays, now that OEMs were not jumping up and saying, here's exactly the impact. But hats off to the team for moving some other chassis and reprioritizing the mix so that we could still get decent flow through our upfit centers. So we're pleased that the impact in total, was pretty negligible and now appears to be behind us.

Robert Schultz

Got it. That's good to hear. And then one last one from me. Solutions margins were pretty strong this quarter. Does it change at all your expectations from that segment perspective for the remainder of the year? And I guess how do you kind of see the margin playing out for the rest of the year?

Sarah Lauber

Yeah. No, it does not change our expectations for the year. So I still expect full year margins for solutions will improve over 2023, making progress towards the double-digit long-term margin profile. But the front half of the year, I expect to be better than the prior year, whereas in the back half of the year, those are a little bit tougher comp base. I expect those margins to be a little more flat to last year.

Robert Schultz

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

Operator

Mike Shlisky, DA Davidson.

(technical difficulty) for Mike, thank you for letting us ask questions. So my first question is, can you give us some thoughts from the NTEA show? What were some customer reaction to some of your new products? And what do you think there -- do you think there are any growth tailwinds this year from those?

Bob McCormick

Yeah. Absolutely. In my comments I made reference to a number new product launches that we had. Probably the one that sticks out mostly for me is the hydraulic pusher plow product that we launched which rounds out our new pusher plow line. Very, very positive dealer sentiment there. This would turn out to be the most productive, efficient pusher plow in the industry.
So we've got lots of excitement there now. We have to temper that a little bit in this calendar year because with the two back-to-back historic low snowfalls and still some elevated retail inventories, it's going to take some of our dealers a little bit of time to work through existing inventory before they grab our new product lines. But the long-term prospects there are just terrific.

Great. That's good to hear. And then, on that, what are you hearing from dealers about the financial health of end-users? Have you -- like have multiple years of low snowfall affected their ability to buy equipment? Or have some of their businesses -- other businesses, like landscaping supported cash flow enough that it doesn't seem like many of them have financial distress?

Sarah Lauber

Yeah. I would say the reaction this year is similar to last year. We are partnered with very strong dealers. And what they are experiencing, I guess from their end users has not changed dramatically in the last couple of years. We've not had a lot of, I guess, dealer input to us that would be negative because of the weather patterns.

Okay. Thank you for the color there. And then my next question is what has been the order cadence at Dejana? Have backlogs increased so far this year?

Sarah Lauber

Yeah, I can speak to solutions in total. Solutions in total, our orders have been very strong. Our backlog is still very high. It really has only come down about 10% from its record high. So we have not been softening of demand.

Got it. And then my last question, I know it's not the most likely outcome, but if it doesn't snow next winter, how do you think your balance sheet and attachments segments are positioned? And what's your view on solutions? You think you have enough backlog or visibility that it could be an offset next year?

Sarah Lauber

Yeah, if we went to another year that would be similar to last year, there's a lot of things that have changed in the business that would be, I would say tailwinds for us. One, you mentioned, I mean, we have backlog in solution, our backlog in solution still is a year and possibly a little bit greater than a year. And then when you look at the cost savings program that we've implemented, a $10 million-plus savings a year, in addition to other baseline profit improvements that we've made. So from that standpoint, I mean, at this point, I do not have any concerns on the ability for our free cash flow in a similar year to cover our dividend like it will this year.

That's great. Thank you for your time today.

Operator

(Operator Instructions)
This concludes our question-and-answer session. I would like to turn the conference back over to Bob McCormick for any closing remarks.

Bob McCormick

Thank you for your continued interest in Douglas Dynamics. Let me finish with a few brief thoughts. We are encouraged by our positions in all the markets we serve today, and our long-term growth prospects remain intact. We're confident that our continuous improvement mindset will allow us to thrive as the external headwinds subside, and we continue to execute effectively, managed through the weather uncertainty, and focus on factors within our control.
I guess for those of you that have been around us quite a while, you know that we're focused on continuous improvement, you know that we have a get better everyday mentality. We're also a weather driven company, right? And this weather challenge we're navigating through, while we've never seen something like this before, remember it is short term. Weather will come back, and our attachments group will come back stronger when those weather conditions come back.
The solutions group is showing ongoing continuous improvement in terms of results. I say all that, just to remind everybody of two things. Number one, our dividend remains our top priority and always will be, and we will generate enough free cash flow to cover that dividend in 2024. And number two, when these weather headwinds subside, our long-term financial targets are still clearly within our reach.
So with that, thank you for your support. We look forward to speaking with you soon.

Operator

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