Welcome to Douglas Dynamics' Second Quarter 2017 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. Now I will turn the conference over to your host, Bob McCormick, EVP and CFO. Please begin.

Thank you. Welcome, everyone and thank you for joining us on the call today. Two quick items before we begin. First, please note that some of the information that you will hear during this call will consist of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. Such statements express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, our actual results could differ materially from those in the forward-looking statements. For more information regarding such risks and uncertainties, please see the sections titled Risk Factors, Forward-Looking Statements and Management Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission and the impending updates to these sections in our quarterly report on Form 10-Q. Second, this call will involve a discussion of adjusted EBITDA, a non-GAAP financial measure which under SEC Regulation G, we're required to reconcile with GAAP. Reconciliation of this measure to the closest GAAP financial measure is included in today's earnings press release which is available at douglasdynamics.com. Joining me on the call today is Jim Janik, our Chairman, President and Chief Executive Officer. Jim will begin by providing an overview of our performance, then I will review our financial results before turning it back to Jim to discuss our outlook. Finally, we will open the call for your questions. Jim?

Thank you, Bob and good morning, everyone. Thank you for joining us. We produced solid results in the second quarter that were in line with our internal expectations and we're seeing a balanced performance across our more diverse business offering. Net sales were $139.4 million in the second quarter of 2017 compared to $113.8 million in the same period last year. Of course this increase is attributable to the addition of the Work Truck Solutions segment. Net income for the quarter was $14.8 million or $0.64 per diluted share compared to net income of $16.3 million or $0.71 per diluted share in the second quarter of 2016. Our results for the quarter reflect slightly better than expected pre-season performance for our commercial snow and ice products which is encouraging following two years of below average snowfall. The ongoing stability in the economy, positive dealer sentiment and late season snowfall, plus the positive response to our new product launches, all helped produce a strong quarter. In addition, the latest data shows continued growth with select North American pickup truck sales increasing 5% in the first half of 2017 when compared to the same period last year. We continue to see cautious optimism from our dealers regarding our 2017 prospects despite two years of below average snowfall. We expect our preseason period to split approximately 55%/45% between the second and third quarters respectively. Over the last few years the breakdown has been closer to 50/50 due in part to the introduction of new products. Based on the information we have to date, we believe our stronger than expected second quarter performance did pull forward some sales from the third quarter. As I mentioned last quarter, we're focused on innovation and expanding into different areas of the snow and ice management market such…

Thank you, Jim. I will begin with our consolidated earnings, followed by a review of both segments and then go over our consolidated balance sheet and company liquidity numbers. Overall, the results were in line with our expectations for the second quarter of 2017. As you can see in our press release, net sales were $139.4 million, representing a 22% increase over the same period last year which relates to the addition of our Work Truck Solutions segment which was finalized on July 15, 2016. In terms of gross profit, the second quarter of 2017 produced $45 million or 32.3% of net sales. This compared to $41.5 million or 36.5% of net sales in the same period last year. The decrease in margin as a percentage of sales is due to the addition of Work Truck Solutions which currently operates at more typical margins for this industry. SG&A expenses were $16.9 million for the second quarter of 2017 compared to $11.3 million in the second quarter of 2016. Again, this increase was due to the addition of Work Truck Solutions. We produced adjusted EBITDA of $31.3 million for the second quarter of 2017 compared to adjusted EBITDA of $32.7 million for the second quarter of 2016. The decrease was driven by the same factors I've already outlined. During the second quarter of 2017 we saw net income $14.7 million or $0.64 per diluted share compared to net income of $16.3 million or $0.71 per diluted share in the same period of 2016. Moving on, in the second quarter of 2017 we saw an effective tax rate of 34% and expect the full year effective tax rate of approximately 36%. As we noted in our last call, the Company's adoption of a certain accounting standard effectively increased the tax rate for…

Thanks, Bob. To close, I'd like to update our outlook and expectations for the second half of the year. Reflecting on the first half of the year, we understood early in 2017 that this year would be quite different from last year and that is proving to be true. We're making the necessary investments and are focused on implementing DDMS in our Work Truck Solutions segment. Our commercial snow and ice brands have faced a tougher preseason due to two below average snowfall seasons in a row, but are performing well under the circumstances and we continue to see positive non-snowfall indicators. Our municipal focused products have faced challenges due to an industry wide shortage of chassis at two major OEM partners which is now moving back towards being solved. It will take us the rest of the year to fully get back on track and still expect revenue to skew towards the back half of the year. Essentially, the year is unfolding as we expected and we feel positive about our long term prospects for the future. With all this in mind, we're narrowing our 2017 outlook and expect net sales for the full year to come in between $470 million and $520 million. This should produce EBITDA in the range of $85 million to $105 million which would translate into EPS of between $1.30 and $1.75 per share. While there have been various positive changes and challenges across our business so far this year, we remain on track to meet our guidance. We continue to execute our plan for the year and are confident we have the right long term strategy in place to deliver shareholder value. With that said, we'd now like to open the call for your questions. Operator?

[Operator Instructions]. Our next question is from Tim Wojs with Baird.

I had a couple of questions just maybe first starting off, how would you describe the new product introduction cadence this year maybe relative to prior years? Is it higher in terms of the number of SKUs or is it pretty similar?

The last three years, Tim, have been unusually high. In fact, as I go through it, the last three years we've actually introduced 26 new products. This year it's been about 9 with certainly a variety of models to that. So the cadence is a little high compared to historical averages. I would guess over time it would fall back a little bit to fewer than that. Many of the products this year, probably half of them, are replacing current models or past models we have had and probably half are entirely brand new products that are focused on tangent markets for us.

Okay. Steel costs have risen in the first half of the year and I'm just curious, Bob, how you're thinking about raw material costs maybe in the back half of the year. And has your stance on pricing changed at all as you've gone through the year just with the higher steel?

Yes, we've certainly seen some modest cost inflation this year. Steel prices have ticked up as you mentioned, but quite honestly, they are just moving back towards more of a historical normal range from our point of view. And having a little bit of visibility to these things before we go to the market with our annual price increase has allowed us to factor those costs into those price increased models and those things are all moving along as they historically do and we'll be able to cover up any contemplation with normal price increases as we've historically done.

Okay. And then with Henderson, is the expectation that can the second half kind of make up for the first half? So should that business grow this year or do you think that that starts to spill into 2018 a little bit? Because it sounds like it's more of an industry issue, not an issue with you guys specifically.

Correct. Our expectation and hope is that they can catch up and be a little bit larger than they were last year. Some of it could spill over into January, but overall we're beginning to see truck shipments pick up a little bit. So as I said in the script, we've got a great backlog order book is terrific, now it's really just getting the trucks and getting them done before the end of the year.

Our next question is from Mike Shlisky with Seaport Global.

This is Jordan Bender on for Mike this morning. I was wondering, do you guys need to do anything special to Arrowhead to get those facilities up to par with Dejana? And do you have to make any changes to their mix?

Well certainly, I mean Dejana has got a history of terrific customer service and very high-quality products. Arrowhead has a similar history but Dejana will certainly take that performance up a level or two. We will eventually implement DDMS concepts in those plants as well and all that looks very, very positive at this point in time. Our OEM partners will be allocating some additional vehicles to us here sometime in the second half of the year as we move even more production through that operation.

Awesome. Switching over to Work Truck Attachments, your operating margins were quite strong in the quarter and some of the best we've seen in some time. Is this indicative of the kind of margin that we should expect at $140 million per quarter run rate? Or was there something unusual like in the mix that we should be aware of?

You're asking specifically in the Work Truck Attachments segment? Well I think you've got -- you have the impact of a low snowfall environment that in a more normal snowfall environment you're going to see a little bit stronger mix in our commercial snow and ice control products. And there is a significant margin difference between what they do and what the rest of the industry does including our Henderson products. So I'd expect on a go-forward basis in a more normal environment, you're going to see higher operating margins in that segment just because of the mix coming back to a more normal place.

One more here, you guys have often talked about pickup trucks as a barometer for your business. If we see a decline in production and sales in this category in 2018, would you guys be concerned at all or can you make it up somewhere else?

It varies by segment for us in our attachments business. I think that it would be something we'd be aware of. If it was a significant drop, it would be something in my mind that I'd certainly have to be wary of. If it's a minor drop, no, that wouldn't bother me at all. In our solutions business, I think probably the answer would be about the same. Generally the markets react to significant swings and we're not anticipating significant swings either on a positive or negative basis. Much of our business right now is really picking up market share. And as a result, if we had a somewhat even modestly negative truck volume scenario, I think we'd still have success picking up some share.

Our next question is from Steve Dyer with Craig-Hallum.

Good morning. This is Ryan on for Steve. As it relates to Henderson, is there any risk with losing orders due to delays lapping municipal budget fiscal years?

Generally not. Because again, you won't lose orders to any other up fitter or manufacturer because the entire industry has got a similar challenge. The shortages that we've had are really from two of the larger manufacturers who carry a pretty significant share of all the Class 7/Class 8 business. So we wouldn't lose it to anybody else. And then secondly, the need from the municipalities still exists. So while it isn't ideal for a municipality, the scenario is such that there really aren't many alternatives. And for the most part we've been in communication with the municipalities and they completely understand. Many of our contracts are actually written in terms of how much time it takes us to ship to a municipality after you receive the chassis, so again, we're not at any risk if we haven't received the chassis. They understand.

As it relates to higher commodity costs, I know you pass through a lot of those costs to the customers, well earlier. Are you guys expecting any pushback there or have you seen anything in your conversations?

No, we have not received pushback of any kind.

As it relates to acquisitions, what are you guys seeing for potential opportunities, seller expectations? Any changes there over the past 3 months or 4 months?

No changes. We continue to look, but from our perspective, we tend to be fairly conservative and at this particular point we continue to look, but at the same time we continue to focus on making sure that the acquisitions that we have made are fully integrated and are doing a good job. So we'ren't getting too far over our skis.

Great, then on that note, you've owned Dejana for a little over a year now or about year. What's gone better, what's gone worse versus your initial expectations there?

I think two things really kind of jump out for me there. One would be the culture of the team there, their willingness to be part of the Douglas family. There's lots of great growth opportunities there but there's also some fairly sizable hurdles you have to clear in terms of transforming yourself from a private company to a public company. And it's a pretty tall hill to climb and they've been right there with us. So the people we knew were great coming in and they've been everything as advertised. I think the other thing I would point to, as referenced by the four new facilities that are in various stages of coming onboard here, is that the growth opportunities that attracted us to this business to begin with certainly are there. The relationships with the OEMs are very strong. The relationships with the customer base and the loyalty there, very, very strong. So we feel good about the long term prospects, we've got a team of people that are locked and loaded and ready to go. Those are the things that we think about and talk about that kind of jump to the forefront.

[Operator Instructions]. Our next question is from Chris McGinnis with Sidoti & Company.

Quickly just a follow-up on those four additional facilities. Should we think about that as that's normal course of business in terms of I guess filling out your footprint? Or should that kind of continue just due to I guess strengthening your position in the marketplace?

Chris, thank you, I've been waiting for someone to ask that question. Because this is not what I would consider to be a normal course of business. Sometimes this is just how the timing works out. One of the facilities was underway before the acquisition was even completed. The next three facilities are a reaction to OEM partnerships where growth opportunities exist. Just so happens that two locations came along with the Arrowhead acquisition. I wouldn't expect, nor should you guys expect that we're in some sort of a constant state of opening 3, 4, 5 facilities a year. Situation and circumstance will dictate when these things occur, but I would go back to the point of Dejana is a growth platform for us. If these kinds of opportunities that are evident of that growth there and I would expect that they will come in waves, they will come in chunks and sometimes it will be lumpy and sometimes there will be periods of time that go by without any new facilities. So we'll react to the opportunities as they come. Right now I would think we would say four is plenty.

Thanks for that. One more question and maybe a little bit rudimentary, but can you just walk through the difference of a low snowfall environment the way that you talk about in that playbook versus maybe a little bit stronger? And just how that looks being a little bit newer to the story? Thank you.

Sure. When you're in a business that is almost entirely weather driven, the way that we think about it, you can have a weather driven recession virtually every other year. That leads you to do two things. You have to build as variable a cost structure as you can because you need to flex up or down rapidly. And you also have to be able to make short term cost cuts by turning on a dime. What we've historically done, the things we've referenced many times, Chris, is as an example, in our manufacturing facility, we use a layer of temporary workers. Between 10% and 20% of the workforce at any point in time can be temps. When it doesn't snow, we can reduce the size of that workforce overnight and pull significant labor costs out of our factory. Additionally, a fair amount of our compensation in that core business is tied to volume and profit. So when it doesn't snow so much, you see variable compensation plans get adjusted down. When it doesn't snow so much, you can't convince an end user to buy a plow he doesn't need, so some of the marketing and some of the customer support programs can be cut. The last thing I would say is that it's very easy for us at a point in time to look at any open positions we have in the business and just put a temporary headcount freeze on that spending as well. So what is really cool about it, is the people that are inside our core business, when it doesn't snow, there isn't anybody walks around hanging their head, fretting, wondering what we're going to do. They basically reach in their desk, pull out the playbook, pull the levers and then we turn to focusing on DDMS initiatives so that we come out of the low snowfall environment stronger than when we went in.

Chris, I'm just going to add another thought here is that what it also does is it forces an organization to continually look at their priorities, both short term and long term. And even though we're in the low snowfall playbook I just described, we're going to introduce 9 new products this year. So we've made choices, cognitive choices to continue to invest in the things that require investing so that when snow gets back to normal or above, we come back even exponentially better than before we even went into the low snowfall period. So understand it isn't all about cost reduction, it's about making solid, value added choices that will pay off long term.

Thank you. We have no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Okay, thank you very much, Operator and thank all of you for your interest in Douglas Dynamics and hope you have a great day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.