Good day, ladies and gentlemen, and welcome to the Douglas Dynamics Fourth Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Chief Financial Officer, Sarah Lauber. You may begin.

Thank you. Welcome, everyone, and thank you for joining us on today's call. A few 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, 2017, filed with the Securities and Exchange Commission and the impending updates to these sections in our quarterly reports on Form 10-Q. Second, this call will involve a discussion of adjusted EBITDA, adjusted net income and adjusted earnings per share, all non-GAAP financial measures, which under SEC Regulation G, we're required to reconcile with the most directly comparable GAAP measure. Reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at douglasdynamics.com. Joining me on the call today is Bob McCormick, our President and Chief Executive Officer; and Jim Janik, our Executive Chairman, who will be available to answer questions. Bob will begin by providing an overview of our performance. Then I'll review our financial results and our 2019 outlook before turning it back to Bob. After that, we'll open the call for your questions. Bob?

Thanks, Sarah. Good morning, everyone. Thank you for joining us. Due to the hard work of everyone at Douglas Dynamics, we produced robust annual results, including record net sales in 2018 of $524 million and adjusted diluted earnings per share of $2.04. This positive performance is based on broad and continued strong demand in both segments. While the chassis availability issues continue, we are pleased that how well our teams are navigating through the supply chain to meet our customers' expectations. We experienced below average snowfall across the country during the fourth quarter of 2018. As such, sales of our commercial snow and ice control equipment were negatively impacted by weather, but this was partially offset by increased demand for recently introduced non-truck-mounted equipment, such as plows or skid steers and ATVs. This is a nice growing market for us albeit at lower margins than our truck-mounted products. As a reminder, we benefited from strong performance in the first 3 quarters of 2018. Snowfall levels reverted to historical averages during the winter, ended March 2018 after 2 previous years of below-average snowfall across North America, which created stronger demand and robust preseason orders. Overall, 2018 was a solid year for our commercial snow and ice products. As we look into the first quarter 2019, we will have tougher comparisons based on the late heavy snowfall we experienced in the first quarter of 2018. Additionally, the other secondary demand drivers remain generally positive. In January, we completed our regular dealer field inventory, and the data indicated inventories were slightly elevated, which is in line with our expectations. Also, sales of select pickup trucks continued to be favorable, increasing 2% in 2018 when compared to full year 2017. During the fourth quarter, sales of our municipal products exceeded expectations, and margins improved…

Thanks, Bob. I'll review our full year consolidated earnings, provide more detail on the fourth quarter segment results, liquidity and the balance sheet. I will close with a look at our 2019 guidance. As Bob mentioned, due to the hard work of all the Douglas teams, 2018 was a robust year. Full year net sales were a record $524 million, a 10% increase over last year. Net sales increased due to the strong preseason order period for commercial snow and ice control products plus increased volumes in the Work Truck Solutions segment and price increases across all of our businesses. The sales increase was partially offset by chassis supply delays for our municipal products, which in turn, delayed our sales and has grown our backlog. Gross profit for 2018 of $154.9 million or 29.6% of net sales compared to $143.1 million or 30.1% of net sales. When viewing 2018 results, clearly material inflation was a large impact to all of our businesses. For the year, material inflation was offset by price increases within our businesses. However, in so doing, the gross profit as a percent of sales declined as I just mentioned. With all of the moving pieces around tariffs and steel and freight inflation, covering the headwinds for the year was a success. However, I'll speak to the fact shortly that the coverage is not always timed perfectly within the quarters. SG&A expenses for the year were $70 million and increased from $60.9 million recorded in the prior year. SG&A increased due in part to increased spending due to return to average snowfall, mainly variable compensation and advertising. On a GAAP basis, the change in full year net income and earnings per diluted share is magnified by last year's onetime benefit associated with U.S. tax reform, which totaled $22.5…

Thanks, Sarah. In summary, we are pleased with our recent results and believe we are poised for continued success as we execute our strategy in 2019 and beyond. We want to thank our team around the U.S. and overseas for their ongoing dedication and tireless efforts on behalf of Douglas Dynamics and our brands. Even though supply headwinds will continue in 2019, we take comfort that when chassis constraints start to ease, we will emerge much stronger and more efficient with improving margins across all of our businesses. We are invigorated by the opportunities we see in 2019, and we'll do everything within our power to successfully address them. As the new CEO, I am excited about our long-term future and the amazing team of people I have around me. With that said, we would now like to open the call for questions. Operator?

[Operator Instructions] And our first question comes from Tim Wojs with Baird.

Maybe I have a few questions, maybe just to start on the chassis availability. Is the main message that the predict -- I mean, basically, the predictability is going to allow you to kind of better manage the cost structure this year? So even though you're still seeing some volatility on the sales line, just your ability to plan production is a lot better than it was in 2018, and that's what gives you confidence that you can expand margins in both segments in 2019?

That is exactly right. And when you look at the Class 8 chassis situation, Tim, we've had 9- to 12-month lead times for the better part of 12-plus months. And so at some point, that becomes more predictable and you're easier to manage and plan schedules around it along with your cost structures. And so that is certainly the case. I will point out that Jon Sievert, President of our Henderson Division, has assembled a talented team, I mean, not only all these guys are winning out in the marketplace but they really are building DDMS foundation fundamentals and are positioning Henderson for some nice long-term profitable growth. And that's -- part of that is just being able to plan more effectively. We did see some of that in the fourth quarter. Henderson had a very nice quarter. And as Sarah pointed out, we expect those margin gains to continue to show themselves during 2019.

Okay. Okay. And then, I know it's early, but at this point, as you think about the preseason, would you anticipate maybe kind of the normal kind of 55-45 split between Q2 and Q3 right now? I think, last year, it was much more weighted to Q2. And I just want to make sure we kind of have that set right on models.

Yes. That's a great question. I would say, at this point, we can assume it goes back to more of the historical mix, but then some of that gets -- some of that shift ends up getting dictated by the cycle of new product launches, what the order book looks like for the new product launches and that sometimes shifts some of those things from Q2 into Q3. At this point in the cycle, I think the more 55-45 is a good place to be.

Okay. Okay. And then on pricing, is there any way to think about just how much pricing realization you saw in the quarter maybe as a percentage of the revenue growth in Q4? And I'm just trying to think of -- it sounds like price cost will maybe continue to be a little tough in the first quarter, but that's seasonally a weaker quarter for you. So -- by Q2, should we expect pricing realization to more than offset material inflation?

Yes. Tim, I guess, in thinking through pricing and the inflation that we saw in 2018, I think it was very clear that from a coverage perspective, for the full year, we covered it. You can see some of that in the top line for the year. As we then moved into the fourth quarter, there was a bit more of the material inflation than we saw in price. There was an impact. We expect that to go into 2019. I would expect Q2 to be improved than -- from that standpoint. But I think the clear message is, we will cover it. We are just working through some of the dynamics from a quarterly perspective.

Okay. Okay. And then the last one for me, just free cash flow conversions for '19. Any way to think about that? It sounds like inventory would normalize in 2019 versus '18, is that the primary swing factor?

Yes. I think when you're looking at free cash flow similar to this year in all of the aspects, I think from an inventory perspective, we've not yet predicted that, that will come down. I think we need to see more of the chassis freeing up for us to plan for that.

And our next question comes from Steve Dyer with Craig-Hallum.

Ryan on for Steve. So as it relates to guidance, you're assuming an average snowfall level this winter, but it seems like you've had a meaningful uptick here in January and February, and now maybe we're trending potentially in line or even above that average trend line. But what are you seeing in your key markets specifically over the last 2 months here?

This is Jim Janik. Can you finish the last part of the question, your voice dropped off?

Yes, I was just curious what you're seeing from a snowfall accumulation in your key markets, specifically in January and February, because it seems like from what we're tracking that we're in line to even maybe above average at this point in the season?

Sure. Sure. To this point, I may dive a little deeper than you care for, but the location and the timing of the snowfall is very important for us. And this year has been kind of a bizarre year. In that, November where it typically doesn't snow much, we got a fair amount of snow throughout the country. December was a very, very poor snowfall month, which is quite unusual. January, the first half of January was very poor, and then the second half of January through February, we've seen very nice snowfall. It has been somewhat regional in nature. The Midwest has gotten their fair compliment of snow, which is terrific, but some of the more populated areas along the East Coast are still at a pretty significant snowfall deficit. And I think -- overall, I think, you're right, as we get through the year, if the snow continues to fall as it is, statistically, it'll probably be average, a little higher in some places, lower in some places. So I would say, average, but the impact of where it fell and the timing might negate a little bit of -- if you took average minus a tick that would probably be a pretty good approximation of what's going on.

I think, just to add just 1 point on that, when it comes to guidance and how we're looking at the year, when you look at the snowfall last year in 2018, we had a very strong Q1, just when the snow fell. So the expectation is that it is a difficult comp for us as we enter 2019.

Great. That's helpful color. And then as it relates to the elevated dealer inventory levels, can you elaborate maybe what's going on there and how you think that will impact orders in Q1? And then if you think that will normalize? Or if this current snowfall is going to help and how that works itself?

Sure. Sure. And that's a good question. I'll just build on what Sarah just finished saying. We had very strong late-season snowfall last year and that would draw inventory levels down. When we have decent snowfall now compared to a more robust snowfall last year, not only does it make for us more difficult comps for the first quarter, but it also means that you had lower inventories from a dealer perspective as we neared the end of the season last year. So that's why we say they're slightly elevated right now, and that's in line with expectations that just makes sense. Now we know we still have plenty of winter left. Last year, if you recall, it snowed very nicely into March and April, and we take another dealer inventory at the end of February. And so we're not overly concerned about the impact of preseason orders at this point. And we just have to wait and see what the rest of the winter deals us. We'll have a better read on how we think it impacts the preseason order book in our first quarter call.

Last one for me, guys, and I'll hop back in the queue. Can you talk about the strength you're seeing in the non-truck attachment products? And then maybe what your expectations are there over the next few years with the product pipeline, et cetera?

Sure. Yes, it's -- when you've got the kind of market share we have in our pickup-mounted snow and ice control product lines, finding substantial avenues for top line growth becomes a challenge, but the whole non-truck part of the market really has been growing over the past few years, ATVs, UTVs, things like that, and that we've had some nice product offerings over the last couple of cycles that have been very well received in the marketplace. So even though fourth quarter weather dealt us a little bit of a revenue blow in our core business, it was the strength of those non-truck product offerings that really helped to mitigate part of that. In terms of future growth rates, I'm not going to get overly specific because of competitive reasons, but we still see a nice growth runway there with those non-truck product lines, and even in some non-traditional channels as well. We are now making product for some OEMs and that sort of thing. And this is all brand-new business for us. There's nothing cannibalized anything that's in our core business. So we're feeling good about the core business' ability to generate some top line growth over the next couple of cycles.

And our next question comes from Chris McGinnis with Sidoti & Company.

Just wanted to ask about a little bit on the solutions side. It sounds like maybe, one, you obviously could see better growth if you have better allotment, but would that be holding you back in terms of expanding that footprint until you have better visibility there? Or is it more about just getting the assets you have in place maybe at a higher utilization? Is that's the way to think about it?

Yes. I think it's clearly higher utilization of existing footprint without a doubt. We are starting to see some of our DDMS activities gaining traction, which means we can improve productivity and throughput through the existing footprint. Quite honestly, when the chassis situation eases on that side and we see some of that backlog flowing back through the operation, there is not a need for any additional footprint whatsoever. We feel comfortable that with the productivity improvements we've made that we can handle the additional volume with the existing footprint. I don't see any of that footprint anytime soon.

[Operator Instructions] Okay, ladies and gentlemen, that concludes our Q&A portion of today's call. I would now like to turn the call back over to Bob McCormick, President and CEO.

Thank you for your interest in Douglas Dynamics. We look forward to seeing some of you next month at the NTEA Work Truck Show in Indianapolis. Have a great day.

Ladies and gentlemen, thank you for attending today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.