Good morning, ladies and gentlemen, and welcome to the Douglas Dynamics Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Sarah Lauber, Chief Financial Officer.

Thank you. Welcome everyone and thank you for joining us on today's call. Before we begin, I'd 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 are Bob McCormick, our President and Chief Executive Officer. In a moment, Bob will provide an overview of our performance; then, I'll review our financial results and guidance before turning it back to Bob for final comments. After that, we'll open the call for your questions. With that, I'll hand the call over to Bob.

Thanks, Sarah. Good morning, everyone. Due in large part to the continued commitment and execution from the entire team here at Douglas Dynamics, we were able to sustain our positive momentum and produced strong third quarter results. Our team delivered record third quarter net sales of $142 million and improved net income of $12.4 million and adjusted EBITDA of $25.1 million, both considerably higher when compared to the same quarter last year. These strong financial results reflect the ongoing positive demand trends that we are seeing across both segments and the tangible progress that we are making with our DDMS initiatives. Throughout the first three quarters of 2019, we have been impressed with the progress and accomplishments both segments have achieved. First, I'll highlight Work Truck Attachments. The preseason for commercial snow and ice control products ended well and right in line with our expectations. We experienced an approximate 60% to 40% split of preseason shipments between the second and third quarters, in line with 2018. Despite this past winter snowfall being generally less favorable compared to the previous year, net sales increased 8% in our Attachment segment. This confirmed that end-user demand is resilient and matches the cautiously optimistic tone we are hearing from both our dealers and end users. When you include the fact that inventory levels and truck sales are in good shape, we are well positioned to execute effectively when the snow starts to fly. It is worth noting that non-truck snow and ice control equipment sales and our expanded parts and accessories offering continued to grow, albeit off a small base and at lower margins. And I'm excited to see incremental improvements in the years ahead. While tariffs continue to result in material cost inflation, we are covering the costs dollar-for-dollar and continue to utilize…

Thanks, Bob. I'll follow the usual routine, beginning with our consolidated earnings for the quarter, followed by a look at the results for each segment and lastly, comment on our balance sheet, liquidity and guidance. As Bob discussed in his opening comments, we are pleased with our performance during the quarter due in large part to higher sales from continued positive demand trends across both segments. In addition, we are continuing to see the year-over-year improved operating performance in our solutions segment. We achieved record third quarter net sales of $141.9 million, a 14% increase over the same period last year, with gross profit increasing to $39.9 million when compared to $34.9 million in the same quarter last year. Our gross margins are up year-over-year due to improved solutions performance, but they were muted by the impact of material cost inflation. SG&A expenses were $17.3 million, slightly higher when compared to the third quarter of 2018. The increase related to higher performance based stock compensation driven by improved operating results. However, SG&A expenses as a percentage of sales declined by approximately 1% to 12.2% this year. The strength and demand across the businesses and our improved performance that I've already mentioned drove adjusted EBITDA up approximately 22% to $25.1 million for the third quarter, compared to $20.5 million for the third quarter of last year. Adjusted EBITDA margins increased to 17.7% this year, compared to 16.4% last year. Both net income and adjusted net income also increased over prior year. For the third quarter of 2019, we generated net income of $12.4 million or $0.53 per diluted share, an approximate 25% increase, compared to net income of $9.9 million or $0.43 per diluted share in the same period last year. On an adjusted basis, net income was $12.8 million or…

Thanks, Sarah. In summary, I couldn't be more pleased with our year-to-date results, and we are well positioned to close out 2019. Our teams in both segments continue to execute and the focus on continuous improvement is consistent throughout the organization. At Douglas Dynamics, the future continues to be bright. I'm excited about the rest of 2019, the next five years and beyond. With our prepared remarks complete, we would now like to open the call for questions. Operator?

[Operator instructions] Your first question comes from the line of Steve Dyer from Craig-Hallum Capital Group. Steve, your line is now open.

Good morning and congrats on the quarter. Ryan on for Steve here.

Thanks, Ryan.

Thanks, Ryan.

So it sounds like everything is going well. Chassis supply is incrementally getting a little bit better. And Sarah, you made some comments on the Q4 guide, basically the uncertainty with snowfall, but besides that uncertainty, I mean the implied guidance is for 2% sales decline at the very high-end of the range and then getting worse as you go down. But are you seeing anything else, I guess, that's given you caution to expect the sales decline in Q4 besides the snowfall uncertainty?

Actually, Ryan, no. I mean we honestly expect growth in both of our segments. But when looking to the full year, there was just really caution around one snowfall, which is always important for the fourth quarter. But general other news, OEM strikes that are in the news and those types of things just made the chassis a little bit more of a question for us. So the expectation, like I said, would be high end from a volume perspective. I wouldn't read anything into the -- not changing of the guidance for the year.

Great. That's helpful. Then as we move over to margins, so there were some margin headwinds related to investments in the business. And you mentioned at your Analyst Day, this increased focus on this non-snow truck attachments. Can you elaborate a little bit, I guess, on how much was spent on new product development in the quarter and then maybe how that compares to prior quarters? And then any expectation, I guess, over the next several quarters of how that spend as well as kind of the future revenue contribution looks like from a cadence standpoint?

Sure, sure. I mean let me talk to the Attachments overall. I mean let's focus just on Attachments. I want to set the stage there. I mean we're almost at 25% EBITDA, so still awesome earnings profile for the business. There were three things that happened this quarter that we talked about. But essentially, although they lowered the margins, they were all positive. One, being the fact that price is covering inflation. However, that just from a mathematical standpoint, the dollar-for-dollar is impacting the margins. Two, the increased sales in our non-truck products, so we're growing there, it's just the fact that it's not going to carry the same margin profile of our truck-mounted products. And then, third, investments in the business, which is also a positive for long-term. It did show up somewhat in the third quarter compared to last year, although still high margins for the business. I expect in the fourth quarter that fourth-quarter attachments margins will improve. We will have more of the pricing and material equilibrium happening in the fourth quarter. So I expect going forward those will improve.

Yes. Let me add on a couple of extra comments to that. I want to be clear. The base margin profile of this highly profitable business, the truck-mounted snow and ice control portion of this business is not deteriorating, okay? We are focused on that, laser-focused on that, profit grows every year on that core product line and there's nothing to be concerned about there. So is other comment, which I think is worthy of expanding on, when you've got a business with 50% to 60% market share in that core product category, you are challenged to find new opportunities for growth. And our focus in the non-truck market and in the parts and accessories area is absolutely the right place to be. I'm thrilled to death with the top-line revenue growth opportunities that we have there and if that comes at more normal industry margins, we should be high-fiving in the hallway. This is a great business that continues to not only grow the top-line in these areas, but also protect and grow the bottom-line.

And then just one quick follow-up, Sarah, on what you mentioned on expecting Q4 Attachments margins to improve, is that on a year-over-year basis or a sequential basis versus Q3?

Year-over-year and sequential.

Great. Last one for me, and then I'll turn it over. So free cash flow burn, you commented on some of the moving parts there, and a lot of that is seasonality and working capital changes, but EBITDA is nicely higher year-over-year, year-to-date as well as the guide implies. Is it reasonable to assume free cash flow will be up year-over-year for the entire year when all is said and done? Thanks and good luck.

Yes. Our expectation is that it would be up and looking to the EBITDA is probably the right approach.

Your next question comes from the line of Chris McGinnis from Sidoti. Chris, your line is now open.

Good morning. Thanks for taking my questions and nice quarter. If we can just maybe touch on some of the growth on the Attachments side. Was there any reason they were stronger than others offhand?

Yes. I would point to one. I was hoping somebody would ask about this. At our industry trade show in March, we introduced what we considered to be revolutionary, industry-leading new LED headlights that go on the front of our plow trucks. Second to none in terms of visibility, in terms of the profile that they cast across the areas that you are plowing, and we've received nothing but tremendous response to that product introduction and essentially, the first round of orders of those products shipped during the third quarter. So that was the largest driver, something we're excited about. And clearly, again, continues to position that business as somebody whose products outperform competitors' products, thus justifying our price leadership position out in the marketplace.

Great. I appreciate that. And any regions offhand now? Or, on a geographical basis, was there anything stronger anywhere else or is it just kind of normal course so far for the year?

I would say its pretty normal course. We are getting some, not significant, but we are getting some early snowfall across parts of the snowbelt at this point. And but what we say at this point is that's called psychological snow, which doesn't really necessarily mean that there's a lot of plowing taking place, but it gives the landscapers a chance to contemplate whether this is going to be a long, heavy season and most times leads people to stock up on equipment and get ready earlier. So we are looking forward to that positive momentum from this early snow.

Great. And then just moving to the solutions business, just the growth there. Is there any way to parse it out between maybe Henderson performing a lot better versus the kind of the traditional Dejana business offhand?

Yes. When you look at solutions growth for the quarter, very good growth for both businesses. They were both pretty much in line with strong demand across the Class 4 all the way to Class 8.

Was there anything special, I guess just a pretty strong number? Obviously, anything special there in terms of the growth that helped to fuel that growth?

I might just add that while we are seeing chassis trends on the Class 8 side start to fall in line with expectations that we think will impact 2020, we are still seeing pretty long lead times for those chassis. The reason the Henderson business is up is because order intake continues to be robust. And if you go back a year, the order patterns at Henderson were strong a year ago, six months ago and nine months ago, and those orders got into the OEM systems with plenty of time for delivery yet into the third quarter. So we can see increased revenue on the Henderson side, even though lead times remained fairly long just because we're able to get those orders into the system 6, 9 and 12 months ago. So I'm expecting even better things once we start to see the chassis lead times actually start to come down in 2020.

Great. Okay. And just last question. I think you referenced within the solutions business supplier rationalization. Obviously, at the Analyst Day, you highlighted on the Attachments business what you've done there. Can you just maybe talk about that opportunity and maybe where it's at today and where you think it could go over time?

Yes. I would state that's an excellent question. I would state that most of the opportunity still lies ahead of us. The excellent results that you've seen in our core business on that front that was probably a five- to seven-year initiative led by Jim Klotz, and Jim is just now beginning to lead both of these solutions group businesses down that path. So we are just scratching the surface on that side. I would expect to see positive things over the next couple of years as we embark on not just trimming some suppliers that just can't meet Douglas' performance expectations, but more importantly, as we strengthen partnerships with the right suppliers for our long-term growth.

All right. Thanks very much and good luck in Q4. Appreciate it. Thank you again.

Thanks Chris.

Thank you.

[Operator instructions] I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Bob McCormick, President and CEO.

Thank you for your time today and your ongoing interest in Douglas Dynamics. We look forward to seeing some of you at the Baird conference tomorrow in Chicago. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.