Good morning, ladies and gentlemen, and welcome to the Douglas Dynamics Fourth Quarter and Full Year 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 hand the conference over to your host, Ms. Sarah Lauber, CFO.

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 to discuss our results is Bob McCormick, our President and Chief Executive Officer. Bob?

Thanks, Sarah. Good morning, everyone. Thank you for joining us. For the full year ending 12/31/2019 Douglas Dynamics delivered tremendous results with record net sales of $572 million and record adjusted EPS of $2.42. This outstanding performance in 2019 is even more impressive considering the headwinds we experienced throughout the year, namely; below-average snowfall for the season ending in March 2019, continued long lead times on Class 8 chassis and uneven supply of Class 4 through 6 chassis. While mitigating the effects of these external challenges, we focused on factors within our control providing high-quality product solutions to end users, which improve performance of their work trucks driving productivity and margin improvements throughout our facilities and maintaining our focus on getting better every day. I want to congratulate all Douglas employees for their first-class execution and dedication to serving our customers. It was quite a year. From a Work Truck Attachments perspective, we overcame the below-average snow season delivering near record results. This outstanding performance is driven by a combination of the ongoing success of our new product launches for our non truck-mounted equipment such as plows for skid steers and ATVs, strong acceptance of a more robust parts and accessories offering plus strong operational execution. Moving on to the current snow season. We got off to a good start in October and November, but the months of December and January saw a little snowfall and above-average temperatures across much of the snowbelt. In total through January, snowfall is below the 10-year average across the cities we track. More specifically, while the Midwest has seen reasonable snowfall so far New England remains significantly below average. Having said all of that, there is still a lot of winter left. As we've seen in the past two winter seasons there can be…

Thanks Bob. I'm just going to jump right into our full year and fourth quarter financial results and will then touch on our outlook for 2020. Thanks to the hard work of all the Douglas teams we were able to deliver a banner year in 2019. Full year net sales were a record $572 million which is a 9% increase over last year. The increase was driven by multiple factors across both segments. As mentioned last quarter, Work Truck Attachments experienced a strong preseason order period. They also benefited from new product launches strength in non-truck equipment and increased parts and accessory sales. In Work Truck Solutions, we experienced strong demand across all Class 4 through Class 8 truck market in addition to pricing recovery on higher material costs and the benefits of generally improved Class 8 chassis supply predictability. Gross profit for 2019 of $168.8 million or 29.5% of net sales compared to $154.9 million or 29.6% of net sales in 2018. Gross profit margin was in line with the prior year and we are very pleased with the impact of improved operational efficiencies, particularly in our solutions business. We were also successful on recovering price on material inflation within the year, but this dollar-for-dollar impact was dilutive to gross profit margins. In addition we experienced higher labor and health care costs which had a negative impact on margins. On a GAAP basis, full year net income of $49.2 million or $2.11 per diluted share increased from $43.9 million or $1.89 in 2018. Our strong full year performance across all operations resulted in record adjusted EBITDA, record adjusted net income, and record adjusted earnings per share. We produced full year adjusted EBITDA of $108.1 million compared to $96.4 million for 2018. In 2019, adjusted net income of $56.3 million…

Thanks, Sarah. In summary, we are very pleased with our full year results for 2019. But we do not celebrate for long here at Douglas Dynamics. We continue to be encouraged that we're in a strong position to deliver on the long-term goals that we've set forth in our five-year plan, but we are realistic regarding some of the short-term challenges we currently face. Nevertheless, the underlying fundamentals of both of our segments are strong and we are well-positioned for long-term success. Before I open up the floor for questions, I just wanted to thank our team for their ongoing dedication and tireless efforts on behalf of Douglas Dynamics, and our brands and making my first year as CEO a very enjoyable one. With that said, we would now like to open the call for questions. Operator?

[Operator Instructions] Your first question comes from the line of Tim Wojs from Baird. Tim, your line is now open.

Good. Good morning, everybody.

Good morning.

Good morning, Tim.

Maybe just to start how – I know you guys typically walk into a year with a pretty wide guidance range. Any way just to frame, how you're thinking what the – I guess any way to frame how the midpoint should kind of correspond in your eyes to kind of what you're seeing in externally? So the midpoint, I think implies revenues down a little bit. I think it does sound like you'll see revenue challenges in both businesses. And then how should we think about the drivers of just kind of EBITDA at the midpoint? What are kind of the offset kind of the positives and the negatives for each?

Yeah. No. Great question, Tim. The way, I'm thinking about the guidance overall as you know, we always have a wide range going into the beginning of the year, just to cover from a snowfall perspective. And this year, sitting here end of February, this looks like it could be another low snowfall year, which would compound the situation just from the standpoint that it would be two times in almost two years in a row of that. But I mean take a step back, our team knows how to manage through that. That's typical for us. But when we look at a broader view, there just seems to be more headwinds going into 2020 than we've had historically. We've got Class four through six that Bob mentioned we expect it could be more severe this year from just the volatility of supply. Class eight basically continues like it was in the fourth quarter, but we have an expectation that will improve, but not until the back half of the year. We are starting to see some labor shortages and that's starting to show. And then we have the wildcard of the coronavirus. So, I think when you take all of that collectively and you look at the range, our midpoint does point directionally to being down year-over-year. As I sit here today, that's probably -- that's where I land. So, you take that and then translate that to the EBITDA guidance. So first, I'll start off by saying, the fundamentals of the businesses are sound. And as Bob mentioned and I mentioned, we will focus on what we can control. When it comes to an earnings perspective, we had a lot of traction in DDMS in Solutions that we expect will continue into 2020. We're going to continue to focus on growth. We laid out a lot of our plans at Investor Day that will be occurring in 2020. Investing in our talent. We're going to focus on our long-term decisions. But even having said all that, the volume that I just walked through could mask some of the favorability on the EBITDA side. So, I think just from a midpoint perspective, that's a fair place, which shows just the challenges of not having year-over-year growth.

So, I think Tim, I would just add a couple of things. I mean, you've been around us long enough to know that, our guidance typically as it gets adjusted throughout the year is based upon the impact of snowfall and preseason orders and things tied to weather. In this particular case, you're likely to see more of our guidance adjustments throughout the year being made for things that we quite frankly don't yet understand the total impact of coronavirus being one of them and we're not alone there certainly. And this Class four through six chassis supply challenge, while we've had them before, as I said earlier, the early indications are that it may be more severe and lasts longer. Last year was choppy. 30 days were good, 30 days were bad, 45 days were bad, 50 days were good. We are getting early signals that it's more sustainable I mean from a timing standpoint that we're not going to see swings up and down that we're going to see challenges at least throughout the first half. So, I think keeping an eye on guidance this year is going to be probably one of the bigger challenges Sarah has and there are just going to be a number of factors that will influence that in addition to the normal snowfall adjustments.

Okay. Okay. No, that's helpful. No, I know you guys typically have a wide range. So, I think, it's just good to kind of get some color around kind of where you're thinking things fall out. I guess, kind of on that same kind of line of question or line of answering Bob, do you expect -- are you embedding that the preseason period this year is going to be down relative to last year just given the kind of two years of potentially below average snowfall?

It's too early yet for us to tell, Tim. I will tell you one of the interesting things that we're seeing is that, retail inventories are in pretty decent shape. I know you guys do some checks. The checks we did at the end of January show that retail inventories were better than we thought they might be. And what that probably translates to, is that the dealers had a more robust selling season when the landscapers are converting from summer to winter, before the snowfall even showed itself. And that's likely driven by the continued strong economy and still the record pickup truck sales, right?

Right. Yeah.

So from that standpoint inventories should be okay. But as Sarah indicated when you get two years in a row of below average snowfall that has a multiplier effect. I would expect preseason orders to be lower assuming that we don't see any wonderful terrific snowfall here over the next couple of months.

Yeah. Right. I guess, you're like the only management team that loves snow. So and then on the medium-duty classes, what's changed?

I guess, I would say nothing has changed in that when we hear about the supplier, our OEM supply chains giving them fits that was the same as last year. It was axles one month and then it was transmissions 90 days later. We are hearing similar things. Again, it's got to be very frustrating for them. So we're not hearing anything new. The only new information that we're getting at this point is that they are sending a clear signal that this is going with that -- this is going to be with us for a while. We still just as a reminder, we are forged number one full chassis recipient for 14 of last 16 years. And in 2019 that hasn't changed. So we still enjoy the most favorable position within the major OEMs of anybody in the market. So we know that when chassis become available, we'll get our fair share before the rest of the world. But this is like any other headwind this is something we have to work through.

Okay. Okay. And then just the last question I had. Can you just remind us when you put through the pricing increase in attachments and kind of when that anniversaries?

Let's see. I mean, we look at it, obviously, every year prior going in -- prior to pre-season. The last increase anniversaries here I think April 1. So we'll have the year-over-year favorable impact in Q1. And then the teams will be looking at that right now on what they're going to do for 2020.

Okay. Okay. Great. Well, thanks for the help. Good luck on 2020. Nice job on 2019.

Thanks, Tim.

Thanks.

Your next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital. Ryan, your line is now open.

Good morning, and congrats on the quarter.

Thank you.

Thank you, Ryan.

So you mentioned supply chain disruptions for the Solutions segment due to coronavirus and other kind of global supply chain issues there. But do you expect any impact in the Attachments segment?

Oh, sure, sure. I mean, it's -- when you look at our global sourcing office we have in China that office opened up a decade ago to serve at that point what was exclusively the commercial snow and ice control business. And still the lion's share of the dollars that we source through Asia are for the Attachments side. So I would expect it to impact both segments. We just don't understand how. I mean, we -- well not how, but when and when and how much. Everybody carries 30 days of inventory on the ground if you source from China. We're no different. We've been in contact with our major manufacturing suppliers in China. 80% of those suppliers were up and running. Last week the plants were up and running. So that's all good news. But we also know that people aren't coming back to those factories from a full employment perspective right away. We know that that putting boats on the water and even people who want a air freight shipments aren't going to be able to because of the flight restrictions that have been in place. So it isn't a matter of if we're going to have some shortages, it is a matter of when and to what extent. Having said all that, we will catch up. We have -- luckily this happens during the first quarter when we've got the balance of the year to get the supply chains full again. And I'm confident that, our teams will be all over making sure that that happens. But again it falls in the category right now, of we can't quantify it. We just know that logic tells us to be prepared for some shortages that will impact, both segments.

Got you, makes sense. Then just -- you've talked quite a bit about guidance, and kind of the year. But you noted basically a below-average snowfall year, thus far, but in guidance it assumes, a normal snowfall year. So I guess should we think that, the year, as we speak today without kind of giving credit to what happen to rest of the winter. But, that we're kind of trending maybe towards a lower end of that range? Or how do you think about kind of the high-end, low -end and mid-point of the guidance?

Yeah. I mean the range is mentioned on compass most of that variability of snowfall. So when we look at the mid-point, that's assuming average snowfall. And then, there's going to be plus or minus, depending on, actual snowfall.

But I think it's -- if we end up with our second below-average snowfall year, that's a logical conclusion to draw.

Yeah. Yeah.

Great, it's helpful. That’s it for me. Good luck, guys. And I hop back in a queue.

Thanks, Ryan.

Thank you very much.

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

Thank you for your ongoing interest, in Douglas Dynamics. We look forward to seeing some of you soon, at the NTA Work Truck Show, in Indianapolis, in early March and at the Sidoti Conference, in New York, at the end of March. Have a terrific day.

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