Ladies and gentlemen, thank you for standing by and welcome to the Douglas Dynamics’ Fourth Quarter 2020 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Sarah Lauber, CFO. Thank you. Please go ahead, ma’am.

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 other 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, our President and Chief Executive Officer. In a moment, Bob will provide an overview of our performance. Then, I will review our financial results and guidance. 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. I'm very pleased with our Q4 results. In fact, it’s our second consecutive quarter of positive results. Despite the difficult and usual circumstances presented in 2020, our teams have endured, remaining focused on serving our customers, and improving performance. Attachments group performed well with a strong finish to the year, which met our expectations. Solutions improved the bottom line with particularly strong performance at Henderson. If you had shown me our fourth quarter 2020 results in April of last year, I would have said I'll take it. While pandemic and the related economic headwinds will present some short term challenges in 2021, Douglas Dynamics is on a path to exit stronger, reaching towards our long term financial goals. Now, a quick health and safety update. From a pandemic perspective, all of our facilities remained operational throughout the quarter. We have seen an increase in absenteeism, as people are making good personal decisions staying home when sick, protecting not just themselves but their teammates. We remain vigilant. Our protocols are effective, and we're ready to handle any outbreaks that occur. I'm very proud of the way our people have adapted to and operated in this pandemic environment, ultimately driving performance without compromising team safety. Let's talk about the segments in more detail. First, the attachments group. It's actually pretty simple. The team executed strongly, outperforming Q4 for 2019 across the board. As we said earlier in the year, we knew this year would be different due to below average snowfall in the previous two winters, and our pre-season order period coinciding with the start of the pandemic. Having said that, we were still somewhat optimistic for three reasons. Number one, the landscapers were not heavily impacted by the pandemic. Number two, products such as the half-ton…

Thanks, Bob. Clearly we ended this extraordinary year on a positive note, delivering strong performance across both segments despite the ongoing impacts of the pandemic on both demand and supply. The headlines for the quarter include better top and bottom line results for attachments and a significant improvement in profitability for Solutions, thanks in large part to more normalized chassis flow at Henderson. In fact, it's important to note that on a consolidated basis, adjusted EBITDA, net income and margin, all increased this quarter when compared to Q4 last year. These improvements really highlight the ability of our income protection plan and DDMS initiative to positively impact results. Now, I'll provide details of our full-year and fourth quarter financial results. Full-year net sales were $480 million which is a 16% decrease compared to last year when we generated a record $572 million for the full year of 2019. The decrease was primarily driven by lower volumes and attachments due to two consecutive seasons of below average snowfall. Overall, pandemic-related disruption which caused us to suspend operations for part of the first and second quarters of 2020 and inconsistent Class 4 through 6 chassis supply at Solutions. Gross profit for 2020 was $128.3 million or 26.7% of net sales compared to $168.8 million or 29.5% of net sales in 2019. Gross margins were negatively impacted by our shutdown early in the year, inconsistent supply due to the pandemic, and inefficiencies due to absenteeism. We partially offset these negative pandemic-related headwinds with cost savings initiatives through our income protection plan. On a GAAP basis, we recorded a full-year net loss of $86.6 million or negative $3.81 per diluted share compared to generating full-year net income of $49.2 million or $2.11 per diluted share in 2019. The GAAP net loss was driven by…

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

Well, hello. It's 38 degrees, so we're actually out of freezing temperatures today. So, a little bit of more than relieved. But thanks for all the color. I guess the first question I had is just maybe on the Attachments business. How would you characterize your dealers and your distributors’ inventory levels kind of relative to normal? I think last quarter you said they were a little bit below. I'm just kind of curious as you're kind of thinking here through mid-February how those have kind of tracked.

Yeah. We take inventory at the end of January. So, we're about 30 days past the last inventory. And the good news, Tim, at that point is inventories were still down a little bit to their historical averages. So, that bodes well for us going forward, heading into pre-season for sure.

Okay. Okay. That's good to hear. And then, thinking about the kind of margin outlook for 2021, I'm kind of getting a low-20s kind of incremental EBITDA margin for the year to kind of take the two midpoints. And I'm just kind of curious what's the kind of puts and takes to that are just given last year you did have a fair amount of operating shutdowns in the first half of the year. So, can you just help us a little bit with what kind of the puts and takes are to the margins and some of the highs and lows?

Yeah. Sure, Tim. I’m going to break it down for you, between Attachments and Solutions, and then, kind of, a -- the consolidated view. When I look at the increments for 2020 to 2021, I would say Attachments are going to be around 35%, and I'm talking EBITDA increments. And that's not as high as the decrements that we experienced and really the main thing that's going on there is the absenteeism and some of the inefficiencies that we experienced exiting the year and entering 2021, which we're still navigating through. So, I expect some headwind there, that would not put us back to our typical increments. And then on the Solutions side, I would say it's closer to 25%. So, when the 25% to 30% is where I would put us. It's not all the way back from -- to the 2019 levels and that's really due to some of the COVID overhang that we're experiencing.

Okay. And how does fuel, kind of, factor into that? I mean, you've, obviously, seen higher steel prices, but your ability to go out and, kind of, recover that through pricing has been pretty good historically. So, how do you, kind of, think about price costs with steel specifically for 2021?

Yeah. I mean, you almost answered the question there in that. We think about it the way we always do, and that dollar for dollar, we will cover the inflation that we experienced. We are experiencing high fuel inflation. The difference, I guess, in 2021, when I think about the guidance range is there's still some uncertainty as far as covering the inflation within the year. So, there might be a lag that would take it into 2022.

Okay. That’s helpful. Great. Well, a nice finish to the year and good luck on 2021. Hopefully, a little bit more normalized environment.

Thank you, Tim.

Thank you. Our next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital. Your line is open.

I just want to dive a little bit more and helpful on the margins. But it seemed like you had a lot of these challenges in the second half of this year, seems like things progressed and got better throughout the year, exited the year well on the margin side. But now, we're going to take a step back, a fairly larger step I think than we were expecting in 2021 especially seeing the progress kind of exiting this year. So, I guess, can you walk through a little bit more kind of those operating inefficiencies? Things that really are getting worse, I guess, from exiting this year into 2021?

Yeah. Sure. Yeah. When you look at the fourth quarter of this year, those were 2019 level, but there were headwinds within those that are continuing into the front half of the year. I mentioned the absenteeism that really was on the tail end of the fourth quarter. If you think about, I guess, some of the COVID peaks that we've experienced they were very late in the year and into January. And that causes a lot of disruption in all of the locations that we have. So that was certainly a headwind. Steel in the headwind, we typically have a little bit of a lag on our steel inflation, so we have more of that coming in Q2, Q3. I think those are the large ones.

Yeah. I think I would add and we've mentioned this during the script portion, municipal budget challenges from an order perspective will impact Henderson in the first half of the year. That's obviously going to have an impact on their profitability. Again, the silver lining here is that quotes continue to be up which means equipment eventually needs to be replaced. But until the municipalities get the tax revenue budgets sorted out, they're sitting now a lot of quotes and orders have sharpened and that will impact performance in the first half, expected to pick up nicely in the second half. But that's another driver for us from a profitability perspective.

Can I add one more, Ryan? I guess, it's important to remind everyone that when we do our guidance this time of the year, we typically plan for average snowfall for the year and what goes along with that is the spending. So when we look at 2020, not only did we have our typical income protection plan that our attachments group always flexes to depending on the snow. We had what we called IPP plus which is the Solutions team also really buckled down. We plan to turn some of that spending back on as we track through the year and start seeing more improvements on the top line.

Great. And then just a follow-up on you mentioned some of the municipal budget challenges. You also mentioned a big backlog that you're working through. So I guess can you walk through kind of how long the backlog that you currently have is expected to run through and then kind of offset that with why you think the first half would be challenged given that backlog?

Yeah. I'm not going to go into providing backlog numbers. We haven't done that to-date. But you will recall Henderson continued to grow their order book even while the chassis constraints on that side of the business showed themselves. As those chassis constraints began to ease and orders began to flow, we really started to eat into that backlog in the second half of 2020. As I indicated, that’s when we started to see the order softening. So we've eaten through most of what I would call that excess backlog at this point in the last six months of 2020 and the first couple of months of 2021. So we're going to see a little bit of a gap here from an order perspective being able to flip those things and turn them into work trucks and get them out the door during the first half. So, while that strong backlog came in handy, we have it down to a more manageable, reasonable historical level now which is going to create some of the challenges we have until that order pace picks back up.

Great. That’s it for me guys. I’ll hop back in the queue. Thanks. Good luck.

Thank you. Our next question comes from the line of Chris McGinnis from Sidoti & Company. Your line is now open.

I was wondering maybe just when you’re thinking about the outlook for '21, I guess just -- what are you thinking on the two in terms of top line? Do you expect both to be up? And given the last, I guess on the solution side itself, what changes if the economy opens? What have you seen changed in the underlying trends around openings of states and geographies that you see? As we look into 2021, hopefully things will open more. How does that change the dynamic of the demand trends there? Thanks.

Hey, Chris. I'm just going to mention. You were cutting out but I think you're talking more about the guidance on top line for each of the two segments, right? I'll say on attachments, we have in our guidance as we always do average snowfall. So you’d see a natural increase there going from the second year of low -- below average snowfall to average snowfall. I guess the other thing I'd add there is it was an unusual year for attachments and that much more of the demand was in the back half of last year and it should go back to a more typical year in 2021. And then on the solution side, you know, the big I guess favorable mix that we would expect would be our comps in the front half of the year because we were shut down for six weeks in Q1 and Q2, which we were not able to fully make that up in the year. So, there will be the comp, I guess, would be better on the front half of the year than in the back half of the year. I think more specific to economy opening up and all of that, like Bob mentioned, are DEJANA orders have been very strong and that's our best representation of kind of more of a GDP business. And we've been very pleased with that, with what we've been seeing. The larger concern is on the Henderson side and municipalities making those decisions and getting those orders in.

Yeah. I think I might add. Sarah’s spot on, DEJANA is really the GDP business that we pay attention to. And they're on the East Coast, the mid-Atlantic which has certainly been right in the heart of this pandemic from day one. I would suggest that their order pattern strength, I don't want to completely lay that at the economy beginning to open back up. They've done a terrific job of identifying growth opportunities in specific markets and targeting those markets and targeting specific customers. So, I think we're actually probably grabbing a little bit of market share. As you see, their order pace strengthened which is terrific. We already spoke about the municipal budgets side. I think, again, just an overall comment from a pandemic perspective, you know, we're one year into this thing. I think there's reasons to be positive, right? There's downward trends and positive cases across the country. The vaccines will have a positive impact. But, right, if we've learned one thing over the last 12 months, it's that this thing isn't over until it's over. And so, I think we're wise as a business to take a cautious approach until this thing is in our rearview mirror. Sarah indicated earlier, yes, we have some income protection plans, spending things that we keep a lid on. Hopefully, when this thing opens up, you'll see some of that free up. But we're going to be cautious. It has worked well for us to this point. And I think that's the right approach for us to take knowing full well that when this thing is behind us, we've got momentum in order patterns, we'll have momentum on the municipal side when those budgets free up. And we should be in decent shape from a snow fall perspective. So, I think things look good longer term. We've just got to fight through these couple of near-term headwinds. You know what? We'll be a heck of a lot smarter on our next call because the snow season will be over and the municipal budget thing should be starting to show itself.

Great. I appreciate that color. And then, just on the first responder, introducing that, but two questions. One, I guess just you flagged delivery maybe in the first half or late in the first half this year, can you just talk about the response you're seeing normally. And then, next question is, can that also be made -- I don’t know if that came up a big [ph]. Thanks.

Yeah. Well, I will start with your second part first that absolutely can be sold into the Dejana’s markets. And so, we will look to roll that portion of it out probably later during the year. I will tell -- here's probably what I think is one of the most interesting early signs of its acceptance. We put a number of demo trucks together, okay. A demo truck is a mockup. It's not a production-pristine product, is a mockup, it’s not a production pristine product, but we've built a handful of these complete packages and our salespeople drive them around to municipalities to show them up and say, this is what it looks likes, this is what you can order, here is the availability. We have sold all those demo trucks already. People aren't even waiting for the first production pieces to come, which is a terrific signal at what we think the early acceptance level is going to be. The other thing that is interesting is that while the municipalities have budget challenges, right, these Class 7 and 8 trucks are anywhere from $75,000 to $150,000 a vehicle for the most part. And these small- or medium-duty trucks are $30,000, $35,000. So, we may find some of these products may fit a little bit more nicely into the current budget environment as well, that could turn out to be another positive driver for us.

Sure. Makes a lot of sense. Thanks for taking my questions and good luck in Q1.

Thank you. [Operator Instructions] At this time, I'm showing no further questions. I would like to turn the call back over to Bob McCormick for closing remarks.

Thank you for your time today. As always, we appreciate your ongoing interest in Douglas Dynamics. We hope you are staying healthy and we look forward to seeing you in person down the road. But between now and then, I'm sure we'll be seeing some of you on a Zoom call soon. Thanks and have a terrific day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.