Good morning, ladies and gentlemen, and welcome to the Douglas Dynamics first quarter 2021 earnings. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Sarah Lauber, CFO. Thank you. Ma'am, please go ahead.

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 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. We're off to a fantastic start in 2021 with record first quarter results. I will keep my comments fairly brief today for 2 reasons. Number one, this is about as straightforward a quarter as we've experienced recently or could have hoped for. Number two, the near-term challenges we face will be very familiar to you, same as every other manufacturing and auto-related company that you follow. Both of our segments turned in strong results. Attachments, we by the heavy snowfall during February in many key markets and solutions improved as more normalized levels of business activity returned. Our teams put forth tremendous effort to produce such strong results this quarter, given the pandemic was still in full force across the country for most of Q1. And while things have gotten much better today than a year ago and we've learned to operate effectively within the pandemic, we are not completely out of the woods. We are still seeing COVID-related absenteeism in a number of our locations. But we are proud of our team for their resolve, flexibility and creativity as we strive to exceed our customers' expectations while placing a high priority on the safety of employees. Generally very happy with the demand outlook in both segments, which sets us up for long-term success. The biggest headwinds that we face today are similar to many other industrial-oriented companies. Number one, supply chain disruption and component shortages, we're in the early stages of this challenge and much uncertainty exists. We do expect performance will be impacted through the balance of the year. Material price inflation is also a factor. And our margins will be impacted in the near term as our pricing typically lags actual cost inflation, but we will recapture it over the long run.…

Thanks, Bob. Overall, our record first quarter financial results were based on increased snowfall in our key markets compared to last year, which drove improvements at attachments, combined with the ongoing stabilization of the broader economy, which positively impacted both segments. Given the emergence of the pandemic in March of 2020, which included a complete shutdown of our facilities for the second half of March of last year, we expected to outperform this quarter, but the significant February snowfall and positive performance in our solutions segment meant we produced record results. From a consolidated perspective, we generated record first quarter net sales of $103.3 million and gross profit of $26.5 million compared to net sales of $68.2 million and gross profit of $11.7 million during the first quarter of last year. We recorded GAAP net income of $742,000 or $0.03 per diluted share compared to a GAAP net loss of $10.1 million or negative $0.44 per diluted share respectively in 2020. On an adjusted basis, we generated net income of $1.2 million or $0.04 per diluted share compared to an adjusted net loss of $7.8 million or negative $0.34 per diluted share. Similarly, we generated record consolidated adjusted EBITDA of $10.7 million compared to negative $1.7 million in the corresponding period of the prior year. Our improved consolidated performance on both a GAAP and an adjusted basis were mainly driven by the higher sales volumes in addition to avoiding the pandemic-related facility shutdowns that significantly impacted our first quarter 2020 results. SG&A expenses, including amortization expense, were $22.6 million compared to $19.9 million during the first quarter of 2020. The increase is primarily related to increased employee incentive-based compensation due to expected improved operating results. Interest expense was $3 million for the quarter, lower than the $5 million incurred in…

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

Maybe just to start off on the supply chain side of things, could you just elaborate a little bit on where specifically you're seeing tightness? It sounds like it's -- I mean, obviously, we've had chassis supply issues for the last couple of years. That hasn't really been cited. It sounds like it's more component. So maybe just kind of broaden out the discussion and just give us an idea of where you're seeing kind of the most supply constraint right now why we continue?

Yes, it clearly still is in chassis. I mean, all you have to do is pick up the Wall Street Journal to see articles about the impact it's having on the OEMs and that is impacting us both in Class 4 through 6 and in Class 7 and 8. And do we have other component challenges? Sure. I mean, you have entire economy trying to ramp back up to meet what appears to be some pretty robust demand. And I won't get into the specifics of commodities there. But it is large. We are paying most attention to the OEM rolling shutdowns of their facilities. And I will tell you, it is a very fluid situation. On a weekly basis, we have calls with them and they're making decisions on a daily basis as they get more and more color on what they can expect from a chip and from a component perspective. So while we didn't mention chassis specifically, that's the number one driver of the uncertainty as we see it similar to what most other industrials have been experiencing.

Okay. Okay. And then is there -- just on the muni side, I guess what has changed there in the past 60 days? Is it stimulus? Is it just the tax revenues and coming in better than municipals feared, so they're kind of going ahead with the orders? I'm just trying to understand maybe what has changed there? And if you could kind of elaborate a little bit on what the book-to-bill is in both Dejana and Henderson, I think that would be helpful.

Well, yes. I mean, going back to the last half of 2020, we had projected a softening in orders, not a softening in quote activity that was still as robust as ever, but we knew that with the municipalities being very unsure as to what their tax revenue looked like that we'd see a decline in orders. And we absolutely saw that in the second half and more notably in the fourth quarter. We did see it start to pick up as we turn the corner into 2021 and our team has done a great job of building the order book back up over the last 60 or 90 days. So I would say whether it's stimulus related, whether it's budget related, whether it's health related, whatever the drivers might be, we are seeing a nice increase in orders on the Henderson's side. It does result though in a temporary gap yet, most notably in the second quarter and into the third quarter a little bit about being able to match up chassis receipt with those orders. And so as Sarah spoke to and I mentioned, we've got these rolling shutdowns, which we'll put into effect. That will help us to mitigate the impact there. On the Dejana's side, I would say it's equal parts, economy starting to gain some traction and our sales team there just doing an awesome job. We're sitting at near-record backlogs there. We don't make that actual data public. But I think the big takeaway here is when these component headwinds solve themselves and they will, we're going to be very well positioned on the Work Truck Solutions side.

Okay. Okay. That's good to hear. And then maybe just the last one on the attachments business. I guess, how does field inventory -- it sounds like field inventory is relatively normal. It sounds like the pre-season is kind of started kind of relatively normal. What kind of informs your perspective that the order activity or the revenue activity that you saw in the quarter was some sort of pull forward? Just trying to understand, that's just, hey, things were better than we thought and it had to come from somewhere? Or if you're actually hearing something in the channel or with your dealers or distributors, that would kind of suggest that?

No. If you -- again, let's go back to the fourth quarter last year where we had said the pre-season order book in 2020 was lighter than normal, pandemic-related, completely expected and that the fourth quarter was going to turn out to be the wildcard, right? Well, the fourth quarter snowfall, right, December and January heading into the first quarter was very soft. And so we never saw that spike in the fourth quarter orders to the extent that we thought we might. And then when it snowed everywhere in the month of February, more specifically on the East Coast which hadn't seen it for a couple of years, we did see a nice spike in plow orders of February into March. And typically, that's when plow orders dry up. So it was certainly weather-driven to a degree, but we think it was pent-up demand related as well. They were just waiting for the snow to show itself before they release some of those orders. Will that impact the 3 season orders? We'll know here by the time we get to the third -- to the second quarter call, but we certainly can articulate that what we saw in order intake and shipments in the second half of Q1 was unusual.

Your next question is from Ryan Sigdahl from Craig-Hallum.

Curious, I don't think I caught it, but you talked about kind of supply chain as well, some pull forward, pent-up demand, et cetera. But have you -- did you mention what you expect from a seasonal cadence between Q2 and Q3, normally, kind of the 60-40 mix, but kind of what's the right expectation this year?

No, we did not mention it. I'm happy to walk you through that, Ryan. So if we go back to 2019 between the second and third quarter, we had a 60-40 split. Last year, very unusual year, we were at 50-50 between the two. Our expectation for this year is we are going to be moving back closer to that 60-40 split.

Helpful. And then just as far as supply chain, certainly difficult across the industry, everyone is feeling it. How do you think you're feeling relative to your competitors, primarily your largest competitor? And then what are you guys doing specifically from a DDMS standpoint to help alleviate those challenges?

Yes, that's an excellent question. I mean one of the upsides of us having these rolling shutdowns across multiple locations is that in those periods where we are shut down, we've got our DDMS teams focused on making process improvements so that when the plants come back online and chassis begin to flow again, that we can more effectively and more productively upfit that product. Now again, we've always felt that that's an advantage we have on any of our competitors. And in this case, it's planned for and is being executed. Now I do want to distinguish these rolling plant shutdowns are occurring on the solutions side, not on the attachments side. When you're in the attachments business, you can pull multiple levers to adjust production. Remember, we have a 15-plus percent of our workforce is temporary. So we can pull levers there. We schedule 4 day, 10 hour work weeks. We can flex up or we can flex down. So the rolling plant shutdown concept is a Work Truck Solutions one, again, which we will utilize to improve productivity and flow and the Work Truck Attachments group will just pull its normal weather-driven levers to manage through this period of time as well.

And then just on the vertical integration initiatives you guys have been working on. Do you think this environment actually makes it easier to accelerate some of those because there is more rolling shutdowns, et cetera? Or does this actually make it challenging and kick those out? Or I guess, are we on target kind of with expectations when you started those?

Yes. I think we're on target there. And the component shortages don't really impact the projects we have going or the ones that are next in line. The staffing that we have there is pretty robust. So I would say things are tracking as expected there. And we don't expect to slow down what those folks are doing from a cadence perspective at all.

Last question for me, and then I'll hop back in the queue. But M&A, I know you mentioned the shell rationale for that. But what are you seeing on the M&A pipe? I know you have a kind of a short list of blue-chip kind of relationships there. But any of those getting closer? Is this environment pushing people more likely to sell, not likely to sell, so on?

Yes. I think everybody is expecting in a post pandemic world, Ryan, that we'll see more deals in our space coming to market. We at Douglas have not seen that yet. And so we have that expectation. And again, to your point, we've got a short list of folks. We haven't gotten any early indicators that those folks are going to be coming to market, but that can change fairly quickly as well. So I like what Sarah and her team have done with the balance sheet. I like what they're doing to prepare us to be able to take advantage of those opportunities. And we do expect to see activity. We just haven't seen much at this point.

Your next question is from Chris McGinnis from Sidoti & Company.

I was wondering if we could start maybe just the inflation you may be seeing on the raw material side. And I don't know if you can think about it maybe on average pricing, but could you see that impacting demand in either of the 2 segments, just given the increases?

Yes. I guess I'll speak to the inflation first and then to the demand side. We're seeing significant inflation coming into the business, predominantly in steel. As we experience steel inflation, that certainly hits all three of our businesses. I'm confident in our ability to cover the inflation from pricing perspective we will experience in 2021. I do planned that we will see some differences in timings on recovering that price versus the inflation coming in. I think on the demand front, when I think through that, I think in each of the businesses, our customers, our dealers, all of that have an expectation, I guess, of how we are giving out prices. And when you're going to quote business on the solutions side, they should be seeing that everywhere. So I don't expect that there's any pull ahead or anything like that. And on the attachments side, I don't think we experienced much of that either. I think because we have set price points or price times, it doesn't drive that, at least not from a material aspect.

Got you. Okay. That was very helpful. And then just maybe [indiscernible], just on the new offering, the light model for the muni side. Are you seeing orders come in, but are already or were the increases that you're seeing coming from the quoting, I guess, more on the traditional side of the business?

Yes. The increase in orders is more on the traditional side. Remember, I made a comment that, although orders slowed down in the back half of last year, quoting did not. And it was just recently that we were out in the market with this new medium-duty muni products. So most of the order intake that we've seen at this point is driven by the core business. I will comment that given the pandemic situation we've all been dealing with, while we were out with demo trucks with that new product and got very positive response, we are likely to see a delayed response from an order perspective just because they need to go back and get their core truck orders taken care of first, which is why I made the comment that while we're excited about the product and we love the response, it's likely a 2022 proposition in terms of a material impact.

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

Thank you, and thank you for your time today. We appreciate your ongoing interest in Douglas Dynamics. We hope you are, like us, optimistic about 2021 and the positive changes we are seeing in the world, and we look forward to speaking with you in the coming months. Have a great day.

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