Douglas Dynamics Inc (PLOW) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Douglas Dynamics first-quarter 2011 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 be given at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Bob McCormick, Executive Vice President and Chief Financial Officer. You may begin.

Thank you. Hello, everyone, and thank you for joining us on today's call. Two quick items as 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's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission and the updates to these sections in our subsequently filed quarterly reports on Form 10-Q.

Second, this call will involve a discussion of adjusted EBITDA, a non-GAAP financial measure which under SEC Regulation G we are required to reconcile with GAAP. The reconciliation of this measure to the closest GAAP financial measure is included in today's earnings press release which is available at douglasdynamics.com.

Also joining me on the call this morning is Jim Janik, President and Chief Executive Officer. With these formalities out of the way, I would like to turn the call over to Jim.

Good morning and thank you for joining us on today's call to discuss our first quarter of 2011. I am going to begin by providing an overview of our performance and then Bob will provide a detailed review of our financial results. Finally, I will be back to discuss current trends for 2011.

Let me start by saying that our first quarter was a very solid start for 2011 and I'm pleased with our overall performance during the quarter. But before I provide more details on the quarter, let me remind you that first-quarter sales for Douglas Dynamics are historically the lowest of any quarter.

Typically averaging less than 10% of full-year sales. As we have previously explained, this is due to end-users generally not wanting to replace equipment until the beginning of the snow season and distributors generally waiting until Douglas Dynamics preseason sales incentive period to restock their inventory. Therefore, historically we have generated a net loss in the first quarter.

I am pleased to report we delivered strong financial results. Net sales increased 60.4% and adjusted EBITDA increased $5.3 million compared to the first quarter of 2010.

These improved results were driven by heavy snow falls across the country that produced significant demand for our parts, accessories and our equipment. I am pleased to report that demand for our product showed strong improvement in the first quarter which we will continue to build on. I believe our distributors still remain cautious on the stability and the rate of the recovery of the economy.

We continued to realize operational efficiencies as a result of the transition of our Tennessee manufacturing capabilities to our Rockland and Milwaukee facilities. In addition, we generated solid cash flow, recording net cash provided by operating activities of $11.8 million compared to net cash used by operating activities of $4.2 million in the first quarter of 2010.

Heavy snowfall throughout the country during the first quarter drove record sales for parts and accessories. Snowfall during the first quarter was very favorable, coming in at 4169 inches of snow which represents a nearly 30% increase over the ten-year snowfall average.

While there are typically very distinct regional variations in snowfall, in the first quarter of 2010, snowfall was abundant in the majority of our North American major markets. The exceptions to this strong snowfall were Canada, Central Pennsylvania and the whole of the Middle Atlantic region.

The other drivers of our business in the first quarter remain positive as well. As I mentioned in the fourth-quarter call, our 31 January inventory indicated that retail activity was up nicely year over year for the November through January period and field inventory was down during the same period.

Lastly, sales of select pickup trucks remained positive as well with low double-digit increases year over year. While general economic conditions are showing slow improvement, we believe a fair amount of caution exists amongst our distributors to aggressively rebuild inventory.

As we have said in the past, a certain amount of pent-up demand likely exists in the industry as professional snow plowers continue to delay [whole good] purchases. We expect that demand to materialize over a several year period rather than one particular quarter or season.

While we are encouraged that we are seeing the beginning of an appetite for new equipment purchases, we believe a general trend towards repair versus replace will continue. Through our continuous improvement activities and initiatives, we have made significant progress towards improving our operating structure which has helped us to generate strong cash flow.

As a reminder, we paid our regularly quarterly cash dividend of $0.20 per share and we also paid a special dividend of $0.37 per share during the first quarter; both on March 31, 2011. We view our cash generation and commitment to paying dividends as a distinguishing characteristic compared to other companies of our size.

We still remain very focused on using our excess cash to reduce the Company's debt and pursue strategic acquisitions at disciplined valuations when the opportunities arise. With that, I'm going to turn the call back over to Bob to discuss the specifics of our financial results and then I will conclude with comments on our business. Bob?

Thanks, Jim. For the first quarter 2011, Douglas Dynamics generated sales of $23.5 million compared to $14.6 million in 2010, an increase of 60.4% driven largely by heavy snowfall in our key markets and increased demand for parts and accessories.

Parts and accessories sales were a record, increasing $3.4 million versus the prior year driven both by the heavy snowfall and the continued trend toward repair rather than replacement as a result of economic conditions. Shipments of equipment units also increased albeit at a slower rate, increasing 1302 units or 49% versus the prior year.

Cost of sales was $14.4 million or 61.4% of sales for the first quarter compared to $12.7 million or 86.5% of sales in the first quarter of 2010. Please keep in mind that these significant cost of sales in 2010 was the result of one-time nonrecurring costs related to our Johnson City, Tennessee plant closure.

SG&A expense were $5.9 million for the quarter, relatively flat with the prior year. First-quarter 2011 adjusted EBITDA was $4.1 million compared to prior year adjusted EBITDA of negative $1.2 million, an increase of $5.3 million. This increase is primarily attributable to both record parts and accessory shipments and higher equipment unit shipments during the quarter.

Net loss for the first quarter of 2011 was $800,000 compared to prior year net loss of $5.7 million. Keep in mind that we historically generate a net loss in Q1 as both orders and shipments slow down in conjunction with the end of the snow season.

Net loss per diluted share for the first quarter 2011 was $0.04 per diluted share based on a share count of 21.4 million shares compared to net loss per diluted share of $0.40 based on a share count of 14.4 million shares in the first quarter of 2010. Net cash provided by operating activities for the first quarter 2011 was $11.8 million compared to prior year net cash used in operating activities of $4.2 million, an improvement of $16 million.

This improvement was driven largely from increased earnings but was also positively impacted by reduced interest payable of $5.3 million and an increase in income taxes receivable of $3.8 million. Cash on hand at the end of the first quarter 2011 totaled $19.5 million. The unused borrowing capacity on the revolver is $28.9 million. With total liquidity of $48.4 million, we are well-positioned to fund our regular quarterly dividend payments and future growth opportunities.

As part of our customary preseason inventory build, inventory was $40.1 million at the end of the first quarter 2011 compared to $23.5 million of inventory at the end of 2010 and $39.3 million at the end of the first quarter of 2010. Accounts receivable in the first quarter 2011 was $9 million compared to $37 million in the fourth quarter of 2010 and $9.6 million at the end of the first quarter of 2010. The Company historically sees accounts receivable decline in the first quarter as the snow season winds down.

As we mentioned on our last call, in an effort to sustain our strong balance sheet, provide a solid long-term capital structure and take advantage of a favorable debt market, we embarked on a debt refinancing project during the quarter. The project was aimed at extending the maturity dates of our current ABL and term loan as well as providing additional borrowing capacity for potential acquisitions. This refinancing was completed during the second quarter.

With that, I'll turn the call back over to Jim for some concluding remarks. Jim?

Let me now take a few moments to share our view of the current market conditions and some thoughts on what we are expecting for the remainder of 2011. We are currently gearing up for our preseason period which is when the snow is not falling.

This is typically April to September or the second and third quarters. During this period our preseason order program encourages distributors to place orders in the second quarter for shipment during the second and third quarters at our dealers request.

We offer a combination of pricing, payment and freight incentives during this period and normally ship 55 to 65% of our annual equipment orders. The preseason program not only provides early visibility on sales for the remainder of the year but also allows us to level out our factories from a production perspective. While we believe the overall economy will continue to dampen the regular replacement cycle, we are encouraged to see the beginning of a slow return to a more normal environment.

Sales of parts and accessories continued to be strong, trending higher than the average when compared to the preceding 10 years which we believe to largely be the result of the continual deferral of new equipment purchases during positive snowfall and high usage environments. While we believe there will be a gradual unwinding of pent-up demand over the next several years, we do remain cautious about the impact of escalating fuel prices on truck sales and the overall economy.

While we showed a significant improvement in sales over the first quarter of the prior year, we believe a lack of clear direction regarding the economy recovery and lingering difficulties in the credit markets continue to generate reasonable caution among our customers. While the indicators that drive our business are positive, we remain cautious about 2011 due to the continuing challenges caused by the still soft economy. As the year goes on, we expect our performance to continue to improve versus 2010.

We will now open for your questions. Operator?

(Operator Instructions) Thomas Hayes, Piper Jaffray.

Thanks. It's Dan on for Tom this morning. Congratulations on the quarter, gentleman.

Thank you, Dan.

Just in terms of the cadence of revenue, looking ahead to Q2 and Q3 you had an especially strong Q2 last year and I'm just wondering if you can give us a sense for what effect the strong year-over-year growth in terms of first-quarter unit shipments might have going forward?

That's an excellent question. Really the strength of the first-quarter revenue really was driven largely by the snowfall that we got in that quarter.

Now I don't know that that has a direct correlation to how Q2 and Q3 shipments are going to lay out, but I would suggest that -- I'm glad you reminded everybody -- that last year our Q2 shipments were skewed much stronger than they normally are and there was even some favorable margin on those product shipments that also flowed into Q2 so that Q2 and Q3 a year ago were quite a bit different than what history would indicate.

While we would still expect a stronger Q2 than Q3 this year, probably not to the same degree as we saw a year ago. And obviously we won't know exactly how that breaks out until all the preseason orders get in and we will update you on that during the next earnings call.

Dan, I would also mention that we do expect the total of preseason to be higher than last year. It's just the quarters in which they fall will be a little difficult to predict at this point.

Sure, that's really helpful. Just one follow-up if I could. Just wondering if you could talk a little bit about how the Johnson City consolidation savings are tracking after the first quarter. I believe -- I think 4 million was kind of what you expected in terms of calendar 2011?

Correct, correct. And again, just to go over some of those numbers, the plant closed at the end of Q2 2010 and we did realize about half of those -- half of that $4 million worth of savings in 2010 expecting to generate the full year's worth of savings this year in 2011, and those are tracking as we anticipated.

Jason Ursaner, CJS Securities.

Just on the gross margin, can you go through the one-time costs you had last year related to the Tennessee restructure? Because it still looks like the gross margin showed a pretty significant year-over-year increase.

Well, it does show a very significant year-over-year increase and that is largely because in that 2010 cost of sales dollars, there's accelerated depreciation as we looked to adjust the book value of that plant down there to more near what the fair market value is in this economic environment. I don't have the number right off the top Jason. We can cover that off later in terms of how many dollars of our 2010 cost of sales related to that, but that was the most significant component.

Okay, and in terms of last year, the preseason split skewing to Q2, what really drove that? Is it timing on some of the lower margin frames that take longer to ship or was it just when customers wanted to accept orders?

It's more the latter. It isn't due to them wanting particular components at certain times. Most times it has as much to do with how much available space they have on their lot as it does anything else.

And that's why it can change from year to year. Having said that, over the past three or four seasons, we have seen on a more regular basis stronger Q2 shipments than Q3 shipments.

But having said that, last year was even stronger than we have seen up to that point. So not expecting that same thing to happen to the same degree this year, but really just driven by what our distributors' appetite is to be able to take product in.

Okay, and then just last question for Jim. I think last call you talked a little bit in more detail about dealer inventory and some I guess channel checks that you do. So if you could just update us on those heading into the preseason.

Sure, the channel check that I talked about at the last conference call is the same one. We don't do our next channel check until the end of May.

It is four times a year, the next one is May. So the data that I gave about having higher retail activity in the June -- or excuse me, the end of January period and lower field inventory is still consistent, basically echoing what I said last time.

Okay, great. Thanks a lot, congratulations on the start to the year.

Peter Lisnic, Robert W. Baird.

I guess first question on the pricing environment in terms of promotion. Anything different from a promotional perspective this year given the reservations about the macro backdrop and then what the pricing outlook is for the broad product line for this year?

Sure. You know, I think as we always are -- we are cautious and looking to try to read tea leaves as to what are the opportunities and the challenges on pricing. There aren't any signals yet at this point vis a vis competition that would indicate we would have to do anything materially different than we've done in the past.

We will continue to monitor the marketplace up until the point that we look at our own pricing and try to be nimble. So, I guess my answer to you is I don't see anything substantially different that gives us pause.

Okay, and should we --- I mean I think historically you have gotten two or three points of price, somewhere in that range I think. Is that a reasonable assumption for this year?

You know, we don't telegraph what we're going to do but our intention is to be somewhat consistent with what we've done in the past unless of course there's something that goes on the market that allows us to be more aggressive or mandates that we're less aggressive.

Okay and if I flip it to the cost side of the equation, the inflation in steel, you feel pretty good you can cover the (inaudible) cost inflation you're seeing there with prices where they are at?

Yes, we do.

And to margin?

Yes, we do.

Okay, all right, and then I know the -- you'll give us I think guidance after the second quarter, but I'm just wondering if you can give us a little bit of a taste as to what you're seeing in terms of April order trends. I know it's really just the initial start, but it sounds like you're hearing some conservatism from your customers. Is there anything else you could add colorwise to give us a flavor for order trends in April and early May?

Sure, we anticipated things being conservative. By no means are we out of our recession, and I think Main Street knows that.

But with the winter and what we are seeing in preseason thus far is I think a slow trend towards people coming out of their shell a little bit which I think is encouraging. Certainly not going to give specific data, but as I indicated earlier that we do expect preseason order period to be stronger than last year and what we have seen at least in April is consistent with that.

Okay, that is very helpful. Thank you for your time and help.

Hamzah Mazari, Credit Suisse.

This is Chris Parkinson on behalf of Hamzah. Most of my questions have been answered but can you kind of just add a little color on what you are currently hearing from your distribution network after this year's snow season? And then also basically is there anything you would note on a sequential basis following what you said on the fourth-quarter earnings call?

I think what we're hearing from distribution is I think distributors are cautiously optimistic. As you know, sort of the model for our business is the more it snows, the more the product gets used, the more it gets used, the more they need parts and replacement.

And last winter was a big snow year. Most people in the snow plow industry, distributors had a good financial year which is good for them.

But I also think they're a little bit cautious probably in their ordering. And when I say cautious, I compare it to when things were much more normal four, five years ago, comparing it back to that. I think they're a little more cautious just because they've come out of a very difficult time and I think while what they're seeing in the markets says it's quite positive, I think they're just reluctant because many of them had cash flow problems the last few years and I think they're a little bit reluctant to put themselves back in that position.

But again from my perspective, we have long-term relationships with our distributors. I actually admire the position they are taking because for us to be successful, they have to be successful. And I don't mind a level of conservativism because it means they're good business people.

Thank you for the color. Just a quick follow-up, I know you won't mention any specifics on acquisitions but can you just give us a little color on what you're seeing out there and whether you believe there are any opportunities in some of the adjacent markets you have previously been looking at?

Yes, I think what we're seeing is there certainly are opportunities out there. I think the market in general after the downturn in the economy, there's businesses that may be trying to market themselves that over the last couple of years haven't.

We're not going to go into great detail at this particular point, but I think the opportunity to look at business is improving and we will continue to look for the right types of acquisitions but they have to be accretive and make great business sense to us and our shareholders. So that's really all the color I can give you at this point.

(Operator Instructions) Robert Kosowsky, Sidoti & Co.

Nice quarter. I was just wondering within the first quarter, were you surprised one way or the other with the number of units sold just given the strong snowfall that we saw?

No, I guess that I wasn't. I tend to think a lot of times you have to look at not only what we ship but I think you also have to look at how distributors unwind their inventory. And I tend to believe in years like we just had, many distributors will take every opportunity to wind down inventory as much as humanly possible. And that's okay because it generally helps clear shelves, so I think I was actually quite pleased with the number of units sold.

Okay, I know you haven't done your May review yet but do you have a sense or kind of feel on if you think inventories might be a little lean right now? Maybe not on unit sales, but also in parts and service -- parts and accessories as well?

Anecdotally, yes, but again, we don't take our inventory until May. But I think anecdotally there are certainly some areas where they got a lot of snow where people took the opportunity to wind their inventories down quite a bit.

Okay, and just wondering on the types of parts sales you guys have experienced in the most recent quarter, can you get a read on given the type of parts sales you have whether or not that is a leading indicator for replacement parts, like any? Kind of parts in particular that are better reads than others?

It's a great question and it's one that we have tried to analyze ourselves, but it's pretty difficult. Because within our industry, the general age of the equipment as well as where parts -- you'd have to make a number of assumptions and we just can't assume that we would be accurate with those. But if we can do it, it would certainly be helpful.

Okay, and then one final numbers question. Looked like depreciation declined a little bit to about $2 million from $2.3 million-ish in the fourth quarter. I'm wondering if this like $2 million run rate is kind of more appropriate going forward?

Yes, probably each time you get to the end of the year, you have got some items that end up falling off because they've reached the end of their useful life from a depreciation perspective. So that $2 million number is probably a decent number.

Thanks a lot. Good luck, guys.

Thank you. If there are no further questions, I would now like to turn the conference over to Mr. McCormick for any additional remarks.

Well, we'd like to thank you all for taking time to join us today and we look forward to our next call in August. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.