Douglas Dynamics Inc (PLOW) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Douglas Dynamics fourth quarter 2011 earnings call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr Robert McCormick. Sir, you may begin.

Hello everyone and thank you for joining us on our call today. 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 risk 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 Form 10-K for the year ended December 31, 2011, 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, adjusted net income and adjusted earnings per share. All non-GAAP financial measures which under SEC Regulation G, we are required to reconcile with GAAP. The reconciliation of these measures to the closest GAAP financial measure is included in today's earnings press release. 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 fourth quarter and our full year 2011 performance. I'm going to begin by providing an overview of our performance and then Bob will provide a detailed review of our financial results. Finally, I'll be back to discuss current trends and provide additional details on our outlook for 2012. To begin, we are pleased to report a strong fourth quarter performance, especially when considering one of the weakest fourth quarter snowfalls in over a decade. During the period net sales increased 24.3% year over year, as a result of early retail activity in the fourth quarter. This activity was driven by above average snowfall last season as well as the gradual release of pent-up demand related to previously deferred equipment purchases combined with this year's early and significant snowfall along the East Coast.

I would like to reiterate how the seasonality of our business historically is reflected in our financial results. Douglas typically generates a loss in the first quarter as distributors anticipate the end of the plowing season and work off inventory while waiting for the pre-season order period to restock. During the pre-season order period which occurs in the second and third quarters, Douglas offers our distributors pricing, freight, payment terms to encourage inventory restocking during the summer months, in anticipation of the primary retail sales period in the fourth quarter. Finally, the fourth quarter which is the primary retail selling period where sales to distributors vary year-to-year, demand is primarily driven by timing, amount, location of snowfall during the quarter as well as the general economic conditions and how the previous winter's snowfall impacts the replacement cycle.

Overall, during this fourth quarter the timing and amount of the snowfall was far from ideal. After an above average pre-season sales period, we began to see an increased appetite for new equipment unit purchases early in the fourth quarter. The snow season got off to a strong early start, most notably with unusually powerful nor'easter that covered a large portion of the East Coast in October. Demand surged in October and November. However, the unusually warm weather and the lack of snowfall in the latter part of the quarter caused plowers and distributors to exercise caution and delay additional purchases. At the same time, sales of parts and accessories continued to be strong, trending higher than average when comparing to the preceding 10 years. We believe this is largely the result of the heavy product use during the previous winter. Overall, despite a lack of snow, the fourth quarter was a good end to a great year for our Company. We executed against our business plan successfully and the financial results reflect that.

Now I'd like to turn over to the operations of our business. Through our continuous improvement initiatives, we have made significant progress in 2011 which has helped us to generate strong cash flow and become a much leaner organization. One important initiative that we rolled out in the third quarter is the pre-assembling and packaging system. By pre-assembling a large portion of the plow, we have reduced installation time for our distributors, thus allowing them to install more plows per day. To summarize this process, the P&P initiative significantly reduces the chance of distributor installation issues and errors and allows product inventory to be stored outdoors and with the incorporation of an enhanced electrical system enables fleet users to marry any fleet truck to virtually any of our plows. Distributor feedback has been very positive toward the new packaging system and the fleet flexibility while serving to confirm the merits of our initiative.

In addition to incorporating the completely new manufacturing and packaging system into our two facilities, we were able to maintain a shipping service level of more than 95%. This is a real tribute to the flexibility we have built into our organization. If we step back and take a look at the long-term trends of the business, it's worth reiterating as a clear leader in an industry that fluctuates from season to season and year-to-year, our primary objective is to manage the assets of the business effectively to maximize earnings and cash flow at all points of our cycle. Consistent with how our business unfolded in the fourth quarter, the non-snowfall drivers of our business were positive at the start of the fourth quarter, but have softened since. The October 31 field inventory showed October period retail sales were up substantially, while distributor inventory was down nearly double-digits.

However, our most recent field inventory at January 31 showed inventories had increased slightly but still remained very manageable. The good news is also that select pickup truck sales increased annually by approximately 11%, and that trend has continued in the first two months of this year. As you recall, previous year snowfall is the primary driver of our business. The more the products are used, the faster the replacement cycle. And in the winter of 2010-2011 equipment was used extensively. But that is certainly not being repeated this winter. While the snow season is not over yet, the low snowfall will undoubtedly lengthen the replacement cycle for some due to limited equipment use this season. As we have said in the past, a certain amount of pent-up demand likely exists in the industry as professional snowplowers delayed purchases during the heart of the recession. We expect that demand to materialize over a several year period rather than one particular quarter or season, and we are pleased to see a portion of it appear early in the fourth quarter.

Lastly, I want to briefly touch on our dividend policy. As previously reported, the Company declared a quarterly cash dividend of $0.205 a share on its common stock which was paid on December 31, 2011 to stockholders of record as of close of business on December 21, 2011. Based on our strong cash position at the end of this year, we voluntarily paid down $10 million in debt in January of 2012, intending to use the cash interest savings to help fund the increase in our stated dividend announced in November of 2011. As we have consistently stated, paying down debt and issuing a dividend remain our top priorities. With $39.4 million in cash on hand at 31, December, we are well-positioned to support our dividend objectives in any snowplow environment.

So in conclusion, 2011 was a great year for Douglas Dynamics. We completed our first full year as a public Company and transitioned our Board from our private equity partners, adding additional independent directors. We produced strong financial results and enjoyed one of the best ever years for service, parts and accessories. We paid a special dividend at the start of the year and increased our regular dividend again towards the end of the year. We initiated important new initiatives that really helps our distributors and of course continued of to provide our distributors with the best products in the industry. All in all, a tremendous effort and a strong performance by the great people we have here at Douglas Dynamics. With that, I'm going to turn the call back over the to Bob to discuss our financial results in more detail. Bob?

Thanks, Jim. While the fourth quarter reported the lowest snowfall in over 10 years, our overall financial performance remained strong. For the fourth quarter 2011, Douglas Dynamics generated sales of $60.3 million, compared to $48.5 million in 2010, an increase of 24.3% year over year. Shipments of equipment units increased 19% versus the prior year driven by a combination of heavy snowfall last winter and some level of pent-up demand release. Parts and accessory sales although strong showed a modest decrease of 7% versus prior year due mainly to below average snowfall in the fourth quarter. Cost of sales was $40.3 million or 67% of sales for the fourth quarter, compared to $30.4 million or 63% of sales in the fourth quarter of 2010. This year over year increase was driven primarily by increased volume.

As a percentage of sales, cost of sales increased slightly due largely to the initial cost of the P&P program as well as increased costs of steel versus the prior year. SG&A expenses were $7.2 million for the quarter. They were $1.2 million higher than prior year with compensation expense being the main driver. Compensation expense includes Company profit sharing plans, sales bonus programs, annual management incentive plans and executive stock plans. Typically, compensation expense estimates are trued-up during the fourth quarter. Current quarter SG&A contains increased compensation expense as both operating profit and free cash flow exceeded original expectations. The reverse was true in the fourth quarter of 2010 when downward adjustments were made to compensation expense.

Fourth quarter 2011 adjusted EBITDA was $14.4 million, compared to prior year adjusted EBITDA of $15.2 million. Adjusted net income in the fourth quarter 2011 was $6.3 million compared to prior year adjusted net income of $5.1 million. Adjusted earnings per share was $0.29 per share in the fourth quarter 2011 compared to $0.23 per share in the prior year, an increase of 26.1%. Net cash used in operating activities for the full year 2011 was $47.7 million, compared to prior year net cash used in operating activities of $15.8 million. This improvement was driven by a net income increase in 2011 of $17.4 million versus 2010, which was driven by a combination of improved earnings results and the negative cost impact of the IPO and other nonrecurring costs totaling $11 million in 2010.

Additionally, net cash provided by operating activities was positively impacted in 2011 by improvements in key working capital accounts. Namely, accounts receivable and accounts payable. The $3 million reduction in AR at the end of the year is a result of cash collection from strong October and November shipments which are billed at Net 30 day terms. Softer December shipments then drove the AR balance at year-end. Inventory levels of $24 million are $500,000 higher than the prior year. Current year levels are slightly higher year over year due to a decrease in unit demand late in the quarter as discussed earlier. As we've consistently stated, we are well positioned to fund upcoming dividend payments even in a low snowfall environment. Cash on hand at the end of the fourth quarter totaled $39.4 million. The unused borrowing capacity on the revolver is $70 million, resulting in total liquidity of almost $110 million. With that, I'll turn the call back over to Jim for some concluding remarks.

Thanks, Bob. To close, I'd like to share our thoughts on what we are expecting for 2012. As most of you have seen in the news, the lack of the snowfall in the fourth quarter has continued into the first quarter of 2012. While the snow season is not over yet, we are on pace for one of the lowest snowfall seasons in 25 years. We believe this will lengthen the replacement cycle for equipment due to limited equipment use this season. We already see evidence of this with the fact that most recent field inventory at January 31 showed inventories had increased slightly but still remain manageable. As a reminder, the first quarter of 2011 produced record results driven mostly by the significant snowfall and demand for parts and accessories. Based on the lack of usage this season, we do not expect to repeat this record performance in the first quarter of 2012.

However, we also expect the negative impact of low snowfall to be partially offset as pent-up demand continues to unwind in the coming years, and select pickup truck sales continue to strengthen in the first few months of this year. As I mentioned earlier, we are also focused on the factors that are within our control. We have opened up our low snowfall playbook late in the fourth quarter and have taken the steps necessary to cut costs, delay spending and position ourselves to manage through a low snowfall year as we have done many times in the past. Based on 2011 results and current trends, the Company expects net sales for the full year of 2012 to range from $160 million to $225 million, and adjusted EBITDA to range from $35 million to $60 million. Earnings per share are expected to range from $0.55 per share to $1.15 per share.

It is important to note that the Company's outlook assumes the economy will remain stable, pickup trucks continue to strengthen and that the snow belt regions in North America will experience average snowfall in the Company's core markets, for the remainder of 2012. We expect to leverage our track record and flexible business model to produce solid results in 2012. We have a strong cash position and have proactively paid down debt and will of course continue to return cash to shareholders via our robust dividend. We believe the overall economy will remain stable and slowly improve and we are encouraged by the pent-up demand we saw in the market in the first half of the fourth quarter. We will now open the call for your questions. Operator?

(Operator Instructions) Jason Ursaner, CJS Securities.

Congratulations on a very strong quarter. First, if I could try and concentrate a little more on the month-to-month trends within the quarter, is there any type of quantification you could add to the reorder environment through November, how above average it was and then how we should think about the speed and magnitude of the slowdown in November -- in December, rather.

Sure. I don't know that we'll give a level of granularity, but I will say that in any particular year, October-November are fairly critical months. It's when your retail selling season begins and there tends to be some pretty good indicators as to pent-up demand, the impact of the previous snowfall and product usage.

October-November were pretty powerful and very, very good months and then as we got into a week or so prior to November and the lack of snowfall and, frankly, just the warm weather, I think made people a little bit cautious just because people weren't getting plowing -- there was no plowing demand at that point. So, I would say that it slowed down. The first two months were quite good and it slowed down considerably in December.

Okay. So in terms of the field inventory check at the end of November, assuming February-March hasn't been much better for snowfall, generally speaking what is the appetite for dealers to hold onto inventory over a season versus moving it through incentives to set up for the next pre-season?

Sure. First of all, Jason, we take four inventories a year. The last one in 2011 actually is at the end of October. And then the one that follows that will then be the end of January. Typically what our distributors and dealers do is, they are very good at self-regulating inventory. Their appetite to carry paid for inventory through the following season is not particularly -- they're not enthusiastic about it and that shouldn't be a surprise to anybody. And they will do some discounting as they get towards the end of the selling season, but typically I don't think it's very significant, because I think many of them find themselves in a good position where they don't need to do anything hugely unusual.

Okay. And then last question from me on SG&A, given the revenue where it was, it also had some -- I was a little surprised where SG&A came out even with the revenue. I know there were some one-time costs in there, but generally what do you think the shape of SG&A should be for next year?

As we've spoken on that topic many times, Jason, it typically is fairly even quarter-through-quarter. However, as I stated, when you get into the fourth quarter is when you true-up all of your year-end incentive payments and when you have a strong year, that true-up adds expense, and that happened this year.

It looks a little bit more pronounced versus last year's results because in the fourth quarter of 2010 it was a little softer and our true-up went the other way. So, don't look at fourth quarter SG&A as some sort of a regular run rate. I really still think that if you look at the annual SG&A expense for the full year 2011, that's more representative of what the ongoing run rate is.

(Operator Instructions) Robert Kosowsky, Sidoti.

I was wondering if you could talk a little bit more about the cost cutting you do in response to a weak environment, like what does that mainly hit from a P&L standpoint, as we look at it from the outside, looking in?

Sure. Excellent question for us. We typically go to two different places. The first thing that we'll do is -- and this is all in the name of trying to improve cash flow, is we will cut capital expenditures. We typically, again as we've said many times, plan on spending about $3.5 million annually in terms of CapEx. We will look to cut that in half, maybe even go deeper than that.

The second thing that we do is we go into all of our fixed spending accounts and we will cut discretionary spending, we'll freeze open positions, we'll cut travel. The incentive plan numbers that we just got done talking about will obviously trend down, given the lower snowfall environment. All told, we are typically trying to chase between $3 million and $4 million worth of spending reductions there, as well. So, you put those two things together, those are really the two major areas that we attack.

Okay, so it's conceivable you might see a down year in SG&A, like a modest down year?

Yes, absolutely. As Jim stated when you pull out the low snowfall playbook, you will take the normal SG&A run rate and you're going to see that come down, without a doubt.

Okay. That's helpful. Then, any commentary on the pricing outlook? Because it's a down year, and I know that you mentioned some steel costs were a headwind in 2011. I am wondering if the competitive pressures are going to freeze up the price environment?

Yes, it's -- we have not yet at this point determined where we're going to go. A number of our competitors will typically announce their price increases right around the time of pre-season, which is the beginning of April and we'll factor that in with other inflationary things that pop their head up, and we'll take a look at that as we get into our typical increase period, which is towards the end of the third quarter.

Okay. So, wait a little bit for pricing.

Yes.

All right. Then just two other questions. Have you spoken to a lot of your dealers, and do you have like an early indication of orders, and that gives you some confidence in the lower end of the revenue guidance range that you put out there? I'm just wondering how much visibility you do have from what you've been hearing from your customers.

Yes, absolutely. One of the good things that we have through our distribution is a fair amount of visibility. In fact, last week was the National Truck Equipment Association Show, where all of our distributors are meeting all of our salespeople and over a cup of coffee they're getting an outlook as to how do you as a distributor view 2012, given the market environment, and pent-up demand and snowfall and truck sales? I think the result of what we're providing you still falls within that range. But yes, I think we have good visibility of the attitudes and thoughts of our distributors.

I think, Rob, let me just add the other point that I would make about the guidance range. Typically, as you know, this first range is fairly wide because so many things can happen. All we've done here is taken the top end of the range out of play, just because with the lack of snow, that's just a common sense thing to do. So, don't read anymore into it than that it will really be driven more by what our pre-season orders look like and those types of things. We will firm that guidance range up when we get to our Q2 earnings call. We just wanted to take the top end of the range out of play for 2012.

Okay. That's helpful. Then, one other question. Working capital seemed like it was about like a $10 million source of cash in the quarter, despite revenue being up pretty nicely. It seemed like, Bob, you described a little bit of like a perfect storm in a good way for accounts receivable and inventory in the fourth quarter. Is that the right of looking at it? And how you think --

I would agree. Sometimes that goes your way and sometimes it doesn't, and most times it doesn't have material impact at all. The fourth quarter 2011, we did have almost a perfect storm of positives if you will. We wouldn't normally generate $47 million of free cash flow on $52 million worth of EBITDA. Okay? So yes, that was positive.

So, some of that may come back and flip on us in 2012. I would expect the AR balance to be higher at the end of the year, just because of the unusual nature of -- we saw heavy October-November collections and we had a soft December. Not expecting that to repeat. And then we will try and manage the rest of those working capital accounts as best we can.

Peter Lisnic, Robert W Baird.

I guess first question, I may have missed this, but on the packaging costs or the new manufacturing methodology, how does that cost tail into 2012? Any impact? The second part of that is just, can you help us understand exactly what that means to your ability to improve working capital use? Does that change the equation at all?

Okay. First off, when it comes to the margins, we spoke during the third quarter call, and said that there was going to be some margin degradation at the launch of that program even though it's a very successful program out in the field, if you will, that we would have some short-term margin degradation. Then in 2012, we would turn our attention to taking some costs out of that process and getting margins to be more flat, if you will.

So, that's what we're moving towards in 2012. We fully expect to be able to mitigate the cost increase that we saw through the launch period. When it comes to -- and it's an excellent question about, when it comes to that program, does that influence working capital requirements at certain points in the year?

I guess the one thing that we think it could do, and probably should do is if the dealer can more quickly assemble plows for the end user, and they can respond quicker, we would like to think that increases sales for us over time. But they may put a little bit of pressure back on us and have us hold a little bit more inventory and then force us to respond faster to their needs, because they can get this thing and just slap it on, if you will.

Now, we are prepared for that by being a lean manufacturing business model and continually improving our flexibility in the plants. So, while on the surface you would think maybe your inventory carrying cost goes up a little bit, we are confident, again, we can mitigate that just through the ongoing continuous improvement and lean initiatives that we have in the plants. I would really say no real net working capital impact.

Okay, presumably maybe increases your competitive advantage to a certain degree -- all competitors. Okay. Good on that one. And then just want to go back to the question on cost structure, or response to low volume or lower volume demand environments. I understand taking out some of the discretionary expenses you talked about. But if you're at, let's call it the low end of the range of what you laid out for 2012, and maybe for whatever reason that continues into 2013. Do you foresee any more permanent or structural actions that you would take outside of the more, what I'd call variable-oriented moves that you'd make in 2012?

I don't think we would anticipate making any major structural moves. Now one of the things that we -- I didn't mention which is the first lever that we pull is, we take that flexible layer of temp workers that are in our plants, which have gotten up to between 15% and 20% of our workforce, and we take that layer out immediately. That is gone. So, we're at a point now where if for some reason this low snowfall went into another season, we've got the cost structure where we need it to be able to support the dividend and continue to move forward.

Okay.

Pete, one other quick comment there is that clearly we're prepared to do in advance anything that we need to do to make sure that we manage the Business effectively at this point. We don't see that as being necessary. But going there is not something we're afraid of, or will stay away from.

(Operator Instructions) Robert Kosowsky, Sidoti.

Just one quick question on just your customer mix. I was wondering what you've noticed between like municipal buyers, or small business buyers, any kind of broad strokes you can make with regard to the customer mix.

Sure. Rob, probably not any major shifts in the customer mix, anything that would raise any level of interest. The only thing that I guess I would mention is that, while many people would assume that with the budget tightening on municipal-type sales, we actually have seen an increase in municipal sales in 2011. So, I don't know if that continues to -- that's a trend or a data point, but I think it's an interesting observation that many would think that municipal sales would be down in tight budget years, but actually we're seeing some growth.

Okay. That's helpful. Then finally, how do you look at acquisitions going forward just in light of a weak snowfall environment? Is this something you still are looking at doing, or is it just standing pat for a little bit until the snow starts falling in next year?

No, I think we continue to look at opportunities. Again, in a business like ours that is seasonal and can change from year to year, there's certain things we look short-term at in managing the Business, expenses and those kinds of things. But longer term, clearly if we saw an opportunity out there that was very compelling, a low snowfall year wouldn't really have any impact on our ability to pull the trigger.

All right. Thank you. That's helpful. Good luck with 2012.

I show no further questions in the queue and would like to turn the conference back to Mr Jim Janik for closing remarks.

Thank you very much for all of your interest in Douglas Dynamics. We look forward to speaking with you about our third quarter 2012 results in May. Thanks again. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.