Douglas Dynamics Inc (PLOW) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics first-quarter 2012 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 is being recorded.

I would now like to introduce your host for today, Mr. Robert McCormick, Executive Vice President and Chief Financial Officer. Please go ahead.

Hello everyone and thank you for joining us on the 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 21-E 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, 2011 filed with the Securities and Exchange Commission, and the updates to these sections and 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.

Joining me on the call today 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. Thank you for joining us on today's call to discuss our first quarter of 2012 results. 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 will be back to discuss current trends for 2012.

Let me start by saying that, while this was certainly a challenging winter, we are pleased to have strengthened our competitive position compared to the first quarter of last year and encouraged by the generally positive economic signs we are seeing going forward. We have been doing this long enough to know, while we love heavy snowfall winter, we are going to have mild winters from time to time, and we know how to manage through them.

Also, 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. This is due to end users generally not replacing equipment until the beginning of the snow season and distributors generally waiting until Douglas Dynamics' pre-season sales incentive period to restock their inventory. As such, the Company historically generates a net loss in the first quarter.

The usual trends were exacerbated in the first quarter of 2012 by near record low snowfall in many of the Company's core markets, and overall the lowest snowfall in more than 25 years, which meant equipment was not used heavily during the season. Therefore, it did not need to be repaired or replaced at typical levels.

The first quarter of 2012 results are in direct contrast to the comparable period in 2011, which saw significant and sustained snowfall in many of our core markets and drove the record first-quarter sales in 2011. As such, net sales were $8.6 million, a significant reduction compared to last year's record results in the first quarter. These results were driven by a very mild winter that brought anemic levels of snowfall across the country.

To provide some perspective, in looking at 66 cities across 27 states, average snowfall this past winter came in 45% below the 10-year average and represents the lowest snowfall in more than 25 years. The only major US cities with above-average snowfall were Anchorage and Denver. This compares to previous winter where average snowfall came in 30% above the 10-year average and was very widespread. Despite this headwind, we are seeing positive signs in the market which continue to improve our strategic position.

While snowfall and demand for our products did not materialize as we hoped in the first quarter, overall business conditions are stable and trending in the right direction. Sentiment among our distributors has improved from the same period last year. As we have said in the past, a certain amount of pent-up demand likely exists in the industry as professional snowplowers continue to delay purchases. We expect that demand to materialize over a several-year period rather than one particular quarter or season.

As I mentioned in the fourth-quarter call, our most recent field inventory, which is taken January 31, showed a low single-digit growth in new inventories, but remained very manageable. This is especially true when you compare the light snowfall in the first quarter of 2012 with the spike in demand created by heavy levels of snow in the year earlier. Inventory levels are only slightly higher than levels seen last season that fit into the robust preseason of 2011.

We're also seeing encouraging sign among light truck sales. Sales of select pickup trucks remain positive, growing 8% year-over-year. Over the years, we found that truck sales do positively correlate with plow sales over the long term.

Turning to the operations of the business, we are entering this year's preseason period, which is typically our second and third quarters, as a more robust, leaner organization. We remain diligent in our management of cash and cost reduction through our continuous improvement activities and initiatives. We remain focused on these factors that are within our control and are positioned to manage through a low snowfall year as we have done many times in the past.

As we mentioned on our fourth-quarter call, with the strong cash flow we generated in 2011, we voluntarily elected to pay down $10 million in debt in January of 2012 and are using the cash interest savings to help fund the increase in our stated dividend announced in November of 2011. During the quarter, our net cash used by operating activities was $10 million compared to net cash provided by operating activities of $11.8 million in the first quarter of 2011. Again, this decline represents a return to more normalized activity against a tough comparison as the first quarter of 2011 was boosted by a very strong winter.

We remain committed to returning value to our shareholders through a long-term dividend growth, supported by financial discipline and operating growth. As a reminder, we paid our regularly quarter -- regular quarterly cash dividend of 20.5% per share -- $0.205 per share -- during the first quarter on March 30, 2012. We view our cash generation and commitment to paying dividends as a distinguishing characteristic compared to other companies our size. We continue to focus on generating 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. Then I will conclude with comments on our business. Bob?

Thank you Jim. For the first quarter of 2012, Douglas Dynamics generated sales of $8.6 million compared to $23.5 million in the first quarter of 2011. This decrease reflects a significant decline in both equipment sales and parts and accessories sales driven mainly by the significant reduction in year-to-year snowfall.

Shipments of equipment units decreased 2334, or 59%, versus the prior year. Parts and accessories sales fell to $3.1 million. Again, this was almost entirely snowfall-driven, as noted earlier.

Cost of sales was $6.7 million, or 78.7% of sales, for the first quarter, compared to $14.4 million or 61.4% of sales for the first quarter of 2011. The increase in cost as the percentages sales is largely due to Q1 2011's unusually high sales, which has an impact on our fixed costs as a percentage of sales.

Note that, at the first sign of low snowfall, we pulled out our low snowfall playbook, right-sizing factory headcount, and increasing our focus on improvements in cost, quality, and service.

Consistent with the aggressive actions taken to protect cash flow during periods of low snowfall, SG&A expenses were reduced $1.3 million to $4.6 million for the quarter. Reductions in SG&A spending will continue throughout the year.

First-quarter 2012 adjusted EBITDA was negative $1.8 million compared to prior-year adjusted EBITDA of $4.1 million, a decrease of $5.9 million. This decrease is primarily attributable to prior-year record parts and accessories shipments as well as higher prior-year equipment unit shipments during the quarter.

Net loss for the first quarter of 2012 was $4.3 million compared to prior-year net loss of $0.8 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 2012 was $0.19 per diluted share, based on a weighted average share count of 21.8 million shares, compared to a net loss per diluted share of $0.04 per share based upon a weighted average share count of 21.4 million shares in the first quarter of 2011.

Net cash used by operating activities for the first quarter 2012 was $10 million compared to prior-year net cash provided by operating activities of $11.8 million. This difference was driven both by the reduction in net income and a return to historical levels of inventory, Accounts Payable, accrued expenses, and other current liabilities due to the unusually high level of sales in the prior-year quarter.

As part of our customary pre-season inventory build, inventory was $46.7 million at the end of the first quarter 2012 compared to $40.1 million at the end of the first quarter 2011. Keep in mind that inventory at the end of the first quarter 2011 was lower than usual due to strong shipments during that period.

Accounts Receivable in the first quarter was $7.6 million compared to $9 million at the end of the first quarter of 2011. The Company historically sees Accounts Receivable decline in the first quarter as the snow season winds down.

As Jim mentioned earlier, we voluntarily elected to pay down $10 million in debt in January of 2012 and are using the cash interest savings to help fund the increase in our stated dividend announced in November 2011.

Cash on hand at the end of the first quarter 2012 totaled $14.2 million. The unused borrowing capacity on the revolver is $31.4 million. With total liquidity of $45.6 million, we are well positioned to fund our regular dividend payments and future growth opportunities.

With that, I will turn the call over to Jim for some concluding remarks.

Thank you Bob. Let me now take a few moments to share a view on the current market conditions and some thoughts on what we are expecting for the remainder of 2012.

As you may remember, we have just entered our preseason period, which typically runs from April 2 through September. Our 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. This not only provides early visibility on sales for the remainder of the year, but also allows us to level load our factories from a production perspective.

While the indicators that drive our business are generally positive, we remain somewhat cautious based on the record low snowfall we saw this past winter and its potential effect on snowplowers' willingness to replace equipment. While it's still early in the preseason period, so far our conversations with dealers have been positive but yet cautious.

We still expect to leverage our track record and flexible business model to produce solid results for 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, remain comfortable with the guidance for 2012 that we issued with our fourth-quarter results, and we'll update and narrow that guidance during our second-quarter call.

We'll now open the call for your questions. Operator?

(Operator Instructions). Jason Ursaner, CJS Securities.

Good morning. Just first I want to focus on the preseason order program. What percent of preseason orders would you normally have in hand, either by the end of March or by the end of April?

Typically, in preseason, by the end of April, it's still relatively low. I don't know that I have a percentage for you, but it's relatively low. It probably builds in May, and then most of the larger distributors actually come in towards the middle of June. So it builds slowly, probably hits a nice pace in the middle of May and then powers through into June.

And with orders coming in that late, I guess that's normal. Would you still expect to have that normal skew to the preseason program of shipping more in Q2 to Q3 or would you expect more of a balance this year?

That is -- even -- that's typically how preseason orders come in every year as I just described. Over the past couple of years interestingly, we've seen a bit of a skew to the second quarter. This year, we might see a little bit more of a mix going back to what historically has occurred with third quarter being probably equally as popular as the second quarter, maybe a little bit more popular. From our perspective, it doesn't really matter whether they are in Q2 or Q3. Our focus is actually on the total number of preseason orders, not on what months they come in.

Okay. The commentary positive start to the preseason, this is more sentiment, or the orders you've seen through March are actually up year-over-year?

I think it's a sentiment at this particular point. It's just so early for us to be making conclusions as to how the preseason is going. But you know, I think, at this particular point, we are pleased with what we are seeing. It's, for the most part, it's following sort of our expectations. So too early to make conclusions, but we are pleased with what we are seeing.

Okay, I'll jump back in the queue. Thanks.

Peter Lisnic, Robert W. Baird.

Good morning gentlemen. I guess first question -- sounds like, with the competitive positioning, that the price outlook shouldn't necessarily change all that much relative to history this year, even with the potential low snowfall and the impacts that has. Is that the right way of thinking about it?

At this particular point, we haven't made any decisions on pricing. So, I guess I can't answer that yet. We typically wait until the last minute just to determine if there's anything unusual that's occurred. But do we -- have competitors taken price increases as they have in the past? Yes they have. Are we looking at a price increase of some magnitude? Yes we are. But it's too early for us to comment as to what size or magnitude that will be.

Okay. By the same token, is it safe to say that you haven't necessarily seen the competitors cut price or be very aggressive on price?

This year, not really. We are not seeing anybody do anything very unusual.

Okay. All right. Then when you look at the demand environment this year, I'm just wondering if there are any insights you can garner from what's happening in the lawn and garden world, maybe with customers having overlap with snow and lawn and garden. Just wondering if there's any sort of read that you can get from those customers and what they might be thinking about the cash flows the they have now presumably a stronger lawn and garden season, what that might mean for their willingness to buy a plow.

Sure. I think it's difficult to draw -- it's a great question. It's difficult to draw any definitive comparisons. I'd like to be able to do that. There is a little bit of a difference in our cycle, so I can't necessarily look at lawn and garden and say what's occurring in lawn and garden is going to duplicate itself in snow and ice control. But I think it does go at least in the same direction from -- so we can follow it.

The downside to this year for us is that it was low snow; the product didn't get used very much. The good side is the landscapers who are plowing in the winter are cutting grass and building walls in the summer, and they got an excellent early start. So that probably means their cash flow is better. I would like to be able to say that that's going to translate into them having cash to make purchases at the end of the season. So I look at it with some positive outlook that, as long as they are making money, they will buy equipment. I just hope that it's mine.

Okay. All right, that is great color. Thank you for the time and the info.

Hamzah Mazari, Credit Suisse.

Good morning, thank you. Just a question on the inventory levels. You talked about inventory being up slightly. Are there any material differences you are seeing by geography in terms of inventory levels?

Typically, you will see quite a few differences based on where the snow fell. This year, the inventories in the cities that did actually get some good snowfall are probably lower. The Anchorage, the Denvers, and probably the Maritimes, Canadian Maritimes inventory is a little bit lower. The other places, I think it's pretty evenly distributed around the country, because I think everybody had equally low snowfall levels.

Thank you. Then just going forward, how are you thinking about capital allocations, specifically between special dividends and paying down debt?

I think, as we mentioned, we paid down $10 million worth of debt in the first quarter, and I guess our cycle there is, as you know, in our business model, cash accumulates during the fourth quarter, so it's at the end of the year and into the first quarter that we sit down with our board and make those excess cash deployment decisions.

Our priority has been and will continue to be paying down debt, number one, as we've mentioned, to continue to fund increases in our stated dividend. Number two would be to deploy some of that capital towards acquisition opportunities when they arise. Then special dividends would be the third priority. But I would comment on special dividends likely being -- or being more likely to occur when you have a really high robust snowfall and a really high cash generation year, so probably an unlikely scenario anytime soon.

Great, thank you. Appreciate it.

Robert Kosowsky, Sidoti & Co.

Good morning guys. I was wondering. When was the last time revenue was at $8.6 million and what was SG&A back then?

The answer to that question was 2006 and 2007. But you're going to stump me on what the SG&A was back then. I'll have to get you that information after the call.

So 2006, 2007 it was about $8.6 million of revenue.

Yes.

Could you just elaborate a little bit further on what your -- how much you have implemented the low snow playbook that you have? Can you pull down expenses even further? I know that we're just entering the seasonally stronger periods, but kind of what did you do and what further kind of latitude do you have to kind of pull back on expenses?

Sure. we do a number of things. We cut capital expenditures back. Typically, as you know, we will spend about $3 million to $3.5 million a year in terms of CapEx, and we have trimmed that back $2 million. You can get through a cycle with pulling back in some areas and just focusing on maintenance and new product development kind of a thing, so a couple million dollars of cash flow comes there.

From the SG&A spending side, we'll cut back on the incentive plans obviously because income is lower. We will cut back on some of our discretionary spending areas in marketing and all the way through travel and field, and chairs and tables and anything we can pull back on that doesn't positively have an influence on us making it through a low snowfall year.

As we said in our last call, that totals about $4 million as we look at it today. So you saw some of that flowing through in the first quarter and that will continue to flow through for the rest of the year.

Now, do we have some other lovers that we can pull? Sure we do. We don't sense that that's appropriate at this point in time, but we always have other places we can go if, for some reason, something happens that is negative to our business.

Thanks, that's helpful. Then was there any increased spending in this quarter from the new product launch that you had, the new prepackaged plow? I know that debuted meaningfully last year, but I was wondering if there was any kind of additional expenses that happened in this quarter due to that launch.

There were not. As we've spoken about, though, we've been working pretty hard on some cost reduction projects, on some factory automation, that type of thing related to that project to get the margins back where we need them to be, and that work has been going very well and should be completed by the end of Q2.

Okay, that's helpful. Then Jim, you mentioned your strength in your competitive position. Could you elaborate on that?

Sure. I think, from our perspective, we continue to do a pretty darn good job with some of the products that we get out in the field. I think we've, in this first quarter and even start of the second quarter, we have done an awful lot out in the field, both with our distribution and their major end users in terms of face-to-face promotion, training, visibility in certain areas that I'm not going to elaborate on too much. But there are certain groups of plowers that still have very, very good cash flow, and we are spending a lot of time with them trying to make sure that if they are purchasing equipment that it's our brands. So I think we are doing incredibly good things in the field.

Then social media, which has just absolutely taken off in our industry, we're real pleased that our brands carry, I think in two or three of the search engines, carry the number one and number two position. So we're real pleased about those kinds of things.

Okay, that's helpful. Then just one final question. Bob, I think you mentioned units were down. I didn't catch what the number was.

Units were down 2334.

Thank you very much. Good luck.

Jim Giannakouros, Oppenheimer.

I guess elaborating on the competitive landscape question, you said that you're doing things with distributors and end users. Can you help us understand if there's any material moves to your distributor network as far as size or breadth of coverage?

Let me rephrase the question so I know I'm asking the right question. You're wanting to know if there's any significant changes going on within our distribution network?

As far as, yes, as far as number of distributors that you have relationships with, or are you taking I guess the low-volume backdrop -- market backdrop to take the opportunity to take on new distributors and -- yes.

Sure. Taking on new distributors is an ongoing process. Typically, it will occur in quarters two and three and not when the snow is flying. So, Q4 and Q1 are typically not periods of time where you're going to take on new distribution because getting them up to speed on ordering and service and warranty and stocking and all those kinds of things is very difficult when you're in the heat of the snow season. But clearly in the second and third quarters, we once again will be looking at geographic markets where we think we still have opportunities to add or change distribution.

Is this the low-volume I guess market batch up that you are assuming for 2012, is this an opportunity for share gains or do you think they are pretty much locked down?

I think there's always opportunities for share gains. I don't think generally that a high volume or a low-volume year is any better for picking up share gains. I think, in our industry, share doesn't change significantly year-to-year. It's 1 point; it's 0.5 points; it's a little bit of growth or a little bit of loss in certain areas. So I think it's really just a continual process where each manufacturer, our competitors and ourselves are always looking for that opportunity to upgrade in certain markets.

Got it. If I understood you correctly, should we anticipate incentives, the incentives that you offer, they may shift depending on market, depending on how 2Q and 3Q are playing out, or are they pretty much set and you don't I guess essentially -- you essentially --?

The preseason incentives are set in the program, so all of the distributors have access to the current programs and I think they are pretty standard among geographic areas.

Thank you very much.

Jason Ursaner, CJS Securities.

Thanks for taking the follow-up. I just want to refocus on the restock at a pretty high level. You sell roughly 40,000, 60,000 unit a year. You have 750 distributors. So that averages out 50, 75 units per dealer. I would assume that they normally hold a certain percent of that as they go to start the year. So I'm just wondering. You did the field inventory at the end of January. How much above year-end level were dealers at the end of January? Then on the other side of that, assuming they ended with a little more inventory, have you seen any dealers restock to a lower level than where they had been in years past?

Yes, it's -- again, it draws some conclusions with preseason and it's really too early to tell -- to make comparisons from year to year as to are there any trends as to what dealers are doing.

My inclination is this, is that most of our dealers will probably put in very good orders. Again, our preseason period doesn't really change much from year to year. Where you see big changes will be in the fourth quarter in restocking, so from year to year, preseason doesn't change a whole lot.

What could happen is we could have some distributors this year, though, who, for one reason or another, may say, I usually take a certain percentage of my plows in the second quarter, a different percentage in the third. They may look at the months they want to take those, and typically in a year like this, it isn't unusual for distributors to make the same number of orders, but skew a little bit more to the third quarter than the second quarter. But it doesn't generally impact the total number of plows that they take.

Okay. The legal expense you guys called out of EBITDA was pretty minimal. Did you guys reach a conclusion on the lawsuit you initiated and I guess any of the other legal stuff you've got going on?

No, Jason. That's just -- it's been hung up in the courts with an appeal pending for quite some time. That's why there's not any legal expense flowing through.

Got it. Appreciate the follow-u. Thanks.

Robert Kosowsky, Sidoti.

Bob, just one question. Longer term, where do you see debt ultimately trending towards? Because I know, as you do pare down debt, you do want to raise the dividend. Assuming no other acquisitions, do you see it slowly going down to nothing, or kind of any kind of thoughts on that longer-term?

Sure. Obviously, as we look to continue to pay down debt to help fund dividend growth, you should see, everything else being equal, you should see debt continue to drop. Whether it drops at a pace of $10 million a year or not, it will be driven by a whole host of factors. But I guess, in theory, if you made no acquisitions, 11 years from now, 12 years from now, debt would be zero. I don't think that's going to be the case. I think you're going to see growth from this Company through acquisition when the right opportunities come along.

Reinvests.

We also have opportunities to reinvest in our own business as well. So, yes, debt will continue to come down over time, but as Jim stated, we continue to look for opportunities to grow the top line of this business, and fully expect to do so down the road.

Thanks a lot and good luck.

This concludes our question-and-answer session. I'd like to turn the conference over to Bob McCormick and Jim Janik for any closing remarks.

Yes, thank you operator. Once again thank you all for participating, and look forward to talking to you on our next quarterly call. Thank you very much and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.