Douglas Dynamics Inc (PLOW) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics' second-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 call is being recorded.

I would now like to turn the call over to Bob McCormick.

Thank you. Welcome, 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 21E of the Securities Exchange Act of 1934 as amended. These 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 conditions 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 update for 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, which is available at douglasdynamics.com.

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 second-quarter 2012 performance. I'm going to begin by providing an overview of our performance for the quarter, and then, Bob will provide a detailed review of our financial results. Finally, I'll return to discuss the business outlook and provide guidance for the remainder of the year.

We are pleased to report a solid second-quarter performance and a nice start to our pre-season order and shipping period, despite the unprecedented weather patterns of the past nine months. Historically, we've demonstrated an ability to successfully navigate uncertain demand environments, focus on the factors within our control, and mitigate the seasonality impact on our business. However, this past year, as most of you experienced, we had a black swan-type event with near-record low snowfall across most of the Company's core markets, that unquestionably impacted our operating results.

For the second quarter 2012, net sales were $65.5 million, in line with our internal expectations. Remember, we saw great levels of snowfall during the late winter of 2010 and 2011 that helped produce a record second quarter for 2011. Fast forward a year, and after one of the lowest snowfall levels in several decades, in almost all of our core markets, we are relatively pleased with our second quarter revenue being down only 8.5%.

Based on recent trends, we believe preseason shipments will be more heavily skewed towards the second quarter than the third quarter in approximately a 65%/35% ratio. The factors causing these shifts are tactical in nature, and range from distributors taking advantage of cash discounts, associated with earlier shipment to the amount of available storage space at our distributors, thanks to our P&P initiative.

As a reminder, the second and third quarters taken together comprised Douglas pre-season order period. Historically, we ship 60% to 65% of our annual equipment orders during this two-quarter timeframe. Revenues are recognized when the order is shipped, and we leverage this time period to encourage distributors to receive shipments prior to the peak four-quarter retail selling season.

If normal climate conditions continue to make for a challenging business environment for many companies, followed by the anemic snowfall levels, many or most of our core markets are currently in the midst of a severe drought with record heat. The drought is impacting many landscaping businesses, which is a very important end-user group for our products, as many landscapers also run professional snowplow businesses in the winter. With less income from their landscaping work, it is somewhat inevitable that these business owners will have less cash flow to fund purchases of new or replacement plows prior to the winter months.

On a positive note, we are seeing encouraging signs among light truck sales. Pickup truck sales have continued year-over-year growth. Sales of select pickup trucks are up approximately 11% through July. Over the years, we have found that truck sales do positively correlate with plow sales over the long-term.

We remain committed to returning value to our shareholders through a long-term dividend plan. As a reminder, we paid our regularly quarter -- regular quarterly cash dividend of $0.205 per share on our common stock during the second quarter on June 29, 2012. We remain committed to paying dividends as a distinguishing characteristic compared to other companies our size. We continue to focus on paying down our debt and pursue strategic acquisitions with attractive ROIC as opportunities arise.

Finally, I wanted to note one other positive piece of news. We announced in June that Margaret Dano joined us as a new independent Director. Margaret will serve as a member of the Audit Compensation and the Nominating and Corporate Governance Committees. Margaret has served as a Director for several industrial and consumer-focused companies, and has amassed a wealth of valuable expertise in her career. We look forward to her invaluable insight and contributions she'll bring to the Board in the years to come.

With that, I'm going to turn the call back over to Bob to discuss the specifics on our financial results, and then I'll conclude with comments on our business and outlook for the remainder of the year. Bob?

Thanks, Jim. We remain cautiously optimistic that 2012 will be a solid year despite the historic weather patterns of the past nine months. In the second quarter 2012, Douglas Dynamics generated sales of $65.5 million compared with $71.6 million in 2011. Shipments of equipment units decreased 8.7%, and parts and accessories sales fell 28.5% versus the prior year. The decreases in both segments were expected, and are attributable mainly to the historic below-average snowfalls this past season.

Cost of sales was $42.4 million or 64.8% of sales for the second quarter compared to $45.2 million or 63.2% of sales for the second quarter of 2011. This year-over-year decrease in cost of sales was primarily driven by decreases in unit volume, as discussed earlier.

SG&A was $5.7 million for the quarter, a decrease of $1.1 million compared to the second-quarter 2011. This decrease was largely due to spending reductions implemented as part of our income protection plan discussed in previous earnings calls. Additionally, current quarter SG&A includes the current projected net cost associated with the settlement of the Northern Star lawsuit. Under the terms of the settlement, we paid $1.5 million to Northern Star. We are currently in discussions with our insurance companies, and expect a portion of this cost to be reimbursed in the coming quarters.

Second-quarter 2012 adjusted EBITDA was $19.6 million compared to prior-year adjusted EBITDA of $21.9 million. Net income in the second quarter of 2012 was $9 million compared to prior-year net income of $9.7 million. Earnings per share were $0.40 per diluted share during the quarter compared to $0.44 per diluted share for the second quarter of 2011.

During the first six months of 2012, we reported net cash used by operating activities of $17 million compared to net cash used by operating activities of $2.9 million in the same period last year. In addition to a $4.2 million reduction in net income, this increase was driven by an $8.5 million increase in cash used for accrued expenses, namely $3.5 million for income taxes, $2.9 million in annual incentive plans, and $1.9 million in customer program approvals.

Accounts Receivable at the end of second quarter of 2012 was $50.6 million, a decrease of $5.8 million compared to the second-quarter 2011. The decrease in Accounts Receivable was driven by more customers taking cash discounts versus extended dating terms on their payment of Q2 pre-season shipments. We expect this will reverse in Q3, the result of which will increase Accounts Receivable to historical levels by the end of Q3.

Cash on-hand at the end of Q2 totaled $3.8 million. The unused borrowing capacity on the revolver is $59.8 million. With total liquidity of $63.6 million, we are well-positioned to fund upcoming quarterly cash dividends. Given the historic low of snowfall this past season, we believe the fact that we can still pay the robust dividend is a good indication of the strength of our business model and our ability to manage the business through a trough cycle.

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

Thanks, Bob. In close, I'd like to share a few of the current market conditions and provide some insight for expectations in the second half of 2012.

The second-quarter pre-season order period provides early directional visibility on sales for the remainder of the year, but there is still variability in our fourth order. We are encouraged by some of the economic indicators, including upbeat distributor sentiment and truck sales year-over-year trending higher.

These positive indicators, coupled with gradual unwinding of pent-up demand for our products, should offset some of the negative impact from the weather-related issues. However, we remain cautious with retail demand, given the ongoing economic uncertainty and the potential negative effects of continued abnormal weather impacting end-user demand this year.

Based on our results from the first two fiscal quarters, and assuming snowfall reverts to typical averages in the fourth quarter, we expect net sales for fiscal 2012 to range from $160 million to $190 million; adjusted EBITDA of $35 million to $45 million; and adjusted earnings per share of $0.55 per share to $0.79 per share. These estimates all fall within the previously issued full-year guidance, albeit towards the lower end of the ranges.

So, in conclusion, while 2012 will undoubtedly be a tough year for our Company, we are very pleased with the reaction of our people to these events. The entire Company has pulled together to manage costs, and ensure we are all doing all that we can to maintain and build up our market-leading position, and consistently meet and exceed the expectations of our distributors and end users. Given the unprecedented nature of the weather we've seen in the last nine months, we believe we have proved we can handle whatever Mother Nature throws at us, and still successfully manage our business and pay our robust base dividend.

At this time, we'll now open the call for your questions. Operator?

(Operator Instructions) Peter Lisnic, Robert W. Baird.

This is Josh Chan filling in for Pete. You talked about the pre-season ratio between second-quarter and third-quarter being 65% to 35%, if I'm not mistaken. That would be a pretty sharp shift from prior years. Is there -- I mean, you mentioned a couple of factors why that might be, but is there particular reasons why this year, in particular, that that shift will be that much more towards the second quarter than the third?

That's a great question, Josh. As we review our potential list of reasons, there isn't anything that really jumps out at us. I do think it's our first year with our P&P program, in which case I think it does help distributors with their ability to store in anticipation of the sales season.

One of the other things that may be occurring is that the truck equipment industry in total is certainly getting more healthy than it has been the last few years. And I think some of our distributors may be taking more advantage of some of the programs than they have in the past; not that we've sweetened the programs significantly, but I think they're in a better position to take advantage of them. And those are the two things that come to mind.

Other than that, it might just be, again, very, very tactical in nature. And again, from my perspective, as we thought as a business, we really don't care too much which quarter they fall in because, from an operating perspective, we're pretty well set up to meet those demands, whether they fall in second or third quarter.

Okay, that makes sense. And just to follow up on that a little bit, is there a noticeable gross margin difference, if you will, between sales of distributors who take inventory in the second quarter versus the third? Or is that a relatively minor difference?

That's a relatively minor difference.

Okay. And last question from me -- I mean, it seems like the distributors are obviously ordering less, and the macro environment is a little bit more uncertain; but you still characterize their sentiment as positive. So is there a way you can give us somewhat of a flavor of what kind of comments you are hearing that causes you to think that the sentiment out there is pretty favorable?

Sure. I think what we're hearing from most distributors is that the truck equipment industry in general, all of the other kinds of products that our dealers and distributors would sell, are experiencing a better year than they have in the past. And as a result, I think overall, their confidence is better. And I think that's reflected in their general attitudes towards business, and the snow and ice business. So, I think that should probably answer your question.

Okay. Yes, it does. Thank you for your time.

Thanks, Josh.

Robert Kosowsky, Sidoti.

Yes, I was wondering if you could talk about parts and service, seemed like it was relatively -- I guess it was down about 30% -- 20% or so -- 28%. Can you talk about what you're seeing for that going into the back half of the year? I know fourth-quarter is a bigger quarter, but -- or could be -- but is the third quarter going to look a lot like the second quarter?

Very, very good question. Just so that you understand the relationship between snowfall, and parts and accessories, parts and accessories are typically very closely tied to snowfall levels. So, in a year like last year, where there was not very much snowfall, we would expect parts and accessories to probably fall a bit more than the overall average, which they have, in fact, done. And we believe that our distributors on average probably have a little bit more parts and accessories inventory than they might normally carry when you have an average snowfall.

Okay. And then, just looking at the guidance, it seems like, if you do the math, it seems like it's a pretty sharp step-down in the third quarter. So are you assuming kind of a bigger step-up in the fourth quarter? I mean, I'm just trying to kind of triangulate what you guys are thinking of how sharp the step-off in earnings could be in the third quarter.

Well, I think in the fourth quarter, clearly, we're assuming average snowfall and the economy stays fairly consistent. But I think you're going down the right track. We expect Q2 to be very strong. And then, while we do get some orders in Q3, we continue to ship some pre-season. We're looking forward to a pretty average fourth quarter.

All right. Thank you very much.

Thanks, Rob.

Jason Ursaner, CJS Securities.

Congratulations on the strong start to the preseason. Can you just continue with the -- you mentioned the inventory on parts; just, generally, how did the May inventory check compare to January?

Sure. As I've mentioned in the past, we're -- as an industry and as a business, the good news about field inventories is that distributors do a tremendous job of reacting to the retail sales activity in drawing their inventories down or ramping their inventories up. So, in May, we saw -- I think it was about between -- well, I don't know -- it was middle-single digits increase over the previous year, which, from my perspective, falls in the category of relatively insignificant difference.

Okay. So it was relative -- and that was relatively the same as the January increase year-to-year? So, I mean, in other words, they got a way to get inventory out the door?

Yes.

Okay. And we can't see it, I guess, in this quarter, but looking at the full pre-season orders that are now in-hand, given that they are up a little bit over last year, are most of the retailers restocking to an equivalent level? And is the total pre-season down because it's off a higher inventory base? Or are you actually seeing compression on both ends, with them starting at a higher base, and then also restocking to a lower level than last year?

I'm thinking through how to answer your question. I think what we'll probably see is pre-season is lower than last year. You had mentioned it was higher. We're seeing a lower pre-season. (multiple speakers)

No, I said lower. But is it because you're starting off a higher base and they're restocking to the same level? Or are they restocking to also a lower level and it's compressing the pre-season on both ends?

Yes, I think the best way to answer that is that, you know, comparative year-over-year May inventory is fairly similar to last year. I think the primary -- if you look at the primary reason for pre-season being lower is that I think people are just more cautious about retail demand on a go-forward basis, based on last winter's weather combined with the real dry weather this year.

Okay. So, looking back to pre-recession levels, how much lower is inventory at the start of the retail season at distributors, relative to where it (multiple speakers) had been in years past?

Yes. I don't have that level of detail. So, if you follow-up with Bob afterwards, maybe we can dig some up.

Okay. And in terms of the SKU for the pre-season, understood the shift in deliveries, but from the balance sheet perspective, there were some changes in working capital. You had higher inventory, various other accrued expenses. Does this essentially eliminate the benefit you got from voluntarily paying down the debt last quarter?

No, because I think a fair amount of this is timing. We're going to see some of that come back our way. I had talked about the Accounts Receivable, which was lower this quarter because a lot more people took the cash discounts. But we see Q3 flipping back the other direction, so that will be a positive for us.

You know, some of the other areas where we've had a reduction in terms of accrued expenses, you would expect to see, when you have a lower income year versus the previous year, income taxes are going to be lower, incentive plan accruals are going to be lower. I don't really think it ends up at the end of the day consuming any more or less cash than we normally would see in a down cycle. So, I think the voluntary debt payment was still the right approach for us to take, and still should have a positive impact throughout the entire year.

Okay. And then, Bob, can you just repeat the commentary on the Northern Star settlement? I didn't quite hear what you said on that.

Yes. Thanks for asking that. And this will come out in our 10-Q, which we file later today. This lawsuit with Northern Star has been settled. Under the terms of the settlement, we paid $1.5 million to Northern Star, and the Court has lifted their preliminary injunction. At that point, that's been terminated.

We're currently talking with a host of insurance carriers about reimbursements from a cost perspective on this settlement. And we are -- we believe it is highly probable that a substantial portion of the costs will be reimbursed over time, and certainly, over the next quarter or two. But in any event, we don't feel that by the time all the dust settles, it will have a materially adverse impact on our financial projections. Past that, Jason, the terms of the settlement really limit what we can say about the lawsuit itself.

And when did you pay that? And I guess had you been accruing for it? Or there is the $1.5 million that we should expect to see embedded in results or (multiple speakers) that is the $1.1 million?

No, it's -- if you look at these schedules that are in the press release in the Adjusted EBITDA section, you're going to see $1.1 million of associated costs for that lawsuit, along with a couple of other costs in there as well. And basically, without getting too technical here, the $1.5 million is already reflected in the second quarter.

We're also reflecting some reimbursement from a couple folks that we have policies with that net against the $1.5 million. Okay? So there's a netting effect in the second quarter, if you will. So all of the costs of the $1.5 million is in this quarter. Any additional reimbursement we get down the road, as we continue to pursue insurance companies, will be positives and/or pickups, if you will.

Okay. And so, if that's -- if the majority of that's related to Northern Star, I guess where do you stand now in terms of the buyers litigation or the Boss marketing injunction?

Well, the Northern Star lawsuit is the Boss marketing injunction. Okay. So that is one and the same. The buyers litigation, again, we won't comment on in any great detail. It's currently -- there are some items that are in the Judge's hand pending his ruling, if you will. And we will see how that progresses forward. So we don't have anything more to comment on that lawsuit at this time.

Okay, great. Great quarter and I'll let some others have a chance. Thanks.

Thanks, Jason.

(Operator Instructions) And there appear to be no further speakers -- or no further questions. I would now like to turn the conference back over to the speakers.

Okay. Well, once again, thank you for joining us today, and for your continued interest and support of Douglas Dynamics. We look forward to speaking with you again during the third-quarter announcement. So, thanks again and have a good day.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.