Douglas Dynamics Inc (PLOW) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics First Quarter 2014 Earnings Call. At this time all participant lines are in a listen-only mode. Later we will be conducting a question-and-answer session and instructions will follow at that time. (Operator Instructions.) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call, Mr. Bob McCormick. Mr. McCormick, you may begin.

Thank you. 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 consistent 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, 2013, filed with the Securities and Exchange Commission and the update 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. A reconciliation of these measures to the closest GAAP financial measure are included in today's earnings press release which is available at douglasdynamics.com.

Also joining me on the call this morning is Jim Janik, Chairman, 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. I'm going to being by providing an overview of our results and then Bob will provide a detailed review of our financials. Finally, I'll return to discuss current trends and provide additional details on our outlook for 2014.

Before we begin I'd like to remind everyone that first quarter sales for Douglas Dynamics are historically the lowest -- first quarter are typically the lowest, averaging less than 10% of full-year sales. As such we historically generate a net loss in the first quarter.

This was not the case this year. We produced very good results during the first quarter even when compared to the strong first quarter of last year. This was due primarily to the continued strong snowfall across our core markets in the first quarter and of course the dedication of our employees who ensured we were able to meet the record first quarter demand for parts and accessories during this high equipment usage environment.

Turning to our results, net sales were $36.4 million in the first quarter of 2014. This represented 158% year-over-year increase. Robust first quarter 2014 results reflect higher than average snowfall levels across core markets and additional sales of products related to the business of TrynEx, which the Company acquired in May of 2013.

For the first quarter of 2014 we achieved record parts and accessory shipments and produced a profitable first quarter for the first time in a decade.

We are encouraged by the recently improving market conditions combined with our leadership position in the industry. As I'm sure everyone is aware, after a tough couple of years, snowfall really came back strong this past season. In fact, North America experienced its highest level of snowfall in 18 years this winter, which is very good for our business. Numerous core markets for Douglas received at or near record snowfall for the season.

As we enter our preseason order period, we are pleased by how positive the non-snowfall business indicators we follow such as the positive trend in light trucks. For the quarter, sales of select pickup trucks remain positive growing 4% year-over-year. Over the years, while there isn't a direct link, we found truck sales do positively correlate with plow sales over the long term and we do think that the cold weather negatively impacted truck sales this quarter.

Our dividend remains a focal point as we look to return value to our shareholders and is protected in our current model. As a reminder, we paid our regular quarterly cash dividend of $21.75 per share during the first quarter, on May 31, 2014. We view our cash generation and commitment to paying dividends as a distinguishing characteristic compared to other companies our size.

As we've stated since our IPO in 2010, aside from enhancing shareholder value through returning cash through our regular dividend, we're committed to generating excess cash to reduce the Company's debt and pursue strategic acquisitions at disciplined valuations when the opportunities arise.

One non-operating issue worth mentioning is our ongoing litigation with Buyers Products Corporation in which we were recently awarded patent infringement damages of $9.75 million. We are pleased with the verdict and happy to put this longstanding five-year dispute behind us. We can't comment any further on the litigation until the process is finalized.

Overall though we are proud of our patents and more broadly our innovation which enables us to provide industry-leading products and solutions to our customers. We expect to leverage our industry-leading combination of innovation and execution and superior customer service to drive growth in our business.

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

Thanks, Jim. For the first quarter 2014 Douglas Dynamics generated sales of $36.4 million, an increase of 158% compared to $14.1 million in the first quarter 2013. Shipments of snow and ice equipment units were 6,502, an increase of 206% versus the prior year. Parts and accessories sales climbed to a record $14.2 million in the first quarter 2014, an increase of $8.2 million compared to the prior year. The increase was driven mainly by the higher than average snowfall across core markets and additional sales of products related to the business of TrynEx which the Company acquired in May of 2013.

Cost of sales was $22.3 million or 61.2% of sales for the quarter compared to $9.8 million or 69.4% of sales in the first quarter 2013. The decrease in cost of sales as a percentage of sales is largely due to operating leverage, more specifically stronger first quarter 2014 sales reduced as a relative impact of fixed costs.

SG&A expenses were $8.3 million for the first quarter compared to $5.9 million in the first quarter of 2013. The increased compared to 2013 was mostly due to ongoing expenses related to TrynEx products of $1.3 million. Additionally $900,000 of the increase was a result of increased performance-based compensation expense as a result of better operating results in 2014.

First quarter 2014 adjusted EBITDA was $8.3 million compared to prior-year adjusted EBITDA of $0.2 million, an increase of $8 million. This increase is primarily attributable to both higher equipment and parts and accessories shipments during the quarter.

Adjusted net income for the first quarter of 2014 was $1.6 million compared to prior year adjusted net loss of $3 million. Adjusted net income per diluted share for the first quarter of 2014 was $0.07 per diluted share compared to adjusted net loss per diluted share of $0.13 lost in the first quarter of 2013. As Jim mentioned earlier, we produced a profitable first quarter for the first time in a decade.

Net cash provided by operating activities for the first quarter of 2014 was $10.2 million compared to prior year net case used in operating activities of $7.1 million. This increase was driven largely by improved earnings and the addition of TrynEx.

Cash on hand at the end of the first quarter of 2014 totaled $10.5 million. The unused borrowing capacity on the revolver is $38.9 million. With total liquidity of $49.4 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 $46.9 million at the end of the first quarter 2014 compared to $28 million of inventory at the end of 2013 and $45.1 million at the end of the first quarter of 2013. Inventory excluding TrynEx products decreased $3.3 million compared to the end of the first quarter of 2013 as a result of higher sales volumes in 2014. The decrease in inventory during the first quarter of 2014 was partially offset by the $5.1 million worth of additional TrynEx inventory.

Accounts receivable in the first quarter of 2014 was $13.5 million compared to $42.3 million in the fourth quarter of 2013 and $11.3 million at the end of the first quarter 2013. The Company historically sees accounts receivables declining in the first quarter as the snow season winds down. The increase in accounts receivable during the quarter was primarily due to additional sales of products related to TrynEx. Excluding TrynEx, receivables were relatively flat year-over-year. Even though Q1 sales for the quarter were $22.3 million higher than prior year, most of those shipments occur in January and February and thus are collected prior to the end of the 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 some thoughts on what we're expecting for the remainder of 2014. As you probably saw in our release based on first quarter results, dealer sentiment, and industry trends, we are updating our 2014 outlook by raising the bottom end of the ranges for all three metrics.

We now expect net sales for the full year 2014 to range from $215 million to $260 million and adjusted EBITDA to range from $45 million to $70 million. And earnings per share are expected to range from $0.75 per share to $1.20 per share.

As you may remember, we have just entered our preseason period which typically runs from April to September, and we normally ship 55% to 65% of our annual equipment orders.

Finally, I want to remind everyone that we launched an unprecedented 8 new products in 2013, which was a record for the Company, and that's something we plan to repeat this year. That launch process impacted the timing of shipments during our 2013 preseason order period causing shipments to trend closer to a 50/50 split between the second and third quarter. For 2014 we expect to move back towards the recent five-year trend of a 60/40 shipment split.

Overall we anticipate robust 2014 results due to improved market conditions and favorable non-snowfall indicators. The continued positive momentum in selected pickup truck sales coupled with the positive January field inventory results indicate we're continuing to see improved sentiment among dealers.

As a reminder, on January 30th distributor inventories were down double digits year-over-year and retail reorder sales from October through March were up substantially year-over-year. As a result, dealers are likely to be optimistic and as a result 2014 preseason orders are likely to be higher than 2013.

With that, we'll now open the call for your questions. Operator?

Thank you. (Operator Instructions.) I have a question from the line of Jason Ursaner from CJS Securities. Your line is open.

Good morning. Congratulations on a great start to the year. Just first question, you mentioned the significant order activity in February and March. I guess the obvious question is how much do you think that pulled from the preseason if at all and do you have any sense for dealer inventory at the end of March given that last year there was a pretty nice drawdown late in the season?

Jason, the second question's a little bit easier to answer. We expect that dealer inventories are at relatively low levels at the end of March even though we don't take a field inventory. I think it's still a continuation of the retail activity coming off the January field inventory. So our feel is that distributor inventories are at a very nice level, somewhat lower than previous years, just -- and that will enhance preseason.

The second one is a little bit harder to answer. I think we get a better feel for whether people are drawing sales from next year into this year. Typically that's not the case. Typically when people are ordering in February or March, and again the numbers aren't generally large numbers. It's really based on need and I think it creates momentum, and I think the momentum that it creates is certainly more positive than any potential sales that are pulled ahead earlier.

Okay. And you mentioned introducing a record number of new products last year. I guess just any sense for how -- have those fully made their way through the channel at this point? Would there be a margin benefit this year more than last year in terms of how those sell through and how we should think about the new products you're coming out with this year.

Yeah, Jason, typically what we tell folks is that when we introduce a new product the goal is for margins to be better than the product that just got replaced, and while that's certainly the case with the majority of those products that we introduced, I guess from that perspective you'd expect to see a little bit of a margin lift, but I wouldn't think it would be of any kind of a material amount.

But does it take time for the product to get into the channel in terms of how dealers are selling and reordering?

Oh sure. Yeah. I think -- I thought your question was more about product margins. In terms of getting fully through the channel, absolutely. Many of the products we introduced last year were not even part of the preseason order program. They were introduced later in the year and I think you do see the first full year of sales, you will see a significant benefit from having those products in the marketplace, people understand them, and now are prepared to place orders for them.

Okay. And in the full-year outlook I'm assuming the infringement award is excluded from that?

Correct.

Okay. And the infringement going forward, is there any royalty agreement on SnowDogg plows?

Jason, we really can't comment on it at this point. It's not concluded so as a result when we have a conclusion I think we can perhaps give some more detail.

Okay. Maybe just one more. You didn't quantify any legal expenses in terms of adjusted EPS. Were there any significant legal costs that you incurred in this quarter, you know in the quarter just reported as you moved towards some of these court dates.

No.

Okay. I'll hop back in queue and let some others have a chance. Thanks.

Thank you. Our next question comes from the line of Robert Kosowsky from Sidoti. Your line is open.

Good morning guys. How you doing? I was wondering if -- I guess looking into this year, do you see any increase in plow sales into the lawn and garden channel and vice versa, like even the TrynEx increased distribution channel?

We would anticipate some of that. I can't get granular with it, but we did introduce the Blizzard product line through the SnowEx channel this year in addition to the existing Blizzard channel and we would expect to enjoy some of the benefits of that.

Okay. So just starting at a slow pace but still pretty good penetration?

It's so early in the preseason order period I don't even know if I can comment.

Okay. Then also I know you've had a couple of good quarters since you bought TrynEx and I'm wondering what normalized SG&A should look like. Is it this $8 million level or should we see it step down to more kind of $6 million or $7 million.

No I think you're probably closer at that 8. TrynEx adds about $5.5 million worth of SG&A to the normal baseline structure if you will. So I think between $7.5 million and $8 million is probably closer.

Okay. And then also any update or how would you view TrynEx's ability to capitalize on the higher demand within the season, and any update on operational integration of TrynEx with your existing spreader manufacturing?

Well from a integration perspective, what we're really focused on in 2014 is making sure that TrynEx can meet the increased revenue demand that we see across all of the product lines. As you know we're implementing our lean manufacturing processes there, so that's the real focal point this year.

Jim mentioned that we'll be selling Blizzard snowplows into that channel, which is another positive. Some of the other revenue synergies are likely to come a little bit further down the road.

Okay. And then also was TrynEx able to fully capitalize on the higher in-season demand?

Absolutely.

All right. Cool. Thank you very much.

Thank you. Our next question comes from the line of Tim Wojs from Baird. Your line is open.

Hey guys. Nice start to the year. I guess just -- is there a way to kind of frame -- do you think, just given your market share and just your production capabilities, is there any sense that you may have gained share just given the abnormal snowfall that we saw this last year? I guess if you can talk about the possibility of that?

You know that's a terrific question. In fact one of the things that we feel very good about is that in the heat of season, which is typically Q4 and Q1, we were still able to ship the majority of orders within a week. We know just by doing some field surveys, most of our competitors were not able to do that.

And by connecting the dots, that should mean some potential to increase market share. It's a little bit difficulty to measure it of course, but our instinct would say that if you have products available in a snow year and maybe some of your competitors don't, you're going to pick up some business you might not otherwise have had.

Right. Okay. No, that's helpful. Thanks. And then I guess just on pricing. Have you guys talked about what pricing might look like this year from an ASP perspective? And then anything we should think about just in terms of raw materials.

Yeah. The pricing, we have not had that discussion. Typically our pricing will come out effective 1 July, and so that's something we'll -- as we being to wrap up preseason we'll begin to talk about the pricing.

From a raw materials, I'll let Bob answer that.

Yeah, Tim, we're not seeing anything from a raw material cost inflation perspective that gives us any reason for pause at all. Typically price increases that we take help to cover off raw material costs and inflation. I would expect that to be the case, but nothing unusual that's going to have any impact on our margins from a negative perspective.

Okay. And then just on free cash flow. Just given the inventory dealer levels that you characterized as pretty low, should we expect free cash flow maybe in Q2 and Q3 to be a little bit -- generate more of a free cash flow negative just given there might be more preseason orders this year versus years prior?

You know, again, that's another excellent question. We are hopeful that with the drivers pointing green for the most part that we'll see an increase in preseason orders this year versus a year ago, which would lead you to believe that we would consume more cash and have to borrow deeper into the revolver. That passes the logic test.

Okay.

The one thing though that we're watching here early on is while most of our customers, when they take a preseason order, choose the extended dating terms of not paying until the fourth quarter. You also have an option of taking a cash discount and paying those preseason orders off early. And early indications are with quotes around early is that we are seeing a greater percentage of people that historically we see taking the cash discount payment terms versus the dating.

So we're going to see a little bit of a greater inflow of cash than we normally do during the second quarter. So the first part of your question, spot on. We should see more of a revolver draw. Counterbalancing that a little bit I think is going to be a little bit better cash coming in through the cash discount payments.

Okay. So there's -- it doesn't sound like there's really any inability to be able to invest in some of the growth opportunities that you can see from an M&A perspective because of the cash draw?

Gosh no. No. Just to comment on that, we've got a number of things that are at our disposal when it comes to being able to finance growth. Number one, as you're alluding to, is we can draw on the revolver and we typically, regardless of environment, have $20 million to $30 million of dry powder there.

We also have a $40 million accordion flex that we can execute on our term loan within the existing debt structure as well. So without even having to go into the debt markets, we've got access to some capital that can continue to fund our growth initiatives.

Great. Thank you.

Thank you. (Operator Instructions.) And I am seeing -- oh. I have a question just now from the line of Jim Giannakouros from Oppenheimer. Your line is open.

Good morning gentlemen. Congrats on the great start to the year. Just tacking on to that last question. If you can address how your M&A pipeline is looking? Does the current environment affect your approach and is it far-fetched to think that something could happen even this year?

I think from our perspective we really never talk granularly about M&A and opportunities that are out there. We continue to look for good strategic opportunities at great valuations and from that perspective, I guess that's all that I'll say at this particular point.

Yeah. I guess I would just add, Jim, that there isn't anything about the year we're having that would influence the amount of energy that we devote to those growth strategies, and it wasn't any different during 2012 during the down cycle as well.

So we think this business model is built to be able to be very sustainable at all parts of the cycle, and I think the acquisition growth strategy is kind of executed on its own regardless of where you're at in those cycles.

Got it. And one other one on margins. I know in the past you've said that you're trying to get your TrynEx margins up to close to Douglas' spread of margins in the two- to three-year timeframe. Did that have a material impact this go around or was it -- or your margin performance really had to do with just the incremental volume flowthrough.

I think it's more based upon the incremental volume flowthrough. There's a lot of great things going on between core Douglas and the Madison Heights TrynEx facility, but those things take some time. And to feel the full-year effect of those things is largely going to be a second-half 2014 proposition and then a 2015-16 proposition as well.

Thank you. Our next question comes from the line of Jason Ursaner from CJS Securities. Your line is open.

Thanks for taking the quick followup. Just on the M&A question, given that anyone in the snow industry should probably be having a pretty good year and some pretty high expectations, if you were to find something strategic and at a good price in the shorter term, is it logical to think it would need to be from some of the counter seasonal markets that you're also looking at?

No. Again, I think that we're looking in a variety of different areas, Jason, and so I wouldn't necessarily connect those dots. I think, again, a great opportunity is a great opportunity and it could be from our industry, it could be from the truck equipment industry, it could be from the grounds care industry, because again, with a seasonal business like ours, we have to put the same amount of effort year-in, year-out through the M&A type of business.

And so again, I wouldn't jump to those conclusions.

Okay. That was it for me. Thanks.

Thank you. (Operator Instructions.) And I am seeing no other questioners in the queue at this time.

Okay then. Operator, thank you, everyone, for your interest in Douglas Dynamics. We look forward to speaking with you again early August for our second quarter earnings announcement. Thanks and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This now concludes the program and you may all disconnect. Everyone have a great day.