Douglas Dynamics Inc (PLOW) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics second-quarter 2014 earnings results. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce your host for today's program, Bob McCormick, Executive Vice President and Chief Financial Officer of Douglas Dynamics. Sir, you may begin.

Thank you. Welcome, everyone, and thank you for joining us on the call today.

Two quick items as we began. 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 of 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, 2013, filed with the Securities and Exchange Commission and the updates to the sections in our subsequently filed Quarterly Reports on Form 10-Q.

Second, this call will involve a discussion of adjusted EBITDA, adjusted net income, 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 is included in today's earnings press release which is available at douglasdynamics.com.

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 to discuss our second-quarter 2014 performance.

I am 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 will return to discuss the business outlook and provide guidance for the remainder of the year.

We achieved record second-quarter financial results with both record quarterly net sales and record quarterly earnings per share while also returning cash to shareholders through our robust dividend. The strong second-quarter results exceeded our expectations and reflected the improved market environment driven by higher than average snowfall across core markets this past year and the impact of our ongoing continuous improvement initiatives which allowed us to leverage our improved sales into even greater earnings growth.

For the second-quarter 2014, net sales were $88.2 million, partly driven by a 51.3% quarterly increase in equipment sales and a 63.6% quarterly increase in service parts and accessory sales compared to the second quarter of 2013.

As a reminder, the second and third quarters taken together comprise Douglas preseason order period. Last year preseason sales were relatively, evenly distributed between the second and third quarters, which was quite different when compared to the average split over the past 10 years of 55/45. For 2014, the Company anticipates every turn to the historical averages. We expect shipments for the preseason order period will be more heavily weighted towards the second quarter and closer to the 10-year split.

While we are excited by the strong momentum and our strong performance so far, it is important to remember that the year-over-year improvements' end result this quarter were partially the result of the shift in the shipment mix. Overall, the non-snowfall indicators within our business including truck sales, dealer sentiment, and end-user businesses are all encouraging. Positive dealer sentiment is driven by the renewed confidence from the strong snowfall levels across the majority of our core markets this past year. This was highlighted by many dealers taking advantage of our best preseason order program terms early in the season.

Another favorable indicator is that dealer inventory levels are slightly below historical averages and in excellent shape. Both of these items are in contrast to 2013 when dealers took a cautious approach to inventory, due to the lingering effect of the 2012 low snowfall.

In addition, select pickup truck sales are enjoying year-over-year increases. Over the years, while there isn't a direct link, we found truck sales do positively correlate with plow sales over the long term.

Finally, it is also worth noting that there's favorable business environment for professional landscapers across many of our core markets. The late arriving and cool wet summer weather means there is more work, which should translate into revenue streams benefiting many landscaping businesses. This is a very important end-user group for our products. And the more summer revenue landscapers generate, the greater the likelihood that they will convert that additional income to purchase snow and ice control products later this year.

Aside from an improved market environment, a sharp focus on continuous improvement and effective execution was very important to producing our record financial results. The improvement in profitability highlights the actions taken in prior years to manage the factors within our control and to position the business for success. Now conditions have improved, it is very pleasing to see our efforts paying off. At Douglas, our ingrained culture and steadfast focus on identifying and executing continuous improvement initiatives underscores our commitment to drive significant value for our customers and shareholders.

Turning to the TrynEx business, which we have owned for just over a year now, I am pleased to report that the business is performing well, and we continue to seize opportunities to increase productivity, leverage, expertise, and implement improvements across the business. TrynEx had solid results this quarter as we continue the successful integration into Douglas. Both in our legacy core businesses and businesses that we acquire, we will continue to strive for greater operational excellence to improve efficiency, optimize cost and deliver better customer service while, at the same time, we will invest our resources in those activities that deliver the highest returns for the long-term benefit of our shareholders.

We continue to generate significant cash flows and are well-positioned to execute on our capital allocation strategy. We remain committed to returning value to our shareholders through a long-term dividend plan and as a reminder we paid our regular quarterly cash dividend of $0.21.75 per share on our common stock during the second quarter on June 30, 2014.

In addition, we continue to focus on paying down our debt and pursue strategic acquisitions with attractive return on invested capital as the opportunities arise.

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

Thanks, Jim. For the second-quarter 2014, Douglas Dynamics generated record sales of $88.2 million compared to $55.2 million in 2013, an increase of $33 million or 60%.

Shipment of snow and ice equipment units were $20,679, an increase of 51.3% compared to the prior year. Parts and accessories sales climbed to $10.8 million, a second-quarter record, and an increase of 63.6% compared to the prior year. As Jim mentioned earlier, a robust snowfall this past season is the main driver of these revenue increases.

Sales of TrynEx products were $4.3 million in the second quarter of 2014 compared to $0.8 million in the second quarter of 2013. Year-to-date TrynEx sales totaled $8.7 million.

Please remember that TrynEx sales are historically stronger in the second half of the year when they typically generate 60% to 70% of their revenue.

Cost of sales was $53.8 million or 61% of sales for the second quarter compared to $36.3 million or 65.8% of sales in the second quarter of 2013. This year we are decreasing cost of sales percentage was primarily driven by operating leverage, specifically stronger second-quarter 2014 sales, reducing relative impact of fixed costs.

Looking ahead, it is worth noting that, historically, Q3 cost of sales as a percentage of sales are higher than Q2 driven largely by the underabsorption from our normal two-week plant shutdown in early July. To a lesser degree, Q3 cost of sales is also negatively impacted by higher shipments of spreader products as cost of sales, as a percentage of sales is higher on spreaders than plows.

SG&A expenses were $8.4 million for the quarter, an increase of $2.3 million compared to the second-quarter 2013. The increase was mostly due to a full quarter of ongoing expenses related to TrynEx products of $1.5 million for the second-quarter 2014 compared to $0.4 million in the same period in 2013. Additionally, $1.2 million of the increase was a result of increased performance-based compensation expense as a result of better operating results in 2014.

Second-quarter 2014 adjusted EBITDA was $27.8 million compared to prior year adjusted EBITDA of $14.4 million. Net income in the second quarter of 2014 was $14.6 million compared to prior year net income of $5.9 million. Earnings per share were $0.64 per diluted share during the quarter compared to $0.26 per diluted share for the second quarter of 2013.

During the first six months of 2014, the Company recorded net cash provided by operating activities of $12.3 million compared to net cash used in operating activities of $11.8 million in the same period last year. This increase was driven primarily by the increase in net income and favorable working capital changes.

Accounts receivable at the end of the second-quarter 2014 were $51.3 million, an increase of $12.8 million compared to the second-quarter 2013. Cash and cash equivalents on hand at the end of Q2 totaled $7.1 million. The unused borrowing capacity on the revolver is $62.4 million. With total liquidity of $69.5 million we are well-positioned to fund upcoming quarterly cash dividends.

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

Thanks, Bob. To close, I would like to share our view of the current market conditions and provide some insight for our expectations in the second half of 2014.

Overall, we are very pleased with the continued growth in revenues and profitability we were able to achieve for the first half of 2014. We have great confidence in our business and the strategies we are implementing across the business to bolster our industry-leading product portfolio, strengthen our manufacturing performance, and deliver best-in-class service and capabilities to customers.

The strong start to the preseason order period provides early directional visibility on sales for the remainder of the year. But there still is variability in the fourth quarter. As we have stated many times, fourth-quarter results are impacted by the weather, which has fluctuated more than normal the past few years.

More specifically, results are impacted by the timing, location, and amount of snowfall, along with other macroeconomic trends. However, we remain encouraged by a continuation of positive market indicators within our business such as dealer inventory levels, below historical averages, continued strength in light truck sales, and positive overall dealer sentiment that all influence and contribute to our business.

All of this combined provides us the confidence to raise our guidance for the full year 2014. Based on our results for the first two quarters and assuming average snowfall in the fourth quarter, and a stable economic environment, we expect net sales for the fiscal 2014 to be in the range of $245 million to $275 million and adjusted EBITDA of $60 million to $72 million and earnings per share of $1.00 per share to $1.35 per share.

Looking ahead, we remain committed to driving profitability through continued focus on operational efficiencies and investing in our business to achieve long-term growth.

At this time, we will open the call for your questions. Operator?

(Operator Instructions). Robert Kosowsky, Sidoti.

Good morning. I was curious on your conversations with dealers. Are dealers interested in taking on materially or significantly more inventory heading into next season from what you are hearing right now?

That is a terrific question. We are seeing certainly the willingness to take more inventory than last year, but I think it would be a leap to say that it would be significantly more. We are certainly seeing good retail activity, but I think our dealers still continue to be somewhat cautious about how much inventory they carry. But to this point, it is not impacting retail activity at any level.

Okay. Then, also first half of this year was pretty fantastic from a parts side of the business. Do you have any thoughts on how we should think about this level of parts sales, I guess translating it through the entire year or what we should be thinking about embedded in your guidance for parts sales assumptions?

Sure. From the 20,000 foot level, Robert, I think that the parts sales really are a reflection of the snow last year and how hard and continual the product has gotten used as well as the general age of the product out there. We talked many years about people holding their product a little bit longer. I think what we're seeing now is certainly a reflection of that.

I also believe that should we get decent snow in the fall, we could still see a fairly strong fall -- late, late third quarter early fourth quarter sales of parts and accessories as well. I don't know, Bob, do you have any other comments?

Well, I guess I would just to add to what Jim said, first quarter we had record parts and accessories sales, Rob. That was driven entirely by the heavy snowfall. Second quarter's record shipments really are more about restocking dealer shelves from that very strong first quarter. So, I wouldn't anticipate parts and accessories sales necessarily continue at record paces for the balance of the year, but as Jim indicated, there is every reason to think that they still should be strong.

Okay, that's helpful. Then one other thought about SG&A expense. I think you mentioned about $1 million to $1.2 million of higher incentive expenses. So if we think about next year if we do get a more normal year from a snowfall standpoint and early unit sales standpoint you would probably see SG&A go down by that level?

Absolutely.

Okay. So that is a better indication of true SG&A?

Correct.

All right. Thank you very much and good luck.

Thanks, Rob.

Jason Ursaner, CJS Securities.

Good morning. Congrats on a strong start to the preseason.

Thank you.

Just looking at the Q2 to Q3 shift that you mentioned. Was last year's shift back towards, or shift to a 50-50 split? Was that just related to the new products you came out with last year that would have changed manufacturing timing?

I think that had a significant impact on that. As you recall we had record introduction of new products. And as a result to do it in an orderly process, we had to feather in during the year when we actually began shipping each of the products and many of it was heavily skewed towards Q3 and Q4.

So, I think that was one of the factors certainly that sort of had a structural impact, yes.

Okay. And the cash discount versus financing, looking at the cash flow statement and I realize it is not a cash generation quarter for you guys in general, but is it a stretch to take away that there might be a slight shift back towards taking the finance terms versus the discount with cash up front?

Yes, I think actually, Jason, by the time the preseason period ended, there was a slight increase in the cash discount terms. There was certainly a lot of early April and May shipment requests when cash discounts are at their highest. So I think that was the largest driver of that.

But by the time the preseason orders balanced out and came in through the middle of June, when more people end up taking the extended dating terms, it was relatively close to historical norms. A little bit of a slight increase in the cash terms.

Okay. And TrynEx, you mentioned performing well. Is there any numbers you could put on how that did or just how spreaders did in general as a percent of revenue or growth?

No. I don't think we plan on getting that granular. What I would suggest is that TrynEx's unit volumes are seeing every bit the kind of uptick in this environment, given the positive drivers Jim mentioned as the core Douglas business.

Okay. And is that business benefiting from the Douglas structure for the preseason order period or it had its own sales model that has a standalone that ended up being pretty similar?

Yes. It has its own programming and, typically, because most of their products goes through lawn and garden dealers, it runs a little bit later than the historical Douglas model. There are some aspects of it that we are blending, but from a timing perspective, the shipments tend to be a little bit later in the year. And that is really because this is a very, very busy time of the year for lawn and garden dealers. And this is the last time -- this is very difficult for them to be thinking about preseason orders and actually taking a lot of inventory because they have still got a lot of grasscutting inventory.

Okay. Appreciate all that. I will jump back in the queue. Thanks.

Flavio Campos, Credit Suisse.

Question on landscaper budgets. Have you got any visibility into that and if the strong first half of the year has helped that at all and if that should drive replacement of plows especially towards the end of the year?

Sure. Our information is only anecdotal. What we do know for sure is people who moved snow last winter for a living did very well financially. We have very good indication that this year because, even though the season started later because of the cool wet weather, it has been a longer season than people would normally see. So what we are seeing is that landscapers in general have had a lot of success in the past two seasons. The last snow season and the current one and garden season. So that bodes well for us.

That's great. That's good color. And a quick follow-up. Do you have any updates on the lifecycle of a plow post this unusual snow season that we have had before, before this strong 2013, 2014 season? You guys have given some updated ways of thinking about how long landscapers are holding onto their equipment. Just wonder if you have any updates on that.

No material updates. We would say during the really poor economic cycle that we have gone through, that people probably extended the life a year or two. Although I think as the economy is coming back and we had the snowfall that we had last year, I think we will -- we have -- are beginning to see some of the return of pent-up demand as we speak. But we are really going to have to get through another snow cycle before we really get a better handle on if the replacement cycle stabilized. So we will have to see.

Perfect. That's great. That's helpful. That is all on my end. Thank you for taking my questions.

(Operator Instructions).

Okay, operator, if there are no more questions, I would like to thank everybody for joining us today and continued interest and support for Douglas. We look forward to speaking with you again during the third-quarter announcement. And thanks again. Have a terrific day.

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