Douglas Dynamics Inc (PLOW) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Douglas Dynamics fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Mr. Bob McCormick. Sir, 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 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 Condition and Results of Operations included our Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission and the updates to these sections in our subsequently filed quarterly reports on Form 10-Q.

Second, this call will involve a discussion of adjusted EBITDA, adjusted net income and adjusted earnings per share, all non-GAAP financial measures which, under SEC regulation G, we are required to reconcile with GAAP. Direct conciliation of these measures to the closest GAAP financial measure is included in today's earnings press release. Joining me on the call this morning is Jim Janik, 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 2014 performance. I'm going to begin with an overview and then Bob will provide detailed review of our financials. Finally, I will return to discuss current trends and provide additional details in our outlook for 2015.

2014 was certainly one for the record books. We achieved record results across the board, with revenue and earnings growth that exceeded all of our expectations for the year. The results reflect a strong momentum in our business, very favorable market conditions, and sharp execution of our strategy. Along with record financial performance, we capped off a great year with a great acquisition. As you probably remember, we expanded our portfolio at the end of the fourth quarter with the acquisition of Henderson, which aligns perfectly with our core business and adds a layer of predictability and stability to our business.

As a reminder, headquartered in Manchester, Iowa, Henderson Products is the leading North American manufacturer of customized turnkey snow and ice control solutions for heavy duty trucks, focusing on state departments of transportation, counties and municipalities. Henderson's diverse product portfolio includes ice control equipment, snowplows, dump bodies, unibodies and replacement parts. As we stated previously, we will always focus on the factors within our control. The improvement in profitability we produced highlights actions taken in prior years to position the business for success. Every day across our business, we are actively seeking opportunities to incrementally improve our market position and operational execution.

We are keenly aware that market conditions within our business can significantly fluctuate from year to year, driven by varying levels of snow and ice, along with changes in the market sentiment of various non-snowfall indicators. As an example, it was only two years ago that we experienced one of our lowest snow seasons and fourth quarters on record. These changing market conditions underscore the importance of our lean operational excellence and the competitive advantage of our manufacturing flexibility, which enables us to be nimble and efficiently adapt to increasing levels of demand a snowfall levels dictate.

The foundation of our success is our proprietary Douglas Dynamics Management System, or DDMS. Through DDMS, we've developed a culture where employees understand the importance of continuous improvement and are leading the charge in implementing efforts that improve our profitability and potential for future growth. We have relentlessly pursued new and innovative ways to improve the productivity of our business and those that we have acquired. We're constantly challenging ourselves as it relates to refining each and every business process. Our efforts have paid off, resulting in increased profit margins, which allows us to invest in areas for future growth and expand our portfolio.

DDMS will be instrumental in driving value creation opportunities with our recent acquisition of Henderson, and we're confident in our ability to make a great company even better. The acquisition (technical difficulty) Douglas Dynamics as a North American leader in snow and ice control across all truck segments and adds a layer of growth to our core business, which will deliver greater long-term shareholder value. The addition of Henderson expands our product portfolio, broadens our geographic footprint and adds a dynamic and productive workforce and Management team. As we've stayed previously, we've pursue strategic acquisitions, with growth platforms in logical core and adjacent market at disciplined valuation.

The acquisition advances our growth strategy, exceeds our disciplined internal accrual rates and adds a layer of predictability and stability to our business. While Douglas earnings have fluctuated the past three years, Henderson primarily serves the government and municipalities market segment, such as state DOTs, that have a more stable, predictable revenue stream. The best evidence for this is Henderson's track record of 12 years of consecutive revenue growth. Our first 10 weeks of integration with Henderson have gone very well and we're working closely with the team to begin implementing DDMS. We are confident we can meaningfully enhance Henderson's operational efficiency to improve long-term profitability and better serve customers through industry-leading quality, delivery and service levels, ultimately resulting in increased market share.

Last year's acquisition of TrynEx highlights our abilities to optimize operational execution. In a year where TrynEx experienced record product shipments, our DDMS efforts resulted in improved quality, shipping performance and profit margins. We expect to see continued improvement in these metrics in the years to come as DDMS becomes more fully integrated at TrynEx.

Along with efforts to optimize operational efficiencies, we have worked diligently to bolster our industry-leading product portfolio. We have executed new product development initiatives to drive incremental growth and innovation across the business each year. We also look forward to unveiling a significant number of new products and technologies throughout 2015. Another record number of new products were unveiled at the NTEA Work Truck Show recently, including a completely redesigned BLIZZARD snowplow line that will also be rebranded SNOWEX and sold through the SNOWEX predominantly lawn and garden dealer channel. This redesign and branding has been in the works as part of the TrynEx acquisition nearly two years ago. We remain committed to innovating products that enable people perform their jobs more efficiently, productively and profitably.

Before turning over to Bob, I'd like to briefly mention our dividend policy. As previously reported, the Company declared a quarterly cash dividend of $0.2175 per share on its common stock, which was paid on December 31, 2014, to stockholders of record as of the close of business on December 22, 2014. We also announced that the Board of Directors approved and declared a quarterly cash dividend increase of 2.3% to $0.2225 per share, which will be paid on March 31, 2015, to stockholders of record as of the close of the business on March 20, 2015. The Board's decision to raise the dividend again is the result of the confidence in the Company's ability to generate significant cash flows in 2015.

We are in strong financial position to execute on our capital allocations strategy. Our priorities in 2015 remain consistent with previous years, with our robust dividend as the focal point of our strategy. We will continue to enhance shareholder value by consistently growing the dividend at levels that are sustainable through all market conditions. Outside of the dividend, our other capital allocation priorities include paying down to debt levels that ensure we maintain our financial flexibility and use the interest savings from debt repayment to fund dividend growth. We will also opportunistically pursue strategic acquisitions, with attractive EPS accretion and cash flow characteristic across all core and adjacent markets as we uncover such companies.

Before I turn the call over to Bob, on behalf of the Board and the rest of our Management team, I want to take a moment to thank our associates in every part of our business for their steadfast pursuit of innovation and operational excellence. I'm extremely proud of the way our team stepped up to execute our strategy and meet the exceptional demand we experienced in 2014 and ensure our customers and partners remain delighted with our products and services and commitment to Douglas.

With that, I'll hand over to Bob to discuss our financial results with more detail. Bob?

Thanks, Jim.

For the fourth quarter 2014, Douglas Dynamics generated record sales of $100.1 million, compared to $73 million in the fourth quarter 2013, an increase of 37.1% year-over-year. Shipments of equipment units and parts and accessories sales increased 21.1% and 14.8%, respectively. Cost of sales was $61.4 million, or 61.3% of sales, for the fourth quarter, compared to $45.6 million, or 62.5% of sales, in the fourth quarter of 2013. This year-over-year decrease in cost of sales as a percentage of sales was driven primarily by operating leverage along with ongoing DDMS initiative across our enterprise to drive operating efficiencies. SG&A expenses of $12.5 million for the quarter were $3.4 million higher than the prior year. Henderson transaction cost of $1.8 million were recorded in Q4. The balance of the increase was largely volume related, namely in the areas of incentive plans and advertising.

Fourth-quarter 2014 adjusted EBITDA was $29.6 million, compared to prior-year adjusted EBITDA of $19.8 million. Adjusted net income in the fourth quarter of 2014 was $14.2 million, compared to prior-year adjusted net income of $8.5 million. Adjusted earnings per share were $0.63 per diluted share in the fourth quarter of 2014, compared to adjusted earnings per diluted share of $0.38 in the prior year. Note that the full-year 2013 results did include certain non-cash purchase accounting adjustments attributable to the acquisition of TrynEx business in May 2013, which negatively impacted earnings by $4.5 million, or $0.20 per diluted share.

I'd also like to mention the Henderson acquisition. Given the deal closed on December 31, 2014, Douglas Dynamics recognized Henderson's assets on its year-end balance sheet, but of course we did not recognize Henderson's operating results on the corresponding income statement based on the timing. Henderson's net sales for 2014 were $81.6 million and EBITDA was $10 million. For more information regarding Henderson's historical financial performance and pro forma financial statements, please review the 8-K/A filing that we made on March 9, 2015.

Nets cash provided by operating activities for the full year 2014 was $53.7 million, compared to prior-year net cash provided by operating activities of $32.2 million. This increase was primarily driven by the increase in net income and favorable working capital changes. Also, please note that full-year CapEx of $5.3 million is higher than historical norms. This relates to significant new product investments and long-overdue facility maintenance begun in 2014 and expected to be completed by the end of 2015. As such, our CapEx spending in 2015 is projected to reach $5.5 million.

Inventory was $48.2 million at the end of the fourth quarter of 2014, an increase of $20.3 million over the prior year. The largest driver of the increase in inventory was $16.3 million in inventory resulting from Henderson acquisition, including a $2 million purchase accounting write up to fair market value, which will impact diluted earnings per share by approximately $0.05, net of tax, in the first quarter of 2015.

Accounts receivable at the end of the fourth quarter of 2014 were $60.9 million. This compares to $42.3 million at the end of the fourth quarter of 2013. The increase was primarily driven by adding $15 million of Henderson AR and higher sales volumes. The Company maintained cash on hand at December 31, 2014 of $24.2 million, of which $11.8 million is required to be paid back to the sellers under the terms of the merger agreement with Henderson.

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

Thank you, Bob. In closing, I'd like to share our thoughts on current market conditions, what we're seeing in the first quarter to date and some thoughts on what we're expecting for all of 2015. 2014 was outstanding record year by any measure. While we are focused on continuing to drive operational excellence in 2015, the nature of our business and historical precedents made it simply unrealistic to expect repeat the same record financial results as 2014.

As great as 2014 was, we know we need continue to execute our strategy and focus on the factors within our control that drive long-term shareholder value. As we progress further into 2015, we are excited by the opportunities inherent in the Henderson business. We are focused on utilizing DDMS to drive innovation and efficiency across our product portfolio, and to enhance operational execution. We are also enthused with our new lineup of innovative products, which further strengthens our best-in-class portfolio. With a great year in the books, we are by no means resting on our laurels. We continue to operate in an industry and economy that can be unpredictable and while we have the wind at our back to date, we have a long memory and know that the circumstances can change quickly.

This winter, the extreme snowfall events were concentrated in New England, compared to last year that experienced or whether events over broader population areas. Regardless, we remain focused on executing our ongoing operational excellence initiatives and driving margin performance in all market conditions. Non-snowfall indicators are trending in a very positive direction. We're continuing to see favorable dealer sentiment as indicated by strong retail reorder activity. Additionally, 31 January dealer field inventories were marginally higher than a year ago and are very manageable going into 2015.

Another positive indicator continues the positive momentum in select pickup truck sales. These favorable non-snowfall indicators, coupled with slightly above average snowfall across core markets, suggest further release of pent-up demand in 2015. Based on record 2014 results, dealer sentiment and industry trends, the Company expects net sales for the full year 2015 to range from $320 million to $380 million and adjusted EBITDA to range from $60 million to $90 million. Earnings per share are expected to range from $0.80 per share to $1.45 per share.

It is important to note the Company's outlook assumes that the economy will remain stable and that our core markets across the snow belt region in North America will experience average snowfall in the Company's core markets for the remainder of 2015. We're excited to continue our success into 2015 and will be relentless in our pursuit to drive profitability across the business and leverage our flexible business model and DDMS to drive value for shareholders.

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

Thank you.

(Operator Instructions)

Tim Wojs, Baird.

Yes, good morning. Nice job on the quarter and the year. The first question for me, I want to bridge normalized unit demand historically and what you're expecting for 2015. Given the install base and the average life of the unit, I think normalized unit demand has been around 50,000 a year, but the midpoint of the guidance, at least the numbers I'm backing into, probably implies closer to 60,000 units in 2015. I'm trying to back out Henderson and back out parts, but first of all, is my math right? And secondly, what's the driver of that differential versus history? Is it share gains? Is it some of the pent-up demand you alluded to, Jim?

Yes. That's an excellent point. It's really it's a number of things. Certainly, we like to think that the pressure is on, given Douglas's service levels, that we continue to grab little bit of market share in the ended-season period. Jim talked about the launch of a record number of new products in 2015, which we expect to have positive impact. Those are two critical elements, definitely.

I think the one that is most important, though, which we've talked about multiple times, is that pent-up demand, which we saw a nice release of 2014, is typically a multi-year proposition. Now, you need two good years of snowfall in a row at a minimum for that multi-year pent-up demand release to play out and given that this season looks like it's going to end up slightly above average in our core markets, gives us reason to believe that unit volumes will trend a little bit above the norms because of additional pent-up demand release.

Okay. Did you -- I know you have had really good lead times relative to the competition, so has that maybe benefited you in year-ago period? Have you seen some additional distributors or dealers take more Douglas Dynamics product relative to history?

I think not necessarily in the stocking. I think what we're seeing is just that retail demand has been so robust, and I think that, at least in the fourth quarter, our ability to meet that demand has been just terrific, so what you're finding is most of our dealers were able to maintain good stocking levels and continued to meet customer demand during that fourth quarter. It's -- I don't think it's anything unusual. I think it's just really blocking and tackling, from my perspective.

Okay. That's helpful. And then a couple of modeling questions. Bob, I think historically Q2 has been a little bit of a seasonally stronger quarter than Q3, but that last year was a little bit more even between the quarters. As we think about the year, how should we think about Q1 that's 80% over already. And then Q2, Q3, just the cadence around that. And then how should we think about free cash flow expectations for the year?

Okay.

When comes to the preseason periods, Q2 and Q3, we've historically said it doesn't really matter to us what quarter the product ships in. Having said that, we have seen a trend over the last three or four years where Q2 was normally stronger than Q3. That may change a little bit in 2015. Some our significant new product rollouts do have mid-year launch dates, so we may see some of those unit shipments fall into Q3 where they may normally be Q2. I can't really call the mix at this point until we get the order book in, but I would expect you could model a little bit of a shift from Q2 into Q3.

From a cash flow perspective, if you look at what our normal free cash flow is when we are at normalized unit volumes and just flex it up from there, we would expect Henderson -- in our core business, Henderson should be slightly free cash flow positive in 2015, but nothing of a material nature.

Okay. And then I had a last question. What is the expectation for Henderson in 2015 for revenue?

What will give you is this. Henderson's revenue in 2014 was just north of $80 million. They've got 12 straight years of revenue growth in their rear-view mirror. We'd expect 2015 to be stronger than 2014. They finished year with a very strong backlog.

They're poised for another great year of revenue and earnings growth. From a modeling perspective, although you can get some of this information from the 8-K/A that we filed, they've historically got margins are in the mid-20%s. Their EBITDA was 12.2% in 2014. We expect both the margin and EBITDA to improve over time as we implement some of the DDMS synergies.

That's great. Thanks for taking the questions and congratulations, again, on 2014.

Jason Ursaner, CJS Securities.

Good morning. This is Robert Magic filling in for Jason. Given the strong snow season, has dealer inventory levels been drawn down? What impact will this have on next season?

Again, I think what's very interesting is, we take dealer inventories at four times a year. The last formal one that we take is 31 January. Interestingly, probably the strongest part of our snow season this year occurred after those inventories were taken. So at that time, dealer inventories were modest -- I mean, slightly, a low-single digits above a five-year average, which we would've been very comfortable with.

Based on the snowfall in February, my expectation would be that inventories would be lower than that. And I think we will see a decent preseason. It's a little difficult at this particular point to really dial that in, because with all of the new product, I think there's a lot of planning has to go into the dealers thinking as to what they're going to take and when they are going to take it. But we're locked and loaded for a pretty decent preseason compared to what we'd call historical averages.

That was helpful. What is your targeted leverage ratio and capacity or interest to make more acquisitions?

Well, our current leverage ratio is at historical lows, right around two. We have said publicly many times that from an acquisition perspective, we would like to have a consolidated leverage ratio that doesn't exceed four for any length of time. We always know that there could below average snowfall cycle coming our way, so we think, having done the math, that anything at a four lever or under keeps us in pretty good shape to satisfy shareholders, protect the dividend, et cetera.

Thanks a lot.

(Operator Instructions)

Robert Kosowsky, Sidoti.

Good morning.

I had a quick question on the 8-K/A that you filed last week. If I do the math in 2012 and 2013, that looked like it was -- EBITDA margin was closer to 9%, versus the 10% to 12%, or 11% to 13% you mentioned when the deal happened. I'm curious, was there something else that I'm missing in just a simple calculation of operating income plus D&A? And what the big jump was from this 13% to the 12% in 2014?

Yes, what you're seeing there, Rob, is in those pro forma 8-K income statements, you've got $2 million worth of inventory write up that is purchase accounting-related being folded into those numbers, so that's going to drive the EBITDA calculation down.

That's, as you know, that's a one-year phenomenon that will all be expensed during the first-quarter of 2015. So from an adjusted EBITDA perspective historically, and an ongoing EBITDA perspective going forward, it's in that 12% range we been talking about.

So $2 million was embedded in the 12% and the 13%? (Multiple speakers)

The way we're obligated to show the pro forma income statements for those guys, we have to include the impact of purchase accounting write up in those pro forma statements.

Okay, that's helpful. And then secondly, it looked like they're running about 2%, 2.5% CapEx as a percent of sales, like $1.5 million to $2 million. Is that accurate ongoing or forward, and how much investment do you need to put into Henderson to get them to realize some of the productivity improvements that you see down the road?

Yes, I think they have a fairly modest CapEx requirement business, similar to our core business. I wouldn't expect significant increases in that spending. From a DDMS implementation perspective, we're obviously very early on. What I would suggest there is, one of the DDMS mantras is creativity before capital. So we'll typically do everything in our power to eliminate waste and improve productivity and efficiency, without having to make major capital investments to do so. If, as we venture down the path, we do make a determination that there is a significant investment of some kind of make, we will be sure to signal that to the market appropriately.

Okay. So just, to be determined?

Yes.

Cool. And then, any abnormal turnover with the employers at Henderson since you brought the company? I'm just wonder how some of the implementations (multiple speakers) are going so far.

Yes, no, not at all. In fact, I think all of the feedback that we're getting, directly and indirectly, is that the employees are just very enthused and thrilled that actually Douglas Dynamics was the eventual buyer.

All right, cool. Thank you very much and good luck.

Jim Giannakouros, Oppenheimer

Good morning.

Two questions. One, as far as the pent-up demand release, I anticipate that you have some earley indications on the preseason buying demand outside of, obviously, your new product introduction that's going to come out later this year, as you mentioned, Jim. But just from your conversations now and seeing that we've had different winters in different parts of the country, if you can speak to, by geography, what you're seeing as far as where you think stronger sales are going to be in -- and again, coming from the Northeast, we know -- we were particularly hit hard this winter again, so that (technical difficulty) you were speaking to on the two years running now and setting up for next preseason, here.

Sure. I'd be happy to.

Typically, the preseason is stronger in areas that receive the most snow. And that typically this year -- really, it's snowfall is a little interesting this year. It was pretty lumpy compared to last year. Last year, virtually every major metropolitan and regional area got a lot of snow every month of the winter. This winter, December was significantly below average nationwide. January was -- first half of January was quite low and then by the end of January -- the middle to the end of January through February, in particular the East Coast, got pounded.

So it's a tale of two stories there. Where we anticipate strength, the primary strength will be east of Michigan and you get into the Western Great Lakes states, they're below average in snowfall. Here in Wisconsin, Minnesota, Michigan is sort of right on the line. And then the for the west you go, you'll see that snow falls is quite low. So we really anticipate decent orders from the entire country, but probably stronger as you get further east.

Understood, and expected. Thanks. And then one on pricing. I know historically you have gotten -- the industry has been pretty rational. But given that there's been some consolidation in the space, what are you seeing from a competitive pricing dynamics? And then just a follow on, if you can speak to it from a price cost perspective, what are you baking into your guidance from a gross margin perspective in 2015?

Sure. I'll talk about pricing and I'll let Bob talk about what he's anticipating for margin. It's a little bit early for us to have any read on pricing. Within our industry, most of the manufacturers will look at their pricing twice a year. It's either right before the preseason period, which is beginning of April and that's when they'll make any announcement, or about July.

So it's a little difficult at this particular point, since no one really had announced their pricing, to really get any bearing what's going to happen in the marketplace. My expectation would be that, based on the kind of snowfall and the environment that were in, is that I think people will probably be rational because I think there's going to be a lot of demand for products nationwide.

When it comes to the margin end of it, Jim, historically -- now, let's talk about Douglas non-Henderson first. As an example, 2013 margins were just about 33.5%. In 2014, margins jumped up to over 38%. That's really driven, obviously, by some operating leverage, given the record revenue, but also equally driven by a record number of parts and accessories sales, which you know will carry greater than average margins. For 2015, we'd expect those margins to retreat back down to more historical level, in the 34% to 35% range. And then keep it in mind what I had said earlier; Henderson's margins are typically in the 23% to 25% range.

Okay, that's helpful. Thank you.

There are no further questions at this time. I will now turn it back over to Management for closing remarks.

Thank you for your interest in Douglas Dynamics. We look forward to speaking with you about our first-quarter 2015 results in May. Once again, thank you.

Ladies and gentlemen, this does concludes today's conference. Thank you for attendance. You may now disconnect. Everyone, have a great day.