Douglas Dynamics Inc (PLOW) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics first-quarter 2015 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 follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Bob McCormick, Executive Vice President and Chief Financial Officer of Douglas Dynamics. Please go ahead, sir.

Thank you. Hello, everyone, and thank you for joining us on our 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. 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, 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, a non-GAAP financial measure which under SEC Regulation G we are required to reconcile to GAAP. Reconciliation of this measure to the closest GAAP financial measure is included in today's earnings press release, which is available at douglasdynamics.com. Joining me on the call this morning is Jim Janik, chairman, President and Chief Executive Officer.

With these formalities out of the way, I'd like to turn the call over to Jim.

Thank you, Bob. Good morning and welcome to the first-quarter 2015 earnings call. We are in New York this morning hosting our call from the New York Stock Exchange, and as you might have seen yesterday, we rang the closing bell to celebrate the five-year anniversary of our IPO, and today we will be hosting our first ever investor event, and we hope you can all join us.

On this call, I'm going to begin by providing an overview of our results, and then Bob will provide a detailed review of our financials.

Finally, I will return to discuss the current trends and our outlook for 2015. We produced another quarter of strong financial results, which was driven by robust equipment and parts and accessories shipments. Of course, the acquisition of Henderson products had a significant positive impact on our results. I'll be sharing further details on the encouraging results we are seeing in that business, as well as provide an update on the integration later in the call.

Turning to our results, net sales were $53.9 million in the first quarter of 2015. This represents a 48.1% year-over-year increase. Robust first-quarter 2015 results reflect the highest plow shipments in more than a decade and the second-highest parts and accessories shipment in the history of the Company.

We are very pleased with our strong performance. It's worth noting that first-quarter 2014 was an unprecedented first quarter for us given the timing and record amount of snowfall last year and certainly makes for a tough year-over-year comparison.

As a reminder, last year almost -- last year almost all major core markets for Douglas received at or near record snowfall for the season, and snowfall levels were fairly evenly distributed across the November to March snow season.

Snowfall was above average this year, although it wasn't as widespread geographically and also was heavily weighted towards the February into March season after a slow start in the early snow season. Based on the tough comparisons, we are still very pleased with our very strong financial performance.

Going forward, we're focused on three key strategic priorities, which I will briefly outline now and discuss in greater detail at our investor invent later today, which will also be webcast. The three priorities are one, optimize the core business; two, deliver operational excellence across the Company; and three, explore adjacent markets.

We are actively (technical difficulty) our communities to optimize the core business through our industry-leading product portfolio. We unveiled a new lineup of products at the NTEA Work Truck Show earlier this year, and these products were very well received by both dealers and end-users. We remain committed to innovating products that enable people to perform their jobs more efficiently, productively and profitably.

Our new products, which were unveiled earlier this spring, will arrive to dealers with plenty of time to meet demand prior to the snow season. Although a significant portion of these products may not be shipped until the third and early fourth quarters. While the early market reception to these new products is strong, it's still too early in the preseason to comment on orders since most of the large orders tend to come late in the preseason period.

As we previously stated, the foundation of our success is our proprietary Douglas Dynamics Management System or DDMS. We're focused on leveraging this approach to the entire value chain. DDMS underpins our success to drive incremental improvements across our product portfolio and allow us to quickly adapt and react to changing market conditions.

We are relentlessly pursuing new and innovative ways to improve the productivity of our acquired businesses, TrynEx and Henderson.

Finally, as we have stated in recent years, we will continue to explore logical adjacent market opportunities that are focused work/truck dedicated attachments. We will opportunistically pursue strategic acquisitions that will expand our market share in new geographic and end-user markets and develop strategic platforms that reduce reliance on weather.

As we continue into 2015, we are encouraged by positive non-snowfall business indicators such as the positive trend in light truck sales. Selective pickup truck sales through March remain robust with a 7% year-over-year increase.

Another positive indicator is favorable dealer sentiment. Dealer field inventory taken at the end of January was relatively flat year over year; however, strong February snowfall further reduced dealer inventory to lower than average levels. Over the years, while there isn't a direct link, we found truck sales do positively correlate with plow sales over the long-term.

Now I'd like to provide an update on the Henderson acquisition that was completed right at the end of December 2014. With one full quarter under our belts, we are pleased with the results we are seeing, and the integration of the business is progressing well. While we are early in the process, the initial results are positive and bode well for the future.

Henderson financial results were in line with our expectations, and there is a healthy backlog of business and new demand opportunities. We remain very excited about the potential for the business. The acquisition firmly positions us as the leader in all truck markets across snow and ice control.

Similar to the TrynEx acquisition, we are seeking opportunities to incorporate DDMS across the Henderson business to drive value creation opportunities. Along with enhancing the profitability of the business, Henderson is on track to achieve its 13th straight year of consecutive revenue growth.

The addition of Henderson advances our growth strategy and adds a layer of predictability our business. Overall we are confident in our ability to make a great company even better.

Finally, I'd like to reiterate our dividend policy. We remain committed to returning value to our shareholders through a long-term dividend growth plan. As a reminder, we paid our regular portly cash dividend of $0.2225 per share of our common stock during the first quarter on March 31, 2015, an increase of 2.3% over the fourth-quarter dividend.

We've increased our dividend every year since our IPO in 2010. Along with the robust dividend, we are focusing on driving long-term shareholder value through accretive strategic acquisitions and initiatives to improve our business profitability.

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 of 2015, Douglas Dynamics generated net sales of $53.9 million, an increase of $17.5 million or 48% compared to $36.4 million in the first quarter of 2014.

Sales of snow and ice control equipment increased $17.7 million for the quarter, driven largely by the addition of Henderson revenue in Q1.

Overall Henderson sales totaled $19.9 million for the quarter. As Jim mentioned earlier, all the first-quarter parts and accessories sales were the second-highest first quarter in the history of Douglas. It still fell slightly below the unprecedented record level of $14.2 million set last year.

Gross margin was $16.4 million or 30.5% of sales for the first quarter compared to $14.1 million or 38.8% of sales in the first quarter of 2014. A decrease in margin as a percentage of sales is largely due to the addition of Henderson sales and lower than historical Douglas margins, including the negative impact of a one-time $2 million Henderson purchase accounting inventory writeup, which was expensed through cost of goods sold Q1.

SG&A was $11.4 million for the first quarter compared to $8.3 million in the first quarter of 2014. Henderson SG&A of $2.5 million comprised a majority of the year-over-year increase. The balance of the SG&A increase was driven largely by increased advertising costs.

First-quarter 2015 adjusted EBITDA was $9.6 million compared to prior year adjusted EBITDA of $8.3 million, an increase of $1.3 million.

Net income for the first quarter of 2015 was $0.4 million compared to prior year net income of $1.6 million. Earnings-per-share were $0.01 per diluted share in the first quarter of 2015 compared to earnings per diluted share of $0.07 in the prior comparable period. Included in these results are $2.1 million of net cash purchase accounting adjustments related to the Henderson acquisition, which negatively impacted earnings by $0.05 per diluted share.

We produced a profitable first quarter first quarter for the first time in a decade last year, and we are very pleased that we were able to repeat that feat again this year thanks to strong performance and the addition of Henderson, which has less seasonality to its business than our core Douglas business.

Let me take a moment and provide an update on the results for Henderson products. During the first quarter of 2015, Henderson generated net sales of $19.9 million and adjusted EBITDA of $3.1 million net of a pretax $2 million purchase accounting adjustment related to inventory writeup.

As previously stated, the acquisition is expected to be accretive to earnings per share on a full-year basis in 2015 and free cash flow positive on a standalone basis in 2015. Henderson's results were in line with our expectations, and combined with the backlog that we see today bode well for 2015 performance.

Net cash provided by operating activities in the first quarter of 2015 was $11.3 million compared to prior year net cash provided in operating activities of $10.2 million. This increase was driven largely by favorable working capital changes.

Cash on hand at the end of the first-quarter 2015 totaled $20.8 million. The unused borrowing capacity on the revolver is $70.3 million. With total liquidity of $91.1 million, we are well-positioned to fund our quarterly dividend payments and future growth opportunities.

As part of our customary preseason inventory build, inventory was $71 million at the end of the first quarter of 2015 compared with $46.9 million of inventory at the end of 2014. Inventory extruding Henderson products increased $6.1 million compared to the end of the first quarter of 2014.

If you remember, inventory at the end of Q1 2014 was unusually low given the strength of shipments last year. Accounts receivable at the end of first quarter 2015 were $23.9 million, an increase of $10.4 million compared to the first-quarter 2014. That was also driven primarily by the acquisition of Henderson trade receivables.

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

Thank you, Bob. Let me now take a few moments to share some thoughts about what we are expecting for 2015. We remain confident that we will achieve another year of strong financial performance following our record performance in 2014. We are particularly encouraged by our new innovative lineup of product and positive non-snowfall indicators such as strong backlog, favorable dealer sentiment and continued strength in selected pickup sales. Distributor added fluids towards snow and ice control, as well as truck equipment business, are positive for 2015.

It is a cautious group by nature, but they are about as positive as they can be at this moment. We are in the process of completing regional preseason meetings to discuss all the new products and share the preseason ordering program with dealers. Dealer feedback has been very favorable as they are enthused about the new products and the potential to drive incremental revenue.

We anticipate order shipments during the preseason order and shipping period to be closer to a 50-50 split between the second and third quarters. This is due primarily to the new product production ramp-up now underway resulting in stronger third-quarter shipments than has occurred over the past few years. As the year unfolds, we will continue to drive profitability across the business and leverage DDMS to increase value for shareholders.

We will now open the call for your questions. Operator?

(Operator Instructions). Josh Chan, Baird.

Just wanted to ask the question about the Henderson margin. You seem to be a little bit better than what Henderson has reported historically. So is there any color you can give in terms of how sustainable that is or whether there's any seasonality to the margins, that would be great.

There's really not seasonality to Henderson's margins. They are a little stronger through the first quarter than they have historically been. I think favorable steel costs are helping add to that, and we expect to see [mid-20s] margins for probably the balance of the year.

Great. And on the scale costs, would that also be likely benefit the core Douglas business for the year?

Yes, it would. Now keep in mind, as we've said many times before, Douglas' steel prices are set on a 90-day lag basis. So when steel prices go down, we will see it 90 days after it goes down. So we would expect second- and third-quarter Douglas margin to have a little bit of favorability there as well.

Great. And lastly, I know you haven't received a lot of preseason orders yet, but any color in terms of the orders that you have received and how that's shaped versus historical patterns, that would be great. Thanks.

Sure. Again, the number of orders to this point really aren't just don't give us a trend of more data points, but they have been very positive to this point so we are encouraged.

Okay. Great. Thanks for your time, and congrats on the quarter.

Jason Ursaner, CJS Securities.

Good morning. Great start to the year. You guys looked good yesterday. I like Bob with that hammer.

Just first on the part sales because I think that was one area where results came maybe a little less than expected. One of the surprising things to me the last couple years have been part sales increasing in unison with equipment sales. I would have expected maybe those go into different directions. The guys reduced parts once they get the new equipment.

So just wondering maybe this -- is that dynamic starting to show through, and I guess more importantly, what if anything that might say to you guys about pent-up demand? Does this mean at all that there are less older units out there, that guys are buying parts for for repair instead of replace, or maybe I'm just reading too much into that?

I think there's a couple of questions you got in there. The first one is last year part sales were just off the charts because it snowed so regularly in so many geographic areas so that basically everyone in the country was buying service parts. This year we have very strong orders by historical standards, but it would be very difficult for us to match what occurred last year.

As far as you're absolutely right, the last few years is we are seeing some release of pent-up demand. We are also seeing an increase in parts and accessory orders, and part of that is really from our perspective we've introduced some new accessories so that will increase our parts and accessories shipments.

But I think it's a little interesting to us, too. We are beginning to see a little bit of a diversion from historical standards where if plow sales or equipment sales were up in any particular year, part sales might go down. We are actually seeing the last few years going in tandem, which is terrific but it is unusual.

Any of the new enhancements, does it help you think with capturing the third-party market? There's more proprietary parts or anything like that? And do you have a decent sense for what percentage of the aftermarket you guys can capture?

There's always proprietary parts when we are making unique products from other competitors. There are always proprietary parts I think this year as we introduce new products. It's a record year of new introductions. I think we will see hopefully pretty strong parts and accessories orders over the next couple of years just because there will be more proprietary parts.

As far as percentages go versus (inaudible) and other people, that's really hard to say. We feel very comfortable that we are getting a significant share of the market, but that is strictly anecdotal.

And just a question that we've talked about a few times before, but the starting inventory base for the dealers kind of after the preseason period, you mentioned the positive sentiment that they are expressing. So just wondering a couple of good years of sales, any sense that they would be maybe thinking about expanding the inventory base back to where it was a couple years ago, which would help expand the preseason period? Maybe especially with some of the difficulties --

I think that's definitely a possibility. But the number of positive years in a row I think the willingness for dealers to begin with a larger amount of the inventory through the preseason period typically takes place, and I wouldn't be surprised to see that this year as well.

That's great. Thanks, guys.

(Operator Instructions). I am showing no further questions at this time. I'd like to turn the conference back to Mr. Jim Janik for any closing remarks.

Thank you, operator, and thank all of you for your interest in Douglas Dynamics. We look forward to speaking with you again in early August for our second-quarter earnings announcement. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.