Douglas Dynamics Inc (PLOW) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics second-quarter 2015 earnings call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the conference over to Robert McCormick, Executive Vice President and Chief Financial Officer. Sir, you may begin.

Thank you. Welcome, everyone, and thank you for joining us on the call today. Two quick items as we begin. First, please note that some of the information that you will hear during this call will consist of forward-looking statements within the meaning of Section 21-E 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 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 today 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 2015 performance. I'm going to begin by providing an overview of our performance for the quarter, and then Bob will provide a detailed review of our financial results. Finally, I will return to discuss the business outlook and provide guidance for the remainder of the year.

Overall, we are pleased with our second-quarter performance as we continued to successfully execute on our strategy and experience both ongoing pent-up demand and a strong pre-season order period. We achieved record net sales of $107.1 million and record adjusted EBITDA of $28.1 million. The record results were driven by strong shipments of both equipment and parts and accessories and were further enhanced by the recent Henderson acquisition.

Along with the solid second-quarter results, our pre-season order book was very strong, signaling positive dealer sentiment and excitement around our new products, the launch of which further enhances our industry-leading portfolio. Last year, pre-season shipments were more heavily weighted towards the second quarter versus the third quarter, with an approximate 55, 45 split. For 2015, the Company anticipates a more even split between the second and third quarters partly due to the initial shipment of the new products in the third quarter.

Our recently acquired Henderson business produced another quarter of solid results and is well-positioned to achieve its 13th consecutive year of revenue growth. Henderson provides added stability to our business with its steady and consistent revenue growth coupled with a healthy backlog of orders. Further, the integration process continues to progress well, which I will touch upon later in the call.

We believe the record snowfall season of 2013, 2014 stimulated the unlocking of significant pent-up demand. We also believe that the above-average snowfall in 2014, 2015, while lower than the previous year, continued the pent-up momentum and provided a nice tailwind for Q2 in our 2015 results.

Along with the favorable pent-up demand dynamics, the non-snowfall indicators within our business, including dealer and end-user sentiment, are all encouraging. Dealer field inventory taken in May indicated dealer inventory levels were lower than historical average, which is always a positive sign. In addition, North American select pickup truck sales remain robust. Over the years, while there isn't a direct link, we found that truck sales do positively correlate with plow sales over the long term.

As I briefly mentioned earlier, the timing of pre-season shipments will likely be more evenly balanced compared to 2014. This is primarily due to the shipment timing of our new products. These new products have received very favorable feedback and are creating real industry excitement. Three of the products receiving significant attention are the new lineup of SnowEx snowplows, the completely new series of stainless steel hopper spreaders, and the redesigned Fisher brand HD snowplow.

The extensive depth and breadth of these new products highlights our commitment to leadership through industry-leading innovation. Our always-evolving product portfolio allows us to better serve our customers and help them perform their jobs more efficiently, productively, and profitably.

A sharp focus on continuous improvement and effective execution was instrumental in producing another quarter of strong financial results. Through our proprietary Douglas Dynamics Management System, or DDMS, we are expanding our competitive differentiation in quality, delivery, and in service. DDMS enables us to achieve unparalleled customer response and product quality. This commitment to continuous improvement has helped us increase our base business profitability across the entire enterprise. We are now actively seeking opportunities to increase DDMS reach deeper into the entire value chain from supply to the customer.

Let me take a moment and share with you an update on the Henderson business. The integration process remains on track. And while we are still in the early stages of executing DDMS, improvements are coming along at a nice pace. As an example, we just conducted several [Kaison] events across a variety of processes. Just one example of the power of DDMS is that a recent one-week event resulted in approximately 50% increase in throughput in final plow assembly. This just scratches the surface of improvement opportunities.

Also related to Henderson, we are currently in the process of opening an additional up-fit facility in Missouri in Q3 of this year. This facility will serve as a greenfield site for further applying DDMS tools across the business.

Lastly, 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 in sizing the base dividend so that it can be protected in all market environments. We will also explore opportunities in adjacent markets to enhance our leadership position. The acquisition of Trynex and Henderson expanded our market share in new geographic and in user markets, and created new strategic growth platforms that provided added stability to our reliance on snow and ice. We will continue to pursue strategic acquisitions and work dedicated attachments with the highest risk-adjusted return on invested capital.

With that, I'm 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 of 2015, Douglas Dynamics generated net sales of $107.1 million, an increase of $18.9 million, or 21%, compared to $88.2 million in the second quarter 2014. Overall, Henderson sales totaled $20.6 million for the quarter. Excluding Henderson, second-quarter sales were just shy of the record set last year.

Gross margin was $37 million, or 34.5% of sales, for the second quarter, compared to $34.4 million, or 39% of sales, in the second quarter of 2014. The decrease in margin as a percentage of sales are largely driven by the addition of Henderson sales at lower than historical Douglas margins. Margins are expected to incrementally improve over time through application of our Douglas Dynamics Management System, while the legacy Henderson margins are not expected to approach that of our commercial snowplow business.

SG&A expenses were $11.3 million for the quarter, an increase of $2.8 million compared to the second quarter of 2014. The increase compared to 2014 was mostly due to expenses related to ongoing operations at Henderson of $2.4 million.

Second-quarter 2015 adjusted EBITDA was $28.1 million, compared to prior-year adjusted EBITDA of $27.8 million. Net income in the second quarter of 2015 was $13.1 million, compared to prior-year net income of $14.6 million.

Capital expenditures through June 2015 totaled $3.3 million, compared to $2.6 million in the prior year. Capital spending will increase in the second half of 2015 as we complete long-overdue facility renovations and increase manufacturing capacity to support the increased sales forecast. Expect 2015 CapEx to approach $8.5 million before retreating back to a more normalized level of approximately $4.5 million to $5.5 million in 2016.

Earnings per share was $0.57 per diluted share during the quarter, compared to $0.64 per diluted share for the second quarter of 2014.

Let me take a moment to provide an update on the results for Henderson Products. During the second quarter of 2015, Henderson generated net sales of $20.6 million and adjusted EBITDA of $2.3 million. 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. These results were in line with our expectations and, combined with the backlog we see today, bode well for a 13th consecutive year revenue growth at Henderson.

During the first six months of 2015, the Company reported net cash provided by operating activities of $10.4 million, compared to net cash provided by operating activities of $12.3 million in the same period last year. Accounts receivable at the end of the second quarter 2015 were $61.6 million, an increase of $10.3 million compared to second quarter 2014, which was primarily driven by the acquisition of Henderson Trade Receivables.

Cash and cash equivalents on hand at the end of Q2 totaled $12.3 million. The unused borrowing capacity on the revolver is $92.1 million. With total liquidity of $104.4 million, we are well-positioned to fund upcoming quarterly cash dividends.

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

Thanks, Bob. To close, I would like to share our view of current market conditions and provide some insight for expectations in the second half of 2015. The strong start to the pre-season order period gives us additional clarity into anticipated sales trends for the remainder of the year. But keep in mind, there is still weather-driven variability in our fourth quarter. Pent-up demand contributed to our solid first-half results, and we expect further unwinding of pent-up demand combined with ongoing strong demand for our top-line products. Additionally, we are encouraged by positive non-snowfall market indicators within our business such as dealer inventory levels, which are below historic average, continued strength in light-truck sales, a strong pre-season ordering period, and positive overall dealer sentiment that all influence and contribute to our business.

Combined, all these business drivers give us confidence to raise our full-year guidance for 2015. Based on our results from the first two quarters, and assuming average snowfall in the fourth quarter and a stable economic environment, we expect net sales for fiscal 2015 to be in the range of $385 million to $420 million, adjusted EBITDA of $90 million to $105 million, and earnings per share of $1.70 per share to $2.05 per share.

Overall, we achieved solid fiscal first-half performance and look to continue that momentum in the second half of the year and remain focused on optimizing our core business, delivering operational excellence across the Company, and exploring adjacent markets, all with the goal of driving sustainable shareholder value.

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

(Operator Instructions) Tim Wojs, Baird.

Hi. Good morning, guys. Nice job.

Thank you, Tim.

I guess first question, just on guidance in the second half of the year, can you help us a little bit with the cadence? And I know you expect shipments in the core business to be stable sequentially. So should that translate into fairly stable Q3 revenue run rate versus the second quarter, and then the fluctuations really in the fourth quarter?

Yes, I think that's the exact way to be thinking about it. Jim made reference to the fact that while we normally have a 45/55 Q2, Q3 revenue mix, this year looks more like 50/50 because of the strong new product launches that we have that are going to occur largely during the third quarter. So it ought to look a lot like Q2. And then as you've already pointed out, then we get into the wild card, which is the fourth quarter.

Okay. As I think about it, does the midpoint of the revenue guidance for this year assume that the core snow and ice control equipment units are actually up year on year?

I believe it does assume that there's an increase in the overall units this year versus last year, yes. It obviously also assumes average snowfall conditions as well.

Right, okay, okay. And then maybe just could you talk a little bit about -- I know you've -- dealer sentiment seems really good, and inventory levels seem to be at lower levels. Is there any way to think about any sort of metrics like units per dealer that you've been selling? Is there -- two years ago somebody was stocking, just for example, 10 units and now they are stocking 12. Are you guys seeing any sort of little bit of incremental build in inventory with just the order trends this year?

Yes. Terrific question, Tim. I can't give you a metric, but what I think we're seeing is that the velocity of the sell-through is really quite robust, so we're not really seeing the inventory build just because I think the retail is taking place at a much stronger pace. Even for the slower times of the year than we've normally seen.

Okay, okay. So you are actually seeing that sell-through, which is really positive. Okay. That's it for me. Thanks for the time, and congrats again.

(Operator Instructions) I'm currently showing no further questions at this time. I would like to turn the call back over to Jim Janik for closing remarks.

Thank you for joining us today, and thank you for your continued interest and support in Douglas Dynamics. We look forward to speaking with you again during the third-quarter announcement. Thanks again and have a terrific day.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.