Douglas Dynamics Inc (PLOW) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics fourth-quarter 2015 earnings conference call.

(Operator instructions)

As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Mr. 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 before 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 of the Securities Exchange Act of 1934 as amended. Such statements express our expectations, anticipations, beliefs, estimates, intentions, plans and forecast. 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 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 that are subsequently filed according reports on Form 10-Q.

Second, this call will involve the discussion of adjusted EBITDA, a non-GAAP financial measure which under SEC regulation G we are required to reconcile with 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, our Chairman, President and Chief Executive Officer. Jim will begin by providing an overview of our performance for the quarter and current industry trends. I will review our financial results before turning it back to Jim to discuss our outlook. Finally we will open the call for your questions. Jim.

Thank you, Bob. Good morning and thank you for joining us. We are very pleased with our results for the fourth quarter especially as winter got off to a very slow start in our core markets. The fact we were still able to produce a very strong fourth quarter indicates that near-term pent-up demand continued to unwind. Our results were driven by a strong performance in both our core business and Henderson.

Fourth quarter net sales were $118.8 million which is a 19% increase compared to the same period last year. We generated fourth quarter diluted EPS of $0.66 per share compared to $0.58 per share for the comparable quarter in the prior year.

At the start of 2015 we certainly did not expect to produce another record year following a fantastic performance in 2014. However we were able to do just that because of the relentless determination of our team, the ongoing execution of DDMS, the acceptance of a record number of new products introduced in 2015, and the continued release of pent-up demand in the market.

Our efforts were supported by external factors such as above average snowfall in certain core markets, in the winter season of October 2014 to March 2015, a stable economy and ongoing growth of light truck sales. Incredibly both our core business and Henderson built upon their record 2014 performance and separately produced record results again in 2015.

I should note that we just got back from the National Truck Equipment Association or NTEA Work Truck Show in Indianapolis last week. It was great to meet with so many of our dealers and our partners. In spite of low snowfall we have seen this winter, the people we spoke to are still enthusiastic about the industry and especially our products.

As you will remember we launched an unprecedented 20 new products in 2015 which were very well received and continued to be in high demand. This year we are building upon that successful launch of the SnowEx range of plows last year by filling out the product line with a SnowEx V-plow offering and Fisher and Western UTV plows. It was very pleasing to see the positive reaction from the people that matter.

Despite all the positive news and momentum, we are keenly aware that market conditions within our business can fluctuate in any given year due to weather conditions along with changes in market sentiment and various non snowfall indicators. As we stated previously we will always focus on the factors within our control which underscores the importance of our flexible business model, which enables us to quickly adapt to changing circumstances.

Over the past 12 years we have honed DDMS and it has become fully engrained in our culture. All of our employees understand the importance of continuously improving service and quality for our customers and as we have said before, DDMS will be instrumental in driving value creation opportunities with any acquisition we complete.

Since acquiring Henderson at the end of last year we have been very impressed with the financial performance of the business and the entire team in Manchester and at the installation facilities around the country. Everything we found during our due diligence process proved to be true and the demand for Henderson's products and services continues unabated.

Perhaps more importantly, the level of collaboration between teams and acceptance of DDMS has exceeded our expectations. With the initial integration complete, we are confident we can continue to enhance Henderson's operational efficiency to better serve customers through industry-leading delivery and service levels, ultimately resulting in increased market share.

Over the past year we have introduced the manufacturing team in Henderson too many DDMS concepts and have trained over 200 people. I would like to share a couple of examples of the progress we made.

The first example is that due to the significant demand for Henderson's products and our focus on providing highly customized solutions, managing lead times is always an important issue for us. In the spreader and dump body fabrication area [pays on] events and problem-solving projects were utilized to concentrate on the DDMS philosophy of kitted flow.

The team focused on developing processes that allowed for fabrication of the components needed for each specific customer order versus producing batches of components that needed to be stored and managed. Using an on the floor scheduling system the team was able to reduce the average lead time through this area from eight days down to two days. An additional benefit of these efforts was in work in process inventory for this area and it was reduced by over $1 million.

The second example I would like to share with you is another DDMS philosophy of visual management. This philosophy focuses on empowering teams to make decisions and be accountable rather than pushing decisions to higher levels of management chain. This allows shop floor associates to understand what the customer needs and also make the decision to ensure increased customer satisfaction, minimizing the time and energy needed to make a decision.

Holding teams accountable throughout the installation side of the business allowed these teams to increase throughput by over 40% in the second half of 2015. This throughput gain increased our customer satisfaction by delivering complete trust on or ahead of previous schedules.

Before turning it back over to Bob, I want to update you on our dividend policy. As we reported on December 10 of last year, we paid a quarterly cash dividend of $0.2225 per share on the Company's common stock on the very last day of 2015. Based on our tremendous results plus our continued financial strength the Board and management agreed it is appropriate to increase the dividend in 2016 by a larger amount than in previous years.

As we announced last week, the Board approved and declared a quarterly cash dividend increase of 5.6% to $0.235 per share. The declared dividend will be paid on March 31 to stockholders of record as of March 21, 2016.

We are proud of our performance and financial management has allowed us to increase the dividend eight times in less than six years as a public company. This latest increase was decided upon by analyzing first our ability to fund the dividend for the foreseeable future which we then weighed against other redistribution options and future potential investment opportunities.

Our primary capital allocation goal remains the same. To return excess capital to shareholders via a robust dividend which can be sustained in all market environments. In addition to the dividend we also consider using our excess cash to reduce the Company's debt levels to maintain financial flexibility and pursue strategic acquisitions.

We continue to explore opportunities with companies that produce work dedicated attachments and offer us the highest risk-adjusted return on invested capital. While we remain active in the M&A arena we also remain very disciplined in our approach.

Following another amazing record year at Douglas, I want to thank our associates around the world for always striving to provide the very best service to our customers and delivering the best quality products in the industry. We understand it takes years to build brand equity and seconds to lose it. While we have led the market for some time, I am always pleased to see that our team has maintained its vigilant focus on service and quality.

With that I will hand it back over to Bob to discuss our financial results in more detail. Bob.

Thanks Jim. As you can see in our press release our financial results significantly exceeded our initial expectations as we produced a second consecutive year of record results. For the fourth quarter 2015 net sales were $118.8 million representing a 19% increase over the same period last year. The increase reflects the addition of Henderson products and stronger than expected in season shipments of equipment service parts in the core business.

Overall sales of snow and ice control equipment for the fourth quarter 2015 increased by 20% compared to the same quarter last year. Overall parts and accessories sales increased by 13% for the quarter ended December 31, 2015 compared to last year.

For the fourth quarter 2015 cognitive sales were $80.3 million or 68% of sales compared to $61.4 million or 61% of sales in the fourth quarter 2014. This year over year increase was driven primarily by the addition of Henderson.

SG&A costs were $12.9 million for the fourth quarter 2015. They were just $400,000 higher than the prior year. Corporate fourth quarter 2014 did include Henderson transaction costs of $1.8 million. We produced adjusted EBITDA of $27.8 million for the fourth quarter 2015 compared to adjusted EBITDA of $29.6 million for the same period in 2014.

Net income was $15.1 million or $0.66 per diluted share in the fourth quarter 2015, compared to net income of $13 million or $0.58 per diluted share in the same period of 2014. As Jim mentioned, Henderson had a great first year as part of Douglas, generating net sales of $96.1 million for 2015. These record results compare to revenue of $81.6 million in 2014. Henderson continues to see robust demand for its products and services and is continually building on its strength to efficiently meet this demand.

For the full year 2015 net cash provided by operating activities totalled $56.5 million compared to $53.7 million in 2014 which was driven primarily by higher net income.

I would also like to remind everyone that because the Henderson acquisition closed on December 31, 2014 we recognized Henderson assets on our 2014 year end balance sheet. But of course we did not recognize Henderson's operating results on the corresponding income statement.

Also please note that 2015 full year CapEx of approximately $10 million is significantly higher than 2014 yet in line with our expectations. The increase mainly relates to long-overdue project to improve the Milwaukee facility which is now complete plus the addition of Henderson.

As we have discussed on previous calls, this project was important to improve the long-term functionality of the Milwaukee facility and working conditions for the employees. Our CapEx model is built to flex up in record years such as 2015 which will serve us well when we also need to flex down our spending in tougher years. Going forward our average CapEx spending for the entire company is projected to fall in the range of $7 million to $8 million annually.

Inventory was $51.6 million at the end of 2015 compared to $48.2 million at end of 2014. The increase partially relates to the opening of a new Henderson upfit facility in the state of Missouri in July 2015.

Accounts receivable at the end of 2015 were $67.7 million, this compared to $60.9 million at the end of 2014 which again included Henderson. The changes primarily driven by higher sales volumes compared to the previous year.

Effective tax rate for the full-year 2015 was 33.3% which is lower than previously expected due to the release of valuation allowances in several states. Our projected effective tax rate for 2016 is approximately 36%.

The Company maintained cash on hand at the end of 2015 of $36.8 million compared to $24.2 million at the end of 2014. This increase provides us with more dry powder to fund the quarterly dividend and to pursue potential acquisitions.

With that I'll turn call back over to Jim.

Thanks, Bob. As we look to the future we continue to see positive non-snowfall indicators in the market. Strong sales of light trucks, low gas prices and positive dealer sentiment all bode well for our business.

However, while winter is not over yet, so far we have seen substantially below average snowfall across North America. Winter storm Jonas was a significant weather event in January but the season started very late and we have not experienced a large number of significant plowable events in our core markets. As such we do expect to see an impact during our preseason period which is just about to begin in April. We will know more as the second quarter unfolds and we will discuss on our earnings call in May.

Following two consecutive years of record performance and extraordinary growth the nature of our business and historical patterns indicate it is unlikely we will produce a third record year in 2016. As always we will focus on the factors within our control and believe we are very well positioned for future success.

Based on 2015 results, the overall economic climate, dealer sentiment, current snowfall outlook and industry tends and manageable dealer inventories, we expect net sales for the full year 2016 to range between $310 million and $370 million in revenue, producing adjusted EBITDA in the range of $55 million to $85 million and EPS between $1.05 and $1.65 per share.

As we noted in the release, our outlook includes an approximately $10 million benefit related to the successful conclusion of a lawsuit which equates to $0.27 per diluted share. It should go without saying but we consider our intellectual property a valuable asset which we will diligently defend.

While we cannot go into detail on the situation, I am pleased to say that an appellate court has upheld a 2010 Federal Court decision which ruled in our favor after a competitor infringed on numerous product design patents. This lawsuit has been sitting out there for a long time, before our IPO and while it has not taken the focus off the important matter of running the Company it is good to have it conclude successfully.

In addition to producing two consecutive years of record results, we have been exploring the optimal approach to executing our strategy and focusing on the factors within our control that will drive long-term shareholder value.

As we move further into 2016, I wanted to share our top strategic priorities. Number one, driving the distance of the difference between DDMS. Number two, achieving Henderson's potential. Number three, optimizing margins and number four exploring adjacent markets.

I will start with DDMS. As investors and analysts you probably hear about lean initiatives from a lot of companies. I would like to explain what we think makes DDMS different and how important it is to our business.

First and foremost DDMS focuses on constantly improving service and quality and unlike most lean initiatives it centers on creating benefits for the customer rather than just reducing costs. This drives us to stay ahead of competition which leads to growing market share and improved profitability.

Implementing DDMS has been a 12-year journey which is all the more remarkable when less than 2% of companies are able to sustain a successful lean initiative. DDMS highlights performance and helps identify gaps which in turn effectively communicates expectations and drives alignment across the company. And finally now that DDMS is fully ingrained in our core business, we can use it to help companies we acquire to fulfill their potential.

That leads us to Henderson. As we have said in the past is the leader in the fragmented municipal truck equipment market. Henderson has significant opportunities to expand market share. Our unique ability to provide customized solutions matches customers desire for tailored solutions that are unique for the geography, climate and population. This provides a significant competitive advantage but we need DDMS to successfully scale the customized solutions approach and meet growing demand.

Our third priority is optimizing margins. As you know we have developed unrivaled margins in the core business, and we have conditioned ourselves to operate with the expectation that profitability improves every year.

We are able to do this because our business is built upon a foundation of quality and service which in turn has created significant brand equity and loyalty. Combining small annual product price increases which helps offset cost inflation, with ongoing cost reductions, we consistently improve profitability. It may sound simple but it takes a consistent tremendous effort from everyone at this Company.

Our final top priority is exploring adjacent markets. As we have stated consistently in recent years, we are committed to pursuing strategic acquisitions, focused on work dedicated attachments and expanding our market share in new geographic and end-user markets.

Over time we also want to develop strategic platforms that reduce our reliance on snow and ice. To date we have successfully completed and integrated two acquisitions and see an active current M&A market in the logical markets we monitor.

Interestingly the market understands our approach and appetite better today since we have been actively exploring options for several years. With that said, we remain disciplined in our approach and we will politely pass on more deals than we pursue.

Those are the four main areas we're focused on today and you should expect to hear more from us on these subjects in the coming months. In conclusion we are excited by the opportunities inherent in the markets we serve and are committed to leveraging our flexible business model to drive value for shareholders in 2016 and beyond.

At this time we would like to open the call for your questions. Operator?

(Operator Instructions)

First question, Josh Chan, Robert W. Baird.

Hi. Good morning guys. Good quarter.

Thank you, Josh.

Thanks, Josh.

I was wondering if you could shed any insight on what channel inventory is like? I assume that it is a little bit higher based on probably the role of snowfall but I just wanted to hear from you on that?

And then also you have managed through to a lot of these cycles in the past and how do dealers typically react to a year of lower snowfall like this? Do they make preseason orders later? Do they take deliveries as late as possible? What is the typical pattern there?

Sure. Two questions. The first one that I will answer is about inventory. For us it is marginally higher but I think from my perspective and from the dealer's perspective very manageable. So it won't have a huge impact on the business in 2016.

The second question is in a little bit lower snowfall year, how do dealer's order patterns change? That is all over the board and it really is based on geography. The areas where it has snowed a little bit more, those people tend to be a little bit more aggressive and the areas where it has not snowed as much, I think people tend to be a little bit more cautious. But I would state that based on our field surveys and the NTEA, which I said we just returned from, I think in general the distribution is cautiously optimistic which is from my perspective a very nice place for them to be.

Okay great. And then I want to switch over to Henderson. You mentioned that as one of your strategic priorities, does your guidance in 2016 assume continued growth from the record level this year and is there a way you can size count the runway or the opportunity that you see whether in terms of share or margin potential there?

Sure, we certainly do expect Henderson's growth to continue into 2015 capitalizing on its record -- I mean into 2016 capitalizing on its record 2015 results. But we are not going to go into that level of granularity in terms of providing Henderson's revenue forecast but safe to say that their growth platform is strong, DDMS is allowing them to quote lead times which the industry likes and all signs point to a very very positive year for them and those growth projections while not shared at this point, are reflected in our overall 2016 guidance.

Okay and then lastly you had talked about exploring adjacent markets. Has the basket of opportunity sort of expanded for you in terms of what you are looking at and what markets and what types of products you're looking at relative to I guess the past comments or have you kind of expanded your horizons in terms of types of companies you are looking at?

Sure. I think from an M&A perspective just a quick summary is that I think the markets are still really pretty active and we are open to a lot of conversations. We have seen things slow down a little bit and as the credit markets tighten up compared to last summer or fall, but we are seeing private deals as we have been out in the market I think more actively we have a number of private owners who have at least approached us to try and determine if there is any fit for the two businesses, but overall a little bit slower. I do not think we are going in any different directions than we have gone in the past.

Okay, great. Thanks for the color and good luck next year.

Thank you.

Thanks, Josh.

Next question, Les Sulewski, Sidoti & Company.

Good morning. Thank you.

Hi, Les.

Hi. Can you comment on little bit more on the new products, what kind of activity you've seen there and then also maybe some feedback you are getting on specifically on the spreaders and versus what you are seeing a year ago?

Sure. This time of year most companies within our industry will have a couple of newer refreshed products as we were at the NTEA last week, that is typically when people will introduce their new products. I would suspect that, you know, Douglas has probably between four and eight new products, most of our competition was probably half of that. I think this year industry wide the products are pretty much incremental except for perhaps the SnowEx V-plow which we just introduced this year. I think that will be a significant new introduction.

So yes, I think this is a year where there are new products, but there is not anything other than the SnowEx V-plow industry wide that I think is going to have a significant impact on the industry.

Got it, thank you. As far as a Henderson goes, were there any somewhat notable contracts during 2015 or is anything that you would announce as far as that business goes?

Can you repeat that? I'm not entirely sure that I understood the question.

Sure, yes. I just wanted to get an idea of any notable contracts that you won with Henderson since your acquisition and if not perhaps is this something that you would announce for us to moving forward?

Yes, I don't think it will be our practice to announce which contracts we get, for competitive reasons. If anything, if something really significant occurs I may say we have gotten a new contract but I won't give you the detail as to who it is because all of these contracts are very, very competitive and we are not entirely sure we want the world to know.

Got it. Fair enough. Kind of back track a little bit. As far as the pent-up demand you have talked about unwinding, is there kind of a see through to what visibility you have or how many quarters we have left of that and are there many, perhaps, preseasons that -- if you will?

Sure. That level of granularity is a little bit challenging to provide you and let me explain the reasoning for that. I believe that pent-up demand still exists but how and when it unwinds is impacted by snowfall and frankly pent-up demand acts sort of as a multiplier when we have average or above average snow and it also -- it impacts us in low snowfall seasons but the impact is definitely reduced. So it is a little situational. But we still believe there is still some out there but it is more likely in an average or above average snow year that it will be obvious.

Thank you. I guess one more I will jump back in the queue. As far as competitive pressure goes and I guess specifically the number two player there, are you seeing any kind of increased pricing pressure and specifically on the landscaping product dealers? Thanks.

We are not at this particular point. We really have not seen anything. Not just from our major competitors but all competitors from time to time they will run programs in certain geographies that have limited time, limited scope to see if they can wiggle the needle. In general when those occur, they are limited and thus far the ones the we have seen haven't really had much impact.

Got it. Thank you.

Next question, Paul Moomaw, Goshawk Global Investments.

You mentioned 13% rise in parts and accessories and I wondered if you wanted to give any color commentary on that?

Nothing more than part of that is the addition of Henderson. Henderson does have parts and accessories revenue. A little bit less of a percentage of their sales than the core business. So part of that growth is that Henderson in 2015 versus not having their income statement results in 2014. And the core business you would have strong parts and accessories revenue all year long.

Okay, great, thanks very much.

You are welcome.

(Operator instructions)

I'm showing no further questions at this time. I would like to turn the call over to Mr. Jim Janik for closing remarks.

Thank you operator and thank all of you for your interest in Douglas Dynamics and we look forward to speaking with you about our first quarter 2016 results in May. Have a great day.

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