Douglas Dynamics Inc (PLOW) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Douglas Dynamics first quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce your hosts for today's conference, Mr. Bob McCormick, Executive Vice President and Chief Financial Officer. 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 21a 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, 2015, filed with the Securities and Exchange Commission, and the impending updates to these sections in our quarterly report filed 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.

Thanks Bob. Good morning everyone. Thank you for joining us on today's call. We are pleased with our overall results for the first quarter, which were in line with our expectations.

As many of you know, we produced uncharacteristically strong first quarter results for 2014 and 2015, based on the release of pent-up demand, strong snowfall across core markets, and of course, the addition of Henderson last year. Given the significantly below average snowfall and far fewer plowable events during this past winter, we certainly didn't expect to repeat this performance. However, I am pleased to report that Henderson performed very well, providing a strong boost for our results, and the team in Manchester, Iowa maintains a healthy backlog of business for the year.

I think this quarter provides a good illustration of one of the benefits of adding Henderson to our portfolio, as their business is not primarily weather dependent, and results are fairly evenly distributed across all four quarters. While the weather trends across North America this past winter impacted our commercial snow and ice products, non-snowfall indicators remain positive. Including ongoing strength in light truck sales, relatively low gas prices, and positive dealer sentiment.

As you saw in our release, we reported first quarter 2016 net sales of $48.8 million, and net income of $0.23 per diluted share, which included a $10 million benefit, or $0.27 per diluted share from the successful conclusion of a patent infringement lawsuit against Buyers Products Company. Collectively, the people at Douglas Dynamics have invested a massive amount of time and energy over the past 65 years, developing and improving our industry-leading products. Therefore after our employees and dealers, we consider our intellectual property our most valuable asset. And one which we will diligently defend.

We were pleased that during the first quarter an appellate circuit court upheld the 2010 Federal court decision which ruled in our favor. The Court concluded that Buyers Products Company, owner of the Snowdog brand was deemed to have infringed on our product design patents. This lawsuit has been sitting out there for a long time due to ongoing appeals, so it's good to have it conclude successfully.

Having to defend our intellectual property in court is one of the less desirable aspects of being the industry leader. It is hard for our competitors to match our commitment to innovation, which sometimes leads to a situation like this. Make no mistake, we'll continue to defend ourselves where necessary.

Turning back to the business, as always, when we experience significantly below average snowfall, we implement our low snowfall playbook. It would be an understatement to say that we've seen this movie before, and we're confident that we have the systems in place to not just manage through low snowfall, but to thrive. We have already reduced some discretionary spending, and are focusing on improvements that will directly increase service levels and quality for our customers, while improving base business profitability.

To be clear, we don't see below average snowfall as a completely negative situation. It is part of our business and something we've experienced regularly for decades. We see it as an opportunity to focus extra time and energy on both innovation for our next generation of products, and using DDMS to improve quality and service for our dealers and end users. This serves us well during the low snowfall environment, but the benefits really start to show themselves when the snow returns and volume increases.

I cannot overstate the importance of DDMS to our business. It underpins our success to drive incremental improvements across our product portfolio, and allows us to quickly adapt and react to changing market conditions. Similar to last quarter, I would like to outline an example of a DDMS project. This time I will outline a project that focuses on improvements, which directly benefit our Henderson customers.

The ability to quickly turn a customer order into a shipment is another major focus for our DDMS efforts. Again looking for ways to enhance our industry leading service levels, we are currently using a measurement called Days in Process. We measure the time we start a customer order until it is completed for shipment.

Through Kaizen events, developing kitted flow, utilizing capacity for the next customer order, and focusing the organization on velocity of work, we have been able to reduce the days in process by more than 50%, which is a dramatic improvement for our Henderson customers.

Also I would like to touch on our uses of cash. We paid our quarterly cash dividend at the end of March of $0.235 per share of common stock. This represents a 5.6% increase over the fourth quarter dividend. We have increased our dividend eight times in the six years since our IPO, which is a testament to our financial strength and commitment to returning excess cash to our shareholders.

In addition to the dividend, our additional cash priorities remain unchanged. We will also consider using 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.

We opportunistically pursue deals that will expand our market share in new geographic and end user markets, and develop strategic platforms that reduce reliance on weather. While we remain active in the M&A arena, we also remain very disciplined in our approach.

Finally, there continue to be positive non-snowfall business indicators such as strength in light truck sales and relatively low gas prices. Selected US light truck sales grew 6% during the first quarter when compared to the first quarter of last year.

Another positive indicator is favorable dealer sentiment. Distributor field inventory taken at the end of January was only moderately higher than last year, which is exactly what we would hope for following a winter with significantly below average snowfall. With that, I am going to turn the call back over to Bob to discuss the specifics of our financial results. Bob.

Thanks Jim. For the first quarter 2016, we produced net sales of $48.8 million, compared to $53.9 million the same quarter last year, in line with our expectations. Henderson performed very well during the quarter, and our commercial snow and ice results matched our expectations given the weather conditions.

Gross profit was $14.1 million, or 29% of sales for the first quarter, compared to $16.4 million, or 30.5% of sales in the first quarter of 2015. The decrease in margin as a percentage of sales is largely due to the strong performance by Henderson, which operates at lower margins, coupled with lower volumes in commercial snow and ice. It is worth noting that the first quarter of 2015 included the negative impact of a one-time $2 million Henderson purchase accounting inventory write-off, which was expensed through costs of goods sold.

SG&A expenses were $10.9 million for the first quarter 2016, compared to $11.4 million in the first quarter of 2015. This 4.4% decrease was driven by lower sales and marketing spending, which we implemented as part of our low snowfall playbook. First quarter 2015 adjusted EBITDA was $6.3 million compared to prior year adjusted EBITDA of $9.6 million. Again driven by the trends I have already outlined.

Turning to net income, as you've seen in the release, our net income this quarter includes approximately a $10 million gain related to the successful conclusion of a lawsuit which equates to $0.27 per diluted share. So including the gain, net income for the first quarter of 2016 was $5.3 million, compared to prior year net income of $0.4 million. Earnings per share were $0.23 per diluted share in the first quarter of 2016, compared to earnings per diluted share of $0.01 in the first quarter of 2015.

Also for the first quarter of 2015, there was a $2.1 million impact of noncash purchase accounting adjustments related to the Henderson acquisition, which equates to negative $0.05 per diluted share. Net cash provided by operating activities for the first quarter of 2016 was $18.6 million, compared to prior year net cash provided by operating activities of $11.3 million. The increase relates primarily to working capital changes.

Inventory was $73.7 million at the end of the first quarter of 2016, modestly higher and in line with our expectations, when compared to $71 million of inventory at the end of the first quarter of 2015. Accounts Receivable at the end of the first quarter of 2016 were $29 million, when compared to $23.9 million for the first quarter of 2015. The increase stems from the fact that the Company entered 2016 with a higher receivable balance compared to 2015, but levels remain within traditional ranges.

Cash on hand at the end of the first quarter of 2016 totaled $48.4 million. The unused borrowing capacity on the revolver is $97.8 million, with total liquidity of $146.2 million. We are well-positioned to fund our regular quarterly dividend payments and future growth opportunities. Overall, we remain in a very strong financial position, and are confident we can continue to improve our standing in 2016. With that, I will turn the call back over to Jim for his concluding remarks. Jim.

Before we open the call for questions, let me talk briefly about our priorities and outlook for 2016. Overall, despite the lack of snow this past winter, we remain encouraged by the positive non-snowfall indicators. We are reaffirming our 2016 outlook, and expect net sales for the full year 2016 to range between $310 million and $370 million, producing adjusted EBITDA in the range of $55 million to $85 million, and EPS between $1.05 and $1.65 per share.

As we are in the early stages of our April to June preseason order period, we anticipate shipments during the preseason period to be closer to a 55/45 split between the second and third quarters. For example, as you may remember, the new product production ramp-up last year resulted in stronger third quarter shipments, which will not occur again this year.

As we move further into 2016, I want to reiterate our top strategic priorities that we announced on our last call. Namely driving the difference through DDMS. We are continually searching for ways to create benefits for the customer, rather than just reducing costs. By diligently tracking performance, we're able to identify gaps, communicate expectations and drive alignment. DDMS continues to be the cornerstone of our strategy, and will remain vitally important to us for years to come.

Secondly, achieving Henderson's potential. I am glad to say that the opportunities continue to abound at Henderson. We're focused on improving our ability to provide customized solutions that are unique for our customer's geography, climate, and population. As I mentioned earlier, we continue to implement DDMS to successfully scale our customized solutions approach, meet growing demand, and expand market share.

Thirdly, optimize our margins. As with every year, we expect to improve profitability this year in commercial snow and ice. Combining small annual product price increases, which helps offset cost inflation with ongoing cost reductions consistently improves profitability.

And finally, exploring adjacent markets. We remain focused on developing strategic platforms that reduce our reliance on weather, and the active current M&A market includes multiple opportunities that we will diligently explore. That said, we remain disciplined, and will politely pass on more deals than we pursue.

We are excited by the opportunities in front of us, and will continue to leverage DDMS to drive service and quality across all aspects of the business. Which will in turn, drive increased value for our shareholders. We will now open the call for your questions. Operator.

Thank you. (Operator Instructions). Our first question comes from the line of Tim Wojs with Baird. Your line is now open.

Hey guys, good morning.

Good morning.

I just had a few questions. The first one is, I just wonder if you can comment maybe on how April's looked from a preseason order perspective, and if that's been in line, or how that's compared I guess relative to your expectations, considering where inventory levels are and some of the non-deposited, non-snowfall indicators that you were talking about?

Sure. April, as you know, is about the first month of preseason for us. And it's coming in nicely. I'm not going to make comparisons from previous years, because it is so early at this point. But it is meeting our internal expectations.

Okay. And then I know steel costs have kind of picked up a little bit here. How should we think about just price costs through the year as we get into the back half where comparisons on raw materials probably get a little bit more challenging?

Yes, I think, Tim, we're certainly seeing a small uptick as well. When we take our midyear price increase, we will take that into consideration, along with what we think the balance of the year looks like. As we've stated many times, we will take a price increase to the market that will largely cover off the cost of raw material and wage rate inflation. I wouldn't expect that to be different in 2016 as it has been historically.

Okay. And then the last one, just any help just trying to, Henderson sounded like had a pretty good quarter. There any way to frame maybe how that business did from a revenue growth perspective in terms of year-over-year growth? Maybe in the single digits in terms of growth, maybe up double digits, just a little bit of color on Henderson would be great?

Yes. That's an excellent question. We provided more granular guidance on Henderson during the first year of our ownership. Now that it's integrated into our base business, we're not providing specific guidance and/or data points there, but safe to say Henderson's growth pattern continues. There is still a long runway for them. DDMS is really allowing them to explore and chase revenue growth opportunity that ought to benefit them in 2016 and beyond.

Okay. I have one last question. What was parts and accessories as a percentage of the total revenue for Q1?

I don't have that information with me at the moment. That will be something you can find in the Q, and we can certainly follow up after the call as well, Tim.

Okay. Great. Good luck on 2016.

Thank you.

Our next question comes from the line of Mike Shlisky with Seaport Global. Your line is now open.

Good morning guys.

Good morning.

So maybe I can follow up on the previous question about Henderson. Is it fair to say that Henderson as a percentage of the mix in 2016 might be larger this year than it was in the prior year?

Yes, I think that's a very safe assumption. You've got Henderson which continues to grow and coming off of two record years in the commercial snow and ice business, the impact of the below average snowfall is going to certainly bring that business' revenues down. That's a logical conclusion to draw.

Okay, great. I also want to ask about pricing. I know you guys mentioned a midyear price increase. But in your core commercial snow and ice business, do you expect to see some of the small competitors out there trying to get competitive, or a little more tricky with their pricing, in a lower volume environment this year versus last year?

We don't anticipate that. Historically, what we've seen is most of our competitors really don't utilize pricing as a competitive advantage or disadvantage. Most of the customers for our business are generally not wary of price. They are really looking more and more for reliable product. So pricing isn't necessarily a great tool for the tool kit at this point if you're a competitor.

Okay. Great. I also want to turn to the low steel fall playbook. I want to get more detail there. It's actually been a while since you've pulled out the old playbook there.

I guess I was wondering first what we saw in Q1 as far as your SG&A reductions, is that the normal amount you would see every quarter throughout the year, or as you approach the more core delivery season, do things change? Is it possible we would actually see higher SG&A cuts here in Q2? Just give us a little more color on the timing and extent of some of the cost structure changes?

Sure. The way that we approach a below average snowfall year, is we will make a fairly substantial amount of cuts and/or freezes early. That includes spending reduction which we talked about. It includes freezing any position opening that you might have. It would also include a substantial reduction in the temporary workforce that are in our factories. Those are all of the main components of the low snowfall playbook.

And then as the preseason order book shows itself as we get farther into the third quarter, and we start to see what fourth quarter demand looks like, we can tweak those spending adjustments up or down, but the real key is to make a fairly sizeable adjustment early, knowing that you can always bring some of that spending back into the business model, if things turn out to be better than you anticipated. So it's really a quarter by quarter proposition, in terms of what happens to that SG&A spending.

Okay. Got it. That's great color. Thanks guys.

Our next question comes from the line of Les Sulewski with Sidoti & Co. Your line is now open.

Good morning. Thank you guys.

Hi Les.

So as far as the, perhaps you can guide us on -- what the risks on the higher end of the EPS guidance are? Is it maybe the unpredictability of a late snow season, or is it more of operational risk specifically at Henderson?

I think when we look at the upper end of the guidance range, the snowfall assumption that we make is that obviously the season that just ended is now behind us. And that is factored into our guidance to begin with.

The upper end of the guidance then would be when next year's snow season starts in the fourth quarter of 2016, that that is a heavy snowfall start to the next season. Henderson's revenue plans and Henderson's growth trajectories are not driven by weather to any large degree, so the upper end of the guidance is really commercial snow and ice, if we get a very positive start to the fourth quarter snow season.

Okay. Got it. As far as capital allocation goes, maybe in the long term, are you more geared towards debt reduction, dividend increase, or an acquisition?

Yes.

In which order I guess? (multiple speakers)

Protecting and paying and growing the base dividend has always been our number one priority. That doesn't change in any snowfall environment. Past that we are in a great capital position currently. Past that, it is a combination of paying down debt, and/or looking for a nice accretive acquisition that fits our very disciplined acquisition strategy. So that would be the priority.

I guess a follow-up to that, in terms of acquisitions, would you be more willing to, are you more open to product additions, or perhaps getting into the distribution business?

I think from our perspective, we're looking at the attachment, truck equipment attachment space. And I think the answer to that is we're keeping a very open but disciplined mind in terms of exactly where the greatest opportunity is. There are some opportunities out there that we continue to vet. But we do pass on a lot more than we actually act on. So I think we're pretty flexible.

Okay. So it could essentially be a product addition, or a distribution?

Again, I would hate to at this particular point, to rule anything out. What we do believe is that if it's in our core market which is truck equipment, and we can utilize DDMS as a basis for improving the business, and it is certainly accretive, we'll certainly consider it.

Got it. Okay. Thank you, guys.

You are welcome.

(Operator Instructions).

Operator, while we're seeing if there are any more questions, I will go back to the Baird question. Parts and accessories revenue for the first quarter was $9.8 million to cover that off for Tim.

I am showing no further questions at this time. I would now like to turn the call back over to Mr. Jim Janik, Chairman, President and CEO for closing remarks.

Thank you Operator. 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. Have a great day.

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