Douglas Dynamics Inc (PLOW) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics second-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Bob McCormick, Executive Vice President and Chief Financial Officer. You may begin, sir.

Thank you. Welcome, everyone, and thank you for joining us on today's call. 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 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 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 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 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, current industry trends, and will review our recent acquisition of Dejana Truck and Utility Equipment. Then I will review our financial results before turning it back to Jim to discuss our outlook. Finally, we'll open the call for your questions. Jim?

Thank you, Bob, and good morning, everyone. I'm pleased to report that despite experiencing one of the lowest snowfall environments the past decade last winter season, we have produced a tremendous start to our preseason order period for our commercial snow and ice products, which drove record second-quarter results.

We also saw a strong performance from the Henderson team for the period. During the second quarter, Henderson successfully relocated its Illinois upfit location to a substantially larger, more efficient facility that better supports our growth expectations in that region.

Not only did we produce a great quarter, we also announced in June and subsequently completed in July the important acquisition of the Dejana Truck and Utility Equipment Company. And based on all this good news, we also increased and narrowed our 2016 outlook, which I'll get to later in the call.

I'll start with a brief overview of our results. We produced a record second-quarter net sales of $113.8 million, which translates into record second-quarter EPS of $0.71 per diluted share. We also generated record second-quarter adjusted EBITDA of $32.7 million. Overall, a lot of records this quarter.

Our preseason for commercial snow and ice products was strong, signaling ongoing optimism from dealers despite the lack of snowfall across the country last winter. Last year, preseason shipments were more evenly split due to the unprecedented new product launch production ramp-up. This resulted in stronger third-quarter shipments for 2015, which will not occur again this year. For 2016, we expect orders to be more heavily weighted towards the second quarter versus the third quarter, with an approximate 55%/45% split, which is more in line with historical averages.

While weather trends across North America this past winter impacted our commercial snow and ice products, non-snowfall indicators remain positive. Dealer field inventory taken at the end of May indicated that dealer inventory levels were higher than historical averages, but still in line with our expectations. In addition, while the rate of growth slowed somewhat compared to last year, North American select pickup truck sales remained strong and grew 6% year to date over 2015.

Although we are producing excellent results so far, we continue to implement our low snowfall playbook and are confident we have systems in place to thrive during this environment. Based on our results to date and outlook for the remainder of the year, we are less likely to intensify our spending cutbacks. We remain focused on investing in improvements that will directly increase service levels and quality for our customers while improving base business profitability.

Even though our teams did an amazing job and produced great results, there was arguably even more exciting news during the quarter: our acquisition of Dejana Truck and Utility Equipment Company, which we announced in mid-June and closed in mid-July. Let me start by reminding you about Dejana's business. Over the past 59 years, Dejana has grown organically to become a premier upfitter of medium-duty class IV through class VI trucks and other commercial work vehicles in the Eastern United States.

They also manufacture van bodies, storage systems for trucks and vans, and cable pulling equipment. Today Dejana employs approximately 500 people in five states. It is a well-run family-owned business that has a long track record of growth and a very strong reputation within the truck equipment industry.

This deal is a natural extension and expansion of the upfit strategy initiated with the Henderson acquisition 18 months ago and provides an important opportunity to drive growth in new markets outside of snow and ice control. Dejana provides us with a new, complementary portfolio of services and products to drive deeper customer relationships and strengthens the Company's geographic footprint.

By adding Dejana, we are rounding out our coverage of trucks and expanding our capabilities into other commercial work vehicles. It is important to realize that Dejana has built strong relationships with the big three truck OEMs for more than 25 years. These relationships are built on a track record of remarkable performance and service from the Dejana team. The trust that exists between Dejana and these organizations is crucial in providing access to important commercial work vehicle pools and fleets, which is a growing market opportunity in North America.

Another area of the market Dejana focuses on is the work van market, which is segment of the market growing at double-digit rates. In 2015, the total number of vans in the US grew to 400,000 units, providing significant opportunities. Dejana has positioned itself as an upfit leader in this growing market. By expanding into these adjacent market segments, we will diversify our revenue streams and continue to mitigate the seasonality in our traditional snow and ice equipment business.

With all these factors, it's clear to see how Dejana has been able to produce strong growth over the past five years, and we see ample opportunities to continue to expand the business in the future. We have a long-standing relationship with Dejana as a partner and a top customer, which we believe will help ensure a smooth transition in the coming quarters. Ultimately, the acquisition of Dejana will advance our growth strategy while adding another layer of predictability and stability to our business model, as its revenue is not influenced by weather and is almost evenly split across all four quarters.

The deal is the next logical step in our M&A strategy to establish a market-leading position in all truck segments, with a focus on truck equipment and attachments for work applications. It also advances our stated aspiration to reduce the influence of weather on our overall business.

While the DDMS journey at Dejana is just beginning, it is well underway at Henderson. As I have on recent calls, I'd like to outline another DDMS project completed during the second quarter: a week-long kaizen event at our Henderson products installation and distribution center, or IDC, in New York. Over the course of five days, 22 employees from across the Company participated in training and application of DDMS tools, including 5S, waste identification and elimination, process mapping, visual management, and systematic problem-solving.

Emphasizing the DDMS cornerstone, creativity before capital, the team constructed a custom parts delivery and scheduling system using simple, inexpensive resources that were readily available. The team delivered an impressive 75% improvement in the time spent moving trucks around the facility per year. Work in process was reduced over 20%, while lead time improved an outstanding 25%. These improvements deliver on our commitment to service and quality and directly, positively impact our customers. A job well done by everyone that was involved.

Before handing over to Bob, I'd like to touch on our uses of cash this quarter. We paid our quarterly cash dividend at the end of June of $0.235 per share of our common stock, and we've increased our dividend eight times in the six years since our IPO. And we'll continue to return excess cash to our shareholders.

Going forward, we remain fully committed to our current capital allocation strategy and are well positioned to successfully execute it going forward. Our priorities remain: first, maintaining and growing our robust dividend; second, paying down debt; and, third, pursuing strategic acquisitions at disciplined valuations.

While the Dejana transition will be our main focus near-term, and we don't have any deals in the pipeline at the moment, we will continue to be opportunistic. We are continually tracking companies that would be a good strategic fit with our offering, and we'll pursue deals that make sense when they become available.

With that, I'll let Bob provide the specifics for our financial results. Bob?

Thanks, Jim. As you can see in our press release, we produced exceptional results for the second quarter of 2016, generating net sales of $113.8 million compared to second-quarter 2015 net sales of $107.1 million. The increase relates to stronger sales of snow and ice control equipment compared to the prior year and a slight shift in the preseason order pattern. The improvements were offset slightly by lower parts and accessories sales due to the aforementioned lower snowfall this past season.

Gross profit was a record $41.5 million or 36.5% of net sales for the second quarter of 2016 compared to $37 million or 34.5% of net sales for the second quarter of 2015. The increase is attributable to favorable commodity pricing and improved operating performance realized through DDMS.

Net income for the 2016 second quarter was a record $16.3 million or $0.71 per diluted share compared to net income of $13.1 million or $0.57 per diluted share last year. Even with the increase in net sales, we were able to successfully leverage our cost structure, which led to a larger increase to the bottom line. We reported adjusted EBITDA of $32.7 million in the second quarter compared to adjusted EBITDA of $28.1 million in the same quarter last year.

The effective tax rate for the second quarter of 2016 was 36.1%, and we estimate that the effective tax rate for the full year will be approximately 36%. CapEx through June 2016 totaled $4.8 million compared to $3.3 million in the first half of 2015. In 2016 CapEx included the $2.8 million purchase of a state-of-the-art upfit facility for the Henderson, Illinois, installation and distribution center, which will significantly increase capacity and drive productivity and throughput. During the first six months of 2016, the Company recorded net cash provided by operating activities of $28.3 million compared to net cash provided by operating activities of $10.4 million in the same period last year.

This increase is partly attributable to a gain of approximately $10 million recorded in the first quarter of 2016 related to the successful conclusion of a patent infringement lawsuit against Buyers Products Company, owner of the SnowDogg line of products.

Accounts receivable were $66.6 million at the end of the second-quarter 2016, higher when compared to $61.6 million for the second quarter of 2015 due to the corresponding increase in sales. Inventory was $60.3 million at the end of the second quarter of 2016, a decrease of $3.5 million compared to the second quarter of 2015 inventory of $63.8 million, which stems from the ongoing DDMS improvement efforts across the Company, particularly at Henderson.

Total liquidity at the end of the second quarter was approximately $148 million, which includes cash and cash equivalents on hand of $48.7 million. Given our favorable liquidity position at the end of Q2, we've allocated a combination of cash and revolver draw totaling approximately $50 million to help fund the Dejana acquisition in mid-July. Post-close, we still have total liquidity of just under $100 million and are well positioned to fund upcoming quarterly cash dividends.

Now I have reviewed the results for the quarter, it is worth mentioning a few additional financial details regarding the Dejana deal. We paid $206 million for the company, which includes a performance-based earn-out of $26 million, with an increase to our existing term loan of approximately $130 million. The balance was funded by a combination of cash and ABL revolver draw. As a reminder, this deal meets our usual financial criteria of being accretive to earnings and free cash flow positive on a stand-alone basis in 2017.

At the moment we plan to file pro forma financials for Dejana in advance of our third-quarter earnings date, which is scheduled for early November. In the meantime, I thought I'd provide a limited update to the financials we issued in June based upon the data we have available today. For the trailing 12 months ending June 30, 2016, the business generated approximately $152 million in net sales and adjusted EBITDA in the range of $22 million to $25 million. As these results indicate, the business continued to perform as expected in the second quarter, and we look forward to providing more details in the coming months.

Now that the deal is completed, Dejana will continue to operate as it does today under the leadership of Andy Dejana and the existing management team. We do not anticipate making facility or workforce adjustments and are excited to add a very strong Dejana workforce, totaling almost 500 people, to our team. Most importantly, we are focused on ensuring there will be no interruption in the quality of service provided to our customers, and we have started to work with the team to provide a variety of resources to help them continue to grow and succeed.

By introducing DDMS, we can help Dejana improve its already industry-leading lead times and deliver enhanced quality and service to all customers, with the goal of gaining market share and ultimately improving the existing margin profile.

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

Thanks, Bob. To close, I'd like to outline the update to our outlook and expectations in the second half of the year. For the first six months of 2016, the Company's performance has exceeded initial internal expectations. Based on second-quarter results and visibility into current market trends, plus the addition of the Dejana business, we are increasing and narrowing our 2016 financial outlook.

I should also mention that we decided to include this additional information to help everyone better understand how the update came together, what is related to Dejana versus the original business -- but we have no plans to provide such levels of detail on a regular basis. While there is additional detail available in the table we included in the press release, I will focus on the new total guidance numbers.

Including Dejana, we now expect to produce 2016 net sales in the range of $395 million to $450 million; net income in the range of $31 million to $40 million; adjusted EBITDA between $77 million and $97 million; and earnings per diluted share in the range of $1.36 to $1.79 per share. Please remember these numbers include our estimates for the impact of purchase accounting related to the Dejana acquisition. We believe this will include an inventory write-up of approximately $4 million net of tax, which equates to approximately $0.18 on a per-share basis. As I mentioned, these numbers are just estimates at the moment. The final computations will be ready in the fourth quarter of 2016, in line with our plans.

Also, you will see we increased the top end of the EPS outlook range while leaving the other items the same. The main reason for the difference is the change in income tax rates and lower interest expense due to our large cash balance than we anticipated at the start of the year.

In summary, the second quarter of 2016 was a successful and important quarter for our Company. We implemented our low snowfall playbook and turned in a financial performance that exceeded our expectations. At the same time, we effectively executed our largest acquisition to date and are now well positioned to pursue growth going forward.

On behalf of the Board, I want to thank all of our employees for their ongoing dedication to the Company and welcome our newest team members on the Dejana team. We are glad you are on board. It is hard for me to fully explain just how proud I am of the entire Douglas team, and how excited I am with fall and winter just around the corner.

With that said, we'd now like to open the call for your questions. Operator?

(Operator Instructions) Josh Chan, Baird.

Morning, guys. Congrats on the great quarter. My first question is on the preseason orders, which you said were above your expectations. Were there any patterns that you noticed in terms of, like, larger distributors versus smaller and specific geographies? And then I just also wanted to make sure that there wasn't any additional incentives or significant dealer additions that kind of drove that number as well?

Sure, I'll answer the second one first. There were no additional incentives. We think we have the right balance of incentives most years that we go into the marketplace. This year is no different. There was nothing materially different there.

Secondly, I think as we always see -- you know, preseason orders are always a little bit stronger in areas that experience some of the better snowfall. There weren't many of those areas this year, but there were some of them. And one of the other things that I've seen this year which might be a little bit different is I think in our programming, we saw more people taking cash terms versus delayed terms over a period of time. I don't know necessarily that we can come to any conclusions as to why that is, or what makes it unique, but it is something that is little bit different.

Okay. Okay, that's interesting. And with respect to the inventory, is that an area that you are potentially concerned about, especially if Q4 doesn't materialize as the way that you'd expect? Or how manageable is the channel inventory right now, do you think?

Channel inventory is pretty manageable. Yes, it's elevated a little bit, as one might expect when you have a fairly low snowfall year last year. But it's well within our comfort zone. And as we look in the fourth quarter, both us -- both the Company and our dealers are very adept at ramping up and ramping down, so that we -- again, we planned for average snowfall in the fourth quarter; if it's above average, we're going to make sure we can take care of all the customers. And if it's below average, I think all of us know what the playbook is so we can always soften. But again, from my perspective, we're looking for average snow, as we always do.

Okay. And on the steel cost front, I think costs have increased pretty meaningfully during the quarter. Historically you've been able to offset that, but just wanted to see what your thoughts are in terms of pricing and margins as we look at the core business into next year?

Sure. Josh, we've certainly benefited from the impact of lower steel costs in our first six months performance. Steel prices have risen in recent months. And if you recall, our steel pricing in our core business is based upon a 90-day lag to the actual market price. And when steel prices go up, we don't feel the impact until 90 days after that increase occurs.

Having said that, we will see an impact in the third quarter from those increasing steel prices. Now, we're not sure the long-term fundamentals are in place to support the current price levels longer-term, so we're going to take a wait-and-see approach. There will be some short-term steel price impact in Q3. We are questioning whether that will hold through the end of the year or not, just based upon market fundamentals.

Okay. And my last question is just on Dejana: you've owned the business for a couple weeks here. Any surprises one way or the other? And what is sort of the primary focus area within the next 3 to 6 months here?

Well, it's -- yes, right. We've owned it --.

Two weeks. (laughter)

Yes, 16 days at this point. We don't see anything different than we saw during diligence. In fact, what we see more of is now that the deal is closed and we are able to get inside and spend more time with more of the Dejana team -- a very cooperative, focused group of folks who come to work every day looking to serve the customer and make their business better, so it fits us very well from a cultural perspective.

Certainly the early target areas for us -- there's some standard integration things we have to do from a treasury perspective, et cetera. But it really is to introduce some DDMS concepts into their business in targeted areas to allow their growth trajectory to continue for the back half of the year and into 2017.

Okay, great. Thanks for the color and congrats.

Thank you.

Mike Shlisky, Seaport Global.

Great quarter. A couple questions here. Let me first ask on the core business. I guess I was wondering about the low snowfall playbook that you've been implementing. Is that the cause of the good results here, or would you attribute it to more the overall market conditions? Because I always thought that the low snowfall playbook was a cost control kind of playbook rather than a sales push strategy?

Correct. That is more of a temporary cost control measure to maximize profit and cash flow when we are in a below average snowfall cycle. So the lowest snowfall playbook really doesn't have an impact on order patterns.

Okay, got it. But is the idea just simply that your customers, even though there's just very low snowfall, still feel good about buying this year early? Or is it just more like you think that these customers have, let's say, a better budget for this year? Or their forecast for snowfall for the rest of the year seemed pretty high?

I kind of wanted some color as to what exactly is making everybody so confident, given that there was no snow last year.

Sure. Well, the primary drivers of our business, as you know, are snowfall; secondary would be truck sales and general economy. The snowfall portion of it was really quite weak, but the rest of our drivers continue to be fairly strong. And I think that creates some additional optimism, not only through our dealer organization but from the end users.

And as a result, I think we were pleasantly surprised by the strength of the orders and the optimism that's out the field as people find that the economy is doing okay. And as a result, I think what we're seeing is a reaction to those drivers and people being generally optimistic. So I think that's the primary driver.

The second -- let me mention another thing that comes to mind is -- two other things. One is, as I mentioned, there is a little bit more of a shift of preseason into Q2 from Q3 than we've seen historically. So that may give us a little bump in Q2.

And secondly, we did introduce an awful lot of brand-new products in 2015, which I think continue to be very popular and well received within the marketplace, combined with some of the new products we introduced this year. So I think there is really a confluence of things that have resulted in a particularly good second quarter.

Great. I also wanted to touch on Henderson as well. You kind of just briefly mentioned it. But maybe just a little bit more color as to how that's going this year, and whether the drivers behind Henderson are also doing as well as the kind of core truck-type business?

Yes, Henderson continues to do well. We're very pleased with the results thus far. One of the big events for them was moving their upfit facility that was in Illinois, northern Illinois. They moved to a significantly larger facility. And interestingly, using DDMS ideas, they were able to move the entire operation of that facility in three working days. So there was barely a loss of productivity and shipping.

So the group is embracing DDMS, and we've got a great leadership team. And I think they're going to continue to do great things.

Okay, great. I have two quick questions here on Dejana as well. Given that you've just bought the company, I'm sure you've seen their balance sheet. Is there anything that surprised you on the inventory side? You feel that that's appropriately sized for what you typically see in your businesses, or are there going to be any changes as to how they manage their inventory and other working capital?

There's nothing out of the ordinary from a working capital inventory perspective that we can see, either through diligence or through this initial ownership time frame. Certainly, one of these decisions they will need to make as part of their DDMS journey is how much focus they put on reducing inventory, which is then a form of waste elimination, versus working on productivity and throughput.

So a little early to answer those questions at this point. But there isn't -- you won't -- when you see the balance sheet, you're not going to see anything out of the ordinary from an inventory turn perspective or from a working capital perspective.

Okay, great. Just kind of finally here on the debt reduction or debt paydown plan, can you give us any sort of framework as to how much you might be paying down, let's say, in the next 18 months, given the guidance, what it is today? And let's assume a somewhat normalized year next year. I guess debt is -- I wouldn't call it amazingly high, but I guess people are just kind of wondering where you might take the debt by the end of 2017, and perhaps as you ramp into your next M&A deal?

Sure. Well, you know, we are very pleased that we only increased our term loan $130 million to get this latest deal done. We did put approximately $30 million on our ABL revolver, which -- it would be nice if we paid most of that, if not all of that, off by the end of this calendar year.

We'll have to wait and see how the start to the snow season goes. But if we can accomplish that, then I think we head into 2017 with a reasonable leverage ratio that if -- as Jim said earlier, if any opportunistic acquisitions come along that are high on our priority list, we'll certainly have the capital necessary to make those acquisitions.

So I'm feeling good about how we approached this particular deal. And if we can execute like I hope we can for the balance of the year and pay that short-term ABL revolver off, I think we're in great shape.

All right, great. I'm going to leave it there. Thanks so much, guys.

Thanks, Mike.

(Operator Instructions) I'm not showing any further questions at this time. I would like to turn the call back over to our host.

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

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.