Douglas Dynamics Inc (PLOW) 2016 Q3 法說會逐字稿

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

I would now like to introduce your host for today's program, Mr. Bob McCormick, Executive Vice President and Chief Financial Officer. Please go ahead.

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. 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 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; then I will review our financial results before turning it back to Jim to discuss our outlook. After that, we'll open the call for your questions.

Jim?

Thanks, Bob, and good morning, everyone. Thank you for joining us. This was a very important quarter in our Company's history, and we are pleased with our results both for the third quarter and year to date. Despite the tough comparisons to our record performance in 2015, we achieved strong results in the third quarter, thanks in part to the addition of Dejana. Third-quarter 2016 net sales were $123.6 million. Adjusted EBITDA was $25.1 million, which produced earnings of $0.32 per diluted share.

Our pre-season for our commercial snow and ice control products was strong, albeit below the record-setting performance we produced last year. We continue to see optimism from dealers, despite the lack of snowfall across the country last winter. As a reminder, the 2015 pre-season shipments were more evenly split across the second and third quarter, due to the unprecedented new product launch production ramp up. This resulted in stronger third-quarter shipments for 2015, which we did not expect to replicate this year.

For 2016, shipments were more heavily weighted towards the second quarter with an approximate 55/45 split, which is more in line with historical averages, and matches our expectations. Our most recent look at dealer field inventory levels indicated they were marginally higher when taken at the end of September, which is still in line with our expectations.

As many of you know, we also track select North American pickup truck sales, which we found do positively correlate with plow sales over the long-term. The latest data shows continued positive growth, with select North American pickup truck sales increasing 4% year-to-date in 2016 compared to 2015. Overall, non-snowfall indicators continue to look positive for our commercial products.

So far, 2016 is unfolding better than we imagined at the start of the year. But we still implemented our low snowfall playbook towards the beginning of the year. And based on our results to date and outlook for the rest of the year, we do not plan on expanding our spending cutbacks in the near term.

Turning to our Henderson business, the team produced a strong third quarter and continues to meet our high expectation. The business is well-positioned to meet its 2016 growth targets, which is one of the reasons we were able to reaffirm our guidance for the year. Of course, this was our first quarter including results from Dejana Truck & Utility Equipment, which we acquired in mid-July. Adding Dejana has provided us with a new complementary portfolio of services and products to drive deeper customer relationships, and strengthens our geographic footprint.

It really has rounded out our offering, and has expanded our capabilities into a full range of commercial work vehicles. It is 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.

Our long-standing relationship with Dejana as a partner and a top customer has helped produce a smooth transition which we expect to continue in the coming quarters. Ultimately, it is a big step forward in our long-term growth strategy while adding another layer of predictability and stability to our business model, as its revenue is not significantly influenced by weather, and it's almost evenly split across all four quarters.

As usual, I'd like to highlight a DDMS project example; but this quarter, I'm going to talk about one of our first projects at Dejana. Although we only closed the deal in mid-July, we're already implementing DDMS and are seeing good initial results. We have completed two of four Kaizen events recently at our facility in Baltimore, Maryland, with a broad team of employees across multiple disciplines.

The objective was to increase throughput and velocity to improve customer lead times at up-fitting operations for certain truck types. During the week-long events, the team uncovered opportunities to improve safety, reduce waste, improve flow, and utilize cross-training.

The initial changes so far have included adding more usable floor space by removing excess materials and creating storage solutions; improving work processes and safety precautions; and using kitted flow methods to ensure the first parts are available when needed.

The team achieved significant safety improvements as well as efficiency gains, and this is really the tip of the iceberg. Implementing DDMS takes time. And while we expect to produce improvements from the start, the real benefits take hold in the coming years, when DDMS mindset becomes ingrained in the culture of each team at each facility. It is gratifying to see the Dejana team take up the DDMS ideology, and look forward to sharing more of our DDMS success with you in the coming quarters.

Turning to capital allocation, it bears repeating that our dividend remains the top priority. We continue to generate strong cash flows, and view our commitment to the dividend as an important component of our investment thesis. As previously announced on September 9, we declared a quarterly cash dividend of $0.235 per share on the Company's common stock, which was paid on September 30.

We continually discuss our dividend policy, and will typically decide upon any changes at the next Board meeting, which is currently planned for early March. We have found that this is the best time of the year to make an informed decision about capital allocation, as we have financial data from the end of the year; most of the snow season is complete; and we have the best view of our financial position.

Aside from the dividend, we're committed to using our excess cash to reduce the Company's debt levels and pursue strategic acquisitions. While we are focused on Dejana's transition for the near term, and don't have any deals in the pipeline at the moment, we will continue to be opportunistic and open to discussions. We are continually tracking a range of companies that would be a good strategic fit with our offering, and we will pursue logical deals while maintaining our disciplined approach.

With that, I will turn the call over to Bob to discuss our financial results in more detail. Bob?

Thanks, Jim. First things first. As you probably saw in our earnings release, we have created two reporting segments: first, the work truck attachments segment, which includes our original business focused on manufactured snow and ice control attachments; and, second, the work truck solutions segment, which resulted from the acquisition of Dejana, and includes the up-fit of market-leading attachments and storage solutions for commercial work vehicles.

Results from Q3 2016 include the impact of the Dejana acquisition for the period of July 18, 2016, which was the first business day following the completion of the deal, through the end of the corridor.

With that said, let me walk you through the results. Overall, results were positive and in line with our expectations. For the third quarter of 2016 we generated net sales of $123.6 million, an increase of 2.5% when compared to the record net sales of $120.6 million in the third quarter of last year.

It's worth noting that while the work truck attachments segment's shipments to Dejana during the quarter historically would have been recognized as net sales in the quarter of shipment; post-acquisition, these sales are now being treated as an intercompany inventory transfer during the period. And revenue is being deferred and will be recognized upon shipments to our work truck solutions segment customers.

Additionally, purchase accounting requires we amortize all of the customer order backlog related to the Dejana work truck solutions following the completion of the acquisition. There was also a small inventory write-up which was fully amortized during the quarter, plus certain acquisition-related costs. In total, these items reduced results by approximately $6.2 million on pre-tax income, or $0.17 per diluted share.

Cost of sales was $86.9 million or 70.3% of sales for the third quarter compared to $79.7 million or 66.1% of sales in the third quarter of 2015. The year-over-year increase was driven by the addition of Dejana, and commercial products making up a smaller portion of net sales year-over-year. SG&A expenses were $15.8 million for the quarter compared to prior-year SG&A expenses of $12.5 million. As with cost of sales, the increase compared to 2015 was primarily due to the Dejana acquisition.

Moving on, third-quarter 2016 adjusted EBITDA was $25.1 million compared to $31.1 million in the third quarter of 2015.

Finally, consolidated net income was $7.3 million or $0.32 per diluted share for the third quarter of 2016 compared to net income of $15.5 million or $0.68 per diluted share in the same quarter last year. The effective tax rate for the third quarter of 2016 was 38.5%, and the estimated effective tax rate for full-year 2016 is expected to be approximately 37%.

Now let's briefly look at the earnings information for the two segments. For the third quarter of 2016, the work truck attachments segment recorded revenue of $100.5 million and gross profit of $33.8 million. This segment reported income from operations of $24.1 million.

While in line with internal expectations, results were lower when compared to same period last year due to the impact of significantly below-average snowfall this past winter; plus difficult comparisons to the record performance in the third quarter of 2015, which was driven by the record launch of 20 new products in 2015 and an influx of pent-up demand.

Also, as Jim already mentioned, in 2016 there was a return towards historical shipment patterns, producing a 55/45 split between the second and third quarters, respectively, which differed from the previous year that saw an even split between the quarters. This helped drive record results in the second quarter of 2016 and exacerbated the difficult comparisons this quarter.

Of note within the work truck attachments segment, Henderson Products continued to perform well, and remains on track to produce a strong year, outperforming its excellent 2015 results.

Next, the Dejana work truck solutions segment recorded revenue of $27.1 million and gross profit of $5.2 million. This segment did record a $400,000 loss from operations, negatively impacted by certain acquisition-related costs discussed earlier, which were all in line with initial internal expectations.

Turning now to the balance sheet, we recorded net cash provided from operating activities of $11.2 million during the first nine months of 2016 compared to net cash used from operating activities of $11.9 million in the first nine months last year. The increase was due to favorable changes in working capital of $23.4 million, mainly accounts receivable.

Accounts receivable at the end of the quarter were $120.2 million, an increase of $1.7 million compared to the end of the third quarter of 2015. This includes the impact of Dejana work truck solutions acquisition, which was largely offset by a general decrease to overall sales in the work truck attachments segment.

Capital expenditures for the first nine months of 2016 totaled $7.1 million, which included the recent purchase of the new Illinois up-fit facility for Henderson which we mentioned last quarter.

Inventory was $71.6 million at the end of the third quarter of 2016 compared to $55.2 million as at the end of the third quarter of 2015. The increase in inventory is primarily due to the acquisition of Dejana, which was partially offset by a decrease in inventory for the work truck attachments segment related to anticipated lower overall sales in 2016.

Total liquidity at the end of the third quarter was approximately $73.6 million, which is in line with our usual seasonal changes. Given our favorable liquidity position at the end of Q2, we allocated a combination of cash and a revolver draw totaling approximately $50 million to help fund the Dejana acquisition in mid-July.

Overall, we are pleased with the initial results from the Dejana work truck solutions; and our work truck attachments segment continue to perform well. We firmly believe we are a much stronger company today with a more diverse portfolio of products and services.

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

Thank you, Bob. To close, I'd like to reiterate our expectations for the remainder of the year. For the first nine months of 2016, our performance slightly exceeded our initial internal expectations, and we are well positioned to achieve annual results within the increased guidance ranges we issues last quarter.

As a reminder, we 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; and adjusted EBITDA between $77 million and $97 million; and earnings per diluted share in the range of $1.36 to $1.79 per share.

This outlook assumes a stable economy and average snowfall levels during the fourth quarter across our core markets. While the structure and focus of the Company has changed this year, and the influence of weather has diminished, our fourth quarter will still be impacted by the magnitude, timing, and location of snowfall.

In conclusion, we are pleased with the initial results from the Dejana work truck solutions acquisition. Our core business, the work truck attachments segment, is well-positioned for future success. And as we look towards the snow season, we are well prepared to execute our strategy, and expect to produce another year of historically strong results.

We are now ready to take your questions. Operator?

(Operator Instructions). Tim Wojs, Baird.

The first question I had just related to the revenue guidance. And I may be over-reading this, but I just want a clarification. So if I take the top end of the range and divide it by the bottom end of the range, I get about 13% or 14% between there. And that's actually a little higher than it's been the last couple quarters -- or last couple years as you have entered Q4.

So, is there something that -- is there an implication there? Or is it just, hey, things haven't really changed, and we're not changing the guidance into Q4? I'm just wondering if from a visibility perspective, if anything has really changed, or if it's just something that you want to reiterate guidance just because nothing really has changed?

Yes, your comments are spot-on. Nothing has changed, and we're just reiterating guidance.

Okay. So don't read into that, okay. And then when I think about -- Bob, can you talk a little bit -- there's some things with the revenue deferrals and some of the amortization of backlog and the inventory write-ups.

Can we just walk through the pieces of that? What falls off in Q4, and as you go into 2017? What's more recurring? Just maybe a little bit more color on those moving pieces. And then specifically where they fall; is it the corporate line? Is it the work truck solutions segment? How to you think about that in the model.

Yes, excellent. A couple different things there. First let me talk to the intercompany sales. Over the course of a calendar year, that should really have a net zero impact. But as the shipments ebb and flow from shipments of CSI to Dejana, and from them to their customers quarter-by-quarter, we're going to see a little bit of put and take.

If you think about how CSI's shipments work, they're shipping a decent amount of product in Q2 and Q3 when there's a little retail taking place; hence, we're going to have some of the intercompany inventory -- or those sales tied up in inventory.

Q4, probably a little bit closer to even shipments in terms of what CSI shipped for Dejana, and what they ship to their customers. And Q1 is when we'll probably see the largest favorable impact of not much in CSI's shipments to Dejana, but a fair amount of retail taking place there. So those are the puts and takes of it. But I want to emphasize, over a calendar year, it really should have close to a zero impact.

Okay. Before you get to the costs, just so I understand -- so basically the Dejana numbers in what's the work truck solutions, that's pretty even, relative to everything. And really the flex point between segments comes in that corporate line.

Exactly. When you look at the revenue and the gross profit in that segment reporting page --

Yes.

That, to an almost entire degree, represents these intercompany transfers. So, that's where you'll be able to pull that from. I would tell you that of the $0.17 that we've identified as related to the acquisition in terms of Q3 hits, $0.07 of that is -- approximately $0.07 is due to the intercompany inventory movements.

The other $0.10, to get the next part of your question -- the other $0.10 is related to these other one-time, acquisition-related costs. Now, the good news there is that those are largely behind us at the end of Q3; and there will be little, if any, of those one-time charges related to the Dejana acquisition in the Q4 and beyond.

Okay. And those items will hit the work truck solutions segment?

Correct. So your normal intangible amortizations and those kinds of things, which aren't one-time in nature and we don't call out, that will flow through the work truck solutions statements. These hits that I just spoke about, the $0.10 in Q3, certainly falls through the work truck solutions segment, generating that $400,000 loss from operations.

Got you, okay. And then just the corporate and elimination line, the $7.2 million -- I guess would that be a loss or negative number there. How much of that is an elimination versus a corporate reallocation?

That's almost virtually, when you look at -- go to the SG&A line. There, the $4.8 million and change that's on corporate plus eliminations, is almost entirely the corporate expenses. So you've got -- sales and gross profit is largely the intercompany inventory. The SG&A is largely corporate; then obviously the income of $7.2 million is the combination of those two things.

Okay. So the gross profit and the revenue will move around with shipments between the segments. And then the SG&A is more of an ongoing corporate expense to model forward.

Exactly, exactly.

Okay, okay. And then just as we think about the amortization at the backlog, is that -- what's the timeline on that, in terms of years? How do we think about the amount of that as recurring?

Well, the good news there is the amortization of that backlog is entirely complete at the end of Q3.

Okay. So that actually falls off?

It falls off. There is nothing going forward there.

Got you. Okay, okay. And then maybe shifting -- my last question, just shifting to the core business. As we think about the profitability there, it's been a -- the margins have held up really well over the last couple quarters, even though volume has been a little tougher with the snow season. But how do we think about price/cost, and maybe the moving variables on profitability into 2017?

Well, one of the things that we're very proud of, in that CSI part of our work truck attachments segment is that those guys improved margins, base business margins, every year, regardless of where we're at in the snowfall cycle. They've done it for a decade-plus, and there's no reason why that won't continue into 2017, and even beyond 2017.

Okay, okay. Yes, you guys have done a great job there. I'll turn it over. Thanks for the time, and let's hope it snows in a couple months here.

Mike Shlisky, Seaport Global.

I wanted to follow up on some of the numbers surrounding Dejana. Would you be able to give us, in your opinion, the -- I guess we'd call it dilution from Dejana in Q3? Whether there was accretion or dilution, excluding some of the one-time items. I know you said there was the $0.10 there of one-time items, but we don't know about taxes and interest, et cetera. So all-in, what do you think the impact was to your EPS, both before and after unusual items?

What I would say, Mike, is I'll give you a more global answer. Having cleared the purchase accounting one-time costs, we expect Dejana to be accretive to earnings per share in the fourth quarter, and for all of 2017. I don't have the direct math in front of me that takes me through the net income line on what happened in Q3. Obviously there's enough noise there.

I would also point out that while Jim made a comment to it -- which is accurate -- that their sales on a quarterly basis are relatively consistent, their fourth quarter is typically a little stronger than the other quarters.

So, we look for some strong performance from them, going into Q4. Having the one-time acquisition costs behind us, we're going to see accretion there. We expect that to continue into 2017.

Okay, okay. And given some of this is some amortization and some intangibles here, it should be cash accretive, as well, going forward.

Absolutely.

Okay. All right. Wanted to turn to Henderson really quickly here, as well. Do you get any sense that the company is gaining share this year? I've been hearing about some other players in that industry retrenching here in 2016. Is it getting more challenging to keep that kind of tailwind going into 2017?

I think at this particular point, anything would be anecdotal. Our hope is that we're gaining some share, but I don't know that I can give you a definitive answer. But part of our strategy is to gain share; so if that's what you are picking up, that's good news.

Okay. I'll follow up offline on that one. And then I also wanted to ask about the guidance. I just want to make sure -- the guidance before and the guidance today, both of them include any one-time items from Dejana.

Correct.

So it's -- that has not changed at all?

Has not changed. And I think what is -- the only real change here is that most of the one-time purchase accounting staff turns out to hit us in Q3 versus initially maybe we had thought it might be spread a little bit more evenly versus Q3 and Q4. So, there's a larger hit in Q3 which bodes well for our performance, going forward.

Okay. And one more one for me, just going back to your opening comments. It sounded like you implied that your low snowfall playbook actions were over. So, I'm not sure if I had this right. But you basically said that you are taking down your cost reductions because you've got decent enough orders. Is that the right way to think about it?

No (multiple speakers). Actually, I'm glad you asked. When we finished last year, and it was a low snowfall, we decided to put in our low snowfall playbook, which really allows us to begin the year 2016 being very cautious with expenditures. We have kept that in place throughout the entire year. And my comment has been that we don't anticipate having to even take more costs down.

So we're just going to stay with the same play, which already began at the beginning of the year. So, not we're changing anything, not tightening down, not loosening up. But all I was doing was reiterating that we began it at the beginning of last -- of 2016, and we're just -- it is still in place.

Okay, perfect. Got it. Great, guys. Thank you so much.

(Operator Instructions). And this does conclude the question-and-answer session of today's program.

I'd like to hand the program back to Jim Janik or any further remarks.

Thank you for joining us today, and for your continued interest in Douglas Dynamics. We look forward to seeing some of you next week at the Baird Conference in Chicago, and speaking with you on our fourth-quarter earnings call in March 2017, if not before. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.