Douglas Dynamics Inc (PLOW) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Douglas Dynamics, Inc. fourth quarter 2016 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will be given at that time. (Operator Instructions). As a reminder this call may be recorded. I would now like to introduce your host for today's conference, Mr. Bob McCormick, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Welcome everyone, and thank you for joining us on today's call. Two quick items before we begin. First, please not 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 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 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 on these sections in the 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. 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. Good morning everyone. Thank you for joining us. We closed the year with solid results, especially given that the winter hasn't been very cooperative in our core markets for the second consecutive year. Our fourth quarter results were driven by the addition of the Work Truck Solutions segment in July, and continued strong performance at Henderson which was partially offset by lower sales in the Work Truck Attachments segment, as we expected.

For the fourth quarter, net sales were approximately $130 million, producing net income of approximately $10 million, or $0.44 per diluted share. Following two successive years of record results, combined with very low snowfall coming out of the previous winter of 2015 and 2016, we didn't anticipate reporting record results for our commercial snow and ice products for a third year in a row. The teams at Western, Fisher and SnowEx have done an admirable job working through the tough weather conditions, and we are pleased with their performance under the circumstances.

I am also delighted to report that the Henderson team continued their strong track record of growth and produced another record performance for 2016. On a positive note, we continued to see pockets of dealer optimism about their 2017 prospects, despite low snowfall in most parts of the country. We expect this winter to end with below average snowfall totals overall. If you want to look in more detail, snowfall was inconsistent both in location and in timing. For example, October/November were very warm, and saw little winter weather. December returned to strong snowfall in some of our core markets, which resulted in average fourth quarter snowfall across North America.

Overall, as five of the six months of winter are over, while some markets in the Northeast saw slightly below average snowfall, we are going to be well below average across North America for the second year in a row. Chicago, as an extreme example, with no measurable snowfall in January or February for the first time on record. These factors will undoubtedly have an impact on the preseason order period for our commercial snow and ice control products.

However, our most recent look at dealer field inventory taken at the end of January indicated inventories were only marginally higher than the same time in 2016, which is in line with our expectations, and bodes well for the coming year. As many of you know, we also track select North American pickup truck sales. The latest data shows continued growth, with select North American pickup truck sales increasing 5% in January 2017 when compared to January 2016. Overall, the takeaway should be that the non-snowfall indicators continue to look positive for our commercial products.

Of course, this was also our second quarter including results from our Work Truck solutions segment, which we acquired in mid-July. Adding this complementary portfolio of services and products is helping to drive deeper customer relationships, and strengthens our geographic footprint. It has really rounded out our offering, and has expanded our capabilities into a full range of our commercial Work Truck vehicles. The Work Truck solutions segment performed in line with our expectations in the fourth quarter, and we continue to expect great things from that team going forward.

As many of you are already aware, the Douglas Dynamics Management System, or DDMS, is an important factor that differentiates our Company, continuously improving service and quality for our customers is not so secret, secret is our success. It will continue to be instrumental in driving value creation opportunities with any acquisition we complete. We have made good progress with TrynEx and Henderson, and are off to a good start with Work Truck solutions as well.

Having said that, we continue to refine DDMS in our commercial snow and ice control business, where the process began more than ten years ago. So as we've done each quarter for the past year or so, I would like to share an example of a recent DDMS initiative. An important component of DDMS is education. In 2017 our commercial snow and ice control teams are implementing what we are calling a change agent development program. Through training and education we will enhance the ability of another 125 associates to drive performance improvements in critical areas of growth, margin, quality, delivery, and safety.

This train-and-do approach will follow three critical learning modules. In addition to each classroom training session, teams will also deploy in the field within our manufacturing, supply chain, product development, and support functions, to identify and implement improvements. The three highly focused modules will build on each other in specific order. First, standardizing work. Stable and predictable defined processes where waste can be easily identified. Then secondly, measuring results. The ability to use highly accurate data to further define and prioritize opportunities.

And then finally implementing solutions. Structured tools and techniques that teach proactive brute cost problem-solving, to drive new levels of performance and sustained improved results. The program allows us to multiply the number of improvement activities we can undertake, but in a very controlled and systematic manner. Essentially we will be empowering many more people at all levels of the Company, with the knowledge to improve customer experiences.

In the early stages of this program our newest change agents have already increased productivity in two of our assembly cells by up to 20%. Error proof several opportunities for improved first pass yield, and made countless safety and ergonomic enhancements. It's important to state that this kind of process will never stop at our Company. The idea that all of the right fruit has been picked does not work for us. We can always improve.

Now I would like to discuss our dividend. As we reported on December 9th, we paid a quarterly cash dividend of $0.235 per share on the Company's common stock on December 30th, 2016. Once again the Board and the management have agreed it is appropriate to increase the dividend this year, and have declared a quarterly cash dividend of $0.24 per share for the first quarter of 2017, which equates to a projected full year annual increase of $0.02 per diluted share. The dividend will be paid on March 31st, 2017 to stockholders of record on March 21st, 2017. Aside from the dividend, we remain committed to using our excess capital to reduce our debt and pursue strategic acquisitions.

We are continually tracking companies that would be a good strategic fit with our offering, and will pursue logical deals while maintaining our disciplined approach. As we've always stated we focus on the factors within our control. Our flexible business model enables us to quickly adapt to changing circumstances, and utilizing DDMS allows us to improve every year. While 2016 unfolded better than we had imagined at the start of the year, the implementation of our low snowfall playbook was an important part of our plan, and we will be continuing to use the playbook this year.

As I just mentioned we are continuing our DDMS journey in our core operations, and are entering a crucial second stage with our Henderson brand, as initial success has to be translated into DDMS becoming ingrained in that business. The first two quarters with Work Truck solutions has produced promising results, but again there is a lot more we can do to address new opportunities in that segment. With that, I'll turn the call back over to Bob, to discuss our financial results in more detail. Bob.

Thanks Jim. Before I begin, I just want to remind everyone that we created two reporting segments in the third quarter of 2016. First, a Work Truck Attachment Segment, which includes our original business, focused on manufactured snow and ice control equipment for both the municipal and commercial markets. And second, the Work Truck Solutions segment which resulted from the acquisition of Dejana, and includes the upfit of market-leading attachments and storage solutions for commercial work vehicles. Also as you will see in this press release, our results for the full year include the impact of the Work Truck Solutions segment for the period of July 18th, 2016 through December 31st, 2016, following the completion of the deal.

With that said, let me walk you through the results. Overall, the results were positive and in line with our expectations. For the fourth quarter of 2016, net sales were $130.1 million, representing a 9.5% increase over the same period last year. The increase reflects the addition of Work Truck Solutions and strong results from Henderson, which was partially offset by lower sales for our core commercial snow and ice control products.

As a reminder we are can comparing fourth quarter 2016 to our all-time record performance in the fourth quarter of 2015. As we mentioned last quarter, the Work Truck attachment segment shipments to the former Dejana operations were originally treated as an intercompany inventory transfer, and revenue was deferred in the third quarter. Some of that revenue was recognized in the fourth quarter, as end-users were shipped products from the Work Truck Solutions segment, and we expect this process to continue in Q1 of 2017.

For the fourth quarter of 2016, cost of sales were $88.5 million, or 68% of sales, compared to $80.3 million, or 68% of sales in the fourth quarter of 2015. This year-over-year increase was driven by the addition of Work Truck Solutions. SG&A expenses of $16.3 million for the quarter of 2016, compared to $12.9 million in the same quarter 2015. Again, this increase was due to the addition of Work Truck Solutions.

Moving on, we produced adjusted EBITDA of $27.4 million for the fourth quarter, similar to adjusted EBITDA of $27.8 million for the fourth quarter of 2015. The slight decrease reflects the addition of the Work Truck Solutions business, offset by lower sales in our more profitable snow and ice control products. Net income was $10.1 million, or $0.44 per diluted share in the fourth quarter of 2016, compared to net income of $15.1 million, or $0.66 per diluted share in the same period of 2015. The decrease in net income relates to lower overall sales in Work Truck attachments, coupled with a higher cost of sales as a percentage of sales in the Work Truck Solutions segment compared to Work Truck Attachments.

The effective tax rate for the full year 2016 was 38.8%, compared to 33.3% for 2015. The higher rate relates to the release of valuation allowances in several states in 2015, resulting from consecutive years of taxable income in those states that was not available in 2016. Now let's briefly look at earnings information for the two segments. For the fourth quarter of 2016 the Work Truck attachment segment recorded revenue of $97.8 million, and income from operations of $23.3 million, while in line with internal expectations, and very similar to third quarter 2016 numbers, these results were lower when compared to the same period last year, due to the impact of below-average snowfall this past winter. It is worth reiterating that within the Work Truck attachment segments, our Henderson brand continued to grow and outperform its excellent 2015 results.

Next, the Work Truck Solutions segment recorded revenue of $37.9 million, and $3.5 million of income from operations. All of these numbers were in line with our initial internal expectations. For the full year 2016, net cash provided by operating activities totaled $69.9 million, compared to $56.5 million in 2015. The increase was driven by favorable working capital changes, and the proceeds of the favorable legal settlement in the first quarter, which were partially offset by the acquisition costs related to Dejana.

Accounts Receivable at the end of the year were $78.6 million, compared to $67.7 million at the end of 2015. This includes the Work Truck Solutions AR, which was partially offset by a decrease stemming from lower overall sales in the Work Truck attachments segment. Capital expenditures for 2016 totaled $9.8 million, which includes the purchase of the new Illinois upfit facility for Henderson, which we mentioned in August. Also please remember that 2015 full year CapEx of approximately $10 million included the Milwaukee facility improvement project.

Going forward we expect our annual CapEx to range between $11 million and $12 million, which reflects the addition of Work Truck Solutions. Inventory was $70.9 million at the end of 2016, compared to $51.6 million at the end of 2015, and in line with third quarter of 2016. The increase in inventory is primarily due to the acquisition of Work Truck Solutions, which was partially offset by a decrease in inventory for the Work Truck attachments segment, related to anticipated lower overall sales in 2016.

The Company maintained cash on hand at the end of 2016 of $18.6 million, compared to $36.8 million on hand at the end of 2015. It is important to note that we deployed $50 million of cash during the year to help fund the Dejana acquisition. Additionally we just recently re-priced our term debt, lowered our interest rate 75 basis points, saving over $2 million in annual cash interest expense. Total liquidity at the end of the year was approximately $108.3 million, which includes $89.7 million in borrowing capacity on the revolver, plus $18.6 million in cash. Overall we are pleased with our 2016 results. We are well-positioned for continued success in 2017, and stand today as a stronger Company with a more diverse set of products and services. With that, I'll turn the call back over to Jim.

Thanks Bob. As we look into 2017, we feel positive about our business and our long-term prospects for the future. For our commercial snow and ice control brands, we continue to see positive non-snowfall indicators, such as positive light truck sales, low inventories, and positive dealer sentiment, all bode well. However, while winter isn't over yet, so far we have seen below average snowfall across North America again. The season started very late for the second year in a row, and we have experienced inconsistent and variable snowfall across our core markets.

When viewed in aggregate across the past six months, we do expect to see below average snowfall winter again, which will impact our preseason period. In contrast, backlog data and ongoing discussions with customers provide us good visibility with our Henderson brand that 2017 will see continued growth. However, unrelated to our operations, we are experiencing a delay in receiving truck chassis from two OEMs, which of course is delaying our team from completing and delivering some trucks to customers. While we are seeing signs that this situation is rectifying itself, during the calendar year we are likely to see more variability from quarter to quarter for our Henderson Products this year.

Typically Henderson produces fairly consistent results across the four quarters, but for 2017 we expect revenue to skew towards the back half of the year. In addition, while we generally expect the Work Truck Solutions segment to grow at a mid to high single digit rate over the long-term, we have seen some temporary softness in the first two months of the year related to dealer sales of Class 4 to 6 trucks, and created our outlook with that in mind.

Looking at 2017 as a whole, we do expect the breakdown of our results between quarters to be different to previous years, due to the changes in the overall structure of our business and the near term factors noted above. In summary, we expect both revenue and profitability to be negatively impacted primarily in the first quarter, and to a lesser extent in the second quarter by the items noted above. We expect the back half of the year to be much stronger in terms of both revenue and profitability.

Turning to the actual numbers, which are outlined in the release, based on our recent results, the overall economic climate plus the items already mentioned, we expect net sales for the full year 2017 to come in between $470 million and $530 million. This should produce adjusted EBITDA in the range of $80 million to $115 million, which would translate into an EPS of between $1.20 and $1.80.

In conclusion, we expect 2017 to be an important year of execution. The additions that we made the last year will continue to be key focus as we integrate the Work Truck Solutions team and address the market opportunity. While we have made a great start, we still have a lot of work to do. Our Work Truck attachments business remains well-positioned for continued success. We do not take our market leadership for granted. We will continue to implement customer-focused improvements to ensure continued success for the years to come. We are now ready to take your questions. Operator.

Thank you. (Operator Instructions). Our first question is from the line of Josh Chan of Baird. Your line is open.

Hi. Good morning Jim and Bob. Thanks for taking my questions.

Sure, Josh.

Yes, so for the quarter I was wondering if in the Attachments business you could give some color, in terms of how accessories did relative to equipment in terms of the Attachment segments?

So let me make sure I understand your question. How did parts and accessories do relative to the attachments segment?

Correct, yes, parts and accessories versus equipment within that segment?

What's interesting is in low snowfall periods, service parts as well as equipment tend to work in unison. I would say that service parts and accessories was probably a little bit softer than we anticipated, and that's entirely because the products overall in Q4 were not used quite as much as they normally would be. So they were a little bit softer.

Okay. Were they softer than the segment average, I suppose?

I don't know that I can answer that. It isn't obvious. I haven't seen those numbers. I guess the way I would say it is it wasn't surprising and it wouldn't be unusual compared to what the weather situation was.

Okay. Great. And then on the Henderson delay, what was the driver behind kind of the delayed shipment? It sounds like it's not related to what you're doing. And what are you seeing kind of in the beginning of the year here?

Sure. What we're seeing is there are two OEMs in particular, I won't name them, but they're having some production issues. One has got some design issues, and the other one is just having capacity issues. And what that's creating is sort of a log jam in the industry for those vehicles. And as a result we're beginning to see that log jam break a little bit, but it is hampering our ability to complete our trucks, and then get them shipped. But it's again, nothing that we've done. We are in close contact with them. But this is something that is an issue for other people who do similar things in the Work Truck industry.

Right. Got you. Okay. And then my last question is on the Attachments segment, it looks like you were able to improve margins for the year, despite having lower revenue. So what was the driver behind the margin improvement there, and how are you thinking about margin looking at the next year, as revenue probably comes down a bit too?

Yes, a couple of things there. I think one of the things that is one of the hallmarks of our core business, is that when snowfall is below average and we're not spending as much time making product to ship, that we double down on DDMS-type improvements. And 2016 was a significant cost reduction year for our core business. We also did enjoy for the first half of the year some nicely below average steel costs. Those have ticked up in the last six months or so, but there was a positive impact there for a while. But I would go back to just what that team does when they're in a low snowfall environment, is we just double down on reducing costs and improving quality, and positioning ourselves so that when the snowfall comes back, we can produce and ship high-quality product at even higher margins than we had the year before. And I would expect that team in 2017, in a similar snowfall cycle, to take a similar approach.

Okay. Great. Good job on the year. Best of luck on the start of next year.

Thank you, Josh.

Thank you. Our next question is from the line of James Giannakouros of Oppenheimer.

Hi, Jim, Bob.

Good morning.

Good morning.

So staying on core, we did some checks, and we got mixed messages. Obviously the mild winter was apparent. Second one in a row. Trying to get a feel for what the preseason is going to look like for you guys? Certainly 1Q, my sense is, and please tell me your thoughts, is that inventories are lean, so I think distributors manage industry down to the extent that they could, and that might actually help the preseason picture, as opposed to what we would have thought maybe a down 15% to 20% type of preseason on core. Is that an offset we should be thinking about? And then also marrying your comments, our checks with your closest competitor, that kind of intimated or suggested that things aren't that bad from what this past winter afforded them?

Yes, I think from our perspective, you are right, there are some puts and takes. Inventory levels are low. But again, equipment didn't get used a lot in the past winter. So as you think about our business as a replacement cycle business, we're comfortable that there will be very good, very decent replacement, but it won't necessarily be driven until we get in later in the year, until we see what kind of sell-through comes through. I think in general, December was a good month for everybody in the industry, because it was a nice month. I would say December was probably the only month people are talking about success this winter. They had pretty good success in December, as we did. But once you combine that with October, November, January, February, it's a significantly below average snowfall year. But December was a very good month for everybody.

Got it. Okay. So if I can ask another way or more pointedly, embedded in your guidance, how should we be thinking about what's in your plan, or thoughts on the core specifically in 2017?

Yes, it's going to be, certainly from our perspective it's a second soft snowfall year in a row, and I think what we're going to see is we're hopeful inventories are low. But again we manage for average snowfall, and then we adjust accordingly. So we're going to really have to wait and see what takes place. I think that the only way I can really give you any guidance is, it won't be the worst year we've ever had and it won't be the best year we've ever had. It will be somewhere in between.

Okay. And since you have two segments now, I mean, can you give us some ranges at least as to the per-season contribution in 2017 to your EBITDA ranges you have put out there on a consolidated basis?

I don't believe we are going to provide guidance for each of the segments, Jim.

Okay. All right. Thanks, guys.

Thank you.

Thank you. Our next question is from the line of Steve Dyer of Craig-Hallum. Your line is open.

Thanks. Good morning guys. Thanks for taking my question. Within Dejana you had sort of mentioned starting to feel a little bit of softness. Is that something I guess you could elaborate on? Is that certain customers or certain segments? Or how should we think about that?

They have got multiple end-user segments. And what we've seen late fourth quarter into the first quarter is their dealer-direct business, where they outfit vehicles for truck dealers in the East Coast. That has softened up. Retail inventory levels are higher there than the dealers would like them to be. And they are slowly working through that. So that comment was specific to the truck dealer business that they do. The other segments of their end-user customer base, whether it's fleets or it's leasing companies, or it's van upfits, orders are fairly robust there. There is a lot of activity. When you get the new budgets approved for the calendar year, there's a lot of quoting that takes place in Q1 for the fleets and for the leasing companies, and we have a lot of good momentum there. So the one segment of their business has been soft for 90 days or so. We need to work through that. But having said all of that, we are still as thrilled with the near term and long-term growth prospects of this acquisition, and we look forward to speaking with you about some pretty exciting things as the year unfolds.

Great. And I noticed you did sort of higher EBITDA margins the last couple of quarters with Dejana than sort of the mid-point of this next year's range. I'm just wondering if that's conservativism, or if there's something maybe not progressing there on an operational standpoint as well as maybe you had hoped?

Yes, I wouldn't frame it that way. I would say, going back to the dealer upfit softness, that happens to be a higher margin profile in that segment of their business. So it's just really a mix issue from that point of view. DDMS implementation there is progressing nicely. We highlighted last quarter a couple of things that are really cool going on there. So it's really just this dealer business softness that is impacting margins a little bit in 2017.

Okay. Great. And then I guess lastly, can you just remind us around the seasonality of Dejana, given that it's been about a quarter and a half now. How should we think about that flow throughout the year?

Yes, I would say it's closer to 25/25/25/25. But the first quarter is probably the low 20s. The fourth quarter is between 25 and 30, and then Q2 and Q3 settle right in between those two. It is much more predictable and much more stable. But stronger in the fourth quarter than it is in the first quarter.

Okay. Got it. Thank you.

Thank you.

Thanks, Steve.

Thank you. Our next question is from Mike Shlisky of Seaport Global. Your line is open.

Good morning, guys. Can you hear me okay?

Morning, Mike.

All right, great. I just want to follow up on that last question, actually, first of all. Can you just give us a sense as to overall for the whole Company, what's the kind of go-forward conversation for earnings? Can you just kind of confirm that this year will not be the same as what you expect in other years for your earnings calendar?

Mike, I'm sorry, but I had a difficult time hearing the question. Could you please repeat that again?

Sure. Could you tell us what is the overall Company more normalized calendar for earnings going forward, not just for Dejana but the overall Company? Sort of maybe first half/second half or kind of by the quarters? If you just confirm that this year will not be in line with that sort of long-term that you have given us, what is going on in Dejana this quarter?

Yes, well, we haven't and we'll likely not give quarterly guidance, in terms of how the total Company financials break down by quarter. I think if you take what we just spoke about in the Work Truck Solutions segment, if you add Jim Janik's comments about Henderson having some truck availability issues, that is going to push some of their business out of the first quarter and into the back half of the year. You're going to see a little bit stronger back half of the year from Douglas than you normally would, and likely a little softer first half of the year. And I think that's an appropriate signal for us to send at this point. But I think when you look at our full year guidance, even given the below average snowfall two years in a row, we've still got some pretty exciting things that are on the horizon in 2017.

Okay. That's fine. I also want to ask about the chassis availability issue that you had mentioned earlier as well. Just a little more color there. The one OEM that's having some design problems, is it that their design does not work with your attachments? Or it's the overall truck itself, and not your attachments that are apparently the issue there?

Yes, the issues have nothing to do with compatibility with our product. It's just in the truck design itself, and the performance of the truck portion of the vehicle, not in how it relates to us. This has frankly nothing to do with Douglas. This just has to do with Class 7 and Class 8 truck availability.

Okay. I'm sorry, is it a model changeover problem or a product quality problem that they're having, do you think?

Well, again, I don't want to get into too much detail. But one of them a few years ago cut back capacity so far because of the downturn, that now as trucks are becoming much more popular again, they are having a difficult time meeting the growing demand, which they're working on. And the other one actually, the other manufacturer actually has some performance issues in their current vehicle, and they have slowed production down until they have fixed those problems.

Okay, that's fair. Can you also just give us a little more color on your M&A outlook for the year? Obviously you're going to keep pursuing targets as you always do, but give us a sense as to whether, give a sense of whether you will be doing it outside of the weather attachment area, or will you be doing it inside of attachments, and are there any areas that you don't serve yet in the weather world that we should be thinking about?

Can you repeat your question one more time? It seemed like there were a couple of questions in there. I just want to make sure what the question was?

Sorry, I'm in a very loud convention right now. Just kind of curious if you can just tell us about your M&A outlook? Are there any areas of weather-related attachments that you don't currently serve right now, or are you looking for areas outside of the weather world for your next target, for M&A?

Yes, we have talked about this before. We don't have any specific timetable for acquisitions. We tend to be more opportunistic. And again from our perspective, the strategic opportunities could and can exist in non-weather-related businesses. But there may be some opportunity that comes up in the weather-related business that just fits us perfectly. So at this particular point, what I will say for 2017 is we continue to look for really good opportunities, but right now I think we're incredibly focused on integrating two of the more recent opportunities. So yes, we're looking but we're also absolutely focused on integration.

Okay. Thanks very much, guys. I'll leave it there.

All right. Thank you.

Thank you. (Operator Instructions). I am not showing any further questions at this time. I would like to turn the call back over to Mr. Jim Janik for any further remarks.

For all of you on the phone, thank you for your interest in Douglas Dynamics. We look forward to speaking with you about our first quarter 2017 results in May. Thank you very much.

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