Douglas Dynamics Inc (PLOW) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics' First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you. Welcome, everyone, and thank you for joining us on the call today.

Two quick items before we begin. First, please note that some of the information that you will hear during this call will consist of forward-looking statements within the meaning of Section 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 Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the year ended December 31, 2016, 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, 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.

Our first quarter results were in line with our expectations. The increase in revenue and gross profit compared to the same period last year was driven by the addition of the Work Truck Solutions segment, which was partially offset by the lower sales in the Work Truck Attachments segment, as we expected.

As you saw in our release, we reported first quarter 2017 net sales of $72.2 million and a net loss of $0.14 per diluted share, which was in line with our expectations based on the circumstances. As a reminder, our first quarter 2016 results included a $10 million benefit or $0.27 per diluted share from the successful conclusion of patent infringement lawsuit against Buyers Products' company, which skews the comparison.

As we said last quarter, the teams at WESTERN, FISHER and SnowEx had done an admirable job working through the tough weather conditions. We continue to see cautious optimism from our dealers regarding their 2017 prospects, despite below-average snowfall in the snow season that just ended.

Overall, snowfall was inconsistent, both in location and timing. For example, October and 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 (inaudible). January and February saw very low snowfall across our core markets, and despite the late-season storms in March, we still experienced a below-average snowfall winter across North America for the second year in a row. This undoubtedly will have an impact on the preseason order period for our commercial snow and ice control products.

So far, our preseason order period is off to a promising start, but it is still too early to predict exactly how the preseason will turn out. However, our most recent look at dealer field inventory levels, taken at the end of January, indicated inventories were only marginally higher than the same time in 2016, which is in line with our expectation and bodes well for the coming year.

In addition, the latest data shows continued growth, with select North American pickup truck sales increasing 6% through March 2017 when compared to January through March of last year.

We are now into our preseason period and have seen a positive response to our new launches. These products include our new compact line of snowplows, which take professional plow performance to the personal plow segment. This year, we also continued to address one of our end user's biggest requests, better tools for clearing sidewalks and pathways. These new products include a new 6-foot straight blade UTV plow, a combination of walk-behind plow, rotary broom and liquid walk-behind sprayer. Sidewalks are traditionally a huge resource and time drain for end users. This is an important area of incremental growth for us in locations that light trucks just can't access, such as universities, hospitals and corporate campuses.

Overall, it is clear our focus on innovation and expanding into different areas of the snow and ice management market continue to reinforce our position as the market leader in this space.

For our Henderson brand, we are still dealing with the chassis delay issue we mentioned on our last call. But the OEMs concerned are working to address the issue and things are starting to move in the right direction. Based on the healthy backlog of business for the year, general levels of activity and quoting in the Municipal sector, we feel comfortable with the long-term growth prospects for Henderson.

The Work Truck Solutions segment performed generally in line with our expectations in the first quarter and the softness we experienced earlier this year has started to improve and the order book is growing well. In addition, Work Truck Solutions is continuing to expand its offering geographically. We just completed a small acquisition of Arrowhead Truck Equipment based in the Albany, New York, area, and we also opened a new upfit facility in Chalfont, Pennsylvania. Acquiring Arrowhead, while not material from a financial perspective, is a great addition and helps broaden the reach of the Work Truck Solutions segment in New York State.

In contrast, the Pennsylvania facility is a greenfield expansion by Dejana, which has been planned since last year before the Dejana acquisition and opened for business recently. Both of these new ventures will help us better serve our current large OEM partners, that need upfit support in these geographic areas and are good examples of how we expect that segment to grow in the coming years.

In summary, while weather trends across North America this past winter impacted our commercial snow and ice products, non-snowfall indicators remained positive, including ongoing strength in light truck sales and a positive dealer sentiment. And while we have seen some near-term headwinds in the Work Truck Solutions and Henderson businesses, we are confident those issues are temporary, and the medium- to long-term prospects for those businesses are bright.

Now, as has become customary on these calls, I'd like to share an example of how important DDMS is to our company.

Our Henderson Installation Distribution Center in Iowa, where we upfit Class 7 and Class 8 trucks, was able to redefine how trucks are processed through the facility using the DDMS principles of waste reduction, flow and problem solving during a recent series of Kaizen events. The program reduced the number of trucks actually in the facility by 50% and increased the velocity of the trucks going through the facility by 50%.

The net result is more trucks through the facility in fewer days. In fact, it used to take 10 days for a truck to be processed, which is now down to 5, which reduces the lead time on truck installations. Team was also able to identify and eliminate an average of 30 hours of non-value-added time on each truck. Utilizing our mantra of creativity before capital, the team implemented these changes with virtually no additional financial investment, a fantastic win for everyone involved.

Now I would like to touch on the uses of our cash. We paid our quarterly cash dividend at the end of March of $0.24 per share of our common stock. We've increased our dividend 9 times in the 7 years since our IPO, which is a testament to our financial strength and commitment to returning excess cash to our shareholders. 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 we'll pursue logical deals while maintaining our very disciplined approach.

Finally, it's worth reiterating that when we experience significantly below-average snowfall, we implement our low snowfall playbook. As we did last year, we're pulling the levers on cost controls to ensure we successfully manage through low snowfall while making the improvements necessary to be in a stronger position when it does snow. We are focusing on improvements that will directly increase service levels and quality for our customers, which has served us well in the past. While the unusual factors impacting Henderson and Work Truck Solutions will continue to impact us in the second quarter, the medium-to-long-term drivers of our business remain strong and we are well positioned to execute our strategy.

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

Thanks, Jim.

I will begin with our consolidated earnings, followed by a look at how our 2 segments performed and end with some liquidity and balance sheet numbers.

Overall, the results were in line with our expectations for the first quarter 2017. Net sales were $72.2 million, representing a 48% increase over the same period last year. The increase reflects the addition of our Work Truck Solutions segment, which was finalized on July 15, 2016.

As we mentioned previously, the Work Truck Attachments segment shipments to the former Dejana operations are now treated as an intercompany inventory transfer, and revenue was deferred in the third quarter. Some of that revenue was recognized in the fourth quarter of last year, as end users were shipped products from our Work Truck Solutions segment. In the first quarter of 2017 we saw a continuation of this, and more of that deferred revenue was recognized.

For the first quarter of 2017, cost of sales was $55.1 million or 76% of sales compared to $34.7 million or 71% of sales in the first quarter of 2016. This year-over-year increase was driven by the addition of Work Truck Solutions.

Gross profit was $17.2 million or 24% of sales for the first quarter compared to $14.1 million or 29% of sales in the first quarter of 2016. The decrease in margin as a percentage of sales is due to the lower volumes in the Work Truck Attachment segment, plus the addition of Work Truck Solutions, which operates at lower margins.

SG&A expenses were $15.1 million for the first quarter of 2017 compared to $10.9 million for the first quarter of 2016. Again, this increase was due to the addition of Work Truck Solutions.

We produced adjusted EBITDA of $5.2 million for the first quarter of 2017 compared to adjusted EBITDA of $6.3 million for the first quarter of 2016. The decrease was driven by the same factors I've already outlined.

Turning to net income. For the first quarter of 2017, there was a net loss of $3.3 million or $0.14 per diluted share compared to net income of $5.3 million or $0.23 per diluted share in the same period of 2016. It is worth noting that last year's first quarter net income was inflated by a $10 million gain related to the successful conclusion of the Buyers lawsuit.

In addition, it is worth noting that the increase in interest expense for the quarter includes approximately $900,000 of fees associated with the refinancing of our company's term debt, which we completed in February. The refinancing lowered the company's overall interest rate and is expected to achieve approximately $2 million in annual cash interest savings.

Moving on, while we expect a full year effective tax rate of approximately 37%, the rate for the first quarter of 2017 was 45.1%. The higher rate relates to the company's adoption of certain accounting standards which effectively increased the tax rate for the first quarter by approximately 10%. The expected tax benefit will decrease the effective tax rate in future quarters.

Now let's turn to earnings information for the 2 segments. For the first quarter of 2017, the Work Truck Attachments segment recorded revenue of $43.6 million and income from operations of $2 million. In the same period last year, the segment's revenue and income from operations were $48.6 million and $6 million respectively. While these figures are in line with internal expectations, the results were lower when compared to the same period last year due to the continued impact of historically below average snowfall this past winter, especially in the first 2 months of 2017. While the round of storms in March helped move us back towards average snowfall, the impact in Q1 results was minimal.

Next, the Work Truck Solutions segment recorded revenue of $29.7 million and income from operations of $0.8 million. These results were in line with our internal expectations based on the temporary softening of demand we saw earlier this year, which has started to move back towards more normal conditions.

Finally, let's take a brief look at some of the liquidity and balance sheet figures from the quarter. Net cash provided by operating activities for the first quarter of 2017 was $4.3 million compared to net cash provided by operating activities of $18.6 million. The decrease is primarily due to the gain from litigation proceeds last year and, to a lesser extent, an increase in inventory this year. Accounts receivable at the end of the first quarter of 2017 were $41.9 million compared to $29 million for the first quarter of 2016. This increase stems from the addition of Work Truck Solutions, but levels remain within our internal expected ranges.

Inventory was $98.4 million at the end of first quarter of 2017 compared to $73.7 million of inventory at the end of the first quarter of 2016. The increase is primarily due to the addition of Work Truck Solutions and, to a lesser extent, higher inventory carried over from the previous quarter. That said, inventory levels are within our internal expectations.

Total liquidity at the end of the quarter was approximately $65.6 million, which includes $57.6 million in the borrowing capacity on the revolver plus $8 million in cash. While our cash on hand is lower than the $48.4 million we had at the same time last year, it is important to remember that we were building our cash reserves at that time in anticipation of the Dejana acquisition, where we deployed $50 million to fund the deal.

Overall, we are pleased with our start to 2017. We knew that a continued low snowfall environment would impact the financial results, but by executing our low snowfall playbook and continuing to build on our diverse offering, we have exited the previous winter season in an excellent position, poised to drive long-term growth.

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

Thanks, Bob.

So far 2017 is unfolding as we expected, and we feel positive about 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 dealer sentiment, despite the below-average snowfall across North America. While we had a strong end to the season and saw more snowfall than the previous year, we were below average for the second year in a row, which will impact our preseason period.

At Henderson, we mentioned last quarter a delay in receiving truck chassis from 2 OEMs. While we are still experiencing substantial delays, I'm happy to say that things are starting to move in the right direction. It will take some time to get back on track, and we are likely to see more variability from quarter-to-quarter throughout the year. We will still expect revenue to skew back toward the back half of the year, and still expect to see continued growth for our Henderson brand in 2017.

Finally, the temporary softness in the first 2 months of the year related to dealer sales of Class 4 through 6 trucks that impacted the Work Truck Solutions segment was temporary, as we expected, and I'm pleased to say we saw demand stabilize and improve in March and April.

Looking at 2017 as a whole, we do expect the breakdown of our results between quarters to be different to previous years due to changes in the overall structure of our business and the near-term factors noted above. The first quarter was in line with our expectations, and we expect to produce sequentially improved results in the second quarter. We still expect the back half of the year to be stronger in terms of both revenue and profitability. Therefore, we are reiterating our 2017 outlook and expect net sales for the full year 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 EPS of between $1.20 and $1.80.

We are managing the business effectively and see many positive opportunities on the horizon. However, we are currently tightening our belts, where appropriate, until some of the headwinds dissipate. We will continue to lever DDMS to drive service and quality across all aspects of the business, which will, in turn, drive increased value for shareholders.

We will now open the call for your questions. Operator?

(Operator Instructions) Our first question comes from the line of Josh Chan of Baird.

My first question is on Dejana. You mentioned that demand has improved in March and April. Would you say that it's back to normal or your expected levels? Or how would you characterize that?

In terms of order patterns?

Correct, for Dejana.

Yes. As we spoke about in our year-end call, there was some dealer softness, which is a pretty substantial piece of their business. It started in fourth quarter of last year, carried into -- went through most of the first quarter this year. That has begun to abate. Dejana, seeing this and sensing this, made some strong pushes in other areas of their business, mainly in fleet sales. And I can tell you, at the end of the first quarter we've got a very strong backlog, and Jim talked about the acquisition along with the Pennsylvania facility starting up. The prospects are very positive moving forward.

Okay, great. And then you mentioned some new products on the snow and ice piece of the business. Do those come in over the course of a number of years? Or can those be noticeable this year? Or how should we think about the impact of new products?

Sure. The products will all be available this year. In fact, I think most of them are available on the preseason order forms. And at this particular point, the sidewalk business is relatively new for us, so we're expecting over time for that to be somewhat incremental based on the relative size of the market and the total value of the products being sold are relatively small. But it -- strategically, it's very important. The plow that we talked about, that has actually been developed for the homeowner use is, I think, going to have a fairly nice impact in year 1. I think initially, even though we're now only about 1/3 of the way through preseason, we're seeing very, very nice response for that. So we're enthused. We think we've got a number of nice new products that have come out this year.

Okay. And then my last question is on the preseason shipments. Is there any color that you can give us in terms of the split between Q2, Q3? Whether that is similar to last year or any differences there?

It's, yes, a little early, Josh, to get a bead on those splits. Certainly, the second quarter fills up before the third quarter fills up. So really -- I really can't give you any guidance there. Jim already spoke about the fact that, that it'll be a challenging preseason in total, given the snowfall environment. But right now, I don't think we're seeing anything that would be unusual in terms of how those splits compare to history.

Our next question comes from the line of Steve Dyer of Craig-Hallum.

You have kind of characterized Arrowhead as immaterial, but any color there as to what that brings to the party financially, maybe what you paid for it, anything like that? Just trying to get a sense for the size.

Yes. We're not going to disclose that data publicly. The fact that we didn't issue a Douglas press release should -- is meant to send a signal that says, it is really a smaller bolt-on acquisition.

We can expect to see some more of these things as we move forward, when our OEM partners ask us to reach in the different regions and help them grow. The -- I can tell you that the purchase price was $7.5 million. That should give you some indication of the size of the deal. And I wouldn't expect that it's -- it's not in our guidance at this point, the deal just closed, but even once we ferret through all the purchase accounting stuff and look at the back half of the year sales, it's likely to be an immaterial impact on our overall results.

Okay. And then as it relates to acquisitions, do you have a preference sort of for these more strategic kind of bolt-ons of regional guys or other tangential aftermarket truck targets or both? Or how do think about that?

Yes. I don't think that our acquisition strategy changes at all. These 2 specific examples, Jim mentioned, are part of us monitoring and partnering with our OEMs. And when those opportunities arise, we will certainly be there to take advantage of that.

Past that, we continue to look at M&A like we always have. And when good strategic acquisitions come up, that meet our financial guidelines and our strategy, we will actively pursue them. But again, I think, you can expect, as the years progress, these kinds of small bolt-on acquisitions tied to OEM partnerships were certainly part of what we saw with the Dejana acquisition as an opportunity, and I would expect more of those things to come our way as the years unfold.

Okay. And then, finally, with respect to acquisitions, can you sort of remind us about a -- maybe a target or comfortable leverage level as you look at more of those deals?

Sure. Sure. I think what we've said historically for a number of years is that, if we can stay under a 4 lever in an average snowfall environment, we are clearly comfortable with that. And we have been under a 4 lever. For quite some time, we've been between 2 and 3. And now, when we hit a below-average snowfall environment, could that leverage tick up over 4 occasionally? That's possible, but we know it's temporary. So the way to think about that, Steve, is 4 lever is our guidepost in an average snowfall environment for our core business.

Our next question comes from the line of Mike Shlisky of Seaport Global.

This is Jordan, on for Mike this morning. If we have an average snowfall year for the rest of the year, do you think that we can still reach the middle of the guidance range? And is there enough you can do from the DDMS standpoint to make it up?

Yes. It's a terrific question, and I think it's pretty early to suggest where we end up. I think, when we set our guidance, we give a range because it's -- at this particular point, we're comfortable within that range. But picking something like the middle or a little above or a little below is a little bit difficult for us. So I think, at this particular point, we're just comfortable within the range.

It's always our hope that we will have average snowfall. Again, from our perspective, last year was below average. And while we got a nice pop in March -- towards the end of March, that does 2 things: one is, statistically it gets us closer to average, but it doesn't have, really, the same impact on product use that maybe the same type of snowfall in January or February would have where, frankly, there's multiple times that equipment has to be used during an individual storm.

Towards the end of the year, unfortunately the snow melts very quickly. So at best, the equipment gets used once or maybe twice. So -- and then on -- in the first quarter as well, you don't get the retail benefit from that, just because people are waiting until the following year. They're -- at this particular point, they're buying parts and service just to keep it running.

Hope is that we certainly get average snowfall. It'd be nice to get above average. And something early -- early December or late November in populated areas would be terrific as well. As far as DDMS, we're frankly implementing DDS (sic) [DDMS] on an ongoing basis. And DDMS isn't really used in a way to -- for short-term activities. It's really more of a long-term activity that's more structural in nature. So the things that we have done last year and this year early on will continue to benefit us. But to say that they will benefit us to a way to offset a below-average snowfall and in its specific way would be difficult. I think we've historically shown that we know the right levers to pull, and we continue to pull them.

Okay. And my next question is, in the attachments, the SG&A was basically flat year-over-year, despite 10% decline in sales. Could you give us a little more color about what we should expect from this segment for the rest of the year?

I'm not going to give a specific dollar guidance from an SG&A perspective. I think when you look at the pro forma Dejana financials that are out there publicly, you can see what gets added to the SG&A from there. This is certainly the second year in a row where the core business has had to implement its low snowfall playbook. So those reduced expenses are already reflected in 2016's SG&A, and I would expect you can see a similar thing there from us in 2017.

So I guess, if I'm giving you any directional guidance there, it would be that we wouldn't expect it to be substantially different in 2017 than it was in 2016, with the exception of acquisition, the onetime items that end up having to flow-through those lines on the income statement.

(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the call back to you gentlemen for closing remarks.

Thank you, operator, and thank you all 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 call. You may now disconnect. Everyone, have a wonderful day.