Douglas Dynamics Inc (PLOW) 2017 Q3 法說會逐字稿

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

I would now like to turn the call over to your host, Mr. Jim Janik, Chairman, President, and CEO. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us on the call today. Before we begin, I want to take a moment to highlight the recent changes to our management team. As our company continues to expand in size and scope, we expanded our leadership team accordingly during the third quarter.

First, I'd like to welcome Sarah Lauber to her first earnings call as our Chief Financial Officer. Sarah joined Douglas near the end of August and has been a wonderful addition to our team. Sarah brings more than 20 years of finance experience, most recently as a public company CFO, and prior to that, extensive experience in financial planning, management, and strategy. In her first 10 weeks at the company, Sarah has hit the ground running, visiting major facilities and immersing herself in our operations and learning what makes Douglas unique.

In addition, after successfully leading our finance team for 13 years, Bob McCormick was promoted to Chief Operating Officer. In his new role, Bob has assumed day-to-day responsibility for both our reporting segments. He has been instrumental in orchestrating our growth and acquisition strategies in recent years and has been effectively operating as a part-time COO for some time. I look forward to continuing our partnership as we execute our strategy in the years ahead. Bob is here on the call today and available to answer questions.

With that said, I'll hand over to Sarah to start the call.

Thanks, Jim, for that introduction. I'm very pleased to be at Douglas. My first few months have been excellent as I've met employees, visited larger facilities and, as Jim said, seen firsthand what makes Douglas unique. I look forward to tackling the challenges ahead and helping the company meet its significant potential.

A few quick reminders before we begin. First, please note that some of the information 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, 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.

Finally, please remember the company completed the acquisition of Dejana Truck & Utility Equipment on July 15, 2016, creating the Work Truck Solutions segment. As such, all references to results for the third quarter of 2016 for the Work Truck Solutions segment refer to the period from July 16, 2016 to September 30, 2016.

Now I'll turn the call back to Jim to provide an overview of our performance for the quarter before I review our financial results. Jim?

Thank you, Sarah. Our results for this quarter were positive from an operational perspective and the strong backlog and demand trends we are seeing across both segments. Plus the relative strength of preseason orders for our commercial snow and ice control products bode well for the future of our business.

Before going further, let me address the 2 external issues that impacted our performance this quarter related to truck chassis availability. First, we have the ongoing issue impacting our municipal business in the attachment segment; and second, a more recent issue in our solution segment, which began in September. At Henderson, the availability of chassis from 2 important suppliers is slowly getting better but we -- but it continues to linger. We have seen sequential improvements and are receiving more chassis now but we do expect this issue to continue to impact our workflow in the fourth quarter.

Our solution segment -- in our solution segments, some OEM work truck allocations are being diverted away from our truck pool operations to other areas of the country. With the multiple major natural disasters that have occurred in recent months, our OEM partners are working to assist the regions that have been unfortunately affected, which is completely understandable under the circumstances. We are working closely with our OEM partners to understand and mitigate the challenges and the supply issue is impacting the entire industry. And with order patterns and backlog at record levels, we remain focused on executing our expansion plans and expect to meet our customers' demand throughout 2018.

With that said, let me give an overview of our performance. We produced slightly better-than-expected pre-season performance for our commercial snow and ice products, which is encouraging following 2 years of below average snowfall. The ongoing stability in the economy and positive dealer sentiment all helped to produce a relatively good quarter. In addition, the latest data shows continued growth with select North American pickup truck sales increasing middle single digits in the first 3 quarters of 2017 when compared to the same period last year.

Our most recent look at dealer field inventory levels indicated they were slightly lower than when taken at the end of September last year. Entering the snow season with inventory at these levels means we're in a good position to capitalize on additional demand from reorder activity as dealers draw down their inventory when the snow begins to fly. This is also positive given that we have introduced more new products in recent years and so our dealers are carrying a larger range of our products overall. Similar to 2016 and as we expected preseason shipments in 2017, we're more heavily weighted towards the second quarter with an approximate 55% to 45% split, which is in line with historical averages.

Switching to our municipal products. As we expected, we continue to see softer performance at Henderson due to the truck chassis availability issues that we have already discussed. The positive news is that demand trends remain strong and order activity and backlog are very healthy. In addition, we have received favorable customer feedback due to our improved lead times, which will be a significant competitive advantage when we have reliable chassis supply.

Turning to our Work Truck Solutions segment. As I've repeatedly noted, the Work Truck Solutions team is quickly becoming a very important part of the Douglas Dynamics family. The important strategic investments we are making in our facilities, organization, people and DDMS principles will enable us to take advantage of the many growth opportunities we see for the solutions group in the years ahead.

During July and August, the Work Truck Solutions performed in line with our expectations with robust order activity and record backlog, indicating the positive direction of the business. However, while we experience strong demand, the supply of trucks from our OEM partners changed significantly in September, as I've already mentioned. I am pleased to report that the development of our 4 new upfit facilities we announced earlier this year is largely complete. As a reminder, we opened a new greenfield upfit facility in Pennsylvania in the second quarter and are already receiving pool trucks there.

In addition, the relatively small acquisition of Arrowhead Equipment, which added 2 facilities in Albany, New York area, is working out well with its stable, ongoing business, and we will start to receive pool trucks at those facilities in the first quarter of 2018.

Finally, the development of the Kansas City facility is virtually complete, and we expect to begin accepting pool vehicles at that location late in the fourth quarter. As a reminder, the Kansas City facility will be focused on assisting an important OEM partner with the upfit of medium and large size vans, which are produced nearby. While we do not expect to receive much revenue from the new pool opportunities during the fourth quarter of 2017, they will be a positive addition to our business in 2018 and beyond. While we have no intention of maintaining our recent pace of expansion, we will continue to take advantage of logical opportunities as demand dictates.

As we've mentioned in the past, the Douglas Dynamics Management System is an important differentiating factor for our business. As such, we have expanded our implementation of DDMS throughout our value chain in North America over the past few years, working with our suppliers, dealers and end users to improve their operations. And doing so has created value for everyone involved, increasing the efficiency and durability of the value chain from top to bottom and strengthening important relationships along the way. Our success with value chain partners in the U.S. meant we decided to look outside the country for other opportunities.

Today I'd like to focus on a project we recently began in China, with an important supplier based in Wuxi, a city in the Jiangsu province of China. This partner supplies hydraulic components for some of our snow and ice control products and has recently started on its own continuous improvement journey. They welcome support from Douglas to build a more structured process.

We recently held a 7 Ways Kaizen event, the second in the series, as part of an ongoing effort by our global sourcing and supply team to deploy DDMS to our suppliers. This has been happening domestically for some time but is relatively new for our Douglas sourcing office in China. The event had good representation from quality, logistics, sourcing, production, engineering, and management from both Douglas and our supply partner.

Our benchmarking efforts indicate it is somewhat unique for an organization of our size to implement continuous improvement projects with supply chain partners in China in this way. Our efforts put us at the head of the pack with regards to global source -- global supply chain collaboration, which is a credit to our DDMS team and our global sourcing office in Beijing. The initial results of the project were very promising, as the team realized reductions in waiting times, overproduction and work in process. This produced significant improvements in lead times and cost savings on certain products and parts, which will benefit both the supply partner and Douglas. Of course, more opportunities will prevent -- present themselves as we continue to collaborate. And there are tangible -- intangible benefits of strengthening both the actual supply chain and our relationship with our important supply partner. Importantly, DDMS is being integrated into the supplier management process and culture within our sourcing office in China. The team, once trained fully, will have recurring responsibility and capability for conducting events with partners in keeping the momentum going in 2018 and beyond.

Turning to capital allocation. It bears repeating that our dividend remains our top priority. We paid our quarterly cash dividend of $0.24 per share of our common stock on September 29. While we review our priorities with the board each quarter and consider all options carefully, today our cash usage priorities remain the same: first, maintaining and growing the dividend; second, paying down debt; and third, pursuing strategic acquisitions at disciplined valuations. We're continually tracking companies that would be a good strategic fit with our offering. While we continue to pursue logical deals in a disciplined manner, at the moment we do not see any large or material deals on the horizon.

Overall, while we experienced unfavorable weather trends across North America for the past 2 snow seasons, our commercial snow and ice products produced a relatively strong preseason. Non-snowfall indicators remain positive, including the overall economy, strength in light truck sales and positive dealer sentiment. The near-term headwinds facing Work Truck Solutions in Henderson are temporary, and the medium to long-term prospects for our company remains very positive.

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

Thanks, Jim. I'll begin with our consolidated earnings, followed by a review of how each segment performed and then go over our balance sheet.

For the third quarter of 2017, the company recorded net sales of $125.3 million, representing a slight increase over net sales in the prior year of $123.6 million. The year-over-year increase is due to having a full quarter of results for the Work Truck Solutions segment this year versus last year's shorter quarter following the completion of the acquisition on July 15. Third quarter gross profit of $36.1 million or 28.8% of net sales compares to $36.6 million or 29.7% of net sales during the same period last year. The decrease in gross profit is primarily the result of lower overall volumes in the Work Truck Attachment segment and lower margin channel mix in the Work Truck Solutions segment.

SG&A expenses were $13.1 million for the third quarter of 2017 compared to $15.8 million in the prior year. The decrease was due to successful implementation of the low snowfall playbook in the Work Truck Attachment segment, overall lower incentive compensation, and nonrecurring costs incurred last year associated with the acquisition of Dejana.

Third quarter adjusted EBITDA of $24.2 million or 19.3% of net sales is slightly down from the previous year's adjusted EBITDA of $25.1 million or 20.3% of net sales. As we have discussed, the margin decline was related to the lower volumes in Work Truck Attachments and lower margin channel mix in Work Truck Solutions. Net income in the third quarter increased $2 million to $9.3 million from $7.3 million in the prior year. Accordingly, diluted earnings per share increased to $0.40 per diluted share from $0.32 per diluted share. The 24% earnings per share increase is largely driven by lower SG&A expense on slightly lower gross profit.

Finally, in the third quarter of 2017, we saw an effective tax rate of 38.1%, which was due to changes in deferred income tax rates in the states that we file. But we still expect a full year effective tax rate of approximately 36%.

Now let's turn to earnings information for the 2 segments. Work Truck Attachments recorded revenue of $98 million and income from operations of $23.1 million in the third quarter. In the same period last year, the segment's revenue and income from operations were $100.4 million and $24.1 million, respectively. Though down from last year, these figures are generally in line with internal expectations. It's worth noting that the demand for our commercial-focused products was slightly higher than anticipated, which helped to offset the impact of the ongoing chassis delay issue that began earlier this year.

Work Truck Solutions recorded revenue of $32.2 million and income from operations of $1.8 million in the third quarter compared to $27.1 million and a $400,000 loss, respectively, in the third quarter of last year. The year-over-year increase is attributable to the timing of the acquisition last year versus a full quarter of results this year, in addition to certain acquisition-related costs.

Now I'd like to discuss liquidity and the balance sheet. Total liquidity at the end of the quarter was approximately $75.7 million, which comprised of $1.5 million in cash and cash equivalents and borrowing availability of $74.2 million under our revolving credit facility. Our cash on hand of $1.5 million is in line with the $300,000 we had at the same time last year. We are well within our comfort zone as we have plenty of liquidity available to us to manage through seasonal needs.

Year-to-date capital expenditures of $5.2 million decreased $1.9 million compared to $7.1 million for the first 9 months of 2016. The reduction is due to the onetime significant expenditure in 2016 related to the purchase of our Henderson, Illinois upfit facility.

Through the first 9 months of 2017, the company recorded net cash used by operating activities of $700,000 compared to net cash provided by operating activities of $11.2 million in the same period of 2016. The prior year cash provided included approximately $10 million received upon the successful conclusion of patent infringement litigation. The remaining decline is due to the working capital that's being employed with our new facilities.

Accounts receivable at the end of the third quarter of $117.5 million compared to $120.2 million at the same point last year. This slight decrease stems from lower year-to-date volumes in the Work Truck Attachment segment. Inventory was $77.4 million at the end of the third quarter of 2017 compared to $71.6 million at the end of the third quarter of '16. The increase is primarily due to the investment made in the 4 new facilities in our Work Truck Solutions segment, and levels remain well within our expectations.

As Jim stated, the near-term headwinds are temporary. The year-to-date financial performance, combined with the strong backlog and demand trends in both segments, capitalization on further DDMS implementation and growth within our new facilities all bode well for the future strength of the business.

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

Thanks, Sarah. To summarize, we had a strong operational execution in the third quarter. The chassis issue at Henderson is slowly improving but is not yet completely back to normal. The chassis availability at Work Truck Solutions is an evolving situation. While we expect it to be a temporary issue, we don't have enough information to completely assess the full impact to our business in the coming months, but do expect some supply restrictions to continue into the first quarter of 2018. However, given this is an industry-wide issue, we believe most of the delayed projects will eventually be completed as planned but within a different time frame.

It is pleasing that our commercial snow and ice products teams produced a better preseason than originally expected. Of course, at this stage, it is difficult to ascertain exactly how the fourth quarter will come in given the influence of snowfall, and we continue to assume the company's core markets will experience average snowfall levels. Therefore, we are now expecting our 2017 outlook and expect net sales for the full year to come in between $450 million and $500 million. This should produce adjusted EBITDA in the range of $80 million to $100 million, which would translate into EPS of between $1.20 and $1.60.

While this situation is somewhat frustrating, it is due to factors beyond our control and doesn't change the long-term prospects for Douglas Dynamics. We continue to implement DDMS and make strategic investments that position us for future growth. We have experienced various external challenges across our business so far this year. We have adapted as necessary and we see a tremendous amount of opportunity in the years ahead. Our customers know that our teams are working together and doing everything within their control to deliver for them, which will help forge stronger relationships for the future. We firmly believe that we have the right strategy in place to deliver shareholder value over the long term.

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

(Operator Instructions) Our first question comes from the line of Chris McGinnis from Sidoti & Co.

I apologize if this has been covered a little bit because I'm jumping back between a couple conference calls, but can you maybe just talk about the impact to the solutions segment from the natural-disaster related and how much, maybe? I don't know how much detail you can go into, but how much of a headwind that was in the quarter, and do you expect that to linger into Q4 as well? I guess that's the first question.

Yes, Chris, we're not going to outline the financial impact of that in the third quarter other than to say it was a material impact to our third quarter results. We do expect it to continue into the coming months. It will likely vary month to month. It's a fairly fluid situation. At this time, we simply don't have enough visibility to predict when availability will come back to normal levels. It will certainly have an influence on our fourth quarter results.

And I guess can you just maybe -- I think similar question around the municipality contracts, but can you just maybe talk about how your customers are responding to this?

Yes. That's an interesting point. Whether it's on the Henderson side, this has been an issue that has been impacting the market for the better part of a year at this point. So adjustments have been made and the end user DOTs in that space have made an adjustment to their expectations.

When it comes to the more recent availability issues on the solutions side, one of the things that we first started to ask about early on was whether this would negatively impact any of our customer orders. And the way to think about this is you have to remember, when it comes to truck pool allocations, Dejana is at or near the top of most of our OEMs' list of truck pool partners. So if anybody is going to get chassis when they become available, Dejana is going to be right at the top of the list. So if Dejana is not getting chassis, customers really can't go anywhere else to find chassis. So we feel very confident that, while orders are going to spread out a little bit, that we virtually will lose very little, if any, of our backlog to order cancellation.

Appreciate that. And then lastly, just on Kansas City, can you just give an update on where that's at? And would that be impacted by this as well, as you start to pave that in?

Sure. As Jim mentioned earlier, we opened up the upfit facility there. We currently upfit small work vans in our Baltimore facility, so the Kansas City operation will focus on medium and large size vans that our OEM partner produces right in that area. We have finished the facility buildout, the team is in place and we're ready to go. And as Jim mentioned, we will begin receiving vehicles late in the fourth quarter.

And we're not hearing at this point that there is any significant negative impact there from a van availability perspective. But I think, as Jim mentioned already, we are likely to really see most of our momentum there from an order standpoint begin to occur in the first quarter 2018.

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

Ryan Sigdahl on for Steve. As it relates to the revenue guidance, it was lowered by $20 million on each end. Was the entire decline due to the chassis supply delays in the Work Truck Solutions segment? Or were there other moving pieces in there?

Yes, I guess the easiest way to say this is that we certainly would not have changed guidance at all if this issue had not occurred.

Okay, great. And then you mentioned the Work Truck Solutions Q1 starting to get some chassis back in, but when do you expect Henderson chassis supply to be back to normal and match demand?

Yes, that's -- certainly, this is taking a bit longer than anybody thought it would. Jim mentioned earlier in the call that, while we have seen sequential improvement during the third quarter and expect to see more in the fourth quarter, this will likely drag out into the early part of 2018 to some minor degree. We're in constant contact with the truck chassis manufacturers. And I guess the good news is steady progress is being made, but it will likely fall into 2018. Certainly, we hope it's cleared up by sometime in the second quarter of next year.

As a follow-up question to that, what are the 2 OEM suppliers doing to remediate the constraints? Are they adding capacity or doing anything besides just kind of moving around who is getting the chassis?

No, no, they have been adding some capacity. They've been working overtime. I mean, it's -- we feel that they're in tune with the issue and they are trying to respond to it. But there was a fairly significant decrease in Class 7 and 8 chassis sales 18 months ago or so. And when it ramped back up, a couple of those folks were just caught off guard a little bit, and it's just taking longer than normal to get back to being able to meet the current chassis demand. But they're mindful of it and they're paying attention to it. And they're performing as we hoped they would. It's just taking a little bit longer.

Great. And then last one for me. With those issues, I imagine it will be hard to continue the year-over-year growth streak that you have there in Henderson, but any thoughts there on if that's still achievable or just not possible with the chassis issues?

Yes, we do believe, with the demand that we have and the order activity, that we will still grow year-over-year, albeit at a lower level than we've had in more recent years. But that is our expectation.

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

I hopped on a little bit late, so if my answers -- if my questions were already answered you can just have me go to the transcript. Feel free to refer me there. I first wanted to ask...

We won't slap your hand, we promise. We won't slap your hand.

Well, you're totally allowed if you need to. In Work Truck Solutions, are there any types of configurations that are being -- that are a bit more affected by the chassis issues than others? And are those higher or lower margin type of configurations?

Yes, that's a good question. I would suggest at this point the chassis shortages are pretty well spread across the entire Class 4 through 6 grouping. We aren't seeing anything at this point that says it leans one way heavier than it does another.

I think you had mentioned earlier in the year and I think today that you've -- that there are 2 OEMs causing some of the chassis availability issues. Is it the same models that we've been seeing all year long, or have additional models in general of chassis started to cause some shortages here?

Yes, this would be Henderson. And no, there -- it's more of the same. It's just an overall situation of those OEM chassis manufacturers needing to ramp back up and just taking a little bit longer than anybody wants them to. But there are no additional chassis issues there. It's just slowly ramping back up to meet the current demand.

Okay, got it. And just one last one for me. I wanted to ask just about the broader attachment segment. It sounds like -- on your dealer inventories here, are you getting the sense that dealers this year are a bit more open to carrying more inventory than last year, just based on broader macro trends as opposed to individual orders? Is it a bit more of an open the wallet scenario this time around than the last couple of seasons?

Yes, that's an interesting question. As Jim mentioned, current dealer inventory levels are actually down versus a year ago. Typically that doesn't happen when you're in a below average snowfall environment. And as Jim mentioned, also typically, when we have a number of new product launches, that generally leads to dealers stocking a wider variety of our products, causing inventory levels to creep up. So given that, when dealer inventories are down, it's likely a good indicator that our new products are being very well received. Overall, we're really happy with the data and with the trend. If we get a little cooperation with the weather here in the fourth quarter, I think we're really positioned to have a great start to the snow season.

I'm sorry. So you're saying, with dealer inventories low, that's a good signal at this time of the year? I would think it would be better in March with things...

Well, no, it's lower than a year ago. So when their retail selling season begins, which is right about now, they're more apt to come back with reorders quicker here in the fourth quarter versus having to bleed some inventory down before they submit those reorders.

(Operator Instructions) There are no further questions at this time. I'd like to turn the call back to Mr. Jim Janik.

Thank you again for your time this morning and for your interest in Douglas Dynamics. We look forward to seeing some of you later this week at the Baird Conference in Chicago. Thanks, and have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.