Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Douglas Dynamics, Inc. (NYSE:PLOW)

Q1 2013 Earnings Call

May 7, 2013 11:00 AM ET

Executives

Robert McCormick – VP and CFO

Jim Janik – President and CEO

Analysts

Josh Chan – Robert W Baird

Jason Ursaner – CJS Securities

Robert Kosowsky – Sidoti

Operator

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now turn the call over to your host, Robert McCormick, Executive Vice President and Chief Financial Officer. Please go ahead.

Robert McCormick

Thank you. Hello, everyone, and thanks for joining us on the call today. Two quick items as 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 Annual Report on Form 10-K for the year-ended December 31, 2012, filed with the Securities and Exchange Commission and the updates to these sections in our subsequently filed quarterly reports on Form 10-Q.

Second, this call will involve a discussion of adjusted EBITDA, adjusted net income and adjusted earnings per share, all non-GAAP financial measures, which under SEC Regulation G we are required to reconcile with GAAP. The reconciliation of these measures 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 this morning is Jim Janik, President and Chief Executive Officer. With these formalities out of the way, I’d like to turn the call over to Jim.

Jim Janik

Good morning and thank you for joining us on today’s call. We’ve got some exciting news to share today first as it relates to our acquisition of TrynEx which we announced last night and second to discuss our first quarter earnings results. I’m going to being by providing an overview of current trends and the first quarter performance and then I’ll discuss the recent acquisition. Afterwards Bob provide a detailed review of our financial results and provide some further financial details on the acquisition. Finally, I will be back to discuss the outlook for 2013.

First quarter financial results were significantly better compared to the first quarter of last year and we’re encouraged by the recently improving market conditions combined with our leadership position in the industry.

The current winter snowfall levels ended slightly above average due to strong snowfall activity in February and March that helped offset the massive lack of snowfall in our core markets that we experienced during the fourth quarter of 2012 and January 2013. As a reminder first quarter sales for Douglas Dynamics are historically the lowest of any quarter, typically averaging less than 10% of the full year sales. As such we historically generate a loss in the first quarter.

Net sales were $14.1 million in the first quarter of 2013, representing a 65.2% year over year increase. While we’re encouraged by the improving results our enthusiasm for the year over year revenue growth is tampered given that this past quarter’s snowfall levels were in direct contrast to the comparable period in ‘12 which saw the lowest snowfall levels in more than 50 years.

Results for the quarter were led by both equipment unit sales up 31.4% and parts and accessories sales up 113% year-over-year. Stronger and sustained snowfall levels across core markets in February and March accounted for the pickup in parts and accessory shipments.

The timing of snowfall was again less than ideal given it occurred late in the quarter. While late snowfall is always welcome it doesn’t have the same impact that received earlier in the year as end users looked to repair rather than replace equipment the closer they get to the end of the plowing season.

As mentioned earlier, total snowfall accumulation was slightly above average and very welcome. However, there are pronounced differences in snowfall levels across our core markets. A few of the major markets in the snow belt region such as Chicago, the Mid Atlantic States and most of New York experienced significantly below average snowfall amounts. On the positive side snowfall in most of New England was considerably above average.

Product innovation remains a cornerstone of our company and I am excited to announce that we have eight new products scheduled for launch throughout 2013. Interestingly this is the largest new product launch for Douglas in over a decade. These new products were unveiled at the NTEA Work Truck Show earlier this year and have been well received by both dealers and end users. These products underscore Douglas’ dedication to deliver superior products and provide an unrivaled value to our customers. Rather than rest on our laurels as a market leader we’re continuing to enhancing our product portfolio with a focus on delivering superior reliability, durability and enhanced productivity.

As we continue into 2013, we are encouraged by positive non-snowfall business indicators such as the positive trend in light truck sales. For the quarter sales of select pickup trucks remained positive growing 9% year-over-year. Over the years while there isn’t a direct link we have found that truck sales do positively correlate with plow sales over the long run.

Turning to the operations of the business, we are entering this year’s pre-season period as a leaner organization. We face some challenging market conditions in the past 18 months but I saw the dedication of our management team and our employees to continually seek opportunities to achieve operational efficiencies, deliver best in class service and products to our customers and overall strengthened our position in the industry.

We will remain diligent in our management of cash and cost reduction through our continuous improvement activities and initiatives. Our dividend remains a focal point as we look to return value to our shareholders as projected in our current model. As a reminder, we paid our regularly, quarterly cash dividend of $20.75 cents per share during the first quarter on March 29, 2013. We view our cash generation and commitment to paying dividends as distinguishing characteristic compared to other companies of our size.

As we stated since our IPO in 2010 aside from enhancing shareholder value through returning cash, we are committed to generating excess cash to reduce the company’s debt and pursue strategic acquisitions at disciplined valuations when the opportunities arise.

We are excited to report our acquisition of TrynEx. TrynEx is the North American market leader in light truck mounted salt and sand spreader solutions under the low recognized brand SnowEx. This is the company’s flagship brand and accounts for approximately 85% of total sales. The brand serves the same landscape contractor market as Douglas Dynamics but through different distribution channels and product offerings.

TrynEx also provides turf control and industrial attachment products under the brand name TurfEx and SweepEx. All in all the deals add approximately 15 product lines across the three brands and access to a dealer network of approximately 1500 dealers worldwide spanning approximately 26 countries. Based in the Detroit area the company had a dedicated workforce and highly experienced management team.

The acquisition strengthens our position as a market leader in snow and ice control solutions and supplements our growth prospectus with an acquisition that will help deliver greater long term shareholder value. This transaction is strategically and financially compelling and will further accelerate our growth in the long run.

The strategic rationale can be broken down in to four key areas which include the complementary product portfolio, entry into new markets and distribution channels, expanding the company’s reach and attractive financial profile.

Perhaps most importantly the deal provides Douglas Dynamics with a complementary product portfolio that will expand the breadth and depth of our offering. The addition of TrynEx flagship brand SnowEx as the leading ice control brand for truck mounted slat and sand spreaders among the commercial contractors in the United States.

The combined company will be uniquely positioned to equip customers with the most comprehensive and innovative portfolio of products in the industry for both the front of the truck and now the rear of the truck as well.

Secondly, this deal provide access to new distribution channels to accelerate growth and entering into adjacent market segments which will help diversify our revenue streams. The combined company serves the same end user through different distribution channels. TrynEx is sold primarily through the lawn and garden channel while Douglas products are sold primarily through truck equipment dealers.

While initially they would be a small component of the business, over time the expansion of turf care and industrial enhancement products will help mitigate the seasonality of our traditional snow and ice control equipment business. The new market segments provide a new platform for future growth and value creation outside of snow and ice control.

Another key benefit is expanding our reach to new geographies domestically and internationally. The SnowEx product offering extends by default into regions where snowfall is historically very light, but ice control products are needed during the winter season. As discussed previously, the TurfEx and SweepEx products are not relying on snowfall and thus can be sold in regions with warmer climates. Opportunities also exist to leverage TrynEx success across the international markets particularly in Europe which today generates approximately 20% of revenues.

Lastly, this acquisition makes sense from a financial perspective given that TrynEx is a profitable business with a track record of generating above average margins. Along with a strong market position and brand equity, this is a well run business that we do not intend to change significantly rather we intend to leverage shared expertise to enhance the combined company’s ability to deliver high profitability and growth.

From an operations standpoint post acquisition, TrynEx will continue to operate as it does today under the leadership of the Truan brothers marketing and selling of SnowEx, TurfEx and SweepEx brands. We work closely with the team to provide a variety of resources ensure expertise to cross all functional areas including marketing sales and research and development functions. Douglas Dynamics will leverage its lean manufacturing expertise to deliver enhanced service to customers.

With that I’m going to turn the call back over to Bob to discuss the specifics of our financial results and provide additional details on the acquisition. Then I’ll conclude with a few comments on our business. Bob?

Robert McCormick

Thanks, Jim. For the first quarter of 2013, Douglas Dynamics generated sales of $14.1 million compared to $8.6 million in the first quarter of 2012. Shipments of the equipment units were 2,120 an increase of 31.4% versus the prior year. Parts and accessories sale were $6 million in the first quarter of 2013 compared to the $2.8 million the prior year, an increase of 113%. The increase was driven mainly by the timing of snowfall and the increase in the year-to-year snowfall amounts.

Cost of sales was $9.8 million or 69.4% for the first quarter compared to $6.7 million or 78.7% of sales in the first quarter of 2012. The decrease in cost of sales as a percentage of sales is largely due to operating leverage more specifically stronger first quarter 2013 sales reducing the relative impact of fixed costs. SG&A expenses were $5.9 million for the first quarter compared to $4.6 million in the first quarter of 2012.

This increase is primarily attributable to both increase in investment to support launching a record number of new product development initiatives in 2013 and an increase in stock-based compensation due to changes in the retirement provisions for senior management and the Board of Directors approved by the compensation and governance committees.

First quarter 2013 adjusted EBITDA was $0.2 million compared to prior year adjusted EBITDA of negative $1.8 million, an increase of $2 million. This increase is primarily attributable to both higher parts and accessories shipments and unit shipments during the quarter.

Adjusted net loss for the quarter 2013 was $3 million compared to prior year adjusted net loss of $4.3 million. Adjusted net loss excludes a one-time non-recurring asset impairment charge of $647,000 related to a write-down of the Johnson City, Tennessee facility which was closed in 2010. In an effort to try to stimulate sales activity we’ve lowered the listing sales price and reassessed the fair market value of the assets.

Keep in mind we historically generate a net loss in Q1 as both orders and shipments slowdown as the snow season comes to an end. Adjusted net loss per diluted share for the first quarter 2013 was $0.13 per diluted share compared to adjusted net loss per diluted share of $0.19 in the first quarter of 2012.

Net cash used in operating activities for the first quarter of 2013 was $7.1 million compared to prior year net cash used in operating activities of $10 million. This decrease is due to $1.9 million increase in net income adjusted for non-cash reconciling items. The remainder of the decrease in cash used is attractable to working capital changes.

Cash on hand at the end of the first quarter of 2013 totaled $11.1 million. The unused borrowing capacity on the revolver is $38.3 million with total liquidity of $49.4 million we are well position to fund our regularly quarterly dividend payments and future growth opportunities.

As part of our customer and preseason inventory build inventory was $45.1 million at the end of the first quarter 2013 compared to $30.3 million of inventory at the end of 2012 and $46.7 million at the end of the first quarter 2012. Account receivable in the first quarter of 2013 was $11.3 million compared to $25.4 million in the fourth quarter of 2012 and $7.6 million at the end of the first quarter of 2012.

The company historically sees account receivable declined in the first quarter as the snow season winds down. The higher accounts receivable levels year-over-year at the end of the quarter reflect the increase in unit and parts and accessory sales.

Turning back towards the acquisition I will provide a quick recap of the financial components of the deal. As you can seen in the press release we have signed a definitive agreement to acquire TrynEx for a purchase price of $26 million. The acquisition will be funded entirely through the use of Douglas’s existing asset base revolving line of credit.

No new equity will be issued to fund this transaction. TrynEx has historically generated approximately $20 million in revenue and $3 million to $4 million of EBITDA annually. The acquisition is expected to be accretive to earnings per share on a full year basis of 2014 and will be cash flow positive on a standalone basis in 2014.

Post acquisition the company remains in strong financial position and is committed to its capital allocation strategy by paying a dividend to its shareholders and paying down debt. This acquisition highlights the third pillar of our capital allocation strategy which is pursuing strategic acquisitions and disciplined valuations to increase shareholder value. With that I will turn the call over to Jim for some concluding remarks Jim?

Jim Janik

Thank you, Bob. We now take a few moments to share some thoughts on what we are expecting for the remainder of 2013. As you remember we have just entered our preseason order period which typically runs from April to September and we normally ship 55% to 65% of our annual equipment orders. Overall, we anticipate a better year in 2013 compared to the very challenging year in 2012 due to improved market conditions.

So we know there won’t be an immediate return to normal well full year 2013 results are expected to improve and other indicators that drive our business are positive, we remain positive yet cautious about the lingering impact of the record low snow fall in the winter of 2011 and ‘12 combined with the very low snowfall this past winter until the strong return of snow this past February and March.

This lingering impact will likely affect the pre season order period and influence dealer buying behavior in the near term. The increased snow fall late in the year compared to the prior year served a pivotal role to moderate previously elevated distributor inventory levels.

However, dealers have short term memories and are still feeling the effects of last year snow fall. As a result the dealers are likely to be overly cautious and rely more on retail demand to pull the product through the distribution channel. As a result 2013 preseason orders are likely to be relatively flat compared to 2012 but we anticipate this will translate into pent up demand for fourth quarter orders as some evidence exist that with decent fourth quarter snowfall retail demand could be significantly stronger than Q4 of 2012.

The enhancements to our already industry leading product portfolio strengthens our position in 2013. However, the timing of the product launches will reverse the shipment mix trend of the pre-season order period of recent years. We anticipate closer to an even split between second and third quarter order of shipments compared to the recent five year trend of closer to 60:40 split.

With that said, we are excited about the future and we are well positioned to capitalize on our new innovative line up of products and work closely with TrynEx to leverage our shared expertise and explore new growth channels. The company remains in strong cash position and will continue to return cash to shareholders via our robust dividend. We are comfortable with the guidance for 2013 that we issued in conjunction with our fourth quarter 2012 results and we will update that guidance during our second quarter call.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Peter Lisnic with Robert W Baird. Your line is open. Josh Chan

Josh Chan – Robert W Baird

Hi, good morning this is Josh Chan filling in for Pete. My first question is on TrynEx, I was just trying to get an understanding of how relatively small company is able to have what seems like a very extensive distribution network, is that sort of a function of seeing in three different markets or is there a strategy that they were pursuing that’s a little bit different. Can you speak to the large, extensive distribution network that they have?

Jim Janik

Sure, well they’ve done a very good job over the years developing distributions through the lawn and garden channel and in many cases they’re actually working through true distributors in regional areas and each of the distributors have direct dealers underneath them which is also very extensive. So, I would say that it’s very good, very strong, very positive distribution channel and they’ve done a terrific job for a company their size which of course from our perspective is why we think this is a tremendous opportunity.

Josh Chan – Robert W Baird

Right. I guess second part to that question would be is there possible synergies in terms of being able to sell the Douglas products to the distribution channel that they have or is that, do you consider those pretty separate?

Jim Janik

Yeah, yeah, I think again one of the opportunities here is to look at within the opportunities within the distribution channel and products is that certainly there is going to be an opportunity to cross market certain of our products in many of our technologies, that still needs to be sorted out. But clearly one of the greater opportunities that lies ahead of us.

Josh Chan – Robert W Baird

Okay. And then if I switch back to snow, or your traditional products, you alluded to more new product introductions this year than normal, are there certain new products that you highlighted as being particularly meaningful? And then, I guess the second part of that question is kind of surprised that with all the new products that the preseason order rates are still expected to be flat?

Jim Janik

Sure, that’s a couple of question, but I’m going to joke with you a little bit, all of the products that we introduced are significant. So, there aren’t any insignificant product, but I think there are a couple that I think will be particularly positive. A number of those in particular are the new V-plows to that both Fisher and Western are developing I think there is a hinge technology that we’re developing.

And I think there is a new improved mounting system this year for the Western products which I think are going to be very, very good for us. I think that the market will like them and I think it really is going to enhance our ability and our market position with those products. The second portion of this is, understanding with a large new product introduction in a business of our size is that we have stagger how the products come through the factory.

Most people would expect that when we announce these at the NTA show we show them to people but frankly we have a planned staggered availability plan for each of these because we’re retooling the factory to bring these products through the lines. So throughout the year there isn’t immediate availability of all of these products from day one. We’re actually staggering a lot of these products and frankly a lot of them availability on a unlimited basis is really going to begin Q2, Q3 and may be even in some cases Q4. The bigger impact will clearly be in 2014.

Josh Chan – Robert W Baird

Okay that’s makes a lot of sense understood. Thank you for your time and all the color.

Jim Janik

You bet, thank you.

Operator

Our next question comes from Jason Ursaner with CJS Securities. Your line is open.

Jason Ursaner – CJS Securities

Good morning.

Jim Janik

Hi Jason.

Jason Ursaner – CJS Securities

I’m just wondering if you could may be just quantify what if any M&A related expenses were in SG&A in the quarter?

Robert McCormick

Actually not many at all I think and I’m not exactly on this number it’s between $100,000 and $200,000. You’ll see most of that come during Q2 Jason.

Jason Ursaner – CJS Securities

Okay and was there anything else in SG&A that would have got that up normal 6 million then in the quarter?

Robert McCormick

Well as we spoke about we had the, with all the new product launches we have a much more significant investment in sales and marketing support kinds of material so that’s going to be a large driver of it. We also talked about a change in our stock comp program which ended up having a result of having to accelerate the expense of some of our stock compensation as that stock gets granted versus how it was historically treated before. So that was about $600,000 plus worth of the year-to-year change was just in stock comp expense.

Jason Ursaner – CJS Securities

Okay. And then just next I would like to ask a little about the pre season Jim, you mentioned overall it should be relatively flat with 2012 but you also talked about the late season snowfall helping to lower the season ending inventory base. I guess I am just wondering if you can maybe give a little more color on sort of where you see that season ending base versus this caution with maybe the season starting base.

Jim Janik

Sure, sure. I don’t have specific numbers because the last formal inventory we take is in January but it was elevated over previous years not instrumental but I think it’s more psychological than it is anything else Jason. You know, a lot of our dealers and distributors really hadn’t seen much snowfall for about 18 months and I think psychologically they look at inventory and they’ve been sitting on inventory even though the levels weren’t incredibly high.

They’re just reminded that, nobody wants to carry much inventory when it’s not snowing. We did get snow, it was tremendous snow. I mean it was great in February and March, we knew that help to drought down a lot of that inventory but I think our distributors are cautious in that, they have some pace for inventory that they held for a while and I think they’re just not too anxious to restock upon inventory.

Now having said that, we have some indication informally that, they’re probably going to order in pre-season fewer snow plows than we think there’s going to be demand forward just because of the psychology and we think that there’s a chance that fourth quarter, we could see return of pent-up demand and it could, an interesting year for us. But, we’re trying to get our dealers and distributors to be a little less cautious because we all benefit from that later in the year but right now it’s been a little challenging.

Jason Ursaner – CJS Securities

Okay and just any quick thoughts on your own, the internal deliveries scheduled Q2, Q3 that has been skewed the past few years?

Jim Janik

Yeah again I think what we’re seeing is that it’s likely to be around 50-50 which frankly almost goes back to a more historical level. But yeah I think what we’re going to see is because of the new products are coming out throughout the year, I think we’re seeing people, really some people taking advantage of some of the regular discounting we do in programming and some saying.

I think I’m going to wait a little bit longer in the year, I’ll order it now but I’ll take it throughout the season, so I don’t think it’s – I don’t think necessarily it’s a permanent shift, I think it’s really temporary this year, but again from my perspective it doesn’t really matter?

Jason Ursaner – CJS Securities

Okay. And then just last question from me I’d like to try to go through the numbers you mentioned on TrynEx you said that trailing 12-month revenue of $20 million and EBITDA between $3 million and $4 million for 2012 so....

Robert McCormick

No, no Jason I want to be clear there. 2012 as you know was the worst snowfall 50 years for anybody associated with the weather business. The $20 million revenue and $3 million to $4 million of EBITDA is a normalized run rate based upon a five-year average for these guys.

Jason Ursaner – CJS Securities

Okay.

Robert McCormick

You know as our business walks up and down we tend to look at normalizations and averages over time this business is no different.

Jason Ursaner – CJS Securities

Okay. And I guess can you share then their internal forecast for 2013 or you are sort of saying that it should be kind of that normalized?

Jim Janik

No, I think, I think what obviously this deal just closed yesterday afternoon. Our thoughts are we have a lot of work to do yet on digging through their internal financial projections for the balance of the year. What we’ll do is in our August earnings call for the second quarter when we normally narrow Douglas’s guidance because the preseason book is in.

We will give you more detailed TrynEx update then but I do I want to make clear a couple of things. It’s going to be EPS diluted in 2013 just because of the purchase accounting exercise you have to go through as most of you know but we’ve got to write up inventory to fair market value that’s going to have a significant negative impact on short-term margins as those, as that product is sold.

We have to get all the assets valued and end up with an intangible asset valuation and yes it’s going to take us a little while to get done. So we’re going to have EPS dilution in the first 12 months. I am thinking it’s likely going to be at least $0.10 per share in 2013 but it could be more.

So we’re going get deeper into it, get some of this evaluations done and we will provide everybody a lot more color in the August call. But keep in mind the other point to make if you go back to some of our key tenants to make in an acquisition okay, it has to be accretive to earnings per share after the first 12 months and this one will be needed to be free cash flow positive on a standalone basis after you’ve levered the debt to make the acquisition against it and it will be. So those are the critical components going forward.

Jason Ursaner – CJS Securities

Okay, appreciate. I have few more but I’ll jump back in the queue. Thanks.

Operator

(Operator Instructions). Our next question comes from Robert Kosowsky with Sidoti. Your line is open.

Robert Kosowsky – Sidoti

Hi, good morning guys how are doing?

Jim Janik

Well.

Robert Kosowsky – Sidoti

I guess first off congrats on doing the acquisition and I was just wondering how, how did you find this company and it this like an auction process or something you have been talking to for a while?

Jim Janik

The Truan family is somebody we’ve known for quite sometime, and you know in fact we were can gently competitors, and they have always been at the forefront of very interesting technology. I think we admire them from afar, they admired us from afar for some of the things that we’ve done.

And a few months ago, we made contact and said is there an opportunity for us to get together on top and what we announced yesterday was the result of that, but it was not an auction and it was just a private transaction between two parties.

Robert Kosowsky – Sidoti

Okay. And then, could you maybe talk a little bit about the seasonality of the business I know you’re obviously not as one we think for any winter related companies so this is a similar process?

Jim Janik

Well, the SnowEx brand is somewhat similar in that, their preseason doesn’t necessarily lay right on top of ours. But again theirs is the winter season although ice tends to happen a little bit later in the year, so that does kind of create an extra couple of months.

The TurfEx, which is also weather-related is more of a spring and late fall kind of business because it’s mostly spreading fertilizer and other kinds of things at least at this particular point. It begins to provide us a little less reliance on snow and ice but still help at least one leg into weather-related businesses which is one of the things that we continue to think we do quite well. So, different seasons but still somewhat related to weather.

Jim Janik

Yeah, Rob, let me just add on to that. As Jim mentioned earlier, the SnowEx part of this business is about 85% of current revenues. So, that’s going to be the driver. That business still falls into that first quarter as very, very stop just like Douglas’s business, it’s probably close to the 10% of revenue generated in Q1 that we see in our current business.

So, don’t only expect any significant shifts out of Q1 coming out of the blocks obviously as the TurfEx and the SweepEx business grows that will obviously help to move that a little but as it come out of the block just going to look a lot like we look today.

Robert Kosowsky – Sidoti

Okay and then I guess just one of the question about the fourth quarter and how strong it could be I mean for modeling purposes do we go back and look at maybe like a 4Q ‘10, 4Q ‘11 as kind of a benchmark it could be higher because of the pent up demand or should be lower because of the kind of just – I am just trying to get a better handle of how to think about the fourth quarter?

Jim Janik

We will be hard pressed to have another fourth quarter like we had in 2012. So I don’t think you want to get anywhere near as low as that. I think the fourth quarter 2011 is closer.

Robert Kosowsky – Sidoti

Okay and finally as you go through this year, how are you looking at pricing versus steel cost?

Jim Janik

Both steel has I would say overall cost for raw material including steel has been relatively stable. Now steel would come down in the early part of the spring. We actually saw an uptick in the past couple of weeks, not been of any significance so I think we feel pretty good for raw material cost inflation perspective right now.

Jim Janik

And as far as pricing of our products in the marketplace, we are still a little ways away before we do our – we look at pricing, so we haven’t made any decision as about pricing of the product.

Robert Kosowsky – Sidoti

Okay and then finally do you look to hit on the revolver pretty fast with cash flow for next few years and would you look at doing another acquisition or staying out of special dividend while you still have little bit of an elevated debt profile?

Robert McCormick

Yeah I would certainly we will now wait until we get it through the fourth quarter and see how the year looks to see what kind of cash accumulation that we have at the end of the year. Obviously revolver debt is the lowest cost of capital that we have in our arsenal if you will, it’s about 1.8%. So we can certainly use some excess cash to pay that down if we wish.

We actually like the opportunity to have some dry powder there to do deals just like this one without having to get back into the debt markets. Still have plenty of available borrowing capacity as we look at other growth opportunities, I don’t think there is a special dividend in our future at all, I sense that is not part of the dialogue.

Robert Kosowsky – Sidoti

Okay, thanks very much and have good luck.

Jim Janik

Thank you.

Operator

Our next question is a follow-up from Jason Ursaner with CJS Securities. Your line is open.

Jason Ursaner – CJS Securities

Appreciate you guys taking me all my questions.

Jim Janik

Sure.

Jason Ursaner – CJS Securities

Just when you look back at the five year sales average on TrynEx, what was peak revenue for the company?

Jim Janik

We are not going to provide that information at this time. As I said earlier Jason, I’m going to provide some more detail updates when we get to the Q2 earnings call.

Jason Ursaner – CJS Securities

Okay, would it have been above of the earn out projections or those are true growth projections?

Robert McCormick

Well let me just kind of comment about that since you brought it up. The earn-out revenue projections are certainly mean to be stretched targets. You cannot look at those revenue projections and try and guess where this business currently is positioned or where it has been positioned. The average revenue number that I gave you is an average over a five year period that floats up or down a little bit higher, a little bit lower but not being significant from that $20 million base. You announce there to give these guys something to shoot for the moon if you will.

Jason Ursaner – CJS Securities

And on the gross margin side, is it similar stretch or that sort of...

Robert McCormick

Oh yeah absolutely, absolutely.

Jason Ursaner – CJS Securities

Okay. Just Jim mentioned, above the average margin in the commentary, so I am just, I guess I am wondering...

Robert McCormick

Well, it’s above the average margin, when you look at margins for small companies for sure. Certainly is not above the average margins when you compare it to Douglas margins but hardly anybody is. But when you look at $3 million to $4 million worth of EBITDA and $20 million of revenue, you’re in the double-digit EBITDA range between 10% 15%, that’s a well run company for a $20 million business.

Jason Ursaner – CJS Securities

Sure. No, I just didn’t know if you’re trying to say relative to your own?

Robert McCormick

No, no, that’s, we trying not flip people in the same category it doesn’t turn out too favorably for them.

Jason Ursaner – CJS Securities

Okay, and if my understanding that there is relatively low ongoing maintenance for the ice controlled products, I was just wondering is there a fairly well defined replacement cycle there and maybe if you can comment on the maturity of the installed base?

Robert McCormick

Yeah, it a little difficult at this point to get that kind of granularity on, sort of the age of the installed base. It is a replacement business and I think there continues to be new technologies that people continue to look at so as they look to replace their old spreading products, they’re looking for new technologies that might even enhance, the things like productivity, reliability, durability because, they are truly in a corrosive environment. So it’s a lot like the snowfall businesses that the product needs to be replaced. There’s no question about it.

Jason Ursaner – CJS Securities

Okay and just sort of sticking with that, because it was going to be my next question, I guess I would like to hear a little more of your view on TrynEx’s success related to brand loyalty similar to your plows versus this more technical value add proposition from some of the horizontal older technology and that sort of stuff?

Jim Janik

From my perspective I think you know brand loyalty and I think they have great brand loyalty really comes from not only the product being good quality but also being the kind of product that solves real life solutions out in the marketplace and I think they have done that very well.

Over time because you know loyalty is also got a factor of time involved in it and I think they have been very, very good to their distribution base in terms of being responsive, I think they have been responsive to the product, responsively programming and I think in an industry like ours that’s relationship oriented those are the kinds of things that resonate in trying to develop loyalty and frankly that’s why I think it’s a good fit with Douglas because these are really the cornerstones of our business as well and they are the cornerstones of the TrynEx Group.

Jason Ursaner – CJS Securities

Okay, great, I appreciate all the extra commentary, thanks you.

Jim Janik

You bet.

Operator

And I’m currently showing no further question at this time. I’ll now turn the call back over to management for closing remarks.

Robert McCormick

Okay, thank you, Operator. And thank you all for your interest in Douglas Dynamics. We look forward to speaking with you again early in August for our second quarter earnings announcement. Have a great day.

Operator

Ladies and gentlemen that does conclude today’s conference. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts