Douglas Dynamics' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Douglas Dynamics, (PLOW)

Douglas Dynamics Inc. (NYSE:PLOW)

Q3 2013 Earnings Call

November 5, 2013 11:00 AM ET


Robert McCormick – EVP and CFO

Jim Janik – President and CEO


Robert Kosowsky – Sidoti & Company

Jason Ursaner – CJS Securities


Good day, ladies and gentlemen. And welcome to the Douglas Dynamics’ Third Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time.

(Operator instructions)

I would now like to turn the call over to Robert McCormick, Executive Vice President, and Chief Executive Officer. Sir, you may begin.

Robert McCormick

Thank you. Welcome everyone and thank you 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 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.

Lastly, 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

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 to discuss our third quarter 2013 performance. I’m going to begin by providing an overview of our performance for the quarter, and current trends, and then Bob will provide a detailed review of our financial results.

Finally, I will return to provide our outlook and additional insight on the remainder of the year.

Overall, we’re pleased with our third quarter performance which was a strong finish to our preseason order period, and in line with our internal expectations. For the third quarter 2013, net sales increased 37.6% year-over-year which is primarily attributed to the shift in timing of preseason order shipments.

As we anticipated and previously discussed, the 2013 preseason order period shipments were relatively evenly distributed between the second and third quarters compared to the shipments split of approximately 65-35 for the same period last year.

The main reason for this shift was the launch of our new products in the spring, and the majority of these products being shipped in the third quarter.

When combined, our second quarter and third quarter, or preseason order period, resulted in net sales of $107.2 million, an increase of 3.8% from the prior year.

The increase is primarily the result of the addition of the TrynEx business which was acquired in early May.

As expected, preseason order period results reflect a cautious approach our dealers are taking to purchasing inventory due to the historic record low snowfall levels from the 2011, 2012 season followed by the drought and delayed arrival of snow this past year across core markets.

Although many dealers remain cautious, we’re beginning to see early indications of improving sentiment, namely lower dealer inventory levels, and solid September retail activity and reorders. The results of our recent September field inventory indicate distributor inventories on September 30th, were the lowest September inventory in the past five years.

Additionally, the field inventory assessment indicated that retail reorder activity was up significantly year-over-year and especially during the month of September.

While September is not historically a significant volume reorder month, when taken in conjunction with the other factors, it often serves as a directional indicator for the remainder of the year.

Another positive non-snowfall indicator providing further support for cautious optimism is continued upward momentum in sales of light trucks. While the sales rate of select pickup trucks has moderated somewhat since June, they are still up approximately 20% for the full year. Long term trends indicate a positive correlation between truck sales and plow sales.

Collectively, these non-snowfall indicators are all positive signals pointing to a return to a more normal operating environment following the challenging market conditions we experienced from the fall in winter of 2011 through all of 2012. These indicators underscore improving optimism within the industry and suggest the potential for increased appetite for new equipment purchases assuming a return to normal snowfall patterns this winter.

As I mentioned on last quarter’s call. We watched eight new product offerings in 2013 which are garnering strong acceptance and feedback from customers. As a market leader within our industry, these new products highlight out commitment to product innovation and further differentiate in strength in our industry leading product portfolio.

Historically, the end customers for our products don’t typically chase the latest trends. So it is very encouraging to hear that the new products are popular and should be contributing more meaningful to the growth in the near future.

Turning to the TrynEx business, we continue to make significant progress on integrating our back office operations and optimizing the execution of the business and leveraging our shared capabilities.

Similar to our business, TrynEx was negatively impacted by the historic market conditions of the past few years. However, as conditions return to a more normalized environment, we believe there will be significant opportunities to carve out new growth channels, expand depth and breadth of our product offering and ultimately enhance our long term growth initiatives.

And finally, I want to briefly mention our dividend policy. As previously reported on September 9th, the company declared a quarterly cash dividend of $20.75 per share on its common stock, which was paid on September 30th to stockholders of record as of the close of business on September 20th.

As we continue to generate strong cash flows in all snowfall environments and maintain a strong financial position, the board of directors has approved a 2.41% increase in the company’s quarterly cash dividend to $21.25 which will be effective in the fourth quarter of 2013.

The board’s decision reflects our continued confidence in the company’s financial strength, cash flow generation potential and future prospects for our business. The decision also reinforces the company’s long term commitment to enhance shareholder value, through returning cash to shareholders.

With that, I’m going to turn the call back over to Bob to discuss the specifics on our financial results and then I’ll conclude with comments on our business and then the outlook for the remainder of the year. Bob?

Robert McCormick

Thanks Jim. As Jim mentioned, results were in line with our expectations and we remain consciously optimistic as market conditions gradually return to a more normal environment.

For the third quarter of 2013, Douglas Dynamics generated sales of $52 million compared to $37.8 million in 2012. Unit shipments for the third quarter increased by 41.1% and Parts and Accessories sales increased 42.7% compared to prior year. Parts and Accessory shipments continue to be strong and as dealers restock their inventories due to the heavy late snowfall last season. Cost of sales is $37 million or 71.1% of sales for the third quarter compared to $26.2 million or 69.4% [ph] of sales in the third quarter of 2012.

The year-over-year increase in cost of sales was primarily driven by increases in unit volume given the shift in pre-season order mix. As farther [ph] up to change to margins, the decrease year-over-year result was exclusively driven by certain non-cash purchase accounting adjustments associated with the TrynEx acquisition. As we all find last quarter, we incurred nonrecurring negative adjustment driven by an inventory write up at fair market value, totaling approximately $600,000.

SG&A was $12.2 million for the quarter compared to prior year, SG&A expenses of $6.4 million. The increase was mostly due to $3.8 million in earn out compensation expense recorded in conjunction with the acquisition of TrynEx. Also contributing to the increase was the on-going quarterly SG&A expenses incurred in connection with the TrynEx business.

Third quarter of 2013 adjusted EBITDA was $10.2 million compared to prior adjusted EBITDA of $7.8 million. Net income in the third quarter of 2013 was $594,000 compared to prior year net income of $2.3 million. Earnings per share was $0.02 cents per diluted share during the quarter compared to $0.10 per diluted share over the third quarter of 2012.

As discussed earlier, when addressing the changes in cost of goods sold and SG&A, non-cash purchase accounting adjustments totaled $4.4 million from the TrynEx acquisition and the inventory adjustments and earn out compensation expenses. These two items negatively impacted net income and earnings per share.

Longer term, we’re enthused about the growth prospects for the TrynEx business and expect the acquisition to be accretive to earnings per share on a full-year basis in 2014 and free cash flow positive on a standalone basis in 2014.

During the first nine months of 2013, we recorded net cash used by operating activities of $26.7 million compared to net cash used by operating activities of $35.1 million in the same period last year. The decrease in cash used in operating activities was primarily due to favorable changes in working capital of $7.7 million.

Cash and cash and equivalents on hand at the end of Q3 total of $4 million. The unused borrowing capacity on revolvers, $24.3 million with total liquidity of $28.3 million. We are well positioned to fund the upcoming quarterly cash dividends. Account receivable at the end of the third quarter of 2013 was $71.3 million, an increase of $600,000 compared to third quarter of 2012.

With that, I will turn the call back over to Jim for some concluding remarks. Jim?

Jim Janik

Thanks Bob. To close, I’d like to share our view of current market conditions and as well as what we are expecting for the remaining portion of 2013.

As we entered the last two months of the year, we are more optimistic about the business than we were at the same point last year and anticipate significant improvement in results this year compared to the fourth quarter in 2012.

As a reminder, last year’s fourth quarter was the culmination of the unprecedented market conditions from the past few years. The 2011, 2012 winter season was the lowest snowfall in more than 50 years followed by unfavorable conditions through the end of 2012.

While it won’t be an immediate return to normal, this fall and winter momentum will serve as an important first step in a continued recovery. In direct contrast to the prior year, we’re excited that market conditions are all trending in a positive direction. However, the biggest barrier to – the biggest variable factor in the fourth quarter is the location timing and of course, the amount of snowfall.

Early snowfall in core markets makes businesses and home owners more likely to contract for plowing services and subsequently plowers are more confident in their outlook. Acute early fourth quarter plowable events coupled with the positively trending market indicators may serve as a catalyst to accelerate the release of pent up demand.

Based on results from the first nine months of 2013 and current trends, we believe we’re well positioned to achieve results within our previously announced full year 2013 guidance. We expect revenues to range from $175 million to $200 million. Adjusted EBITDA to range from $36 million to $46 million and earnings per share to range from $0.30 per share to $0.60 per share. The full year 2013 outlook assumes the company’s core market will experience average snowfall patterns and economic conditions will remain stable.

So in conclusion we’re excited as we look at the start of the winter retail season and believe we’re well positioned to respond to industry demand and achieve strong fourth quarter results, assuming a normal snowfall environment. We faced a very challenging environment in recent years and I firmly believe we’re emerging as an even stronger company and will reap the benefits of the strategic initiatives we developed over this time to accelerate growth and profitability as business conditions improve.

At this time, we’ll now open the call for your questions. Operator?

Question-and-Answer Session


(Operator instructions) Our first question comes from Robert Kosowsky of Sidoti & Company. Your line is open.

Robert Kosowsky – Sidoti & Company

Hi, good morning, guys. How are you doing?

Jim Janik

Hi, Rob.

Robert Kosowsky – Sidoti & Company

I was just wondering – maybe a question for Bob. So if I back out the $600,000 – and first off in cost of goods sold, there was only about a $600,000 inventory impact, the rest was pretty clean quarter, is that correct, Bob?

Robert McCormick


Robert Kosowsky – Sidoti & Company

Okay so if I back that out to about a 30.1% gross margin, and I’m just wondering how PLOW – or with the legacy Douglas Dynamics versus TrynEx and kind of what’s our margin dilutive impact there and kind of can you square away any kind of margin impact from the new products that you’re selling as well?

Robert McCormick

Yes, I guess I mean the TrynEx margins aren’t going to be anywhere near the current Douglas margins for the first 24 months or so until we get more of our cost structure in place and those kinds of things. So you know, that’s going to pull margins down a little bit, but we would expect that overtime, we can get them in a similar cost position as we have here and they’re a price leader in their markets. I would expect margins for those guys to improve over time.

When it comes to the new products – I don’t really think that those things had a – those introductions had a negative impact. Sometimes margin floats up and down just based upon the mix of product that is shipped during the quarter.

If you end up shipping more mounts as an example versus blades, there is margin differences between those two products. So it’s probably as much mix related as anything, Rob.

Robert Kosowsky – Sidoti & Company

Okay. That’s all I have. Thank you very much.


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

Jason Ursaner – CJS Securities

Hi. Congrats on a solid end to the preseason, guys.

Jim Janik

Thanks, Jason.

Jason Ursaner – CJS Securities

Just first on the optimism heading into the snow season. You mentioned various factors, but I guess just two in particular, the lower field inventory, and the preliminary October results. Just wondering if you can maybe provide a little more quantification on what you saw from both of those.

Jim Janik

Sure. We don’t give specific inventory numbers as you know, but I can give you certainly, directional guidance.

We’re seeing – in the field, September field inventory as I mentioned was – for the September period, as low as it’s been in five years. And basically, that really confirms what we’ve been telling the street, is that there’s just a lot of caution about stocking levels. But from the optimism side, we’re seeing very good retail.

So as the shelves need to be filled, we’re fairly confident that this will result in some fairly nice reorders since there isn’t a lot of inventory out there.

And while we only have preliminary numbers for the October ending field inventory, I think that just confirms what we’ve seen in September.

Jason Ursaner – CJS Securities

Okay. And when dealers reorder, would they be doing it to a larger internal stock, or they’re relying on manufacturers to deliver on a relatively short lead time and then maybe reassess next preseason where to start the year?

Jim Janik

Sure. Because of the kinds of conditions we’ve experienced over the last few years, I think what we’re likely to see this year, is just, you know, caution in terms of the size of the reorders. I suspect we’re going to see dealers placing more in smaller reorders than one or two large reorders so that as they get into the spring, they can assess to your point where they are with preseason and the kind of winter that they do actually see.

Jason Ursaner – CJS Securities

Okay. And under GAAP, you guys booked the entire fair value of the – your note, in terms of it being achieved relative to the target projections you guys have set, how much base business was added to TrynEx from I guess what would have been Fisher or Western versus what qualifies as more the internal growth objective?

Jim Janik

Yes. I don’t have any firm numbers for you on that. That will be – we’re still talking with them, working through product lines and what products are going to be sold where, and when those things are done, I will have a much better number. But it’s just basically going to be a left pocket, right pocket thing. It will disappear from one income statement, show up on the other income statement in terms of the core business, if you will.

Jason Ursaner – CJS Securities

Okay. And in terms of the improvement in working capital, is that more a reflection on the earlier payment that you got on some of the preseason sales or is it a true working capital efficiency that you would expect to flow through the full year free cash flow?

Jim Janik

Yes, I would say two things really make up the majority of that. With the stronger third quarter shipments, we end up with lower inventory than we would have had a year ago. So that’s going to give us a favorable impact.

The other thing is, just given how off normal levels 2012’s performance was, and 2013 looking much better, all of our annual bonus incentive plan accruals this year are going to be much stronger than they were a year ago.

So that’s something I would expect – I would expect both of those working capital favorability is the whole – as the fourth quarter progresses.

Jason Ursaner – CJS Securities

Okay, great. That’s it for me. Thanks, guys.

Jim Janik

Thanks, Jason.


(Operator instructions) I’m showing no questions at this time.

Jim Janik

Okay. Let me just finish then by thanking all of you for joining us today and for your continued interest in Douglas Dynamics. We look forward to speaking with you again during the fourth quarter announcement in March 2014.

Thanks again, and have a great day.


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

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