Earnings Labs

Douglas Dynamics, Inc. (PLOW)

Q3 2020 Earnings Call· Mon, Nov 2, 2020

$45.36

+0.22%

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Douglas Dynamics Third Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sarah Lauber, CFO. Thank you and please, go ahead, madam.

Sarah Lauber

Analyst

Thank you. Welcome everyone and thank you for joining us on today's call. Before we begin, I'd like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in yesterday's press release and in our filings with the SEC. Joining me on the call today is Bob McCormick, our President and Chief Executive Officer. In a moment, Bob will provide an overview of our performance, then I'll review our financial results. After that, we'll open the call for your questions. With that, I'll hand the call over to Bob.

Bob McCormick

Analyst

Thanks, Sarah. Good morning, everyone. Before I discuss our quarterly performance, I wanted to highlight two important topics. First we are very pleased that the vast majority of Douglas' employees have remained healthy since we came back to work in May. We've had a handful of isolated cases at some locations and people who have tested positive, have contracted COVID outside the workplace. In all cases, we have responded quickly and we have avoided any large outbreaks at this point. Heading into the winter months, we're likely to have more positive tests, especially as cases expand across the country. We do remain vigilant, working to ensure no one lets their guard down. Our protocols are effective and we're ready to handle any outbreaks that occur. Additionally, I'd like to take this opportunity to welcome Lisa Rojas Bacus to our Board. Lisa has a proven track record of leadership, with greater than 30 years of experience across a diverse set of industries. She focuses on marketing, strategic planning and data analytics at Cigna American Family Insurance and Ford Motor Company, bringing invaluable experience in the years ahead. We're looking forward to having her as part of our team. At the same time, we'd like to recognize Jim Packard for his numerous contributions to Douglas Dynamics. Jim will retire from the Board at the end of his current term at the 2021 Annual Meeting. We are grateful for his contributions and guidance over the past decade and wish him all the best for the future. Okay. Turning to the results for the quarter. In short, we are pleased with our results. All of our facilities operated throughout the quarter, albeit, under pandemic conditions, attachments performed well, with a strong finish to the preseason. Solutions rebounded from the second quarter shutdowns and executed…

Sarah Lauber

Analyst

Thanks Bob. Overall, our financial performance for the quarter reflects the sequential improvement in general business conditions, as people get back to work following shutdowns in the spring. Both our customers and suppliers are gradually ramping up production and continue to adapt their operations to the new confines associated with the pandemic. While we continue to provide comparisons on a year-over-year basis given the dramatic changes over the past year, the sequential changes from the second quarter are perhaps more important. All things considered, we're generally pleased with the resilience of our performance this quarter. From a consolidated perspective, we generated third quarter net sales of $133.8 million and gross profit of $36.7 million, compared to net sales of $141.9 million and gross profit of $39.9 million during the third quarter of 2019. We recorded GAAP net income of $9.2 million, or $0.39 per diluted share, compared to $12.4 million and $0.53 respectively in 2019. On an adjusted basis, we generated net income of $9.8 million and $0.42 per diluted share, compared to adjusted net income of $12.8 million and $0.55 per diluted share. Similarly, we generated consolidated adjusted EBITDA of $23.1 million, compared to $25.1 million in the corresponding period of the prior year. SG&A expenses including amortization expense were $19.2 million approximately $800,000 lower than the third quarter of 2019. The decline in SG&A was due to lower discretionary spending, including travel, advertising and promotions all as a result of our income protection plan. Interest expense was $5 million for the quarter, which was higher than the $4.3 million incurred in the same period in the prior year. The increase is primarily, due to higher interest paid on our term loans, due to the increase in principal balance from our June refinancing. This was somewhat offset by a…

Operator

Operator

[Operator Instructions] Your first question is from Tim Wojs from Baird.

Tim Wojs

Analyst

Hey, everybody. Good morning. Nice results.

Sarah Lauber

Analyst

Good morning, Tim.

Tim Wojs

Analyst

Maybe just first question, just on September, just wondering if you could add maybe a little bit of color on what you saw in terms of the order activity in attachments. And maybe what drove that? Just stronger light truck sales? Or did you get more -- did the cash flow improve at the dealers? And so they just kind of pre-ordered a little more closer to the season? Just trying to understand kind of the drivers? And based on your intel what kind of drove that --I don't want to call it pull forward but better numbers in September?

Bob McCormick

Analyst

Yes. It again going back to the pre-season order period, which was right in the early stages of the pandemic, we expected dealers to be conservative in their ordering and they were and again, as I said earlier, what we hoped would happen. When you get to the last half of the third quarter, orders typically are their lightest that they are at any point during the pre-season because everybody's already placed their stocking order in April, May and the first part of June. And so we typically don't expect a lot of activity during that period of time, Tim. But as I said, we hoped that we'd see some increased stocking order activity late because dealers were conservative early on and that's what we saw. So we actually started fielding dealer calls at various points over the summer. Remember the pre-season period closes middle of June from an order perspective and people would call and say is it too late to add 100 plowers to my order? And we absolutely let them do that. So there was some momentum building later in the quarter. At that point, not yet driven yet by retail activity, Tim because we're still in the green season to a large degree. It's just more dealers feeling more and more comfortable about their lot in life and wanting to bring those inventory levels back up to a decent place. Having said that, retail inventories are still on the plow side 10%, 15% below a year ago and we feel good about that as well. So everything is lining up for our dealers to be well positioned to start this season and for us to be well positioned to respond to it.

Tim Wojs

Analyst

Okay. Okay. I appreciate all that. That sounds great. And then, basically just switching over to the solutions. On the supply chain pressures it doesn't really sound like anything's changed. I mean if anything seven to eight chassis have really improved. Where else -- outside of four to six where else are you seeing kind of acute supply chain pressure in that business?

Bob McCormick

Analyst

It's knock on the wood if you have any wood near you, right? We have been -- yes exactly. We have been pleased with the component suppliers up to this point. Not to say that we don't have a few challenges here and there, but by and large we have not had significant constraints that have held back our ability to build and ship work trucks. Now I put a big caution flag around that because as we enter the winter and we're seeing COVID cases increase. We have no idea what the future holds from a shutdown perspective or from a supply chain perspective. But up to this point, I think it speaks to the strength of our relationships with those suppliers and that they by and large been holding up their end of the bargain.

Sarah Lauber

Analyst

Yes. Tim I would add to that. We do have backlog in those businesses. So for us, we can safely add to our inventory levels which we have been doing just because of the uncertainty of what could happen to the supply chain here in the fall and the winter.

Tim Wojs

Analyst

Okay. Okay. That sounds good. And then the last question, I had just on your vertical integration initiatives I think you said in your prepared remarks you'll talk a little bit more about that next year. But any sort of preview you could give us just in terms of maybe how meaningful a contribution those initiatives could be to 2021?

Bob McCormick

Analyst

Yes. Here the way to think about this group of projects which we've been speaking about now for the better part of the year. 2020 was really the year of product design and capital investment to get the Greenfield facility to a point where it can be producing product. And you're right, we will speak to it in more depth as we round the corner into 2021. I would suggest that this is a long-term play. And that while there will be some impact in 2021, the greater impact will be certainly down the road in 2022 and beyond.

Tim Wojs

Analyst

Okay. Great. Well, I hop back in queue and good luck on the rest of the year.

Bob McCormick

Analyst

Thanks, Tim.

Operator

Operator

Your next question comes from Ryan Sigdahl from Craig-Hallum Capital.

Ryan Sigdahl

Analyst

Good morning. Congrats on the results, and thanks for taking my questions. I just want to dig in a little bit on Dejana. So you mentioned in your prepared remarks that chassis are, I believe you said double the supply from when you acquired that business a few years ago. You also mentioned year-to-date orders a record. Yes, it seems like 2021 expectations are still for some softness kind of across the business and down from 2019 level. So, I guess help me understand the supply dynamics given those two comments, given the constraints you also mentioned in that segment?

Bob McCormick

Analyst

Yes. It's a couple of things. When you think about 2021 for Dejana, obviously, we went out of our way to send a signal about the strength of orders and what a terrific job that that team has done in this environment. Similar to Henderson, during the years of chassis constraints in 2018 and 2019, Henderson was building record order books every year, Dejana is in the process of starting to do a similar thing. That means that long-term, we've got nothing to worry about, okay? Shorter-term, we do have some inconsistent supply with those chassis, but I wanted to remind people I'm actually glad that that stuck with you. It isn't that our OEM partners haven't been paying attention or are not supporting Dejana and our growth initiatives they have, but we're just growing at a pace that is faster than their ability to supply. Now obviously the pandemic doesn't help that at, all right? Because everybody is going through various stages of startup. So I think it's prudent as we look at 2021, we're going to keep the foot on the gas out in the marketplace in terms of getting new orders. It's prudent for us to plan for some inconsistency in chassis supply until we see a change. And likely we're going to have some of these challenges certainly through the remainder of the pandemic whatever that turns out to be, but longer-term we're going to be just fine.

Ryan Sigdahl

Analyst

Got you. And then we saw you guys enter into a distribution agreement with John Deere to support cell attached to their utility vehicles. Any color you can provide on that relationship, and maybe what you guys if anything were doing before versus going forward?

Bob McCormick

Analyst

Yes. Actually thanks for noticing that. We're excited about this opportunity. I'll say two things. It is evidence of the success of our non-truck strategy on the attachment side. As you know, we've got market-leading 50% to 60% share in that space. And so growth is difficult to come by on traditional pickup mounted snow and ice control products. So most of the growth in the industry is occurring in this non-truck segment and this John Deere partnership is evidence that that non-truck segment for us is working. Having said that, I will tell you that this agreement just got finalized, it's very early and we will have much more to say on this topic as we get into the first half of 2021.

Ryan Sigdahl

Analyst

Just one follow-up on that without getting too specific. Do you think the utility segment can be a material contributor and/or this specific agreement as you go into 2021 and beyond?

Bob McCormick

Analyst

In 2021, I don't think we should think about it that way. Keep in mind that when you sell a plow for UTV, ATV, it is a much smaller piece of equipment nowhere near as complicated, nowhere near as profitable. So, even as we sell units, we're going to see revenue and margin improvement, but it isn't the same as selling one of our traditional units. That doesn't mean, we're not excited about it. I think the way that we're looking at this heading into 2021 and is let's make sure we get the partnership kicked off appropriately. Let's make sure that we're bringing the new dealers on in a fashion where we're accustomed to treating them like they ought to be treated. And at some point in 2021, we'll have a better perspective on what 2022 and beyond could look like. I would summarize it this way. It's a tremendous addition to an already extremely successful business. But given the revenue profitability of that business to begin with it's likely not to have a material impact longer term.

Ryan Sigdahl

Analyst

Great. That’s it for me. Thanks. Good luck.

Sarah Lauber

Analyst

Thanks, Ryan.

Operator

Operator

Your next question comes from Chris McGinnis with Sidoti.

Chris McGinnis

Analyst · Sidoti.

Good morning. Thanks for taking my questions. Good morning, Bob and Sarah. I just wanted to talk about market share like you just were Bob. In this environment with your ability to replenish quickly and meet that dealer demand, I know there's not a lot of room. But in a difficult environment like this is this helping you in any way maybe gain smaller market share at least in the snow and ice? And then maybe if you take that same question and apply it to the attachments or the Solutions business as well what you're seeing in competitive dynamics there given you have strong ability to get the products from OEMs? Thanks.

Bob McCormick

Analyst · Sidoti.

Yes. Chris, thank you. I mean, certainly you know Douglas' business pretty well. We look at any uncertain economic environment whether it's snowfall driven or whether it's economic driven, obviously, in 2020 pandemic driven they are all opportunities for us. Sarah mentioned the fact that we've been prudent about cutting our costs and those sorts of things. We absolutely scale the businesses back. But boy, we look at these situations as an opportunity for us to not just exit stronger but that when everybody else is battening down the hatches and kind of hiding in the corner waiting for the headwind to pass. We look at it as an opportunity to better serve our customers and to be more responsive. So is there a possibility we could grab a little market share on the attachment side? Possible. I hope so. It has happened before. Solutions side, I think, similar opportunities exist. Obviously we've got a few chassis challenges with Class 4 through 6. But again, our teams there are learning from the attachments group right? And they are focused on being more responsive in this environment so that our end-user customers just get a reinforcement of the value proposition from those dynamics.

Chris McGinnis

Analyst · Sidoti.

Great. I appreciate that. And then just one quick one just on the cash flow that you're targeting for year-end. I guess where could you see an improvement from that? Is that really just around stronger kind of end market demand? Or is there other, I guess, working capital abilities you have to maybe beat that number? Thanks.

Sarah Lauber

Analyst · Sidoti.

Yes. Yes, we mentioned our free cash flow being greater than the dividend. I would say that opportunity in the free cash flow for the year is two-fold. It will be one just improved earnings. So a strong fourth quarter finish which for us has a lot to do with snowfall. I am expecting working capital to be relatively flat for the year. That would be the second area of opportunity just if we are able to reduce our working capital. It's not been something that we've been pushing hard because we want the inventory level to be there for us when the chassis are here and the ability to get those trucks out the door quicker, but there's always some opportunity that we may be able to execute on in receivables.

Chris McGinnis

Analyst · Sidoti.

I appreciate that. Thanks and good luck. In Q4 hopefully see lot of snow this year.

Bob McCormick

Analyst · Sidoti.

Thanks, Chris.

Sarah Lauber

Analyst · Sidoti.

Thanks

Operator

Operator

[Operator Instructions] There are no further questions at this time. I would like to turn the call back to Mr. Bob McCormick, President and CEO.

Bob McCormick

Analyst

Thank you for your time today. As always, we appreciate your ongoing interest in Douglas Dynamics. We hope that you and your families are staying healthy and we look forward to talking to some of you at the Virtual Baird Conference next week. Have a terrific day.

Operator

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.