Q3 2019 Earnings Call
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I would like to turn the conference over to your host Mr., Charles Albert Chief Financial Officer.
Thank you.
Welcome everyone and thank you for joining us on todays call.
Yeah, we began I'd like to remind you that some other comments that will be made during this conference call, including answers to your question what 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 other matters that we have described in yesterday's press release and in our filings with the FCC.
Joining me on the call today have five 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 and guidance before turning it back to Bob for final comments after that we'll open the call for your questions with that I'll hand, the call over.
Uh huh.
Thanks, Sarah good morning, everyone.
Due in large part to the continued commitment and execution from the entire team here at Douglas dynamics, we were able to sustain our positive momentum and produce strong third quarter results.
Our team delivered record third quarter net sales of $142 million and improved net income of $12.4 million and adjusted EBITDA of $25.1 billion, both considerably higher when compared to the same quarter last year.
The strong financial results reflect the ongoing positive demand trends that we're seeing across both segments.
And the tangible progress that we are making with our Dms initiatives.
Throughout the first three quarters of 2019, we had been impressed with the progress and accomplishments both segments have achieved.
First off highway work truck attachments.
The pre season for commercial snow and ice control products ended well and right inline with our expectations, we experienced an approximate 60% to 40% split a pre season shipments between the second third quarters.
In line with 2018.
Despite this past winter snowfall being generally less favorable compare to the previous year net sales increased 8% in our attachment segment.
This confirms that end user demand is resistant and matches the cautiously optimistic tone, we are hearing from both our dealers and the end users.
When you include the fact that inventory levels and truck sales are in good shape, we are well positioned to execute effect. If we wanted to know starts to fly.
It is worth noting that noninterest snow and ice control equipment sales and our expanded parts and accessories offerings continue to grow, albeit off a small base and out lower margins and I'm excited to see incremental improvements in the years ahead.
Well tariffs continue to result in material cost inflation, we are covering the cost dollar for dollar and continue to utilize our global sourcing office to mitigate the tariff impact where possible.
Transitioning to work truck solutions, where we generated record performance for the quarter.
Our strong top and bottom line growth were driven by a combination of increased volumes and pricing improved operational performance price recovery on higher material costs and greater predictability of class a chassis supply.
We continue to be very impressed by the solutions team's commitment and ownership there continuous improvement journey.
They've developed solutions that reduce costs optimize floor space and significantly improve velocity in throughput.
Not only will these initiatives translate in the world class quality and decrease lead times for our customers.
But I'm confident that these improvements will lead to long term margin expansion.
Just a touch on the chassis situation, we continue to expect lead times to slowly improve.
We are seeing demand for over the road chassis is falling off and aligning with available capacity, which means more production should be allocated to the class eight work chassis is we need.
We continue to anticipate that class HFC lead times will begin to normalize over the course of the next year.
On the class four through six chassis from chassis supply continues to be less constrained overall.
Somewhat unpredictable as a result of supply line issues and component shortages at all major Oems.
At this point I'd categorize the situation as slightly improving overall.
We do believe that we will see less volatility in 2020, although again not starting immediately on January onest.
So that's where we are today.
But I also want to talk about where we're going a.
A conversation we began about a month ago at our Investor event in New York.
We talked about how we win today and how we will continue to win in the future.
I, often remind our team that long term profitable growth is it possible only through delivering meaningful the monster Bowl competitive advantages in the marketplace.
Our core competitive advantages.
Being a total custom solutions provider.
Delivering industry, leading lead times and World class quality have been a center pieces of our business model and up driven our profitable growth to date.
Our long term commitment to continuous improvement through Dms is the fuel that drives these competitive advantages.
For example.
Being flexible and nimble on the shop floor allows us to customize our products to meet our customer specific end use requirements.
Constant improvement in velocity in throughput drive down lead times.
And World Class quality is a result of empowering all shop floors. So she wants to make improvements to product in processes on a daily basis.
Our people truly set us apart at Douglas dynamics, where we create a culture, where all employees are important part of creating them driving our competitive advantages.
And we are committed to growing our people both personally and professionally.
Which is even more critical today in this very competitive labor market.
In the past year Weve doubled down on our commitment to growing our people buy in investing in building an organizational development program with the long term objective of making Douglas dynamics, the employer of choice for top level talent in the working in the truck equipment industry.
So it's not just what we do in leveraging competitive advantages or how we do it through Dms, but who we do would with.
So when combined these three factors are how we continue to win at Douglas dynamics.
Speaking of winning.
A few days ago Douglas received the 2019, so supply chain risk management program of the year Award.
Which recognizes our commitment to our supply chain partners.
We realized a long time ago that the success of our supply partners in turn helps us succeed.
And so we truly collaborate with our partners to help them manage risk and foster improvements.
This award highlights the great work of Jim Class Clots, our senior Vice President of global sourcing as well as everyone involved with our global sourcing Nvidia mess programs.
If you look at who else received these awards, which includes industry leading companies such as general dynamics. It shows that Douglas continues to punch above its weight when it comes to our expertise and approach the business.
No as we look to the next five years, our first priority is to strengthen our market position by leveraging our competitive advantages.
And creating new points of differences in the market.
One such opportunity includes exploring the possibilities for vertical integration.
Leveraging the operations expertise of our attachments group to broaden this product offering.
Of course through Dms, we will execute effectively and take advantage of the growth opportunities we see.
And finally, we will focus on investing strategically.
Balancing our investment strategy to support our growth initiatives.
Chain in growing the dividend keeping considerable capital available to pursue their rights strategic acquisitions across both segments.
As a key to our future success.
When all is said and done I want you to know that we're laser focused on being the best at everything we do.
And we'll not try to grow for growth sake.
By being the best at what we do the growth will follow.
We firmly believe that when you give the customer a high performance high quality custom product in the shortest lead times you will win.
Ultimately we believe this approach will continue to create shareholder value over the long term.
To conclude I'm pleased with our robust year to date performance and EM and I am encouraged that the strong backlog and positive demand trends will continue to trend favorably in the near term.
Based on our visibility through the end of the year, coupled with the him improvements were driving through Dms.
Im confident in our team's ability to sustain the positive momentum achieved so far in 2019.
Now I'll hand, the call to Sarah to discuss our financial results and guidance.
Thanks, Bob I'll follow the usual routine beginning with our consolidated earnings for the quarter, followed by a look at the results for each segment and lastly comment on our balance sheet liquidity and guidance.
As I've discussed in his opening comments, we are pleased with our performance during the quarter due in large part to higher sales from continued positive by demand trends across both segments.
In addition, we are continuing to see the year over year improved operating performance and our solutions segment.
We achieved record third quarter net sales of 141.9 million a 14% increase over the same period last year with gross profit increasing to 39.9 million when compared to 34.9 million in the same quarter last year.
Our gross margins are up year over year due to increase solutions performance, but they were muted by the impact of material cost inflation.
SDN expenses were 17.3 million slightly higher when compared to the third quarter of 2018.
The increase related to higher performance based stock compensation driven by improved operating results. However, as DNA expenses as a percentage of sales declined by approximately 1% to 12.2% this year.
The strengthened demand across the businesses and our improved performance that I've already mentioned drove adjusted EBITDA of approximately 22% to 25.1 million from the third quarter compared to 20.5 million for the third quarter of last year.
Adjusted EBITDA margins increased to 17.7% this year compared to 16.4% last year.
Both net income and adjusted net income also increased over prior year.
For the third quarter 2019, we generated net income of 12.4 million were 53 cents per diluted share.
An approximate 25% increase compared to net income of 9.9 million or 43 cents per diluted share in the same period last year.
On an adjusted basis net income was 12.8 million or 55 cents per diluted share compared to adjusted net income of 10.1 million or 44 cents per diluted share for the third quarter of 2018.
Interest expense was 4.3 million for the quarter, which was slightly lower than the 4.4 million incurred in the same period last year, primarily due to the reduction of the principal balance of our term loan credit.
The effective tax rate for the third quarter of 2019 was 20% higher compared to 10.4% for the same period last year.
The current effective tax rate was higher due to a decrease in the release of reserves for Unsi certain tax position of 500000.
Additionally, the company made a voluntary pension funding payment during the third quarter 2018 of 7 million that reduced taxable income for that year.
<unk> increased pension funding deduction in term resulted in a tax benefit of 700000 further decreasing the tax rate for the third quarter of 2018.
Now lets transition to review results for the two segments.
For the third quarter attachments recorded revenue of 75.6 million and adjusted EBITDA of 18.7 million.
In the same period last year. This segment's revenue and adjusted EBITDA were 69.8 million, an 18.8 million respectively.
The increase in net sales compared to the third quarter 2018 is mainly attributable to a strong conclusion of the preachy pre season shipment and price recovery on the higher material cost.
Adjusted EBITDA and attachments was relatively flat to the prior year. However margins were negatively impacted due to the impact of material cost inflation.
Increased investments in the business.
And a shift in product mix as we expanded sales of our non trucks snow and ice control product, which typically so at lower margins than our truck mounted product this quarter.
Turning to work trucks solution.
We reported net sales of 66.2 million and adjusted EBITDA of 6.4 million for the third quarter.
In the same period last year the segment net sales and adjusted EBITDA were 55 million and 1.7 million respectively.
The improved results relate to ongoing strength in demand, resulting in higher volume.
Price recovery on higher material cost.
And greater predictability of class eight chassis supply, which is helping the operations to operate more efficiently.
The adjusted EBITDA margin growth and solution is primarily a result, the success of our pbms initiatives and global sourcing efforts and continued lower spending.
With that said I'll now turn to the balance sheet and liquidity.
Net cash used in operating activities. During the first nine months of 2019 was 21.2 million.
Compared to cash use of 17.9 million during the same period in the prior year.
The increase relates to higher receivables balance as a direct result of our robust pre season results. This year.
As a reminder, and change in cash on a quarterly basis is highly correlated to our seasonal business and is not necessarily indicative of cash generation for the full year.
Free cash flow for the first nine months in 2019 was negative 29 million compared to negative 24.2 million during the same period in 2018.
Similarly, the decrease in free cash flow is driven by the timing of working capital invested in accounts receivable.
Which were 153.2 million at the end of the quarter compared to 128.2 million at the same period last year.
Inventory was 90.4 million at the end of the third quarter of 2019, similar to 89.4 million at the end of the third quarter of 2018.
Relatively flat to last year, we are still experiencing higher inventory levels than historically to ensure a timely delivery to our customers in light of tightening of supply chain.
In terms of total liquidity, which is comprised of four point mill 9 million in cash and $42.4 million borrowing capacity under our revolver was approximately 47.3 million at the end of the third quarter compared to liquidity of 57.7 million at the end of the third quarter last year.
Sure.
This lower liquidity again relates to the timing of the increased working capital around accounts receivable.
Although we covered this topic extensively our recent Investor day, I'll, just reiterate our cash usage priority as you already know during the first quarter, we increased our dividends for the 11 time in the past nine years and also made an additional 30 million dollar payment on our debt.
Today, our net debt leverage ratio has declined to 2.5 time down from 2.9 times at this point last year.
In addition to methodically growing our dividend and paying down debt. We are focused on investing in our businesses growth project and we plan to continue to look at potential strategic acquisition.
With this focus capital expenditures of 7.8 million for the first nine months of 2019 are higher when compared to 6.3 million. During the first nine months of 2018 due to the mentioned ongoing investments in the business.
Based on our strong year to date operational performance combined with ongoing positive demand friends and both of our segment.
We are again reaffirming our outlook for the year.
While this isn't really news given we already did so at our Investor event in early October let me walk through the detailed quickly.
We continue to expect net sales between 520 million and 560 million.
Adjusted EBITDA in the range of 95 million to 115 million.
And adjusted earnings per share between $2 and $2 and 40%.
A couple other items to consider.
First we anticipate our effective tax rate to be approximately 25%.
And second in the fourth quarter, we expect to incur onetime expense related to the termination process for our pension plans.
This will impact GAAP earnings per share by approximately 25 cents, but we will have no impact on adjusted earnings per share.
The Finalization of this activity will not have a material impact on our free cash flow for the year.
At this point in the year, we still have a wide range because of the wildcard in the fourth quarter, notably snowfall.
However, it's fair to say that if we experienced average or above average snowfall in core markets.
And chassis availability tends not to deteriorate. We believe we will end the year on the high end of our sales guidance and at the middle to upper end of our earnings guidance region.
The success of implementing price and this inflationary market throughout the year is driving our sales higher without significant impact to EBITDA earnings per share.
We have sustained a positive momentum through out at this point in 2019, which fully supports our guidance. We will continue to focus on the factors within our control and on executing our long term strategy.
With that I'll turn the call back to bottom.
Thanks Sara.
In in summary.
I couldn't be more pleased with our year to date results and we're well positioned to close out 2919.
Our teams in both segments continue to execute and the focus on continuous improvement is consistent throughout the organization.
At Douglas dynamics, the future continues to be bright I'm excited about the rest of 2019, the next five years and beyond.
With our prepared remarks complete we would now like to open the call for questions.
Operator.
Ladies and gentlemen, you can you have a question at this time. Please press Star then the number one key on your Touchtone telephone.
If your question heterogeneous answered or are you wish to remove yourself from the Q. Please press the pound Keith.
[noise].
Your first question comes from the line of Steve Dyer from Craig Hallum Capital trip, Steve. Your line is now open.
Good morning, and congrats on the quarter Ryan on for Steve here.
Thanks, Ryan Thanks, Ryan.
So it sounds like everything is going well ER chassis supplies incrementally getting a little bit better and Sir you made some comments on the Q4 guide basically the uncertainty with snow fall, but besides that uncertainty I mean, the implied guidance is for two.
Two person sales decline at the very high end of the range and then getting worse as you go down but are you seeing anything else I guess, that's giving you caution to expected sales declined in Q4, besides the snowfall uncertainty.
Actually Ryan no I mean, when we honestly expect growth and both of our segment.
When looking to the full year I mean, there there was just really caution around one snowfall which is always.
Always important for the fourth quarter.
But the general other news Oems strikes whether in the news and those types of things just made the chafee a little bit more of a question for us.
So so the expectation like I said would be high end from a from a volume perspective, I wouldn't read anything into.
The than not changing up the guidance for the year.
Great that's helpful.
Ben as you move over to margins I'm. So there was some margin headwinds related to investments in the business and you mentioned at your analyst day. This increased focus on this non snowfall truck attachments can you elaborate a little bit I guess on how much was spent on new product development in the quarter and then maybe how that compares to prior quarters and then.
You know any expectation I guess over the next several quarters of how that spend as well as kind of the future revenue contribution looks like from acute and standpoint.
Sure sure I mean, let me talk just Tibet attachment overall I mean, the let's focus just on attachment.
When they set the stage there I mean, we're almost at 25% EBITDA, So still awesome earnings profile for the business.
There were three thing that happened this quarter that that we've talked about but essentially although they lowered the margins. They were all positive one being the fact that price is covering inflation. However that just from a mathematical standpoint. The dollar for dollar is impacting them.
Jim.
To the increased sales in our non trucks now are.
Noninterest products.
So we're growing there. It's just the fact that it's not going to carry the same margin profile as our truck mounted products.
And then third investments in the business, which I'm also a positive for for long term.
It didn't show up somewhat in the third quarter compared to last year, all although still high margins for the business.
I expect in the fourth quarter that fourth quarter attachments margins will improve.
We will have more of the.
On pricing and material equilibrium happening in the fourth quarter. So I expect going forward both will those one true.
Yeah, Let me look let me add on a couple a couple extra comments to that.
I want to be clear the base margin profile of this highly profitable business the truck mounted snow and ice control portion of this business is not deteriorating.
Okay.
We are focused on that laser focused on that profit grows every year on that core product line.
And and there's there's nothing to be concerned about their silver is other comment, which I think is worthy of of expanding on you know when you when you've got a business with 50% to 60% market share in the in the core product category.
You are challenged to find new opportunities for growth.
And our focus in the non truck market and into parts and accessories area is absolutely the right place to be I'm thrilled to death with the topline revenue growth opportunities that we have there and if that comes out more normal industry margins.
We should be high five being in the in the in the hallway. This is a great business that continues to not only grow the topline in these areas, but also protect and grow the bottom line.
And then just one quick follow ups there on what you mentioned I'm expecting Q4 attachment margins to improve is that on a year over year basis or a sequential basis Q3.
And year over year end and sequential.
Great last one from me and then I'll turn it over the.
The free cash flow burn you commented on some of the moving parts are in a lot of that a seasonality and working capital changes, but you, but as you know nicely higher year over year year to date as well as the guide implies.
Is it reasonable to assume free cash will be up year over year for the entire year when all of sudden done. Thanks. Good luck.
Yeah, our expectation is that it would be up and looking to the EBITDA is probably the right approach.
Your next question comes from the line of Chris Mcginnis from Sidoti Chris Your line is now open.
Good morning, Thanks for taking my questions and nice quarter.
If we could just maybe touch on some broke from the attachment side was there any reasons that were were stronger than than others all sand.
Yeah, I would I would I would point to one I was I was hoping somebody would ask about this.
At our at our industry trade show in March we introduced what we consider to be.
Revolutionary industry, leading new Elie de headlights that go on the front of our of our of our cloud trucks.
Second to none in terms of visibility in terms of the profile that they cast across the areas that you are plowing and we've received nothing but tremendous response to that product introduction and essentially the first round of orders of those products shipped during the third call.
Order so that was the largest driver or something we're excited about and clearly again continues to position that business.
As somebody whose products outperform competitors' products, thus justify an hour price leadership ship position out in the marketplace.
Great I appreciate that and then he regions off hand, though or.
Hey on geographical basis, driving stronger anywhere else or is that sort of just kind of normal course of work through your.
I would say, it's pretty normal normal course, and you know where we are getting some not significant but we are getting some early snowfall across parts of the snowbelt at this point and what we what we say at this point is that so that's that's called psychological snow.
But which doesn't really necessarily mean that there's a lot of plowing taking place, but it gives the landscapers a chance to contemplate whether this is going to be a long heavy season and most times leads leads people to.
Suck up on equipment and and get ready earlier. So we are looking forward to that positive momentum from this this early snow.
Great.
And then just go into the solutions business just the growth there your way to parse it out between maybe Henderson performed a lot better versus the kind of the traditional dejana business all of them.
Yeah. When you look at solutions growth for the quarter you know very.
Good growth for both businesses.
They were both pretty much in wine with strong demand across across the class for all the way the class eight.
Was there anything I.
I guess, just a pretty strong number obviously anything.
Special there in terms of the gross a you know that helped fuel that most thanks.
Hi, Mike.
I might just just add that that while.
While we are seeing chassis trends on the on the class eight sites start to fall in line with expectations that we think will impact 2020, we're still seeing pretty long lead times.
For those those those chassis is the reason the Henderson business is up is because order intake continues to be robust and if you go back a year.
The order patterns at Henderson were strong a year ago six months ago in nine months ago, and those orders got into the OEM systems with plenty of time for delivery yet into the third third quarter. So we can see increased revenue on the Henderson side, even though lead times.
Remain a fairly long just because we're able to get those orders into the system six 912 months ago. So.
I'm I'm I'm expecting even better things once we start to see the chassis lead times actually started to come down in 2020.
Okay and just last question I think you referenced a within the solutions business supplier rationalization, obviously at the.
At the Analyst day, you highlighted on the on the attachment business, which is on there can you just maybe talk about that opportunity and maybe where it's at today and where do you think it could go over time.
Yeah, I would I would I would state that's a that's an excellent question I would state that most of the opportunity still still lies ahead of us.
The excellent results that you've seen in our core business on that front.
That was probably.
Five to seven year initiative led by Jim Clutch and and Jim is just now beginning to to lead both of these solutions group businesses down that down that path. So we're just scratching the surface on that side I would expect to see a positive things over the next couple of years.
As we embark on.
Not just trimming some.
Suppliers that that that that just can meet douglass performance expectations, but more importantly, as we strengthen partnerships with the right suppliers for our long term growth.
Great. Thanks, very much and good luck in Q4 Richard.
Thanks, Thank you.
Okay.
Again, ladies and gentlemen, if we have a question at this time. Please press Star then the number one key on your touched on telephone.
I'm showing no further questions at this time I would now like to turn the conference back to Mr., Bob Mccormick, President and CEO .
Thank you for your time today on your ongoing interest in Douglas dynamics, we look forward to seeing some of you at the Baird Conference Tomorrow in Chicago. Thank you.
Okay.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect.