Q4 2019 Earnings Call
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Thank you.
Welcome everyone and thank you for joining us on todays call.
Before we begin I'd like to remind you that some other comments that will be made during this conference call, including answers to your question.
Well 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 to discuss our results, it's Bob Mccormick, our President and Chief Executive Officer Bob.
Thanks Sara.
Good morning, everyone. Thank you for joining us.
For the full year, ending 12, 31, 2019 Douglas dynamics delivered tremendous results with record net sales of $572 million and record adjusted EPS of $2.42. This.
This outstanding performance in 2019 is even more impressive.
Considering the headwinds we experienced throughout the year.
Namely below average snowfall for the season ending in March 2019.
Continued long lead times on class eight chassis is an uneven supply of class four through six chassis as.
Well mitigating the effects of these external challenges we focused on factors within our control.
Providing high quality products solutions to end users, which improved performance with their work trucks.
Drug and productivity in margin improvements throughout our facilities.
And maintaining our focus on getting better every day.
I want to congratulate all Douglas employees for their first class execution and dedication to serving our customers.
What is quite a year.
From a work truck attachments perspective, we overcame to below average snow season delivery near record results.
Outstanding performances, driven by a combination of the ongoing success of our new product launches.
[noise] for our non truck mounted equipment, such as applause for sketch, there's an H.T.V.'s strong acceptance of a more robust parts and accessories offering plus strong operational execution.
Moving onto the current snow season, we got off to good start in October and November but the months of December and January so little snowfall and above average temperatures across much of the snow belt.
In total through January.
<unk> falls below the 10 year average across the cities we track.
More specifically, while the mid west has seen a reasonable snowfall so far.
New England remain significantly below average.
Having said all of that there's still a lot of winter weather.
As we've seen in the past two winter seasons, there can be significant snowfall in March and even April.
At the moment, though we are on pace to see a below average snowfall season, which could impact our pre season order in Korea.
At work trucks solutions, our record top and bottom line performance were driven by a combination of increased volume and price and EM improved operational performance.
Our order patterns remained strong during 2019 the teams at both the Ziana and Henderson are seeing success and apply and Dms continuous improvement concepts in a custom up fit environment, resulting in both reduce lead times and margin improvement.
Of course, the chassis situation remains a challenge for both of these businesses.
We expect supply of class HFC is to start to improve in 2020.
Demand for over the road chassis is continue to continues to fall as predicted.
Which should result in more production being allocated to the class HFC is we need.
At this stage, we believe most of the improvement in lead times will occur in the second half of 2020.
For medium duty class four through six chassis is we are again experiencing chassis supply constraints due to tight supply lines and component shortages and many of the work truck Oems.
And while we did experience class four through six chassis shortages. During 2019. The early signals are that shortages in 2020, maybe more severe and last longer.
At this point, we expect these shortages will impact our business throughout the first half of 2020.
While we continue to monitor these situations closely mitigating the impact where possible. We acknowledge that these external challenges will hinder our growth in the short term.
But let me make one thing clear.
We're very encouraged by the long term prospects for the solution segment.
As we approach the first anniversary of him taking on the role John Secret is doing a great job as president of work truck solutions.
Under his leadership teams are positioning both agenda and Henderson for long term profitable growth by expanding our competitive advantages and leveraging synergies across the businesses.
At this point I like to speak to a new headwinds that are starting to impact the global economy, and that's the Corona virus.
As you May know, we have a global sourcing office in Beijing.
Team of people dedicated to supporting our U.S. production up at facilities with high quality products sourced throughout Asia.
Their safety is paramount importance to us.
Through mid February we instructed this team to work from home.
Which was standard practice across most of Beijing during this time.
We're pleased to announce that they have returned full time to the office resuming their normal movies.
From a business perspective, we believe there will be an impact not only on the direct supply of components from Asia, but also when those in the supply of components from our U.S. supply partners, many of whom also source components from China.
As the as the situation remains fluid, we are going to be able to predict the impact with any sense of accuracy, but expect supply chain shortages will begin the show themselves in the coming much.
We are in constant contact with both our U.S. and trying to sourcing teams and we will provide updates as the situation unfolds.
At Douglas dynamics, one of the things we take great pride in is seen around corners.
One of the downsides of such a robust long running favorable economy is a tightening labor market, especially in manufacturing.
While this is something that most us companies have been experiencing in recent years, we have doubled down on our commitment to attract and retain talent by building high performance organizational development capabilities to try to drive ongoing development of our most precious resource.
Our people.
As a follow onto some of the items, we discussed at our Investor event that October 2019, I'd like to share some results regarding our our organizational development program, we kicked into high gear, almost a year and a half ago.
In 2019, we delivered 50 training and development sessions to more than 360 people.
Largely targeted to managers and supervisors at facilities around the country.
We believe this group is key to promoting development across the teams they manage.
I am happy I'm happy to report that the feedback from this group was extremely positive over 90% of the people would recommend the courses to colleagues.
That kind of rating is significantly higher than national averages for similar training programs.
While we got off to a great start last year. There is still a lot more for us to do.
Our main focus in 2020 is to reach more shop floor associates and and to ensure that we are tailoring the program to support their continuous improvement cdms initiatives.
Finally in an organization like Douglas dynamics, whose success is centered on creating hundreds of decision makers at all levels in the organization. It is often the development of so called soft skills that have the most impact our program focuses on those soft skills.
I feel strongly that if you provide your people with the proper tools and training.
Put them in a collaborative continuous improvement environment.
And asked them to folks some better serving our customers.
Good things will happen.
With that complete I'd like to turn to our cash usage priorities yesterday, we announced an increasing our dividend that Sarah will speak to in more detail.
This increase marks the Twelveth time that we've raised our dividend in the past 10 years reinforcing the fact that our dividend remains our top priority and we're firmly committed to protecting and growing it over the long term.
Next we.
Continue to make new investments across our business in order to best position ourselves for sustained success.
We believe these investments will translate into our organization being able to deliver even higher quality products and services to our customers in a more efficient manner and ensure we maintain our leading positions in the markets we serve.
Finally, we also want to ensure we have capital available to pursue strategic acquisitions, which will add important products and services to our portfolio.
To conclude I am proud of our strong full year performance and the strides we've made across our organization.
While external headwinds will always exist. It does seem as though 2020 will have at least its fair share.
But that's okay.
At Douglas our business model is built around managing many factors outside of our control I can promise you. This.
Well navigating these challenges our teams will be laser focused on serving our customers and getting better every day.
So that when conditions improve we would be better positioned to meet our long term profitable growth goals, we will have expanded our market leading positions and will be a more efficient company.
We are encouraged by the many long term trends across the truck equipment industry and look forward to addressing the challenges ahead.
With that I'll hand, the call to share it to discuss our our financial results and guidance.
Thanks.
I'm, just going to jump right into our full year and fourth quarter financial results and we will then touch on our outlook for 2020.
Thanks to the hard work on all the Douglas team, we were able to deliver a banner year in 2019 full year net sales were a record 572 million, which have a 9% increase over last year.
The increase was driven by multiple factors across both segments.
As mentioned last quarter work truck attachments experienced a strong preseason order period. They also benefited from new product launches.
Thanks, and non truck equipment and increased parts and accessory sales.
And work truck solutions, we experienced strong demand across all classes through class eight truck markets.
In addition to pricing recovery on higher material costs and the benefits of generally improved class eight chassis supply predictability.
Gross profit for 2019 of 168.8 million or 29.5% of net sale compares to 154.9 million or 29.6% of net sales in 2018.
Gross profit margin was inline with the prior year and we're very pleased with the impact of improved operational efficiencies, particularly in our solutions business.
We were also successful on recovering price on material inflation within the year.
This dollar for dollar impact was dilutive to gross profit margin.
In addition, we experienced higher labor in health care costs, which had a negative impact on margin.
On a GAAP basis full year net income of 49.2 million or $2.11 per diluted share increased from 43.9 million or $1.89 cents in 2018.
Our strong full year performance across all operations resulted in record adjusted EBITDA record adjusted net income and record adjusted earnings per share.
We produced full year, adjusted EBITDA of 108.1 million compared to 96.4 million for 2018.
And 2019, adjusted net income of 56.3 million or $2.42.
Adjusted earnings per diluted share increased from 47.4 million or $2.04 in 2018.
Now I'd like to briefly cover our fourth quarter results, which also displayed topline straight compared to last year.
For the fourth quarter of 2019, we reported net sales of 160.3 million, an approximate 6% increase compared to net sales of 151.8 million and the same period last year.
Gross profit for the quarter was 46.3 million compared to 44.1 million in the fourth quarter last year.
As a percentage of net sales gross profit was 28.9% compared to 29% and the same period last year.
SGN expenses for the quarter were 18.6 million 1.9 million higher compared to 16.7 million recorded in the fourth quarter last year.
The increase was driven by higher variable compensation due to better performance and higher benefit and health care costs.
We produced adjusted EBITDA of 29.9 million in the fourth quarter compared to 28.8 million for the same period last year. The increase in adjusted EBITDA was primarily related to continued strong momentum we are experiencing within our most profitable work truck attachment segment.
It's also worth noting that we completed the plan termination of our pension plans in the fourth quarter.
Recorded related one time expenses of 5 million net of tax.
This drove a decline to our GAAP basis fourth quarter net income of 11.6 million or 50 cents per diluted share compared to 14.7 billion or 63 cents per diluted share for the fourth quarter of 2018.
However, on an adjusted basis, which excludes the onetime pension termination expenses.
Fourth quarter net income was 16.7 million or 72 cents per diluted share an increase over the 14.4 million or 62 cents per diluted share for the corresponding period last year.
Now, let's look at the segment results for the fourth quarter.
Work truck attachments recorded revenue of 79.9 million and adjusted EBITDA of 21.3 million compared to revenue and adjusted EBITDA of 77.3 million and 20.2 million respectively.
The increase does for both net sales and adjusted EBITDA can be attributed to the ongoing positive demand trends that we're seeing combined with pricing recovery material cost.
The work truck solution segment recorded revenue of 80.4 million and adjusted EBITDA of 8.6 million in.
In Q4 last year, the segment's revenue and adjusted EBITDA were 74.5 million and 8.6 million respectively.
Net sales were higher based on continued strong demand price recovery on higher material cost and ongoing improvements and class eight chassis supply predictability.
Adjusted EBITDA was flat on an absolute basis, but down 80 basis points as a percentage of sales due to increased labor and health care costs.
Turning to the balance sheet and liquidity figures for the full year 2019.
Net cash provided an operating activities. During 2019 was a record 77.3 million compared to 58.2 million in the prior year.
Free cash flow of 65.8 million increased over last year by 17.3 billion.
The teams have been working diligently on inventory management and have successfully lowered inventory levels that were built up last year in anticipation of Europe and rising prices.
As a result total liquidity was approximately 135.1 million at the end of 2019, which includes 35.7 million in cash and 99.4 million in borrowing capacity under our revolver compared to last year's liquidity of 122.4 million.
As I've said many times in the past, we prioritize our dividends and also remain committed to reducing our debt.
We paid a dividend of 27 and a quarter cents per share of our common stock at the end of December. In addition, we will increase the dividends for the 12 time and 10 years. So 28 cents per share for the first quarter of 2020.
Which equates to a projected full year annual increase of three cents.
Net debt of 245.8 million at year end is down from 278.1 billion at the end of 2018 due to the 30 million dollar pre payment. We made early in 2019 to reduce our borrowings.
In addition, we just recently made an additional 3 million dollar payment our debt based on our strong financial and cash performance in 2019.
As a result, our net debt leverage ratio has declined from 2.8 times last year to 2.4 times at the end of 2019 and 2.3 times today.
Subsequent to the 20 million dollar payment.
Capital expenditures for 2019 totaled 11.5 million, an increase of 1.8 million when compared to 2018 capital expenditures of 9.7 million.
The increase is driven by ongoing investments in the business focused on our long term growth.
Overall, we're very pleased with our 2019 performance.
We continue to be encouraged by the progress we've made towards our long term goal.
Turning to our 2020 guidance.
We expect to deliver net sales between 530 590 million.
Adjusted EBITDA in the range of 95 to 120 million.
And adjusted earnings per share between $1.95 cents and $2.75.
We also expect our effective tax rate to be between 23 and 25%.
As we look at the year it'll be very difficult for the attachment segment to achieve similar results in 2020 as they did in 2019, given the strength of the near record 2019 result.
Yes, the likelihood that this will be the second winter in a row was below average snowfall and the multiplier effect that create.
It will also be a major challenge for the solution segment to repeat their record performance across the board again this year.
We will continue to be impacted by talking supply issues of various kinds from class four through class eight for the foreseeable future.
Plus the supply of components and other attachments for our outfit are likely to be impacted by many external factors.
With that as a reminder, we view our guidance at this time of the year to encompass most scenarios except for the tail end of the bell curve, largely driven by seasonality of snowfall and dramatic changes around either supply chain for chassis availability.
We view this guidance as a realistic view of 2020, given the strength of our performance in 2019, which will make for a tough comparison.
While we made significant progress on 2019, we don't expect our results to show linear improvement every year.
Hi, Bob discussed earlier the teams at Douglas have experienced navigating through dynamic time.
We will focus on what we can control while working through the impact of chassis supply changes and the unpredictable predictable economic impact of the unfolding Corona virus crisis.
We will remain laser focused on talent and winning and a very tight labor market.
We remain confident in the long term goals, we laid out at our investor events in October of 2019, and we are now fully focused on producing the best results possible and 2020.
With that said I'll turn the call back over to Bob.
Thanks Sara.
In summary, we are very pleased with our full year results for 2019.
We do not celebrate prolong here at Douglas dynamics, we continue to be encouraged that we're in a strong position to deliver on the long term goals that we've set forth in our five year plan.
But we are realistic regarding some of the short term challenges we currently face.
Nevertheless, the underlying fundamentals of both of our segments are strong and we're well positioned for long term success.
Before I open up the floor for questions I just wanted to thank our team for their ongoing dedication and tireless efforts on behalf of Douglas dynamics, and our brands and making my first year as CEO of very enjoyable one.
With that said, we would now like to open the call for questions.
Operator.
All right, so ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone.
If your question has been answered or you wish to remove yourself from the Q. Please PRASA pelkey.
Your first question comes from the line of team Weiss from Baird. James Your line is now open.
Good good morning, everybody.
Good morning, Tim.
Maybe just to start how I know you guys typically walk into year with a pretty wide guidance range any anyway, just to frame, how how youre thinking what the.
I guess anyway to frame, how the midpoint should kind of core spine and your eyes to kind of what you're seeing in externally. So.
The midpoint I think implies revenues down a little bit I think it does sound like you will see revenue challenges in both businesses.
And then how should we think about the drivers of just kind of EBITDA at the midpoint motorcar, though that the offset it kind of the positives and negatives reach.
Yeah, No great question Tim.
In the way I'm thinking about the guide on Oh, Paul as you know, we always have a wide range going into the beginning of the here I'm just to cover from us snowfall perspective.
Okay and this year sitting here into February this looks like it could be another low snowfall year.
Which when compounded the situation just from a standpoint than it would be two times and almost two years in a row of that but I mean, you take a step back our team knows how to manage through that and that's that's typical for us.
But when we look at a broader view there there's just seems to be more headwinds going into 2020 than we've had historically.
Weve.
Okay. That's four through six said that Bob mentioned, we expect could be more severe this year from from just the volatility of of supply.
Class a eight basically continues like it was on the fourth quarter.
But we have an expectation that will improve but not till the back half of the year.
We are starting to see some labor shortages and Thats starting to show and then we have the wildcard of the Corona virus.
So I think when we take all of that collectively and you look at the range, our midpoint does point directionally to being down year over year.
As I sit here today, that's probably.
That's where I land.
So you take that and then translate that to the but EBITDA guidance.
So first I'll start out by saying the fundamentals of the businesses are our sounds.
And and as Bob mentioned I mentioned, we will focus on what we can control.
When it comes to an earnings perspective.
We had a lot of traction Nvidia Matt in solution.
We expect will continue into 2020.
We're going to continue to focus on growth, we laid out a lot of our plans on investor day that will be occurring in 2020 investing in our talent.
We're going to focus on our long term decisions.
But you know, even having said all that.
The volume that I, just walked through could math.
Some of the some of the favorability on the EBITDA side. So I think just from a midpoint perspective, that's a fair play on which shows just the challenges of not having year over year growth.
So I think Tim I would I would I would just said a couple of things I mean, you've been you've been around us long enough to know that our guidance typically as it gets adjusted throughout the year is based upon the impact of snowfall and pre season orders and and things tied to weather.
In this particular case, you're likely to see.
More of our guidance adjustments throughout the year being made for things that we quite frankly don't yet I understand the total impact of Corona by risk being one of them and we're not alone there are certainly.
And this this class four through six chassis supply challenge.
Well, we've had them before as I said earlier the early indications are that it may be.
More severe and last longer last year was choppy.
30 days were good 30 days were bad 45 days were bad 50 days were good we're getting early signals that it's more sustainable I mean from a from a timing standpoint.
That we're not going to see swings up and down that we're going to see challenges at least throughout the first half so.
I think keeping an eye on guidance. This year is going to be probably one of the bigger challenges Sarah has and theyre just going to be a number of factors that will influence that in addition to the normal snowfall adjustments. Okay. Okay. No. That's that's helpful. No. I know you guys typically have a wide range. So I think it's just going to kind of get some color on kind of kind of where you're thinking through.
Fallout.
I guess.
Kind of on that on that same kind of line of line of questioning Atlanta answering Bob do you expect are you embedding that the pre season period. This year is going to be down relative to last year, just given the kind of two years of potentially below average snowfall.
It's too early yet for us for us to tell Tim I will I will tell you one of the interesting things that were that we're seeing is that retail inventories are in pretty decent shape. I know you guys do some checks the checks we've the checks we did at the end the January.
Showed that retail inventories were better than we thought they might be end and what that probably translates to is that the dealers had a more robust selling season. When the landscapers are converting from summer to winter before the snowfall even showed itself and that's likely driven by the continued strong economy in the.
And still the record pickup truck sales right right.
So from that standpoint inventories should be okay.
But as Sarah indicated when you get two years in a row of below average snowfall that that that has a multiplier effect I would expect pre season orders to be to be lower OCA, assuming that we don't see any wonderful terrific snowfall here over the next couple of months yes.
Right because like the only management team that love snow.
So.
And then and then on the on the on the medium duty classes, what what's changed.
You know I.
I guess I would say.
Nothing's changed in that when we hear about the supplier.
Our OEM supply chains, giving them fits that was the same as last year. It was actuals one month and then it was transmissions.
90 days later.
We are hearing similar things again, it's got to be very frustrating for them.
So we're not hearing anything new.
The only new information that we are getting at this point.
Is that they are sending a clear signal that this is going to be would that this is going to be with us for a while.
We still just as a reminder.
We are forge number one pool chassis recipient for 14 to less 16 years into 2019 that hasn't changed.
So we still enjoy the most favorable position within the major Oems have anybody in the in the markets. So we know that Winchester you'd become available.
We'll get our fair share before the rest of the world, but this is like any other headwind. This is something we after that we have to work through okay. Okay. And then just just the the last question ahead.
Can you just remind us when you put through the the price increase in attachments and kind of when that Danny anniversaries.
Yes, let's see I mean, we look at it obviously every year prior going and prior to pre season, the that last increase anniversaries here I think April one.
So we'll have the.
Year over year favorable impact in Q1, and then the teams will be looking at that.
Right now on what they're going to do for 2020, okay. Okay, great well. Thanks for the thanks to the help good luck on 2020 nice job on 2018. Thanks.
Okay.
Your next question comes from the line of Brian seek though from Craig Hallum capital.
And your line is Hamilton.
Good morning, and congrats on the quarter.
Thank you.
So you mentioned supply chain disruptions for the solutions segment due to Corona virus, another kind of global supply chain issues there.
Do you expect any impact in the attachments segment.
Oh sure sure I mean it it is.
When you when you look at our global sourcing office, we have in China that office opened up a decade ago to serve at that point, what was exclusively the commercial snow and ice control business and still the lions share of the dollars that we source through through.
Asia are for the attachment side.
So I would expect it to impact both segments.
We just don't understand how I mean, you know, we will not how but when and when and how much everybody care reached 30 days of inventory on the on the ground. If you sourced from China, We're no different.
We've been in contact with our major manufacturing suppliers in China, 80% of those suppliers were up and running a last last week the plants were up and running so that's all good news.
But we also know that.
People are coming back to those factories from a full employment perspective right away we.
We know that says that putting boats on the water and even even people who want to airfreight shipments are going to be able to because of the flight restrictions that have been that have been in place. So it isn't a matter of if we're going to have some.
Shortages it as a matter of when and to what extent, having said all that.
We will be will catch up.
We have you know locally Luckily this happens during the first quarter when we've got the balance of the year to get the supply chains full again and I'm confident that our teams will will be all over making sure that that happens, but again it falls in the category right now.
Have we can't quantify it.
We just know that logic tells us to be prepared for some shortages that will impact both segments.
Gotcha makes sense.
Then just you've talked quite a bit about guidance and kind of the year, but you noted basically oh below average snowfall year, thus far operating guidance. It assumes a normal snowfall year. So I guess should we.
I think that the year as we speak today without kind of giving credit to what happens rest of the winter, but that we're kind of trending maybe towards the lower end of that range or how do you think about kind of the high and low end and midpoint of guidance. Yes. I mean, the ranges is meant to encompass most variability of snowfall. So when we look at the mid.
Point that adds assuming average snowfall and then there's going to be plus or minus depending on actual snowfall, but it gets a if we if we end up with our second below average snowfall year.
That's that's a logical conclusion to draw yes, yeah.
Great. That's helpful. That's it for me a good luck guys and I'll hop back in the Q.
Thank you very much.
Yes.
Again, ladies and gentlemen, you have a question at this time. Please press Star then the number one key on your touched on telephone once again data star one cubic question.
I'm showing no further questions at this time and selling all like to turn the conference back to Mr., Bob Mccormick, President and CEO.
Thank you for your ongoing interest in Douglas dynamics, we look forward to seeing some of you soon as he NT a work truck show in Indianapolis in early March and that the Sidoti Conference in New York at the end of March.
Have a terrific day.
Ladies and gentlemen, this concludes today's conference and thank you for participation in half are wonderful day to me all disconnect.
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