Q1 2021 Douglas Dynamics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the talk with dynamics, the first quarter 2021 earnings 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, if anyone should require assistance. During the conference. Please press Star then.
Moving on your Touchtone telephone as a reminder of this conference call is being recorded I would now like to turn the conference over to your host Sarah Lubbock CFO. Thank you Ma'am. Please go ahead.
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 other matters that we have described and yet 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.
For the moment, Bob will provide an overview of our performance then I will review our financial results and guidance after that we'll open the call for your questions.
With that I'll hand, the call over to Bob.
Thanks, Sara good morning, everyone.
We're off to a fantastic start in 2021 was a record first quarter results.
I will keep my comments fairly brief today for two reasons.
Number one this is about.
The straightforward a quarters, we've experienced recently or could have hoped for.
Number two of the near term challenges, we face will be very familiar to you same as every other manufacturing in the auto related company that you follow.
Both of our segments turned in strong results attached mentioned buoyed by the heavy snowfall during February in many key markets and solutions improved as more normalized levels of business activity return.
Our teams put forth tremendous effort to produce strong results. This quarter given the pandemic was still in full force across the country for most of Q1.
And while things have gotten much better today than a year ago, and we've learned to operate effectively within the pandemic, we are not completely out of the woods.
We are still seeing COVID-19 related absenteeism and the number of our locations.
But we are proud of our team for their resolve flexibility and creativity as we strive to exceed our customers expectations, while placing a high priority on the safety of employees.
Generally very happy with the demand outlook in both segments, which sets us up for long term success.
The biggest headwinds that we face today are similar to many other industrial oriented companies number one supply chain disruption and from component shortages.
We're in the early stages of this challenge and much uncertainty exists. We do expect performance will be impacted through the balance of the year.
Material price inflation is also a factor.
And our margins will be impacted in the near term as our pricing typically lags actual cost inflation.
But we will recapture it over the long run.
The number three we continue to navigate the tight labor market. This is a common challenge across the U S. Skilled workers are simply hard to find.
We are of great HR team, finding creative ways to attract and to retain quality employees.
Remember our business model is built to deal with the with adversity.
Our management team is meeting these challenges head on.
And while the exact impacts are difficult to judge at this juncture, we're comfortable maintaining guidance.
Now, let's discuss the latest developments at each of our segments.
Beginning with the work truck attachments, where we had a strong start to the year.
We generated $42 million of net sales and $8 $2 million of adjusted EBITDA impressed.
The impressive increases compared to the first quarter of last year.
It was a very unusual winter season.
Well below average in the key months of December and January but rebounded with significant snowfall in February.
There's nothing in March.
Which led to a slightly below average season in total.
This is the third consecutive below average snowfall season.
But this year did see better snow totals on the east coast than the previous winter.
Timing of and <unk>.
Severity of the storms in February drove not only P&A sales, but pushed end users who had been delaying purchases to buy new plows.
So all of our strong Q1 results likely included some orders pulled forward.
Which may impact second and third quarter revenues.
The pre season order period has just started so far so good nothing out of the ordinary.
Dealer inventories are in good shape and dealer sentiment is positive.
<unk> no dealer credit concerns heading into the pre season period.
We're pleased with what we're seeing within the attachments group.
The team has a long history of strong execution in Q1's performance is proof of that.
When we finally get back to an average snowfall season, the results will be even more impressive.
That brings us to our work truck solutions segment.
Strong all around performance encouraging progress, which bodes well for the future.
We delivered $61 4 million of net sales and $2 $4 million of adjusted EBITDA.
At Henderson delays in order intake mentioned last quarter are improving now.
As the municipalities have more visibility on their budgets. That's the good news for the long term.
But it did create an expected GAAP and production schedules based on the delays.
Our teams are pulling appropriate levers, including utilizing rolling plant shutdowns to right size, our labor force with the production GAAP.
And this will impact Q2, and Q3 financial performance.
Does the I know the team is doing a great job overall.
Overall demand is strong as the.
The economy continues to stabilize.
The Henderson supply side challenges will impact the Janus performance in the near term.
And the team will stay flexible and staffing our outfit locations to meet customer expectations.
With backlogs in the solutions segment of approaching record levels, we're well positioned for long term success.
Overall, we're very.
Encouraged with where both segments stand today.
Moving onto the capital allocation.
We continue to make necessary investments to fund our growth initiatives.
As previously mentioned.
<unk>.
Are on track to launch the medium duty municipal first responder product this summer day.
The end user response is positive and we expect the gained significant traction in 2022.
As our vertical integration strategy proceeds a number of projects are already in the index.
Many of these projects will be singles and doubles, but all will help drive long term organic growth.
Despite the challenges over the past year, we remain committed to our dividend and that commitment has not wavered.
We've increased the dividend for the 13th time over the past 11 years in February.
Moving forward, we remain committed to returning cash to our shareholders.
Additionally, we used our strong free cash flow to pay down debt, maintaining a healthy balance sheet is always top of mind.
It allows flexibility too.
Deploy capital for both internal and external growth initiatives.
On that topic, we continue to actively monitor the competitive landscape for potential M&A opportunities still not many deals available and valuations remain high.
So we'll have to weigh that against the growth potential and the strategic fit.
So all in all very pleased with our overall performance, we continue to prioritize the health and safety of our number one asset.
Our people.
We're laser focused on providing the highest level of value to our customers continually outperforming our competitors.
The pandemic will impact performance throughout Q1 throughout 2021 Theres no question about that.
But despite this challenging backdrop, we continue to innovate driving continuous improvement initiatives across the company.
Although supply related headwinds will impact short term results were.
We're well positioned to exit the pandemic stronger than we entered driving towards our long term financial targets.
With that I'd like to pass the call to Sarah to discuss our financial results in more detail share.
Thanks, Bob.
Overall, our record first quarter financial results for based on increased snowfall in our key markets compared to last year, which drove improvements out of attachments combined with the ongoing stabilization of the broader economy, which positively impacted both segments.
Given the emergence of the pandemic in March of 2020, which included a complete shutdown of our facilities for the second half of March of last year.
We expected to outperform this quarter, but the significant February snowfall and positive performance in our solutions segment, Matt We produced record results.
From a consolidated perspective, we generated record first quarter net sales of $103 3 million.
And gross profit of $26 5 million.
Per the net sales of $68 2 million and gross profit of $11 7 million during the first quarter of last year.
We recorded GAAP net income of 742000 or three cents per diluted share.
<unk> to GAAP net loss of $10 1 million or negative <unk> 44 cents per diluted share respectively in 2020.
On an adjusted basis, we generated net income of $1 2 million or four cents per diluted share compared to an adjusted net loss of $7 8 million or negative <unk> 34 per diluted share.
Similarly, we generated record consolidated adjusted EBITDA of $10 7 million compared to negative $1 $7 million in the corresponding period of the prior year.
Our improved consolidated performance on both the GAAP and an adjusted basis were mainly driven by the higher sales volumes. In addition to avoiding the pandemic related and facility shutdowns that significantly impacted our first quarter 2020 of results.
SG&A expenses, including amortization expense were $22 6 million compared to $19 9 million during the first quarter of 2020 the.
The increase was primarily related to increased employee incentive based compensation due to the expected improved operating results.
Interest expense was $3 million for the quarter lower than the 5 million incurred in the same period last year the.
The 2 million decrease was due to a one and a half million gain recorded on a noncash swap adjustment.
Compared to a $1 4 million loss last year. This was slightly offset by higher cash interest paid on our term loan based on the increase the principal balance following our June 2020 of refinancing.
Now, let's turn to the earnings information for the two segments.
Our work truck attachment segment generated record net sales of 42 million compared to net sales of $19 2 million last year.
The considerable increase was primarily a result of significant February snowfall and the release of temporary pent up demand from the fourth quarter.
Adjusted EBITDA was $8 2 million during the first quarter higher when compared to adjusted EBITDA of a negative $2 1 million recorded in the prior year.
Driven by the increased sales volume and not having to contend with the facility shutdowns like we had last year.
As Bob mentioned, the snow season was unusual with the wide swing in snowfall totals over the season February delivered significantly above average levels of snowfall.
But December January and March were all well below average.
Overall the season ends at approximately 7% below the 10 year average.
The significant snowfall in February coupled with the continuing gradual return to normal business activity saw strong parts and accessory sales plus higher plow sales as temporary pent up demand from the fourth quarter wasn't dressed.
As we begin our preseason order period, we want to reiterate that our record first quarter performance likely meant we pulled forward some sales from our second and third quarter revenue.
In addition to deferring some sales from 2020 into 2021 due to our customers being conservative.
That brings us to work truck solutions.
We reported net sales of $61 4 million and adjusted EBITDA of $2 4 million compared to net sales of $49 1 million and adjusted EBITDA of 400000 in the same period last year.
The increase in both net sales and adjusted EBITDA can be attributed to a combination of improved the operating conditions, coupled with the avoiding the facility shutdowns that impacted the business activity in March last year.
As Bob mentioned earlier, we are encouraged by strengthening order patterns that we're seeing across the segment and we're hopeful this trend will continue in the coming quarters.
Turning to the balance sheet and liquidity figures net cash provided by operating activities. During the first three months of 2021 was $24 1 million compared to $9 1 million cash used for the same period in the prior year.
Free cash flow for the first three months of 2021 was $22 million compared to negative $11 4 million during the same period in 2020.
These cash flow improvements were primarily driven by more favorable operating results.
As well as favorable changes in working capital of $22 9 million.
The largest favorable change in working capital was the decrease in inventory. If you remember last year, we had a buildup of inventory in anticipation of supply chain constraints going into the pandemic.
Inventory declined to $99 9 million at the end of the first quarter, which is an improvement compared to a $112 4 million at the end of the first quarter of 2020.
Accounts receivable at the end of the quarter were $45 1 million compared to $48 1 million at the end of the first quarter 2020, Despite increased sales strong receivables collections drove down the balance in the current year.
Capital expenditures for the first three months of 2021 totaled $2 2 million in line with the $2 3 million that was incurred in the first three months of 2020.
As we've stated consistently during the pandemic, we remain committed to making the necessary investments to fuel our long term growth projects. We remain on track with our vertical integration initiatives and look forward to sharing more updates with you regarding our progress throughout the rest of this year.
Similar to recent quarters, we continue to reduce our outstanding debt and paid down an additional $20 million during the period.
At the end of the quarter, we had a net debt leverage ratio of two two times lower than two five times of the end of 2020.
Lowering our debt at the most logical times continues to be a top priority, we maintain our goal to keep the ratio of between one and a half and three times.
Turning to total liquidity, which totaled approximately $133 6 million at the end of the first quarter, comprising $35 5 million in cash after our pay down of $20 million on debt.
$98 1 million in borrowing capacity under our revolver. This compares favorably to $86 3 million at the end of the first quarter of 2020, primarily due to stronger cash flow generated from our operations and favorable working capital.
On a separate note. We also announced yesterday that we have filed a shelf registration statement with the SEC.
To be clear this move gives us the flexibility to address strategic growth opportunities using the capital markets, but should not be taken as the signal that we're making specific near term plans.
For now this filing is simply a matter of good corporate governance that means we can streamline the process. If we choose to access the markets at some point in the future.
Finally, as you probably saw in our release, we are reiterating the quantitative guidance established last quarter.
For 2021, we expect net sales of between $505 million and $565 million.
Adjusted EBITDA is predicted to range from $75 million to $100 million.
Adjusted earnings per share are expected to be in the range of $1.20 per share to $2 per share and our effective tax rate is expected to be approximately 25 to 26 per cent.
Of course, this outlook assumes economic conditions remain relatively stable and that we experienced average snowfall levels in our core markets in the fourth quarter of this year.
As we mentioned earlier this year, we did see a temporary slowdown in order activity for our municipal business in the solutions segment as local and state governments delayed decision, making as they assess their 2021 budgets and federal government stimulus packages.
We're pleased to say those orders are now starting to come in but it did create an order GAAP that will impact our production schedules in the second and third quarter.
As of the global economy tries to return towards more normal business conditions, we do anticipate that our supply chain will be impacted throughout the remainder of the year as the pandemic lingers and companies take time to adjust.
It remains to be seen exactly what those impacts will be but we're focused on working the factors under our control and adapting to the changing circumstances for the best of our ability.
Based on the interruption in the orders and the impact of anticipated supply chain constraints, we're planning to implement rolling facility shutdowns and the solution segment to maximize efficiency wherever possible and minimize the impact on margins.
In addition, we expect to encounter material price inflation, which will impact our margins given the timing of how and when we can pass through these costs.
One silver lining in some of the conditions, we experienced over the past year is that it really drove the solutions team to fully embrace the disciplined income protection plan approach that's been part of our attachments business model for decades. The team now has the experience and knows which levers to pull to control costs and how to effect of.
Of late close and open the facilities, which will help with the challenges that we're facing this year.
Despite these headwinds we're still comfortable reiterating our guidance for the year, we of the right team in place to work through these obstacles using our problems solved.
Solving mindset for adapt overcome and emerge a stronger and more efficient organization.
With that we'd like to open up the call for questions operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our first question is from Tim <unk> from Baird. Your line is open.
Hey, good morning, everybody is nice the nice job so far.
Thank you for an audience.
Good morning.
Maybe just to start off on on the supply chain side of things could you just elaborate a little bit on on where.
Specifically youre seeing tightness.
It sounds like I mean, obviously, we've had chassis supply issues for the last couple of years.
That hasn't really been cited it sounds like it's more components. So maybe just kind of broaden out the discussion of just give us an idea of where you're seeing kind of the most.
The straight right now.
While we can see.
Yeah. It's you know, it's it's clearly still isn't as in chassis I mean, there's all of you have to do is pick up the wall Street journal to see articles about the impact it's having on the Oems and that is impacting us from both in class four through six and in class seven and eight.
And do we have other.
Components challenges sure I mean, you know you have an entire economy trying to ramp back up to meet what appears to be some pretty robust demand and I won't get into the specifics of of of commodities there.
But it is larger we are paying most attention to the OEM rolling shutdowns of their facilities and I will tell you. It is a very fluid situation on.
On a on a weekly basis, we have calls with them and they're making decisions on a daily basis as they get more and more color on what they can expect from a from a chip and from a compel.
Component perspective, so while we Didnt mentioned chassis specifically that's.
That's the that's the number one driver of the.
Uncertainty as we see it similar to what most other industrials have been experiencing.
Okay, and then is there just on the on the Muni side I guess, what's changed there in the past 60 days.
Is it stimulus is it just the tax revenues have been coming in better than the municipals field, yes.
Feared sitting here kind of going ahead with the orders I'm just trying to understand maybe what's changed there and if you could kind of elaborate a little bit of what the book to Bill is in both the Shanghai and Henderson I think that'd be helpful.
Yeah, I mean going to going back to the last half of 2020, we had projected a softening in the orders nowadays softening and quote activity that we're still as robust as ever but we knew that with the municipalities being very unsure as to what their tax revenue look like that we'd see a decline in <unk>.
And we absolutely saw that in the second half of more notably in the fourth quarter.
We did see it start to pick up as we turned the corner into 2021 and our team has done a great job of building. The order book back up over the last 60 or 90 days. So I would say, whether it's stimulus related whether it's budget related whether it's.
Hello <unk>.
Whatever the drivers might be but.
But we are seeing a nice increase in orders on the Henderson side. It does result, though.
A temporary GAAP, yet most notably in the second quarter and into the third quarter of little bit about being able to match up chassis receipt with those orders and so as a share spoke to when I mentioned, we've got these rolling shutdowns, which will which will put it into effect that will help us to mitigate the <unk>.
Impact there on the the genocide.
I would say, it's equal parts the economy, starting to gain some traction in our sales team Theyre just doing an awesome job, where we're sitting at near record backlogs there.
We don't we don't make that actual data public, but I think the big the big takeaway here is when these component headwinds solve themselves and they will we're going to be very well positioned on the work truck solution side.
Okay. Okay. That's good to hear and then maybe just the the last one on this the attachments business.
I guess, how does the field inventory it sounds like field inventories relatively normal it sounds like the pre seasons is kind of starting to kind of relatively normal.
What kind of informs your perspective that the.
Order activity or the revenue activity that you saw in the quarter was with some sort of pull forward I'm just trying to understand.
That's just pay things were better than we thought of it had to come from somewhere or if you're actually hearing something in the channel or with your dealers of distributors that would kind of suggest that.
So well you know if for you if you again, let's go back to the fourth quarter last year, where we had said.
The preseason order book in 2020 was lighter than normal pandemic related completely expected and that the fourth quarter was going to turn out to be the wildcard right.
Well the fourth quarter snowfall right December and January heading into the first quarter was very soft and so we never saw that spike.
In the fourth quarter orders to the extent that we thought we might and then the when it snowed everywhere in the month of February of more specifically on the east coast, which hadn't seen it for a couple of years, we did see a nice spike and plow orders of February into March and typically that's when the cloud orders dry up.
So it was certainly weather driven to a degree, but we think it was pent up demand related as well they were just waiting for the snow to show itself before the release some of those orders will that impact of the the pre season orders, we'll know here by the time, we get to the third for the second quarter call.
But we certainly can articulate that what we saw in the order intake in shipments in the second half of Q1 was unusual.
Okay.
Okay, good well I'll hop back in queue. Thanks for the time guys I appreciate it.
Yeah.
Your next question is from Ryan the signal from Craig Hallum. Your line is open.
Great. Thanks for taking the questions.
Just curious I don't think I caught it but you've talked about kind of supply chain as well as some pull forward of pent up demand et cetera, but of you did you mention what you expect from a seasonal cadence between Q2 and Q3 normally kind of the 60 40 mix, but kind of what's the right expectation this year.
No we did not mention of I'm happy to walk you through that Ryan.
So if we go back to 2019 between the second and third quarter, we had a 60 40 split.
Last year, a very unusual year, we were at 50 50 between the two.
Our expectation for this year is we're gonna be moving back closer to that 60 or 60 40 split.
Helpful.
And then just as far as supply chain.
Certainly difficult.
Ross the industry everyone's feeling it how do you think you're feeling relative to your competitors, primarily your largest competitor and then what are you guys doing specifically from a D. D. M. S standpoint to help alleviate those challenges.
Yeah. That's an excellent question I mean, one of the one of the upsides of US having these rolling shutdowns across multiple locations.
Is that in those periods, where we are shut down we've got our Dms teams focused on making process improvements so that when the plants come back online and chassis begin to flow again that we can more effectively and more productively up fits that product now again, we've we've always.
Felt that that's an advantage we have on any of our competitors and in this case it's.
It's planned for and is being executed now I do want to distinguish these these rolling plant shutdowns of recurring on the solutions side not on the attachment side.
When you're in the attachments business.
You can pull multiple levers to adjusted production remember we have a 15 plus per set of our work force of temporary so we can we can pull levers there.
We scheduled for day 10 hour work weeks, we can flex up or we can flex down so the rolling plant shutdown concept as the work truck solutions, one again, which we will utilize to.
The improved productivity and flow and the work truck attachments group will just pull its normal weather driven.
The levers to manage through this period of time as well.
And then just on the the vertical integration initiatives you guys have been working on do you think this environment actually makes it easier to accelerate some of those because there's more rolling shutdowns et cetera, or does this actually make it challenging to kick those out or I guess, where are we on the target kind of with expectations. When you started the.
Yeah, I think I think we're on we're we're on target there and the.
The component shortages don't really impact the projects, we have going the or the or the ones that are that are next in line the.
Staffing that we have there is pretty robust.
So I would say things are tracking as expected there and we don't expect it to slow down what those folks are doing from a cadence perspective at all.
Last question from me and then I'll hop back in the queue, but Emma.
M&A I know you'd mentioned the shelf a rationale for that but what are you seen in the M&A part of it I know you have the kind of a short list of blue chip kind of relationships there, but any of those you know getting closer as this environment pushing people more likely to sell not likely to sell some of them. Thanks.
Yeah, you know I think I think everybody is expecting and of post pandemic World Ryan that we'll see more deals in our space coming to market.
We had douglas have not seen that yet.
So we have that expectation and and you know again to your to your point, we've got a short list of folks we haven't gotten any early indicators that those folks are going to be coming to market, but that can that can change fairly quickly as well so I like what share of and her team have.
Done with the balance sheet I like what they're doing to prepare us to be able to take advantage of those opportunities and we do expect to see activity. We just haven't seen much at this point.
Thanks, Bob Thanks, Eric Good luck guys. Thanks Bryan.
Your next question is from the Chris Mcginnis from Sidoti <unk> Company. Your line is open.
Good morning, Thanks for taking my questions the nice quarter one of them.
Christian Good morning, Chris.
I was wonder if we could start maybe the inflation or deflation you may be seeing raw material.
And I don't know if you can think about it maybe on average pricing, but could you see that impacting demand in either of the two segments.
Just given the increases.
Yeah, I guess I'll I'll speak to the inflation first and then to some of the demand side. We're.
We're seeing significant inflation coming into the business predominantly in steel.
You know as we experience.
The only inflation that certainly hits all three of our businesses I'm confident in our ability to cover the inflation from pricing perspective, we will experience in 2021, I do I do plan that we will see some differences in timing on the.
Recovering that price versus the inflation coming in.
I think on the demand front, where when I think through that.
I think in each of the businesses our customers our dealers all of that how have been the expectation I guess of how we are giving out prices and when you run a quote business on the solutions side.
You should be seeing that everywhere. So I don't expect that there was any pull ahead or anything like that and on the attachment side I don't think we experienced much of that either.
Think of them because we have set price points are of price times.
It's it doesn't drive that at least not from a material.
Material aspect.
Got it okay very helpful.
Then this is maybe maybe really just on the new offering the right model for the Muni side.
Are you seeing orders come in for that already for.
Or.
The increases that you're seeing coming from the core.
I guess.
More traditional side of it.
Yeah the Z.
The increase in orders is more on the traditional side remember I made a comment that although orders slowed down in the back half of last year quoting did not and it was just it was just recently that we were out in the market with this new medium duty of Muni products. So most of the order intake that we've seen at this point is driven by the.
Core business.
We'll comment that you know given the pandemic situation, we've all been dealing with while we were out with demo trucks.
With that new product and got very positive response, we're likely to see a delayed response from an order perspective, just because they need to go back and get their core truck orders taken care of first which is why I made the comment that while we're excited about the product that we loved the response, it's likely of 2000.
22 proposition in terms of a material impact.
Okay. Thanks for the very much of the I appreciate it good luck for Q2.
Thanks, Chris.
Yeah.
Again, if you would like to ask the question. Please press Star then the number one key on your Touchtone telephone again Thats Star then the number one you touched on the telephone.
I'm showing no further questions at this time I would now like to turn the conference back to you Mr. Bob Mccormick.
Yeah.
Thank you and thank you for your time today. We appreciate your ongoing interest in Douglas dynamics. We hope you are like us optimistic about 2021 and the positive changes we are seeing in the world and we look forward to speaking with you in the coming months have a great day.
Yeah.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation have a wonderful day you may all disconnect.
Okay.
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Yes.
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