Q2 2021 Douglas Dynamics Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to be Douglas dynamics second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question at this time.
You will need to press star 1 on your telephone please be advised that today's conference call is being recorded.
I will now turn the conference call over to Sarah Lauber CFO you may begin at this time ma'am.
Thank you and 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.
Well constitutes forward looking statements.
These forward looking statements are subject to risks that could cause actual results to be materially different.
Those risks and include among other matters that we've 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 and guidance after that and we'll open the call from your questions with that I'll hand, the call over and above.
Thanks, Sarah and good morning, everyone.
We are pleased with our results for the second quarter, which reflects both the continued strength of overall demand trends across our businesses plus our team's commitment and creativity and addressing the various industry wide supply challenges, we continue to face.
Total segments turned and positive results with a strong pre season and shipping period from attachments and a very strong order book for our solutions segment, creating record backlog at both Henderson and does yeah.
The strong demand outlook and both segments means we are well positioned for long term success.
It would be a massive understatement to say that from a business perspective, our situation has improved dramatically from a year ago.
We continue to adapt and learn how to operate most effectively within the constraints we are facing.
The headwinds we outlined last quarter remained our biggest challenges today.
To many other industrial companies.
First material price inflation has arguably moved to the top of the list.
We have seen many suppliers, bringing multiple price increases across all areas of the business during the quarter.
Naturally our margins will be impacted this year as these increases outpaced our ability to pass these costs through.
And while we will recaptured over the long term.
The pace of increases means this will take some time.
Second supply chain disruption and.
Component shortages.
We are still seeing uncertainty with the supply of many components.
The issue is impacting any at all vehicles globally, not just the north American work truck industry with chip shortages at the top of the list of factors.
Oems have cut back chassis production in Q2 and expect to continue to do so into Q3.
There are signals that chip production may bottom out and the third quarter and then slowly improve.
It's clear our performance will definitely be impacted through the second half of 2021.
Third as labor market constraints.
Majority of our work force remains loyal and dedicated.
Our primary issue is with the entry level shop floor positions that we generally see more turnover with even during normal circumstances.
The churn and these positions has increased in recent quarters and is expected to continue to be an issue for the near term.
Our teams are finding creative ways to attract and retain employees, including temporary financial incentives and other rewards.
While these challenges continue we are managing through them as effectively as possible.
Our flexible business model and problem solving and mindset.
We are better able than many and to overcome and diversity and we're confident our approach is yielding the best possible results.
Now I will walk through each segment.
Beginning with work truck attachments, where we had a strong quarter.
We produced $104.6 million of net sales and $32.2 million of adjusted EBITDA.
As a reminder, this past season produced and unusual third consecutive below average snow season.
But this year saw better snow totals on the east coast and the previous winter, which is good for our Fisher brand in particular.
So a good start to preseason shipments partly related to the release of pent up demand following dealer cautiousness and 2020.
And as we stated last quarter, our strong Q1 results likely did include some orders pulled forward from the preseason.
This year, we expect to see a shift back towards the historical 50.545.
Flip between pre season shipments.
Rather than the 50.50 split we saw last year, which was impacted by the pandemic.
Both dealer inventories and dealer sentiment remains positive.
Overall attachments continues to lead the industry and manage through the supply challenges effectively.
Turning to our work truck solutions segment, where we delivered $52.9 million and net sales and $1.3 million of adjusted EBITDA for the quarter.
Demand dynamics continue to improve and now are at or above pre pandemic levels at both hendrickson and death agenda.
The municipal budget uncertainty is behind us and was a bump and the road as we had hoped.
With order patterns, improving significantly and the second quarter.
The Henderson team worked through the GAAP and production schedules and implementing rolling shutdowns at several facilities, which were executed efficiently.
As you and I had a good quarter under the circumstances and the strength of demand across our broad customer base bodes well for the future.
The yen is always at the front end of the line for chassis. So we know orders will eventually be filled.
Similar to what we've done at Henderson. The did you and a team is pulling short term cost cutting levers and implementing rolling shutdowns of certain day gander locations and the third quarter.
While these ongoing supply chain challenges are frustrating and will impact second half performance. We are encouraged by the strong demand trends with.
With record backlog and our solutions group, we are well positioned for long term success.
Moving on to capital allocation.
We've continued to invest and the business to fund our long term growth initiatives.
As a brief update we have watched the medium duty and municipal first responder product and have seen a positive response so far.
This initiative has been a great first project and while it won't be a significant driver of growth this year it.
It is an excellent example of the approach and results we expect going forward.
As our vertical integration strategy continues we are aligning up projects that when combined will help drive long term organic growth.
Of course, our commitment to our dividend remains a strong as ever after increase and it again for the 13th time earlier this year.
Additionally, we will continue to use our strong free cash flow to pay down debt and maintain a healthy balance sheet.
We continue to actively monitor the competitive landscape for potential M&A opportunities.
The valuations, we see remain high and we will always take a hard look at pricing versus growth potential and strategic fit.
In summary, we're pleased with our performance overall, and especially under the circumstances and are comfortable with our guidance going forward.
Demand trends remain very positive we are managing through supply issues seen across our industry and the broader economy.
We are working on near term projects to drive organic growth and longer term strategies to ensure we maintain and expand our industry leading position.
And as always we're laser focused on providing the highest level of value to our customers.
Although supply related headwinds will impact short term results, we remain well positioned and confident about our future potential.
We're looking at the factors within our control we are driving our continuous improvement mindset across the company and pushing towards our long term financial targets.
With that I'd like to pass the call back to Sarah to discuss our financial results in more detail.
Sarah Thank you.
Bob.
And that and the second quarter of last year, and we were still experiencing a complete shutdown and ramp up of our facilities from a comparison perspective, we expected this to be a stronger quarter, even though we experienced near term headwinds with labor availability and input cost inflation and supply chain constraints.
That being said our second quarter financial results were a result, and strong demand record backlog, which drove improvements at both attachments and solutions combined with ongoing economic improvement, which positively impacted the segment.
From a consolidated perspective, we generated second quarter net sales of $157.5 million.
And gross profit of $48.8 million compared to net sales of 120 million and gross profit of $32.1 million during the second quarter of last year.
Sales increased year over year as a result, and strong pre season shipments at work truck attachments and.
In addition, and the second quarter of 2020 was impacted by pandemic related plant shutdowns that significantly and Pete and shipments across both segments and drove operational inefficiencies.
SG&A expenses, including amortization expense were $24.7 million compared to $16.6 million during the second quarter of 2020.
The increase was primarily due to an increase and stock based compensation of $2.9 million and a 2 million earn out reversal last year the.
And the remainder is due to increased employee incentive based compensation and discretionary spending and business conditions returned more towards normal.
For the second quarter, we generated consolidated adjusted EBITDA of $33.5 million compared to $23 million and the corresponding period of the prior year.
Our performance improved significantly year over year as a result of the improved volume and not having the effect of prior year pandemic related plant shutdowns.
Interest expense was $4.4 million for the quarter lowered and the 5.7 million incurred and the same period last year.
1.3 million decrease was due to a 600000 loss recorded on non cash swap adjustment compared to a 1.6 million line last year.
The effective tax rate from the quarter was 5.5% compared to 14, 4% and the prior year.
The rate was lower and the current quarter due to a discrete tax benefit of $2.7 million stemming from a successful outcome from an ongoing state income tax audits.
We recorded GAAP net income of $14.1 million or 60 cents per diluted share significantly higher than the GAAP net loss of $103.9 million or negative $4.55 per diluted share respectively and 2020.
On an adjusted basis, we generated net income of $21.3 million or 91 cents per diluted share compared to adjusted net income of $7.6 million or <unk> 33 per diluted share and the prior year.
On a GAAP and adjusted basis net income was positively affected by our improved operating results and favorable tax audit outcome.
Additionally, on a GAAP basis. The prior year was impacted by a 1 time noncash goodwill impairment charge of $127.9 million relating to the solutions segment.
Now, let's turn to the earnings information for the 2 segments for the second quarter. Our work truck attachment segment generated net sales of $104.6 million compared to net sales of $73.8 million last year, and adjusted EBITDA of $32.2 million.
Significantly higher when compared to adjusted EBITDA of 24 million comparator in the prior year.
These increases are primarily a result of strong pre season orders and shipments.
List of pent up demand this year following dealer cautiousness in 2020, and not experiencing the pandemic related disruptions and we faced and the second quarter of last year.
The respect and 42% and 57% increases and net sales and adjusted EBITDA are a testament to both the considerable resilience of demand and the flexibility and adaptability of the attachments team.
In addition, the timing of preseason shipments and 2021 and shifting back towards traditional pre pandemic level.
We anticipate an approximate 50.545 ratio between second and third quarter pre season shipments compared to an approximate 50.50 ratio in 2020.
That brings us to work truck solutions, where we reported net sales of $52.9 million and adjusted EBITDA of $1.3 million compared to net sales of $46.2 million and adjusted EBITDA of negative 116000, and the same period last year.
The increase and both net sales and adjusted EBITDA compared to the prior year are primarily due to the improved operating conditions this quarter and again not experiencing the impact of operational shutdowns plus other pandemic related issues in 2020.
Results were negatively affected by order delays from municipal customers and that occurred in the fourth quarter 2020 and.
First quarter 2021, due to budget uncertainty, which has sent from true, but the impact on production flow was felt this quarter.
And as communicated on our last call when other supply chain constraints were factored in we decided to be prudent and implemented rolling shutdowns at some henderson facilities during the second quarter of 2021.
As Bob mentioned earlier, we are encouraged by the strong demand and ordering trends we are seeing across the segment, which have created record backlog at both Henderson and pushing them out.
Yeah.
Turning to the balance sheet and liquidity figures.
Net cash provided by operating activities. During the first 6 months of 2021 was $13.1 million compared to 6 million cash used from the same period and the prior year.
Free cash flow from the first 6 months of 2021 was $8.6 million compared to negative $11.1 million during the same period last year. Please.
These cash flow improvements were primarily a result of improved operating results.
Inventory declined to $93.9 million at the end of the quarter, which is an improvement compared to $99.8 million at the end of second quarter of 2020.
Accounts receivable at the end of the quarter was $92.1 million compared to $76.8 million at the end of the second quarter 2020, which is in line with the increased sales volume year over year.
Capital expenditures from the first half of 2021 totaled $4.6 million slightly lower than the $5.1 million that wasn't incurred and the first half 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 and Michigan and have commenced production of the components for our MDM first responder and our expanded Milwaukee.
And he facility, which will supply our Henderson operations.
Other vertical integration and development projects are in development and we remain committed to making the right internal investments to drive long term profitable growth.
At the end of the quarter, we had net debt leverage ratio of 2.1 times lower than 3.5 times at the same point last year.
We maintain a total liquidity of approximately $114.3 million at the end of the second quarter, comprising $15.2 million and cash and cash equivalents and borrowing availability of $99.1 million under our revolver.
Pairs to $126.8 million at the end of the second quarter last year.
After initially refinancing our debt and 2020 and during the height of the pandemic, we were able to refinance again in June this year with even more favorable terms.
We refinanced our existing $375 million and senior secured credit facilities with a new $225 million term loan a facility and a 100 million senior secured revolving credit facility due in June of 2026.
The new refinancing allowed us to fortify our already strong financial position at better terms.
And lower our annualized interest expense by approximately $6.5 million a year, while providing us with liquidity and flexibility to execute our long term goals.
Finally, as you probably saw in our release, we're slightly updating our quantitative guidance range for the year to account for 3 factors.
First the sales range increase to account for the price increases we've implemented to offset and placed them.
And third our adjusted EPS range now reflects.
Lower interest expense from our debt refinancing and the tax benefit related to the favorable state tax audit outcome.
For 2021, we expect net sales of between 520 and $580 million up from $505 million and $565 million.
Adjusted EBITDA is unchanged and predicted to range from 75 million to 100 million <unk>.
Adjusted earnings per share are expected to be in the range of 1 dollar and 40 per fair to $2.20 per share up from $1 and 20 to $2.
And our effective tax rate is now expected to be approximately 20% for the year due to the discrete tax benefit that will lower our effective tax rate for 2021.
Of course, this outlook assumes economic and pandemic conditions remain relatively stable and that we experienced average snowfall levels and our core markets and the fourth quarter of this year.
As we mentioned last quarter, we did see a temporary slowdown and the order activity for our municipal business and the solutions segment and la.
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 have come in but it did create and order GAAP that impacted our production schedules and the second quarter and will continue to impact us and the third quarter.
As the global economy continues to return towards more normal business conditions, we anticipate that our supply chain will be impacted throughout the remainder of the year and uncertainty around component shortages will continue to affect the work truck industry and overall economy.
That being said, we are anticipating sequential improvements and our supply chain through the rest of this year.
In addition to the rolling facility shutdowns that were implemented at some Henderson facilities during the second quarter and in response to the supply chain shortages, we're planning additional rolling shutdowns and the Jama and the third quarter as well to maximize efficiency wherever possible and minimize the impact.
Packed on our margins.
After 2020, the solutions team now has experience with which levers to pull to control costs and how to effectively close and open facilities, which will help with the challenges we face this year.
Despite these headwinds we're still comfortable updating our guidance for the year, we have the right team in place to work through these obstacles using our problem 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.
A reminder to ask questions you will need to press star 1 on your telephone and to withdraw your question. Please press the pound key.
And we will standby, while we compile the Q&A roster.
Okay.
And our net our first question will come from the line of Tim We'll just appeared.
Hey, good.
Good morning, everybody.
Good morning, Jim.
Maybe just a you know my first question just on on kind of the the solutions business and incentives and supply constraints.
And it sounds like we're kind of getting past some of the some of the constraints and the context of you, saying that the supply chain should should improve sequentially kind of from here on out and I mean should we read that as.
We should start to see both sales and margins also getting kind of stronger sequentially from from Q2 levels.
Yeah, I'll answer that Kim from from the standpoint of sequential improvement I mean, what we experienced late and this quarter and really kind of starting in Q3 and.
And is the computer chip shortage and its impact on class 3 to 6 chassis.
And what we expect I and guests and what we've seen in some areas is the expectation that that will continue to improve.
Throughout the remainder of the year.
So when you look at the third quarter for solutions.
From a margin perspective.
And I expect it to be flat kind of to 2020, maybe up a little bit.
And then sequentially improving into Q4.
And that availability frees up a little bit more but not getting back to the fourth quarter 'twenty levels, but that we had from a margin perspective.
Okay. Okay. So it sounds like solutions margins could actually be up year over year, and Q3, and then maybe down a little bit and Q4 okay.
Okay, I would say.
More flat and the third quarter, possibly up but it's going to be closer to flat is what I'd say.
Sure when you'd be effectively doubling them sequentially. So that's pretty.
Pretty good.
And then I guess, when you're thinking about a pricing is there a way to think about how much pricing is kind of either embedded in the second half of the year or maybe and kind of the full year guidance and totality.
Yeah, probably the best way to speak to that is the big change that we made to our guidance range in sales is predominantly for price for the year and clear.
Clearly, we have escalator and price increases in all 3 businesses and some of those you know haven't have a bit of a delay.
So when you look at the entire shift.
And of the sales range of 15 million Inc.
Definitely got more and the back half of the year.
And I would say in total just just and thinking about price versus cost and what we're experiencing.
Its coming at us pretty pretty fast.
And we are reacting accordingly, and all 3 businesses with with changing our price increases.
Would expect that for the full year, we will have a delay and price covering their costs. So it will impact our margins and the back half of the year.
And that will be made ups and in 2021.
I'm, sorry, 2002 line.
Okay, Yeah that sounds good okay, and and then I guess.
How do you feel about the momentum of the business relative to 3 or 6 months ago, because I understand some of the external headwinds, but I mean, you're you're you're attachments business on a first half basis is basically in line or better than 2019, which I think was a record level at that point you know it.
It seems like record you're seeing record backlog kind of build and both of your kind of Henderson and to shine a businesses. So I know, we're kind of talking about some of these constraints, but I mean could you just talk about how you're set up for 'twenty, 2 and 'twenty 3 because it does seem to be like you're building momentum really across the enterprise.
Yes, Tim I'll make I'll make a couple of comments and as Eric and add on.
It's interesting.
When you go through the last 18 months of all of the unique challenges that we've had.
Sometimes easy to forget that the weather business is still the weather business and if volume comes through.
Other business drivers and so even though snowfall was a little below the historical averages last year, we are still seeing strength there.
That's that's a positive reminder of the resiliency of debt of that business model and Youre right. When we look at the incoming order pace when we when we look at the backlog that's on the solution side, when we look at being able to finally get people back out into our updated locations and working on.
This improvement and <unk> initiatives.
When the when the production and starts to flow through those locations again.
And we're feeling really good about 2022 and beyond I'll, let Sarah add any other comments you may want to at that point.
Yeah, I would say you know and many of US we look back to pre pandemic and for Douglas 2019, being a record year when.
And when we think about the business says, there's nothing that has structurally changed and and you're right to them and that we have momentum from a demand perspective, but you know once we can clear up the.
These headwinds that we that we have in front of US. There is no reason why those businesses don't get back to those 19 levels and then you know focus on the growth that we have laid out for them.
Okay, Okay, great well good luck on the back half and your guests and Susan.
Thanks, Bill and thank them.
Thank you and our next question will come from the line of Ryan Macdonald of Craig Hallum and capital group.
Good morning, Thanks for taking my questions.
Hi, Ryan.
I'm curious on the rolling shutdowns at and the solutions segment, how much of that is just operational efficiencies and the near term scale and volume I'm trying to maximize kind of free cash flow and margins and the near term versus opportunity to really accelerate dbms improvements at those facilities given kind of.
Shutdowns.
Yes.
And really had it had to do more initially.
And with the slowdown and the municipal order intake and the second half of last year and the D. O cheese, we're nervous about their municipal budgets and.
And and so we had a pretty a pretty low backlog entering the year and then with chassis being a little challenged because of some of the supply headwinds we've been discussing it really created a GAAP.
Late first quarter into the second quarter of chassis availability to keep those facilities fully operational and so the initial concept of a of a rolling shutdown.
Was to try and minimize short term cost implications, while hanging onto our long term Labor force and then we get the added benefit debt as long as we've got the facility shutdown and let's get our continuous improvement and people into those locations. If the opportune time to work on realigning shop floor.
And bays and workflow and that sort of thing so that when the production does come back and chassis and begin to flow again will be and a much better position. So it's really a combination of those 2 things.
Great and then just on attachments and how much do you think is or if any is pent up demand from last year, maybe just less order and given the uncertainty and COVID-19 and everything else going on versus just kind of normalized just stronger business trends and industry trends here.
Yes.
Terrific question that is that is so difficult to answer.
And I mentioned earlier that even even with the below average snowfall for the season in total and again it was slightly below average and wasn't significant remember we just had February was just insane right. I mean, there was weather everywhere across the country and we had a record first quarter.
There and so demand was high.
When we look at back into the early pandemic stages dealers were certainly cautious that made perfect sense right, but the 1 thing again, the 1 thing that we did learn from last summer and are still see and at this summer.
The landscapers and who are the largest and user of that particular product, they're having record years.
And so you've got you've got all these variables that are in place below average snowfall for the third year in a row negative.
The landscapers and having a bunch of cash in their pocket positive.
And when you mix it all up.
And as we see it now it looks like it's coming out and more of a net positive for us as.
As we get ready to head into the season for this next snow season, So a lot of moving pieces there.
And we're pretty pleased with with what the net result is at this point.
Great.
Quick ones for Sir just on the modeling standpoint.
And then I'll turn it over to others, but with the new debt refi. What's the go forward kind of current run rate for interest expense and then secondly stock based comp a little elevated and the quarter noted an increase there is that structural or was there. Some 1 time stuff thanks and good luck.
Yeah, absolutely Ryan and so when we look at our interest with the the new refi.
And in total as I mentioned in my script on an annualized basis, we have savings of around 6 and a half million versus our 2020 level.
And that's closer to a little bit and below $4 million for 2021.
And then on the stock based compensation, Yes, you saw an increase in there. There's a couple of things going on there to get to your question on what's structural and.
The piece, that's not structural is the fact that debt.
The comp that we're looking at right now last year and reversals. This year the accruals because of just the dynamics and.
Looking at the longer term day.
That is not structural that's a piece of it.
And the other piece of it is us expanding our participation and across a broader audience that that is a more structural I would say of the of the increase.
Probably 80% of it and it's kind of what would stick, but I'll be able to provide more of that as we look to our full year guidance next year.
Great Thanks, and good luck.
Thanks, Brian.
Thank you and the next question will come from the line of Chris Mcginnis of Sidoti and company.
Good morning, Thanks for taking my questions and nice quarter.
Do you think any of the pre season sales strength that you saw possibly driven by maybe if you're going to have price increases coming up.
Do you think anyone thought.
And does that change any of the buying habits of him.
Another great question I should have added debt is my is my third variable to the last question. We certainly think that's possible.
I mean.
Obviously and this.
Inflationary market.
People are taking multiple price increases we took 1 day and the pre season before the ordering period started.
And I would expect.
Many people are looking towards another round of price increases sometime between now and the time that the debt the debt the season starts and so there certainly could have been some of that for sure great point.
Okay.
And then just on the vertical integration and the introduction of the.
And the white offering and Muni side.
Maybe just talk about how thats being accepted and it gets a little bit further into the introduction of it.
Sure.
It was a it was a summer time already or in late spring launch and and it has been very well received it did get caught up a little bit and the municipal budget Crunch that we talked about whether they were sitting on the orders for quite a while and trying to figure.
We're out how this whole thing was going to shake out from an economic standpoint.
And so when that started to free up.
They went back to focusing first on their core.
Product lines, and if you will and on the vehicles that they already had and so while it's being very well received and we're pleased with the initial orders and we really think of that.
That's the bulk of the positive will be felt and this next snow season cycle I will add though.
And I made this comment earlier.
As great of a first project as that 1 was we've got 2 or 3 coming right behind it.
And that will be equally if not more impactful and it's just it just reinforces our thought to this strategy Chris.
This vertical integration process will turn out to be a significant driver to the long term top line work truck solutions growth.
And our financial models.
So we are just beginning to see it and theres plenty more exciting things to come and we will certainly give you more details.
And when we're when we're ready for the market to hear about them as well.
Alright.
And I understand and.
And taking my questions and good luck and next quarter.
Thank you and scrap.
And again, ladies and gentlemen for additional questions. Please press star 1 at this time.
Okay.
And thank you at this time, we will return the call over to Mr. Bob Mccormick, President and CEO. Sir. Please go ahead.
Thanks, I've got I've got 1 last comment before we sign off.
It's certainly been a.
Along and challenging 18 months for everybody. That's that's clearly and under statements, but I want everybody to know that at Douglas, where we talk about inside our 4 walls.
Is playing the long game.
While managing the short game and.
And when it when it comes to managing the short game remember.
We're and we're in the weather business.
We deal every year with ever changing and uncertain business drivers. That's just part of our business model and so this is what we know how to do so when it comes to managing the short game.
From health and safety of our employees early on and this pandemic to.
And to navigating the COVID-19 headwinds and the supply chain and labor markets that we're currently dealing with.
Our teams are built to manage these kinds of variables and they're doing a terrific job.
But while we're doing that we never lose focus on playing the long game.
From investments and vertical integration and new product development.
Doubling down on talent development, both growing our internal talent and securing outside talent.
And to realigning our debt structure to strengthen our balance sheet.
These are all things that we've been focused on to ensure that we're playing the long game successfully I just want to close with this the.
And the future is bright at Douglas dynamics and <unk>.
And that headwinds will subside at some point.
And when they do.
We are well positioned to drive towards our long term financial targets.
And thank you for your time today, we appreciate your ongoing interest and Douglas dynamics and look forward to providing more updates in the coming months.
Have a great day.
Thank you ladies and gentlemen. This concludes today's conference call. Please disconnect at this time.
Yes.
Yeah.