Q1 2022 Douglas Dynamics Inc Earnings Call
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[music] Good day, and thank you for standing by and welcome to the Douglas dynamics first quarter.
Two.
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I would now like they had the conference over to Sarah Lauber, Chief Financial Officer. 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 we 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.
Richardson.
All other matters that we have described in yesterday's press release and in our filings with the SEC.
Joining me on the call today is Bob Mccormick, our President and Chief Executive Officer.
In a moment Bob will provide an overview of our performance then I'll review, our financial results and guidance after that we'll open the call for your questions with that I'll hand, the call Tomorrow.
Thank you Sarah good morning, everyone.
Our first quarter performance.
Spectation says we continue to navigate through the same challenges we've been facing in recent quarters.
While external conditions arent, improving yet so we haven't seen a curve ball recently.
Net sales were essentially flat compared to the record results for the same period last year with higher pricing at both segments offset by lower volumes.
We had a return to a more typical first quarter attachments versus a tremendously profitable first quarter, we delivered last year driven by concentrated snowfall in February 2021.
We did not expect to repeat this snowfall driven performance.
We've experienced lower production volumes in the solutions segment this quarter stemming from chassis component shortages.
Yes, it started to impact us in the first quarter of 2021.
Pandemic related absenteeism ebbs and flows.
I believe in line with the country in local markets.
<unk> had an impact in the first quarter, but we have learned to manage through some surge as well.
Very proud of our team for maintaining their focus on pandemic safety for more than two years now.
We continue to demonstrate flexibility and creativity.
As we strive to deliver for our customers every day.
We're very pleased with the demand outlook in both segments setting us up for long term success.
Our headwinds remains the same and don't seem to be getting any worse.
Supply chain disruption and some volume shortages.
Expect the situation to stabilize in the coming months and slowly start to improve later this year.
We've been monitoring the latest pandemic disruptions in China carefully.
The majority of our supply partners are in provinces outside of those spacing lockdowns. So we're not overly concerned at this.
Second material price inflation remains a factor.
We are now REIT, capturing price in attachments and as promised.
And still have work to do in solutions, which is a much more complex situations.
And lastly, we continue to navigate a tight labor market.
We're seeing the benefits of ideas some programs put in place last year.
Kudos to our HR team for finding creative ways to address these issues every employer space.
While uncertainty still exists is now some unexpected given the past few years.
Or even better than what we said at depth.
The constant need to pivot and adjust and find solutions rapidly.
Just how were built.
We are comfortable maintaining our guidance, which Sarah will discuss later.
Now, let's discuss the latest developments in each of our segments.
Guinea with work truck attachments, where we generated $45 $8 billion of net sales and $3 million of adjusted EBITDA.
First quarter 2022 volumes met our expectations, despite a slightly below average snowfall.
Net sales increased 9% due to higher pricing and higher input costs, which offset lower volumes when compared to the robust first quarter of 2021.
Profitability was impacted by lower volumes and product mix as well as a return to more normal spending levels, particularly the in person <unk> work truck show in March.
Our pre season is off to a strong start seeing significant interest in our non driver products.
Dealer inventories are in good shape.
Sentiment is positive.
We're pleased with the continued execution and the outlook for the attached.
That brings us the work truck solutions, where we experienced a continuation of recent trends.
We delivered $56 8 million of net sales of $1 6 million of adjusted EBITDA.
<unk> was down compared to last year and continues to be impacted by restricted flow chassis and other supply chain constraints.
Brian chassis headwinds are more robust now that first quarter 2021.
Looking ahead demand remains strong as does our backlog.
When supply chain disruption starting to subside.
We are well positioned to meet customer expectations driving revenue and earnings growth.
Our teams worked tirelessly to alleviate these issues wherever possible and.
And we continue to expect the situations are slowly start to improve in the second half of 2022.
Overall, we are.
Coverage for both segments Dan Giannini.
In conclusion Q1 results were in line with expectations.
Attachments pre season is off to a strong start.
And our solutions group demand and backlog remains strong.
Continue to believe supply chain difficulties.
We will gradually improve in the second half of the year and we are reiterating our full year guidance.
Despite the challenging backdrop demand signals remain strong across the board.
We continue to invest and innovate to ensure that we are ready to deliver when supply change improve and are well positioned to drive towards our long term financial targets.
With that I'd like to pass the call to Sarah to walk through our financials.
Thanks, Bob.
Overall, our performance this quarter was in line with our expectation to provide some context, it's important to remember that the first quarter is our seasonal model. It's.
And typically accounts for only 10% of attachments in annual net sales and.
And as we level set our year end results.
But in the quarter as is the case this year.
Results also have a tough comparison to the record consolidated results in the first quarter of 2021.
However, it was really the first quarter of 2021 that was the anomaly.
The remainder of the business has rebounded as we exited the first phase of the pandemic combined with robust snowfall in February .
'twenty, one that created massive demand for parts and accessories, plus the supply chain constraints have not yet taken hold.
These factors combined for unusually strong performance in both segments producing record first quarter results that we did not expect to repeat going into this year.
With that said, let me walk through the numbers for the first quarter of 2022.
On a consolidated basis, we delivered net sales of $102 6 million and gross profit of $21 1 million.
<unk> net sales of $103 3 million and gross profit of $26 3 million during last year.
Net sales were essentially flat due to higher pricing at both segments.
Setting.
Okay.
SG&A expenses, including amortization expense were $24 million compared to $22 6 million during the first quarter 2021 the.
The increase was largely due to higher labor costs as well as a return to more normalized marketing.
Attachment.
We recorded GAAP net loss of $3 9 million or negative <unk> 18, principally to share compared to a GAAP net income of 742000 or three cents per diluted share in 2021.
On an adjusted basis, we generated net loss of $2 3 million tonnes.
<unk> per diluted share compared to an adjusted net income of $1 2 million or four cents per diluted share.
Similarly, we generated consolidated adjusted EBITDA of $4 6 million compared to $10 seven.
In the corresponding period of the prior year.
Profitability was impacted by lower sales volume in both segments and unfavorable product mix comparison within attachment.
Interest expense was $2 1 million for the quarter lower than the $3 million incurred in the same period last year as we benefited from the refinancing we completed in June of 2021.
Now, let's turn to the earnings information for the two segments.
Our work truck attachment segment generated net sales of $45 8 million compared to $42 million for the first quarter 2021 benign.
The 9% increase was due to higher pricing and higher input costs, which offset lower volumes.
Adjusted EBITDA was $3 million during the first quarter lower when compared to record adjusted EBIT of $8 $2 million reported the prior year.
The decrease was based on lower volume and product mix impacting profitability as well as outsourcing costs and a return to more normalized marketing spending.
As I mentioned earlier, we have a tough comparison this quarter given the results last year. When we saw a tremendous snowfall in February 2021, when you create a huge demand for parts and accessories, assisting both revenue and profitability.
If you go back and compare in the first quarter 2022.
Normal first quarter in 2019, Youll see our performance this quarter was positive.
No season ended slightly below the 10 year average, which we don't anticipate we will have a significant negative impact on demand during our preseason order period, which is off to a strong start this year.
Turning to work truck solutions, where we reported net sales of $56 8 million and adjusted EBITDA of $1 6 million compared to net sales of $61 4 million and adjusted EBITDA of $2 4 million in the same period last year.
Our results this quarter were impacted by lower volume and inefficiencies stemming from chassis and component shortages that hindered production plus inflationary pressure.
As Bob mentioned, we're seeing a continuation of recent trends demand remains strong and backlog continues to grow at Henderson and Jana.
With that said I'll turn to the balance sheet and liquidity net.
Net cash used in operating activities. During the first three months of 2020 to 126 million compared to cash provided of $24 1 million for the same period last year.
Free cash flow for the first three months of 2022 was negative $28 2 million compared to positive $22 million during the same period last year.
The changes were driven by the less favorable operating results as well as an increase in inventory in anticipation of inflationary price increases and supply chain disruption.
<unk> of supplier payments.
Inventory increased to $143 8 million at the end of the quarter compared to $99 9 million at the end of the first quarter of last year as we strategically built inventory and bought forward in areas that will allow us to optimally deliver on customer demand in 2012.
<unk>.
Accounts receivable at the end of the quarter were $43 1 million in line with the $45 1 million at the end of the first quarter last year as expected.
Yes.
Capital expenditures for the first three months of 2022 totaled $2 2 million consistent with the two 2 million that was incurred last year.
We continue to make the necessary investments to fuel our long term growth projects. We are enthusiastic about our vertical integration plans and look forward to sharing more updates with you later this year.
After announcing another increase.
Last call, we paid our quarterly cash dividend of <unk> 29 per share at the end of March as planned.
<unk> been able to consistently generate significant free cash flow in recent years, despite difficult operating conditions.
Therefore in addition to increasing the dividend. We also initiated a $50 million share buyback program earlier this year further demonstrating our commitment to deploy excess capital.
During the first quarter, we repurchased approximately 82000 shares at a cost of approximately $3 million.
The effective tax benefit was 26% and 11, 6% for the first quarters of 2022 and 'twenty one respectively.
The rate was higher in the first quarter of 2022 due to discrete items related to stock based compensation.
At the end of the first quarter, our net debt leverage ratio of three one times higher than two five times at the end of 2021.
We plan to maintain our goal of keeping the ratio between one five and three times this year and expect it to drop back below three times later this year.
Finally, we are reiterating the guidance established last quarter.
For 2022, we expect net sales of between $570 million and $630 million.
Adjusted EBITDA is predicted to range from 70 to 100 billion adjust.
Adjusted earnings per share are expected to be in the range of $1.05 per share to $2 15 per share.
And our effective tax rate is expected to be approximately 25% to 26%.
Of course this outlook assumes the economic conditions remain relatively stable and that we experienced close to average snowfall levels in our core markets in the fourth quarter of this year.
While the global economic implications the war in Ukraine continues to unfold, we have not seen any supplying impact to date and we don't have any direct customers or suppliers located in the region.
While our guidance assumes the same level of inflation contemplated on our February call. There are many moving pieces that we will continue to monitor and update throughout the year.
We feel comfortable reiterating guidance given the first quarter results met our expectations in the preseason.
I'll start and attachments.
Demand remains strong in solutions and as we noted last quarter 2022 is expected to mirror 2021 with supply chain difficulties in the first half of this year.
Lee subsiding and starting to improve as the second half of the year unfolds.
Data coming out of the work truck industry indicate 2023 shouldn't produce similar conditions to 2019, which was a record year for Douglas. Therefore, we remain confident in both our 2020 to annual guidance and our long term targets.
Demand signals remain strong across the board, we continue to invest in our operations. So we are primed and ready to deliver when supply chain improve which will subsequently drive long term growth.
With that we'd like to open the call for questions.
Yes.
Thank you ma'am as a reminder to ask a question you will need to press star one on your telephone keypad.
To withdraw your question you May press the pound.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Timothy with Baird You May ask your question.
Hey, Hey, everybody good.
Good morning.
Good morning, Matt.
My name is Ben Butcher, before but Thats definitely a first.
Sure.
Sure.
Maybe just to start off on the solutions business just it doesn't seem like anything really changed in terms of your view on the year and chassis supply and things like that.
I wanted to confirm that and I know youre, not really kind of fully control.
The supply, but kind of any update on kind of what you've heard by by various classes.
Yes, I think.
I think it is.
It's a fair conclusion.
Tim that we're not seeing any significant change as Sarah mentioned, when we entered 2022.
Oems, we're sending the signals to expect the full year 'twenty to chassis supply to be pretty equal to 2021.
But all of those kind of flipped a little bit right. In 2021, we didn't really see some of the chip.
Issues surface until second half of the year. So deliveries were stronger in the front half got a little softer in the back half and we're seeing a little softer in the front half of 'twenty, two with projections to slowly start to improve in the second half of 2022. So that's still the thesis that we have we haven't.
My thing.
Plus or minus.
So that statement from the from the Oems at this point.
Okay. Okay. That's good and then just.
I know, it's small numbers, so maybe there's some mass things to it but I mean the <unk>.
Profitability in the quarter and solutions was the strongest it's been in the last three or four quarters. So is that just a reflection of just getting the business right sized.
For the current volume environment or.
Is there some mix elements just anything there that could kind of give us a little bit of.
Color on that.
I would say, there's probably two significant items that have shown sequential improvement in Q1.
One is as you know, it's more difficult getting price and to the market on our solutions business does.
And so now here we here we are after a full year of steadily.
Steadily increasing price.
Delivering on some of the <unk>.
Now, we're seeing more of that come through.
The second item, which we're really pleased with is the hard work on the solutions team.
From the standpoint of getting variable costs out continuing to work on our Dms initiatives, we have been to ITC closures that we talked about on the last call at Henderson.
There are some cost structure.
Initiatives that are taking hold.
We expect to continue to show improvement on as we go through the year.
Okay, Okay, great and then.
I guess on the attachments business is there any way to think about the pricing contribution versus the volume contribution in the quarter and I.
I noticed you didn't say anything about inflation impacting margins. There. So are we to read that that.
Meaning you are in a good spot on price cost in the attachments business going forward.
Yes.
When it comes to price and attachments Q1, we were we covered the inflation.
Were really pleased last year, when we closed out the year and as a company we cover inflation in total.
That trend continued into the first quarter, which is which is great.
What I can say about the magnitude of the price is we've had double digit pricing going into the market. That's all in in the first quarter.
So certainly well up over double digits is related to price.
Okay, and then I've got one more just on the buyback.
I know, it's kind of a small amount $3 million, but its obviously one of your weaker free cash flow quarters, and so I'm just trying to think about how youre thinking about the buyback, especially with the stock sitting here at 30 Bucks. This morning.
Yes, I mean, the way, we're thinking about the buyback one as another tool in the toolbox that we thought it was great to bring into the fold and.
We really wanted from a minimum buybacks perspectives on it on an annual basis to cover the equity that we have in our compensation plans.
So you can call that $6 million.
That's kind of the low that we would like to do and then we're going to be looking at our free cash flow generation and what we expect in the back half of the year.
<unk>.
To make any decisions on further buybacks.
Essentially we just are starting down that path with what we bought back in the first quarter.
Okay, Okay great.
Good good start to the year and good luck on the rest of it.
Thanks, Tom Thanks, Tim.
And we have our second question. Our next question from Mike Shannon.
D. A Davidson you may ask your question.
Hi, guys good morning.
Morning, Mike Good morning, Mike.
Sara your last comment in your prepared statement about 2023.
Very interesting.
It sounds like what you've been hearing so far is mostly from our industry volume top line perspective.
23.
I was wondering if you can give me a little bit more commentary about how delta kind of thinking about 2023.
Do you feel like you're.
On the right path to additional share gains next year and the non enhancements in the nonprofit attachments business.
And from a margin perspective can be matched 2019 as well.
Im trying to dissect all of that question it was a little choppy Mike.
So the comment of 2023 compared to 2019 was really on supply chain comments.
Which is getting back to what we're expecting for chassis chassis flow.
Which which then should give us the opportunity to get at the backlog that has just continually grown.
Which should translate pretty well to the fall through to EBIT.
I think you went somewhere on attachment with non truck.
Could you repeat that.
Yes, I was just curious to see I mean, I think the broader question was holistically.
Is your feel on EBITDA and earnings.
Similar to 2019 coming up in 2023, just Holistically speaking.
Non truck solutions and your margin performance potential.
I would love to say that we're getting back to 2019 record year performance.
There is just the moving pieces in that headwinds are too many.
We have now and the start of 'twenty three for me to be able to continentally make that statement.
Many items that are really outside of our control.
There's nothing structurally in the business that was saying that we could get there.
Really is going to be very dependent on supply.
And many of the other things we're navigating through yes, I think I would just add.
Would add to that as insurers point is spot on.
When one chassis flow.
Like they did in 2019.
That 2019 performance is clearly in our sights we've done so many things to improve the business over the past two years, whether it's new product development initiatives that have launched or will be launched whether it's as Jerry commented earlier about some of the productivity Dms.
Improvement initiatives some of the adjustments to our fixed cost structure.
Some of the cost reduction program to drive variable costs down.
All of those things are in play in 2023 and were part of our 2019 performance. So we can get.
Once this chassis thing gets back on our historical pace.
We feel very good about our go forward prospects.
Great.
Can we maybe just come back to the present day.
Could you compare and contrast for us the chassis supply differences today between.
I understand between the agenda in attachments to know who is who.
The lead currently who is behind.
Are there any nuances between each of those three areas.
Specific to supply chain.
Yes.
Why.
Of the heavy truck for the media and with the light duties, which one is doing the best which ones being the worst.
Well I think.
I think I would I would give kudos to all of our sourcing teams for how they're navigating through these through these crazy times.
Think about it logically Mike on the work truck solutions side, where you are sourcing multiple different components to build the work truck.
It's certainly three or four dimensional chess for those folks on the attachment side. We are building more of a stock product you still face the same challenges just not to the same magnitude. So we're feeling even past chassis. We are feeling the impact of supply chain constraints more so on those.
Solutions side than on the attachment side has nothing to do with the performance of the teams has everything to do with the business model and the sheer.
Complexity of the products, we have to source.
Okay. Okay.
Makes sense and then the 111 last one for me do.
So let me comment Bob on How's It MTA go for you in general for both segments any any large new order leads or interesting learnings from the show you could share with us.
Yes, I think it was first off there was there was excitement in the year I think just to be face to face again. After after two years of having to show shut.
Just shut down we had some we had some new products there on the attachment side, you've heard us talk about our non truck offerings, a little bit more.
Those are more of a growth Avenue for us and those were pretty well received.
And on the solutions side I think I think the most important thing there was just talking to dealers and customers.
About about how they feel demand is going to continue to be to be strong going forward. So really kind of walked out and there was a confirmation.
Of how solid we think that our long term prospects are.
That was probably the biggest takeaway for me.
Got it well thanks, so much I'll pass it along.
Thanks Frank.
And our next question from Chris Mcginnis with Sidoti You May ask your question.
Good morning, Thanks for taking my questions.
Morning, Chris.
I guess just.
If you said this I apologize I may have missed it just any notable difference in terms of the cadence of pre season for 2022 versus 21.
I guess, maybe just start there with a quick quick questions.
Yes.
It's a little early yet we had this conversation a couple of days ago do we have a feel yet for what the Q2 Q3 shipment mix is going to turn out to be in and we just don't have enough data yet we can tell you that.
On the April order book.
We have seen orders.
Generally a little higher than our estimates on a dealer by dealer basis, which means we're off to a great start.
As I said earlier.
Inventories are in great shape out the field dealer sentiment is positive.
Users are still having record performance years under on the Green side and Thats translating.
Into them.
Spending more money during the during the winter months.
So we're pretty bullish about what the preseason is going to hold for US there may be maybe I'll, let <unk> comment on this.
One of the watch items for us here is a stronger than anticipated pre season.
Possibly could include some pull ahead.
From the fourth quarter. So you want to comment on that a little bit.
Start by answering your question birth trends not with anything.
But.
When you look at Q.
One three.
Breakeven flat, where we flip flops and.
Were heavier in the third quarter.
We expect this year to be much closer to a typical.
Closer to 'twenty, one kind of split.
Q2 Q3.
If anything one motor level with Q2 being higher and then box that a little too early to tell.
I think to comment on the dynamics that box mentioning and again, it's probably too early to tell but yes.
The strength that we're seeing increased season.
And all.
Inflation, that's out there the pricing thats out there.
That's out there.
Difficulty securing supply.
There is a bit of a question mark.
The demand and whether or not any of the preseason orders would impact fourth quarter demand.
Dealers getting in and walking in.
Their supply potentially.
We don't have any.
Sure.
So for us to say that that is absolutely effects.
It's something we're really keeping a close eye on and order commentary as we navigate through the year.
Yes, no I appreciate that color.
Lead with another question of asking do you think inflation can pull forward and it sounds like that could be a factor. It's just it's too early to tell.
Alright, I appreciate that.
I guess just given.
Fly chain constraints around components.
Does it make you kind of rethink the backward integration initiative you have in place to maybe making some of those components, so that youre not us.
It depends on those suppliers that youre working with I was wondering if you could talk about that thanks.
Well sure I mean.
It's a secondary benefit of that of that strategy for sure Chris.
Most of the most of the additional project work that we're doing there is focused on.
Products that will allow us to drive revenue growth. So products, we can eventually take to the market.
That are more productive more efficient more reliable and more durable than the goods that we purchased on the outside before.
And the point, you're making is valid right I mean, we could if we can get to a point in this multiple year strategy, where we end up looking at.
Just basic everyday components that we think we can build and not just do it a little lower cost, but also may be focused on those areas, where the supply lines are long or where we feel that the.
The market for those components, just isn't as reliable as we would like it to be that's an excellent point.
Great I appreciate it thanks for taking my questions and good luck in Q2.
Thanks, Chris.
And again, if you would like to ask a question you will need.
Press Star one on your telephone keypad.
That is again star one on your Touchtone phone.
As there are no further question at this time I will now turn the call over back to Bob Mccormick, President and CEO .
I'd like to thank you for your time today and would love to leave you with a couple of thoughts.
We're encouraged with where both segments stand today.
And certainly encouraged about Douglas as long term prospects.
Our Q1 results were in line with expectations and demand trends remain very positive.
While we look forward to the macroeconomic headwinds subsiding, we are constantly working to improve our operations. So we will be better positioned and more efficient.
Do you see the situation.
We are reiterating our guidance and continue to manage through the short term, while maintaining focus on achieving our long term strategic objectives.
We thank you for your time today and look forward to seeing you in person in the coming months.
This concludes today's conference call. Thank you all for joining you may now disconnect.
Okay.
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