This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, and ladies and gentlemen, welcome to the Douglas Dynamics First Quarter 2021 Earnings. At this time, all participants are in the 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 zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Sarah Lover, CFO. Thank you. Ma'am, please go ahead.
spk00: 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 others, 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 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.
spk02: Thanks, Sarah. Good morning, everyone. We're off to a fantastic start in 2021 with record first quarter results. I will keep my comments fairly brief today for two reasons. Number one, this is about as straightforward a quarter as we've experienced recently or could have hoped for. Number two, the near-term challenges we face will be very familiar to you, same as every other manufacturing and auto-related company that you follow. Both of our segments turned in strong results. attachments buoyed by the heavy snowfall during February in many key markets, and solutions improved as more normalized levels of business activity returned. Our teams put forth tremendous effort to produce such 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-related absenteeism in a 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 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. And number three, we continue to navigate a tight labor market. This is a common challenge across the U.S. Skilled workers are simply hard to find. We have a great HR team finding creative ways to attract and to retain quality employees. Remember, our business model is built to deal 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 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. 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. Then 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 and 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 our strong Q1 results likely included some orders pulled forward, which may impact second and third quarter revenues. The preseason 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. Importantly, no dealer credit concerns heading into the preseason period. We're pleased with what we're seeing within the attachments group. The team has a long history of strong execution, and 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 solution 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 good news for the long term, but it did create an expected gap in 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 gap. And this will impact Q2 and Q3 financial performance. Dejana, the team, is doing a great job. Overall, demand is strong as the economy continues to stabilize. As at Henderson, supply-side challenges will impact Dejana's performance in the near term. and the team will stay flexible in staffing our up-fit locations to meet customer expectations. With backlogs in the solutions segment approaching record levels, we're well positioned for long-term success. Overall, we're very encouraged with where both segments stand today. Moving on to capital allocation, we continue to make necessary investments to fund our growth initiatives. As previously mentioned, we are on track to launch the medium-duty municipal first responder product this summer. The end-user response is positive, and we expect to gain significant traction in 2022. As our vertical integration strategy proceeds, a number of projects are already in the on-deck circle. 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 is 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 use our strong free cash flow to pay down debt. Maintaining a healthy balance sheet is always top of mind. It allows flexibility to 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. Relays are focused on providing the highest level of value to our customers, continually outperforming our competitors. The pandemic will impact performance throughout 2021, there's no question about that. But despite this challenging backdrop, we continue to innovate, driving continuous improvement initiatives across the company. And although supply related headwinds will impact short term results, 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. Sarah?
spk00: Thanks, Bob. Overall, our record first quarter financial results were based on increased snowfall in our key markets compared to last year, which drove improvements at attachments combined with the ongoing stabilization of the broader economy and 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 solution segment meant 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, compared to 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 $742,000, or three cents per diluted share. compared to a GAAP net loss of 10.1 million or negative 44 cents per diluted share respectively in 2020. On an adjusted basis, we generated net income of 1.2 million or 4 cents per diluted share compared to an adjusted net loss of 7.8 million or negative 34 cents 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 a GAAP and an adjusted basis were mainly driven by the higher sales volumes, in addition to avoiding the pandemic-related facility shutdowns that significantly impacted our first quarter 2020 results. SG&A expenses, including amortization expense, were 22.6 million, compared to $19.9 million during the first quarter of 2020. The increase is primarily related to increased employee incentive based compensation due to 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 $2 million decrease was due to a $1.5 million gain recorded on a non-cash 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 increased principal balance following our June 2020 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 negative 2.1 million recorded the prior year, driven by the increased sales volumes and not having to contend with facility shutdowns like we had last year. As Bob mentioned, this snow season was unusual. With a 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 ended 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 was addressed. As we begin our pre-season 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 400,000 in the same period last year. The increase in both net sales and adjusted EBITDA can be attributed to a combination of improved operating conditions coupled with avoiding the facility shutdowns that impacted business activity in March last year. As Bob mentioned earlier, we are encouraged by strengthening order patterns that we are 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 a 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 112.4 million at the end of 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 of 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 2.2 times, lower than 2.5 times at 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 between one and a half and three times. Turning to total liquidity, which totals 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 a 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 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%. Of course, this outlook assumes economic conditions remain relatively stable and that we experience 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 solution segment. as local and state governments delayed decision-making as they assessed 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 gap that will impact our production schedules in the second and third quarter. As 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 to the best of our ability. Based on the interruption in orders and the impact of anticipated supply chain constraints, we're planning to implement rolling facility shutdowns in 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, giving the timing of how and when we can pass through these costs. One silver lining to 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 experience and knows which levers to pull to control costs and how to effectively close and open 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 have the right team in place to work through these obstacles using our problem-solving mindset to adapt, overcome, and emerge a stronger and more efficient organization. With that, we'd like to open up the call for questions. Operator?
spk01: Thank you, Ma'am. 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 Hodge from Baird. Your line is open.
spk05: Hey, good morning, everybody. Nice job so far. Thank you. Good morning. Good morning. Maybe just to start off on the supply chain side of things, could you just elaborate a little bit on where specifically you're seeing tightness? It sounds like it's, I mean, obviously we've had chassis supply issues for the last couple years. That hasn't really been cited. It sounds like it's more component. So maybe just kind of broaden out the discussion and just give us an idea of where you're seeing kind of the most, you know, supply constraint right now. Yeah.
spk02: Yeah, it clearly still is in chassis. I mean, all 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 both in Class 4 through 6 and in Class 7 and 8. And do we have other... Component challenges, sure. I mean, 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 commodities there. But it is largely, 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 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 chip and from a component perspective. So while we didn't mention chassis specifically, that's the number one driver of the uncertainty as we see it, similar to what most other industrials have been experiencing.
spk05: Okay, okay. And then is there, just on the muni side, I guess what's changed there in the past 60 days? Is it stimulus? Is it just the tax revenues been coming in, you know, better than municipal feared? So they're kind of going ahead with the orders and just trying to understand maybe what's changed there. And if you could kind of elaborate a little bit on what the bill is in both DeGeneres and Henderson, I think that'd be helpful.
spk02: Well, yeah, I mean, going back to the last half of 2020, we had projected a softening in orders, not a softening in quote activity that was still as robust as ever, but we knew that with the municipalities being very unsure as to what their tax revenue looked like, that we'd see a decline in orders. And we absolutely saw that in the second half and more notably in the fourth quarter. We did see it start to pick up as we turned the corner into 2021, and our team's 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 health related, whatever the drivers might be, we are seeing a nice increase in orders on the Henderson side. It does result, though, in a temporary gap yet, most notably in the second quarter and into the third quarter a little bit, about being able to match up chassis receipt with those orders. And so, as Sarah spoke to and I mentioned, we've got these rolling shutdowns, which will put into effect, and that will help us to mitigate the impact there. On the DeJana side, I would say it's equal parts economy starting to gain some traction, and our sales team there just doing an awesome job. We're sitting at near-record backlogs there. We don't make that actual data public, but I think 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.
spk05: Okay. That's good to hear. And then Maybe just the last one on the attachments business. I guess how does field inventory – it sounds like field inventory is relatively normal. It sounds like the preseason has kind of started, you know, 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 some sort of pull forward? I'm just trying to understand, you know, if that's just, hey, things were better than we thought and it had to come from somewhere, or – if you're actually hearing something in the channel or with your dealers or distributors, that would kind of suggest that.
spk02: Well, you know, 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 wild card, right? Yeah. 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 when it snowed everywhere in the month of February, more specifically on the East Coast, which hadn't seen it for a couple of years, we did see a nice spike in plow orders of February into March. And typically that's when plow 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 they released some of those orders. Will that impact the preseason orders? We'll know here by the time we get to the second quarter call. But we certainly can articulate that what we saw in order intake and shipments in the second half of Q1 was unusual.
spk05: Okay. Okay, good. Well, I'll hop back with you. Thanks for the time, guys. Appreciate it.
spk02: Thank you.
spk01: Your next question is from Ryan Sigdal from Craig Hallam. Your line is open.
spk04: Great. Thanks for taking our questions. I'm curious. I don't think I caught it, but you've talked about kind of supply chain as well as some pull forward, pent-up demand, et cetera. But did you mention what you expect from a seasonal – between Q2 and Q3, normally kind of the 60-40 mix, but kind of what's the right expectation this year?
spk00: No, we did not mention it. 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, very unusual year, we were at 50-50 between the two. Our expectation for this year is we are going to be moving back closer to that 60-40 split.
spk04: Helpful. Thank you. And then just as far as, you know, supply chain, you know, certainly difficult across 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 DDMS standpoint to help alleviate those challenges?
spk02: Yeah, that's an excellent question. I mean, 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 DDMS 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 upfit that product. Now, again, we've always felt that that's an advantage we have on any of our competitors, and in this case, It's planned for and is being executed. Now, I do want to distinguish these rolling plant shutdowns are occurring on the solution side, not on the attachment side. When you're in the attachments business, you can pull multiple levers to adjust production. Remember, we have a 15 plus percent of our workforce is temporary. So we can pull levers there. We schedule four-day, 10-hour work weeks. We can flex up or we can flex down. So the rolling plant shutdown concept is a work truck solutions one, again, which we will utilize to improve productivity and flow. And the work truck attachments group will just pull its normal weather-driven levers to manage through this period of time as well.
spk04: And then just on 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, you know, more rolling shutdowns, et cetera, or does this actually make it challenging and kick those out? Or I guess are we on target kind of with expectations when you started those?
spk02: Yeah, I think we're on target there, and the – The component shortages don't really impact the projects we have going or the ones 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 to slow down what those folks are doing from a cadence perspective at all.
spk04: Last question for me, and then I'll hop back in the queue, but M&A, I know you mentioned the shelf rationale for that, but what are you seeing on the M&A pipe? I know you have kind of a short list of blue-chip kind of relationships there, but any of those getting closer? Is this environment pushing people more likely to sell, not likely to sell, so on? Thanks.
spk02: Yeah, you know, I think everybody's expecting in a post-pandemic world, Ryan, that we'll see more deals in our space coming to market. We at Douglas have not seen that yet. And so we have that expectation And, again, 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 change fairly quickly as well. So I like what Sarah 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.
spk04: Thanks, Bob. Thanks, Sarah. Good luck, guys.
spk01: Thanks, Brian. Your next question is from Chris McGinnis from Sidoti and Company. Your line is open.
spk03: Morning. Thanks for taking my question. Nice quarter.
spk00: Good morning, Chris.
spk03: I was wondering if we could start maybe just with the inflation you may be seeing on raw material side. 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?
spk00: Yeah, I guess I'll speak to the inflation first and then to the demand side. We're seeing significant inflation coming into the business, predominantly in steel. You know, as we experience steel inflation, that certainly hits all three of our businesses. I'm confident in our ability to cover the inflation from a pricing perspective. We will experience in 2021, I do plan that we will see some differences in timing on recovering that price versus the inflation coming in. I think on the demand front, when I think through that, I think in each of the businesses, our customers, our dealers, all of that have an expectation, I guess, of how we are giving out prices. And when you're on a quote business on the solution side, they should be seeing that everywhere. So I don't expect that there's any pull ahead or anything like that. And on the attachment side, I don't think we experience much of that either. I think because we have set price points or price times, it doesn't drive that, at least not from a material aspect.
spk03: Gotcha. Okay. Very helpful. And then this may be too early. Just on the new offering, the light model for the muni side, are you – seeing orders come in without already, or would the increases that you're seeing come from the quoting, I guess, more on the traditional side of the business?
spk02: Yeah, 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 recently that we were out in the market with this new medium-duty muni, the core business. I will 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 are 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 and we love the response, it's likely a 2022 proposition in terms of a material impact.
spk03: Okay. Thank you very much. I appreciate it. Good luck with you, too.
spk01: Thanks, Chris. Again, if you would like to ask a question, please press star, then the number one key on your touchtone telephone. Again, that's star, then the number one on your touchtone telephone. I'm showing no further questions at this time. I would now like to turn the conference back to you, Mr. Bob McCormick.
spk02: 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.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. Have a wonderful day. You may all disconnect.
Disclaimer