Douglas Dynamics, Inc.
Q1 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Douglas Dynamics First Quarter 2020 Earnings Conference Call. [Operator Instructions].I would now like to turn the call over to Sarah Lauber, Chief Financial Officer of Douglas Dynamics. Please go ahead.

[Sarah Lauber:]

Thank you. Welcome, everyone, and thank you for joining us on today's call. Before we begin, I would 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'll review our financial results and our thoughts around guidance. After that, we'll open the call for your questions.With that, I'll hand the call over to Bob.

[Robert McCormick:]

Thanks, Sarah. Good morning, everyone. Before we begin, I'd just like to note that today marks the 10-year anniversary of our IPO. Our company has evolved significantly over the past 10 years and we are proud of the changes we've implemented and the growth we've produced over that time. Outside of the stock price increases, we're proud of the diversity of our business, the exciting new markets we now serve and the long-term prospects for growth. We've made a lot of progress in the past 10 years, but there's a lot more to do.I'm confident that we are aligned and focused on expanding our leadership position in the truck equipment market, ultimately driving the long-term plans we outlined last year. Our strategy is sound, our balance is strong and our talent is second to none. While the pandemic will undoubtedly impact our timeline, it won't sway us from our task and we have the right team in place to achieve our goals.Now turning to the near term. Everyone is going to remember this quarter, which presented both familiar challenges and unique challenges that no one could have predicted to start the year. These challenges impacted our financial results and the ability to operate effectively in the first quarter.For the quarter, we generated sales and earnings lower than our internal expectations due to 3 main factors

[Sarah Lauber:]

Thanks, Bob. Near term, we're clearly facing a significant financial impact. However, our financial strength will allow us to continue to invest for the long term and emerge from this situation stronger than we went in. The first quarter was a tough quarter for three main reasons

[Operator:]

[Operator Instructions]. Your first question comes from the line of Ryan Sigdahl with Craig-Hallum.

[Ryan Sigdahl:]

I want to start with Work Truck Attachments. How are you guys feeling about channel inventory? And then what are you hearing from kind of dealer and then also end customer sentiment? I know you talked about delaying more orders probably to Q4, but what are you hearing from the channel?

[Robert McCormick:]

The last dealer inventory that we took was at the end of January, and we were quite pleased with the results. In this environment of 2 low-snowfall years in a row, you would expect plow inventories to be accelerated or increased, but they were relatively flat. So that was a good sign. When it comes to dealer sentiment, as I mentioned before, most of our dealers, while they're the cream of the crop in terms of truck equipment, they're the best and biggest in most of the MSAs that we operate in, they're still considered a small business by normal standards. And so this pandemic and this shutdown certainly has them capital constrained. And our early take is that it is wise for them to be more mindful of the size of preseason order that they place and also when they will take shipment of those orders.So not only is the reduced snowfall 2 years in a row going to have a negative impact over all on the preseason, we expect that dealers will probably tick that down even a level further and wait until the fourth quarter snow season to start showing itself and then place some accelerated increased orders at that point in time.The other point that I would make is that while it's still early in the ordering process we would expect to see more of our preseason ship in Q3 versus Q2. Again, we just kind of see this thing lengthening out a little bit as the calendar year progresses.

[Ryan Sigdahl:]

And then you mentioned kind of financial constraints among some of your customers. Are you guys extending any greater payment terms than you historically do, to try and help them?

[Robert McCormick:]

No.

[Sarah Lauber:]

No, we're not, Ryan. We have our typical preseason terms. And I'll tell you, I'm relatively pleased thus far that those that have opted for cash terms historically have remained with cash terms. So that's one good sign that we've seen.

[Ryan Sigdahl:]

Last question for me and then I'll turn it over. You talked about capital allocation, firmly reiterating the dividend. After the dividend, given the current environment, do you have any changes to kind of the temporary or near-term capital allocation between kind of investments in the company, hunkering down, stock buybacks, et cetera?

[Sarah Lauber:]

So the way we think about capital allocation has not changed in this environment, maybe a tweak here and there. We are focused on the dividend, fully committed to that. We expect that we will generate free cash flow to cover the dividend for the year.Secondly, we've been focused on paying down debt, of which we made a $20 million payment in Q1. We are at leverage that we're comfortable with today. And then, third, investing back into our business and then acquisitions. I'll make the comment on CapEx, in this environment I'd say we are committed to continuing to invest in our long-term growth projects. However, we are also going through each capital request again and re-approving it, I'll say, as we navigate through the year. I still expect that this will be an investment year, CapEx around 3% of sales, but we are just being very diligent on making sure we invest in the right areas.

[Robert McCormick:]

Let me just add on to that, just for one moment. One of the things to remember about Douglas is we have a balance sheet that is almost always in great shape. It's a high free cash flow generation business model, even when things get tough. It is certainly better than most. So while we do pull levers to trim back CapEx, as Sarah suggests, we have the ability and we have the mindset to make sure that we're still making appropriate investments that will support the long-term growth initiatives we have. So it is a very balanced approach for short-term cuts, at the same time making sure we don't lose momentum against our long-term goals.

[Operator:]

Your next question comes from the line of Tim Wojs, with Baird.

[Timothy Wojs:]

Maybe just a first question on maybe just kind of a normalized decremental margin. How would you think of kind of unit decrementals as you look at maybe the second quarter and into the third quarter, kind of recognizing this isn't kind of a normal situation? But how do you think the margins can flex or what can you flex, just given expectations of more sluggish volume?

[Sarah Lauber:]

Great question, Tim. When I think about our business and a typical decrement margin, we've always been around that 35% range. And that has evolved, obviously, from our commercial snow and ice, where we have a much more variable cost structure, to the additions of our acquisitions with a little bit more fixed costs.But from that standpoint, that's a good place to think about in normal times. Clearly, Q1 was higher than that. With the speed and severity that we saw this come at us in March, it takes a bit longer to react. And we have the overhead costs related to our shutdown for 2 weeks in Q1 and then when you look at Q2 were half the quarter.So when you think about Q1, I estimated the impact being $0.15 to $0.20 of adjusted earnings per share based on the COVID-19 impact. You can look to Q2, not two weeks, being more half a quarter, which is clearly going to have an increase to the decrement. But I see that improving then sequentially through the end of the year.

[Timothy Wojs:]

Okay. That was going to be my second question. It sounds like if we used kind of the $0.15 to $0.20 that you called out for Q1, it sounds like we could maybe triple that and kind of use that as a baseline for what the impact to Q2 might look like.

[Sarah Lauber:]

Absolutely. And I was just going to reiterate, those are shutdown impacts. We've been working hard on getting back to work and ramping back up during this period. So we'll start to come out of that here in May and into June.

[Timothy Wojs:]

Right. Okay. Okay. Understand there. On the Dejana side of things, how would you characterize the backlog there? It sounds like Henderson has held up pretty well and there haven't really been any contract cancellations. But is that the same in Dejana?

[Robert McCormick:]

Well, I would say we haven't seen cancellations there, but as you can imagine, if you think of where Dejana's market-leading positions are it's on the East Coast and Mid-Atlantic. And so they're right in the middle of this thing. And so we've seen orders drop off, as we would expect. I made a comment earlier, the truck dealers that we work with in those areas, half of them are open, half of them are closed. The ones that are open are pretty well downsized at this point. And I guess, Tim, what I would leave you with is although we will certainly be first in line for chassis when the OEMs get back up and running, probably the biggest wildcard we have looking forward from a demand perspective is what's the economy look like and what's the end user sentiment look like in that region of the country when all the dust settles.

[Timothy Wojs:]

Okay. Okay. Understood. And then I guess just lastly, I guess, could you [indiscernible] us on how you're thinking about just kind of maybe extending the revolver or how you're kind of looking at that? Because I think, before, you had talked about maybe trying to refinance. And so any sort of kind of update on pushing out some of the maturity and getting into agreement there?

[Sarah Lauber:]

Absolutely. As you know, the credit markets have been challenged. We're very fortunate in our banking partnerships that we've had and we've been working closely with them. I still expect us to be able to refinance. It could be as early as Q2. We may opt to wait until the back half of the year. We're just staying close to the market. We have a lot of different approaches we could take. We're currently in a Term Loan B. There are other ways for us to refinance that would be open to us. So I'm not concerned about the ability to refinance. I think the expectation, though, is it's going to be a little more expensive than it was before this pandemic hit.

[Timothy Wojs:]

Okay. Okay. Well it's good that the ability is still there.

[Operator:]

Your next question comes from the line of Chris McGinnis, with Sidoti & Company.

[Christopher McGinnis:]

I just wanted to start maybe off with just in response to COVID, can you just maybe talk about some of the safety measures and maybe changes in manufacturing and any projected thoughts that that may hurt the margin, going forward? I know you've obviously spent a lot of time around DDMS, but just any issues around margins being hurt by measures to combat the pandemic?

[Robert McCormick:]

I think Sarah speaks appropriately to the short-term financial hits that we'll take during shutdowns and ramp-ups. I'm going to speak to that element of it. I will say that, as I mentioned earlier, the Safe Return to Work teams that we put in place as soon as we shut down have been going through all of our facilities, whether it's a 400-person location for manufacturing or a 15-person location for upfitting. And we are putting all the logical safety measures in place, from a cleaning perspective, from a social distancing perspective.I would tell you that initially I had a concern that some of the long-term solutions that we may have to put in place might impact productivity because people might be spaced farther apart. But then again, you can't, you just can't imagine the work that these people do when they're faced with a crisis. And so some of the unique solutions people have found already are just nothing short of incredible.The other thing that I would suggest to you is you give an engineering and operations team a completely shut-down facility to stand there and look at and dream about what's possible, quite frankly, you never get an opportunity to shut a location down and look at a blank sheet of paper and say, what can we do differently if we've got 30 days to do it?And so some of the continuous improvement initiatives that have come out of this I think are really cool. I would expect, long answer, shorter, I would expect that long term, when we're back up and running 100% operational, that the safety measures we put in place should not have a negative impact on our long-term margins, at all. And in fact, we may see that some of the momentum that we've gained will actually accelerate some of those margin improvements.

[Christopher McGinnis:]

Great. I appreciate that insight. And then maybe moving on to Henderson, I know you didn't own it in the past recession, but just as states and local budgets are starting to be impacted by COVID, any risks there on the Henderson backlog?

[Robert McCormick:]

That's a terrific question. While we purchased Henderson on the other end of coming out of the last economic cycle, we were always very proud to say that even up through the acquisition Henderson continued to grow through the most significant economic downturn in our lifetimes. So I think that says all we need to know about the impact on municipal budgets.Do those budgets get cut back during downturns? Absolutely. But one of the last things to get cut is snow and ice control removal because of the significant impact it has on commerce and tax collections. So while every environment is a new situation unto itself, history says that Henderson should not be significantly impacted from that perspective.

[Christopher McGinnis:]

Okay. Thanks for that. And then last question, just around the competitive environment in Solutions. You talked about the strength of your balance sheet. Can you maybe just talk about the opportunity of possibly the disruption it's causing across the country and opportunities for you to maybe flex a little bit and grow as competition maybe falls by the wayside?

[Robert McCormick:]

Certainly, that's something that we're exploring. But I guess what I go back to is if you can think about your average size upfitter, your truck equipment dealer, it's probably a $5 million to $10 million operation. It is a small business. Okay? I think some of those businesses are going to be challenged longer term having to weather this environment. To a large degree, those businesses were not and are not on Douglas' short-term acquisition target list. Okay?So one of the things we will not do is make a modification to the acquisition strategy to accommodate a situation. We have a list of blue-chip targets out there. Most of them are medium- to larger-sized companies. We'll certainly be keeping our eyes open for opportunities that may present themselves coming out of this other end of it. I unfortunately think that if there's fallout it's likely to be in the smaller companies, which are not a large part of our go-forward strategy.

[Operator:]

[Operator Instructions]. I am showing no further questions at this time. I would now like to turn the call back over to Bob McCormick, President and CEO.

[Robert McCormick:]

Thank you. And thank you for your time today. We hope that you are all staying healthy throughout these difficult times. And as always, we are very appreciative of your ongoing interest in Douglas Dynamics, and we look forward to updating you on any new developments in the months ahead as we work through this situation together. Have a terrific day.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.