Mar 12, 2013
Executives
Jim Janik - President & CEO Bob McCormick - SVP & CFO
Analysts
Jim Giannakouros - Oppenheimer and Company Josh Chan - Robert W. Baird Jason Ursaner - CJS Securities Robert Kosowsky - Sidoti
Operator
Good day ladies gentlemen and welcome to the Douglas Dynamics Fourth Quarter 2012 Earnings Conference Call. (Operator Instructions).
If anyone should require assistance please press star then zero on your touch tone telephone. As a reminder this conference is being recorded.
I would now turn the call over to your host Bob McCormick, Executive Vice President and Chief Financial Officer. Please go ahead.
Bob McCormick
Hello everyone and thank you for joining us on the call this morning, two quick items as we begin. First please note that some of the information that you will hear during this call will consist of forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934 as amended.
These statements express our expectations, anticipations, belief, estimates and intentions, plans and forecasts because these forward-looking statements involve risks and uncertainties our actual results could differ materially from those in the forward-looking statements. For more information regarding such risks and uncertainties please see the sections titled risk factors, forward-looking statements and management discussion and analysis of financial condition and results of operations included in our Form 10K for the year ended December 31, 2012 filed with the Securities and Exchange Commission and the updates to these sections in our subsequently filed quarterly reports on Form 10Q.
Second this call will involve discussion of adjusted EBITDA, adjusted net income and adjusted earnings per share all non-GAAP financial measures which under SEC regulation G we’re required to reconcile with GAAP, the reconciliation of these measures are the closest GAAP financial measure is included in today’s earnings press release. Joining me on the call this morning is Jim Janik, President and Chief Executive Officer with these formalities out of the way I would like to turn the call over to Jim.
Jim Janik
Good morning and thank you for joining us on today’s call to discuss our 2012 performance. I’m going to begin by providing an overview of our results and then Bob will provide a detailed review of our financials.
Finally I will be back to discuss current trends and provide additional details on our outlook for 2013. As expected fourth quarter and full year results were in line with preliminary results we provided in January.
During the period we reported fourth quarter revenue of $28.2 million compared to 60.3 million the prior year. The full year revenue for 2012 was 140 million compared to 208.8 million for the prior year.
The impact of mother nature coupled with a sluggish economy set the stage for an unprecedented market conditions in 2012 that impacted the entire industry. Similar to fourth quarter 2011 the timing amount and location of snowfall was far from optimal.
The mild start to this winter season of cross core markets of October, November and most of December compounded the effects from the previous year’s low snowfalls. Further exacerbating the impact with the record growth during the past summer which affected the financial strength of many professional landscaping businesses which as a remainder represents majority, our major segments of our customer base in the winter.
While the results were lower than previous year results our original expectations given the near term external factors were encouraged by our leading position within the industry. The strong long term fundamentals of our business and we’re excited by positive non-snowfall indicators within our business which I’ll provide more visibility into towards the end of the call.
Overall our company’s focal point during this challenging environment is to focus on the factors within our control. I firmly believe that we’re implementing strategic initiatives and rolling out new and innovative products to the market that will expand our capabilities and performance and firmly positioning ourselves to emerge from this environment as even stronger company.
I want to take a moment to thank all of our dedicated employees for their unwavering enthusiasm and commitment to positively influence the long term future of our business this past year. We made significant progress across operational initiatives and enhancing our value proposition to customers through the launch of our new line up of best in class products.
Now I like to highlight some of those operational and business highlights in 2012. During the year we implemented numerous continuous improvement initiatives to increase profitability and improve operational efficiencies and enhance our service capabilities.
This past year we initiated a record number of cost reduction projects and strengthened our supplier partnerships by sharing lean expertise and conducting multi Kaizen improvement attempts in supplier factories worldwide. As evidenced of some of the traction we have gained on these initiatives we achieved a new record of 98.9% for perfect shipment delivery performance while improving base business profitability.
These activities provide significant dividends to Douglas and our customers and will be a continued focus in 2013 and beyond. These process improvements and high standard of excellent service levels will allow us to manage the assets of our core business and even more efficiently maximize earnings once business conditions reverse back towards average historical weather patterns.
Along with operational improvements we work diligently on a record number of new product development initiatives to drive growth and innovation within the business in 2013 and beyond. The product scheduled for our 2013 launch, are timed well as two to three major players within the pickup truck industry are also scheduled to launch new models of trucks.
As we have discussed before truck sales do positively correlate with snow and ice equipment sales over the long term. Looking forward we’re introducing multiple new products which ever see strong positive feedback thus far and will position us to expand our leadership position within the industry.
Our new suite of products was introduced at the NTEA Work Truck Show in Indianapolis last week and we will be sold through Fisher, Western and Blizzard distribution. These new products represent both snow removal as well as ice control solutions for both truck and non-truck applications.
We’re very encouraged by the positive reaction from both our dealers and professional plovers attending the convention. It really does highlight our position as an innovator and leader within the industry.
These products continued Douglas mantra of creating real value for those focus on superior reliability, durability and enhanced profitability. Lastly I want to briefly touch on our dividend policy.
As previously reported the company declared a quarterly cash dividend of 20.7% per share on its common stock which is paid on December 31 2012. Stockholders have record as of the close of business on December 21, 2012.
We continue to generate significant cash flows and are well capitalized to execute on our capital allocation strategy. Our strong financial position in 2012 despite a myriad of negative market conditions is a testament of our company’s ability to deliver solid cash flows in any market environment.
Enhancing shareholder returns through our industry leading dividend is a distinguishing characteristics compared to other companies of our size and it is protected in our current model. As we have consistently stated paying down debt and using, and issuing a dividend remain our top priorities.
Since initiating the dividend in 2010 we have already increased the dividend payment three times with $24 million of cash on hand at 31 December, we’re well positioned to support our dividend objectives in any snowfall environment. With that I’m going to turn the call over to Bob to discuss our financial results in more detail, Bob?
Bob McCormick
Thanks Jim. For the fourth quarter of 2012 Douglas Dynamics generated sales of $28.2 million compared to $60.3 million in the fourth quarter of 2011.
This decrease is a reflection of the market environment which resulted in a significant decline of both equipment sales and parts and accessories. Shipments of equipment units and parts of accessory sales decreased 54% and 38% respectively.
As Jim mentioned the decrease in unit volume for both segments were expected and was largely driven by the compounding effects of weak snowfall last winter and the timing amount and location of snowfall this past fourth quarter. Cost of sales was $20.7 million there is 73.3% of sales for the fourth quarter compared to $40.3 million or 67% of sales for the fourth quarter of 2011, this year-over-year increase was driven primarily by the reduction in volume.
SG&A expenses of 4.5 million for the quarter were $2.7 million lower than prior year. Beyond the spending reduction which have been in place throughout 2012 additional compensation expense adjustments were made in Q4 as we threw up company profit sharing plans, sales bonus programs, annual management bonus plans and executive stock plans at year end.
Fourth quarter 2012 adjusted EBITDA was $4.2 million compared to prior year adjusted EBITDA of $14.4 million, adjusted net loss for the fourth quarter of 2012 was $1 million compared to prior year adjusted net income of $6.3 million. Adjusted earnings per share was a loss of $0.05 per share in the fourth quarter 2012 compared to income of $0.29 per share in the prior year.
Net cash provided by operating activities for full year 2012 is $15.6 million compared to prior year, net cash provided by operating activities of $47.7 million. This decrease was largely driven by a net income decrease in 2012 with $13 million versus the prior year but was also impacted by changes in working capital namely inventory of $6.3 million and accrued expenses of $5.8 million.
Inventory levels of $30.3 million or $6.3 million higher than the prior year for an inventory levels out of higher year-over-year due to a decrease in equipment unit demand in the fourth quarter from the record low snowfall levels of 2012. As we have consistently stated we’re well positioned to fund upcoming dividend payments even if we get other low snowfall environment.
Cash on hand at the end of the fourth quarter totaled $24.1 million; the unused borrowing capacity on the revolver is $60.9 million is resulted in total liquidity of approximately $85 million. With that I’ll turn the call back over to Jim for some concluding remarks.
Jim Janik
Thanks Bob, to close I would like share our thoughts on what we’re expecting for 2013. As we put together our guidance for 2013 there are multiple elements to be taken into account both positive drivers and limiting factors.
On the positive side we’re introducing multiple new products which have received strong positive feedback thus far and will position us to expand our leadership position in the industry over the long term. However in the near term there are additional costs associated with the development launch and production of these new products, while the positive impact of the sales won't be realized until later 2013 and subsequent years.
Overall non-snow drivers of the business are trending in the right direction, the expansion of our product portfolio coincides well with positive indicator such as select pickup truck sales. Furthermore major automotive OEMs unveiled new lineup of truck models this year and growth trends within selected trucks continue very positively as evidenced by the 9% year-over-year growth in sales.
As we have mentioned before we have found that well difficult to quantify truck sales do positively correlate with plow sales over the long term. Other positive signals include stable distributor sentiment and a modest improvement in the housing and construction markets.
After a very late start to the season snowfall started to improve in our core markets in February, as we have discussed before the later in the season we see snowfall the less of a positive impact it makes on the sale of new equipment in the first quarter. While the increase in snowfall in February is certainly positive for our business it will mainly lead to increased parts and accessory sales as the plovers typically decide to repair rather than replace towards the end of the snow season.
The February storms will also help observe the elevated inventory measured in our January 31 field inventories which stem from the low snowfall in the first and fourth quarters of 2012 as well as January 2013. Overall we feel better about 2013 today than we did about 2012 at this point last year.
Based on 2012 results and current trends the company expects net sales for the full year 2013 to range from $155 million to 215 million and adjusted EBITDA to range from 30 million to 55 million. Earnings per share are expected to range from $0.32 per share to a $1.02 per share.
We believe this is an appropriate range based on the challenges we encountered last year and I believe that it will take some time to return to normal industry conditions. It is important to note that the company’s outlook assumes that the economy will remain stable and that our core markets across the Snowbelt regions in North America will experience average snowfall in the company’s core markets for the remainder of 2013.
As we continue forward in 2013 our focus is to execute on our strategy and influence the factors within our control that enhance shareholder value. Looking to the long term we are in solid financial footing and excited about the long term pent up demand industry dynamics and the opportunities for growth within the business.
We expect to leverage our track record and flexible business model to produce solid results in 2013. We have a strong cash position and we will continue to return cash to shareholders via our robust dividend and pursue strategic acquisitions at this discipline valuations when the opportunities arise.
At this time we would now like to open the call for your questions, operator?
Operator
(Operator Instructions). Our first question comes from Jim Giannakouros from Oppenheimer and Company.
Your line is open.
Jim Giannakouros - Oppenheimer and Company
I believe we had what amounts to average snowfall this past winter and I’m curious what part you can verify that and second if you can kind of qualify why you’re casting your guidance for this year sales and EBITDA in particular at your historical normalized level if I’m doing my math correctly, it doesn’t seem to be factoring too much of a pent up demand early this year.
Jim Janik
Yeah I will take the first part of that Jim is as far as snowfall goes through the end of February we’re still about 5% below average and that comes off in October through January that we’re while above last year we’re still quite a bit below average so as we look at the full year I think we’re encouraged by February snowfall but I think the timing and even part of the location of where that fell is still not optimum, the states that our very good states for business that are typically around the great lakes like Illinois, Michigan, Pennsylvania, New York those states still are significantly below average in terms of total snowfall so we’re enthused by the snow fall but the location and the timing of it was not perfect from our perspective so I think that we’re taking into account in our ranges and I’ll let Bob talk to the other side of the question.
Bob McCormick
Yeah couple of points to add on to Jim’s comments and first off is in any year where snowfall is up or down a little from average that really doesn’t create any impact on the following year. however when you have the worst snowfall in 50 years that we went through in 2012, you got a couple of conditions that exist which carry over into 2013 and do have an impact one is your inventory levels are a little bit higher than we would normally see them at the end of January, so there is an inventory to work through within the channel.
But the other point is just when snowfall is that poor it's just leads to a little bit of a longer recovery period. So what you’re seeing in the top end of our range being pulled down is just an indication that it's going to take a little while to return to normal conditions throughout the industry therefore we thought it would make sense to pull the high end of the range out of the equation even if snowfall at the end of the day it does return to average levels.
Jim Giannakouros - Oppenheimer and Company
And follow-up if I may, pricing, are you seeing any shipping material pressures in the industry and what should we be expecting for this year?
Jim Janik
We haven't seen any pricing pressure and this is really too soon for us actually even think through our pricing. Our pricing is typically introduced for the July one time frame, so we’re still few months out from analyzing what’s going on in the market and looking at what kind of pricing that will try to incorporate.
Operator
Our next question comes from Josh Chan from Robert W. Baird.
Your line is open.
Josh Chan - Robert W. Baird
As you look at some of the discounts that you offer to your preseason ordering program I guess do you expect there to be any differences in terms of like the levels or the types of discounts that you will be offering this year compared to last year’s?
Jim Janik
Again these are things that we have not introduced yet so I don’t want to get into too much detail on the kind of programming that we go through. I think every year we change our programming, to take advantage of certain opportunities and show up areas that might be important for us.
Having said that I guess I’m really not going to talk about the programming but it won't be significantly different from what we have done in the past.
Josh Chan - Robert W. Baird
And as we look at your SG&A levels certainly you have implemented a cost reduction program in 2012 so suppose we get a normal snowfall year how much of the expense do you think you can possibly roll back in given a better environment?
Bob McCormick
That’s an excellent question, the way that we think about at it is those significant cuts that we made when we’re in a trough snowfall cycle I always intend to be temporary cuts and when the environment returns to normal so will those spend levels so you will definitely see SG&A spending increase in 2013 because snowfall will be better and as Jim mentioned earlier we have to support a number of exciting new product launch initiatives as well. So I think you would definitely will see SG&A go up whether it returns all the way back to “normal levels or not” we have to wait and see how the balance of the snow season shapes up but it will definitely be an increase year-over-year to support the increase in our business requirements as well as the increase in snowfall.
Josh Chan - Robert W. Baird
Okay but there is no way to sort of ball park at this point yet? It's too soon to tell?
Bob McCormick
Correct.
Josh Chan - Robert W. Baird
What is your I guess preliminary view on CapEx as the use of cash (inaudible)?
Bob McCormick
You’re going to see CapEx go up obviously again when we’re in the trough we can pull that thing down keep in mind that we normally plan for CapEx about $3.5 million a year, did not spend anywhere near that in 2012 again I would expect us to be returning back near those normal levels because of the large amount of cost reduction things that we have been doing along with the large amount of product introduction that also require capital.
Operator
Our next question comes from Jason Ursaner from CJS Securities. Your line is open.
Jason Ursaner - CJS Securities
Just first question higher level question, obviously it was a tough year for Douglas but it was a tough year for the entire industry and you’re the only public company in this space so when you look at the quarterly sales figure down 50% or the annual number down over 30% do you have any concerns about lost market share embedded in those figures and specifically how do you attempt to benchmark yourself first the broader industry?
Jim Janik
I guess the way to answer that is your last question is how we benchmark, we do within our organization we do actually state by state, territory by territory we do market share studies within our organization to try and benchmark ourselves with other people and then probably every five years we will hire an independent contractor who will go out and try and do that same thing, we have actually found that you know the external consultant basically this is the same process we use and comes up with fairly similar numbers that we do so but it's sort of built on suspenders. You know and I think here is a legitimate question.
Our feedback has done that probably not losing market share and there is even a chance in some markets we’re picking some up. So you know this is typically in a very soft environment like this you will see the major players and I would say that in plural tend to pick up market share from some of the smaller players and that would be probably consistent with what we think we have seen this year.
Not big chunks of market share but you know it could be a point something like that.
Jason Ursaner - CJS Securities
And next question is more specifically on the decrease in part sales, got about 15 million in total dollars, it can be higher gross margins sales for you guys closer to the 50% range doesn’t seem like a whole lot of variable SG&A expenses associated with them. So if I back into $0.15 to $0.20 of earnings is that sort of the right way to be thinking about the loss contribution from parts in this year and is that just a permanent loss or is there any I guess make up in subsequent years?
Jim Janik
I will talk about the volume part and then I will let Bob talk about the how to view it from a financial perspective. Parts and accessory sales are almost 100% the result of snowfall and product use, and so if you have a high snowfall year you will tend to see you know very, very robust parts and accessory sales if you have a very low snowfall you probably see that fall considerably as well.
So it has a direct correlation with snowfall levels and so you will see it go up, you will see it go down and it will have larger swings frankly than probably plough or equipment sales. So now how to think about that financial and I will let Bob talk about that.
Bob McCormick
I don’t think you’re too far off there Jason we have talked many times before parts and accessories margins do approach 50% so that’s a logical data point to use, there is probably some variable SG&A associated with those sales and that would be in the form of customer programming also as we talked about in this call we have these management and sales incentive bonus plans that are revenue and income driven as well so there is probably some variable movement as parts and accessory sales float up and down but nothing of any substance.
Jason Ursaner - CJS Securities
Okay and obviously the early portion of the winter had a lot of stuff, you mentioned that since the year there has been a fair amount of accumulation the big (inaudible) mid-February there was another storm that ranked on EIFS scale in early March. So in terms of visibility for how that might more immediately translate to part sales in Q1 and then you mentioned it is just a result of so called usage can you give better clarity on that?
Jim Janik
Yeah so if you look at January I’m trying to pull these numbers from my memory so if I’m not precise I apologize but I think we’re with January snowfall again was above last year but about 20% to 25% below the historical average. If you look at February you know that was up about 36% in snowfall from the historical average so you will probably see a comparative reduction from a historical average in January and parts and accessories and you will probably see a pretty strong February for parts and accessories just based on the level of snowfall.
Jason Ursaner - CJS Securities
And qualitatively you said not to expect an immediate translation to your equipment orders but how decent storms how would they normally impact the draw down on your inventory especially if many of them choose to not reorder earlier in the year.
Jim Janik
Correct. Again we’re talking about typical situations but when we have late year snow storms it doesn’t typically generate a significant amount of new plough or spread orders, it does create some demand but it never, it's just not a significant as if it was December, January because you’re coming close to the end of the year and people will tend to repair them versus replace them so you will see some sales which is good, we believe that the February snowfall has helped elevate some of the higher inventory dealers who are carrying that’s good news but again most of these people will react by and large to buy more parts and accessories to fix their products to get them through the snow season.
The challenge for us to try and determine how this heavy use in February translates into preseason order programming, dealer inventories, going to preseason and the full year. We would expect as we look at this year that it will probably be and our thinking at this point is it will probably be a little bit later seasoned meaning that there is still some caution but if we get some good cold weather late in the third and early fourth quarter those could be strong quarters for us comparatively to the you know the first couple of quarters.
Operator
(Operator Instructions). Our next question comes from Robert Kosowsky from Sidoti.
Your line is open.
Robert Kosowsky – Sidoti
Quick question on the new products that you’re launching, what are some of the costs that are going to be associated into this year if you can quantify it and also some of these productivity and cost savings initiatives what are some of the I guess cost and benefits or maybe payback periods you’re looking for those programs and when are we going to see margin expansion come out of that and what kind of margin expansion? So what are you doing with revenue and what are you doing with cost?
Bob McCormick
Let me see if I can get most of it, from a new product development perspective as Jim mentioned we have a record number of our launches this year and with any new product launch you’re going to have a series of marketing types of initiatives, you’re going to have new packaging and new selling materials, things along those lines and so you’re going to see the SG&A expenses go up as we had mentioned earlier probably a closer return to normalized if you will so that we can incorporate some of those things in. From a cost reduction perspective, we typically try and target 1% of revenue a year in terms of cost savings earned which is a pretty aggressive number, so that would be something that we will think is going to continue into 2013 probably require a little more capital if you will than we had last year to get to that number.
We find that most of our cost reduction programs Rob have a payback of anywhere between less than 12 months upto maybe 18 months. It's unusual for us to have a cost reduction initiative requiring capital that has us getting out side of a 24 month payback if you will.
So I got the cost reduction one I got the new product development one, margin expansion I think was your other question when all the dust settled on 2012 as poor year as it was we still saw some growth in variable contribution margin per unit which I think is phenomenal given the environment we were in, we would expect to continue to see growth in that key metric force in 2013 as well.
Robert Kosowsky - Sidoti
That’s very helpful and then on the balance sheet it looked like there was an income tax refund receivable about $ 4 million or $5 million can you explain what that is and also when you might be collecting that $5 million if it's (inaudible).
Bob McCormick
When you get into the trough part of our earning cycle even though we may show some book net income remember we have that high amount of annual intangible amortization that we get for tax purposes. So we in essence had a tax loss in 2012 therefore setting up a receivable for us as we carry that loss back to prior years, okay?
So we will actually be picking up that cash, it's kind of hard to predict because we’re relying on things we can’t control which should be our friendly IRS agents if you will but I would hope we would see that cash sometime in 2013, it wouldn’t be in the front half I don’t think it would be in the second half but you can’t take that to the bank either. So that will be a nice cash adder for us.
Robert Kosowsky - Sidoti
Finally this might be just a little more of an anecdotal question it seems like storms are getting a little bit fewer and bigger over the past year or two and at least where I live and I’m just wondering how this impacts the useful life of a plough you see in bigger snow storms that there is a greater tax on the plough at least on the small part sales in the shorter replacement cycle and (inaudible).
Jim Janik
That’s a great question I don’t know that I can opine on that at this point. The general philosophy has always been that you know heavier snow is better than light snow because it's harder to move and more storms are better than less storms but I don’t know what we have yet looked into the granularity but it's a great question that I’m frankly writing down so that I can challenge my folks back at the office and trying to determine you know how they would come out with that.
So great question but I don’t know that I can answer it.
Operator
And I’m showing no further question at this time. I’ll now turn the call back over to management for closing remarks.
Jim Janik
Thank you operator and thank you all for your support and we look forward to speaking with you on our first quarter 2013 results in May.
Operator
Thank you ladies and gentlemen that does conclude today’s conference. You may all disconnect and have a wonderful day.