Bob McCormick - Executive Vice President and CFO Jim Janik - Chairman, President and CEO.

Josh Chan - Baird Robert Kosowsky - Sidoti Jim Giannakouros - Oppenheimer Jason Ursaner - CJS Securities.

Good day, ladies and gentlemen. And welcome to the Douglas Dynamics’ Third Quarter 2014 Earnings Results Conference Call. At this time, all participant lines are in a listen-only mode. Later, we will be conducting a question-and-answer session and instructions will follow at that time. (Operator instructions).

As a reminder, this conference is being recorded. I would now like to introduce your host for today's program, Bob McCormick, Executive Vice President and Chief Financial Officer. Sir, you may go ahead..

Thank you. Welcome everyone and thank you for joining us on the call today. 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 21E of the Securities Exchange Act of 1934 as amended.

Such statements express our expectations, anticipations, beliefs, estimates, 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’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission and the updates to these sections in our subsequently filed quarterly reports on Form 10-Q.

Lastly, this call will involve a discussion of adjusted EBITDA, adjusted net income and adjusted earnings per share, all non-GAAP financial measures, which under SEC Regulation G, we are required to reconcile with GAAP.

The reconciliation of these measures to the closest GAAP financial measure is included in today’s earnings press release, which is available at douglasdynamics.com. Joining me on the call this morning is Jim Janik, Chairman, President and Chief Executive Officer. With these formalities out of the way, I’d like to turn the call over to Jim..

Good morning. And thank you for joining us on today’s call to discuss our third quarter 2014 performance. I’m going to begin by providing an overview of our performance for the quarter and current trends and then Bob will provide a detailed review of our financial results.

Finally, I’ll return to provide our outlook and additional insight on the remainder of the year. During the third quarter we achieved record quarterly financial results that exceeded our expectations.

Overall, net sales increased 52% year-over-year partly driven by a 46.5% quarterly increase in equipment unit sales and a 106.4% quarterly increase in parts and accessories compared to the third quarter of 2013.

This growth and record quarterly results reflect a favorable market environment, strength across our portfolio, and operational efficiencies from our ongoing continuous improvement initiatives. As discussed last quarter, we were anticipating a robust preseason order period compared to the same period last year.

The above average snowfall levels and frequency of plowable events across core markets during the past winter season created a very favorable market environment for the preseason order period. Dealer restocking appetite for new equipment was higher in stark contrast to the cautious approach dealers utilized in 2013.

In combination with strong preseason order period shipments, there was early and significant retail reorder activity in August and September. Historically August and September reorder activity are light as dealers wait until the beginning of the winter retail season to assess their additional needs following the preseason.

This year early dealer retail activity is more robust than it's typical. Along with stark reorder activity, other non-snowfall indicators within our business are also trending positive. Sales of select pickup trucks continue to be strong and are up 7% year-over-year. Long term trends indicate a positive correlation between truck sales and plow sales.

Additionally, dealer inventories remain in a very manageable shape. Aside from the favorable market environment, we achieved record profitability during the quarter, driven by our continued focus on optimizing our operational effectiveness.

We continue to relentlessly pursue new and innovative ways to improve the productivity of our business and those that we acquire through our own Douglas Dynamics Management System, which we refer to internally as DDMS.

Through DDMS, we train our employees to continually enhance processes and improve productivity of our own business and those of our business partners. Our employees understand the importance of continuous improvement and are leading the charge in implementing efforts to improve our profitability and potential for future growth.

Our focus on DDMS has been a focal point across our organization and has us well positioned for continued growth and profitability providing long-term value to our shareholders. Our lean centric focus across the business has led to industry leading in seasonal lead time and unparalleled shipping performance and manufacturing flexibility.

We’re also applying the same principles to businesses we acquired such as the acquisition of TrynEx last year. Finally, I want to briefly touch on our capital allocation strategy. Our dividend remains a principal component of our capital allocation strategy as we continue to generate significant cash flows.

Review our cash generation and commitment to paying dividend has a distinguishing characteristic compared to other companies of our size. As a reminder, we paid our regular cash quarterly dividend of $0.2175 per share on our common stock during the third quarter in September 30, 2014.

Aside from enhancing shareholder value through returning cash through our long-term dividend plan, we’re committed to generating excess cash to reduce the company’s debt and continuously pursuing strategic acquisitions and logical core markets and adjacencies at disciplined values when and where the opportunities arise.

With that, I’m going to turn the call back over to Bob to discuss the specifics on our financial results. And then I'll conclude with comments on our business and outlook for the remainder of the year.

Bob?.

Thanks Jim. As Jim mentioned, we achieved record quarterly results which exceeded our expectations. For the third quarter 2014, Douglas Dynamics generated sales of $78.8 million compared to $52 million in 2013. Unit shipments for the third quarter increased by 46.5% and parts and accessory sales increased 106.4% compared to the prior year.

This performance is driven by both strong pre-season orders and robust reorders in the latter part of the third quarter compared to the historical levels. Cost of sales was $49.7 million or 63.1% of sales for the third quarter compared to $37 million or 71.1% of sales in the third quarter of 2013.

The year-over-year decrease in cost of sales as a percentage of sales was primarily driven by two factors. First, in the comparable period in 2013, cost of sales included certain non-cash purchase accounting adjustments associated with the TrynEx acquisition.

Second, operating leverage decreased the cost of sales along with our ongoing drive to improve efficiency and productivity through DDMS. SG&A was $9 million for the quarter compared to prior year SG&A of $10.7 million.

The decrease was due to $3.8 million in our earn out compensation expenses recorded in the third quarter of 2013 in conjunction with the acquisition of TrynEx. This was slightly offset by an increase in short-term incentive planned expenses. Third quarter 2014 adjusted EBITDA was $22.2 million compared to prior year adjusted EBITDA of $10.2 million.

Net income in the third quarter of 2014 was $10.8 million compared to prior year net income of $0.6 million. And earnings per share were $0.47 per diluted share during the quarter compared to just $0.02 per diluted share in the third quarter of 2013.

As discussed earlier, when talking to the changes in cost of goods sold and SG&A, non-cash purchase accounting adjustments totaled $4.4 million from the TrynEx acquisition in third quarter of 2013 mainly inventory adjustments and earn out compensation expenses.

These two items negatively impacted net income and earnings per share in the same period last year. During the first nine months of 2014, we reported net cash used by operating activities of $18.1 million compared to net cash used by operating activities of $26.7 million in the same period last year.

The decrease in cash used in operating activities was primarily due to an increase in net income of $23.8 million slightly offset by an increase in working capital totaling $13 million. Cash and cash equivalents on hand at the end of Q3 totaled $4.3 million. The unused borrowing capacity on the ABL revolver is $46.5 million.

With total liquidity of $50.8 million, we’re well positioned to fund upcoming quarterly cash dividends. Accounts receivable at the end of the third quarter of 2014 were $96.6 million, an increase of $25.3 million compared to third quarter of 2013. With that I’ll turn the call back over to Jim for some concluding remarks.

Jim?.

Thanks Bob. To close, I’d like to share our view of current market conditions and as well as what we’re expecting for the remaining portion of 2014.

As we enter into the last two months of the year, the non-snowfall market indicators that provide directional guidance to the strength of the business are all continuing to turn positively, which includes continued strength in light truck sales and positive overall dealer sentiment.

Furthermore, last winter’s season sustained and significant snowfall levels experience last winter season have provided a favorable marketing environment. Collectively, these positive market indicators signal the release of pent-up demand. And then we are in a position to increase our outlook for the year.

We now expect net sales for fiscal 2014 to range from $265 million to $295 million and adjusted EBITDA to be in the range of $70 million to $82 million. Earnings per share are expected to range from $1.40 per share to $1.75 per share.

It is important to know the company’s outlook assumes that the economy will remain stable and the company's core markets will experience average snowfall levels. In conclusion, we are excited as we look at the start of the winter retail season.

A favorable market environment coupled with our relentless focus on leveraging our Douglas Dynamics Management System principles to drive efficiency and profitability across the business position us well for long-term profitable growth.

Assuming, we see an average amount of snowfall before the end of the year, we expect to produce record results in 2014. At this time, we'll now open the call for your questions.

Operator?.

Thank you. (Operator Instructions). Our first question is from the line of Josh Chan from Baird. Your line is open..

Hi, good morning Jim and Bob..

Hi Josh..

Good morning..

Hi. You spoke about the increased reorder activity in August and September, which was kind of unusual.

And I was wondering if you could give some thoughts in terms of what drove that; was that strong retail demand out of season; were there any promotional activity that sort of drove that reorder that we gained?.

Sure. I think the strong retail activity is a result of very simply increased retail demand early in the season. Typically, there is some retail demand prior to the fourth quarter, but this year it seems to be quite a bit stronger and therefore, we see many of our dealers reordering more frequently and larger quantities in that third quarter period..

Okay.

And would there be any risk by any chance of some sort of pull forward and demand since that some of dealers have already ordered larger than usual an amount or do you think that that’s relatively lower risk at this point?.

I think that’s a relative low risk. For our business, as long as the weather conditions remain favorable, that’s relatively unlikely..

Okay.

And just in terms of this year potentially being a record year in terms of revenue and earnings, how are you thinking about cash flow conversion? Is it reasonable to expect this to be very robust year as well?.

We’ll certainly, as the tide rises on the income level so does cash as well.

But as Jim stated earlier, our excess cash deployment strategy has really remained fairly consistent with what they’ve been in prior year’s Josh and that is to make sure that we maintain the robust dividend we have, look to pay down some debt and also have some money set aside from some strategic acquisitions, should they come along..

Okay. And last question for me. I think select parts of the country has already experienced snowfall activity.

And I know it's early read but is there anything notable in terms of behavior of some dealers in those regions that you can speak to at this point?.

It's really too early to tell. Most of the snow that occurred late last week and it's been in mostly New England. We would expect more of a psychological pop versus the actual reorder at this period of time. Early snow anywhere in the country is terrific for our business and this would be consistent with that..

Okay, great .Congrats on the results..

Thank you very much..

Thank you. Our next question is from the line of Robert Kosowsky from Sidoti. Your line is open..

Good morning guys.

How are you doing?.

Good morning..

I was wondering if you can give us an update on what you thought dealer inventory or where do you think inventory is right now? Do you think it's pretty flush going into the season?.

Sure. We take a dealer inventory four times a year. The last two are the end of September, the end of October. October's inventory isn't completed yet; they're still running the numbers.

September indicated that dealer inventory was about even with the five year average for this period which means they're exactly where you want them to be and again they are not overstocked and they are not under-stocked. I think our dealers are in a perfect position to take advantage for any pent up demand that might be coming forward..

That's helpful. And then one other thing.

Could you just give us some color on some of the operation improvements that you did and maybe just examples of where lead times are coming and what your capacity for more improvement is?.

Yes, I think Rob, this goes back to the DDMS comments that we made. We've been on this journey for a decade plus at this point. And as we -- as Jim said earlier, really focused on improving in season lead times and service levels.

All you have to do is go back and take a look at last winter’s lead times when the heavy snow hit and you will find that Douglas was clearly the industry leader in that regard. I can’t give you specifics as to what happens because basically it is a continuous improvement process that never stands still.

And we’re at a point in our core business where some of the improvements are smaller in nature but more frequent. And in the TrynEx business for example, some of the improvements are much more significant as they begin their journey.

So, the good news is, we know that it results in better service to our customers, higher quality product, we know that results in profit improvement for us, and certainly something that we can take that business model to future acquisitions as well..

That’s good.

And then one final thing which if you probably won’t have a comment on, but any views on BOSS and Toro with that acquisition or just any thoughts on that?.

Sure. I can make a few comments. First of all, BOSS has been a respected competitor of ours in the snow and ice space and we expect the healthy competition to continue. The deal was just announced, so as the integration unfolds, we’ll probably have a clear understanding of what the impact is.

But I will say the recent announcement doesn’t significantly impact our approach going forward. We’re going to continue to focus on executing on our strategy, drive profitability. And overall I think we’re really confident we’re well positioned to drive long-term growth to the business.

So, those are the only comments I can make at this point, it's for us at this point the business is usual..

Okay. Thank you very much and good luck..

Sure. Thank you..

Thank you. Our next question is from the line of Jim Giannakouros from Oppenheimer. Your line is open..

Hi, good morning guys and congratulations on the year you’re having..

Thank you..

Just a follow-up, if I can ask it little differently or more pointed question on the recent acquisition is the number two player in your industry.

The way I thought about it was that maybe there were implications for I guess either your footprints or for the industry, whether it'd be they expand their -- where exactly boss product is maybe they're going to be competing against yours or just expanding distribution.

I mean is there anything that you can speak to as far as implications for the distribution channel specifically?.

That's really all part of the integration. And until they roll that out, I mean there is certainly a number of different directions they can go on until they roll that out. At this point it would be a complete conjuncture, which is of no value to me..

Fair, fair okay. And as far as orders go, the checks that I have made can indicate that October was also really strong.

Can you talk about how October shaped up relative to the historical October experience, which in my impression is that it's a relatively quiet time as the incremental buyer typically comes of the sidelines when snow starts falling in November and December?.

Yes Jim, excellent question. We would suggest that the earlier momentum we saw late in the third quarter has carried over throughout the month of October, which is very encouraging indicative of the pent-up demand release, Jim mentioned earlier.

Anytime you get heightened reorder activities before the first snow really starts to fall is a positive signal for us. So, the first half of the fourth quarter that non-snowfall portion of the quarter looks positive, obviously the second half of the fourth quarter will be dictated by Mother Nature..

Understood. Thank you..

Your next question is from the line of Jason Ursaner from CJS Securities. Your line is open..

Good morning. Great quarter guys..

Thank you..

I just want to follow-up on few of the questions from earlier in the call.

Did your inventory levels -- can you maybe breakdown when you look at the overall pre-season, how much of that would have gone into restocking dealers back to similar inventory levels to last year because those had gotten down pretty low in the year and the snow there and how much of that would be accessed that’s gone into expanding the inventory?.

Yes. Jason, I don’t know that I can go to that level of granularity in -- it’s probably a great question, I just don’t know how to answer that..

Okay.

In the latest reading that you picked up or maybe just anecdotally, how much higher would you say in three basis are to start the year, I mean compared maybe that the levels pre-recession when dealers have been willing to carry a lot more inventory to deal more like that environment?.

Well, I think what you’re going to see is not a lot of change year-over-year. One of the things within our industry is that dealers are particularly good at really self-leveling their inventory to the amount of demand that is out in the marketplace.

So, the comparisons from pre-recession to recession to to-date, you're going to find are not very different during those four different checks of the year..

Okay..

I mean they will change but if at any -- from year-over-year if they change double-digit that's very unusual..

Okay. And given there have been some on-time delivery issues the last couple of years, not a Douglas problem but across the industry, why wouldn't dealers want to carry some more this year, kind of have it on hand given last year's winter, you would feel pretty confident selling it..

Well, if I was a dealer, I would. But I think that one of the things that we do see is this year is you are seeing dealers probably ordering earlier than it would have in the past because most of them know that the momentum in the pent up demand is clearly there.

And as a result, they may not order more at each individual period of time but what they may do is place more smaller orders. But I think in general, the attitude of the dealers right now is such that most of them are comfortable carrying a little bit more inventory than they might have the last few years.

So, I think there is a pretty disposition to perhaps carry more inventory than they would have been comfortable a few years ago..

Okay.

And the BOSS deal with Toro, was that a marketed transaction or would you guys have even been able to look at that given regulatory reasons with your mortgage share?.

I don't know if it was marketed and again, as a rule, we don't disclose any details of potential M&A activity. But in this instance, I can say that we’ve never been in negotiations with Toro or BOSS, so I think that’s probably what I can say about that..

Okay, I appreciate it. I’ll jump back in the queue. Thanks guys, good quarter..

Thank you..

Thank you. (Operator Instructions)..

Operator, if there is no more questions, I think we can conclude..

I see no other questioners in the queue..

Okay. Well, finally again for all of you on the call, thank you for joining us today and for your continued interest in Douglas Dynamics. We look forward to speaking with you again during the fourth quarter announcement in March of 2015. Thanks and have a great day..

Ladies and gentlemen, thank you for your participation in today’s conference. This now concludes the program. You may all disconnect. Everyone have a great day..