Bob McCormick - EVP & CFO Jim Janik - Chairman, President & CEO.

Good day, ladies and gentlemen, and welcome to the Douglas Dynamics' Third Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference to Bob McCormick, Chief Financial Officer. Please begin..

Thank you. Welcome everyone and thank you for joining us on the call today. Two quick items before 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, 2014 filed with the Securities and Exchange Commission and the updates to these sections in our subsequently filed Quarterly Reports on Form 10-Q.

Second, this call will involve a discussion of adjusted EBITDA, and non-GAAP financial measures, which under SEC Regulation G, we are required to reconcile with GAAP. The reconciliation of this measure 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 today is Jim Janik, our Chairman, President and Chief Executive Officer. Jim will begin by providing an overview of our performance for the quarter and current industry trends. Then I will review our financial results before turning it back to Jim to discuss our outlook. Finally, we will open the call for your questions.

Jim?.

Good morning and thank you for joining us. We are very pleased with our results this quarter and so far this year. Our track record of success is a testament to the almost 1,100 people at Douglas Dynamics' who strive every day to extend our market leadership position and improve efficiency through DDMS.

Despite the tough comparisons to our record performance in 2014 we once again achieved record quarterly results this year. Overall, net sales for the quarter increased 53% year-over-year.

While the primary driver of this growth was the addition of Henderson products, it is worth noting that both, our core business and Henderson achieved record results on a standalone basis.

These kinds of results would be excellent in any year but they are even more of an achievement when you remember that the third quarter last year were also record quarters for both teams separately. I am pleased to report that we produced a very strong pre-season order period in our core business.

Last year pre-season shipments were more heavily weighted towards the second quarter versus the third quarter with an approximate 55-45 split. This year we were expecting the pre-season to be split fairly evenly between the second and third quarters, partly due to the initial shipment of new products in the third quarter.

While we did see a shift, the ratio was approximately 45% to 55% between the second and third quarter. The third quarter came in stronger than expected based on the strength of the overall market and the demand for new products.

As we've previously mentioned, we launched an unprecedented 20 new products this year, most of which didn't begin shipping until the third quarter. To say these new products have been well received is an understatement, and the market is clearly recognizing that our innovation coupled with reliability will allow them to increase their productivity.

There were multiple industry and economic factors that contributed to our record results. Let me walk you through them. First, pent-up demand. End users in our industry delayed purchasing new equipment during the last recession creating significant pent-up demand.

With two consecutive years of above average snowfall plus a favorable economic environment we are continuing to see that pent-up demand flow back into the market this year.

Second, while we don't expect the trend to continue in perpetuity, at the moment select American pickup truck sales are showing strong growth, increasing 19% in September 2015 compared to September 2014. Over the years, we found the truck sales do positively correlate with plow sales over the long-term.

Essentially for commercial plowers, their pickup trucks and plows have a similar replacement cycle, so when there is time to buy a new truck, adding a new plow also makes sense. I'd like to take a moment to discuss our Henderson products business which we acquired at the end of 2014.

The Henderson team led by Marty Ward, produced their third quarter of solid results as part of our company and continue to meet our high expectations. The business is well positioned to meet its 2015 growth targets which is one of the reasons we are able to affirm our guidance for the year.

Importantly, we can confirm that Henderson will be accretive to our earnings on a standalone basis this year delivering on the promise we made when we announced the acquisition.

As we mentioned last quarter, we also successfully opened our sixth Henderson upfit facility in Missouri, in August, which increases our capacity and helps to better service our Midwest municipal customers. This facility will serve as a Greenfield site for further applying DDMS tools across the business.

We continue to be very impressed with the Henderson team which provides a stable and growing revenue stream, and provides us with a leading position in the municipal snow and ice control market.

The integration process remains on-track, and while we are still in the early stages of executing DDMS, which is always a multi-year process, we are setting a strong foundation this year and are already starting to see the benefits of the initial changes. I'd like to walk you through a quick DDMS service enhancement example.

Recently a cross functional team of eight people worked together to study and improve throughput on the assembly line of our plow business unit. During this event the DDMS team measured the actual steps of the assembly employees as they walked and retreat parts in tools required to assemble the plows.

The average daily walking distance for the assembly of four people in this area was 13 miles. Terrific exercise but not very efficient. Through the use of DDMS principles the team was able to reduce travel distance by 54% to six miles per day which translated to an additional five hours of actual assembly time per shift.

The team also measured the amount of time that it took on average to assemble a plow using DDMS principles of flow, five [ph], and waste elimination the team was able to reduce the average time to assemble by 55%, effectively increasing customer service by enhancing throughput by 55% with the same number of people.

So as you can see, we are off to a great start implementing DDMS at Henderson this year and we are expecting improvements to gather steam in the coming years. Finally, I'd also like to reiterate our approach to capital allocation. Our dividend remains a critical component of our capital allocation strategy.

We continue to generate significant cash flows and view our commitment to the dividend policy and focus on cash generation as distinguishing characteristics to compare to other companies of our size. At the end of last quarter, we paid a quarterly cash dividend of $22.25 per share on the company's common stock on September 30.

As a reminder, we will review our current dividend and decide upon any changes at the next scheduled Board meeting in March. At that point we have data from the end of the year, most of the snow season under our belt, and therefore a clear view of our financial standing which is the best time of the year to make capital allocation decisions.

Aside from the dividend, we're committing to using our excess cash to reduce the company's debt levels and pursue strategic acquisitions. We remain focused on exploring opportunities with companies that produce work dedicated attachments and offer us the highest risk-adjusted return on invested capital.

It is worth noting that the current M&A landscape is the most active we've seen in the past five years in our logical core markets and adjacencies that we monitor.

However, I want to point out that we will maintain our disciplined approach regardless of the marketplace and we are keenly aware of valuations and will only pursue deals when and where it matches our strict internal criteria. With that, I will turn the call back over to Bob to discuss our financial results in more detail.

Bob?.

Thanks Jim. As Jim mentioned, we achieved record results again this quarter, thanks in large part to the addition of Henderson and strong execution in our core business. For the third quarter 2015, we generated record sales of $120.6 million, an increase of 53% when compared to $78.8 million in 2014.

Snow and ice control equipment unit's increase 58% for the quarter while parts and accessories revenue increased 17%. Henderson revenue of $26.9 million was the primary growth driver for the quarter. Having said that, our core business revenue increased $15 million versus prior year.

The increase in our core business sales relates to a record number of new product releases which commence shipping in the third quarter of 2015. This growth is a tremendous achievement given the third quarter of 2014 was also a record quarter and made for a tough comparison.

Cost of sales was $79.7 million or 66.1% of sales for the third quarter compared to $49.7 million or 63.1% of sales in the third quarter of 2014. The year-over-year increase was driven by the addition of Henderson which was - which has a higher cost of sales as a percentage of sales when compared to our core business.

SG&A expenses were $12.5 million for the quarter compared to prior year SG&A expenses of $9 million dollars. The increase compared to 2014 was due to expenses related to ongoing operations at Henderson of $2.9 million.

Third quarter 2015 adjusted EBITDA was $31.1 million, a significant increase when compared to adjusted EBITDA of $22.2 million in the third quarter of 2014. Net income was a record $15.5 million or $0.68 per diluted share for the third quarter of 2015 compared to net income of $10.8 million or $0.47 per diluted share in the same quarter last year.

Let me provide a quick update on the results for Henderson products. During the third quarter Henderson produce net sales of $26.9 million and adjusted EBITDA of $3.5 million. As predicted, the acquisition will be accretive to earnings per share on a full year basis in 2015 and free cash flow positive on a standalone basis in 2015.

These results were in line with our expectations and Henderson remains on-track for another year of profitable growth. Effective tax rate for the third quarter of 2015 was 34.3% and the estimated effective tax rate for full year 2015 is expected to be approximately 36%.

Turning to the balance sheet, we've recorded net cash used in operating activities of $11.9 million during the first nine months of 2015 compared to net cash used in opportunity activities of $18.1 million in the same period last year.

The decrease in cash used by operating activities was primarily due to an increase in net income and favorable working capital changes. During May 2015 capital expenditures totaled $7.1 million compared to $3.3 million in the prior year.

Capital spending peaked in the third quarter in conjunction with the renovation project at our Milwaukee facility and increased manufacturing capacity to support our record sales outlook. These investments will pay dividends in future years as they improve the overall productivity of our manufacturing facilities.

We expect to 2015 CapEx to total approximately $10.5 million before returning to more normalized levels of approximately $7 million to $8 million next year. Inventory was $55.2 million at the end of the third quarter of 2015 compared to $36.4 million at the end of the third quarter of 2014.

The increase is in line with our expectations and is attributable to the Henderson acquisition. Accounts receivable at the end of the quarter were $118.5 million, an increase of $22 million compared to third quarter 2014 which reflects the impact of Henderson products acquisition and overall higher demand.

Cash and cash equivalents on hand at the end of the third quarter totaled $3.9 million compared to $4.2 million at the same point last year. The unused borrowing capacity on the revolver is $72.4 million. With total liquidity of $76.3 million we are well positioned to fund upcoming quarterly cash dividends.

Overall, we have maintained a strong financial footing while continuing to invest in the business for the future. We are well positioned to execute on our plans and will enter 2016 in a stronger financial position than ever before. With that, I'll turn the call back over to Jim for concluding remarks.

Jim?.

Thank you, Bob. To close I'd like to share our view of current market conditions and outlook. While we are pleased with our results so far in 2015, there is still an important two months to go before the end of the year. Overall, our outlook remains positive.

The combination of a strong pre-season order period, continued positive dealer sentiment, and robust light truck sales bode well for the future. Of course, truck sales have been aided by lower gas prices recently, and we don't expect the same growth rate to continue at current levels if gas prices or the overall economy shifts.

At the moment, we believe the ongoing release of pent-up demand will continue for the near-term which means we feel comfortable re-affirming our outlook for the year. We continue to expect 2015 net sales to be in the range of $385 million to $420 million, and adjusted EBITDA to be in the range of $90 million to $105 million.

Earnings per share for 2015 are expected to range from $1.70 per share to $2.05 per share. It is worth remembering that even with the addition of Henderson which has reduced the impact of weather on our business, our fourth quarter results will still be influenced by snowfall trends in our core markets.

However, assuming we see average snowfall in the coming months, we remain on-track to produce record results in 2015. Overall, we have performed well so far this year and enter the winter season focused on optimizing our core business, while delivering operational excellence across the company.

Today we are benefiting from strong market conditions in overall economic stability. We are making investments for today to strengthen the company, so we are even better prepared to maximize profitability through all business cycles. At this time we'll now open the call for your questions.

Operator?.

Thank you. [Operator Instructions] The first question is from Tim Will [ph] of Baird. Your line is open..

Good morning.

I guess just on - just the guidance, I was curious if you could give us a little bit of color just on how we should think about - what the lower end of the range implies in terms of snowfall and then maybe the upper end of the range just in terms of how you guys are making those assessments on just based on snow in Q4?.

Sure. From our perspective we're suing average snowfall which is as you know, what we always do. And then the ranges will likely shift based on that snowfall. So again, you get to the higher end of the range, it means we probably have above average snowfall. You get to the lower end of the range, it means just the opposite.

So it's really relatively simple..

Okay.

And then I guess just - I guess on the pre-season period, I guess the question I had there was just - what's the biggest surprise around pre-season this year? I mean was it just the level of new product acceptance, was it - were dealers interested in taking more inventory? I'm just curious what - as you end the pre-season period what was the biggest surprise today versus six months ago?.

Sure. I think the biggest surprise for us is with the acceptance of new products and the media demand for new products that we introduced. I think we expected to be very successful with those products but were finding that the demand has actually outstripped our initial reaction. So that's really what's driving a lot of that..

Okay.

And then just raw materials, how should we think of just the volatility that we've seen in steel? And how should we think about that as we end this year and into next?.

I think you know obviously steel prices have been down most of the year. Most of the forecast we are looking at next year show very modest inflation if any steel cost inflation at all, Tim.

At this point we obviously continue to monitor it and gauge it but we are not seeing anything on the horizon that would suggest there is any significant changes coming soon..

Okay, great. Well, congrats on the quarter and Good luck..

Thank you, Tim..

Thank you. [Operator Instructions] And next question is from Jim Jiancoros [ph] of Oppenheimer. Your line is open..

So fully understand that you're benefiting from pent-up demand and certainly you don't expect it to sustain in perpetuity but how should we think about the industry, you guys being the largest player clearly, the current state of the installed base of plows out there.

I guess what inning do you think we are in regarding the accelerated replacement cycle you are currently experiencing?.

That's - it's a terrific question, it's a little bit difficult to answer but at this particular point it's really clear to us that pent-up demand is being released this year and we expect it to continue for the short-term.

We're not seeing any signs of demands slowing to-date but I would say that you based on snowfall levels there - you will see typically more pent up demand return the higher the snowfall level. So really how much runway that has in the near-term will really be dependent upon snowfall..

Okay, understood. And I guess, a follow-up on that. How would you characterize now given Henderson and given everything you're doing internally, what your - what you would dub as your normalized EBIT and margin level, given your current business portfolio.

And I'm curious if there is upside to that, if you can quantify or what are your goals on raising that EBITDA margin, just given the anticipated benefits from DDMS and other internal initiatives?.

So I think Jim, as we've stated prior to the Henderson acquisition adjusted EBITDA in a normalized environment is between $50 million and $55 million. We said at the time of the acquisition, Henderson brings about a $10 million EBITDA with it.

So those would be the baselines, certainly in our core business and with Henderson we expect under normal snowfall conditions for base business profitability to improve. We don't share those goals publicly and haven't set them for 2016 at this point.

But be sure to understand that we will expect baseline profitability from both our core business and from Henderson in 2016..

Got it, okay. And one follow-up if I may. I missed what you said, I think it was on interest expense, is that a normalized $7 million or $8 million in next year.

As you retire some, you pay down some of your revolver or your overall debt or did I mishear you?.

Actually Jim that was that was $7 million to $8 million should be our normalized capital expenditure run rate..

CapEx, sorry..

That interest expense was CapEx..

And interest expense, I mean it should stay at the current run rate going into next year or do you anticipate or to be seen this far as just your capital allocation conversation that you're having in the next..

Yes, I would expect it to remain at its current run rate. Obviously we have excess cash deployment decisions to make at our March Board meeting. So I'm not going to jump ahead of that at this point. If we were to make a decision to pay down some additional debt then that would obviously change the interest expense projection.

We would obviously share that with you at that time..

Got it. Thank you very much..

You're welcome..

Thank you. [Operator Instructions] And there are no for the questions in queue at this time. I'll turn the call back over for closing remarks..

Thank you, operator. And thank you all 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 2016. Thanks again, and have a great day..

Thank you ladies and gentlemen, this concludes today's conference. You may now disconnect..