ASV Holdings, Inc. (NASDAQ:ASV) Q3 2018 Earnings Conference Call - Final Transcript

ASV Holdings, Inc. (NASDAQ:ASV) Q3 2018 Earnings Conference Call - Final Transcript 2018-11-01T20:30:00+0000 Executives Andrew Rooke - ASV Holdings Inc, Melissa How - ASV Holdings Inc., Analysts Chris Howe - Barrington Research, Travis Anderson - Gilder Gagnon Howe, Operator - Good day and welcome to the ASV Holdings Incorporated Third Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Rooke. Please go ahead, sir. Andrew Rooke - ASV Holdings Inc Thank you. Molly. I think it's Andrew Rooke, but let's not worry about that too much. Good afternoon, ladies and gentlemen. Thank you for your interest in ASV and welcome to our third quarter 2018 earnings call. Joining me on the call today is Missi How, our CFO, who will take you through the financial results for the quarter, after the overview of market and strategy update from me. (Forward-Looking Cautionary Statements) So I will begin with slide number three and an overview of the business. Today, we reported $32.8 million in sales, $2.4 million of adjusted EBITDA and earnings per share of $0.06. Although our total revenue growth from last year's quarter was again held back by lower sales to our largest customer, we recorded 16.4% machine growth in total, our 7th consecutive quarter of year-over-year quarterly machine revenue growth. In North America, our largest market and where our goal is to build our brand and presence, our year-over-year quarterly machine growth was 40%, with same-store sales growth of 30%. The increased sell-through from same-dealer stores is good evidence that our dealers are maturing and securing opportunities in their territories, where underlying demand and retail activity is still strong and that our efforts to work with them are gaining traction. Last quarter, I commented that with our dealer/rental location count approaching our near-term target of 300, our focus was increasingly movement -- moving towards dealer management, that is, taking steps to facilitate higher rates of sell-through from our current dealers who sell ASV products. A key action for this was the dealer meeting that we hosted here in Grand Rapids back in September. As we recently reported, that event was attended by approximately 140 representatives from our North American network, representing over 100 dealer locations where ASV products are sold. Beyond the nearly $40 million in orders for machines that we took during those two days, we met with our partners to discuss our vision for the brand and product, and to communicate what we expect to need from dealers who want to be able to receive the highest level of incentive discounts and most attractive co-marketing and promotional commitments from us. With the highest same-store sales we have experienced since relaunching the brand just under two years ago, clearly, we're seeing improvements in inventory turnover rates from within our dealer base and we expect to see this trend continue buoyed by demand in the underlying markets that our products serve. I'll return to this later. The other key items from our third quarter relate to the industry supply chain and input costs. With elevated levels of market demand comes some strain on the supply chain, particularly for critical components such as engines and this shortage continues to have some impact on production and delivery times. During the third quarter, we were able to mitigate most of the impacts on shipments by a combination of nimble resourcing and modestly higher inventory levels of both long lead time components and finished products. However, the supply constraint show little sign of improving in the near term and will remain a challenge for us again in the final quarter of the year and until additional supply chain capacity comes online. Input costs are also an industry-wide challenge, with for us US sourced steel and imported components affected by tariffs showing significant cost increases from the start of the year. As previously discussed, we implemented steel surcharge pricing on our sales orders received from May 1st, and we've seen competitors recently follow through with similar pricing adjustments. We have also accelerated our resourcing and cost reduction activities to help mitigate the adverse effect of material costs. There is a timing lag to the full run rate benefits from these actions that resulted in a net cost of $0.5 million in the quarter, or $0.05 of the EPS. But we still anticipate that with steel at its current cost, we will be largely able to offset the impact as we go into 2019. So, now please move to slide four, where I will comment on the market conditions for our products. The key indicators for our compact track loaders such as housing starts, general construction, and the rental channel have been largely favorable for the year so far. And industry forecasts indicate this demand will continue. The housing market is seeing more uncertainty and adverse impacts from adverse weather and interest rate increases. Although September starts were again down from the previous month, new starts in September were 3.7% above the prior year, on a year-to-date basis were 6.4% ahead of last year's rate and at a rate of $1.2 million are still below the long-term average of $1.5 million units. The trend is still good in US construction, as spending continues with year-over-year growth of 5.3% and the rental market also remains robust. Australia, a large market for us, remains in the positive trend with the recent reports of 3.4% GDP growth, above expectations in the second quarter of the year. Our discussions with dealers also indicate optimism in the level of activity going forward and activity at the landscaping equipment trade show we attended a few weeks ago was very strong. Turning to slide five, I'd now like to make some comments regarding our strategic initiatives. So far this year in North America, our net increase of additional dealer or rental locations less those that have been canceled is 48, taking our total at the end of the quarter to 270. We expect to continue this progress and remain highly focused to continue the expansion of the network to our initial target of 300, but are increasingly working towards driving overall network performance. This revolves around expanding our overall brand awareness, marketing material and major improvements, aftermarket support and dealer support and management. These focused initiatives target finding retail opportunities and directing them to our dealers and then ensuring we secure the sale and involve a targeted and robust methodology developed by our marketing team and partners. As I mentioned earlier, our dealer meeting was a great initial kick off and was very well received. We expect our efforts to continue to incrementally improve our dealer sell-through into the end markets. During the quarter, we launched two new CTL products into the market, which have been well received. The RT25, the world's most compact track loader, solidifies our position in the smaller capacity segment, targeting rental, landscaping and snow removal markets for example, as well as providing a compelling alternative to the large market of stand behind or walk-on machines. The RT65 is a Tier-4 final emissions compliant machine firmly targeted in the middle capacity all-purpose market. The new machine show our commitment to research and development of a leading brand and company. And now, I'd like to turn it over to Missi, who'll discuss the financial results for the quarter. Melissa How - ASV Holdings Inc. Thank you, Andrew. Please refer to slide six as I walk through key figures for the third quarter with comparatives against third quarter of 2017. Net revenues for the three months ended September 30th, 2018, increased $2.2 million, or 7.2% year-over-year, to $32.8 million. Compared to the third quarter of 2017, machine sales increased $3.2 million to $23.1 million, OEM undercarriage sales decreased by $0.4 million and aftermarket parts and other sales decreased by $0.6 million. Increased machine volume and an improved machine mix of larger, higher revenue models, resulted in an increase in machine revenues of 16.4%. The increase in volume was primarily due to increased sales into our North American distribution channels, offset in part by fewer units shipped into Australia and New Zealand. For sales from orders placed after May 1st, steel surcharge pricing was implemented, which accounted for $0.4 million of machine revenue in the period. Growth in revenues from sales of machines through our North American distribution channels was an increase of 40% compared to the three months ended September 30th, 2017. As of September 30th, 2018, we had 163 North American dealer and rental accounts, with 270 locations as compared to 124 in North American dealer and rental accounts with 189 locations as of September 30th, 2017. The decrease in OEM undercarriage shipments was due to a shift in demand requirements and we continue to see undercarriage volumes at the lower end of our expectations. Parts sales as a percentage of total sales for the period was 24.3% compared to 28.1% in the same period of 2017. We reported GAAP net income of $0.6 million, or $0.06 per share, compared to a GAAP net income of $0.5 million, or $0.05 per share in the third quarter of 2017. Adjusted net income for the quarter was $0.5 million, or $0.05 per share, compared to an adjusted net income of $0.5 million, or $0.05 per share, in the third quarter of 2017. The adjustment at September 30th, 2018, reflects the tax benefit relating to the finalization of the Company's 2017 tax returns. Adjusted EBITDA for the third quarter was $2.4 million, or 7.3% of sales, compared to $2.8 million, or 9% of sales, in the third quarter of 2017. Slide seven is a bridge movement in sales and net income for the third quarter 2018 compared with the third quarter of 2017. On the sales reconciliation, the principal item is increased sales of $1.8 million from volume and product mix, offset by $0.4 million in steel surcharge pricing. Input cost inflation accounted for a decrease in gross margin of $0.9 million, offset by a $0.4 million recovery in pricing, which represents a net EPS effect of $0.05 per share. The income reconciliation also reflects decreased operating expenses of $0.2 million, substantially coming from the relocation of our aftermarket parts distribution center. We saw a $0.2 million benefit from reduced interest expense resulting from improved interest rates as a result of our refinancing activities at the end of 2017, and a tax decrease of $0.2 million from lower pretax income and a tax rate now projected at 19% for the year, as well as the benefit relating to the finalization of the Company's 2017 tax returns. With the discussion of the impact of input cost increases on a reported numbers, I wanted to provide an overview of our gross profit percent, which you can see on slide eight. As reported, gross profit was 12.8% of net sale. Increased input costs, net of price recovery, accounted for a reduction of 2.7% of sales. In addition, parts distribution center costs that were previously paid to Terex as an SG&A, accounted for 0.2%. Combined, this effectively adjusted gross profit as a percent of sales to 15.7% as compared to 15.8% in the 3rd quarter of 2017, showing that as market pricing adjusts for the new level of steel cost, our margins will be well positioned to grow through our cost reduction initiatives. Slide nine highlights key balance sheet and liquidity ratios that have remained relatively constant. Our current ratio of 2.2 remains healthy and our leverage ratio at 3.3 times trailing adjusted EBITDA is within our target range. Our net working capital to annualized last quarter sales was 25.5%, just slightly above our target of 25%. Our days sales outstanding improved to 54 days from 58 days at December 31st, 2017, principally from our mix of customers. Days inventory on hand has shown a modest increase. As input costs rise, we continue to secure long lead production components for future builds, including two new model releases, as well as maintaining a larger finished machine inventory to improve our ability to ship against current and future anticipated orders. Slide 10 provides a breakdown of our net debt as of September 30th, 2018. The increase in borrowings reflect an increase in our revolver for working capital needs and repayment of our principal on our term loan debt. At September 30th, our weighted average cost of debt was 5.7%, an improvement from 8.4% in the same period, 2017. And with that, I'd like to hand it back over to our operator, Molly, to open up for any questions. Q & A Operator - (Operator Instructions) Chris Howe, Barrington Research. Chris Howe - Barrington Research There's a lot of things here, but I have a few questions. I guess the first is around this dealer network, you're at 270 locations, 163 in North America. You mentioned that there were some closings to get you to this net number. Can you comment just about perhaps what you're discovering as far as different markets, different densities within these markets, and as you approach 300 and optimize this portfolio? In other words, would you consider keeping the portfolio at a consistent number of locations, while increasing the inventory turns perhaps greater than 4 to 5 times to reach your long-term targets? Andrew Rooke - ASV Holdings Inc Just want to clarify a couple of things. The 270 is the number of locations here in North America. The 163 I think relates to the number of actual dealers that we have. So, obviously, there are dealers with multiple locations. But that is all relating here to North America, and that's our rental and dealer distribution. With regard to the number and the density, we as, you may be aware, are looking to develop distribution and focus on key markets to ensure that we have the coverage in those key markets to obtain the market share levels that we're hoping to achieve, and that does come from each of the locations having a turn rate of, as you again pointed out, above three. Our objective there remains the same. I anticipate that as we continue the development of dealers in the key markets, that our number will go up above the 300 locations here and that will do a couple of things. If they all turn at the level of inventory turns that we anticipate or hope to achieve, then that will obviously bode well, but it also allows us some scope within the sort of a normal distribution of any population -- almost anything that you've got the 80.20 rule, whereas a number of those dealers at any one time may not be operating at full capacity. Our job is to: A, make sure that we have the density coverage.for the key markets and we still have a number of key markets that are not at the levels where we want the distribution to be. Although we had a great quarter I think with regard to same-store sales of up 30% year-over-year, which is really a very, very pleasing number for us, we still have some way to go for all of our dealers and all of our locations to get to those levels and that's why we're working on the things that we're working on, the dealer show, the material that we are covering with them, the support levels that we are giving them, et cetera. Does that answer the question? Chris Howe - Barrington Research That does and more. Thank you. And within this dealer network when you're selling into the dealers, what proportion would you say have the optimized mix of ASV machines to go into market and to reach those inventory turns? Andrew Rooke - ASV Holdings Inc So, I think there is a couple of things there, all of our -- what we've seen historically is that, our initial selling rates into a location tends to be at around 3 units and I think we've talked about that before. And that does allow a dealer, many of whom are carrying several lines of product, not just our product, to start to develop their relationship with the market and with their customer base and then they expand out of that. What we are I think starting to see and hope to see more of is that, our product the ASV product gets more penetration within the dealer and then within that territory as well. So, we've got a long way to go. By our very nature, we are short line and that means people carry multiple brands or at least two brands probably of this type of product, but we are focusing our efforts on encouraging more of our dealers and incentivizing more of our dealers to carry just our product within the category. And as we move into next year, certainly one of the things that we announced and tried to encourage our dealers to understand at the dealer meeting was that there is benefit to them as well as to us if they carry ASV as their only brand of compact equipment. And that's certainly what we're trying to encourage and develop them to do. Chris Howe - Barrington Research And a few more if I may. You mentioned the supply constraint environment that is still ongoing, and the potential for capacity to come online in the future. Any idea of what your expectation is of when it will come online and/or when this supply constraint will loosen a little bit? Andrew Rooke - ASV Holdings Inc No. Unfortunately I don't at the moment, Chris. We certainly see it being impacted through 2018 fourth quarter, and probably, into the first quarter of ' 19. I think we're seeing some better projections of availability in that first quarter, which probably indicates that some supply is becoming more available. One of the things that we referenced in my comments was that we were able to do some re-sourcing, and we've certainly taken some strategic decisions and done some I think very rapid and very effective engineering work to increase the availability of a variety of engine manufacturers in our product. And we're able to do that because of our platform configuration, for example, which enables us to engineer this fairly quickly in the cycle. So, we are trying to avail ourselves of a broader number of engine suppliers and we've certainly done that as we are exiting this year and into 2019. So that's how we are mitigating some of those impacts. And these are industry-wide impacts, they are affecting pretty much everybody to our understanding. Chris Howe - Barrington Research And see if anything else. I think that's all I have for the moment. I will -- yes, the last question I had is just in regards to housing trends. You mentioned your belief on the current market. For those looking at those trends and seeing perhaps potential softness in the future, can you perhaps highlight or fill me in on the diversification within ASV, if there is any temporary softness in the market within your different end markets? Andrew Rooke - ASV Holdings Inc Yeah. Sure. Housing is a good indicator of activity in the general economy and it is a driver of compact equipment, but as you very rightly point out and thank you for that, the compact track loader and particularly ours, which has capabilities of being used far longer in the season, has a number of other applications. So landscaping, snow removal, agriculture, all of the forestry work, all of these are niche markets within the economy that our machines work very effectively in, number one, and in many, many cases better than the competition as well. Our product comes with an all-season track for example. So, you can use it throughout all the seasons. You don't have to go and get or buy another track to put on that for winter use. Our track machine is very effective in snow blowing and snow removal, for example. So there is a broad diversity, which gives us some counter-cyclicality and allows us to offset some of the activity in the housing sector. Operator - (Operator Instructions) Travis Anderson, Gilder Gagnon Howe. Travis Anderson - Gilder Gagnon Howe I was wondering if you could talk about the price increases you've put through on steel and whether the competition has been keeping up? I know you were fairly early in doing this and the competition didn't match you for a while. Have they caught up? Andrew Rooke - ASV Holdings Inc Yes. So, just to recap, we introduced surcharge pricing on orders received by us effective after May 1st, and I think we were probably at the forefront of doing that. To our knowledge, certainly Caterpillar have followed with a price increase in the mid-year and we also understand -- I haven't got exact details of it, but I understand other competitors have followed as well. But certainly, Caterpillar talked about it on their recent earnings call, and we expect others have done the same. There have been some mid-year price increases that we're aware of as well. So we believe that the market pricing is moving to accommodate the current levels of steel through that either pricing or surcharge pricing. Operator - It appears there are no further questions at this time. Andrew Rooke - ASV Holdings Inc Okay. Well, thank you very much, Molly, and thank you, everybody, for your interest in ASV. We look forward to seeing you at a number of investor conferences and meetings further on throughout the rest of the year. So again, thank you very much for your interest. Bye-bye. Operator - This concludes today's call. Thank you for your participation. You may now disconnect.

ASV Holdings, Inc. (NASDAQ:ASV) Q3 2018 Earnings Conference Call - Final Transcript

Nov 01, 2018 • 04:30 pm ET

ASV Holdings, Inc. (NASDAQ:ASV) Q3 2018 Earnings Conference Call - Final Transcript

Melissa How