Juris Pagrabs - Group Treasurer and Director of IR Daryl M. Adams - President and CEO Frederick Sohm - CFO and Treasurer

Steven Dyer - Craig-Hallum Capital Group Rhem Wood - Seaport Global Securities Brad Noss - ROTH Capital

Thank you, Andrea. Good morning everyone and welcome to Spartan Motors 2017 Second Quarter Earnings Call.

I am Juris Pagrabs and joining me on the call today is Daryl Adams, our President and Chief Executive Officer, and Rick Sohm, our Chief Financial Officer. For today's call, we've included a presentation deck, which will be filed with the SEC and is also available on our Web-site at spartanmotors.com.

You may download the deck from the Investor Relations section of our Web-site and follow along with our presentation during the call. Before we start today's call, please turn to Page 2 of the presentation for our Safe Harbor statement.

You should be aware that certain statements made during today's conference call, which may include management's current outlook, viewpoint, predictions and projections regarding Spartan Motors and its operations, may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. I caution you that as with any prediction or projection, there are a number of factors that could cause Spartan's actual results to differ materially from projections.

All known risks that management believes could materially affect the results are identified in our forms 10-K and 10-Q filed with the SEC. However, there may be other risks that we cannot anticipate.

For today's call, Daryl will provide an overview of the second quarter and a brief business update, and Rick will review the second quarter results and our 2017 guidance. We plan to then return to Daryl for closing remarks before proceeding to the question-and-answer portion of the call.

At this time, I am pleased to turn the call over to our CEO, Daryl Adams, for his opening remarks, which begin on Slide 3.

Thank you, Juris. Good morning, everyone.

Thanks for joining us on Spartan Motors 2017 Second Quarter Conference Call. I'm pleased to report another solid quarter of sales growth and operational improvement.

This marks our sixth profitable quarter in a row despite being up against some difficult comparisons year-over-year. As expected, our results for the quarter were impacted by volume and mix, defense order that did not reoccur, and the timing of our previously announced Reach vehicle order.

Revenues for the quarter rose 4.4% to $169.7 million from $162.5 million a year ago. The increase in sales was driven by the acquisition of Smeal, which closed earlier this year.

Smeal contributed $30 million in net revenue during the second quarter. For the second quarter we reported adjusted net income of $2.4 million, or $0.07 per share, compared to $6.3 million or $0.19 per share last year.

Even with the comparative headwinds, we made significant progress in operational improvements, which I'll talk about in a few minutes. Our momentum is building as shown by the quarterly sequential growth in adjusted EBITDA margins across our business units.

We see this positive trend continuing into the second half of the year, which gives us confidence to raise our midpoint adjusted EPS guidance by 28%. Please turn to Slide 4.

I'll provide an update on a few business highlights and developments. For the full year, we expect Smeal to generate revenues of approximately $105 million, up from $70 million in 2016.

This increase is a direct result of improved efficiencies and streamlined manufacturing processes. Our integration efforts continue to run ahead of schedule.

The operational team is focused on inventory reduction and implementing the Spartan production system. We are well-positioned for the second half to return the ER business unit to profitability on an adjusted basis for the full year.

Please turn to Slide 5 for a brief update on the S-180. Acceptance of the S-180 Pumper continues to grow.

Backlog at June 30 totalled 28 units. In the second quarter, we delivered 19 S-180 pumpers.

That's up 36% with the first quarter when we delivered 14 and 280% over the fourth quarter of 2016 when we delivered five units. Please turn to Slide 6 for a brief update on Isuzu F-Series.

Today, production of the new Isuzu F-Series Class 6 medium-duty truck is now in full swing, as we recently celebrated the grand opening of our new production facility. The F-Series truck is designed to optimize fuel efficiency and maximize cargo space to serve the growing urban and last-mile delivery segments, and will produce meaningful second half contributions and beyond.

Please turn to Slide 7 for an update on the Reach walk-in van order. Earlier in the quarter we announced two new orders totaling approximately 900 Reach vehicles from two delivery service companies, including an 800 unit reorder and a first time order from a global logistics leader.

The reorder was primarily due to early positive feedback from last year's order as the Reach design met the ever-changing last-mile delivery landscape and has directly impacted our growing e-commerce retail trade. I'll now turn the call over to Rick to discuss Spartan's financial results for the second quarter and the outlook for the remainder of the year.

Thanks Daryl. Please turn to Slide 9.

Revenue for the quarter increased 4.4% to $169.7 million from $162.5 million, with Smeal contributing $30 million to the top line increase for the quarter. This excludes approximately $5.8 million of inter-company chassis sold to Smeal.

For the year, we expect Smeal to generate approximately $105 million in revenue, excluding $20 million of Spartan inter-company chassis sales. Second-quarter adjusted EBITDA decreased to $4.9 million from $8.2 million and adjusted EBITDA margin declined to 2.9% of sales from 5% of sales a year ago.

On a sequential basis, our EBITDA margin grew 40 basis points to 2.9%, from 2.5%, which reflects a momentum from our continued operational improvements. As Daryl mentioned, the results for the quarter were impacted by volume and mix in FVS, the timing of our Reach vehicle order which we announced in June, as well as a defense order that did not reoccur in 2017.

Our adjusted EBITDA excludes the impact of $400,000 of restructuring and acquisition related expenses and the impact from the one-time lag in recognizing sales and gross margin of $900,000 on chassis sales that are now inter-company. This compares to $200,000 of restructuring expenses and a product recall of $1.7 million in the prior year.

Our backlog at quarter end was up $21.5 million, or 6.1%, to end at $372.8 million compared to $351.3 million at the end of the first quarter. Now let's take a look at the results by operating segment, starting with FVS on Slide 10.

FVS reported revenues of $53.5 million, compared to $73.8 million last year. The revenue decrease was due to volume and mix and the timing of the previously announced Reach order.

Adjusted EBITDA declined $900,000 to $6.2 million from $7.1 million a year ago, largely due to the items I just described. As we explained last quarter, we expected difficult top line comparisons as we were up against the large up-fit order in the previous year.

Despite a sales decline, our adjusted EBITDA margin improved 190 basis points to 11.5% of sales from 9.6% a year ago, reflecting the strong improvement in manufacturing, productivity as well as improved labor productivity. Backlog increased 15.2% to $131.3 million compared to $114 million in Q1, reflecting our strong orders for last-mile delivery.

Moving onto Slide 11 and the SCV segment, second-quarter revenue totaled $35.8 million, compared to $37.8 million last year, which included a $4.4 million defense order. But this was largely offset by a $3.7 million increase in motorhome sales as we continue to gain market share in the Class A big diesel segment with all of our major customers.

Adjusted EBITDA in the second quarter declined 130 basis points to $2.8 million or 7.7% of sales, from $3.4 million or 9% of sales in the prior year, primarily due to the defense order. Adjusted EBITDA margin improved 300 basis points sequentially due to increased motorhome sales and aftermarket parts.

Our backlog experienced strong growth of 17.1% to $26.7 million, compared to $22.8 million in the first quarter, reflecting market share gains which will drive sales in the second half of the year. On a year-over-year basis, our motorhome backlog is up 131% to $25.8 million versus $11.2 million in the prior year.

Please turn to Slide 12 and the ER segment. Revenue was up 54.2% to $80.8 million, from $52.4 million, due to the $30 million of sales from Smeal, as I mentioned earlier.

This increase was offset by slightly lower shipments from our base business compared to last year as we continue to focus on profitable sales. Adjusted EBITDA loss declined $400,000 to $700,000 from adjusted EBITDA loss of $300,000 a year ago, primarily due to increased health care costs of approximately $1 million, or $0.03 per share.

This growth was offset by improved vehicle mix, increased labor and manufacturing productivity, material efficiencies, and lower warranty costs. Adjusted EBITDA a year ago included a $1.7 million charge for a legacy product recall.

Adjusted EBITDA margin declined 30 basis points to negative 0.8%, which reflects the increased health care costs we experienced. On a sequential basis, margin improved 80 basis points driven by S-180 volumes and a more profitable sales mix.

Backlog remained essentially unchanged at $215 million compared to the first quarter, and our Smeal backlog was $78 million. Turning to our balance sheet on Slide 13, you will see cash on hand was $21.2 million, which reflects a $10 million payment on our revolver, which reduced our acquisition related debt to $22.8 million from $32.8 million in the first quarter.

Inventory at the end of the second quarter was $88.4 million, and if you exclude the Smeal inventory, the business ended the quarter at $59 million, which represents the lowest second-quarter inventory balance since 2012. Smeal inventory at the quarter end was down nearly $33 million or 53%, from $63 million at the acquisition closing date on January 1.

If you turn to Slide 14, we'll now discuss our outlook for the remainder of 2017. In the second half of the year, we expect to see year-over-year revenue growth driven by last-mile vehicle delivery orders, including Reach and walk-in vans, Class A motorhomes, and the production ramp-up of the new Isuzu F-Series.

This revenue growth, together with continued operational improvements and additional synergies from the Smeal acquisition, gives us the confidence to raise the 2017 guidance as follows. Revenue in a range of $680 million to $720 million, up from our previous guidance of $650 million to $700 million; our adjusted EBITDA is in a range of $28.3 million to $31.3 million, up from the previous range of $26.5 million to $29 million; restructuring, acquisition cost and inter-company chassis impact of $3.7 million, up from $3.2 million; income tax expense of $700,000 to $2.2 million, down from our previous guidance of $1.5 million to $2.3 million; we expect interest expense of $600,000, down from $800,000; and we now expect adjusted earnings per share in a range of $0.48 to $0.52, up from the previous guidance of $0.36 to $0.41 per share, assuming 35 million shares outstanding.

At this point, I'll turn the call back over to Daryl for his closing remarks.

Thanks Rick. Please turn to Slide 15.

Before I close though, I want to take a minute to thank the entire Spartan team for their support and dedication to our plan and our first half results. Overall, we were very pleased with the progress we have made to date.

This marks our sixth profitable quarter in a row on an adjusted basis. The management team is confident and focused on delivering profitable growth and increasing shareholder value.

This combined with our market share gains, realizing better than originally planned synergies with the Smeal acquisition, the ER segment returning to profitability on an adjusted basis in 2017, and the acceleration of second half earnings growth across all business segments, gives us the confidence to raise our midpoint adjusted EPS guidance by 28% for the year. Operator, [please take the call] [ph], we are ready to take questions.

Congratulations on another good quarter. Starting off in the ER segment, Smeal appear to have a very good second quarter sort of relative to what you expect in the back half of the year.

So was there anything sort of one-time deliveries there, anything that jumped out that drove that strength in the quarter?

No, I think, Steve, it's just some continuous improvement. I think we have seen the team do a great job right out of the gate and it's what we expect to continue for the remainder of the year.

The one thing we did see in the second quarter were some health care costs that were largely attributable to the ER business, but we made some changes in some of our insurance programs and coverages and we hope to mitigate that going forward.

So am I reading, kind of digging around in the Q, are you anticipating second half Smeal incremental revenue of like $40 million, or am I reading that wrong?

I think for the full year, we're at about $105 million I think. If you remember, back in the first quarter, we had some revenue due to changes in the revenue recognition policy from what Smeal had done in 2016 and how we were handling it going forward.

Okay, got it. And another thing in that segment, S-180, we're a number of quarters into that now, do you have anything you can sort of share with us just in terms of, I don't know, orders or anything quantifiable about it, or are we still kind of in the stage where we're kind of gauging customer interest, et cetera?

No, Steve. I'll take that.

So what we have figured out was, the trucks we have built to date, there's more popularity on a certain number of the 11 models that we offer. So we are gaining good information back from our customers on what they like and don't like.

So we'll be continuing to refine that as we move forward, probably drop a couple of the models, right, if we're not getting sales on them. But I think the key point is we're in the middle of engineering an aerial S-180, also a commercial tanker S-180 up at [indiscernible].

So, we have a number of new products now that we are seeing what they like and don't like with [indiscernible]. We are adjusting and moving forward with it.

Okay, great. And then within FVS, there's been a lot of chatter, continues to be, whether it's Amazon talking about [creating] [ph] their own fleet, et cetera, what are you hearing kind of in that segment?

Backlog appears to be strong, but is that still sort of the same kind of big secular tailwind that it has been all along here?

I think, Steve, the Reach order again this year was high, not quite as far as last year. So, we think we are seeing a trend maybe from the larger vehicles into the walk-in van and into the [indiscernible] van up-fit market.

But again, Amazon is a great fighter. They have not announced but I think we are not the only one that's making sure we stay close to Amazon and try to understand what they do.

So I think it's anybody's guess, but we continually talk about what's our strategy and what are we doing to make sure that we are in a good position to take advantage of some of those orders when they come out.

Got it, okay. And then finally for me, just as it relates to acquisitions, we are a couple of quarters into the integration of Smeal.

You obviously have some flexibility on that on the balance sheet there. What's sort of the thinking or the mindset as it relates to acquisitions right now?

Do you still need a couple of more partners to integrate or if you saw something that sort of fit well, are you guys actively on the hunt, any help there would be great? Thanks.

I think, to answer that, Steve, we are always ready to go. As you said, we're ahead of the schedule, synergies are good, team is doing well.

I'm not sure if we'd be really looking in the ER space right now, but I think the other two business units are [up for a game] [ph] if there's anything that comes along. But we want to be opportunistic and we still want to make sure that whatever we do is accretive to our earnings.

The teams work hard to get us where we're at. We're going to make sure we continue.

So, we are looking. We're making sure that nothing tries to slip by us.

But if you have any ideas you'd like to share with us, we'd be willing to listen.

Will do. Alright, thank you.

Congrats on the quarter and the guide there. So my first question, based on your guidance obviously you're going to have much better margins going into the back half of the year.

Can you just give us an update on the turnaround? What inning are we in, how long will it take to complete, and really where do you think margins can go now seeing what you see and how long will that take, just specifically I guess EBIT margins if you will?

No problem, Rhem. Like Daryl said, we continue to make continued progress.

I think as we go here from 2017, we thought of it as moving from a turnaround story here to one where we're going to focus on growth. The previous question talked about M&A.

We have discussed this on prior calls that we are open to it. We have the liquidity and the earnings power to do it now.

So, we are starting to transition out of turnaround. I think in the previous quarters we had talked about being at the top of the fourth or the fifth inning.

We are moving forward there. And we have an Analyst Day scheduled for October 12 in New York where we will kind of come out and show you guys a three-year plan.

But we have EBITDA margins that we expect moving north of 4% this year, and over the next three-year period we're not afraid to target overall EBITDA margins of 10%.

That's great. I look forward to the upcoming Analyst Day.

So you think on an EBIT basis, you could get 6% to 10% EBIT margins?

I was talking EBITDA margins going from 4% to 10% over the next three years, that's right.

Yes, okay. Okay, that helps.

And then can you talk about just the earnings cadence in the back half, third quarter versus fourth, and how this FVS kind of revenue will layer on? I mean typically there is some seasonality I think in the fourth quarter.

I mean just help there with the seasonality in the business and then how things layer on.

As you know, we don't provide quarterly guidance, but we've talked about some of the big orders we are working on now with Reach, and our customers typically are looking for those vehicles to be delivered in the early part of fourth quarter. So, I would say as it relates to some of the FVS volume, it's probably more heavier-weighting in the third quarter.

Okay, thanks. And then just two modeling questions, what tax rate should we use?

And then the restructuring charges, did that go into SG&A or in COGS? Thanks for the time.

I think the small amount of restructuring charges we took in the second quarter were in SG&A. And your other question, Rhem, was on tax rate, right?

Yes, that's right.

Right now the guidance we are giving on our tax rate is probably consistent with how we've looked at the year so far. But as we continue to make forward earnings progress and the earnings continue to grow, at some point we'll be looking at the valuation allowance that we put on the books back in the third quarter of 2015, which would then have kind of the offsetting impact it had back in 2015, and over time as I look out into 2018, I would think of it more as something closer to a statutory tax rate.

It's Brad Noss here on for Matt. Just wanted to go ahead and look at the guidance provision.

So it looks like the guidance provision implied a pretty substantial increase for the second half compared to what we were expecting. Can you just highlight some of the biggest moving pieces that sort of changed the guidance for this quarter versus what you were looking at last quarter?

I know you mentioned some of the Smeal acquisition synergies and productivity improvements there, some last-mile delivery orders, and the F-Series ramp-up, but which of those elements sort of changed the most or were you not building in as much prior?

I think when we came out and announced the Reach order in June, Brad, not all of the volume had been contemplated in our guidance on the May call. So that certainly has an impact.

And as you see, the motorhome backlog had some big growth, up 130% year-over-year and up 17% sequentially. So we are going to get some more motorhome volume.

I think we've made some significant inroads in market share. And we have talked about in the past, in previous quarters as well, but now you are seeing it across all of our major motorhome customers.

Okay, thanks for that color, that's helpful. And then looking at the motorhome sales, we looked at the Class A data and it seems like it's sort of mixed, maybe flattish for Q2 shipments just overall for the industry, but some customers are seeing expanding capacity and strong demand for gas related platforms.

Can you just help us understand how the gas related platforms would impact you or if we should – is it typically just Class A shipments that we should be looking at?

This is Daryl. It's a very good question and we continually try to separate, if you will, our segment which is the Class A diesel rear pusher engines over 400 horsepower.

So I think the starting prices of our units are much higher than the average motorhome. So, we don't see the fluctuations that you see in regular motorhome even in the smaller diesel segment.

But I think the key that we talked about was we are becoming – getting back some of the market share that we may have lost over the previous years due to some of our new content we're putting in, and we've been putting on, getting put on new platforms both of our two largest motorhome customers. So, we believe that's significant.

So, as market share gain, we try to separate ourselves from the rest of the RV market, which is key. So, you might want to – we can help you with that data, and so really it's mainly market share and new platforms.

Okay, perfect, that helps clear it up a little bit. And then just staying with the SCV segment, can you just talk about sort of the F-Series ramp, as that progresses, how we should expect that to impact the SCV margins?

I think, Brad, you will see improvement sequentially, Q3 versus Q2, and then Q4 should ramp a little higher sequentially over Q3.

Okay, perfect. And then lastly, just looking at the S-180 backlog, I think you referenced 28 units there.

Should we anticipate sort of the Q3 and Q4 run rate continuing to grow ahead of the 19 or how much should we really be expecting that, the run rate to be able to increase through the back half of the year?

Brad, I think we'll see a little bit of an uptick. As I mentioned earlier, we're going to adjust some of the models that we are offering.

But we are seeing, we are honing that in, we are seeing very, very good feedback, positive feedback, a lot of interest as we are giving some of the demos out on the road, give them out to different customers, different municipalities. So, like Rick said, we don't really try to forecast this out through quarter by quarter, but we believe we'll get more orders for them in the year to increase that 28.

Okay, perfect. That's all the questions I had.

Thanks, guys.

Thank you, Andrea. Thank you everyone for joining us today.

We look forward to updating you on our Q3 later this year. Thank you and have a great day.