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Executives

Matthew W. Long - Interim Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Treasurer and Assistant Secretary

Analysts

Tim Clarkson

James Wilen - Wilen Management Co., Inc.

Supreme Industries (STS) Q1 2013 Earnings Call April 26, 2013 9:00 AM ET

Operator

Good morning, and welcome to Supreme Industries First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Long. Please go ahead.

Matthew W. Long

Thank you, Chad. Good morning, and thank you for your interest in Supreme Industries. Joining me today on today's call to discuss the company's 2013 first quarter results are Mike Oium, Vice President of Operations; Jeff Mowery, Vice President of Finance; and John Dorbin, Vice President and General Counsel. The earnings press release that was issued after the market closed yesterday is available on the Investor Relations section of Supreme's website. Our prepared remarks will include a review of the quarter, and then we will open up the call for questions.

First quarter results. 2013 continued to reflect the progress that was started a few years ago. We continued to generate substantial increases in gross profit margin and operating income, which is particularly gratifying given that last year's results had already begun to reflect major year-over-year improvements due to early headway with our manufacturing initiatives.

Gross margin improved 230 basis points to 17.3% versus 15% in the last year's opening quarter despite lower revenue. This marks the company's highest quarterly gross margin percentage since 1999, and pretax income improved 37% reaching $3.4 million for the first 3 months of 2013.

We continue to see improvements at all facilities. However, there is work to be done in the bus product line. During the quarter, we had the opportunity to benefit from the improvements at our truck production facilities. As most of you will recall, industry-wide rental fleet business was less than robust at the end of 2012, and certain rental fleet operators were pushing contracts out further and further. Apparently, this was aimed at trying to get a better sense of how early 2013 was shaping up before making purchasing commitments.

Taking advantage of our enhanced flexibility at our truck manufacturing facilities, we were able to quickly react to changing market conditions. Increased rental orders more than compensated for the softer demand from fleet customers and improved our fixed cost leverage. As a result, we increased year-over-year sales of trucks, and the higher proportion of retail business contributed to the margin improvement.

In addition, we had a slight uptick in armored sales during the quarter, which also helped offset the softness in bus. First quarter saw declined demand for buses from state and municipalities as a result of tightening government budgets. This has led some competitors to offer incentives and discounts of what we believe to be unsustainable levels. Supreme has endured many industry cycles, and we know this one will eventually turn, but when that will happen is difficult to predict. While bus sales declined by $7.4 million compared with last year, we believe this drop is consistent with industry-wide conditions, and that Supreme's market share in this product line is holding steady.

The bus division represents one of our greatest opportunities for future improvement, and to that end, we have been instituting manufacturing and process improvements at our bus facility. This rebuilding, if you will, is similar to the actions we initiated with the truck division in 2011 and is aimed at better understanding the precise cost structure and profitability on each bus we sell. This will help us with new product development and to more accurately quote prospective orders, as well as optimally manage production runs at our bus manufacturing facility.

Our sales backlog at quarter end totaled $84 million, up from $68 million at year end, but down from the $107 million and reported in the first quarter of 2012. As noted earlier, the decline from 2012's first quarter is a result of an industry-wide reduction in rental fleet orders for 2013.

Through this year's first quarter, the company has experienced increased order activity in the truck division, which has translated into a 24% improvement in the backlog since year end. For the quarter, we reported slightly lower diluted earnings per share of $0.15 versus $0.16 of last year. This is solely due to the $1.1 million in tax expense recorded in the current year quarter. As previously disclosed, Supreme did not record any tax provision in the first quarter of 2012 because of the utilization of net operating loss carry forwards.

In this year's first quarter, we reported an effective income tax rate of 32.3%, which is consistent with our expectations for the foreseeable future. Pretax income, which we believe is the better metric to evaluate the company's progress, increased by 37% to $3.4 million compared with $2.5 million in 2012's first quarter. If we apply the 2013 effective tax rate to last year's first quarter, net income would have been $1.7 million or $0.11 per diluted share comparable of the $2.3 million or $0.15 per diluted share we reported last night. This represents an increase of 36%.

Turning to the executive front. Supreme had a busy start to the year. I would like to welcome Jeff Hermeister[ph] , who was named Vice President of Sales and Marketing in 2013's first quarter. He was previously employed by Penske where he had more than 26 years of experience in various roles of increasing responsibility, most recently serving as Senior Vice President of Vehicle Supply Planning and Remarketing. His background and expertise will further deepen our management bench and better enable Supreme to be a leader in the industry. We are looking forward to Jeff's impact as he concentrates on strategically driving top line growth.

In addition, last week, we announced that Mark Weber will join the company as President and Chief Executive Officer. I'd like to take this opportunity to welcome him to Supreme, and on behalf of the entire organization, we're looking forward to his contributions. Mark, who starts early next month, comes to Supreme from Federal Signal Corporation where he spent 17 years in a variety of senior executive roles. Most recently, he was the Group President responsible for 5 divisions with revenues in excess of $500 million. Prior to his service at Federal Signal, he worked at Cummins Engine Company for 17 years in numerous operations management and new product development assignments. We expect his operational experience to add a great deal of value to Supreme's leadership team.

Shifting to the balance sheet before we open the call for questions, working capital was $41.7 million at March 30, 2013, up from $41.1 million in last year's comparable quarter and $38.6 million at December 29, 2012. We invested $1.7 million in facilities and equipment in this year's first quarter in order to complete projects we started last year. Stockholders' equity increased 4% to $69.6 million or $4.55 per share. This compares to a $67.2 million or $4.41 per share at the end of 2012. Cash flow improved by $2.3 million during the quarter with net cash used for operating activities totaling just $300,000 versus $2.6 million in cash used in last year's comparable period.

In closing, I would want to thank everyone at Supreme for their hard work and dedication without which our progress would not be possible. We continue to successfully execute our mission and strategy to maintain our status as a leader in our industry.

And with that, let's open the call for your questions. Chad?

Question-and-Answer Session

Operator

[Operator Instructions] Our next question is from [ph] Zach Stephen, GP Funds Management.

Unknown Analyst

I just wanted to ask you if you could give me any insight as far as how the how the [indiscernible] litigation and King County litigation is going and whether or not there'd be any material effect on your company.

Matthew W. Long

The way it stands right now, we see no change from what was disclosed at the end of the year. So we currently don't see any material change to our financial condition.

Unknown Analyst

All right. And assuming something would happen with the litigation, how much litigation insurance do you have?

Matthew W. Long

Well, it depends on the particular claims. In the case of and I won't tell you our level of insurance, but we have insurance that most companies similar to Supreme would have.

Operator

Our next question comes from Tim Clarkson with Van Clemens Capital.

Tim Clarkson

I'm new to the company. I just want to get a little background if you could talk a little bit about the truck cycle and how big you think the -- I know that there's a lot of aging trucks out there, how big you think the potential reversal in business there is, and also exactly what your product is and how it's differentiated from your competitors.

Matthew W. Long

As far as the aging truck market, we've been talking about it probably off and on for the last couple of years that the truck market itself has probably gone 2 to 3 years beyond its normal cycle. In late 2010, early 2011, we saw a resurgence of purchases beyond probably what would be considered the norm. 2012 had similar purchasing patterns from our customers with a pause that we saw in fourth quarter we believe due to presidential election, the fiscal cliff and just trying to get a sense of what's going on into 2013. And your second question was? I'm sorry.

Tim Clarkson

Well, yes, just explain what your product is, what part of the truck it is and what advantages do you have competitively against the competition?

Matthew W. Long

Sure. Supreme has 3 product lines, and our largest product line that ranges from middle 70% of our business is truck bodies. And so the chassis are supplied by a number of OEM manufacturers, and what Supreme does on our truck product line is build the, what I call a straight truck or a box truck on the back of the chassis depending on what the end customer's looking for. We also outfit shuttle buses and then also we have armored vehicles that -- and specialty products that we also build.

Tim Clarkson

Okay. And what would you say would be your differentiating competitive advantages?

Matthew W. Long

Well, number one, we are a national builder. There's only a couple of national builders as it stands right now. So we cover most of the United States. I would like to believe that our quality is one of the top in the industry, and also we have a pool of vehicles, which allows the suppliers to work through our OEM suppliers, which just gives us a much better availability from a timing standpoint. We can react much quicker to orders than we might otherwise have. If you're waiting to get an order and then put that order into the OEM, it's going to add additional time. We're a pool. We have vehicles or chassis on the ground waiting for orders.

Tim Clarkson

Okay, one last question. Just what do you think are the keys to your improvements in gross margins?

Matthew W. Long

Well, we have been talking for certainly the last couple of years about the work that we've been doing to make changes to our manufacturing facilities, allowing for streamlined labor improvements. There's been a major focus on cost reductions, looking at material sourcing, looking beyond what we've done in the last several years. And then we've also focused on pricing, making sure that we're staying up with current market trends as it relates to pricing. So it's a number of things up and down the income statement.

Operator

Our next question comes from Jamie Wilen with Wilen Management.

James Wilen - Wilen Management Co., Inc.

Nice quarter. Question on gross margins. You made lots of progress, and each quarter seems to be, on the sequential basis, better than the quarter before taking out the fourth quarter of last year. How much more room is there to go? You're sitting here at 17. What is your internal target for where you think you could take gross margins over the next year or so?

Matthew W. Long

It's probably early for me to tell, Jamie. As you know, I don't like to or don't as a standard course give a forecast. I talked to you about from a gut standpoint, there is more to be done certainly. But I don't really have a target that I would communicate outside the company.

James Wilen - Wilen Management Co., Inc.

Okay, what do you think your competitors are doing gross margin-wise?

Matthew W. Long

Well, I think that we're probably somewhere in the same area. It's possible. Certainly we've been in this rebuilding mode for, on the truck side, for the better part of a couple of years. So I would have assumed that they're probably ahead of us from a gross margin standpoint. But they're not public, and I don't have any real insight into their financials.

James Wilen - Wilen Management Co., Inc.

Okay. Obviously, seasonally, the second quarter is usually stronger than the first quarter because of the fleet business. Given the lack of fleet business, would you still expect revenues in the second quarter to be higher than the first?

Matthew W. Long

Well, based on, and again I don't want to give any forecast, but based on the information that we've been given, certainly the fleet business was down in first quarter. Based on what we've been seeing and the order intake that we've had this first quarter, we believe it's possible that we'll have a slightly higher amount of fleet business in Q2 than what we had this time last year. So I'm hopeful, but again that's an estimate of what we've heard. It's not necessarily booked business. But beyond that, we've seen just an overall uptick in certainly the truck business.

James Wilen - Wilen Management Co., Inc.

Okay. And your basic truck business, does that have higher or lower margins than your fleet business?

Matthew W. Long

Well, we're still getting down to that, but I think the belief has always been and what we've always communicated is that the retail business has higher gross margins than the fleet business. But I know with the efforts that we've put into our manufacturing operations and certainly again we focused on being competitive but rightfully competitive that the business or the margin relative to fleet is certainly more profitable than it has been in last years.

James Wilen - Wilen Management Co., Inc.

Okay, obviously, doing good cost-wise. When is that point in time where we can achieve revenues higher than the year-ago period? When do you think we'll actually cross that point?

Matthew W. Long

Well, that's a good question, Jamie. As I'm sure you heard in my script, we've added a new VP of Sales. We're very excited about his coming on board. He's got many, many years of Penske who, in many years, has been our single largest customer. So we know that he certainly knows the truck body business. And we expect a lot of good things out of him. Certainly the first will be to sit down with him Mark and the rest of the senior team and talk through strategies for each product line so that we can go out and actually do just what you're talking about, which is go after increasing sales. Certainly, this year, if you talk about this quarter truck sales are up over last year. Our armors over last year we've been struggling just this quarter certainly in the last couple of quarters with the very competitive bus business. And again as I've said in the past, we're not going to chase negative margin business. So we've been selectively sticking to that program. But I really believe that now that Jeff and Mark are on board, we've got a full complement, and we'll put our full effort into making sure that we can continue staying profitable longer growing the top line.

James Wilen - Wilen Management Co., Inc.

Okay, and last 2 quick numbers, questions. Your inventory level at the end of the first quarter this year versus last year? And secondly, what do you expect CapEx to be for the full year?

Matthew W. Long

CapEx I, don't expect to be certainly at the level last year. Last year was roughly $7 million. If I talked about equipment and certainly we spent another $6 million in making some changes as it relates to a couple of buildings that we purchased from an inventory standpoint, inventory is -- I'm getting a signal, Stan, I was just looking so I could give you a little better answer. It's over last year at this time, it's down $6 million. Of course, it's up a little bit from the end of 2012, but that's normal as we start to ramp up for first and second quarter business.

Operator

[Operator Instructions] There appears to be no further questions at this time. So I'd like to turn it back to management for any closing remarks.

Matthew W. Long

Thank you for participating on our call today. We look forward to reporting our second quarter results and introducing Mark Weber at our next call this summer. Thanks again.

Operator

Thank you very much. As a reminder, some statements made on today's call may be predictive and are intended to be made as forward-looking within the Safe Harbor protection of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties. They could cause results to differ materially. Important factors that could cause actual results to differ materially from those in forward-looking statements are set forth in the company's reports on Form 10-K and 10-Q and news releases filed with the Securities and Exchange Commission. Today's live broadcast will be archived and available for 30 days on Supreme's website. The conference has now concluded. You may now disconnect. Thank you.

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