Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Spartan Motors, Inc. (NASDAQ:SPAR)

Q4 2013 Earnings Conference Call

February 11, 2014 10:00 AM ET

Executives

Greg Salchow – Director, IR

John Sztykiel – CEO

Lori Wade – Interim CFO and Treasurer

Tom Gorman – COO

Analysts

Joe Maxa – Dougherty & Company

Robert Kosowsky – Sidoti

Shivangi Tipnis – Global Hunter Securities

Operator

Good morning and welcome to the Spartan Motors Fourth Quarter and Full Year 2013 conference call. All participants will be in listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Spartan Motors, if anyone has objections you may disconnect at this time. I would now like to introduce Greg Salchow, Director of Investor Relations and Treasury for Spartan Motors. Mr. Salchow you may proceed.

Greg Salchow

Thank you. Good morning everybody. Welcome to the Spartan Motors fourth quarter 2013 earnings call. I’m Greg Salchow, I’m joined on the call today by John Sztykiel, our President and Chief Executive Officer; Lori L. Wade, Interim Chief Financial Officer; and Tom Gorman, Chief Operating Officer.

Before we start today’s call, please be aware that certain statements made during today’s conference call which may include management’s current outlook, view point, predictions and projections regarding Spartan Motors and its operations, may be considered forward-looking statements under the Securities Laws and those caution you that as with any prediction or projection there are number of factors that could cause Spartan’s result to differ materially. All known risk, our 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 we face that we cannot anticipate.

As always please note that, during the question-and-answer period we’ll take one question and one follow-up per analyst that will allow everyone the opportunity to ask a question. After asking your question, you’re welcome to rejoin the queue for additional questions if time permits.

And I’m pleased to turn the call over to John Sztykiel for his opening remarks.

John Sztykiel

You’re right. First Greg, thank you very much. Good morning to everyone and thank you for joining us on Spartan Motors fourth quarter 2013 conference call. As we move into the call, as you at the release first to know [indiscernible] performed are we trying to gloss over the poor performance of our bodybuilding fire truck crew which in Q4 2013 as whole is terrible, it can and will be fixed more on that layer. What we also want to make sure has in every release we talk, we strive for clarity, transparency and perspective as we want to make sure all of you see all the positives that really good work that was accomplished by so many.

When you look at Q4 2013 delivery and service Utilimaster, Specialty Vehicle, Spartan Chassis, the Emergency Response Chassis portion, ER really a lot of very, very good was accomplished. Delivery and service for example closed at a profit in Q4 as it largely completed the launch process of its Bristol, Indiana facility. Specialty vehicles, SV posted an even stronger performance for the quarter and the year. And I’ll get into a little bit more detail later on as will Lori.

In Q4, only our Emergency Response segment was non-profitable, while launch in the ER segment was driven by poor performance in our emergency response vehicle unit, ERV as we call it, the group that builds fire truck bodies in Brandon, South Dakota, Ephrata, Pennsylvania and Ocala, Florida. Unfortunately the loss in ERV not only exceeded the profit generated by the emergency response chassis segment it over shed on the profitability of the delivery and service group and the specialty vehicle group as well.

We have done a lot of rate things at ERV, the vehicle group in developing great products, outstanding sales and marketing. We have the capability to generate over $200 million a year in revenue over 500 bodies vehicles into the marketplace. The opportunity per segment shareholder value is there, first we need to improve the operating performance and that is simply quality trucks built on time, built efficiently.

Our plan to fix the ERV operations will be focused, it will be disciplined. We will fix the business, protect our brand and reduce the cost base. With even interesting is as we look at SMI, even with the losses incurred at ERV excluding the $4.9 million goodwill impairment charge and the $0.3 million valuation adjustment at delivery and service. Spartan generated a non-GAAP profit from continuing operations of $9 million. When you do the math that is the fourth quarter on a non-GAAP basis excluding charges and valuation, considering all that we’ve done it is really quite an accomplishment. What’s interesting is Spartan generated an operating profit for all that the first quarter of 2013. So again there is a lot of good that is going on, we’ve done a lot of things right, but it also drives absolute clarity, that ERV must and will be fixed.

Some of the main points I wanted to emphasize on today’s call are one, the strengths of our brands, demonstrated by the growth of the order intake and our backlog. Simply, we are gaining market share in each one of our respective markets. Second, the losses on the Reach reduced further in Q4. This dynamic product is expected to be profitable, in the second half of 2014 and we look forward to its growth in continued success.

Third, positive cash generation even with inventory that is unacceptably too high and we’ll talk about that a little bit later on, we generated positive cash. Delivery and service, specialty vehicles are performing well on the right track as we move into 2014, point number four.

Point number five, emergency response chassis really great financial results. Point number six, it gets back to ERV is now our only major problem. Now let’s spend a little bit of time in the ERV the body company. First, we need to align our leadership, our operational structure to fit the realities of the industry i.e. we must reduce our cost base, both build material and operating. Second, one of the issues was unrealistic production expectations for Brandon, South Dakota.

Third, what impacted us was carryover pricing from 2012, 2013 that was discounted in the tough marketplace. Four, were excessive delivery times, five with the associate, high associate turnover in Brandon, South Dakota.

All of this can do ahead during Q4 as we were making progress in Q1, Q2 and Q3 in 2013. In Q4 though, Brandon was set up for a high production ramp up with certain extra numbers doubling their business. By mid-quarter it became apparent, one we were going to have severe issues, thus we start to make several changes to address these issues. One of the things which we did was earlier in the year in 2013 we brought back Kevin Crump who was leading the Bristol relocation for Utilimaster back to Brandon, South Dakota.

For a point of reference, Kevin previously led the emergency response vehicle group in 2010/2011 when they were profitable. It brings a great deal of familiarity and operational skills back to the business. As in the end everything revolves around people, this also points out to note that to a certain extent we were a little bit too thin on the management deficit. When we took Kevin away things did not go in the right direction at the vehicle group in South Dakota. That issue is now being rectified.

Second, as noted in the 8K filed yesterday, the former President of emergency response at Spartan is no longer with the company, until a successor is named the ER leadership group will report directly to me. Once ERV has been stabilized, the positive operating trends established, I would expect to name a new President. I know this business well, it can be fixed, it’s been profitable before it will be profitable again.

Now let’s get to the plan to address the issues which I mentioned earlier. And we started implementing the plan in Q4 and saw significant operational financial improvement in the month of January. Some of the specific actions to improve the performance of the emergency response vehicle group are, one, we’ve increased pricing not just in 2013, but also in 2014. Second, we are leveraging Spartan’s manufacturing days, we will run Brandon at a very narrow, optimal rate, simply complex units with a supplement that with Charlotte, Michigan international units in Ocala, Florida simple and – simple custom and commercial units.

And this is a big deal. This is where we made an operational mistake from a planning perspective. South Dakota has a very low unemployment rate. So there we have in the plan a 50% ramp up. End result was high turnover, units now felt high inventory, poor cash utilization, simply a mess which we saw in our financial results. Brandon, South Dakota as set it array with the half and can build trucks efficiently of high quality and profitability.

The third part of the plan is to enhance the operational and controls and processes to reduce the cost base. Number four is to stabilize the Brandon work base was nice as those actions taken in December, the turnover rate over the last 60 days has been very, very low that extremely positive you cannot move a business in the right direction with a high turnover rate.

Collectively as an organization, we strive for a voluntary turnover rate of less than 10%, our other locations are at or below that, we need to get Brandon South Dakota at that point.

Number five was, is management changes. I talked about those a little bit earlier. And again I want to get back a little bit leveraging the manufacturing base, because that is very, very key, because again we have a product sales marketing distribution machine that can bring in over 500 orders a year, $200 million business model.

As I mentioned earlier we plan for Brandon, South Dakota to build very specialized products in a very, very tight production range. Ocala, Florida we will leverage growth around simple custom and commercial fire trucks, capacity will expand. What’s nice is the leadership of Ocala, Florida is now under Dave Bailey, who previously led Charlotte, Michigan’s fire truck chassis operation. So we have demonstrated wise leadership now in Ocala, Florida.

The third part of the plan is Charlotte, Michigan. And as we look at Charlotte, Michigan what’s interesting is a point of perspective as I talked about earlier we’re focused on clarity, transparency and perspective, Charlotte, Michigan and any market has been a high performing excellent machine, whether it would be the Isuzu trucks, whether it would be RV chassis, whether it would be the Reach vehicle, whether it would Frito-Lay truck bodies, whether it would emergency response chassis, Charlotte, Michigan has demonstrated excellence this location makes money.

Now we’re going to leveraging that excellence in the fire truck bodies, the Lima, Peru order. Over 25 million will start to be shift in Q3 of 2014. This process are our process to ensure that we deliver high quality effective and efficiently build trucks on time is really very, very impressive. We have people in South Dakota, people in Ocala, Florida learning understanding the process, the engineering, the documentation is all moving in the right direction.

Why do I have faith? I can look back at the – probably the most recent ramp up which was dramatically the Isuzu. 2011/2012 we went from a clean plan to doing 14 units a day in less than an 11 months. As a point of perspective today their plan is doing 29 vehicles a day with less than 55 people. Charlotte does a lot of things extremely well and we are going to leverage this location to expand and grow our emergency response business model. And again we’re going to keep it simple Brandon, very narrow, very tight. Ocala, Florida great operation, leverage growth, Charlotte, Michigan the new add demonstrated excellence, leverage the growth in that location.

Here the reality is, when you look at Q3, Q4 we were simply pushing a rope uphill as we are trying to double production with a low unemployment rate that plan has now changed. And as Lori will talk and you wonder why she uses the term Q3, the second half of the year being a positive inflexion point, it really stems around the fact between improvements and the pricing and the export order starting to ship those are both very, very positive for ERV and for Spartan Motors Inc.

Now let’s switch over to delivery and service, reported an operating profit of $4 million in the fourth quarter 2013. And this is really great from a perspective standpoint, because they had an operating loss of $2.1 million in the fourth quarter of 2012. So when people wonder how far we have come from an efficiency and effectiveness of implementing Bristol in the right direction, it is a long, long ways in the right direction. We’ve gone from $2.1 million loss to a $4 million operating profit with less revenues. We have really moved the ball in a very positive direction with the Bristol implementation. Are we perfect yet, no, do we still have significant room to improve, absolutely and that will improve DSV’s or Utilimaster’s results in 2014 that we have come a long ways. Another point to note is we also did take a $0.3 million or $300,000 valuation reduction of one of our remaining facilities at the Wakarusa location.

Next early in the year and to give you a little bit of background on Bristol, we didn’t struggle material flow, material handling and other challenges, as we mentioned earlier, the launch process is now been substantially completed. We’re seeing improved profitability, a lot less work stress and improvement in DSV, delivery and service Utilimaster’s operating results. When you look at the first half of last year 2013, to the second half, DSV reported an operating profit of $2 million before the $300,000 valuation charge a $1.7 million yet net versus an operating loss of $5.6 million.

Well I could the percentage or give it to you, but it’s in the release, but this gives you an idea of the dramatic improvement from the first half to the second half. And there are a lot of people that questioned us or wondered could we get the launch done completed, our organization moving in the right direction, the answer was absolutely yes, the data speaks for itself and do the financial results.

In the fourth quarter, we produced 508 Reach vehicles bringing the total for the year to 1216 units. We also today have a few hundred Reach vehicles and work in process inventory that’s one of the big reasons why our inventory is too high right now, which affects our cash position. The delay in shipping some of these units is another factor fourth quarter revenue decline compared to prior year and it’s because of cladding shortage that is now been solved. We expect to complete and ship the remainder of the 1900 unit Reach order FedEx early in the second quarter of 2014.

Spartan, we have made significant progress in improving Reach’s financial performance, during the fourth quarter and throughout the year. Prior actions to reduce the build material, while increasing the production rate and resulted in significantly lower loss for the quarter and significant improvement year-over-year from an operating loss perspective. We anticipate another order at higher prices for several 100 more reach which will be dealt during the second half of 2014.

As we look at the data, as we look at the trend lines Reach will cross over into a profitable product at this point in time, it is a great product, the market likes it and I’m excited about producing it profitably in the second half of the year. I really compliment everybody within Utilimaster both from a pricing and operations and execution perspective, reduction in cost, the Charlotte campus for building the Reach, a lot of people put in a lot of sweat, a lot of very good work and we are now crossing over and that’s exciting.

As we told you during the last conference call, truck body demand declined late in Q3 with lower production set for the fourth quarter of 2013 compared to 2012. To a lesser extent the same was true with walk-in vans, what’s nice or interesting is orders picked up for both during the fourth quarter of 2013, that was a positive surprise for us, mean to be blunt Utilimaster’s backlog is higher typically in the fourth quarter than where it is right now.

When I talk to people in sales in the marketplace it just get back to the simple fact, the consumer base the market base perceives that the issues, Bristol behind us that we’re building higher quality trucks, our delivery times are now coming back to normal. So we’re now getting some orders which were of positive surprise. This gives us confidence in our outlook for revenue and profit growth as we look at 2014.

The opportunity for Utilimaster, delivery and service is a great one and the growth should surprise no one. Simply Utilimaster is the median, the transport link between brakes and clutches.

All right, switching over to Specialty vehicles and this was our standout segment for Q4 and all of 2013. The performance of the specialty vehicle group is dramatically improved not only from 2012, but from 2011 in particular. In 2011, to give you again a point of perspective, clarity, transparency, the specialty vehicle segment loss $2.3 million. In contrast this year specialty vehicle revenue grew 25%, operating income increased 363% to $10.2 million compared to 2012, even greater be compared to the loss of 2011.

This improved financial performance is concrete evidence that we know how to turnaround the business. What’s interesting and it’s simply how to turnaround the business. First you got to focus on the attitudes, get people believing in themselves, the vision, the plan. Then you examine every aspect of the business, particularly the motorhome and bus chassis, looking for ways to improve the operating efficiency eliminate ways reducing the cost structure.

In specialty vehicles, we reduce the cost structure by nearly $4 million per year. Again we didn’t slash the business de-content, we improved our efficiency. Then we invested in the business, because at the end of the day you got to have high performing products which the market is excited about to pay a higher price for. We invested in the business to drive the revenue growth.

We’re continuing that on to develop more chassis initiatives, I’ll be blunt when I look at specialty vehicles in the motorhome, I think our product has some whiskers on it. It could be more exciting. Our marketing could be more effective, more dynamic, those are things which were expected to improve upon, to develop in 2014 and 2015 and beyond.

As I bring this section to a close, turn it over to Lori drive is working. Two out of three segments are making strong progress, now the task is to fix ERV, and that frustrates us like knowing tomorrow. We are focused on it and we will get it fixed, because ER for us is a $200 million plus operating segment and we expect both portions of it to be dynamic with the financially great results, the chassis side which is there today and the vehicle side which we are very, very focused on.

Lori will talk a little bit about the date, about quickly as we look at ERV as I said in the release as we got a long job ahead of us, a difficult task, a lot of ground to make up to bring it to profitability. It will be a late Q4, could be a 2015 event in Q1. We expect substantial progress each and every quarter, we have a very good plan we’re generating good results in order to get it to where we wanted to be without destroying the business we are going to do in a discipline very, very wise way making substantial quarterly improvement.

We got challenges, we’re excited, and somewhat like situation normal each and every day. Lori.

Lori Wade

Thank you, John. And good morning everyone on the call, I’m going to shift gears here slightly. First look at the balance sheet. Spartan ended the year with cash of $30.7 million, $9 million higher than at the end of 2012. Cash decreased despite an increase in nearly $14 million in inventory from December 31, 2012. Growth in inventory was due to the higher Reach work in process inventory due to the body cladding issue mentioned in the press release and earlier by John.

As well as the inventory levels at ERV due to the lines at Brandon, we expect to reduce Reach inventory during the first quarter as we complete these units and shift them to the customer. We expect to reduce inventory we have on handed ERV, but these efforts will be offset by inventory brought in as we begin production of the 70 unit Peru order.

We expect the net results to be for total inventory levels to remain steady or increase somewhat by the end of the first quarter of 2014. Spartan’s financial results for the fourth quarter and the full year of 2013 include several one-time expenses and non-cash charges. Some of the one-time items include, first quarter ERV due to bankruptcy $0.6 million, first and fourth quarter SV steering gear recall $1.4 million, first quarter Bristol startup cost $1 million plus another $1 million in labor and efficiency cost.

Second quarter Bristol labor and efficiency, which is additional labor during a launch phase of $1 million. Second half DSV incurred startup cost [indiscernible] Mexico $0.4 million and additional warranty recalls at ERV in the first and fourth quarters for $0.7 million. These and other expenses reduced operating income by $6.2 million or approximately $0.12 per share. In addition, we incurred non-cash charges that included $4.9 million to write-off ERV’s goodwill and $0.3 million to adjust the remaining building we own in Wakarusa, Indiana to its estimated fair value.

As John mentioned, if you exclude these two charges from our fourth quarter 2013 results Spartan generated a non-GAAP operating income of $0.9 million. In total, Spartan booked $11.4 million in one-time or non-cash items during 2013, of this $8.2 million comprised of the Bristol start-up cost and the non-cash charges are truly non-recurring in nature. Having these items behind us allows us to set a baseline for ongoing operating performance and expectations for 2014.

We believe we have fairly good visibility for 2014 in two of our operating segments DSV and SV. Our outlook for 2014 is less certain for the ER segment due to the turnaround underway in the ERV segments. Improving the performance of this business is a top priority for Spartan but accurately forecasting the timing and the impact of these efforts on quarterly financial statements is more of a challenge.

With that said, we expect 2014 revenue in the range of $500 million to $525 million. We base our expectations on order intake of $536 million in 2013 and year-end order backlog of $242.7 million. We expect to ship approximately $14 million in Reach vehicles during the first half of the year and 20 plus million in fire trucks to Peru most during the second half of 2014.

On top of these large orders we are seeing recovery demand at DSV for both truck bodies and traditional walk-in vans. We expect to seek genuine growth in SV segment especially in motorhome and bus chassis sales during 2014. Also contributing to revenue growth should be greater output from ERV production shifting to Ocala, Florida.

Both SV and DSV are expected to be profitable during 2014 but SV’s operating income is expected to be lower than in 2013 due to a planned investments in developing new motorhome chassis and expanding its distribution network as John mentioned earlier. SV’s after-market parts and accessories unit is expected to experience reduced demand for defense related parts which is expected to contribute to low revenue and operating profit in that business line. This segment could also be impacted by the uncertainty of the defense vehicle demand for 2014.

As a result, we expect Spartan to report an operating loss in the first quarter of 2014 with the modest operating loss in the second quarter.

Let me go back. I think I missed the ER segment here. The ER segment is projected to report an operating loss in the first half of 2014 returning to profitability in the second half of 2014 and full-year. So, back moving on to Spartan as a whole, again, I repeat. We expect Spartan to report an operating loss in the first quarter of 2014 with a modest operating loss in the second quarter. As mentioned by John, we expect Q3 to be in a fluxion point expecting to report an operating profit for the third and fourth quarters of 2014 as well for the full-year.

Our projections for 2014 operating income is in a range of 1% to 1.5% of sales. Operating income for the year will be driven largely by the pace of improvement at ERV so we expect to update financial expectations for the year as we make progress in emergency response turnaround efforts.

I thank you for your interest and now I will turn the call over to John Sztykiel for his closing remarks.

John Sztykiel

All right, Lori, thank you very much. As I look at – Q4 and 2013, I look at I’m a large shareholder and all of us are in the same boat together. It really frustrated me and I’m sure it frustrates each and all of you because we had great performance and so many dog-on [ph] areas delivery and service especially vehicles, emergency response chassis all overshadowed by one.

Notice within this release and this transcript you don’t see the word transformation transition because that is behind us. Emergency response vehicles will be fixed. It is going to take time. What a great position when you look at our backlog when you look at the strengths of our brands, so many things are moving in an upward trajectory. And especially vehicles our motorhome chassis business, we’ve turned around and we’re now in offence, as I mentioned earlier some of our products have whiskers we’re developing new chassis, new innovations to expand our presence in that marketplace.

In delivery and service Utilimaster, our Bristol launch is behind us. Operating efficiency is greatly improved and the Reach had a positive gross margin in Q4, which actually is a tremendous compliment I wish to thank everybody both the Utilimaster and Charlotte where it’s build and all they’ve done to get the Reach to that point and we’ll be profitable in the second half of 2014. ERV is our remaining operational challenge.

During the fourth quarter, the pace of change accelerated to achieve profitability. The nice thing is when we look at January’s results we hit the production targets and brand in Ocala. I think we’ve gone into fairly good detail on the outline of our plans and I’m confident in our ability to get it done because we’ve gotten it done before whether via Utilimaster especially vehicle we do know how to turnaround the business.

But again, it’s not going to happen overnight because as we move forward we do not want to destroy all the good that’s going on within emergency response. We have a great product line; we have strong distribution; we have very dynamic marketing. In Latin America, we have secured 134 orders over the past 24 months, very profitable orders, we’re very focused on a path that increased our presence within Latin America because the Spartan brand is sort after and is very profitable for us.

For SMI as Lori mentioned earlier, when we look at Q1 we expected to be a loss primarily due to emergency response, the vehicle group. We will make progress though when you look at Q4, when we look at the second quarter there will be continued progress, but again, we still expect a modest operating loss. We just got a lot of work to do some hurdles to overcome. By third and fourth quarter of 2014, to quote others should be in inflection point moving on the positive side. But I think we’ve got clarity, we try to provide transparency, we’ve got a plan, we are working to execute against the plan and we look forward to delivering a significantly better 2013, I should say 2014 than what we did in 2013.

Time for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Joe Maxa of Dougherty & Company.

Joe Maxa – Dougherty & Company

Good morning.

John Sztykiel

Good morning Joe.

Joe Maxa – Dougherty & Company

Thanks for all the details and on your plan and what you expect to do this year. I’m going to focus a little bit on the guidance more specifically on the margins. If we look at Q1, I mean it sounds to me based on everything given and all the put all the puzzle – pieces of the puzzle together that Q2 will have higher revenue because of the Reach shipments but maybe not gross margin because they haven’t quite broken that. I guess they are broken above zero but I’m wondering when do you expect that Reach to get to double-digit. Do you think you hit that in the back half?

Lori Wade

We believe double digits, excuse me my tongue is tied this morning, I apologize Joe.

John Sztykiel

You need some water for that.

Lori Wade

I do need some water. So if we look at Reach in the second half of the year we’ve definitely have seen improvement both in pricing and form reduction cost and its efficiencies. We believe it will get into that range of what we expect on [indiscernible] delivery and service margins to be. So we’ll be in that range, I would say somewhere between the 7% to 9% range.

Joe Maxa – Dougherty & Company

Okay. Then I wanted to mention to these fire trucks going to Peru $25 million in the back half of the year. What does the margin look like typical fire truck margin, are they better or are they worse?

Lori Wade

I would say that we have – we’ve priced it because to be profitable but there is a lot of unknowns in the country, we believe we’ve cut all the cost that we – it is currently priced at a nice margin compared to some of the domestic product.

Greg Salchow

And the other thing Joe is that these are 70 identical units of, and it’s a fairly basic specification so these should be much easier for us to build and to hold on to the margin than with some of the more complex units that have presented difficulties for us in the past.

John Sztykiel

Joe, this is John Sztykiel, end of the group and I’m glad Greg Salchow jumped in there to give people a point of perspective. The average common build today from a fire truck perspective is about 1.2 to 1.4, which in essence everyone is unique. So as we look at the – this export order the opportunity is, significant improvement from an operating efficiency perspective we’ve got a greater chance for that in Q4 versus Q3 because it’s not like you become wiser overnight.

Another point of perspective for the group what excites us so much about the export business when it comes to emergency response, North American emergency response business as I mentioned earlier almost every vehicle is different 1.2, 1.4. However, when you go globally and our core focus is Latin America, Central and South America and certain due extent selected areas in China but what’s interesting is they buy a lot of trucks just exactly the same.

So it’s a dramatically different business model, which is a great compliment. So as we look at emergency response and the emergency response vehicle group, we’re very focused in selected areas on global or export because what we love about it, it’s not like every truck is a different truck you build. You have no idea how nice it is to know you’re going to be building a group of something the same thing and that happens from engineering to purchasing to sales throughout the whole operations chain within the company. That’s a really good question Joe.

Joe Maxa – Dougherty & Company

Thanks a lot guys.

Operator

Our next question is from Robert Kosowsky with Sidoti.

Robert Kosowsky – Sidoti

Good morning, guys and Lori, how are you doing?

Lori Wade

Good. How are you doing today?

Robert Kosowsky – Sidoti

Pretty good. I guess first off, on the specialty vehicle side. Can you tell us, how we should think about margins on the [indiscernible] for next year because obviously the fourth quarter has really strong revenue and margin performance, but we have cost headwinds coming in so and also backlog is down. So I wanted to get a better sense of a) Kind of quarterly revenue kind of cadence or just directionally and then b) What kind of margins do we look out for the whole year because it’s been going at a pretty higher rate but I know you have higher investment coming as well?

Lori Wade

Hi, Rob, I’ll attempt to that. Well, that was a good question. So if you look at the specialty vehicle, we do believe our motorhome and our bus business to increase year-over-year. But again, as we’ve talked before that is more lower margin products if you look we also mentioned that our APA business is going to go down especially in the defense business which tends to be a much higher profitability product. We, Isuzu we believe is a nice profit that that is going to that’s going to grow.

But the thing is to remember that also in 2013, we also built 24 ILAV vehicles and we have no orders at the moment for any ILAV and we really, it’s a guessing game, if we’re going to get any orders or not. So I mean that’s a nice profitable business. And so those things if you can look what the growth in the motorhome and bus business at low margin losing some products for the defense APA to high margin. I would expect the margins to go down slightly and also remember that we had talked that we are going to reinvest in that product line as well. And so I would expect their operating income to be down over where we were in 2013.

Robert Kosowsky – Sidoti

Okay. Down significantly or just kind of down modestly because it seems to me like the third and fourth quarter were kind of relatively clean quarters from like after-market in ILAV standpoint or you have like 5.7% to 9.2% operating margin, I’m just wondering which is better?

Lori Wade

I would say we’re going to be on the lower I guess. We really truly have some reinvesting as John mentioned we have some products with which it grows, some age products, we really need to invest. And I would say in the millions of dollars to develop a chassis is really not cheap and so we really have some large investments to be made throughout the year in 2014.

John Sztykiel

And I think – Rob, this is John Sztykiel, when she quoted the term like millions of dollars it’s not like 5 or 10, okay? And it’s not like it’s all about one product line but we’ve got a great brand name. In the motorhome, we’re now developing one in the bus marketplace we’re very focused on developing a chassis for the delivery and service marketplace to leverage of the strength of the Utilimaster brand there. So we have a selected and again, its in line with our strategy drive redefining technology – redefining technology and innovation.

We’ve got some very, very selected initiatives which in-turn, we believe will both grow sales and operating income not so much in 2014 and 2015, which we simply need to do. So when you look at the specialty vehicle group one, we don’t have the ILAV units and I’ll be blunt. I don’t think the defense business is going to be real good for us because when the military wants to give away 13,000 of the existing MRAPs, it’s not like there is a lot of demand for new ones, okay, which actually that’s what the Wall Street journal wrote on a few weeks.

But second, we have to do some things to improve the product line in the motorhome and bus area to bring some innovation attractiveness, but also we’re very focused on bringing into the market a delivery and service chassis in the 2015 timeframe.

Robert Kosowsky – Sidoti

Okay. So delivery and service, so I guess if you look at market share gain opportunity, you might see something in 2015 on delivery and service and because you can kind of integrate that and so you already did but then –

John Sztykiel

From a chassis perspective, yes. From a body perspective, I believe we’ll do that in 2014, but from a chassis perspective you’re absolutely right.

Robert Kosowsky – Sidoti

Okay. But as far as like motorhome and bus maybe those are new products that it could be on platforms a couple of years down the road just because you got to develop it and then get the sale processed on right?

John Sztykiel

Yes, I’d say 18 months not two years. I mean, typically you’re looking at something that would show up in the March to July timeframe of 2015.

Robert Kosowsky – Sidoti

Okay. And then switching to the ERV side, I guess I understand and I appreciate all the issues that you’re having there but I thought that at least regarding pricing that something that was an issue from like almost like a year ago and we had already kind of addressed pricing and order complexity a few quarters ago and I’m just wondering why those improvements haven’t stuck or kind of what the hindrance has been because it seems like a few quarters ago you were talking about raising pricing, higher margin, backlog mix coming in and less complexity begin offered by the sale people and I’m just wondering the disconnect from what we heard three quarters ago four quarters ago and kind of where we stand today?

John Sztykiel

Well, one the pricing has stopped and one of the reasons, we believe Q4 or I should say Q1 of this year will be better than last year is because of some of the pricing initiatives which took place in 2013. We’re also going down a path of raising prices some more to give us some flexibility in the marketplace. I think if there is an area where we underestimated and again, that’s a very good question where we underestimated was the increased complexity of the trucks.

We have – what we call a complexity fee for every order that if it gets X amount of hours, to look for better term you’ve got a surcharge and simply that surcharge was not high enough in 2013 that was adjusted going into 2014. And so the negative is, we’re not going to see that in the first half of the year relative to improving our gross margin. We will see it in the second half of the year.

So if there is an area we underestimated was the increased complexity of the truck and how much it drove not just the increase in hours on the shop floor, but you typically have more rework after the vehicle is inspected when the dealer and the customer comes in that’s an area which we missed and I apologize for it. We learned from it feeling the pain from it, we’ve now adjusted for.

Lori Wade

Hey, Rob. This is Lori. I want to add one more piece of color to that. Let’s remember that we’ve been talking for the last several quarters that we’ve been increasing our prices in the first quarter of 2013. And as you may recall, we also have a backlog that is upwards of a year. And so with that it takes a while for that to get flush through that lower price product to get flush through our backlog and so we’re starting to see the benefit of that now.

Robert Kosowsky – Sidoti

Okay. That’s helpful. And then finally, on the redesign of the Reach where does it sit right now versus where you wanted to ultimately be, I know you’re trying to swap out certain components to be a little bit, I guess lighter or just kind of easier to assemble kind of what’s the update on how the truck looks now versus where you see it down the road?

Lori Wade

I’ll attempt that one on the price side. I don’t pretend to be an engineer nor did they want me to be an engineer. I would say as we talked about in our press release we’re still shooting for another $1000 per unit to come out of the cost. And all those things the goal would be to make it so it’s easier to manufacture along the way if you also get some reductions on the shop floor. So and plus, we’re also doing some pricing action so we definitely believe it to be going in the right direction. And we’re also – the unit is right now, in June we’ve got it going through durability test and once those things are validated we should have be able to get those put in production.

Robert Kosowsky – Sidoti

Okay.

John Sztykiel

One of the things and this is John Sztykiel to give you a little bit, of color relative to the region and Lori is right with the number and we do have to go through durability testing, because the reasons people pay 20% to 30% more for our each product is because it has significant durability versus other commercial vans out there. The other thing to know and this is what frustrates us, we missed about 400 Reach orders, simply because of this cladding issue, which would have been at a higher price. So while we expect and that would have been a Q4 order for us, so, part of the reason I bring that up is the marketplace, some of the larger fleets and now as we work with the smaller fleets and some of the larger fleets now that they are having the Reach product out there delivering – delivering packages and services, they like it, they absolutely like it. Our challenge is to not de-content it, but to improve the operating efficiency and reduce the build material cost base and make sure it has the durability, because it is clear even with the higher price that the market likes the vehicle.

So I thought Lori’s answer was absolutely spot on, we’ve got it will take some time, dollar numbers correct, but we do have to go through durability testing, because that is a key product differentiator of the Reach versus commercial, the Sprinter, the Ford Transit, etcetera commercial vans.

Robert Kosowsky – Sidoti

Okay, thank you that’s helpful.

Operator

(Operator Instructions). Our next question comes from Shivangi Tipnis with Global Hunter Securities.

Shivangi Tipnis – Global Hunter Securities

Hello, guys. Thank you for taking my call. I just wanted to know out of the $156 million backlog for ERV, how much was related to the new orders as against the production constrained, to clarify you’re talking the Peru order?

Lori Wade

Yeah, the ERV backlog is $156 million and it’s increased because of, partly because of the new orders as well as part because of the production constraint.

Shivangi Tipnis – Global Hunter Securities

So can you tell us, what was the new orders throughout Q4?

John Sztykiel

We have – it’s about $20 million – $22 million coming from the Peru order and I’m not sure that follow what the second part of your question was.

Shivangi Tipnis – Global Hunter Securities

Okay. I think that was my first question, so can you provide some color on the new orders that you have been receiving for ERV this half of 2014?

John Sztykiel

Well, it’s still fairly early and this is John Sztykiel relative 2014. One, I won’t say this is the orders for North America, the bid activity for us, is not just good just for us. Okay one of the things that data shows is that lot of states have surpluses today, like even California is talking about a $2 billion to $3 billion surplus. So what we’re seeing is some increased order active, I believe there will be increased buying for North American emergency response product for the industry, are we going to be back to the 5500 unit a year levels, 2005, 2006, 2007 now the answer is no. We could get out to the 4500, but I believe collectively as an industry and for emergency response vehicle, I’m very positive about the ability to increase or secure orders in 2014.

Next as I mentioned earlier we’ve got lot of momentum in Latin America, we’ve secured a 134 orders over the past 24 months. Next what’s nice is in house we’ve got 14 what’s called tracked to drawn aerials and those are the ones were actually you’ve got an individual in the back steering ladder and those are very high aerials, very, very long, we’ve got a very dynamic product, very expensive range from 800,000 to 1.4 million, very maneuverable for high cities.

On the books we should ship 14 of those this year there is a lot of activity in the marketplace for that that is a good sweet spot for us. So actually what’s interesting when we look at our operational plan to improve earnings for ERV one of our core focused items is track to drawn aerials, how do we improve the gross margins, but relative to your broad question, I would expect the emergency response market to be good not just for us, but for a variety of companies in 2014 in North America, I feel very positive about our opportunities in Latin America.

Shivangi Tipnis – Global Hunter Securities

Okay. Fair enough. Thanks for the color. So one question on the ERV pricing, this in continuation to the – your comments on the 2013 price increase. How much overall price increase did you do in 2013?

Lori Wade

I’ll take that, the price increase in 2013 if I understand the question, we did it on average about 3, 5.3% price increase across the broad difference for different products that are on average that’s about where we were.

Shivangi Tipnis – Global Hunter Securities

Okay. And just to know overall how the pricing would in 2014 is it going to be like a gradual over the course of 2014 or it could be just like one-time that you are – do we, can we do?

Lori Wade

Hey, John, would you take this question? So the strategy for price increase on ERV is that going to be a gradual every quarter are we going to do is that one-time event.

John Sztykiel

Well one you will see us follow similar to the automotives, the passenger car industry and let you seen them do extremely well and I know I’ve got a number of my honorable competitors and dealers listening to this call as well, but you will see smaller price increases, each and every quarter, in that way we’re able to transition it to the marketplace more effectively. So rather than one large price increase as Lori mentioned a few moments ago, you will start to see selected price increases on different models as we look into the marketplace. And one of the areas Lori’s group is focusing on is margin analysis by product line and where those selected price increases should be. I think one of the things which you will see as well, is you will see reduced discounting on multiples, etcetera, because when you look at our backlog of 10 to 12 to 14 months depending upon product line.

Now we’ve got the benefit of being more selective as to what we go after, the only negative is because, as I mentioned a few moments ago 10 to 12 to 14 months backlog again that’s not going to drive back, so Q1 of 2015. So really our strategy is to fold one selected price increases on gradual basis each and every quarter depending upon model, just like the automotive industry, which the consumer marketplace as accepted. And second a reduced discounting on selected multiples, etcetera due to the strength of our backlog.

Shivangi Tipnis – Global Hunter Securities

Okay. Thank you for the information. And my last question is on the Reach orders, so for FedEx its I’m doing the math correct it would be about 650 plus remaining order deliveries out of the 1900 is that, is that correct what I’m calculating?

Tom Gorman

Shivangi, this is Tom Gorman, that’s correct. We’re – we’re fortunate with the cladding issue that we’re picking up that they go on after the trucks finish. So at this point we’ve got several 100 units that we have work in process, so as the cladding is coming in we’re finishing those out and releasing to FedEx and we’re committed to finishing those up here in the first quarter in fact our last online start would be March 10.

Shivangi Tipnis – Global Hunter Securities

Okay. So all – so we should be expecting only FedEx orders to be completed by the first half of 2014?

Tom Gorman

Well, there may be some trailers, yes, what we currently, the current order that’s left over from 2013 should be primarily Q1 and there maybe some in April that will be out there, but nothing later than that.

Shivangi Tipnis – Global Hunter Securities

Okay. And the new orders that you’re talking about is that from an additional order FedEx or it’s from any new customer that you are talking about, the several 100 in H2?

John Sztykiel

We – right now we don’t have a firm order, we have an indication from the customer, and so and tell us firm order and we have the customer sign off, we won’t mention who it is.

Shivangi Tipnis – Global Hunter Securities

Okay. Fair enough. Thank you for answering my question. Thank you guys.

John Sztykiel

Okay. Operator we would have time for maybe one more question.

Operator

Okay. At this time, we don’t have anyone lined up in the queue. (Operator Instructions).

John Sztykiel

All right. This is John Sztykiel and I want to bring it to a close. First Greg Salchow, Lori Wade will be available obviously for calls and what have you actually I’m going to be getting in my current travelling to an IR Investor Relations conference, well I have to be presenting tomorrow morning with Greg. But one of the questions which shocked me or one of the questions which wasn’t asked which shocked me was why did it take so long to get into ERV and make some of the changes, which you’ve just talked about or we’ve just talked about.

And in a nutshell simply, we were making progress throughout 2013, we have positive forecast and plan for Q4. The moment October results did not come in the way we expected, we started to take actions immediately, we reset the Brandon production rate. We said okay we’re going to leverage the growth in Ocala and we because we have a new wise leader down there Dave Bailey who has grown the business substantially here in Charlotte, Michigan in fire truck chassis. Third, we’re going to build all the export 70, 22 plus million, $25 million worth of business in Charlotte.

Number four, we took very aggressive steps to reduce in a very wise way our cost base. Number five, we focused on reducing the associate turnover. Six, we started steps took actions to reassure the dealer base, because when you are not delivering product and you’ve got delivery to 10 to 12 to 14 months and these individuals and companies are relying on your product for their revenue income cash stream. You do not want to lose them, because they are doing a dynamic job.

We number seven we introduced a larger complexity fee on the trucks. Number eight, we reduced our discounting on selected bids etcetera. Number nine, we made some leadership structure changes which were announced yesterday. So, one of the things I want to illustrate was one we were making progress, we had a good plan at the moment October ahead and things were not inline where we expected. We implemented a number of steps to get this business moving in the right direction, because it is absolutely key we get this fixed again it’s not going to happen overnight, but the nice thing is we are moving the ball in the direction and we’ve got two very, very good operating groups that did a lot of things extremely well.

So in closing, I want to thank you for your time, I look forward to a more positive call with better results in Q1 and just wanted to say thank you very, very much and to all those partners, associates they did a lot of very good things. Thank you very much and to the emergency response vehicle group, we are simply going to get it done. I look forward to being a part of that team. Thank you.

Operator

Thank you everyone. The conference is now concluded. Thank you for attending, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Spartan Motors' CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts