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Supreme Industries (NYSEMKT:STS)

Q4 2013 Earnings Call

February 14, 2014 9:00 am ET

Executives

Mark D. Weber - Chief Executive Officer and President

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

Analysts

Tristan Thomas - Sidoti & Company, LLC

Doug Dyer - Heartland Advisors, Inc.

James R. Wilen - Wilen Investment Management Corp.

Operator

Good morning. Welcome to the Supreme Industries Fourth Quarter 2013 Conference Call. Some statements made on today's call may be predictive and are intended to be made as forward looking within the Safe Harbor protections 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 that could cause results that differ materially. Important factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in the company's reports on Forms 10-K and 10-Q and news release filed with the Securities and Exchange Commission. Audio of today's call will be archived and available for 30 days on Supreme's website.

At this time, I'd like to introduce your host for today's call, President and Chief Executive Officer, Mark Weber; and Chief Financial Officer, Treasurer and Assistant Secretary, Matthew Long. Please go ahead, Mr. Weber.

Mark D. Weber

Thank you, Ed. Good morning, and thank you for participating in today's call and for your interest in Supreme Industries. Our fourth quarter earnings press release was issued after the market closed yesterday and is available within the Supreme Financials section of Supreme's website.

I will start with a review of our fourth quarter financial results. As expected, net sales increased sharply compared with last year's fourth quarter. This was due to fleet orders being awarded later in the year than usual, chassis delays in the third quarter of 2013 and better retail demand for trucks.

Net sales were $72.5 million in the quarter, which is a 26% increase from the $57.7 million in net sales generated in the final quarter of 2012. Increased volume and a larger portion of truck business resulted in a higher margin product mix and better overhead absorption compared with 2012. This compounded the positive impact we've experienced from ongoing manufacturing process improvements and resulted in a 200 basis point expansion in gross margin to 15.2%, up from 13.2% in the same quarter last year.

On a GAAP basis, net income increased significantly reaching $1.7 million in the fourth quarter, a nice improvement from the $384,000 booked in the same period during 2012. GAAP earnings per share for the quarter improved to $0.10 per diluted share, up from $0.02 per diluted share last year. Since both periods included some unusual items related to tax rates, last year's legal settlement and exiting the shuttle bus business, we have, again, included supplemental results in the press release. In our view, identifying these items in each periods' quarterly and full year reported results will help clarify where we are heading from an operating perspective.

Adjusting for these items, net income improved to $2.1 million or $0.13 per diluted share, up from $800,000 or $0.05 per diluted share in the fourth quarter of 2012. I will refer you to the reconciliation provided in yesterday's press release for more specific information on the supplemental results.

For the full year of 2013, sales of $282 million were essentially flat with last year's $286 million. As was the case for the quarter, lower sales of shuttle bus, specialty and armored products due to the budget constraints in the governmental sector were offset by higher work truck volume.

Reported GAAP net income in 2013 was $6.4 million or $0.39 per diluted share, down from 2012 reported income of $11.8 million or $0.73 per diluted share. After taking into account the impact of the same unusual items that I just highlighted, adjusted net income improved more than 30% to $11.2 million or $0.68 per diluted share, up from $8.6 million or $0.53 per diluted share in 2012.

Now let's move to an update on our 2013 business improvement initiatives focused on reducing order to cash cycle times, on-time delivery and continued margin improvement. Consolidated gross margin expanded by 136 basis points during the full year and reached 16.6%. This marks the highest annual gross margin percentage for Supreme since 1998. Future expansions in gross margin percentage is anticipated to moderate versus the recent increases. Therefore, profitable growth will become our primary focus.

Capital investments during 2013 concentrated on manufacturing cycle time reductions and in-process quality control enhancements for both standard and custom products. Although our products receive high marks in quality and durability, we believe it's important to drive continuous improvement in the areas critical to our customers. Our on-time delivery to customer request date has improved over 5 percentage points during 2013, which coupled with continued lead time reductions, will remain an important focus going forward. All of these provides the ability to respond quickly and efficiently to changing market conditions and will have a positive and lasting impact as we grow our work truck and specialty vehicle businesses.

Excluding the shuttle bus business, our order backlog ended 2013 at $71.5 million, up 28.4% as compared to the end of 2012. Positive industry demographics such as the aging midsize truck fleet in North America increased construction activity and a more typical fleet ordering cycle are all contributing to the improved backlog position. Although we have internal capacity to support stronger demand, some chassis manufacturers are experiencing extended lead times on Class 3 cutaway full chassis.

The industry-wide delivery delays from the chassis suppliers are projected to impact sales during the first half of 2014 as they address supply chain constraints and national fleet demand concentrated in the first quarter. We have internal resources dedicated to managing chassis deliveries and are working closely with our suppliers to minimize this near-term constraint.

The divestiture of our shuttle bus business that we announced on December 31 is proceeding on schedule. We are pleased with the level of interest exhibited by potential buyers and have entered into more detailed negotiation with multiple buyers. We will release more details once a definitive agreement is mutually executed.

Petroleum business, which we will retain, aligns well with our existing focus on armored and specialty vehicles, all of which will receive more focus once the shuttle bus sale is completed.

With that, I will turn the call over to Matt to provide more details on the product categories and the financials. After which, we will open the call up for questions.

Matthew W. Long

Thank you, Mark. As Mark mentioned at the beginning of the call, lower sales of buses and specialty vehicles were offset by growth on the truck side of the business for both the quarter and the full year periods.

For the full year, truck sales increased 7% and accounted for 80% of the year's consolidated sales before adjusting for the shuttle bus sales. Sales of bus products declined 23% in 2013 versus 2012, with shuttle bus representing the majority of that decline. Sales of armored vehicles declined 26% in 2013 from last year and made up the remaining balance of our vehicle sales.

Selling, general and administrative expenses increased year-over-year as a percent of sales to 12.1% from 11% excluding shuttle bus legal settlement and related expenses, mainly due to higher commissions on more profitable sales and other employee costs such as health care, wage increases and selective headcount ads.

Interest expense declined to $88,000 this quarter from $242,000 in the fourth quarter of 2012, and $625,000 for the full year down from $971,000 due to the overall lower debt levels during the year.

For the past few years, we have been discussing our return to profitability in the accompanying return to statutory tax rates. 2013 marked the return to normalized rates and we recorded an income tax expense of $2.9 million compared with an income tax benefit of $300,000 in 2012. Even though we had pretax earnings in 2012, the income tax benefit was due to the reversal of a tax valuation allowance.

Moving forward, tax expense is expected to contain much less noise and will be more comparable on a year-over-year basis. The tax impact on net income and net income per share is broken out on the reconciliation table included with yesterday's press release.

Total debt was reduced by $4.4 million during the year driving the reduced interest expense discussed earlier. Net cash generated from operations increased by 8% to $13.5 million as we focused on our cash conversion cycle. The cash generated will use to reduce debt loss, selectively investing in improving operations reducing our debt to $9.7 million from $14.1 million in 2012 when capital expenditures related to our facility upgrade program peaked.

Stockholder's equity increased more than 10% to $74.1 million at the end of the year compared with $67.2 million at the end of last year. This equates to a book value per share of $4.59 compared with $4.20 at the end of 2012.

As Mark indicated, the negotiations on the sale of shuttle bus business continues, we anticipate presenting comparative results of the shuttle bus business as discontinued operations starting with the first quarter of 2014 filing reflecting the potential of the company. We're excited to continue pursuing our strategy to increase shareholder value in 2014.

With that, let's open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tristan Thomas of Sidoti & Company.

Tristan Thomas - Sidoti & Company, LLC

First question, just regarding the gross margins over the course of the year. First half were at about 17.5%, second half about 15.5%. I know in the third quarter we had some issues with the chassis delays. What are you seeing as a more normalized rate moving forward? What do you expect?

Matthew W. Long

Tristan, that's probably a question we're not going to answer just because it would be more predictive of the future. Certainly, part of the impact to the margin has been impacted by the shuttle bus business. As you know, that's been a fairly large drag on the company this year.

Tristan Thomas - Sidoti & Company, LLC

Got you. And then another question I had. The preliminary order numbers, December truck orders looks very good, January is looking good so far. How much value are you seeing kind of trickling down to you and what's your overall take on the industry for 2014?

Mark D. Weber

Well, I think we'll probably looking at the same numbers that you're looking at, as well as we watch housing starts as a leading indicator and sort of the recent add, we're projecting a 20% increase from 2013 to 2014 on housing starts. So we're pretty optimistic on the market conditions. I guess, that's good and bad. The good news is the demand is out there, as I indicated. There's a near-term shortage of cutaway chassis. One situation is a supplier-related issue where a supplier went out of business. It's affecting Ford and then it's just sort of a demand peak situation with GMC here in the near term. So we're a little constrained there, that's temporary. But we're pretty optimistic in terms of the market conditions looking forward.

Tristan Thomas - Sidoti & Company, LLC

Okay. And then one final question. You expect 2014 to return to a more normalized order cycle for you guys as opposed to how 2013 was a little abnormal, correct?

Mark D. Weber

Yes, we actually even saw that at the -- in the fourth quarter of last year in terms of the fleet buying cycle. So we are expecting a more normal cycle. I guess, it's always possible that a fleet customer who ordered at the end of last year could come in and increase the order or they could place an order in the second half of the year, but that's not typical and we don't expect that at this point in time.

Operator

Our next question comes from Doug Dyer of Heartland Advisors.

Doug Dyer - Heartland Advisors, Inc.

Last year, we discussed you making some changes with your sales focus, you believe that currently you're a little bit too dealer-centric and you're talking about going closer to the end customer. How are those -- how is that initiative progressing?

Mark D. Weber

Well, we're moving forward. We've done a couple of things. We've brought on some outside talent in the marketing area, and actually even a product manager on the truck side. So we are continuing to work to get a better understanding of the end user and their expectations on what we can do to help them be successful in the markets that we serve. We're also working pretty hard on the sale side as well, in terms of improving our capability there in our salesforce. And also making sure that we've got a comprehensive sales foot print out in the marketplace. So I would say, we're making progress. There's a lot of opportunity. We're pretty optimistic about that opportunity, and I think that coupled with the overall demand in the marketplace is going to be a positive -- have a positive impact on the organization's performance.

Doug Dyer - Heartland Advisors, Inc.

All right. One more question. The proceeds that you could potentially receive from the shuttle bus division, what would you do with those proceeds?

Matthew W. Long

Well Doug, there's probably a number of things that we would consider but certainly as it stands right now, we're not planning on paying down our debt. We've got a term loan out there that's kind of our base capital, so we would probably still be assessing what we can do to enhance increasing volume of trucks in the specialty vehicle side.

Operator

[Operator Instructions] Our next question comes from Jamie Wilen of Wilen Management.

James R. Wilen - Wilen Investment Management Corp.

If I could just follow-up on the last question. You said you wouldn't pay down debt but you'd be doing some things to increase sales at your various businesses. Could you talk about that answer a little bit?

Matthew W. Long

Well, Jamie, our debt that we have right now is a term loan. The idea is to keep that as our base capital as opposed to going to all cash. We don't have any plans necessarily as far as investing in building some on, this is leaving us the flexibility to do whatever we see fit to improve the -- whether it's some margins or look at incremental sales.

James R. Wilen - Wilen Investment Management Corp.

Or acquisitions? Or is that not part of the preview at this point?

Matthew W. Long

I think that's probably always out there. The question is do we have our house in order well enough that we're ready to take something new.

James R. Wilen - Wilen Investment Management Corp.

If you could go back and look at truck margins historically and breakout where the bus business obviously impacted overall company margins. If you could say 2010, 2011. What were truck margins historically? Again, we're not looking in the future but what have they really been in the past?

Matthew W. Long

I would say they were probably somewhere in the low or high single-digit area, probably a couple of years ago.

James R. Wilen - Wilen Investment Management Corp.

And today, again, you say you won't look forward but is 20% a realistic gross margin to achieve in this business?

Matthew W. Long

Well, certainly we're heading towards that. Over all as the company, we keep talking about getting close or moving better until we get back to 1998. 1998 levels were 17%. So I think it's realistic. We got to keep focusing on doing what we're doing, which is continuing to manage the business, look for ways to work costs out. So do I think, overall, we should get to 20%? Hard for me to say. Certainly, I think we'll get to the 17% level on a consolidated basis.

James R. Wilen - Wilen Investment Management Corp.

But when you look back in 1998, that 17% was net of extremely low margins on the bus side?

Matthew W. Long

I would have to say that's probably true. Yes.

James R. Wilen - Wilen Investment Management Corp.

As far as chassis availability, this is not unique to Supreme, I assume it's industry-wide and your major competitors will deal with the exact same thing, or do they have better access to chassis than we do?

Mark D. Weber

Well, let me comment on that, Jamie. The primary issue is related to the cutaways, which is Class 3 in the pool chassis. So it is an industry-wide issue. Some of our competitors have a higher mix of pooled chassis-related or cutaway business or lower. So it sort of depends. It will affect everybody across the industry. Ford's affected by it, they've got a constraint issue on their 6.8-liter diesel engine, which is affecting their output. And GMC, it's just a matter of right now they've got quite a bit of fleet demand that as they go through their priority, they build fleet demand first, then they service their dealers, and then they service the bodybuilders through the pool program. So we're still getting our high share of the pool chassis availability. And eventually, once they work through the fleet demand here in the first quarter, then our availability will return back to normal levels. So it is industry-wide. We're working very closely. I was on a call yesterday with Ford and making sure that we're staying very close to that and maximizing our opportunities.

James R. Wilen - Wilen Investment Management Corp.

So if there's a chassis delivery problem, does that mean the sales are deferred or they could evaporate?

Mark D. Weber

Well, if it's somebody who wants a cutaway product on a cutaway chassis, again, everyone in the industry is affected by it. So I don't think it's going to change the demand. There's not really an alternative. There's not a substitution product out there that somebody could go to. So I don't think it's going to delay the sales obviously. But I don't think it's going to change the fundamental demand.

James R. Wilen - Wilen Investment Management Corp.

Okay. And the last, the late fleet order that you received last year, did this company order any trucks in the beginning of the year on the normal fleet season last year, and are they ordering in this year's fleet season?

Matthew W. Long

So to answer your question, as you may recall, at the end of 2012, really none of the fleet purchasers put orders in at the end of the year, which was abnormal, as you know our business as well as we do. What happened then, early in 2012 was one of the 2, put in probably a soft level of orders and then ended up buying throughout the first half of the year once they saw the market was stabilizing. The one that put the order in, in the second half of the year did in fact put in orders for the upcoming years. So both of them are now in 2013, the backlog. So we've gone back to our normal process. I don't know if that answer your question specifically.

James R. Wilen - Wilen Investment Management Corp.

It does. And lastly, as far as the bus division, have you booked any expected loss on disposal within that fourth quarter number, or may we have a gain or loss moving forward on the sale?

Matthew W. Long

We have not. Because we don't have a definitive agreement at this point, Jamie. So it would be premature for us to start booking anything because we don't really know where we're at yet.

James R. Wilen - Wilen Investment Management Corp.

Okay, can you tell me the net book value of that business that we're selling?

Matthew W. Long

I'd prefer not to do that at this point. When we have the announcement, which we hope will be in the next coming days, we'll be able to explain the rest of that.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Weber for any closing remarks.

Mark D. Weber

Thanks, Ed. This year marks Supreme's 40th year in business. Over the past 4 decades, our focus has always been on manufacturing the highest quality products and providing the best customer service in our served markets. During the past 3 years, improvement initiatives have successfully transformed Supreme into a leading manufacturer of work trucks, trolleys, armored and specialty vehicles with a nationwide footprint. We now have best-in-class manufacturing facilities, designed to efficiently build high-quality products with dependable on-time delivery. I want to recognize the dedicated employees at Supreme who have made this milestone possible through their commitment to serving our customers. As we enter 2014, we are optimistic concerning our organizational momentum, a sharper focus on core markets and opportunities to leverage our value proposition to accelerate profitable growth. Thank you for participating in today's call. We look forward to sharing our continued progress with you when we report our first quarter results in April.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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