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Supreme Industries, Inc. (NYSEMKT:STS)

Q1 2014 Earnings Conference Call

April 25, 2014 9:00 AM ET

Executives

Mark D. Weber – President and Chief Executive Officer

Matthew W. Long – Chief Financial Officer, Treasurer and Assistant Secretary

Analysts

Tristan M. Thomas-Martin – Sidoti & Company LLC

Operator

Welcome to the Supreme Industries’ First Quarter 2014 Conference Call. As a reminder, today’s call is being recorded. 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 to 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 releases filed with the Securities and Exchange Commission. Today’s call will be archived and available for replay on Supreme’s website for approximately 30 days.

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, Gary. Good morning and thank you for participating in today’s call and for your interest in Supreme Industries. Our first 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 the quarter’s operating and strategic review and turn the call over to Matt for the financial detail. After that, we will open the call for questions.

A major accomplishment for Supreme was completing the sale of our shuttle bus assets during the quarter, which was executed in less than 90 days of announcing our decision to exit that business segment. Due to the excess manufacturing capacity in the shuttle bus industry, the interested buyers did not offer to acquire the related land and buildings. The silver lining in this development is that it allows us an opportunity to further optimize the layout of our Indiana manufacturing campus and release underutilized assets.

The transaction closed at the end of March and we realized the small gain on the sale of approximately $150,000. We manufactured an invoiced more finished bus inventories than anticipated from the time we announced the deal until closing, and also managed our associated raw material inventory to a lower level than initially projected. This resulted in net proceeds from the sale of $3.9 million; approximately $3.1 million lower than originally projected. The proceeds will be utilized to support new product development and efficiency improvement initiatives targeted to both impact top line and the margins. The shuttle bus business has now been reclassified as discontinued operations and that unit results are reflected in the $1.6 million loss from discontinued operations we reported last night.

We are pleased to have expedited process, but financing a suitable buyer reaching a neutrally acceptable agreement, and then closing the deal all inside of 90 days. I would like to command our financial and operating teams for pulling together to get this deal successfully executed in behind us.

Now our undivided attention can focus on growing the core truck and specialty vehicle business segments. First quarter sales were well below our expectations as margins and earnings from continuing operations were negatively impacted by OEM cutaway chassis shortages, we could demand for armored products and extreme weather conditions.

The cutaway chassis shortages I mentioned during our February conference call deteriorated significantly in early March, due to an air bag defect resulting in a stock delivery notification from our major supplier, that if you escalated the supply interruptions impacting our retail cutaway sales delayed fleet productions schedule from March and impacted manufacturing efficiencies.

The stock delivery status was clear in early April and cutaway chassis deliveries have improved over the last couple of weeks. I’ve been personally involved with the executives of our major chassis suppliers to mitigate the impact of this industry-wide cutaway chassis constraint. We have already taken actions to increase the diversification of our OEM chassis supply base, initiate the offering of alternative products and will increase the size of our chassis pool going forward. both General Motors and Ford have light-duty 2015 model year releases scheduled for this summer and we are working closely with both suppliers to ensure we have pool chassis inventory in place to bridge these events.

The work truck industry will remain depended upon a reliable supply of OEM chassis. so that continues as on going business risk. However, we are taking multiple actions to reduce that risk going forward. As we have previously discussed, the governmental budget constraints have reduced the market demand for security related armored products. from a year-over-year comparison, the backlog of our orders for armored products at our SSB division was down 27% at the end of 2013 that lower backlog translated into lower year-over-year sales of higher margin armored vehicles in the first quarter of 2014.

The SSB backlog at the end of March had recovered from the prior decline and will result in a more normalized sales volume over the next quarter. The extreme winter weather conditions, most of us endeavored for the last several months for shutdowns at five of our eight manufacturing facilities during the first quarter. Over time, we utilized to recover loss production, but we clearly experienced negative variances in manufacturing efficiencies in direct labor and utility cost. While we made progress on our strategic initiative during the quarter, we clearly did not execute on the day-to-day business as required. We are taking actions to reduce the future risk related to chassis and broaden the customer base at our SSB division.

Concerning the work truck market, we follow housing starts as a leading indicator and that index was up approximately 20% year-over-year in 2013 and projected at similar growth levels for 2014. That translated into an 8.6% growth in commercial, straight truck chassis sales for 2013 and market forecast for 2014 year-over-year growth are in the range of 6% to 7%.

In summary, the demand for work trucks appears steady with a positive slow on the growth curve, projected for the next several quarters. The order backlog at the end of the first quarter at $74 million, up from $72 million at the end of December, and up from $69 million at the end of the first quarter of last year. That represents the year-over-year order backlog increase of 8% on work trucks and a 30% increase in armored products.

Before I turn the call over to Matt, I want to provide some insight into our view of the primary growth levers; we will focus on during the next several quarters. Work is already underway to capture, market and customer base analytics to help identify unreserved markets, new product opportunities and adjacent market potential. While we are in the early stages of developing this intelligence, we are mobilizing efforts around new product development, adjacent markets and geographic expansion opportunities.

I also wanted to note that we hired a new Vice President of sales during the first quarter and also added a Vice President of marketing. These leadership additions will complement the existing management team as we refine and accelerate our focus on profitable growth.

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 for questions. Matt?

Matthew W. Long

Thank you, Mark. First quarter net sales came in at $53.4 million, compared with $56.4 million in the first quarter of 2013. As Mark mentioned earlier, lower sales of specialty vehicles during the quarter accounted for the majority of decline in net sales. Overall, truck sales were essentially flat, but we experienced higher fleet demand, offset by lower retail demand and large changes within product lines year-over-year. Our ability to offset the lower sales of specialty vehicles with incremental fleet demand was curved by availability of chassis, as Mark described earlier.

Gross margin from continuing operations during the first quarter decreased to $7.9 million or 14.8% from $11.1 million or 19.7% in the last year’s first quarter. The large portion of the margin in that versus last year was due to decline in higher margins specially vehicle sales. The margin was further impacted negatively versus the prior year quarter due to the mix of fleet versus retail business and a mix of truck shipments as the end users’ purchases changed year-over-year.

Additionally, we missed the number of fleet retail shipments due to the chassis constraints discussed earlier and their associated margin. This erratic flow of the light-duty chassis also cause unplanned line interruptions and extreme weather conditions negatively impacted our ability to manage our workforce efficiently along with that normally high utility cost, given our stronger backlog, inclusive of sales impacted by chassis constraints, we should see an improvement in both revenues and margins.

Total selling, general and administrative expenses declined 4% year-over-year, which is in line with the lower sales volume. Other income decreased 700,000 primarily due to a realized gain on the sale of real estate during the first quarter of 2013 that was not repeated in 2014. Interest expense declined to $76,000 in this quarter from $98,000 in the last year’s comparable quarter on lower average debt balances.

Beginning with this period, we are now able to compare our after-tax results on an apples-to-apples basis. Supreme’s effective tax rate normalized in 2013 after several years of recorded tax benefits related to prior period operating loss carryforwards. Income tax expense was $108,000 in the first quarter of 2014, with an effective rate of 32.4%, compared with $1.3 million last year, which was at a similar effective rate of 33.2%.

Net cash used in operations in the quarter was $900,000, compared with the $300,000 of cash used in operations last year, impacted by the losses on the shuttle bus operations. Working capital improved $1.4 million to $36.2 million, since the end of 2013, while debt remained essentially flat at $9.5 million. Stockholders’ equity stood at $72.9 million at the end of the first quarter, compared with $74.1 million at the end of last year. This equates to a book value per share of $4.50, compared with $4.59 at the end of 2013.

And with that, let’s open the call for questions. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Tristan Thomas with Sidoti. Please go ahead.

Tristan M. Thomas-Martin – Sidoti & Company LLC

Hey, guys. How are you?

Mark D. Weber

Good morning.

Matthew W. Long

Good morning, Tristan.

Tristan M. Thomas-Martin – Sidoti & Company LLC

A couple of questions, first off, as far as they’re still experiencing a place getting their 6.2-liter diesel engine?

Mark D. Weber

We don’t really buy too much in that area. I think they’ve got that issue for the most part behind them, albeit they are running at capacity based on what they’ve told us, until they do the 2015 changeover, but those products are available. we used to have primarily on the shuttle bus side, not so much on the truck side.

Tristan M. Thomas-Martin – Sidoti & Company LLC

Okay. And then I’m assuming you’re referring to GM with the [stop delivery] (ph) status, are they – were they in relational capacity?

Mark D. Weber

I didn’t understand the question, again, Tristan.

Tristan M. Thomas-Martin – Sidoti & Company LLC

I’m sorry where is GM’s relational capacity for a cutaway chassis?

Mark D. Weber

Yes. they build the cutaways at Wentzville, Missouri. and again, that plant is running pretty much at capacity, primarily because of sort of two issues, one, that impacted us. They had unusually higher-than-expected fleet orders in the first quarter, like fourth quarter, first quarter. And then they also had that campaign that affected the dual air bag. So that caused them some line stoppages. so they’re clearly behind, they’re fundamentally sort of running at capacity at Wentzville. And they have a line changeover coming up there in July, as well.

Tristan M. Thomas-Martin – Sidoti & Company LLC

Okay. Then how much, when they shifted to Colorado, what should that do to the available capacity, I mean if you could just quantify that, is that kind of a cutting off or what’s a good way to look at it?

Mark D. Weber

Well, that’s where it will go and have an impact, because they run the cutaways at that same plant. they’re bringing the Colorado, as you said on in July. We’re working again, as I indicated in my comments with – very closely with GM. We’re working with their – I’m directly involved with their VP at commercial sales and all other planning people. And we are working to put inventory in place to bridge that. There is clearly going to be an impact, I think for a period of time, they’ll probably lose within our tap or some level of production as they start up with the Colorado. But we’re working closely with them to build an inventory plan that bridges that event.

Tristan M. Thomas-Martin – Sidoti & Company LLC

Okay. Do you have a new; I guess almost a new standard for base chassis on hand (indiscernible)?

Mark D. Weber

Well, we’re looking at a couple of things we’re doing. One is, we buy pool chassis from Ford and GM, and some other suppliers are coming into that space. So, we’re looking at trying to do diversify our concentration there a bit. so we have more choices, and we are also looking at increasing that pool level as we go forward. So with – we’ve got a handful of things going on there.

Tristan M. Thomas-Martin – Sidoti & Company LLC

Okay. So good work, one final question, if you can maybe just go into a little more detail of what exactly you’re going to do to optimize your Indiana campus?

Mark D. Weber

Well. As I indicated, when we sold the shuttle bus business, the plan and some of the acreage associated with that was originally discussed, but the interested buyers did not want to acquire those assets. So that gives us quite a bit of the latitude here to optimize, because we do have truck operations to know the campus here; both on north and the south side of statement 38 here. So, we see an opportunity to probably move those truck operations and consolidate into a tighter net layout.

Tristan M. Thomas-Martin – Sidoti & Company LLC

Okay, got you. Thank you.

Mark D. Weber

Thank you.

Operator

As I’m showing no further questions. This concludes our question-and-answer session.

I would like to turn the conference back over to Mark Weber for any closing remarks.

Mark D. Weber

Well, thanks, Gary. Just to summarize, we are pleased with our progress on strategic opportunities and feel that the actions initiated during the first quarter are having a positive impact on the issues that affected our operating performance. Thank you for participating in today’s call. And we look forward to sharing our continued progress with you when we report our second quarter results this summer.

Operator

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

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