Supreme Industries' (STS) CEO Mark Weber on Q2 2014 Results - Earnings Call Transcript

| About: Supreme Industries, (STS)

Supreme Industries, Inc. (NYSEMKT:STS)

Q2 2014 Results Earnings Conference Call

July 25, 2014 9:00 a.m. ET

Executives

Mark Weber – President and Chief Executive Officer

Matthew Long – Chief Financial Officer, Treasurer and Assistant Secretary

Analysts

Tristan Thomas - Sidoti & Company

Doug Dyer - Heartland Advisors

Ralph Marash - First Manhattan Co.

Operator

Welcome to the Supreme Industries’ Second Quarter 2014 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 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 Weber

Thank you, Emily. Good morning everyone and thank you for participating in today's call and your interest in Supreme Industries.

We released our second quarter and first half financial results after the market closed yesterday. A press release containing the results is available within the Supreme financials section of our Web site.

I will start my comments with an overview of operations, discuss progress made on our strategic initiatives during the quarter and review market conditions. Matt will cover more details on our financial performance after which we will open the call for questions.

After a difficult first quarter, our divisions returned to more normalized operations during the second quarter of the year. Net sales from continuing operations rebounded 34% sequentially from the first quarter reaching $71.6 million. This also represents a 4% year-over-year increase from last year's second quarter. The resolution of the cutaway chassis shortage and completing the sale of our shuttle bus assets in the first quarter allowed us to focus more attention on growing the core truck business during this period.

As we said on your April conference call, steps have been taken to reduce the impact of a future industry chassis shortage on our operations. These actions including, broadening the diversification of our OEM chassis supply base offering alternative products and increasing the size of our chassis pool. Chassis supply chain disruptions will always be a risk in this industry. It's just the nature of the business. However, we believe Supreme is much better positioned to withstand any future chassis supply disruption.

Concerning strategic initiatives. We recently introduced a new lightweight body panel for dry freight applications in our core work truck business that is exclusive to Supreme. The product is trademarked as FiberPanel HC, the HC standing for honeycomb. Work truck bodies built with FiberPanel HC will allow fleet operators and work truck owners to increase payload capacity, decreasing their overall cost per load. Additional features include a polypropylene honeycomb more which is moisture resistant and an external gel coated wall surface that does not contain rivets, thus greatly enhancing decal aesthetics.

Our engineers at the Tower Structural Laminating division built upon technology originating in the aerospace and automotive industries, creating a product that is lightweight and tough which can provide work truck operators a distinct economic benefit. This new material is now being offered in our van body and intercity truck bodies.

In addition to progress on product innovations, we have invested to extend and enhance the capability of our marketing and sales teams. Earlier this year we placed experienced executives to lead these respective functions with a mission to build a team of industry-leading professionals focused upon customer satisfaction. At the district sales level, we have supplemented our best talent by adding several new professionals to the sales team, which improves both our geographic coverage and sales capability. While this level of talent acquisition creates near-term integration and training challenges, we are convinced this will return significant future dividends for Supreme Industries.

Shifting to market conditions. We are receiving conflicting signals from leading economic indicator. New home construction data for June was released last Thursday by the U.S. Department of Commerce. We believe this is an important indicator because a significant number of our end-users work in or support that industry. Housing starts increased in the Midwest, northeast and in the west. However, construction in the south was so far below expectations that has pulled the consolidated national number down by a disappointing 9.3%.

These figures along with a decline in building permits for the past two months contributed to growing concerns in the housing market. Contradicting this was a report showing that confidence among homebuilders rose in July to the highest level in six months. On an additional positive note, non-residential construction and recent employment statistics were stronger than anticipate. Initial jobless claims revised this week declined to 284,000, indicating genuine strength in the labor market.

This should eventually translate into unlocking pent up demand in the housing market although it's difficult to say when this will actually happen. Truck industry data is also mixed depending upon the class size. According ACT Research, orders for medium duty trucks, defined as Class 5 to 7, were down 6% in June. The NCEA reports that through April, commercial medium duty sales are up year-over-year with cutaway sales defined as Class 2 to 4, remaining flat versus last year.

Regardless of the short-term noise in the various indicators, the sentiment for the balance of 2014 and 2015 concerning the work truck industry remains positive with more bias towards 2015. Entering the second half of the year, we anticipate the market will remain stable with more relative activity in the medium duty segments. As we continue to rollout innovative products and build a market presence that is stronger, Supreme will be well positioned to support the growing needs of our work truck customers.

At the end of the second quarter, our consolidated order backlog stood at $57 million, down 9.6% compared with $63 million at the end of last June. The 2013 backlog included $8.9 million of fleet orders that were placed later than normal during 2013. So actually on an adjusted basis, our backlog and retail business is up about 5% year-over-year.

Now I will turn the call over to Matt to provide more details on our financials after which we will open the call up for questions.

Matthew Long

Thank you, Mark. On a consolidated basis, sales were 4% higher this quarter over second quarter last year. In comparing first half 2014 to 2013, there was a modest change. However, the mix shifted in a meaningful way. As mentioned in the press release, last year the ordering patterns from some fleet customers came in much later than normal and as a result we ran a higher proportion of retail business in the second quarter and the first half of last year versus this year.

Ordering patterns from fleet customers normalized this year. As a result we had more fleet business in both the second quarter and six months period this year in addition to associated ramp-ups which negatively impact productivity. After adjusting for discontinued operation, last year's gross margins were quite strong at 21.1% for the quarter and 20.5% for the half. For the second quarter of this year, gross margin from continued operations was 20.5%, albeit down a bit from last year, we consider gross margin appropriate for this volume and mix of business. In the first six months, gross margin contracted to 18% of sales.

In addition to the change in product mix, first half 2014 margin was also adversely impacted by lost productivity in the first quarter related to the industry-wide chassis shortages and harsh weather impacting all facets of production and delivery. Operating income from continuing operations was unchanged year-over-year as $6.4 million in the second quarter of 2014 as well as 2013.

Income tax expense was down about $300,000 in this year's second quarter due to reductions in the company's state effective tax rate due to mix of income by state, increase benefit from our captive insurance company and other permanent tax deductions. This lowered our effective tax rate for the quarter down to 32.7% from 37.6% in last year's comparable quarter. As a result, income from continuing operations increased to $4.3 million, up from $4 million in the last year's second quarter.

At 5.9% of sales, income from continuing operations in the quarter reached its highest level since third quarter of 2012. Net income per diluted share increased to $0.25 from continuing operations this year, up a penny from $0.24 last year.

The shuttle bus business sale closed in the first quarter and consequently there is no impact from discontinued operations in the 2014 second quarter. In last year's second quarter, an after tax operating loss of $3 million was recorded for discontinuing shuttle bus operations. This equated to a loss of discontinued operations of $0.18 per diluted share. On a GAAP basis which includes the loss from the shuttle bus business in last year's results, Supreme earned $0.25 per diluted share in the second quarter, up from $0.06 per diluted share in the second quarter of 2013.

For the six months period, net sales were flat at $125 million, operating income was lower at $6.8 million compared with $10.4 million in the first half of 2013. Last year's operating income benefited from the higher gross margins we just discussed as well as a gain on the sale of real estate that wasn’t repeated in the first half of the year. The effective tax rate for the 2014 first half was the same as second quarter at 32.7%, down from 36% in last year's first half. Which we expect to remain in that range throughout 2014.

Income from continuing operations was $4.5 million in the first half, compared with $6.6 million in last year's same period. On an earnings per share basis, we are on $0.26 per diluted share in the first half of 2014 from continuing operations versus $0.40 per diluted share last year. Net losses related to the discontinued shuttle business operation are recorded in the first half of both years. The net after tax loss from discontinued operations in the first half of 2014 was $1.6 million or $0.09 per diluted share compared with a net after-tax loss of $3.4 million or $0.20 per diluted share in last year's first half. This resulted in net GAAP earnings per diluted share of $0.17 this year compared to $0.20 in the first half of 2013.

Turning to cash flow and the balance sheet. Supreme's financial conditions has strengthened considerably during the first half of the year. Better inventory and receivable management has further compressed our case conversion to levels not seen in the recent past. This helped push cash generated from operations up 38% to $6.2 million in the first half of this year compared with $4.5 million in 2013. At the end of June, we held $12.5 million in cash, up from $6.1 million at the end of the first quarter and $3.9 million at the end of last year. There is currently no outstanding balance on our revolver.

Total debt at the end of June stood at $9.3 million, which reflects only the term loan and puts us in a net cash position. We are expediting dealer payments where possible to capture discounts offered by them for early payment and strategically investing in the business where we believe we can earn better returns. We continue to optimize efficiencies at our manufacturing facilities, and as Mark just highlighted, we continue to invest in sales and marketing initiatives as well product innovations such as our new highly engineered honeycomb body walls.

Stockholders' equity increased to $77.6 million at June 28, compared with $74.1 million at December 28 last year. This equates to a book value per share of $4.74 at the end of June compared with $4.59 at the end of last year.

This concludes the financial summary. Now we will open it up to questions. Emily?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tristan Thomas with Sidoti. Please go ahead.

Tristan Thomas - Sidoti & Company

First question. I know you are much more confident about your chassis situation. Could you maybe comment on really in the short term with the Silverado and also the new F-150 kind of ramping up its production. You think that’s going to have a meaningful impact on the chassis available?

Mark Weber

Well, both GM and Ford in their 2015 changeovers. The Ford changeover is much less complicated than GM, where GM is putting the Colorado in the Evansville factory. But in terms of where we stand, we were able to work very closely with Ford and GM, more so with GM because of the complications of their changeover. And we are pretty confident that we have a very good inventory of 2014 product at our facilities on the ground, going into this changeover. And just as recent as this week, we continue to get sort of weekly updates from both OEMs, but closer with GM. And they are on track.

So we are not indicating any issues right now. We believe that our inventory of 2014 on the ground chassis cutaway obviously is such that we will not have an issue unless there is a huge surprise that GM is not anticipating at this point in time. And they are pretty far into that changeover. So they seem to be on schedule. That’s how they are relaying their progress back to us.

Tristan Thomas - Sidoti & Company

Okay. Great. Kind of jumping gears a little bit. You have done, STS as a company has done quite a bit in terms of internal improvements to the manufacturing process. Is there anything left you can really try to capitalize on?

Mark Weber

In the operations side of things?

Tristan Thomas - Sidoti & Company

Yes, operations side.

Mark Weber

Well, we have talked a little bit when we sold the shuttle bus assets. Here on our Indiana campus, we have a lot more space in material handling that is excessive and can be optimized. So I think there is opportunities clearly here in Indiana to continue to bring out some efficiency improvements. The other campuses are in pretty good shape. So I don’t see significant improvements in the other locations. But we will see more improvement here Indiana.

Tristan Thomas - Sidoti & Company

Okay. One housekeeping item. The retail backlog, was that 5% change (indiscernible)?

Matthew Long

Yes, that was so. The backlog from a year-over-year basis, even though in total it's down because of that fleet business that we took in the second quarter of last year which is typically a late order, unusual in timing. But if you take that out, the $8.9 million out of last year's backlog and all the other fleet business would have washed out of there by that point in time and has washed out this year. The retail side of the truck business is up 5% year-over-year.

Tristan Thomas - Sidoti & Company

Okay. And then just one final question. Could you maybe give a little clarity regarding what you are really doing to improve retail sales? Is it little more in the hands of the actual sales representatives on the ground or are we planning to come out with a overall sales strategy for specific product lines?

Mark Weber

Well, we are doing -- it's probably two or three points, the things that we are doing there. One is, as I commented, we are just making sure that we have got enough sales personal on the ground. You know I think that’s an asset that we have at Supreme, where we have a district sales team covering each of our territories and district sales managers out in the field eye to eye with customer. So we have added quite a bit of resources in that regards to make sure that we have coverage where our customers are located. So coverage was one.

The other thing we have done is, we have an express shipment program that allows a customer to either take a chassis out of our pool or if they have a chassis available, they can drop ship that chassis to us and with some very defined specifications, we can build and ship that product in ten days once we have access to the chassis. And we have program in the past but I don’t think we really marketed it and really pushed it. And what we are seeing with the market improving, execution speed is getting more and more important to the customers. So that’s a program that we have refreshed. We have gone out with a very aggressive marketing campaign, primarily on the light duty side but it also hits medium duty in some cases.

So there is two or three things that we are doing on that retail side to really try to gain some additional traction over where we have been.

Operator

Our next question is from Doug Dyer of Heartland Advisors.

Doug Dyer - Heartland Advisors

I think last year with regard to the marketing efforts you had talked about, getting closer to the customer. I know that you have got more people in the field but what are some of the things you are doing in terms of gathering data and getting to understand their needs better.

Mark Weber

Well, one of the things that we have done is we have gotten much more connected to the market information side of the NTEA, which is an association that serves the industry. I don’t think we had utilized that organization to the fullest extent in the past. We have also conducted some third party independent market surveys where we have gone out to poll customers to understand how they make decisions about purchases, likes and dislike. Their industry trends and so forth. That was concluded in the first quarter of this year.

The other thing that we are doing again is, our management team is spending a lot more time in the field in front of customers. And again, they are primarily the larger customers. We are sort of leaving our district folks to handle the smaller retail side but on the flee and leasing side, leasing being a growing segment because of the tax changes and so forth coming, we are spending a lot. We being the management team and the sales directors that are stationed in the districts. So spending a lot more time out in front of customers and trying to validate a bit, some of the market study and the market assessment work that we have done with face to face discussions with those customers.

So that’s kind of what we are doing to get a better, clearer picture of the market conditions and the preferences that key customers have about work truck products.

Doug Dyer - Heartland Advisors

Okay. And not to beat a dead horse but getting back to chassis supply. I can remember in the prior quarter I think GM had a ship hold problem, and once that problem was resolved did that put a whole bunch of chassis in the market at once?

Mark Weber

Well, it did. But one of the problems that they - - once the ship hold was lifted, they had issues getting the quantity of chassis actually delivered. And interestingly enough, we -- or I personally attended the recent GM and Ford product previews which they hold in the first half of the year each year. And both companies had several thousand vehicles staged waiting on transportation. Now that didn’t affect us. Once the ship hold was released, they were able to supply us with enough chassis to meet our short-term, I will say second quarter. And they had worked through that now but as soon as they opened the floodgates, the next bottleneck was the transportation industry. But that has been since resoled, but it took them pretty much the entire second quarter to flush all those chassis out through the delivery channel.

Doug Dyer - Heartland Advisors

Okay. And one final question. I believe on the prior quarter you had mentioned that there is a possibility of them allocating a different plant to production of chassis. Did that ever come through or are we just getting supply from the same plants?

Mark Weber

Well, on the cutaways there was no change. We are adding some full cab chassis product to our portfolio, which do come out of a different plant. So GM and Ford are still building their cutaway products at the same location. But I talked a little bit about that we are sort of diversifying our offering a bit and specifically what we are doing that is adding a cab chassis, so it's a full cab product to the market place.

Operator

(Operator Instructions) And our next question will come from Ralph Marash of First Manhattan Co. Please go ahead.

Ralph Marash - First Manhattan Co.

I want to ask you about labor. If you have been adding production people and if so, if you are okay on the skill sets of the people you are hiring or if you are having trouble finding the skills you need?

Mark Weber

Well, we just completed our fleet runs. And again, that’s more typical. So as you know Ralph, typically we get our fleet orders in third and fourth quarter and then we will produce those in the late first quarter, primarily wrap them up through the second quarter. And typically a we handle those fleet runs, we will bring in seasonal or temporary employees. And then as that work tapers off, lots of times we will take some of those temporary employees or seasonal employees that were high performers, let's say, and pull them into our retail lines which are more continuous around the year runs.

So we have -- obviously there is always an issue with finding skilled employees. Whether it's welders or skilled assemblers. And with the economy improving and obviously the jobless situation is getting lower and lower. So we are getting closer and closer to full employment, especially here in the [Elkart] (ph) area with the RV industry. But that hasn’t constrained us at this point in time. So we were able to complete our fleet runs. We ramped up with our employees and we are able to complete those on time. Our on time performance for our fleet customers this year was in the high 90s. In some cases, some customers, a hundred percent. So I think that right there indicates our ability to bring in labor and get that work done. And it's not a constraint in our retail business at this point in time.

Ralph Marash - First Manhattan Co.

Sounds good. Is there anything new on the competitive landscape, particularly with your smaller competitors?

Mark Weber

Not really. There has really been nothing in terms of significant adds or deletes on the competitive side.

Ralph Marash - First Manhattan Co.

Okay. And my last question is, an preliminary comments on the uptake of the news body panels?

Mark Weber

Well, we just rolled that out. We have got some stocking orders, have been sort of the initial response, primarily on the light duty side. We plan to start production of that here in the next 30 to 60 days. But we have got a lot of interest. We have some show trucks that are out going through the circuit right now. So we are anticipating as we sort of go through the summer with a lot of the regional GM shows and (indiscernible) and so forth that we will start getting some in customer traction with that. Right now the orders have primarily been stocking orders where dealers are wanting to get them on their lots so they can show them to customers.

Ralph Marash - First Manhattan Co.

And roughly what's the percentage differential between that and the plywood sandwich?

Mark Weber

The percentage...

Ralph Marash - First Manhattan Co.

I didn’t ask dollar because I know the size.

Mark Weber

Yes. Well, I would say, if you are looking at a 12 to 14 foot body in terms of the total body cost, it's probably 5%.

Matthew Long

Between 5 and 10.

Mark Weber

Yes, 5% of the total body cost. And you are picking about 10% to 15% payload benefit on that same body.

Operator

(Operator Instructions) I am showing no further questions. This will conclude our question-and-answer session. I would like to turn the conference back over to Mark Weber for any closing remarks.

Mark Weber

Thanks, Emily. If there are no other additional questions, we will leave you today with two thoughts. First, Supreme is gaining momentum. After a challenging first quarter, supply chain issues have been mitigated and internal distractions associated with the shuttle bus business has been eliminated. Management's time is now entirely allocated to profitably growing the business in a systematic and sustainable manner. We have a number of initiatives underway to provide innovative solutions and speed of execution for our customers as well as the addition of new sales professionals in key markets. All of this is aimed at driving top line growth.

Second. Supreme is a much different organization than it was just a few years ago. Today, we are more sophisticated from an operating standpoint with better alignment and focus on initiatives that bring value to our customers and improve our execution capability. The improved execution is visible in some of our operating improvements such as the net margin and cash flow as highlighted by Matt. We have initiated a strategic planning process that will result in a customer-centric roadmap to achieve our profitable growth agenda.

The employees of Supreme have established a great foundation that has allows us to celebrate 40 years of success. And I think them for that accomplishment. We intent to build on that 40 year foundation with a focused value proposition that will resonate with both customers and our employees. Success in the market combined with crisp execution will allow us to create more satisfied customers which in turn should increase shareholder value.

I think everyone for participating in today's call and look forward to sharing our continued progress when we report our third quarter results in October.

Operator

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

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