Supreme Industries' (STS) CEO, Mark Weber on Q4 2015 Results - Earnings Call Transcript

| About: Supreme Industries, (STS)

Supreme Industries Inc. (NYSEMKT:STS)

Q 2016 Earnings Conference Call

February 19, 2016 9:00 am ET

Executives

Mark Weber - President, Chief Executive Officer

Matthew Long - Chief Financial Officer, Treasurer, Assistant Secretary

Analysts

Tristan Thomas - Sidoti & Co.

Jamie Wilen - Wilen Management

Louis Moser - Mayfax Investors

Operator

Greetings and welcome to the Supreme Industries Inc. Fourth Quarter 2015 Earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two.

Please note 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 its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual 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. Please also note today’s call is being recorded.

At this time, I’d like to introduce your hosts 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, Austin. Good morning and thank you for participating in our conference call to discuss Supreme’s 2015 fourth quarter and full year results. A press release disclosing our results was issued Thursday after the market closed and is available within the Investor Relations section of our website.

We are certainly pleased with our results for the fourth quarter and full year of 2015, which reflect our progress in pursuit of profitable growth and enhanced shareholder value. As a foundation for our discussion today, I think it is beneficial to review the progression of strategic initiatives that we have executed in recent years to increase shareholder value, such as restoring profitability as we exited the Great Recession, which required enhanced managerial controls, data-driven pricing discipline, focused cash flow management, and improved organizational productivity. We invested in people, technology and facility improvements, upgrading our manufacturing capability to more efficiently deliver high quality products with best-in-class lead times.

Product lines were evaluated for alignment with our strategic direction, which resulted in the decision to exit the distressed shuttle bus business in early 2014 and focus on growing our core truck business. As internal processes were improving, we also invested in marketing intelligence which allowed us to define a customer-centric value proposition which continues to resonate with channel partners and end users. Most notably, we invested heavily in customer-facing assets, supplementing our best sales resources with additional talent, training and technology to increase the leverage of our channel strategy.

These initiatives combined with the strong demand for commercial work trucks culminated in significantly improved operating and financial performance in the fourth quarter and full year of 2015. Net sales grew 27% in the fourth quarter and 18% for the 12-month period, reaching $278.4 million for the full year of 2015. Gross profit as a percent of sales also expanded due to improved volume and mix on both a quarter-to-quarter and year-over-year comparison. Operating income in the quarter more than doubled to $5.7 million and the full year was up 48%, reaching $19.3 million.

Excluding the impact of discontinued operations, full year earnings per diluted share also increased 52% to $0.76 per diluted share. It is very encouraging that our financial results are reflecting the positive impact of our customer-centric value proposition as it becomes integrated into our operating DNA.

Our strong operating performance and improved cash flow were instrumental factors in the board’s decision to increase the regular cash dividend payout in 2015. In addition, the board declared a special cash dividend of $0.27 per share in the fourth quarter as a means of returning a portion of our profits to the shareholders.

On many fronts, 2015 was a very good year for Supreme and we remain optimistic about continued organic growth opportunities as we look forward to 2016. While some sectors of the economy are stressed, demand remains stable for light duty and medium duty commercial trucks. As you know, we only manufacture bodies for commercial vehicles in weight classes 3 to 7, therefore we have no meaningful exposure to the Class 8 tractor-trailer cycle which is currently contracting.

The February NTEA chassis report indicates a 9% year-over-year growth of Class 3 to Class 7 straight truck chassis sales through November of 2015. The NTEA also published an updated full-year 2016 commercial truck retail sales forecast which projected year-over-year growth of 5% in the Class 3 to 7 segments.

January U.S. housing data, which is a leading indicator for Supreme released by the Commerce Department, reported that housing starts dropped by 3.8% to an annual rate of 1.1 million units, although permits remain stable at an annual rate of 1.2 million units, posting a 13.5% increase over the same period of 2015. Given the choppy outlook of some economic indicators, we are keeping a vigilant watch on leading indicators and market conditions, although I want to reiterate that the 2016 growth projections for our served markets are still projected to achieve mid-single digit growth rates as compared to 2015.

Our order backlog increased to just under $100 million by the end of December. This is 32% higher than at the end of September of 2015 and up 23% from the end of 2014. The backlog growth is a direct result of improved close rates on our deal pipeline and more consistent execution from our operations teams. On a year-over-year basis, we posted solid double-digit increases in new orders during 2015, which is reflected in our stronger backlog. Retail and leasing orders for the quarter again outpaced reported NTEA year-over-year growth rates as another indicator of our positive traction in our broader served markets.

Rental fleet demand is expected to moderate somewhat for 2016 as some accounts are completing the retirement of aged equipment, and rental demand also tends to be more sensitive to near-term economic conditions.

Internally, we continue to extend our capability to consistently deliver on our customer-centric value proposition across the entire organization, as well as improve our flexibility to manage more effectively through the business cycle. As we transition into 2016, our primary initiatives will be in the following areas: supplementing our sales team to maximize regional and national account coverage, optimizing our fabrication strategy to improve speed and product cost, deployment of lean manufacturing techniques to eliminate waste and reduce cycle times, development of new products that can expand our solutions portfolio, and initiating a process to populate a deal pipeline for accretive acquisitions. We believe this mix of initiatives will allow continued organic growth opportunities, bringing our cost structure more in line with class-leading benchmarks, and set the stage for some additional diversity in our product portfolio.

With that, I will turn the call over to Matt for the financial highlights.

Matthew Long

Thank you, Mark. Fourth quarter net sales jumped 27% to $67.7 million compared with $53.3 million in 2014’s fourth quarter. Full-year net sales increased 18% to $278.4 million in 2015, up from $236.3 million in the prior period. Sales growth in both the three and 12-month periods reflect higher sales volume of work trucks which more than offset lower sales of trolley and specialty vehicle products.

As we have highlighted on prior calls, gross margin improvement has been one of our key objectives in 2015 and prior periods. Margins as a percentage of sales have expanded sequentially in each quarter of 2015 and reached 21.7% in the final quarter of the year with improved utilization on increasing sales. On a full-year basis, consolidated gross margin expanded 92 basis points to 19.5% this year, up from 18.6% in 2014. We are just 50 basis points away from gross margins in the 20s.

SG&A expenses increased 15% to $8.9 million in the quarter, up from $7.7 million last year. Much of this was related to higher selling expenses on the increased sales volume. As a percentage of sales, we gained some operating leverage as SG&A improved to 13.2% of net sales, down from 14.5% in last year’s fourth quarter. For the full year, SG&A expense was $35.3 million or 12.7% of net sales compared with $31.3 million or 13.3% of net sales in 2014.

The increase in sales has had a very positive impact on our operating income for the year. In the fourth quarter, operating income spiked 139% to $5.7 million compared with $2.4 million in last year’s same quarter. Operating margin almost doubled from 4.5% in last year’s fourth quarter to 8.4% in the final quarter of 2015. For the full year, we reported operating of $19.3 million, which was up 48% from the operating income of $13 million we reported last year. Operating margin in 2015 was 6.9% of net sales versus 5.5% of sales in 2014.

We earned a little more than $100,000 of interest income net of debt service in the fourth quarter of 2015. Once again, we generated net interest income in the quarter due to Supreme’s fixed level of financial support from our OEM supplier exceeding the storage fees Supreme is charged due to demand outpacing supply. In the fourth quarter of 2014, we had a net interest expense of $270,000. For the 12-month period, net interest expense was $89,000 in 2015 compared with net interest expense of $526,000 in 2014.

All of this resulted in fourth quarter net income increasing by 150% to $3.8 million in 2015 versus net income of $1.5 million in the same period last year. On a diluted earnings per share basis, we earned $0.22 per diluted share compared with $0.09 per diluted share in the fourth quarter of 2014.

In the first quarter of 2014, we recorded a net operating loss of $1.6 million related to our discontinued shuttle bus operations. This marks our final results disclosure where prior period comparisons will be impacted by those discontinued operations.

For 2015, we reported net income of $12.9 million or $0.76 per diluted share, up from net income of $6.9 million or $0.41 per diluted share in 2014. If we exclude the effect discontinued operations had on last year’s results, net income from continuing operations increased more than 52% to $12.9 million or $0.76 per diluted share, compared with $8.5 million or $0.50 per diluted share in prior year. We ended the year with $17.2 million of cash on hand, up from cash and equivalents at the end of the previous year of $11.6 million. This was net of the $1.8 million in cash dividend payments to shareholders during 2015.

We continue to use our cash to earn quick-pay discounts from vendors, which lowers our cost of goods sold and boosts profit margins. In addition, we continue to make strategic investments to support our growth strategy and invested a total of $3.9 million in capital expenditures during 2015 to support those initiatives.

Working capital was $51.6 million at the end of 2015 compared with $43.3 million at the end of 2014. The working capital increase is primarily supporting higher average inventory levels and accounts receivable related to the increased sales volume.

Stockholders equity increased 9.3% to $88.6 million during 2015. This is up from $81 million at the end of December 2014.

This concludes our prepared remarks, so with that, Operator, let’s open the lines for questions.

Question-and-Answer Session

Operator

[Operator instructions]

Our first question comes from Tristan Thomas with Sidoti & Company. Please go ahead.

Tristan Thomas

Good morning, how is everyone?

Mark Weber

Good morning, Tristan.

Tristan Thomas

A couple questions. First, can you talk to the product mix in this quarter, and then also what comprised the backlog?

Matthew Long

As far as product mix, in terms of--

Tristan Thomas

Let’s call is retail versus fleet.

Matthew Long

The retail for the most part was about $13 million higher this quarter than last year’s fourth quarter. Fleet was pretty much flat.

Tristan Thomas

Okay, and then the backlog?

Matthew Long

The backlog retail-wise was again higher, roughly about the same, and fleet again pretty flat.

Tristan Thomas

Okay. Could you talk to the chassis situation heading into ’16? Any updates or any changes on that?

Mark Weber

Yes Tristan, this is Mark Weber. I would say it’s--well, we’ll split medium duty, light duty because they are two different animals. As you know, the light duty is a pool process and medium duty is sort of customer supplied. No real issues on the medium duty side. On the pool chassis side, I would say that that continues to slowly get better. As you know, we’ve talked--GM primarily has had some capacity constraints, but they are continuing to improve their output. So while Matt commented earlier that our sales organization is doing a nice job of selling those light duty chassis products in the marketplace, we’re consuming those pretty much as fast as we’re getting them. But obviously, you can see by our financial results, it’s not really having a drag on our business at this point in time.

So we see that continuing to slowly improve, and it’s something that’s not causing us heartburn today.

Tristan Thomas

Got it. Also, maybe a quick update on the sale of the Goshen property, or the components of that?

Mark Weber

As we’ve talked before, we’ve pretty much finished the consolidation of the campus. I will have to say that we’ve recently made a change in our real estate broker - we weren’t satisfied with the activity that we had, so at this point we’ve made a change and we’re starting that process anew here just in the last couple of weeks.

Tristan Thomas

Okay. One final question - I know you’ve been talking about the possibility of M&A activities for a little while now. Could you maybe give everyone an idea of what you’d look to acquire in terms of maybe a product line or whatnot?

Mark Weber

Yes Tristan, this is Mark Weber again. Again, we’re just starting to initiate a process of identifying particular targets and so forth. I think as we start that process, we’re going to look for opportunities that are strategic, we’re going to look for opportunities that are closely adjacent so we’re not going to get way out of our space, and things that we believe can come in and be accretive in a pretty short term period. So those are the criteria, so to your point, we’re probably more talking about product line additions or adjacent products, smaller companies that could add to our portfolio, sort of leveraging our capability that we have today.

Tristan Thomas

Got it, thanks. Congrats on the quarter.

Mark Weber

All right, thank you.

Operator

The next question comes from Jamie Wilen of Wilen Management.

Jamie Wilen

Thanks. Outstanding quarter, fellows. First on gross margin, so the operational efficiencies all included in our results, or I know you consolidated the campus, but is everything at full gear during 2015?

Mark Weber

By the end of the year, we were up to speed, if that’s your question, Jamie.

Matthew Long

We were still moving in Indiana during the first half of ’15, so ’15 is not a fully consolidated footprint year. There’s a little bit of drag there in first half.

Jamie Wilen

Got you, and as you look at gross margins, 19.5% for the year, obviously it’s a great number compared to where we’ve been - 20 has always been the first goal. But you’ve had sequential improvement in gross margins over the last several quarters. Is 20 the goal for 2016, or the 21.7 that we did in the fourth quarter, is that an obtainable gross margin in the current year?

Matthew Long

Jamie, this is Matt. I think that we’re still - and I’ve said this for probably a number of years now - 20 is kind of that next target on a regular basis. The fact that we’re growing the sales as much as we have, has really helped us leverage our expenses, so my hope would be solid. Over the 20 target, I wouldn’t give you a guidance of anything other than that’s our plan to get over that spot.

Jamie Wilen

Okay, and specialty vehicles, we had kind of slowed down earlier in 2015. Is that now profitable again, and what’s the outlook in that business?

Mark Weber

Yes Jamie, this is Mark. We have made progress. As you recall, we had that shutdown for a few weeks in the first part of ’15. Our backlog is significantly improved in that business, and we see that as a profitable entity going forward.

Jamie Wilen

Okay, and you mentioned in addition to acquisitions, the development of new products. What areas are you potentially looking at?

Matthew Long

Well again, we’re sort of there, still staying in our space, trying to enhance the product portfolio that we have to maybe bring some things to the table that our customers have been looking for in terms of higher utility. One of the things our sales folks have been doing is we’ve been spending quite a bit of time in the field, actually riding with customers and trying to get a better understanding of how they actually use our product in the field. That’s giving us some ideas and some insight into some things that we might be able to do to improve the performance and utility of our products, so those are the kind of things we’re thinking about.

Jamie Wilen

Okay, and then lastly, retail sales are up for you guys, retail backlogs are up. What’s causing the increase in market share?

Mark Weber

Well, we’ve invested--as I said, we’ve invested a lot in our sales organization as well as operations, so I think it’s the combination of those two segments of our organization executing at a much higher level than they have in the past. I’ve spent a lot of time myself in the field in front of customers, talking to them about their current supplier, about our performance and what their expectations are. That’s all rolled into our value proposition, and I think it’s just better execution on the sales side on the front end and better execution with our operations folks backing up our commitments in front of our customers.

Jamie Wilen

Okay, and we have plenty of capacity to handle the increased demand in 2016?

Mark Weber

Absolutely.

Jamie Wilen

Without increasing any overheads?

Mark Weber

Yes, we’ve got all the brick and mortar that we need. I mean, we’re talking about maybe adding some sales folks in very targeted areas. It’s a very small number, but very targeted at some large opportunities, so there will be a little bit of SG&A. We’re also adding some resources on lean manufacturing - that’s not been a focus here at Supreme in the past, and we’ve added a couple experts in that area. So it’s going to be very, very targeted at either customer-facing resources or internal process improvement cost reduction resources.

Jamie Wilen

Got you. All right, fantastic job, fellows. Well done.

Mark Weber

Thank you.

Operator

Again, if you would like to ask a question, please press star then one. Our next question comes from Louis Moser [ph] with Mayfax Investors. Please go ahead.

Louis Moser

Nice quarter.

Mark Weber

Good morning, thank you.

Louis Moser

You’re welcome. I was wondering if the company has any interest in expanding the coverage of the stock, because I only show one analyst that’s in there with some estimates. It would seem to me that it looks undervalued here, according to the progress you’re making, so you might have a pretty good story to tell Wall Street.

Matthew Long

I agree, or we agree, Louis. That’s one of our initiatives for this year, is to pick up at least one if not another.

Louis Moser

I heard you mention single digit increase somewhere along the line - I’m sorry, I came in a little late. What were you referring to?

Mark Weber

That might have been me. That’s sort of the outlook that is currently projected for year-over-year growth in the market for the Class 3 to Class 7 work trucks, which is our served markets, so that’s sort of the market projection right now. I think the NTEA has got a number out there of about 5% year-over-year growth, so that’s sort of the base market growth. We’re obviously expecting to grow our business at a rate faster than base market growth.

Louis Moser

I haven’t followed the company for that long, so this question might be obvious to most, but the quarter ending in December ’15 that you just completed, is that traditionally a lower quarter than others? Is there any seasonality to where you are at that point?

Matthew Long

Since you haven’t been following, Supreme historically has its largest couple of quarters really the tail end of first quarter. Second quarter is usually our strongest. Third quarter, it starts to come down, and fourth quarter is typically one of our lower quarters. That’s primarily due to the fleet business that we’re generally awarded in the latter half of the year for build and delivery in the first half of the year, and then it’s pretty much all retail business as we roll forward in the second half of the year. That’s the general rule of thumb.

With the efforts that Mark talked about this year, we’ve actually had a much better fourth quarter than what we typically have had in many of the recent years.

Louis Moser

Okay, thanks. Continue the great work.

Matthew Long

All right, thank you.

Mark Weber

Thank you.

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 Weber

Thanks again, Austin. In closing, I would like to thank everyone for joining us on the call this morning and for your interest in Supreme Industries. We are very encouraged by our 2015 results and how we are positioned going into early 2016. The growth projections for our served markets remain solid and in addition, we believe that consistent execution of our customer-centric value proposition will allow Supreme to continue on an accelerated growth trajectory.

We hope everyone has a great day, and I look forward to reporting on our first quarter progress in April. Thank you.

Operator

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

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