Supreme Industries, Inc. (NYSEMKT:STS)
Q1 2016 Earnings Conference Call
April 22, 2016, 9:00 am ET
Mark Weber - President & CEO
Matthew Long - CFO, Treasurer & Assistant Secretary
Tristan Thomas - Sidoti & Co.
Jamie Wilen - Wilen Management
John Mann - Private Investor
Welcome to the Supreme Industries 2016 First Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event 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 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.
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.
Thank you, Harrington. Good morning and thank you for joining us today on our conference call to discuss Supreme's 2016 first quarter results. A press release disclosing our financial results was issued after the market closed yesterday and is available within the Investor Relations section of our website. As expected, our positive momentum generated last year has continued to influence our operating and financial results as we enter 2016.
Everyday more and more customers are specifying Supreme Solutions when making their work purchase decisions. The improved results, we reported yesterday are confirmation that the consistent delivery of our customer centric value proposition continues to resonate with channel partners and end users.
The delivery of high quality products with best-in-class lead times has allowed Supreme to grow at a rate faster than our base industry expansion, resulting in several quarters of progressive top-line growth and improved profitability.
The significant investments we have previously made in our manufacturing facilities, as well as operations in sales talent, continued to mature and provide the anticipated impact in the marketplace. The elevated customer intensity, coupled with KRIP day in and day out execution in operations is allowing our sales force to differentiate our solutions and demonstrate the competitive advantages for our customers.
Market demand for light duty and medium duty work trucks remains stable in line and in line with the NTEA forecast of 5% year-over-year growth. March ACT data for class five and seven orders provides additional confirmation for the moderate but positive industry growth projections.
Seasonally adjusted housing starts for March remain just above 1 million units annually which is admittedly lower than February, however, more importantly; the results are 14.2% higher than March of 2015. In addition, the latest U.S. employment report was very bullish for the first quarter and the Fed continues with a dovish monetary policy.
Our nationwide footprint and ability to provide application specific solutions also has us well positioned to leverage the growth trends in home delivery of packages and truck leasing.
As disclosed in the press release, our order backlog increased to $102 million at the end of March which represents an 8.2% increase as compared to March of 2015.
In addition, the current backlog has a higher mix of retail and leasing work truck orders versus last year. This provides additional confidence that our regional sales teams are gaining traction with a broad range of retail end users and leasing channel partners.
New orders for these two market sectors posted double-digit year-over-year increases as compared to bookings received in the first quarter of 2015. Rental fleet orders were mixed, as some accounts are trimming expenditures to achieve targeted utilization rates.
In the opening quarter of this year, net sales grew 10%, and we again outperformed the mid-single-digit growth rates for our sector of the work truck industry has reported by the NTEA and ACT.
First quarter 2016 consolidated sales reached $69.4 million, up from $63.3 million as compared to last year, primarily as a result of higher work truck sales.
Gross margin came in at 21.8% in the quarter making this the fifth consecutive quarter of gross margin improvement, and SG&A expenses as a percentage of sales were roughly in line with last year's first quarter.
Operating income for the quarter was $5.8 million as compared to $3.1 million for the first quarter of 2015 with both mix and volume driving the improved profitability.
Net income for the quarter was up 94% at $3.8 million compared with $1.9 million in last year's first quarter and diluted earnings per share doubled to $0.22, up from $0.11 per diluted share in the first quarter of 2015.
Concerning some of our 2016 initiatives, we now have our lean manufacturing team in place and have initiated benchmarking visits at our five work truck plans, have started delivering the initial wave of lean training, and conducted some targeted Kaizen events. This initiative requires a long-term commitment but is critical to achieve the next level of cycle time reduction for our manufacturing and business processes.
Our sales team continues to expand our solutions expertise to more customers as we engage side by side with the end users to optimize the application efficiency of their work truck solution.
Although our creative acquisitions remain a challenge at current valuations, we continue to define potential adjacent targets for investigation and evaluation.
While we expect this to be a longer-term initiative, we do have the balance sheet strength to take action when an appropriate opportunity is available.
With that, I'll turn the call over to Matt to review the quarter's financial highlights.
Thank you, Mark. As Mark mentioned, net sales year-to-date have continued the same positive momentum we experienced in 2015. Net sales grew 10% over the first quarter last year to $69.4 million compared to $63.3 million during the first quarter. In addition to higher truck sales in the quarter compared with prior year, the result saw an uptick in specialty and armored vehicles sales. Year-over-year sales of trolley products were similar to last year's first quarter.
Gross margin as a percentage of sales has increased sequentially in each of the past five quarters and came in at 21.8% in the first quarter of 2016. In last year's first quarter gross margin was 18.1% of sales for an improvement of 375 basis points. Improved utilization from increased volumes and more favorable mix of retail sales compared with 2015's first quarter drove the margin improvement.
As volume increases we generate better operating leverage on our fixed overhead expenses.
SG&A expenses increased 12% to $9.4 million in the quarter, up from $8.4 million last year. The increase was primarily due to higher commission expense resulting from the increased sales, higher salary costs related to annual merit increases, and profit based incentive plans, partially offset by lower health insurance claims. SG&A expenses as a percentage of sales were roughly in line with last year's first quarter. The increase in net sales volume combined with the gross margin expansion led to operating income improving 86% to $5.8 million. This compares with $3.1 million in last year's same quarter.
Operating margin lightened in the quarter from 4.9% of sales last year to 8.3% this year. Net interest expense declined to $183,000, down from $243,000 in last year's first quarter mainly due to our management of working capital and not needing to borrow from our line of credit. Net income was $3.8 million in the first quarter versus net income of $1.9 million in the same quarter last year.
Diluted earnings per share increased twofold to $0.22 compared with $0.11 per diluted share in the first quarter of 2015.
We ended the quarter with $6.1 million of cash on hand, down from $17.2 million of cash and equivalents at the end of last year, primarily due to the current fleet though. Total debt at the end of March was $8.2 million consisting of only our low cost term loan. We continue to deploy cash when we can to earn quick pay discounts from our suppliers. This effectively lowers our cost of goods sold and reduce gross profit margin. In addition we continue to make strategic investments to support our growth strategy.
Working capital increased by $3.3 million in the quarter to $54.9 million compared with $51.6 million at the end of 2015.
Stockholders equity moved to $91.9 million at the end of the quarter, up from $88.6 million at the end of last year. On a per share basis, book value at the end of March was $5.49 per share compared with $5.32 per share at the end of December.
This concludes our prepared remarks. Harrington, please open the lines for questions.
We will now begin the question-and-answer session. [Operator Instructions].
The first question comes from Tristan Thomas of Sidoti & Co. Tristan, go ahead.
Good morning. How are you everyone?
Good morning good.
Good morning, Tristan.
Just a couple of questions. Can you may be expand upon the opportunity of leasing by the business I’m not taking relatively newer I'm going to call it segment for you guys?
Yes, I'll talk a little bit about it. That scenario when I joined the organization back in 2013 and start spend some time out in the field; it's an area that that was pretty evident that was growing in the meeting primarily in the meeting duty side of the business. The complicated side of the fuel systems and the technology that's there makes it more difficult for end users to find technicians and service the product and so forth. So it's really a combination of sort of that that full service leasing, offering that I think is driving a lot of that growth.
So we see that growing nationwide. There we have a large leasing partners Penske Rider are the obvious ones. But a lot of regional leasing companies that are seeing growth as well so, that’s an area that we are concentrating on with our sales team and making sure that as that segment of the marketplace grows we’re well positioned to benefit from that as well.
Okay, where do you spend chassis wise heading into the fleet built season?
We are actually in pretty good shape on chassis. We’ve never really had a constraint on the medium duty side; it's always been on the light duty. And GM is continued I think we talked a little bit about this a couple quarters ago. GM is continuing to make sort of progressive improvements quarter-over-quarter in their supply chain.
I don't think they're quite yet at the output that they want to be at long-term. But it really hasn't been an issue for us. And on the fleet season side, we're really not I mean there is sort of spot shortages or delays one week, two weeks, things like that but nothing significant that's really impacting us during the fleet runs.
Sounds good. May be just an update on the property sales where we stand at that?
We made a change with brokers roughly a couple of months ago. We've got quite a bit more actively now. We may not be selling everything. We may end up at least for a little while having some leasing income coming in but we're certainly getting a lot more attraction than, than what we had in the past.
Got it, that’s good. And just one final question. I know you mentioned a new lean initiatives are in place but I mean what’s kind of the next step, having Mark mentioned M&A may be just spend geographically what’s kind of the next step to keep growing the business?
Well, we still have a lot of room ahead of us on organic growth. We're getting closer to 20% lower we're still probably sub 20% market share, it's not a track market. So, we have to sort of triangulate that and figure that out ourselves but we have a lot of room there from an organic standpoint. Keep in mind we have a lot of young sales people in their organization that is still coming up to speed.
So, I think we have room there to continue to grow our nationwide footprint helps us on the leasing side as well to grow with that. The lean is really helping us and the intent there is to help improve our class position, our productivity, and also takes -- continue to take cycle time out of our process, delivery lead time is a real critical issue in the leasing side of the business but also for all customers.
So, that's important from a performance in the marketplace but also from a cost structure standpoint. The acquisitions we're taking out real slow or real easy and very cautiously. So we're looking at adjacent products, that's not too far out of our space and there is some geographic opportunities as well. We have customers that for example are in Canada that ask us about our presence in Canada, we're not there today. So that could be another opportunity.
Okay, I mean is that something that you try to just take your sales force expand organically there or may be a small acquisition to kind of a foothold in Canada I mean what will be kind of the way you go about it?
Well, I think if we went into Canada that makes sense, we would probably go in with an acquisition versus adding, adding capacity because I think the manufacturers that are in Canada today are not fully utilized.
The next question comes from Jamie Wilen of Wilen Management. Please go ahead.
Great quarter, fellows. I'll start off on the retail side, the reason for your increases are you, the market are you adding new dealers or is it greater penetration of existing dealers?
Well, Jamie, this is Mark Weber. So we have five sales teams in each of our regions. So each of our divisions have a sales group to operate out of that region and calls on the meeting, duty light duty truck dealers there, they also call on end users and so forth.
So I mean the market is projected and sort of seems to be growing at about 5% clip. We're moving at a faster pace than the market. So I will say that it's a combination of our sales people getting out to speed and a much more aggressive approach to the marketplace than may be we had let's say pre-2014 with our newer sales organization. But the other thing is that, our execution and delivery is also helping us win business in the marketplace.
I was out in front of some leasing customers in the first quarter and delivery was the biggest issue that they were struggling with and that's an area where we fully pay attention to that and perform at a pretty high level.
By order of magnitude, how much better is your delivery capabilities today than it was two-years ago?
I would say that if we were measuring the delivery a couple of years ago, we were probably in that 80s and now we're consistently in the 90s.
Okay. And as we’ve grown the business, your footprints remains the same are we going to run up against capacity issues if the business continues to grow at double-digit rates?
Well at some point in time we will. But fundamentally with exception of some subassembly operations and so forth, we’re still kind of one shift operation. So we could expand its not easy, but we could expand into a second shift and sort of directionally may be not double but get close to a doubling of the top-line without brick and mortar.
Okay. And lastly on the specialty vehicles armored and trolleys that do you expect those businesses to stay flat as you move forward?
The armored is probably the one that's got the most potential in terms of upside opportunity. If you recall there was DOS contract that we participated in and that expired in '13, I think it might have got extended a little bit into '14 but it was just winding down when I arrived, there is some discussion, some activity in the marketplace that would indicate that a new DOS contract could be coming out in the next 6 to 12 months. If that happens and we’re fortunate enough to participate in that, we could see a probably more significant uptick at SSV.
Okay great job managing the business. Well done guys.
The next question comes from John Mann, a Private Investor. Please go ahead.
Hi just wanted to see if you could sound a little bit more on market share opportunity. Is there one particular segment either light or medium or across a particular business segment, where you think a particular opportunity exists and just clearly overall you’re gaining share. Can you actually put some numbers around that about where you think you are and what you think is possible?
Well John, this is Mark Weber. Again it’s not a tracked market. So when I talk about market share numbers you have to take those as directional versus precise. So we did some work recently with the third-party to try to get a good handle on that. And again we have ourselves somewhere in the 15% to 20% range and so that tells me there is lot of opportunity out there.
So in terms of areas that we're focusing on, on the retail side, I talked a little bit about our sales teams out in the field. We have five regional sales teams. We have a good portion, let's say 20% to 30% of those sales associates have left in two or three years experience, so they're still coming up the learning curve. So I think you're going to continue to see additional penetration at the retail level.
I think as leasing grows, because of our national footprint and ability to build product across the U.S. or larger regional and national leasing company that puts in a good position for that business as well. So those would be the two areas I think that we would hope to see some expansion in market share penetration.
Okay. And can you, I mean, I apologize, I should probably know this. But where are your leasing competitor and market share?
Well, we had again, these are all triangulated. We would see Morgan who is the other sort of national footprint competitor probably about double size of us, so some place in 35% to 45% range. Then it drops off pretty dramatically from there into a handful of single-digit type competitors. Did that answer your question, John?
It seems that Mr. Mann has been disconnected.
If he dials back in, I will go ahead put him back on the queue.
So I guess, I answered his question.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Weber for any closing remarks.
Okay, thanks Harrington. Just to summarize for 2016 our primary focus remains on organic growth with class leading quality, durability, and delivery performance. We are also investing in initiatives to remove the next layer of waste across our business systems, to bring our productivity in line with industry-leading benchmarks.
We are also still building momentum with many of our newer sales people as they gain field experience with our products and develop broader application expertise. It is certainly gratifying to get off to a strong start in 2016 and to be well positioned with a solid order backlog heading into the second quarter.
Thank you for joining us on the call this morning and I look forward to reporting continued progress during our second quarter conference call this summer.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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