Supreme Industries' (STS) CEO Mark Weber on Q2 2016 Results - Earnings Call Transcript

| About: Supreme Industries, (STS)

Supreme Industries, Inc. (NYSE:STS)

Q2 2016 Earnings Conference Call

July 22, 2016, 9:00 am ET

Executives

Mark Weber - President and Chief Executive Officer

Matthew Long - Chief Financial Officer, Treasurer and Assistant Secretary

Analysts

Tristan Thomas - Sidoti & Co.

Greg Eisen - Singular Research

Jamie Wilen - Wilen Management

Ralph Marash - First Manhattan Company

Operator

Welcome to the Supreme Industries 2016 Second 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.

Mark Weber

Thank you, Bianca. Good morning and thank you for joining us today to discuss Supreme's 2016 second quarter and first half operating results. A press release summarizing the financial performance of the quarter and first half of the year was issued after the market closed yesterday and is available within the Investor Relations section of our website.

The second quarter is traditionally very strong as we are building and shipping rental fleet units in addition to our base retail demand. This past quarter was no exception with sales up 34% sequentially, but more importantly 12.4% higher than the second quarter of 2015. I think it is important to recognize our employees for their commitment to our customers during this past quarter.

It is not an easy task to ramp up for the rental fleet production and meet customer delivery expectations. The continued sales growth reinforces that our customer-centric value proposition is placing Supreme top of mind as customers are purchasing more trucks.

Our field sales teams continue to expand their understanding of customer applications in order to offer optimized solutions supported by the delivery of high-quality products with best-in-class lead times. In addition to our solid sales growth, we again posted double-digit year-over-year gains in new work truck orders for the second quarter.

While we still have room for improvements, our execution on the rental fleet orders allowed us to pick up incremental rental truck orders during the quarter reinforcing the consistent execution can positively influence customer purchase decisions.

Demand for work trucks remains stable during the quarter with some indications of demand moderation late in the quarter. Following robust demand early in the year, ACT data reported that June medium-duty truck orders were down 10% sequentially from May and 1% below June of 2015.

The NTEA reported that April straight truck chassis sales for Class-3 through 7 were off 2.5% from last April, while still showing positive growth on a year-to-date comparison. The NTEA updated their full year 2016 forecast in July with year-over-year growth at 4.9% for light-duty and medium-duty straight truck chassis sales.

Most leading indicators remain positive with year-to-date housing starts through April up 10.2% from 2015 and the current 2016 forecast from the National Association for Business Economics indicating an 11.7% year-over-year improvement. The Bureau of Labor Statistics also reports that labor participation rate is finally increasing, an indication of a more positive outlook on employment expectations.

This could provide a little relief to the tight labor market; however, we anticipate upward pressure on wages to continue over the next several quarters. Considering long-term trends, the U.S. Department of Commerce also reports that online retail sales have increased 12% to 14% annually since 2013 and are projected to sustain 10% to 12% growth rate through 2018, a trend that will certainly have a positive impact on the demand for home delivery of packages.

As I previously mentioned, net sales increased 12.4% in the second quarter as compared to the same quarter last year, which resulted in an 11.3% year-over-year net sales growth for the first half of 2016.

Gross profit expanded to 24.1% of sales, picking up leverage from the combination of increased volume and a higher mix of retail work truck shipments in the quarter. Net income was up 91% from last year’s $4.3 million, reaching $8.3 million or $0.48 per diluted share in the second quarter.

For the first half of this year, net income improved to $12.1 million, up 92% from the $6.3 million reported in the same period last year. Diluted earnings per share improved 89% to $0.70 per share, compared with $0.37 per share in the first half of 2015.

Order backlog at the end of the second quarter increased to $75.5 million from the $74 million we reported at the same time last year. A greater percentage of our current backlog is made up of retail orders as compared to last year, which will generate the benefit of improved mix as the backlog converts to sales during the next quarter.

We continue to win more business from leasing company and end-users, which is a direct result of our intensified sales methodology, coupled with girth execution from our operations teams.

During the quarter, we took action on multiple strategic opportunities to improve our core business focus and continue to optimize our cost structure as follows; subsequent to the end of the quarter we signed an agreement to sell our trolley product line. This product line has no synergies with our core work truck portfolio and only represented 2% of our consolidated 2015 net sales with very limited growth potential.

Therefore we felt this business is better suited with another strategic owner. In addition, we are consolidating the Rhode Island service center into our largest manufacturing and service facility in Jonestown, Pennsylvania.

Our facility in Jonestown has adequate floor space to accommodate the Rhode Island business and a deeper resource pool of both production and technical staffs to support our customers on the East Coast. Once the consolidation is completed, we plan to sell the Rhode Island facility.

Our recently established lean manufacturing engineering team is fully staffed and mobilized to remove the next level of waste from our operations, enhance our continuous improvement culture and optimize our order to ship cycle times. Their primary focus for 2016 includes lean training for our employees, best practice site assessments, initiating our first round of Kaizen in advance and optimizing throughputs on critical bottleneck operations. We will update you more on these initiatives later in 2016.

In line with our customer-centric commitment, we voluntarily submitted a recall notice to the National Highway Traffic Safety Administration during May related to a potential marker light failure. The supplier of the marker light has worked closely with Supreme to develop the remedy that entails the installation of an inline fuse with a warning decal.

We’ve recorded a pre-tax charge in the second quarter of $150,000 to fully reserve Supreme’s estimated share of the clause associated with this campaign. With that, I’ll turn the call over to Matt for the quarter’s financial highlights.

Matthew Long

Thank you, Mark. Net sales increased 12.4% in the second quarter and represented an additional market share gain as we grew faster than the industry averages. Sales of $92.9 million exceeded sales in the same quarter of the prior year by more than $10 million. Volume with leasing and retail customers grew faster than fleet sales.

As Mark mentioned, our focus on customer has been reflected in large increases in sales year-over-year this quarter. As far as product mix goes, most of the growth was in dry freight and the insulated category.

Year-to-date net sales totaled $162.3 million which was 11.3% higher than the $145.9 million in sales we reported for last year’s first half. Gross margin as a percentage of sales has sequentially increased for the past six quarters and was 24.1% of sales in the second quarter.

In last year’s same period, gross margin was 18.7% of sales, for an improvement of more than 500 basis points. Improved utilization from increased volumes and the favorable product mix led to the higher margins.

As Mark stated earlier, we recorded a pretax charge of $150,000 in the second quarter in addition to the $350,000 pretax charge recorded in the first quarter for a total of $500,000 in the first half of 2016 to fully reserve Supreme’s estimated cost related to the recent recall campaign.

Year-to-date gross margin was 23.1%, up 470 basis points from 18.4% in the first half of 2015. SG&A expenses of $10 million were $700,000 higher than the prior year’s same quarter, but declined from 11.2% of sales in last year’s second quarter to 10.7% of sales in the second quarter of 2016.

This produced some operating leverage as operating income improved by 95% in the quarter reaching $12.5 million, up from $6.4 million in the prior year’s same quarter. Similarly, SG&A represented 12.1% of sales in the first half and this improved to 11.9% of sales in this 2016 six months period.

Operating income jumped 92% reaching $18.3 million in the first half of 2016, up from $9.5 million in the same period last year. We earned net interest income in the second quarter as our interest support for our pull chassis exceeded the interest expense due to much higher demand than last year’s second quarter coupled with lower debt balances.

In the second quarter, we earned $37,000 in net interest income compared with a net interest expense of $28,000 last year. For the first half of 2016, net interest expense declined to $146,000, down from $272,000 in the first half of 2015.

Net income was $8.3 million in the second quarter, versus net income of $4.3 million in the same quarter of last year. Diluted earnings per share increased 85% to $0.48 per share compared with $0.26 per share in the second quarter of 2015.

Net income in the first half was $12.1 million, up 92% compared with $6.3 million in the first half of last year. Diluted earnings per share increased 89% to $0.70 per share in the current year versus $0.37 per share in last year’s first half.

Turning to the balance sheet, we ended the quarter with $7.7 million of cash on hand down from $17.2 million of cash and equivalents at the end of last year. The lower cash balance reflects the increased need for working capital to support our fleet build. This year we were able to support the higher working capital demand without having to borrow against our credit facility.

Total debt at the end of June stood at $8 million representing the outstanding balance on our low cost term loan. Today the financial strength of Supreme is in the best shape I’ve seen since I joined the company more than five years ago. Our debt-to-capital ratio was 7.4% versus 9.1% a year ago June.

Working capital increased to $62.8 million at the end of June compared with $31.6 million at the end of 2015. Again this reflects higher accounts receivable and inventory needed to support the higher sales volumes. Stock owners’ equity has increased 12.7% so far this year rising to $99.8 million compared with $88.6 million at the end of 2015.

On a per share basis, book value at the end of the second quarter was $5.93 per share, compared with $5.32 per share at the end of June.

This concludes our prepared remarks. Bianca, let’s open up the lines.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Tristan Thomas with Sidoti & Company. Please go ahead.

Tristan Thomas

Good morning. Great quarter.

Mark Weber

Good morning. Thank you.

Matthew Long

Hi, Tristan, how are you doing?

Tristan Thomas

Good. Couple questions, one, I know you don’t necessarily provide guidance, but could you maybe give us a little kind of color in the best way for us with gross margin in the back half of the year? And also going into 2017, and then kind of lastly, against maybe a backdrop, let’s call it a slowing industry as that does continue in 2017?

Matthew Long

From a margin perspective, I guess the best guidance I can give without giving guidance is we talked about, Mark talked about our backlog, current backlog having a slighter tilt towards the retail business as opposed to fleet, which was – tell you that we should have low higher margins relative to maybe a prior period. This depends on how the volume comes out in the current quarter.

Tristan Thomas

Yes.

Matthew Long

As far as we look forward, he also alluded to the work that the lean initiatives should produce, we should start to see some benefits, I would think in 2017.

Tristan Thomas

Right. Got it.

Mark Weber

Tristan, definitely the outlook that people have right now for 2017 on volume in terms of the market, there the predictions are in the range of 3% to 5% growth for sort of medium-duty, light-duty. So there is still an expectation in 2017 from a core market standpoint is, it’s not going to drop. It’s not a huge growth, but it’s not predicted to decelerate to a negative rate.

Matthew Long

And to finish the commentary on the gross margin, Tristan, obviously, we had some serious leverage on our fixed cost with the increased volume as you look at the backlog, the backlog is going to settle more towards the way it lost Q3 last year. So I wouldn’t expect the same level of leverage on the fixed cost.

Tristan Thomas

Got it. You spoke a lot about retail, could you maybe give us an update where you stand in terms of leasing, capturing share there if I understand, I think you have a couple small orders out and those could potentially become large orders down the line?

Mark Weber

Yes, this is Mark, Tristan. Yes, leasing is an area that as we’ve gotten little bit smarter about what’s going on in the marketplace. We see that transition from ownership to leasing and you can see the same sort of information or indication in Ryder’s public information as they talk about where they are going and so forth. So, we are just trying to make sure that we are lined up with that side of the business. It is a material amount of our business today. It’s grown, I would say rapidly over the last three years. But we are still seeing year-over-year progress and have very clear initiatives inside the sales organization around continuing to grow our position with not only the big leasing companies, the ones that always come to mind Penske and Ryder, but there is a lot of, I would call, sort of mid-tier companies out there AIM Nat and National Lease and even private companies out there that are strictly in the leasing business. So, it’s a clear focus and we expect to see that continue to expand as we go forward.

Tristan Thomas

Last question from me for now, with the sale of their trolley business, I mean, what’s the status of armored and is that kind of the logical function or that would be a next step in terms of kind of moving on?

Mark Weber

Well, let me comment on armored. The thing that’s different about armored is that, there is growth potential for that business and when the DOS had their contract out and active, the armored business was much larger than it is today. We have indications that that DOS contract is going to be renewed sometime let’s say in the next six months and if that happens, we have an opportunity there to return the size of the SSV business to where it was, maybe three to five years ago, which is significantly larger than it is today. So, that business I believe has a little different perspective in future potential than the trolley business had. As I indicated, the trolley business has been pretty flat as we looked at the market and what opportunities existed it was very, very limited. So that was the decision strategically to exit the trolley business. I’ll let Matt comment on the anticipated financial impact.

Matthew Long

Right, and just to clarify Mark’s comments talked about it being 2% of sales for 2015 is less than 1% year-to-date 2016 from a revenue standpoint. Our estimation is by the time that we close we’ll have no material gain or loss relative to the product line as we sell. We’ve got to run out the backlog that we have on hand and then we will finally close before the end of the year that stands right now.

Tristan Thomas

Yes, just one following question with the DOS business. How larger is that contract?

Mark Weber

Well, the view right now is that, in lieu of issuing, I think in the past, they issued contracts to the OEMs and we were one of three to five contractors that participated in that. They are moving to a different approach where they will buy out of the GSA catalogue. So, it’s going to be much more difficult for us to kind of figure out what the size of that opportunity is going to be other than we’ll be obviously talking to the customer and so forth. So, they are changing their approach a little bit versus coming out in a warning, let’s say a $10 million contract, you get your products and the GSA catalogue and they buy off of that. So, we are just in that process right now getting all of that information catalogue and ready for the opportunity. They haven’t given us any indication of what their expectations are from an annual purchase standpoint.

Tristan Thomas

Okay, thanks.

Mark Weber

Thank you.

Operator

The next question comes from Greg Eisen with Singular Research. Please go ahead.

Greg Eisen

Thanks, good morning everyone. I’d like to follow-up on the DOS contract business first. Trying to understand the timeframe under which this business could come into your sales. So, you put your products into their catalogue and they buy off of that once they are ready to make an order. Is that my understanding, correct?

Mark Weber

Yes, that’s correct.

Greg Eisen

So, have you actually submitted product specifications for that catalogue yet?

Mark Weber

Yes, so we just gotten confirmation, I would say in the last two weeks that the information was accepted and is in the catalogue and our expectation is that now, again, I mean, this contract has been out of play for two years. So, the DOS – there has been some very limited Singular purchases but for the most part it’s been silent for two years. So, the expectation here would be that, now at the end of the year, there would be some purchasing activity that would start up. Now, how fast it’s going to start up, again they are not giving us any indication in terms of the size of the initial purchases, but it will be product that we are familiar with. I mean, just give you an indication, one of the primary products that we supply in the past was a armored suburban. That product was out of production for about a two year – two or three year period. It was relaunched by GM in a heavy duty configuration for military, government use only. So, the new suburban is now available which haven’t been, it’s been out circulation for a period of time. So there is two or three things going on here that would indicate to us that there is a reasonable expectation to see some activity and see some increase in sales there, over, I would say the next six to nine months.

Greg Eisen

In six to nine months, you could see something. And once the order comes through, it’s relatively fast turnaround for delivering the product that it isn’t one of those order now for delivery a year from now we would be, within a quarter or two, right?

Mark Weber

Yes, I would say within a couple quarters, because we are talking armored equipment, so, the glass is very specialized. The armoring and so forth, it’s not stuffily stock. So it’s going to be probably a two quarter conversion where like in our truck business it’s closer to a one quarter conversion from the time we get the order and until we ship the product.

Greg Eisen

Understood, understood. Changing the topic, I just – overall, you’ve talked before about the chassis availability in the marketplace and obviously this is a very strong quarter for volumes. Was there any difficulties with the chassis availability this quarter versus what you’ve seen in the past or is that all just flowing through nicely?

Mark Weber

No, I would say that we really don’t have any negative impact due to chassis availability in the second quarter, really in the first half of the year. It’s not unusual to have component constraints more related to the body during this time of the year because the demand across the board is up where our competitors are also running a certain amount of fleet business and a retail business. So it clearly stresses the people who make the rear doors and the lift gates and things like that. But that’s normal during this time period. So, we’ve kind of worked our way through that. It really didn’t have a material impact. We had situations where we were held up maybe for a week on a few orders in this and more working our way through that. One thing though that is noteworthy is that, GM signed an agreement with Navistar during the quarter to move their cutaway production to one of the Navistar plants over in Ohio off of the Wentzville – out of the Wentzville factory. So, the GM cutaways which we build on in our light-duty segment have been constrained just because of capacity at Wentzville. So, we believe that we will see some additional availability of cutaways. They are saying sort of mid-2017 when they think they’ll have that transfer completed and up and running.

Greg Eisen

By mid-2017 that constraint would be gone.

Mark Weber

Right.

Greg Eisen

But it doesn’t sound like you really had any significant problem this quarter.

Mark Weber

We didn’t, that’s correct.

Greg Eisen

Okay, good, good. Obviously, good gross margin improvement this quarter year-over-year and that was nice to see given you got the operating leverage taken down by on the sales growth. Trying to understand what your potential is kind of on the top end from what gross margins could get to, A, as volumes expand and B, as you make these lean production improvements that are taking place. Is it possible to talk about what is the kind of maximum gross margin this set of businesses that you have right now could get to? Is that a fair question?

Mark Weber

Let me comment on the top-line a little bit just to calibrate on where we are at in the market. We believe we are around 18% to 20% market share in the work truck side of the business. So, from a top-line standpoint, we’ve got room and we are number two in the industry. We are not number one today. So we have room on the top-line to grow the business. I guess, I’d be, if we were offsetting at 40% to 60% market share, I’d be maybe scratching my head or thinking about it little bit differently. But at 20%, there is no reason other than we got to execute on the front-end and on the back-end that we can’t grow our share from that standpoint. So, I think there is top-line runway. I’ll let Matt comment on the margins.

Matthew Long

Greg, as you know, I don’t give guidance, but what I can tell you is that, from a volume standpoint, we are a one shift operation. So, as volume continues to improve, we’ll get more leverage on the fixed cost which should give us left on gross margin. But lot of – this particular quarter had to do with, what you might call favorable mix, we had lower year-over-year fleet business, not that we wanted to be lower, but it has lower gross margins and higher retail business year-over-year. So we had a confluence of good mix and then on top of at this, that incremental volume gave us some pretty good leverage. So, to Mark’s point, if we keep executing and keep working our way on the top-line, that should have some positive impact. Relative to the lean initiatives, we are so early in that process. It’s hard to tell what impacts that will have, but it will certainly be positive. Most of the low hanging fruit I think been done and you see that as we’ve improved the margins again, straight for the last six quarters.

Greg Eisen

Okay, okay. Moving on, regarding your decision to close the Rhode Island facility and move with the Jonestown PA, will you take a charge for closing Rhode Island?

Mark Weber

At this point, we don’t believe so. We are going to be moving the equipment from that location into Jonestown. As far as the property where we have an appraisal of the property being worked out, so we don’t know yet what our sale price is, what we believe that we are in an ideal location that should give us the opportunity to sell at, certainly at our book value at the very least.

Greg Eisen

Okay, so you get some cash over there. Regarding the trolley business, is there a one-time cash benefit from selling off the trolley business, or is it just offset by closing cost?

Matthew Long

I would say there probably will be a positive cash benefit, it just depends on where we end up. At the end, it will be very minor. We will have some closing cost. So I would say if that’s we’re probably going to be modest one way or the other.

Greg Eisen

Okay, and then, speaking of the charge for the, I think for the recall, should we expect that this quarter has been the last quarter we’ll see for charges on that particular recall when partly in Q1?

Mark Weber

I am sorry, I just started talking too early. Will you please say it?

Greg Eisen

I am sorry, yes, I was just going to say, I guess, you did – you had a charge partly in Q1 and then now also in Q2 am I correct?

Mark Weber

Yes, the Q1 charge was initially based on how we were originally going to do the recall and so, we had our estimate, we updated the estimate after we had to do some additional work to get the recall put in place the way that – wanted and so, we believe right now, we’ve estimated at what we expect to be the highest cost. Obviously, we monitor that on a weekly basis and if we end up with a higher cost, we’ll take adjustments in the next quarter, but we believe we have that all behind this now.

Greg Eisen

Okay, got it. I’ll let someone else go. Thank you very much.

Mark Weber

Okay, thank you.

Operator

[Operator Instructions] The next question comes from Jamie Wilen with Wilen Management. Please go ahead.

Jamie Wilen

I’ll chime in with outstanding quarter, so that was wonderful.

Mark Weber

Thanks, Jamie.

Jamie Wilen

Couple of, was the trolley business profitable at all or just marginal?

Mark Weber

It was profitable, but it was marginally profitable. So, both answers to that.

Jamie Wilen

Okay. And moving the Rhode Island facility, is that going to result in a significant amount of cost savings or just ease of running the business?

Mark Weber

I think it’s probably a combination to be quite honest, while the Rhode Island facility was modestly profitable, at least for the last year or so, we think we should be able to get some leverage on actually running it out of Jonestown. It’s the last service center that we have. We kind of left it in place. The guidance that we got four years ago when we were closing all the others was that, it was something that customers wanted on the upper East Coast and now we’ve got it to the point where they feel comfortable with a certain freeing it out of Jonestown.

Jamie Wilen

On the armored side, you just – it seems like you are just talking about federal contracts, but are there things down at this statement is the level that could also be appropriate for our product line here?

Mark Weber

Yes, it could be, again, as you probably well know, there are state and other government entities that buy out for GSA schedule. So, we believe that could be the case. Right now, today that business is really focused more on specialty vehicles than armored just because most of the armored customers are governmental based. We do some cash and transit there that has some level of armoring honored as well. But they are doing a lot of specialty vehicles today, but the majority of what was going on from an SSD volume standpoint due lack in time, it was the DOS type work. So, the fact that that’s getting active now that we are in the GSA schedule. We are optimistic that there is some upside there, probably 2017 realistically, I don’t think there is going to be much impact in 2016. By the time we get orders and get material and so forth, but we believe that there is an opportunity to see some benefit there in 2017.

Jamie Wilen

Okay, and assume, being a specialized vehicle, this is one of your more higher margin product lines?

Mark Weber

It has been in the past that we expect it would be in the future.

Jamie Wilen

Industry growth, if you are looking for 3% to 5% industry growth in 2017 where the industry is, what’s the percentage industry growth that was – that’s exists in 2016 versus what you’ve done?

Mark Weber

So far, in the – sort of Class 3 to 7, we don’t have a good beat yet from NTEA on May, June and it appears that June was weak across the board. So, we are right now through April I think they are right at 10% for 3 to 7 year-over-year. So, we think, mid-year that’s going to taper – the industry is going to be a little bit, maybe a high single-digits, because there is an expectation that once the NTEA date is in for May and June that that’s going to be a little weaker. As you heard me mention, April as a standalone month year-over-year for NTEA was down 2.5%. So, we saw the activity has been pretty strong in the first quarter from an order standpoint and that’s going to what we heard from the industry standpoint as well and then expecting some softness in the NTEA numbers in May and June. So I am going to go out and let me say I am thinking the NTEA for the six months is probably going to be in the 6 to 8 range and we are at double-digit range.

Jamie Wilen

Okay, and you mentioned the strength on the retail side, if you should see when you pick up a fleet crunch or contract, but how are you increasing your share on the retail side? What’s happening over there that’s causing you to get more in that business?

Mark Weber

Well, a lot of that is, we are leveraging our district sales offices. We are a little different than some of our competitors in terms of how we structuring our sales team. So each of our plants, we have a district sales team that runs out of that plant. So we have five district sales teams distributed around the country and they are out calling on end-users. So, I think the fact that we’ve invested a lot in terms of supplementing our sales group with some additional talent, some additional headcount in markets that we were underserving and we’ve trained in our sales organization, the team have to sell, really go out and sell our value proposition. We are using sales force so we’ve given some tools to be more effective in terms of following up on lease and things like that. So, I think that we are getting the leverage out of our sales team in these districts where maybe you go back three or four five years ago, they were a little more passive than active versus today.

Jamie Wilen

And lastly as far as the Indiana facilities, are there more operating improvements to be had? Have you done most of that? And the real estate that you have now vacated, is that on the market to be sold and what status is that?

Mark Weber

Let me comment a little bit about the operations and then Matt talk a little bit about the real estate side of it. I would say that we’ve got the big stuff done. We’ve got everything on one side of the street, the fab facility, it’s connected to the assembly plants. So we’ve got significantly improved flow of raw materials to the fabrication process into the assembly line and then trucks out the backdoor. Inside the building is there opportunity? Absolutely, so which is what we really have is lean team working on is going through and sort of looking at best practices. So we see sort of improvements at the work cell level at the work station level that this team is going to help us get after which will make us more efficient. We should, at the end of the day be able to produce more trucks with the same number of people. So, I’ll let Matt comment on the property we have here.

Matthew Long

Yes, from the Indiana property side, as I am sure we shared with you last quarter, we switch brokers and we’ve had much more active process with this. So, on the largest portion on the north side, we have at least two companies that have been interested in the property. We’ve gotten one offer that was a bit below where we believe the market value is. So we are kind of working that. We’ve had a – just recently had another company come in and toward the north side and we are expecting between the two that we might get some action out of that, one of the options that we’ve talked about also in the past is, if they are not ready to buy, they might be ready to lease that will eliminate if the operating cost while they are still trying to decide. We’ve got an offer on the – we had an offer on the another piece, a lower piece south of the highway and again it was a bit low. So we’ve pushed back on that a bit. The activity has been greatly increased with the new broker. So we expect that we should have something here soon.

Jamie Wilen

And lastly, just one to ask, the light weight panels that you were putting out in test, have they borne through that?

Mark Weber

Well, we still don’t have a significant amount of demand in the marketplace. We have the units in test with Penske. We have another national account that we are getting ready to build a pilot test unit for them in a larger size configuration. So, I would say that, it’s slowly gaining some interest and some traction. It’s far from being a market driver or a primary product that we have out in the industry today. We are producing it for some non-truck applications, some construction and other customers having interest in the product. So, we are going to continue to experiment with the options and opportunities for raw material and/or construction-related material that we can supply to other customers from our tower location.

Jamie Wilen

Gotcha. Thanks fellas. Well done.

Mark Weber

Thank you, Jamie.

Matthew Long

Thanks, Jamie.

Operator

The next question comes from Ralph Marash from First Manhattan Company. Please go ahead.

Ralph Marash

Good morning.

Mark Weber

Good morning, Ralph.

Ralph Marash

Are there any issues with labor, particularly in Indiana where you are sort of in the heart of very strong business conditions right now?

Mark Weber

Yes, you sort of hit the nail on the head. I would say that, during the fleet season, that was where we dealt with the highest challenges of attracting talent and so forth. It caused us to stretch out our build schedule a bit in Indiana. Albeit our customers understood what was going on and it worked with us very well and I indicated that our performance on delivery-related to the fleet runs in the second quarter, we had some additional orders that those customers sent our way late in the quarter that will produce here in the third quarter. So, we muscled our way through it. I think that’s why this efficiency, lean manufacturing initiative is so important to us in the factory to get our efficiency up, so that we can produce more trucks with less people. We will also begin to look for as we standardize the processes. We’ll be looking for opportunities to automate some of the labor-intensive standard work. But again, it has been a challenge. There is no doubt about it. Our sort of the challenge is really been on the fleet side. Our core employee base remains pretty stable, because they’ve been here long-term. So we haven’t had a tremendous amount of issues with our sort of core group. Our problem has been attracting those seasonal workers that are much more difficult here in Indiana to come by because of the bus RV industry pretty super heated right now still.

Ralph Marash

Thanks. That’s helpful. Given the strength in your business overall and particularly of course as you’ve been talking about your retail business, have you been able to be sharper and in effect turn down some of the fleet business that was lower margin? Have you just been able to get tougher with your customers?

Mark Weber

Well, I think that, we have through the work that that Matt initiated before and the team here before I even arrived, we have a much better understanding today of our cost structure at plant level, so by location and also by product lines. So I think we are doing a much better job of drawing a line in the sand and kind of say, okay, that’s as far as we are going to go and we have lost some business on the fleet side. Now one thing that affected is, this year is one of the three large rental fleet players out there Budget, Ryder and Penske and Ryder to stabilize their utilization rates. They were – their purchases for the rental fleet this year were not as large as they have been historically. So, that was sort of a customer decision, it really wasn’t anything to do with our performance, but we have. We have drawn a line in sand. We kind of know where we need to be and I think we are doing a much better job of managing the margin situation related to that business.

Ralph Marash

Have you seen the business – I don’t know, this might be more detailed than you want to answer, but have you seen the business go to the big competitor or is it some of the retail guys that have picked up the business you may have turned away?

Mark Weber

Well, most of the rental business, because those are national account customers. You have to draw your conclusion, most of that goes to Morgan and Supreme, because we have a footprint across the U. S. So we can produce the trucks regionally as those national account customers that being Penske, Budget and Ryder, they want those trucks produced where they are going to be domiciled or deployed. So, it’s for the most part, if we are gaining rental business, then, it’s pretty straightforward unless the market is going up, I mean, assuming everything is equal then if Morgan is going to lose it and if Morgan is gaining rental business and the we are the ones that are going to lose it. Assuming everybody is buying at the same level. So as I indicated, there were some changes in buying patterns this year with the – I am calling the big three that are out there in the rental business. But that business, that national account business is, I would say 90% of it is spread between Supreme and Morgan and there maybe because of a unique product or an unique situation, a regional player might pick up a small amount.

Ralph Marash

Okay, thanks. As you implement lean manufacturing and Kaizen, I am assuming that it’s being implemented more or less on the same schedule at all the different plants around the country?

Mark Weber

Well, it is and that flows down a bit, because obviously we got five locations. So we are trying to move five locations along. So, we got our team working across those locations. Training has been deployed in all locations at this point in time. So that was sort of the first big round of activity and now we are starting to go in and deal with some bottleneck situation. But again, we are deploying it across to all, we are not going to do it all in Indiana and then move to Pennsylvania and so forth. So, it’s a gradual process that’s going to try to bring all five locations along at the same speed.

Ralph Marash

Okay, that’s it. Thanks very much.

Matthew Long

Thank you.

Mark Weber

Thanks Ralph.

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

Thank you, Bianca. At the midpoint of 2016, we feel we are making solid progress on the primary initiatives we shared during our call with you on February 19th. As we move through the second half of the year, we will remain laser-focused on organic growth, utilize lean manufacturing to compress cycle times, continue to bring our cost structure inline with class-leading benchmarks, and pursue managed diversity around our core product portfolio.

In closing, I’d like to thank you for joining us on the call this morning and I look forward to reporting on our ongoing progress during the third quarter conference call this fall. Have a great day.

Operator

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

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