Supreme Industries, Inc. (NYSEMKT:STS)
Q3 2016 Results Earnings Conference Call
October 21, 2016 09:00 AM ET
Mark Weber - President and CEO
Matthew Long - CFO, Treasurer, and Assistant Secretary
Greg Eisen - Singular Research
Jamie Wilen - Wilen Management
Greetings, and welcome to the Supreme Industries 2016 Third 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]
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 is being recorded and will be archived and available for replay on Supreme’s website for approximately 30 days.
At this time, I would 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, Nicole. Good morning and thank you for joining us today to discuss the operating results of our third quarter and the first nine months of 2016. A press release summarizing our financial performance was issued after the market closed yesterday and is available within the Investor Relations section of our website.
Our third quarter was highlighted by double-digit year-over-year revenue growth, solid gross margins, and continued progress with target market segments. Net sales improved more than 15% during the quarter, resulting in a 12.5% year-over-year sales growth for the first nine months of 2016. Gross margin also expanded in the third quarter to 23% of sales as compared to 19.5% in the third quarter of 2015, which resulted in year-to-date gross margins of 23.1% of sales, a 430 basis-point improvement compared to last year. During his comments, Matt will provide more insight into the primary drivers of the gross margin improvement.
The previously noted revenue growth led to net income increasing 79% in the third quarter of 2016 to $5 million or $0.29 per diluted share, compared with $2.8 million of net income or $0.16 per diluted share in the same quarter last year. For the nine months, net income improved 88% to $17.1 million or $0.99 per diluted share in 2016. That was up from net income of $9.1 million or $0.53 per diluted share in 2015.
Economic indicators have turned more bearish during the summer months with several cross-currents resulting in delayed purchase decisions. On the positive side, retail sales, housing construction, low energy costs, and interest rates are all favorable. Dampening that optimism is the lack of small business confidence, several weak manufacturing sectors, limited export support, and the uncertainty of the November elections.
The IHS automotive division recently released our July update for full year 2016 U.S. commercial truck retail sales. That update projects class III to VII sales for full year 2016 will now actually drop below 2015 sales by 1.4% and the growth into 2017 is now projected at a rate of only six-tenths of a percent versus the prior forecast of 1.8% growth.
My discussions with multiple leasing companies and end users over the last ninety 90 days, confirm the caution being created by these economics cross-currents and the flat to slightly better outlook for 2017.
Order back log at the end of the quarter was $58.1 million compared with $74.4 million at the same time last year. The lower back log comparison is due to two large fleet replacement orders and the timing of an annual fleet account order received during the third quarter of last year. The current backlog position, while a reduction from last year, is in line with our historical third quarter backlog average since 2011. Orders for work trucks year-to-date remained better than 2015 actual orders and ahead of our internal plan.
Our third quarter 2016 retail truck orders were very solid, representing our second best third quarter order level since 2011 and only eclipsed by very strong booking in the third quarter of 2015. Our lean manufacturing engineering team is making incremental process improvements and advancing our continuous improvement culture, which optimizes our order to ship cycle time.
The back log at the beginning of this quarter was within $1.5 million of the back log we had at the start of last year’s third quarter. However, net sales were approximately $10 million higher this year versus the same quarter in 2015, a direct reflection of our improved throughput. In addition to the lean initiatives, we completed the consolidation of the Rhode Island service center into our Jonestown, Pennsylvania manufacturing campus. The broader nucleus of technical talent at Jonestown will allow us to improve our support levels across the East Coast and at the same time, reduce our overhead cost.
The excess property in Rhode Island is currently being marketed for sale with early indications of interested commercial buyers. The Marker Light Recall that we discussed last quarter is proceeding in accordance with National Highway Traffic Safety Administration Protocol and there’s no data that would indicate the associated cost will be greater than our initial estimate.
Concerning growth initiatives, we’re actively engaging in quoting for 2017 national account rental fleet requirements. However, we’re in very early stages of those discussions and it is premature to speculate on that outcome.
During the quarter, we also added talent to our national account sales team and placed a new Director of Sales into our Southeast region. We continue to look for opportunities to improve coverage, capability and customer service levels.
We also have multiple product innovation initiatives in various stages of development that could improve the utility of our existing products and possibly broaden the range of applications. I will provide more details on those projects as we move through concept development and in-the-field testing over the coming months.
With that I’ll turn the call over to Matt for the quarter’s financial highlights.
Thank you, Mark. Net sales increased by 15.4% to $74.8 million compared with $64.8 million in last year’s third quarter, representing continued success in capturing market share gains in excess of industry averages. Net sales increased 12.5% to $237.1 million for the nine-month period, that’s up from $210.7 million in the same period of 2015.
Sales of specialty vehicles were down in the quarter. However, on a year-to-date basis, specialty vehicle sales increased over last year. Gross profit in the third quarter of 2016 increased to $17.2 million, up from $12.6 million in 2015. Gross margin as a percentage of sales improved to 23% of sales in the third quarter versus 19.5% of sales in the third quarter of 2015.
As we indicated in July on our previous earnings call, compared with last year, we had a higher proportion of retail products in our backlog entering this year’s third quarter, which contributed to the margin improvement. In addition to the higher margin and profit mix, we also gained some operating leverages as a result of increased production due to higher sales volume.
For the nine months, gross profit increased to $54.8 million compared with $39.6 million in 2015 on higher sales. Gross margin was 23.1% of sales in 2016 compared with 18.8% of sales in the same period last year. The year-to-date improvement over 2015 has benefitted from favorable product mix as well as increased volume. The gross margin is net of previously disclosed pretax charge of $500,000 that we took during the first half of 2016 to cover Supreme’s estimated cost related to Marker Light Recall campaign.
Selling, general and administrative expenses increased by $800,000 to $9.5 million for the third quarter of 2016 compared with $8.7 million for the same period in 2015. As a percentage of sales, SG&A declined to 12.7% of sales compared with 13.4% of sales in last year’s third quarter.
For the nine months SG&A expenses improved to 12.2% of sales, down from 12.5% of sales in the first three quarters of 2015. The dollar increases in the 2015 periods were mainly due to higher commission expense on the higher sale, incremental wages for added personnel in key regions, profit-based compensation plans and annual merit increases.
Operating income in the quarter was $7.9 million and was up 95% from the $4.1 million in operating income reported for the third quarter of last year. Year-to-date operating income in 2016 nine months was $26.2 million, an improvement of 93% versus operating income of $13.6 million in the same period last year. Net income was $5 million in the third quarter, up 79% from the net income of $2.8 million in the same quarter last year.
Diluted earnings per share increased to $0.29 per share compared with $0.16 per share in the comparable quarter of 2015. Year-to-date net income was up 88% from last year, coming in at $17.1 million; this compares to $9.1 million during the same period last year. Diluted earnings per share increased to $0.99 per share in the current year-to-date period versus $0.53 per share last year.
Turning to the balance sheet, we ended the quarter with just over $23 million of cash on hand, up from $17.2 million of cash and equivalents at the end of last year. Total debt at the end of the third quarter was $7.8 million, representing the outstanding balance on our low cost term loan. Working capital increased to $67.6 million at quarter end compared with $51.6 million at the end of 2015. Cash flow from operating activities for first nine months improved to $15.7 million from $1.2 million in 2015. Stockholders’ equity rose to $104.5 million compared with $88.6 million at the end of last year.
On a per share basis, book value at the end of the third quarter was $6.20 per share, up 16.5% from $5.32 per share at the beginning of the year.
This concludes our prepared remarks. Nicole, let’s open up the lines for questions please.
We will now begin the question-and-answer session. [Operator Instruction] Our first question comes from Greg Eisen of Singular Research. Please go ahead.
Your sales for the quarter seems like came in kind of better than you would have had expected, based upon the backlog level there. Could you talk about what went right in the quarter? You talked sales were higher on I guess better market share grab. What was the contributing factors on sales growth, given the outlook that you’ve just described that’s kind of come down on a nationwide basis?
This is Mark Weber, Greg. The order activity in the first, I think five months of the year, was pretty strong. We saw -- on the retail side, saw it start to cool off a bit in that time period and it’s sort of now in line with what the general commercial light-duty and medium-duty truck data would indicate here in the back half of the year. So, we had pretty strong momentum from orders. Our back was in good shape going in comparably. Again, last year’s back log was one of our stronger periods going into the third quarter. We were about on par with that. So, we had a solid backlog going into quarter.
Our business seasonality, we’re typically running at a pretty high output in the second quarter. And with the orders that had in the backlog, chassis availability was good, so that really allowed us to move that through our plants. And again, we’ve continued to improve the footprint of our plants and the layout and so forth to try to optimize the throughput. So, I would say, it was a combination of multiple factors that allowed us to have a strong sales period there in the third quarter.
Okay. And it sounds like you’re hearing confirmation from major customers about the environment, being similar to the study that you just quoted that -- you said flat to up slightly is what they are expecting.
Yes. For next year, I was just talking to area VP with a major leasing company on the West Coast yesterday. And we were talking about just general business. And he said in his area, again, that’s a region, not the entire United States, but he said in the medium-duty -- light-duty side, they are pretty much flat right now year-over-year.
So, whether you’re talking about down 1% or up 1%, I think that sort of the viewpoint right is that next year’s going to be about flat; it could be up 1% or 2% it could be down 1%. We will get a better indication once we get through the rental fleet bidding process here over the next say 60 days. The rental fleets tend to be -- have a little more exposure to sort of economic uncertainty. We saw some of the rental accounts pull back pretty hard. Ryder, who’s a public company, they pulled back pretty hard on their rental for 2016. So, that will give us a little bit of indication. But, like I said, our retail orders in the third quarter of this year, was our second best third quarter since 2011. So, we’re not -- obviously we love to have a bigger back log, I don’t know who wouldn’t but we’re not terribly concerned about our position right now.
Just going back to Rhode Island plant for a second, were there any costs you wanted to call out in the third quarter that went through the P&L, whether it’s SG&A or on the cost to goods sold side that would be done recurring?
There was minimal amount, Greg.
Our next question comes from Jamie Wilen of Wilen Management. Please go ahead.
Two questions, first on the backlog, the mix of the business in the backlog, is that in the third -- your backlog moving into this quarter, you said the margin mix was a little bit better, how does it look now?
It’s roughly in line with what it was third quarter last year from a relationship standpoint. So, we still think we’re going to be reasonably good -- good place to be.
I realize there is no great industry statistics on market share but industry was relatively flat and you were obviously up this year. So, obviously you’re gaining in market share which you -- is that true?
Like you said, there’s no data out there being tracked. We had some accounts, we look at customer accounts; we had some accounts that didn’t buy this year. We didn’t necessarily lose the business; they just didn’t buy, as I indicated. And regionally, we have pockets that are stronger than others. So, there’s certain cases where we know that we’re picking up some market share. And with a lot of people sort of standing on the sidelines from a purchase decision standpoint, it makes it even more complicated to kind of figure out. I would also say that with the general slowdown in activity, as you would always expect pretty much in any marketplace that the competition has gotten a little more heated. So, we’re paying real close attention to that as well. But again, like I said, the third quarter orders on the retail side were pretty solid. We think we’re in a good position going into the rental fleet bidding process performance with those accounts; it’s been very strong this year in terms of execution. We have very strong relationships with couple of those large accounts on the leasing side where we’ve performed quite well. So, like I said, we’re feeling reasonable about our transition from 2016 into 2017.
As far as the real estate Indiana, now that you’ve fully consolidated, are all the efficiencies now in, and what is the status of the excess real estate there?
I believe that we’re in fact -- this is Matt. We’re in fact starting to see the efficiencies from the consolidation here. I believe based on what we projected and what we’re seeing, we’re actually seeking that to a certain degree. From the real estate perspective, we’ve got one of the buildings; it’s leased at this point. We’ve had a few sessions where we’ve been working with some of the local RB [ph] companies looking at the property but nobody bid quite yet. But we’re hopeful that that’s still going to happen. Now, we’ve also had some interest in potentially leasing those. And while that’s not our first desire, certainly leasing them out and then offsetting any of the cost of maintaining them is one of the things that we’ll look at.
And lastly, obviously the balance sheet is a thing of beauty. What’s the acquisition outlook, because you mentioned you’re beginning to look for other vehicles?
We’re actively out talking to people in the M&A space that are representing companies and also out talking to companies. Again, valuations are still pretty elevated. So, it makes it tough for us to look at something that we want to be creative. So, I would say we are active in the space. Those situations are all timing related, but we are out there talking to people, looking at opportunities and our balance sheet puts us in a position where, if there is an opportunity that strategically makes sense for us, we can act on it.
[Operator Instruction] We have a follow-up question from Greg Eisen of Singular Research. Please go ahead.
Yes, thanks. Could you give us an outlook on the specialty vehicles side of the business? You said it was down this quarter but up year-to-date. What’s happening in that space and what should we be looking for?
That’s a business that -- it’s low volume, high-custom product. And as you would expect, the orders and the projects are very lumpy. One of the things that we did about two years ago is we restructured that business to really drop the breakeven point such that we were better positioned to deal with that sort of uncertainty about order activity and lumpy incoming order rates, so that if our volume goes down, we are not setting not a real high breakeven point. One thing I would say is that that is positive. A big part of that business in the past was armored equipment for the Department of State. That contract expired in 2012; it was extended for a couple of years, but ran out in the ‘13, ‘14 time period. That contract is coming back out again. And we believe that could have some benefit to us in 2017. So, we are optimistic about that DOS contract coming back out and having an opportunity to participate in that going forward. That provides sort of a base of business for that division. And then the other sort of lumpy orders like cash-in-transit or specialty tool trucks or things like that sort of is icing on the cake.
Our next question comes from Bob Jaffe of EBR. [Ph] Please go ahead.
Could you just break truck revenue versus specialty vehicle et cetera for the quarter?
Yes, we can certainly. Truck revenues for the quarter was just under $72 million. And when we talk about specialty vehicles now, it also includes the trolley business which we are in the process of running out as we sold that business. So that makes up basically the remaining portion of the revenue base.
Okay. So, $72 million in truck revenue versus backlog at the beginning of the quarter of 75 to76 with backlog at $58 million, does that mean Q4 revenue is roughly around 58 -- call it $56 million?
That really -- that was one asked me to forecast and we don’t have a 100% throughput. What we typically say in the quarters that we are not running fleet business, our backlog is roughly 90 days business. So, it should be someone in that realm without really getting into the details of, what we have in the back log that may have some longer term business than as we book fleet business and Mark has talked about that a little bit. Those generally span into first and second quarter of the next year.
We have no other questions at this time and this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Weber for any closing remarks.
Thanks Nicole. Although the economy remains Choppy and demand for light-duty and medium-duty commercial trucks has cooled in recent months, we remain optimistic about the future for Supreme. Our customer-centric value proposition continues to gain organization momentum and out speed of execution opens doors with conquest accounts, allowing us to demonstrate the value of our solutions. As Matt indicated, our balance sheet is in excellent condition, allowing us to invest in process improvements, product innovations and even considering accretive acquisition as an opportunity becomes available. I would like to thank you for joining us on the call this morning. And I look forward to reporting on our ongoing progress during our next conference call, early next year. Have a great day.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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