Spartan Motors, Inc. (NASDAQ:SPAR) Q3 2017 Earnings Conference Call November 1, 2017 10:00 AM ET
Juris Pagrabs - Group Treasurer and Director of IR
Daryl Adams - President and CEO
Frederick Sohm - CFO and Treasurer
Steven Dyer - Craig Hallum Capital Group
Matt Koranda - Roth capital
Rhem Wood - Seaport Global Securities
Hello. And welcome to the Spartan Motors, Inc Third Quarter 2017 Earnings Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Juris Pagrabs, Director of IR and Treasury. Please go ahead, sir.
Thank you, Kei, and good morning, everyone. Welcome to Spartan Motors 2017 Third Quarter Earnings Call. I am Juris Pagrabs and joining me on the call today is Daryl Adams, our President and Chief Executive Officer, and Rick Sohm, our Chief Financial Officer.
For today's call, we've included a presentation deck, which will be filed with the SEC and is also available on our Web-site at spartanmotors.com. You may download the deck from the Investor Relations section of the Web-site and follow along with our presentation during the call.
Before we start today's call, please turn to Page 2 of the presentation for our Safe Harbor statement. You should be aware that certain statements made during today's call, which may include management's current outlook, viewpoint, predictions and projections regarding Spartan Motors and its operations, may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995.
I caution you that as with any prediction or projection, there are a number of factors that could cause Spartan's actual results to differ materially from projections. All known risks that management believes could materially affect the results are identified in our Forms 10-K and 10-Q filed with the SEC. However, there may be other risks that we cannot anticipate.
For today's call, Daryl will provide an overview of the third quarter and a brief business update, and Rick will review the third quarter results and our 2017 guidance. We plan to then return to Daryl for closing remarks before proceeding to the question-and-answer portion of the call.
At this time, I am pleased to turn the call over to our CEO, Daryl Adams, for his opening remarks, which begin on Slide 3.
Thank you, Juris. Good morning, everyone. And thank you for joining us this morning for our third quarter update. I'd also like to thank everyone who attended or watched our recent Analyst and Investor Day event in New York City where we shared long-term business goals and financial targets. For this quarter, I am pleased to report another solid quarter of sales and profitable growth for Spartan Motors. Revenues for the third quarter rose 27.3% to $189.2 million from $148.7 million a year ago. The increase in sales was driven by strong performances from ER and SCV segments.
For the third quarter 2017, adjusted net income more than doubled to $7.4 million or $0.21 per share or $3.4 million or $0.10 per share last year. Our strong financial performance across all business segments is evidenced that unrelenting focus and profitable sales growth and operational performance is paying off. As shown by our 6.8% consolidated adjusted EBITDA margins for the quarter which 180 basis improvement over the prior year.
Even more exciting that our ER segment was profitable on both a GAAP and an adjusted basis for the quarter.
Now turning to Slide 4, I'll provide an update on the new USPS contract. On September 29th, we awarded a $214 million multiyear cargo body order with the USPS. This represents our largest single order in history of Spartan Motors. The award is for more than 2,000 vehicles to figure in Cab Over and Cab Behind chassis and an 18 and 24 foot bodies. These awards demonstrates industry confidence in our ability to design, custom engineer and build commercial trucks across Classes 1 through 6 in addition to providing custom vocation-specific upfits that uniquely positions us to serve the growing demand for last mile vehicle or fleet operators. The USPS contract provides a mean for us to expand our truck body manufacturing footprint to the east coast. From a potential location will be to leverage our Ephrata, Pennsylvania location. This will provide access to the entire east coast on the largest truck volume market and combined with the Midwest market will give us access to over 60% of the truck body market in the United States. Production is expected to begin sometime in the second quarter of 2018 and will ramp up to full production during the second half of 2018.
Now turn to Slide 5. I'll provide update on our key business highlights and development. AmeriPride. Last week we announced the receipt of 20 units electric vehicle walk-in van order from AmeriPride Services. One of the largest linen and uniform service companies in North America. This innovative walk-in van integrates the Utilimaster body design with the Motiv Power Systems' EV propulsion solution as more fleet operators look for solutions to reduce the carbon footprint and address environmental sustainability. Strategic alliances with alternate propulsion providers have allowed Utilimaster to produce nearly 800 EV vehicles over the past eight years. Coupled these strategic alliances with our 45 years history as a leading fleet provider Utilimaster and Spartan Motors earned utmost position to serve the growing alternative market for large fleet customers.
Isuzu F-Series ramps up. As indicated last quarter, some of the new Isuzu F-Series Class 6 medium duty truck is ramping up and today we are full productive. The F-Series truck is designed to optimize fuel efficiency and maximize cargo space or to serve growing urban and last mile delivery segment. Class A Motorhome, our Motorhome chassis segment demonstrated strong performance during the quarter as we continue to gain market share within a Class A, greater than 400 horsepower segment as evidenced by our $31.2 million backlog at the end of third quarter, that's up 63% from a year ago. Motorhome sales for the quarter up 65.7% to $37 million and it attribute to our superior product and services which encompass first to mark innovations for superior ride and handling as well as safety.
S-180 pumper continues to capture awareness and market acceptance. We sold 40 units including 9 units in October, 6 of these units are slated for hurricane affected areas which demonstrates an expected benefit of our quick delivery.
The Smeal acquisition, our integration efforts continue to run ahead of schedule as we discovered more synergies than originally anticipated which help facilitate the strong third quarter performance anniversary response as we return to profitability.
Please turn to Slide 6. Two weeks ago at our Analyst Day and Investor Day in New York we informed you that ER segment will be profitable on GAAP basis for both Q3 and Q4 and on adjusted basis for the full year. I like to congratulate the entire Spartan team for their hard work, dedication and execution over ER business plan. We expect ER to show year-over-year improvement of approximately 400 basis points in gross margin, approximately 300 basis points in SG&A improvement, approximately $10 million in adjusted EBITDA as well as significant reduction in warranty expenses.
I'll now turn the call over to Rick to discuss Spartan financial results for the third quarter and outlook for the remainder of the year.
Thanks, Daryl. I'll start on Slide 8. Revenue for the quarter increased $40.5 million to $189.2 million from $148.7 million, driven by almost $24 million from ER and SCV contributing more than $80 million to our top line growth. Smeal contributed more than $70 million to the ER results and exclude approximately $9 million in inter-company chassis sales.
For the full year, we expect Smeal will generate approximately $105 million of revenue which excludes $20 million of Spartan inter-company chassis sales.
Third quarter adjusted EBITDA rose $5.5 million or almost 75% to $12.9 million from $7.4 million and our adjusted EBITDA margin improved to 180 basis points to 6.8% from 5% of sales a year ago.
Third quarter adjusted EBITDA exclude the impact of $600,000 of restructuring and acquisition related expenses which compares to $300,000 in restructuring expenses and a part recall of $1.7 million in the prior year. Our backlog at September 30th reflects the new $214 million USPS order which puts us at $537.7 million or 97.6% compared to $272.1 million a year ago.
Now let's take a look at results by operating segment starting with FVS on Slide 9. FVS reported revenues of $78.6 million compared to $78 million last year, an increase of $600,000 despite the fact that we experienced difficult top line comparisons due to large uptick order last year that has not yet reoccurred. Adjusted EBITDA declined $1.3 million to $8.8 million from $10.1 million a year ago largely due to product mix driven by lower sales in our uptick business.
Adjusted EBITDA margin declined 180 basis points to 11.2% of sales from 30% a year ago, driven again by unfavorable product mix but this was partially offset by improved labor and manufacturing productivity. Backlog increased to 186.2% to $292.5 million compared to $102.2 million a year ago reflecting the new USPS order. As Daryl mentioned, production of order for USPS is expected to begin sometime in Q2 of 2018. And with that timeline we anticipate approximately 35% to 40% of the contract revenue to be achieved in 2018. We do expect to incur certain launch cost and spend additional capital as we lead into ramp production early next year. Despite this we expect operating margin during the first year of production to be accretive to overall corporate margins. Despite the start up cost and the inefficiency we expect with the early production runs.
Turning to Slide 10 in the SCV segment. Third quarter revenue increased $18.2 million or 59% to $49 million compared to the $30.8 million last year, and reflects a $14.7 million increase or 65.7% increase in Motorhome sales as we continue to gain market share in the Class A diesel segment across our product portfolio. The remaining increase is due to contributions of Reach and the F-Series production which Daryl mentioned achieved full run rate late in the quarter.
Adjusted EBITDA for the quarter grew more than 34% or $3.8 million to $5.1 million or 10.5% of sales from $1.3 million or 4.3% of sales last year. This was driven primarily due to the higher sales volume and improved operational performance. Our backlog experienced strong growth of more than 58% to $31.9 million compared to $20.1 million a year ago, and reflects a continue strength in Class A Motorhome motors. In fact, year-over-year Motorhome backlog is up 63% to $31.2 million as we continue to gain share.
Moving to Slide 11 in the ER segment. Revenue for the quarter was up 56% to $65.9 million from $42.1 million in the prior quarter. Adjusted EBITDA improved $3.7 million to $2.5 million from Adjusted EBITDA loss of $1.2 million a year ago. Adjusted EBITDA year ago included a $1.7 million charge for our legacy product recall. And our adjusted EBITDA margin improved 660 basis points to 3.8% of sales for the quarter. The improvement reflects more profitable sales driven by lower warranty and product quality cost, improved vehicle mix and increased labor, material and manufacturing productivity. We also believe this validates a focus, hard work and execution of the entire Spartan team over the last several years.
Backlog increase of more than 42% to $213.3 million compared to a year ago and our Smeal backlog at the end of the quarter was more than $83 million.
Turning to our balance sheet on Slide 12. Our earnings growth combined with the progress we've made in converting working capital to cash is driving increased liquidity. Total liquidity at September 30th, totaled $67.4 million which reflects $21.9 million of cash on hand and more than $45 million of capacity on our revolver. Sequentially, total liquidity improved approximately $11 million which continuously increase our overall capacity to pursue future acquisition opportunities.
Please turn to Slide 13 and we'll discuss our outlook for the remainder of 2017. Looking ahead to the fourth quarter which typically has more sales lines than the third quarter, we expect to see continue year-over-year sales growth and improved operational performance which will result in our eight profitable quarter in a row. We expect to see year-over-year growth primarily driven by last mile delivery orders, Class A Motorhome and the production of the new Isuzu F-Series.
At this time I'd like to take a few minutes to discuss the release of our valuation allowance against our deferred tax assets that occurred during the quarter and its impact on the remainder of 2017 and 2018. As background, in the third quarter of 2015, we recorded a valuation allowance against our deferred tax assets as we determined that it was more likely than not that we would not be able to realize their future tax benefit due to accumulative losses occurred in prior years. Since that time we have performed quarterly reviews to determine whether the valuation allowance continue to be warranted. During the third quarter, we concluded that the valuation allowance was no longer required as a result our return in profitability over the last seven quarters, our expectations of significantly higher earnings next year and the acceleration of earnings for long term. Accordingly, we reversed $6.3 million of the valuation allowance as of September 30th. As a result, our effective tax rate going forward will be more closely aligned with the statutory rate, which will have an impact on our fourth quarter and full year 2018 tax expense. Please note that this change only affects tax expense and adjusted EPS. Our current revenue and Adjusted EBITDA guidance remains unchanged, reflecting our strong year-to-date operational performance.
For the remainder of 2017 we expect revenue to be in the range of $790 million to $710 million. And adjusted EBITDA to be in the range of $29.3 million to $30.3 million and our tax benefit recorded in the third quarter and our expected tax rate of approximately 35% in the fourth quarter. Adjusted earnings per share to be in the range of $0.40 to $0.42 which includes the $6.3 million or $0.18 per share valuation allowance adjustment recorded in the quarter and includes the impact of the expected fourth quarter income tax expense.
At this point, I'll turn the call back over to Daryl for his closing remarks.
Thanks Rick. Before I conclude I'd like to thank you entire Spartan team for their execution and effort in achieving our terrific third quarter results. As we mentioned three weeks ago at our Analyst Day and Investor Day in New York, Emergency Response business turnaround is behind us. We are now focused on sales growth and operational improvement as all three business segments demonstrated this past quarter. This discipline and concentration and sales growth and operation improvement is the underlying foundation to our financial performance. As we move forward to accomplish our stated goal of achieving $1 billion in sales and approximately 10% adjusted EBITDA margin by 2020. Since 2015 we have worked hard to consistently improve and deliver on our commitment. I am proud to say we've re-earned the confidence of our customers, our employees, our Board of Directors and our shareholders. Today, I tell you with confidence that we are determined to keep the core and deliver real measurable shareholders returns by accelerated organic growth making sure it's sustainable for the long term and aggressive pursuing strategic market expansion and acquisition target as they present themselves. Thank you. Operator, we are now ready to take questions.
And the first question comes from Steven Dyer with Craig Hallum.
Thanks, good morning, guys. First question I'd like to spend a little bit time on FVS. Rick, you sort of touched on a little bit the cadence of both revenue -- a kind of revenue for the new USPS contract. Could you talk a little bit I guess as specific as you feel comfortable about sort of what that means for next year's cost. You talked about some launch cost. I don't know what capitalized versus expense and kind of how that all sort of plays into EBITDA next year. Obviously, you are not going from call 30 to 100 in three years is a sea bream I just want to make sure can everybody's expectations are where they should be?
Yes. So I'll tell you what you'll see Steve next year as revenue from the comp fact somewhere near $80 million, what that means is that 2019 we probably pickup somewhere around $130 million. I think some of the expenses I talked about there will be some capital but in terms of expense there is probably some training cost we have caused bringing on some new employees and maybe some of the inefficiencies and ramping that production. They are all alluded to the fact that we are working on where we are going to produce these vehicles. There are a number of options but we have production facilities located in Ephrata, Pennsylvania which puts us in a nice location and a good proximity to the east coast market and then it allows us longer term to invest and make better use of our manufacturing footprint.
Got it, okay. Outside of this contract your FVS backlog was down a little bit year-over-year. I know that's really lumpy business with some non-recurring stuff, just wondering if there is anything else to that. Are you being more selective or turning away anything? Is there a capacity issue or is that just kind of timing of these lumpy orders?
Yes, unfortunately Steve I think it is timing of some of these orders right. We had a significant outfit order which over time we expect some of these customers to come back, it just hasn't happened yet and that's what I'd attribute to sort of the year-over-year comparison. Walk-in van and truck bodies have a good backlog but the one order have been difficult to replace.
And then just moving to the ER segment, obviously really impressive operational turnaround there. Was there anything sort of one time in the quarter that I mean you addressed the profitability a little bit. I mean are there margins you can build off of in that segment or was there sort of anything that tell [Indiscernible] to better this quarter.
Other than obviously these results we are happy with. They were little stronger than we expected. I think we got some higher volumes in the third quarter and as I head into the fourth quarter I would think volumes maybe down sequentially but nothing out of the ordinary, Steve.
Thank you. And the next question comes from Matt Koranda with Roth capital.
Good morning, guys. Just wanted to start up with the guidance question. The midpoint of our adjusted EBITDA guidance looks unchanged. I think despite what looks like a pretty strong Emergency Response EBITDA contribution that will continue to be pretty strong in the Q4 and I think SCV looks like it's firing all cylinders, does that imply sort of a bid of segment weakness FVS in Q4 that led you to maintain EBITDA guidance rather than raise it for the year?
No, I don't know that implies any weakness there Matt, the ER production run will be completed early in the fourth quarter here probably on the next few weeks. So, yes that explains I think some of the sequential quarter-over-quarter decline. Sales will probably off in total up $50 million but no we are happy with what we are seeing down a crystal from an operational perspective and like I just answered the Steve, unfortunately the order for the uptick business they haven't come back to this point.
Got it. Any sense what's driving that softness in uptick in near term?
Just like I said the one order that was significant last year. It's our customer that has -- lot of customer of ours continues to be a customer Matt and I don't think its question of if but when will see additional orders for that product.
Okay, got it. Wanted to see if I could attack that USPS contract ramp up and maybe a little bit a different way. So the ramp you guys mentioned an impact of margin next year. Just looking historically at sort of where you guys have been in that segment on EBITDA margins in the same timeframe. So in Q2 over the past three years you guys have ranged kind of from 8% to 11.5% EBITDA margins. Would you expect during the initial stages of the ramp maybe Q2, Q3 to kind of be at the low end of that EBITDA range? Is that a fair assumption? Just little bit of help on sort of the ramp up would be great.
Yes. I think Q2 and Q3 next year will be little lower right. I think our truck body business if it is in a new location we expect to benefit from that as it will be if it is outside of Bristol it will be a dedicated facility but obviously as we go from call it $80 million next year to $130 million plus in 2019; we would expect to see significant improvement in margin year-over-year.
Got it. In ER, I mean it's really phenomenal EBITDA margin this quarter I mean already more than halfway towards the low end of your 68% EBITDA margin target for the three years forward here, is there any sense for where we improve off of this base for next year? Could you give us a sense for kind of the expected margin improvement in the near term so that we don't get too far ahead of ourselves in 2018?
Yes. I think third quarter is definitely a high watermark. We expect fourth quarter to be profitable as well as I think we talked about in New York a few weeks ago. The full year of 2018 we would certainly expect to be profitable on a GAAP basis and an adjusted basis so while third quarter maybe high watermark if I look at the full year, year-over-year I would expect 100 -150 basis points add a minimum improvement.
Okay, that's helpful. And then just last one for me. I think in the prepared remarks and the slides released you guys mentioned Smeal coming through with more synergies than anticipated. Anyway to quantify that for us and then what buckets would those synergies fit into in particular, is it productivity? Is it sourcing? Just a little bit more color on that.
Yes. I don't know that we called out the absolute levels of the synergies but I think good example Matt is what we are seeing as we have throttle down our Spartan aerial product, what we are seeing is a lot of acceptance for the Smeal aerial product so call it a mix where we had some of our top leaders having a lot of success selling the Smeal aerial. So I think we should see that continue forward and there is also an important part of productivity that we've seen -- we've talked about focus factory concept going forward and I think that helps drive margins longer term.
Thank you. And the next question comes from Rhem Wood with Seaport Global.
Hey, good morning. So first question just on the tax rate so we are all on the same page. I think you talked about 35% for the fourth quarter. I am using 38.5% for 2018, can you kind of ballpark that or where you think that might go?
Yes, Rhem, I mean there is statutory federal rate and then you are probably looking at some state taxes as well. So forward loaded is probably somewhere between 35% and 38%
Okay. All right. And then this opportunity in Pennsylvania, can you talk about I mean seems like there is an opportunity to kind of expand your manufacturing facility to get closer to east coast customers. Can you talk a little bit more about that? And then I mean what is the likelihood of maybe winning some additional business like that USPS, United States Postal Service business you just won. I mean do you have the manufacturing capacity now to win additional business or you need to expand some. Just can you talk about what your thoughts are there?
Sure. I will take that, it's Daryl. Good question, Rhem. I think if you go back to the comment Rick made I think a couple minutes ago while us winding down our Spartan aerial products and moving to the Smeal aerial products, we talked about that as part of the synergies and the lot when we purchase Smeal. We look at those as is freeze up our effort at campus for this truck body build so that's probably reason why we are looking at it. We are still in evaluation but I think from capacity standpoint we are growing sales. We are going to remove the truck body out into this location. And it's actually turns out to be a real nice location within 200 miles of the coast, gives us a lot of east coast presence that we haven't had from the FVS business segment, which will always even potentially those motor products on that campus as we continue to grow. So, yes, it's positive in a number of ways not just after this USPS two year run. We are going to have some sales people out in that area, continue to try to grow the truck body business. So we see it is a win-win.
Yes. And the only thing maybe I would add is if you go back to our Analyst Day presentation right I think Daryl and Tom Ninneman talked about our truck body business out. We are looking at a kind of 4% market share run. And we talked about expanding our production footprint over time both to the east coast and the west coast, right where transportation cost just eat us up so I think the investments if we make out on the east coast is kind of the first step to being able to grow the truck body market share.
Okay, yes, that's good color. It seems like a big opportunity there for you guys. So maybe a little bit more cost in first part of 2018?
That's our thinking currently to convert from an ER plant to truck body plant there. We are going to have spent some money and invest some capital but we think there is big opportunities longer term.
Okay. And then so east got lot of things going on right now in good internal initiatives and progress. What is your -- what are your thoughts on M&A right now and what is your deal pipeline there look like? I mean what would be interested in potentially?
Yes, I'll take as well. We haven't talked about the number of deals we are looking at. We continually look at them; we evaluate them in a very disciplined approach I think we've talked about this as some of the conferences we have been at, they do to be accretive right and I think we also said right that the ER business would not be of interest but any other opportunity we are talking fleet vehicles, like we just talked about truck body right. Then fleet is of interest something to get us as Rick mentioned different footprint that we would have. EV is probably not a rideable but we are looking at EV and then if there is something that we can use SCV segment. So the two that we are looking at would be fleet vehicle service and SCV. And we are going to let ER continue to digest and work their plan to be more profitable. I hope that gives you enough color around it and again we have not look at the number of deals we are looking at because we all know that we look at lot one, good one.
Thank you. And that was a last question I assume. I return the call over to management for any closing comments.
Thanks everyone. Thanks for joining us today on our conference call. We have a couple of investor conferences coming up over the next couple weeks. So I am sure we'll see some of you. And if not, if you are interested please sign up for one-on-one meetings. And I just want you to have a great holiday and I think the next time we touch base will be for fourth quarter earnings which are scheduled for the end of February or first week of March. So have a good day and thanks.
Thank you. The conference is all concluded. Thank you for attending today's presentation. You may now disconnect.