Shyft Group Inc (SHYF) 2017 Q1 法說會逐字稿

Good morning, and welcome to Spartan Motors 2017 First Quarter Conference Call. (Operator Instructions) This call is being recorded at the request of Spartan Motors. (Operator Instructions)

I would now like to introduce, Juris Pagrabs, Group Treasurer and Director of Investor Relations for Spartan Motors. Mr. Pagrabs, you may proceed.

Thank you, Ryan, and good morning, everyone. Welcome to the Spartan Motors 2017 First Quarter Earnings Call. I'm 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 website at spartanmotors.com. You may download the deck from the Investor Relations section of our website 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 conference 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 first quarter and a business update, and Rick will review the first 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'm 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 on Spartan Motors’ 2017 First Quarter Conference Call. We're pleased to report another solid quarter of growth and profit improvement on adjusted basis for Spartan Motors. We met our internal expectations, and this marks our 5th profitable quarter in a row. Revenues for the first quarter rose 24.9% to $167.1 million from a $133.7 million a year ago. The increase in sales was driven by the acquisition of Smeal Apparatus, which closed on January 1, 2017. Smeal contributed $35.2 million in revenues during the first quarter, including $5.5 million of Spartan intercompany chassis sales.

For the first quarter of 2017, we reported an adjusted net income of $1.3 million or $0.04 per share compared to $0.5 million or $0.02 per share last year. That's an adjusted net income increase of 142.1% year-over-year.

Our solid performance during the quarter was driven by the operational improvements we continue to make in labor and manufacturing productivity. As we’ve told you, our deliberate investment in manufacturing and best practices are starting to pay off. I'm extremely proud of all the Spartan team members, how quickly they've embraced our initiatives of improving and growing the business. We are starting to see the impact of implementing our Spartan production system, Lean Manufacturing and continuous improvement initiatives, and a positive momentum is building quarterly, as we execute our plan.

Now turning to Slide 4, for an update and a few business highlights and developments. As we previously announced, we completed the Smeal acquisition on January 1, and for the full year, we expect Smeal to increase sales by $35 million to approximately $105 million in revenues. That's up from $70 million in 2016, including our Spartan chassis sold to Smeal. The increase is a direct byproduct of improved manufacturing processes and an increased level of interest from our dealer network and customers, as a result of having a more robust broadened product portfolio.

I'm pleased to report that our integration efforts are running ahead of schedule due to well-disciplined focus and hard-working team. Equally exciting is that not only have we met our synergy goals, we've identified significant additional opportunities, which we can credit to the application of our lean and continuous improvement initiatives, which will accelerate the turnaround time line of our Emergency Response business.

The newly combined Spartan Emergency Response business units ranks as one of the top 4 North American fire apparatus manufacturers in an increasingly consolidated industry. As we work through the integration process, we are applying lessons learned and documenting the processes required to optimize future acquisitions.

And please turn to Slide 5 for a brief update on the S-180 pumper. As you're likely aware, in 2016, we brought to market the S-180 truckline currently in 11 pumper models. As a reminder for those new on the call, the S-180 is designed to provide the market with faster order-to-delivery cycle times. The S-180 truck offers several pre-engineered pumper models that are based on the most commonly ordered option packages. By reducing complexity, we're able to streamline the ordering, engineering and production processes, thereby cutting delivery time to as little as 180 days.

The product line continues to gain momentum, as our dealers are showing increased excitement and support. During the first quarter, we shipped 14 S-180 pumpers, that's up 180% over the fourth quarter when we shipped just 5. In April, we shipped 3 units and our backlog is currently at 18 units through June 2017.

If you please turn to Slide 6. Last week, in conjunction with the Annual Fire Department Instructors Conference, also known as FDIC, we launched Spartan refurbishment centers as a direct outcome of listening to our customers and providing them a cost-effective approach to repair out-of-service and damaged or worn trucks in a fraction of the time and cost of a new vehicle. These Spartan refurbishment centers are designed to solve municipality backwater issues, and keep trucks in service by improving safety, increased performance, while ensuring they stay within their budgets.

Fire departments across the country are battling aging fleets and trucks that are out of service. They require Emergency Response vehicles to not only last longer, but to perform more reliable over a longer period of time. Located at Spartan campuses, primarily in the Midwest, we offer a complete range of services and refurbishments from lights to full cabin chassis replacement, to the recertification of critical systems for departments or municipalities looking for a cost-effective way to upgrade their fire trucks without the capital expense associated with purchasing a new vehicle.

Now please turn to Slide 7. Lastly, at the National Association of Fleet Administrators Institute and Expo in Tampa Bay, we also announced a new partnership with Ranger Design, a commercial van upfit manufacturer for mobile professionals. The new partnership expands van outfit options for fleet customers that combine the customer -- sorry, the customer engineering and deep industry expertise of Spartan Upfit Services with Ranger's real-world tested standardized products.

Ranger and Spartan will offer an industry-leading portfolio of work-truck solutions with OEM Ship-Thru availability. The partnership will also expand customer warranty support to over 300 locations in North America for Ranger components installed by Spartan Upfit Services. Spartan Upfit Services is a cost-effective, modernized fleet upfit assembly operation, dedicated to the customization of cargo vans and other midsize fleet vehicles serving the utility, telecom, health care, construction, food and beverage, parcel delivery and the last mile delivery market. Spartan offers a combination of kits and vocational packages with corresponding customized services.

With that, I'll now turn the call over to Rick to discuss Spartan's financial results for the first quarter and outlook for the remainder of 2017.

Thanks, Daryl. Please turn to Slide 9. As Daryl mentioned, we're pleased to report a strong first quarter performance, which reflects the favorable impact of continued operational improvements we have made in labor and manufacturing productivity, as a result of implementing the Spartan production system, Lean Manufacturing and continuous improvement initiatives across all our production facilities. Concurrent with the improvement to our base business, the Smeal integration is running ahead of schedule.

Revenue for the quarter increased 25% to $167.1 million from $133.7 million, with the Smeal acquisition contributing $35.2 million to the top line increase for the quarter as Daryl mentioned earlier. For the full year, we expect Smeal to generate approximately $105 million of revenue, which excludes $20 million of Spartan intercompany chassis sales.

For the first quarter, our adjusted EBITDA increased almost 46% to $4.2 million from $2.9 million. Our adjusted EBITDA margin improved 40 basis points to 2.5% of sales from 2.1% of sales a year ago. Operational improvements enabled by our Spartan Production System and Lean Manufacturing initiatives continue to drive year-over-year improvement. Our adjusted EBITDA excludes the impact of $1.5 million of restructuring and acquisition-related expenses and the impact from the one-time lag in recognizing sales and gross margin on chassis sales of $1.1 million that are now in intercompany. This compares to $330,000 of restructuring expenses in the prior year.

Our backlog at quarter end remains strong at $351.3 million, up from approximately $250 million at year-end, and reflects $78.6 million in Smeal backlog, as a result of our acquisition.

Now let's take a look at results by operating segments, starting with FVS segment on Slide 10. FVS reported revenues of $53.9 million compared to $59.3 million last year, a decrease of approximately 9%. This revenue decrease was due to lower parts sales and upfit volumes, and was partially offset by favorable vehicle product mix. Adjusted EBITDA declined $300,000 to $6.2 million from $6.5 million a year ago, largely due to the lower upfit volumes.

As we explained last quarter, we expected difficult top line comparisons as we had a large upfit order last year. Despite the sales decline, our EBITDA margin improved 70 basis points to 11.6% of sales from 10.9% a year ago, which reflects our improved manufacturing and labor productivity. Our backlog remains strong at $114 million compared to $89.5 million at year end, an increase of 27%.

Moving to Slide 11 and the SCV segment. First quarter 2017 revenue totaled $33 million, essentially flat year-over-year, despite being up against some difficult comparisons as the first quarter of last year included a defense order that did not reoccur in 2017. Adjusted EBITDA for the first quarter declined $100,000 versus the prior year, primarily due to that defense order not reoccurring. Our SCV backlog also remains strong and increased 13.4% to $22.8 million compared to $20.1 million at year end.

Now let's move to Slide 12, and our ER segment. Revenue was up just over 95% to $80.2 million from $41 million due to the $35.2 million in sales from the Smeal acquisition, as I mentioned earlier. This increase was offset by slightly lower shipments of complete fire apparatus and custom cab and chassis from our base business compared to last year, as we continue to focus on profitable sales. Our adjusted EBITDA loss for the quarter improved $1.8 million to $1.3 million from an adjusted EBITDA loss of $3.1 million a year ago, driven by improved vehicle mix, increased labor and manufacturing productivity, material efficiencies and warranty costs. Backlog is up significantly, reflecting an additional $78.6 million from the Smeal acquisition. Backlog at the quarter-end was $215 million compared to $140 million at year-end.

Turning to Slide 13, you'll see our balance sheet continues to improve. Cash on hand was up almost 11% to just over $35 million compared to $32 million at year-end. Inventory at the end of the first quarter was $109 million, up just over $50 million compared to our year-end balance, as the first quarter includes $44 million of inventory due to the Smeal acquisition. The Smeal inventory at quarter end is down nearly $20 million or 32% from $63 million as of the acquisition closing date on January 1. Reducing Smeal inventory continues to be a high priority as we believe that cash generated will fund a significant portion of the acquisition cost. Given the strength of our balance sheet, we have initiated a $10 million repayment on our revolver, which will reduce our debt level to approximately $23 million. We'll continue our disciplined approach to working capital management and will continue to be opportunistic as market conditions dictate to support both future growth and maximize shareholder value.

Please turn to Slide 14, and we'll discuss our outlook for 2017. As we look at the remainder of the year, we expect our strong first quarter performance to continue to reflect the favorable impact of successfully implementing our Lean Manufacturing and continuous improvement initiatives across all production facilities. We expect to see continued year-over-year operational improvements and additional synergies to be realized from the Smeal acquisition. This, together with the Smeal acquisition and integration running ahead of schedule, gives us comfort in raising the 2017 guidance as follows.

We now expect revenue in the range of $650 million to $700 million, up from our previous guidance of $615 million to $685 million. Our restructuring, acquisition costs and intercompany chassis impact of approximately $3.2 million, up from $2.8 million previously. We expect adjusted EBITDA in the range of $26.5 million to $29 million, up from the previous range of just over $25 million to $28.3 million.

Income tax expense to be in a range of $1.5 million to $2.3 million, down from our previous guidance of a range of $1.7 million to $2.8 million. Our interest expense to be approximately $800,000, down from our previous guidance of $1 million. And we now expect adjusted earnings per share of $0.36 to $0.41, up from our previous guidance of $0.30 to $0.36, and this assumes approximately 35 million shares outstanding.

And finally, as a reminder, our forecast for the remainder of the year includes the impact from the one-time lag in recognizing Smeal sales and gross margin on chassis sales that are now intercompany. Approximately $1.1 million of related margin deferral still remains, which will impact the second quarter of 2017.

At this point, I'd like to turn the call back over to Daryl, for his closing remarks.

Thanks, Rick. Please turn to Slide 15. First quarter 2017 results marked our 5th profitable quarter in a row, and it assures us that we will be profitable on all 4 quarters again in 2017, on an adjusted basis.

To say that we're pleased with the progress we've made to date is an understatement. Not only do we have the right people and the right seats across the organization, our bench strength is building. Acquisitions and the workflow that comes along with them are not easy to accommodate. The fact that the Spartan team has not only been able to assimilate and integrate Smeal and its brands while improving and simultaneously growing our core business is a testament to how dedicated and frankly powerful this team is.

My thanks go out to the team and to our shareholders for their continued confidence. We're incredibly proud and -- we're incredibly proud of the power and capabilities of this team, and this is just the beginning. I intended on closing this call by telling you the momentum is building and become intangible, but there is more than that going on here. There is literally a cultural shift. There is an appetite for more, more challenge, higher standards and tougher goals, it's no coincidence then that the Spartan Production System is improving significant, improvements in labor, manufacturing and productivity across campuses. The Smeal integration is well ahead of schedule, and we're well-positioned to take on other strategic acquisition opportunities as they present themselves.

The ER segment will return to profitability on an adjusted basis in 2017. Earnings are accelerating. We've increased our midpoint EPS guidance by 18% for 2017. While we’ve made notable progress to date, I want to be clear, it's only the top of the fourth inning. Our star team is energized, confident and determined on improving and growing the business. I can't wait for you to see what winning means at Spartan.

Operator, we're now ready to take some questions.

(Operator Instructions) And our first question comes from Steve Dyer with Craig-Hallum.

With respect to Smeal, looks like you're calling for $105 million in revenue, which was up from previous expectations in the -- to $70 million that was done last year. Is that just the intercompany? Or has something else changed there?

No. Steve, I think it reflects that we'll have higher volumes in 2017 versus the prior year. So there is a healthy backlog there. And as we've improved the manufacturing productivity, I think our expectation for the number of units we'll be able to deliver has increased since the date of the acquisition.

Got it. Okay. Jumping over to FVS, you guys obviously have a tough comp on that big upfit order from last year. Any sort of visibility or further color on potential for large orders there over the next quarter or 2?

I don't know that we expect orders to that same magnitude, Steve, but we feel we have a nice order backlog now. And I think we've talked previously about a new facility in Kansas City, where we do upfit business off of the Ford Transit platform, and we see that ramping nicely as we head into the second half of the year.

Okay, great. And then Daryl you touched on M&A at the end. Smeal looks to be going well. Is that -- do we see another deal this year? Or are you still thinking that it'd be a little bit of a slower pace than that?

Steve, you could be in the range on that. I mean, we want to make sure we close that one out, integrate it, get into our systems. As we also stated, right, we want to be optimistic, that's the way we were on Smeal acquisition. So I'm not comfortable to tell you that we have these things scheduled and locked in, certain dates. But if something comes along, will definitely makes sense and it can be accretive, we'll take the opportunity.

The next question today comes from Matt Koranda with Roth capital.

Just on the guidance, it looks like the primary driver of the top line increase is really 100% related to Smeal. So could you just confirm that's the case? And then maybe could you provide a little more color on sort of what you've done on the production side that enables you to boost revenue by that amount at Smeal?

Yes, I think Matt, the improvements we've seen in the Smeal business and the confidence we have there has been the driver of a lot of the top line increase in guidance. And also I think, the continued momentum that we're seeing in our S-180 program.

Matt, I’ll take the second half of your question about the operation, so January 1, we hired a new VP of Operations, and -- automotive style individual, understands our Spartan Production System. He’s jumped on it. We have hired another couple of individuals in the operational side. So along with implementing the lean principles, we're also doing a number of Kaizen events that are very fruitful for us and it'll be sustainable as we move forward.

Okay, that's helpful guys. And just sticking with the Emergency Response segment, it looks like the way that the cadence is playing out for the S-180, you guys are implying that you could be shipping close to 20 units in the second quarter here, which would imply a nice ramp. Is that the case? And then also should we expect that sort of cadence through the remainder of the year? Or are we kind of fulfilling demand early in the year and then we take a pause before you look at other orders?

No. It's a very good question. So what we did, I think we've mentioned it previously where we want to make sure we don't get out over our skies on the delivery timing of 180 days. So we're -- took some time last year after we announced the 180, we worked on the design, had our dealers in, made some changes. After those changes were implemented by engineering, we built a number of demo units. And I think that's where you're seeing the increase. The demo units are out on the road. Our new Smeal dealers are excited as we've mentioned. And we're picking up orders, but we are going to manage it so that we do stay within 180 days, which is our commitment to our customers.

Okay, got it. And then on the refurb side, could you just help us understand sort of how that refurb business fits in with your OEM business? I guess just at face value, it looks like it may be kind of complementary and drive some stickiness with customers, but just wanted to hear kind of the rationale in your own words there.

You nailed it. This is exactly what we're -- our approach is. We continue to hear from these guys as they're primarily waiting for their trucks, that's why we're excited about the S-180. And we told you in the past that the S-180 isn't for everybody. So this is a complementary initiative that we have to pick up additional, as you said, customers that can't get -- buy new trucks, maybe they don't have the money. Also it's going to help us keep that customer going forward since we're working with them on their current products.

And then impact of margins on that business. I mean, I would assume it's more like aftermarket type margins, but could you help us understand that?

Yes, Matt, I think, you're spot on, your characterization of it. It is a good margin business like aftermarket, and would certainly be accretive to the business’ margins.

Got it. Okay. Maybe one last one on the ER side. Just in terms of the competitive environment that you guys are seeing, obviously, there's been some additional consolidation activity happening in the recent weeks. So could you maybe talk about, if you're seeing any impact to kind of order flow, pricing or other elements of the business related to kind of industry consolidation?

Yes, I'll take that. I think that last acquisition that you're talking about, it's a little early to see any outcome of it. But I think it's part of the strategy or the industry consolidating we've talked about a number of quarters. We're seeing it, and we actually were involved in it. So it's -- I think it's actually healthy. The industry move it -- shorten up its delivery cycles, not well below a year, but as we get the capacity and the other 3 companies ahead of us have very good processes as we're putting in place. I think it’s going to be a dynamic industry going forward.

Okay. Got it. And then lastly, on SCV. Just any update or change in cadence to the ramp up in the F-Series? And how that's factoring in the overall guidance for the year?

No. The -- we're on schedule. We're actually starting to do some slow ramp up right now in production units, but we'll see the impact start to move up in the second quarter.

And our next question comes from Rhem Wood with Seaport Global.

All right, so the first one, I wanted to -- you mentioned that you're in the fourth inning. Was that referring to the lean implementation? Maybe just some more color on that like where are you seeing the most improvement? And where do you still have work there to do?

Yes. Let me clarify that for you, Rhem. We've talked before about where the company stands, right, since 2015, when we started to build our new team. So the reference to the fourth inning was in association with the new team, the company and where the company is at in its transformation. And then to your second question, initially when you start to put in SDS-type process or lean, Kaizen, (inaudible) and proven activities, you're picking up some low-hanging fruit. We see that also in maybe the fourth inning, maybe even earlier than that. There is a lot of runway left on both of those initiatives. And that's why we're pretty -- not pretty, we are confident we'll be profitable getting all 4 quarters this year.

Okay, great. And then can you talk about -- let me go back to the M&A, can you talk about your pipeline there? What kind of multiples you're seeing? And then as you think out, do you see more opportunities in M&A or in additional partnerships?

I think we ultimately see additional M&A opportunity. I think if I look at the balance sheet, in our liquidity, our ability to generate cash, we certainly have that dry powder, if you will. I think Daryl summed it up pretty well earlier, that I don't know that we have a cadence or a timeline. But I would say, based on the success of what we see with Smeal so far, it certainly has us looking more actively going forward.

Okay, great. And then, can you just talk -- just a couple of modeling questions. You’ve given the tax range, but can you talk about what rate to use? And the same with share count, maybe just to help with the cadence there? And the last one, just the EPS. Can you help us with first half versus second half cadence? How do you expect the EPS to play out?

Yes. If I look at first half versus second half, I think it is definitely more weighted to the second half, Rhem. We had some continued headwinds heading into the second quarter. There's the additional headwinds in the second quarter from some defense orders that didn't reoccur. So the weighting is certainly back half weighted.

Okay. And then one last one. Just on the ER business, it sounds like the -- your improvement is going well there. I mean, could you be profitable in the second quarter? Or is it still kind of the end-of-the-year thing?

Well, thank you, Rhem. I think, what gives us confidence in taking our guidance up is, like we said before, the Smeal acquisition will accelerate the turnaround of the ER business. And I'm not ready I think to say what specific quarter it will return to profitability. But we have a lot more confidence sitting here today than we did back in early February.

And this concludes our question-and-answer session. I’d like to turn the conference back over to Spartan Motors for any closing remarks.

Thank you, everyone, for joining today's call. We look forward to continuing to provide you updates on our progress as well as our next earnings call, which will be in first week of August. Thanks and have a great day.

Ladies and gentlemen, this concludes our conference. Thank you for attending today's presentation. You may now disconnect.