Edited Transcript of SPAR earnings conference call or presentation 12-Mar-20 2:00pm GMT

Thank you, Juris. Good morning, everyone. And thank you for joining us on our fourth quarter and full year conference call. I’ll just start by acknowledging the team’s incredible effort and hard work, transforming our business.

Over the past year, Spartan has integrated 3 acquisitions and completed the divestiture of our ER segment. The strategic changes allow us to significantly improve our focus within our core markets by expanding our national footprint and product portfolio. This has positioned us in the growth markets that will allow us to accelerate top line growth and profitability.

For the full year 2019, our sales increased 33% to $757 million, while our gross margins improved 270 basis points to 15.5%, which drove the 103% improvement in income from continuing operations to $37 million or $1.03 per share from $18 million or $0.52 a share. Including the discount — discontinued ER operations, sales reached $1 billion compared to $816 million a year ago, which exceeded our previous guidance.

Turning to Slide 4. I want to provide some context surrounding the recently announced divestiture. Last month, we announced the strategic decision to sell our ER business. We appreciate the team’s efforts over the past years turning around the ER business, enabling us to make the transformative move at a time that we feel is advantageous.

This change will allow us to redeploy capital for high returns in the Delivery and Specialty Vehicle segments in order to maximize shareholder value. The commercial, fleet, delivery and specialty vehicle markets have undergone a significant change.

Exciting new opportunities exist, driven by the growth in e-commerce and upcoming electric and alternative propulsion vehicles, the fundamental drivers of our business moving in the right direction.

Our acquisition pipeline is robust. With redeployed resources and capital, we will have the flexibility to drive accelerated growth and profitability in our core businesses, both organically and through strategic acquisitions. We believe this strategy will enable us to better serve our customers with innovative solutions and products over the long term.

Lastly, the sale provides us the opportunity to rebrand our corporate identity to more closely align with our current business in the markets we serve. We plan to provide updates on the rebranding effort in the months ahead.

Now please turn to Slide 5. I’ll provide an overview of our growth strategy. We continue to see strong momentum in vehicle Classes 1 through 7, as consumers focus even more on their spending online, creating higher demand for delivery vehicles across our entire portfolio of products.

In 2019, consumers spent $602 billion online, that’s up 31% from $461 billion in 2017, which is reflected partially in our increasing backlog. This momentum has created a strategic imperative for us to establish an infrastructure to meet our customer demand.

Over the past 14 months, we’ve acquired 3 companies, that included 8 U.S. manufacturing facilities in 4 states. We also added or expanded 4 additional facilities, which included optimizing both our walk-in van and truck body facilities. These acquisitions provide us with expanded coast-to-coast flexible manufacturing capabilities, which covers approximately 80% of the total U.S. population within a 300-mile radius of our facilities.

Now please turn to Slide 6. I’ll highlight a few initiatives that support this growth strategy. To support our customers’ needs, as vehicle preferences continue to move down the GVWR Class spectrum, last week, at the NTEA Work Truck Show, we unveiled the Velocity M3, a purpose-built walk-in cargo van. This new purpose-built Class 3 walk-in cargo van blends the fuel efficiency, driver ergonomics and safety provisions of a cargo van, cab and chassis with the expansive cargo space of a traditional higher vehicle class walk-in van.

The Velocity M3 has a lighter body design, a 70% payload improvement over its predecessor, the Reach, and better fuel efficiency. But the real game changer is our proprietary patent-pending innovations that deliver unequaled stop-by-stop efficiency gains that our customers demand.

This vehicle, which can be built on 3 OEM van chassis, is receiving significant interest from our major fleet customers and is a strong example for our commitment to bring customers’ sought innovation that deliver efficiency gains, best position us to meet their needs in the first-to-last mile delivery segment.

Earlier this year, we also announced the opening of a new 105,000 square foot facility to support the FVS production complex in Bristol, Indiana, due to increased capacity demand and growth in our delivery vehicles. In November, we opened a new vehicle modification center at our Charlotte campus to support the growing demand for chassis modifications requested by Isuzu dealers in support of their contract manufacturing operation.

In the luxury motor coach market, we continue to gain market share in a down market, having gained 2 additional points of share during the fourth quarter, ending at 28% in the over 400-horsepower Class 4 diesel market.

By adopting and integrating automotive safety technologies into our chassis over the past 4 years, we’ve increased our market share by 10%, solidifying our position in this niche market. Having said that, we are well-positioned when the demand for the high-end luxury motor coach market returns.

To conclude, the acquisition of Royal Truck Body has proven to be a significant addition to Specialty Vehicle — to our Specialty Vehicle product portfolio. Not only did it greatly expand our western manufacturing capabilities across California, Arizona, Texas, it also brought in a talented Specialty Vehicle team that will play a significant role in our future.

With that, I’ll turn the call over to Rick to discuss Spartan’s financial results for the fourth quarter.

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [4]

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Thank you, Daryl. Please turn to Page 18 (sic – Page 8). Our 2019 results from continuing operations improved significantly over 2018 on every key financial metric and reflect well on our ability to integrate key acquisitions, transform the company by completing the ER divestiture, while improving productivity.

For the year, adjusted EBITDA was up 83% to $64 million from $35 million a year ago, and margin improved 37% to 8.5% and from 6.2% in the prior year. Backing out the impact of the USPS truck body order, that margin would have been 9.6%. Including discontinued ops, adjusted EBITDA was $50 million compared to $34 million in 2018.

Adjusted net income nearly doubled to $44 million from $23 million in the prior year, while adjusted EPS grew to $0.66 per share — or went from $0.66 per share to $1.24 in 2019. Demand for our products continue to grow, and our backlog at year-end was $337 million, up $194 million or 136% from the prior year, when you exclude the onetime truck body order.

Turning to Page 9, I’ll provide an overview of the quarter. Q4 revenue increased $6 million to $180 million. Excluding the truck body order, our revenue grew 30% compared to $139 million in 2018. Fourth quarter income increased to $14 million from $4 million in 2018, reflecting increased volume and mix, improved pricing and our acquisition of Royal Truck Body. Q4 EPS grew to $0.40 per share compared to $0.12 per share in the prior year.

On Page 10, you’ll note that Q4 adjusted EBITDA grew $14 million to $23 million from $9 million a year ago, and margin increased 770 basis points to 13.1% from 5.4% a year ago, driven again, primarily by volume and mix, Royal Truck Body and partially offset by lower luxury motor home volume. Adjusted net income rose 166% to $17 million from $6 million in Q4 of 2018, and adjusted EPS grew to $0.47 per share from 17% — or $0.17 a year ago.

Now I’ll review each operating segment, beginning with Fleet on Page 11. Fleet reported revenue of $133 million compared to $131 million last year. Excluding $34 million of pass-through revenue, growth was $36 million or 37%.

We reported adjusted EBITDA of $21 million, up $14 million from $7 million a year ago, largely due to mix, pricing and manufacturing productivity. And our adjusted EBITDA margin increased to 15.9% from 5% a year ago. Fleet backlog grew $201 million or 191% to $306 million compared to $105 million a year ago, excluding the onetime truck body order.

Moving on to Page 12 in the Specialty segment. Revenue was $47 million, up from $46 million, primarily due to revenue from the Royal Truck Body acquisition and partially offset by a $9 million decline in luxury motor coach volume. With slightly higher revenue and better mix, adjusted EBITDA increased to $7 million from $5 million a year ago, and margin improved to 13.9%, up 20% from 11.6% a year ago.

Although our backlog declined 19% to $31 million at year-end, we are pleased, as Daryl mentioned, that we are gaining market share, and we’re outperforming the overall market, which saw a 24% decline in Class A diesel volume in 2019.

Please turn to the balance sheet on Page 13. The balance sheet presented here is from continuing operations as the ER business has been classified as held for sale at year-end. During the quarter, we paid down another $20 million on our revolver on top of the $5 million paid at the end of Q3, immediately following the Royal acquisition. Our total liquidity at year-end was $79 million.

Upon receipt of the proceeds from the ER sale, we paid down another $30 million on the revolver, and we expect to make further payments over time as we continue to monitor our M&A pipeline for additional growth opportunities. As a result of the sale, we also have a number of short and longer-term plans to right size our cost structure. We expect to complete our shorter-term initiatives in 2020, which will generate run rate savings of approximately $2 million annually. Longer term, we will be making several IT investments to drive down costs throughout our company.

And finally, I’d like to make you aware that during our ongoing assessment of our internal control environment, we identified the material weakness in Fleet relating to revenue recognition controls. I would like to make clear that this issue had no impact on our financial statements at year-end, but we have moved quickly to implement our remediation plan to ensure our internal controls are improved and designed to operate effectively.

Now I’ll turn the call back over to Daryl for our 2020 outlook, beginning on Page 14.

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Daryl M. Adams, Spartan Motors, Inc. – President, CEO & Director [5]

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Thank you, Rick. Overall, we are excited about 2020 and our position in the market. Spartan’s near-term outlook is strong, despite the unknown impact that coronavirus may have on our business. At this time, our supply chain has not been disrupted. We continue to monitor and assess potential impact daily, and we are working closely with our suppliers to ensure continuity of supply. Additionally, with the higher demand of our products, we are closely monitoring the chassis supply as well.

Our current outlook for 2020 is as follows: revenue to be in the range of $730 million to $780 million with a midpoint of $755 million; net income of $37 million to $43 million with a midpoint of $40 million; adjusted EBITDA, $66 million to $74 million with a midpoint of $70 million; earnings per share of $1.04 to $1.20, midpoint at $1.12, assuming a 22% tax rate and 35.4 million shares outstanding; adjusted earnings per share, $1.20, $1.36 with a midpoint of $1.28.

Now please turn to Slide 15 for my closing comments. 2019, we have transformed the company by expanding our geographic footprint, enhancing our product portfolio and accelerating our previously stated vision of revenue growth and improved EBITDA margins. Today, we’ve aligned our business to ensure we accurately target opportunities within ongoing macro and micro trends to ensure we maximize top line growth and profitability in the Delivery and Specialty Vehicle markets.

And most importantly, the Spartan team has the resources to drive both organic and acquisitive growth as we continue to provide innovative solutions in the markets we serve, which will benefit our employees, customers and shareholders. Operator, we’re now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Steve Dyer of Craig-Hallum.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division – Co-President & Senior Research Analyst [2]

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I guess, before I get to the obligatory coronavirus questions, you guys raised your 2020 EBITDA guidance pretty considerably, about $10 million, $10 million-plus at the midpoint, despite the fact that, I think, generally speaking, the macro’s kind of just gotten worse. Is that a function of a large order or several large orders? What sort of changed in the last 3 months relative to your outlook there?

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [3]

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Yes. Good question, Steve. It’s basically a function of the demand we’re seeing, our backlog increases. We’re here in March, and you start to get visibility out further in the year, probably until September or so. So that gave us some confidence to come out with maybe a little better number than people had been expecting.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division – Co-President & Senior Research Analyst [4]

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And is that a function — I mean, was that driven by — was there any customer concentration, I guess, in there? Or was it fairly broad-based?

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Daryl M. Adams, Spartan Motors, Inc. – President, CEO & Director [5]

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No. Steve, it’s broad-based, as I mentioned. We’re seeing growth in all of our vehicle Classes in 1 through 7 and all customers. I think it’s an e-commerce trend, significant growth there in the macro space. And now with divesting the ER, we’re much more focused on the 2 segments we have left. And we see operational improvement as well as growth in the revenue side.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division – Co-President & Senior Research Analyst [6]

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Got it. And then, I guess, maybe what have you seen, if anything, from your clients, your customers in the last couple of weeks? Have there been any cancellations or conversely, just given more people seem to be having more things delivered. Has anybody told you to speed it up? Or any change in the last week or 2? Or maybe what’s sort of contemplated in that guidance for virus impacts, if anything?

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Daryl M. Adams, Spartan Motors, Inc. – President, CEO & Director [7]

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Yes. And I think we mentioned, Steve, I might answer the last — your last question first. We mentioned this is without that — actually, right now, we don’t see it impacting us at all, and we’ll obviously update if we see something. But right now, our supply is good. Obviously, we had some inventory, right, when this thing kicked in. We are tracking our products from China that we sourced over there last year.

We also have backup suppliers, as I mentioned in previous calls, anything we offshore, we have backup suppliers in North America. And we’re in contact with them on a regular basis, and we’re tracking the chassis.

So we’re seeing it — we haven’t seen it yet, any request to speed up. But I think we saw the demand coming with, as Rick said, our backlog and we’re actually improving our throughput at plants. As I mentioned on the last call, we moved truck body from Bristol up into Charlotte to give Bristol a whole another line to fulfill the walk-in van demand.

And we see, as we mentioned before, also moving down the vehicle class scale, we now have a Class 3 vehicle that’s been tested through durability, was at NTEA. Customers have seen it, and they’re excited about it as a Class 3 due to the features in the cab and the increased payload. So we’re hearing good things from customers in that space.

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [8]

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Yes. And maybe I’ll just add to Daryl’s point. When we talked about monitoring the chassis flow, they could be a problem in 2020. But right now, that would be unrelated to COVID-19.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division – Co-President & Senior Research Analyst [9]

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Okay. Got it. So it sounds like you’re more — if there’s a concern, it’s around the supply more so than customers canceling orders or anything like that.

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [10]

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Correct.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division – Co-President & Senior Research Analyst [11]

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Okay. And then last for me, and I’ll jump back in the queue. Your Specialty Chassis margins were really strong in the quarter, 13.9%, I think. Is that a good number to use going forward? Or was there anything sort of onetime to the plus or to the minus in that segment? Or is that sort of a good way to think about that margin profile going forward?

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [12]

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Yes. I don’t know that I would model it the entire way forward. We acquired Royal Truck Body kind of mid-September, and they had a good amount of orders that needed to get shipped before year-end. I think we’ve mentioned before that their margin is accretive to the overall margin of Specialty. And there is a somewhat seasonality impact, and they tend to do, I think, a little stronger in the back half of the year. So I don’t think I would carry that margin all the way through.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division – Co-President & Senior Research Analyst [13]

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Got it. Okay. Congratulations on the execution, guys.

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Operator [14]

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The next question comes from Justin Clare of Roth Capital Partners.

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Justin Lars Clare, Roth Capital Partners, LLC, Research Division – Director & Research Analyst [15]

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So I guess, first off, given your revenue growth outlook here and the strong growth that you are seeing in Fleet Vehicles, I was wondering if you could comment on your market share there. How are you seeing market share trending, especially given that you have an expanded national footprint now?

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Daryl M. Adams, Spartan Motors, Inc. – President, CEO & Director [16]

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Yes. Justin, I would love to know that answer as well. The problem is it’s really hard to get data from our customers, especially the big fleets, on when they dispose of the vehicles. We’re trying different ways, and we’ve hired a new business development person to help us, obviously, with M&A, also with strategy, but just gathering some more data.

We’re talking to some new companies we haven’t talked to before about registrations, and we’re trying to get to that answer because I’ve also believed — in fact, I’ve mentioned, I’m pretty much a data guy. So I like to make decisions based on data, not on emotions or trends.

And right now, we can’t give you that answer. But we do know with one of the newer companies into the field, what we’ve delivered. We have a strong opinion on what we’ve built versus what might be out there. But we also know that customers are going to have dual sources, so we’re trying to figure out, of their entire fleet, how many have we built over the years. So it’s something we’re working now, but we don’t have it right now.

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Justin Lars Clare, Roth Capital Partners, LLC, Research Division – Director & Research Analyst [17]

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Okay. All right. I guess shifting gears. So you indicated the Royal Truck Body acquisition is performing better than expected. I was wondering, can you provide a bit more detail on the business performance there? How is the integration coming along? And when do you expect that business to kind of be fully integrated?

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Daryl M. Adams, Spartan Motors, Inc. – President, CEO & Director [18]

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Sure. I’ll take the first half, and I’ll let Rick follow-up with the financial section of your question. So the integration is going well. As you know, we put that under Specialty Chassis, which is Steve Guillaume. Steve’s traveling out there right now. We have some travel restriction, I think, like every company, but the integration is going well. I mentioned they have a great team, and that’s what we’re really excited about.

Obviously, when we’re talking to different companies about acquiring them, part of our request or part of the point that we have is that the management team has to stay, and majority of it stayed here. The owner wanted to get out, but the functioning team is very strong, operationally, financially, sales-wise. And you can see that through the expanded footprint that they have. Those are all independent locations, not through a dealer network. So we’re excited on what we can do with Royal going forward on the sales side.

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [19]

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Yes. And in terms of performance, I would not say that they are outperforming, I would say, they were performing in line with our expectations. And like Daryl mentioned, there’s a strong management team, and we have good visibility of what’s coming at us. I think longer term, the opportunity will be to take their product portfolio and take it to other parts of the country where we’ll have manufacturing operations that are flexible, and we think there’s opportunity for their product throughout the country.

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Justin Lars Clare, Roth Capital Partners, LLC, Research Division – Director & Research Analyst [20]

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All right. Great. And then one last one for me. Can you share how much in CapEx you expect to spend for the Bristol facility that you’re opening up? And then for the full year 2020, how much in CapEx you anticipate spending?

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [21]

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Yes. I don’t know that I’ll comment directly on CapEx at a particular facility. Daryl mentioned that we already moved in 2019, some of our truck body out of Bristol into Charlotte. But we do expect to see a higher amount of capital spending to not only make our plants more flexible to multiple product lines, but there’s also going to be some IT infrastructure spend. And I would say, capital spending could be up 50%-plus or more year-over-year.

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Daryl M. Adams, Spartan Motors, Inc. – President, CEO & Director [22]

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And Justin, if I could add. Last summer, we announced we added Todd Heavin as our COO. And since then, we’ve added a VP of Operations to support him, in order to continue the operational improvements that we have with the plants, and we’re actually running a number of Kaizen events that — I think we talked about in the last call, one of the first ones, we’ll continue with those.

So when you’re doing that kind of a — not only transforming the company, but transforming your operations into lean facilities, the COO and VP of Ops are starting to hit the ground and get some traction. It’s going to take some capital to grab the efficiency, but the payback is usually short, and that’s what we’re excited about.

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Operator [23]

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(Operator Instructions) The next question comes from Steve O’Hara of Sidoti & Company.

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Stephen Michael O’Hara, Sidoti & Company, LLC – Research Analyst [24]

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Yes. I guess, so first, going back to the CapEx question, can you just remind me what maintenance CapEx is here, now that you no longer have the ER business? And then maybe around the Fleet or in terms of your business now going forward. I mean how much would you say of your business is focused on last mile — kind of leans more towards e-commerce-type solutions versus maybe traditional trucking and things like that?

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [25]

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Yes. You’re right, Steve. With the ER divestiture, our maintenance CapEx number goes down significantly. But the returns where we can get in fleet, our capital spending will be more heavily weighted there, like I said, to make these multiple manufacturing locations flexible enough that they can build multiple product lines.

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Daryl M. Adams, Spartan Motors, Inc. – President, CEO & Director [26]

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Yes. So Steve, if I could add. For example, we bought — acquired General Truck Body out of Montebello, California. They have a number of products that we don’t have. One of them, in particular — at the time we didn’t have, now we do, is refrigerated box trucks, Class 6, 7s. We want to move that technology, right, to some of our other locations, right, based on the data I talked about earlier that Justin asked about.

So we’re going to use data, understand where the market is. And so now we have to buy some additional fixturing, some more foaming equipment. So that stuff does get a little expensive, and we have a plan to do that in 2020 and going forward as a plan that we have put in place.

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Stephen Michael O’Hara, Sidoti & Company, LLC – Research Analyst [27]

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Okay. And then maybe just on the kind of old world-new world revenue mix now. And I mean, it would seem like delivery and things like that may be picking up here. And given the situation and — I mean, I would think maybe the share of e-commerce jumps certainly over the near term. But I mean, how much would you say of your business is currently focused on maybe the high — what, I guess, maybe what should be considered higher growth versus maybe closer to GDP-like growth at this point?

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [28]

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Yes. I think if you’re looking for a breakout of our revenue going forward, right, I would say it’s probably 3/4 Fleet, and the remaining 1/4 would be with the Specialty. But I think as we really get Royal Truck Body ramped up and able to move their product across the country over time, some of that can — that gap can narrow, but we haven’t disclosed in the past, the revenue by product line.

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Stephen Michael O’Hara, Sidoti & Company, LLC – Research Analyst [29]

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Okay, okay. And then can you — maybe in terms of acquisitions and things like that, can you talk about maybe your expected returns? Or your hurdle rates and things like that for investments going forward now that the ER business is no longer with you?

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [30]

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Yes. I think it’s a good question. We would certainly expect to invest with returns that are higher than our cost of capital and Royal Truck Body is a perfect example. Like I’ve mentioned, it’s accretive to the overall SCV segment, and we have plenty of liquidity.

And we’ve had an M&A pipeline that remains active. And we’ve told people in the past that, absent a deal, we would delever the company. But very quickly, we expect the leverage ratio right now to be under 1.

So we’ll continue to look for growth opportunities. We’ve added talent to manage a larger company and manage it better. So we’ll be selective, while we’ll focus on last mile delivery. If there are opportunities to complement the Specialty Chassis business, be it RTB or contract manufacturing, we’ll look at that as well.

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Stephen Michael O’Hara, Sidoti & Company, LLC – Research Analyst [31]

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Okay. And maybe just a quick follow-up on that. Just — I mean, is there a way to think about acquisition size? I mean would you guys be open to doing something transformational in terms of, maybe if not comment on that, but maybe on where your comfort is taking the leverage ratio up to? And then if you’re seeing anything interesting in the near-term, given the disruption in the market?

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Frederick Sohm, Spartan Motors, Inc. – Chief Financial Officer [32]

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Yes. I think a good question again. We are comfortable doing bigger deals. In the past, we had talked about kind of bolt-on acquisitions, but we’ve transferred — transformed the company already by getting rid of ER.

And you’ll remember that we’ve told people, we’re very selective about our M&A activity, and we don’t feel we need to chase a deal. We’ve also told people, we didn’t feel real comfortable above 2x on our leverage ratio. But I think there’s a lot available to us, and we’ll continue to look.

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Operator [33]

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As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Juris Pagrabs for any closing remarks.

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Juris Pagrabs, Spartan Motors, Inc. – Director of IR & Group Treasurer [34]

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Thanks, everyone, for joining the call today. Normally, I’d give you an update on some of the conferences we will be attending here in the near future, but given the environment, it seems like that’s not going to happen.

I will reach out to you. If you want to talk with management, we can certainly set up virtual calls in the short term as we get through this process. First quarter earnings will be around the first week of May and look forward to keeping you updated. Thank you.

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Daryl M. Adams, Spartan Motors, Inc. – President, CEO & Director [35]

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Thank you.

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Operator [36]

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The conference has now concluded. Thank you for attending today’s presentation, you may now disconnect.