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Spartan Motors (NASDAQ:SPAR)
Q3 2019 Earnings Call
Oct 31, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Spartan Motor's third-quarter 2019 earnings results conference call. [Operator instructions] Please note, this event is being recorded. I would like to turn the conference over to Juris Pagrabs, group treasurer and director of investor relations. Please, go ahead.

Juris Pagrabs -- Group Treasurer and Director of Investor Relations

Thank you, Francesca. Good morning, everyone, and welcome to the Spartan Motors 2019 third-quarter earnings call. I'm Juris Pagrabs, and joining me on the call today are 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 that has been 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 to follow along with our presentation during the call. Before we start today's call, please turn to Slide 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. On the call today, we will provide an overview of the third quarter, along with a brief business update, followed by a more detailed review of the third quarter results and an update on our outlook for the remainder of the year before proceeding to the Q&A portion of the call. At this time, I'm pleased to turn the call over to Daryl for his opening remarks, which begin on Slide 3.

Daryl Adams -- President and Chief Executive Officer

Thank you, Juris. Good morning, everyone. Thank you for joining us on our third-quarter conference call. I'd like to start by thanking the entire Spartan team for their hard work this quarter, resulted in an exceptionally strong performance, which includes record sales and 80% increase in adjusted EBITDA.

The actions we've taken over the past several years support our strategic growth plan while building a solid foundation for improved performance in 2019 and beyond. Our record revenues for the third quarter rose 28% to $289 million, underscoring the acceleration of both organic and acquisition growth, which includes significant geographic expansion, as well as increased demand for delivery vehicles in all of our vehicle classes. The strong growth at FVS continued in the third quarter as sales were up 52%, driven by higher sales for delivery vehicles in all of our vehicle classes. ER also posted another quarter of sales growth, up 7% to $64 million as the segment saw increased volume and improved pricing.

While SCV, as expected, saw sales decline 13% due to lower sales for the luxury motor coach chassis and the completion of the Reach vehicle order. You may recall from last quarter's call, we had higher Reach sales during the second quarter as those orders were pulled forward to meet customer demand. Now please turn to Slide 4, and I'll provide an update on a few business highlights and exciting new developments. Investing in our future.

As we continue to invest in our future, I'd like to highlight three key areas where we've made progress toward our long-term growth strategy in the quarter. First, one of the pillars of our strategic growth plan is to deliver on coast-to-coast expansion, and through M&A, we've delivered on our commitment. In fact, within the last 10 months, we've expanded our footprint through three acquisitions, which added eight manufacturing facilities in four states. Next, in addition to acquiring new facilities, we've remained focused on maximizing the performance of our current operations.

By repurposing and optimizing our current operations, we've been able to make progress toward achieving a leaner, more efficient and flexible manufacturing processes. During the quarter, we completed the relocation of Bristol truck body build to the Charlotte campus. And by doing so, our Bristol facility is now a focused walk-in van factory. Truck bodies will now be built in Michigan, Pennsylvania and California.

Additionally, I'm pleased to report that we currently have a six-month backlog at the Pennsylvania truck body facility, which nicely backfills the USPS order we completed this quarter. We also invested in all three of our upfit facilities to increase capacity, and we've ramped up Kansas City and North Charleston facilities to three shifts operations to meet strong demand for delivery vehicles. Our third focus has been investing in new products and technologies to drive future growth. We have developed a new purpose-built Class 3 vehicle that we plan to release next year; a new delivery vehicle shelving concept that improves ergonomics and customer efficiencies; and a new cab manufacturing facility that we launched last quarter, called Detroit Truck Manufacturing, which serves as a vertically integrated supplier of fabricated aluminum caps for the ER business.

The facility continues to increase its production ramp curve and will provide material cost and quality benefits for ER beginning in 2020, as well as fulfill other fabrication needs across the organization. Please turn to Slide 5, and we'll discuss our most recent acquisition. Continuing with our strategic growth plan, last month, we announced the acquisition of Royal Truck Body. As the largest specialty service body manufacturer in the West, with six operating facilities across California, Arizona and Texas, this acquisition provides us coast-to-coast geographic coverage.

The acquisition of Royal Truck Body is complementary to the acquisition of General Truck Body, which we completed earlier this year. Together, both will provide significant West Coast and Southwest operations, which will position us to better serve our existing customers in the region, while simultaneously allowing us to grow our overall customer base. We also foresee many opportunities for our expanded West Coast operations to support fleet customers by building and distributing commercial trucks more efficiently and cost effectively. Please turn to Slide 6, and I'll continue with our growth strategy.

Our growth strategy is supported by the continued demand for delivery vehicles in all vehicle classes. In 2018, consensus spent -- sorry, consumers spent $517 billion on online, up 15%. This accelerated e-commerce growth is reflected in the FVS backlog, which is up 93% year over year. We believe the results in the quarter and throughout the fiscal year reflect a broad industry demand for vehicles across our GVWR product offering, and we started this trend to continue.

With that, I'll turn the call over to Rick to discuss Spartan's financial results for the third quarter, as well as our revised outlook for the remainder of 2019.

Rick Sohm -- Chief Financial Officer

Thank you, Daryl. Turning to Page 8. Our strong third quarter highlight growing demand for delivery vehicles across our entire product portfolio. As we noted last quarter, we expect to see stronger year-over-year revenue and profit growth in the second half of 2019.

And our third-quarter revenue grew $62.8 million, or up 28%, to $289 million. Q3 adjusted EBITDA grew 81% to $19.2 million from to $10.6 million a year ago, and our margin grew from six -- well, to 6.6% from 4.7% a year ago, due primarily to a shift in product mix to last-mile delivery demand across the portfolio. Adjusted net income more than doubled to $12.3 million from $6 million in Q3 of 2018, while adjusted EPS also more than doubled to $0.35 a share. And included in the quarter is approximately $1 million in start-up and reconfiguration costs incurred in our upfit and truck body plants.

Our backlog at quarter end continues to grow and ended at $459 million, up 41% from a year ago, excluding the postal truck body order. Now we'll look at each BU beginning with fleet on Page 9. Fleet reported record revenue of nearly $180 million compared to just over $118 million in the prior year for a growth rate of 52%. The revenue growth is driven by higher volume and pricing.

Adjusted EBITDA grew to $17.4 million -- or grew $17.4 million to $24.7 million from $7.2 million a year ago, largely due to volume, lower material costs from new low-cost country procurement and improved pricing, offset by the $1 million of start-up costs I mentioned earlier. Our margin grew to 13.7% from 6.1% a year ago. When you exclude the one-time truck body order, our margin would have been 15.8% compared to 17 -- or 7.6% a year ago. Fleet backlog grew 93% to $224 million compared to $116 million a year ago, excluding the truck body order.

Moving to Page 10 and ER. Q3 2019 revenue grew 7% to $64 million from $60 million in the prior year. The growth in ER revenue was driven by higher volume and pricing. Adjusted EBITDA in Q3 declined to a loss of $1.1 million from a profit of $0.6 million in the prior year.

The decline was primarily the result of unfavorable mix, higher material cost and was partially offset by pricing and volume. Our backlog grew 11% to $195 million compared to $176 million in the prior year. Turn to Page 11, and we'll cover specialty. We reported revenue of $45 million, down from nearly $52 million in 2018 due primarily to a $6 million decline in motor home volume and the completion of the Reach build in Q2 of 2019.

As a result of the decline in revenue, adjusted EBITDA declined to $4 million from $6 million a year ago, driven by volume, mix and the manufacturing disruption due to an OEM strike. The resulting margin decreased to 9% from 11.4% a year ago. Our backlog at the end of the quarter did grow 18% to $40 million from $34 million in the prior year. We'll look at our balance sheet on Page 12.

Our overall leverage and liquidity position remain a key resource to support our long-term strategy. During the quarter, we paid $5 million down on our revolver, and our total liquidity at quarter end was $55 million. We've since paid down another $10 million on the revolver earlier in the month of October. Our improved liquidity matches the debt paydown $10 million, and we expect liquidity to continue to improve for the remainder of the year.

On Page 13, I'll review our outlook for the remainder of 2019. Based on our year-to-date performance, combined with our footprint growth, improving backlog, growing productivity and new low-cost country procurement, we are improving our current outlook for 2019 midpoint by the following: revenue, up 2% to a range of $990 million to $1 billion; net income, up 11% to a range of $27.3 million to $28.8 million; adjusted EBITDA, up 18% to a range of $51.9 million to $53.7 million; earnings per share, up 10% to a range of $0.77 to $0.81; and adjusted earnings, up 23% to a range of $0.89 to $0.93. Now I'd like to turn the call back over to Daryl.

Daryl Adams -- President and Chief Executive Officer

Thanks, Rick. Please turn to Slide 14. Our strong performance through the first nine months of 2019 provides a solid platform with continued growth for the remainder of 2019 and into 2020. As the Spartan team continues executing our overall strategic growth plan, we'll continue to invest in new products, technology and manufacturing facilities to expand our leadership position in the markets we serve that will benefit our employees, customers and shareholders.

Operator, we're now ready to take questions.

Questions & Answers:


Operator

[Operator instructions] The first question is from Steve Dyer with Craig-Hallum. Please go ahead.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Good morning, and congratulations on those results, guys.

Daryl Adams -- President and Chief Executive Officer

Thank you, Steve.

Rick Sohm -- Chief Financial Officer

Thank you, Steve.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

A question on margins. So guidance for Q4 implies really exceptional margins. And I guess, a couple of things: One, am I right in assuming that a lot of that is due to the USPS pass-through business being done for the time being? And if so, are those the kind of margins we should be thinking about going forward?

Rick Sohm -- Chief Financial Officer

I think you're right on. Fourth quarter won't include any of the pass-through revenue, and we expect to have a good, strong fourth quarter. The margin, I think I wouldn't model that as our go-forward margin with the fourth quarter because in the fourth quarter of the year, we typically get something of a downturn in deliveries of ER products and motorhome products. But yeah, the fourth quarter is going to be real good, Steve.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

But from a segment perspective, absent mix, and absent, I guess, another big pass-through order at some point, these are the kind of FVS margins that you'd be comfortable with looking out into the future.

Rick Sohm -- Chief Financial Officer

Yeah. If you look at Q3, we would feel comfortable for fleet on a go-forward basis at that kind of level.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Q4 mean or do you mean Q3?

Rick Sohm -- Chief Financial Officer

No. Q3 would be a good proxy going forward for Q4 in terms of margin.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. OK. And then on Slide 4, you guys talked about a new purpose-built truck in parentheses. Is that done for a specific customer? Or is that -- and if so, is that something you can sort of branch out to other customers? Or a little color around that would be great.

Daryl Adams -- President and Chief Executive Officer

Yeah, Steve, I'll take that one. I think you've heard us talk about how we see the vehicle delivery class moving down into the lower classes. And this is just our -- you have a lot of the EuroVans out there that are running around, and people are asking for smaller vehicles. And so we've put together a vehicle that we think is going to be exceptional in the market and be exciting.

So it's on a Class 3 platform, and it's -- although any customers, not purpose-built by customers, it's purpose-built by the industry, which is going to be delivery vehicles.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. OK. And then last one for me. I'll jump back in the queue.

The backlog that you guys have put together in Ephrata, assuming that is little to no USPS and is all sort of upfit and not purpose-built, is that right -- or I'm sorry, pass-through?

Daryl Adams -- President and Chief Executive Officer

Correct, Steve, that we ended in the Q -- this quarter with the USPS build. We have not heard any news about the add-on order that we talked about previously. So the backlog is 100% regional and commercial in that region of the country.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. That's great. OK. Thank you.

Operator

Your next question is from Justin Clare with ROTH Capital Partners. Please go ahead.

Justin Clare -- ROTH Capital Partners -- Analyst

Hi, everyone. So I guess, first, with the acquisitions that you've made, both on the East Coast and the West Coast, you now have a national footprint. So I was wondering if you could talk about the response that you're seeing from your customers, and whether you're actually getting increased order flow from national accounts that may want to take delivery of trucks in different regions of the country.

Daryl Adams -- President and Chief Executive Officer

Justin, this is Daryl. I'll take this one. So I think if you go back to our strategy discussions in the past, we talked about the -- establishing a national footprint, like you described. The reason we did that was because we heard from customers that we would only receive a third of the order, and the other two-thirds would go to our competitors on either coast.

So this fulfills our commitment to be on coast to coast. And to answer your second part of your question, we are seeing increased order flow. We're seeing customers come to us and ask us if they can have certain number of trucks at each location across the country, so we'll get a certain quantity in California, some here in Bristol or in Charlotte, and then the balance in Pennsylvania. So that is fulfilling our commitment again on -- our customer asks us to be there, and we put in place a strategy to get there and it's working.

Justin Clare -- ROTH Capital Partners -- Analyst

OK, great. And then could you comment on the ability to improve margins as a result of that? Because I assume you need -- you only need so many people to manage a particular customer relationship, but now you can serve that customer across the entire country. So you could assume that you could get a margin uplift. Can you comment on that?

Daryl Adams -- President and Chief Executive Officer

Yeah. We typically don't talk about margins by individual product line. But your concept is correct. And that's -- in the past, we've not been able to be competitive in either one of those two locations, the East Coast or the West Coast.

Now with the -- having those two covered, we can compete, and it's going to be depending on the market. But I think as they continue to get integrated, and our goal is to have them integrate within 12 months or less, you'll see some of that fall through to the bottom line.

Justin Clare -- ROTH Capital Partners -- Analyst

OK. And then shifting to the balance sheet. With the purchase of Royal Truck Body, you increased the level of debt. But it sounds like you've already repaid $15 million or so on the debt that you used to fund the acquisition.

I was wondering if you could just talk about the level of debt you're comfortable with. What your repayment plans are? And then looking toward the future, if another acquisition were to -- if there was an attractive acquisition that were to present itself, could you use debt to fund that purchase?

Rick Sohm -- Chief Financial Officer

Yeah, good question. And I think what we've said all along is in absence of another deal, we'll use cash flow to pay down the revolver. And I would expect by year-end another payment on that revolver. I think we've talked not feeling real comfortable when you start approaching three times leverage.

But I guess to your point, if there was an attractive acquisition that would be positive to our footprint, positive on the management front, we would pursue that. And we're confident we can get the financing for it.

Justin Clare -- ROTH Capital Partners -- Analyst

OK. Great. That's it for me. I will pass it on.

Operator

The next question is from Steve O'Hara with Sidoti & Company. Please go ahead.

Steve O'Hara -- Sidoti and Company LLC -- Analyst

Yeah, hi. Good morning. Just curious, I think you noted that material costs were a headwind for ER and then, I guess, a tailwind within fleet vehicle. I'm just wondering what the -- how that works.

Is it longer lead times? Is it just quicker turnover? What's the -- how does it -- maybe different sourcing areas? Can you explain that?

Daryl Adams -- President and Chief Executive Officer

Yeah, Steve, this is Daryl. You nailed it in your question, right? So if you remember, ER is about a year backlog, and we talked about -- we still have some of those headwinds through the second half of this year in previous calls and meetings. While on the -- so you got a year backlog. We have contracts with municipalities and going back -- may have certain clauses.

And then going back and getting material increases through the contract is not easy, and we haven't had much success. If you go to fleet to your second part of the question, that's a much shorter lead time and quote period. And it's PO to PO. It's not a long-term volume, so we can price the material fluctuations into that.

If you remember, last year in Q3, as we told everyone, as the material was going up, we committed to volume through the end of the year, and the material came back down. So that volume, we had to swallow at a higher price. So we did put in some policies and procedures to eliminate that going forward. And I think if you remember, I also said that, that will not happen to us again.

And once we work through the ER piece, we're finding our plan is working on the FVS side.

Steve O'Hara -- Sidoti and Company LLC -- Analyst

OK. And maybe just to follow-up on that. I mean, is there a way to think about ER margins maybe into next year? As, I assume, kind of you work through that inventory, and I think you guys went for price increase, etc., how do you think about ER margins maybe next year?

Daryl Adams -- President and Chief Executive Officer

Yeah. We still stick to our commitment that we've made, 3% to 6%, but it -- due to the tariffs and other items, that had been pushed out. So we haven't put a year on it, but we see it somewhere between where it is today. It will be a trajectory that is consistent over time, and it will get up to that 3% to 6%.

Steve O'Hara -- Sidoti and Company LLC -- Analyst

OK. And then was there an impact in the quarter or maybe going forward from GM strike or anything like that? Has that not been an issue?

Rick Sohm -- Chief Financial Officer

No. Good question, Steve. We had an issue starting kind of mid-September, so the quarter, it wasn't a big impact. The quarter that will be affected is October.

That will be a relatively small number because we could make up the production later in the quarter.

Daryl Adams -- President and Chief Executive Officer

And Steve, our customers are asking us to put plans together to make up that volume that was missed during that strike. So -- and we see it, like Rick said, minimal impact, if any, to the quarter and full year.

Steve O'Hara -- Sidoti and Company LLC -- Analyst

OK. And then maybe just lastly, on the USPS contract. Was there any USPS revenue in the quarter? And then was that a -- was that a big impact on FVS margins in the quarter? Maybe the reduction of that revenue, was that a big impact on the quarter?

Rick Sohm -- Chief Financial Officer

It probably wasn't as big as Q1 and Q2, but I think we had $23 million in the quarter of pass-through revenue. And that's what drove the adjusted number from 13.7% to 15.8%.

Steve O'Hara -- Sidoti and Company LLC -- Analyst

OK. All right. Thank you very much.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Juris Pagrabs for any closing remarks.

Juris Pagrabs -- Group Treasurer and Director of Investor Relations

Thank you, Francesca. Thanks, everyone, for participating today. Just a heads up, we'll be over in Chicago next week, participating in the Baird industrial conference. Hope to see many of you there.

And that will be it. I think the next scheduled update is -- will be the fourth quarter, sometime in February. Thank you, and have a great day.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Juris Pagrabs -- Group Treasurer and Director of Investor Relations

Daryl Adams -- President and Chief Executive Officer

Rick Sohm -- Chief Financial Officer

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Justin Clare -- ROTH Capital Partners -- Analyst

Steve O'Hara -- Sidoti and Company LLC -- Analyst

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