Greg Salchow - Group Treasurer and Director, IR Daryl M. Adams - President and CEO Lori L. Wade - CFO and Treasurer.

Rhem Wood - BB&T Capital Markets.

Ladies and gentlemen, good morning and welcome to the Spartan Motors' Second Quarter 2015 Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Spartan Motors. If anyone has any objections, you may disconnect at this time.

I would now like to introduce Greg Salchow, Group Treasurer and Director of Investor Relations of Spartan Motors. Please go ahead, sir..

Thank you. Good morning everyone and welcome to Spartan Motors' second quarter 2015 conference call. I am Greg Salchow and I'm joined on the call today by Daryl Adams, our President and Chief Executive Officer, and Lori Wade, the Chief Financial Officer.

Before we start today's call, please 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 our 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. Now, I am pleased to turn the call over to Daryl Adams for his opening remarks..

Thank you, Greg. Good morning, everyone, and thank you for joining us on Spartan Motors' second quarter 2015 conference call. In the second quarter, Spartan reported net income of $0.03 per share compared to $0.01 per share in the second quarter of 2014.

All three of our segments reported revenue growth and improved operating performance compared to last year. Gains in operational efficiency combined with revenue growth in all three segments resulted in growth in operating income despite the restructuring and NHTSA settlement cost.

Operating income for the second quarter rose to $2.3 million from $31,000 last year despite incurring $1.1 million in charges related to a consent order agreement with NHTSA and Emergency Response ER segment restructuring expense of $800,000. ER shipped all 21 units for pumper trucks to Brazil at the end of the second quarter.

That compares to 10 trucks exported to Peru during the second quarter of 2014. ER's operating loss narrowed to $1.2 million from $1.5 million a year ago despite including $1.3 million in nonrecurring expenses in the second quarter of 2015.

Despite the adverse impact of this consent agreement and restructuring, we made progress in our ER turnaround efforts. For competitive reasons, we cannot provide you with specific details or dollar impact of some of the initiatives but we can provide a few examples. For instance, Brandon's labor efficiency reached its highest level in two years.

Operations became more consistent and the plant approached or met efficiency targets more often. By the end of the second quarter, the Brandon plant was experiencing less variability in its operations as the root cause of variance was addressed.

We haven't eliminated all the causes of variance but we are addressing them one by one, slowly and steadily. As we complete one corrective action, we find another area requiring attention and move to that area.

We continue to emphasize, there is no quick fix to all the problems but we have been able to eliminate some of the obstacles and improve performance. Brandon's throughput is increasing slowly as a result of these lean and continuous improvement initiatives.

Last quarter, we shared with you how our production associates designed and implemented new processes that eliminated overtime and increased the output in the pump module assembly area. During the second quarter, we conducted a similar exercise that resulted in significant changes to our main assembly area.

We reconfigured the production line consolidating from two lines to one with components coming into the line rather than production associates being required to leave the line to obtain the parts. The production area is more open and allows the associates to move freely and work more efficiently.

We were also able to balance labor to the complexity of each truck and moved production associates from one truck to another as needed. Results have been promising in terms of improved labor utilization and with significantly improved quality.

As we improve the design and engineering of our products to make them easier to build, we expect to gain more benefit from improved manufacturing efficiency. Another project in the ER segment is an upgrade of welding capabilities and fixtures.

This involves designing and building or sourcing new equipment and requires some lead time as well as time to install and test the equipment and adapt the new processes. Implementing a long-term solution is the only way to ensure a lasting change. But these projects take time to complete.

This is part of our multi-year plan to turnaround ER performance, again not a quick fix. Now turning our attention to the DSV segment, DSV performed well during the second quarter with operating income nearly doubling to $3.3 million from $1.7 million in the second quarter of 2014.

Revenue and operating income grew despite ongoing chassis shortages that constrained truck body production. We expect chassis shortages to be a challenge for the industry, at least periodically for some time to come.

The timing of some walk-in van orders has pushed production of these units into the third quarter rather than the second quarter, as we originally projected. Despite total unit shipments declining year-over-year, product mix was favorable resulting in revenue growth in the most recent quarter.

Another bright spot for DSV was its aftermarket parts and service solutions business which saw large revenue increase to $7.8 million in the second quarter of 2015 from $4.9 million a year ago. Specialty Chassis and Vehicles experienced revenue growth throughout the segment despite encountering some challenges during the second quarter.

Segment revenue totaled $30.7 million in the second quarter of 2015, up from $24.1 million a year ago. The motorhome and bus business saw revenue increase but product mix suffered. One of our major customers has been working through some finished goods inventory and reduced chassis orders during the second quarter of 2015.

The APA business experienced favorable trends in the second quarter due to large part strong orders for defense parts with modest growth in commercial parts and new product offerings. The Other category included approximately $3.3 million in defense sales from the shipment of International Light Armored Vehicles or ILAV during the second quarter.

This was a positive addition to product mix for the quarter but at the same time we have no following orders booked for the rest of the year. Approximately $0.5 million of NHTSA settlement was charged to SCV in the second quarter.

Despite the charge and headwinds in the chassis business, operating income increased to $2 million from $1.4 million in the second quarter of 2014. Now Lori Wade will discuss Spartan's second quarter financial results..

Thank you, Daryl, and good morning everyone. Spartan's second quarter operating performance improved from last year with the Company earning net income of $1.2 million or $0.03 per share versus net income of $0.2 million or $0.01 per share in the second quarter of 2014.

Revenue for the second quarter of 2015 rose to $144.8 million, an increase of $29 million from the prior year. All operating segments posted revenue growth due to higher unit volume in ER and SCV and favorable product mix in DSV resulting in a better operating performance compared to the second quarter of 2014.

Gross margin for the second quarter of 2015 was 12% compared to 10.9% in the prior year. We should note that in the second quarter of 2015, we changed the way we classify engineering expenses for routine product design changes, classifying these costs as cost of goods sold rather than research and development expense.

The 10.9% presented for 2014 also includes the reclassification of these engineering expenses. We believe this change more accurately reflects the true manufacturing cost of our products and aligns operating results among our segments.

This change results in a higher cost of goods sold and a lower gross margin compared to our previous classification method. The increase in cost of goods sold is exactly offset by reduction in operating expenses, so there is no impact on operating income when compared to prior periods.

Operating income for the second quarter of 2015 was $2.3 million, which included $1.9 million of nonrecurring expenses. Even with these additional expenses, Spartan's second quarter operating income compared favorably to last year's $31,000 of operating income.

In July, we filed an 8-K stating Spartan had entered into an agreement with NHTSA pertaining to our early warning and defect reporting.

Under the terms of the agreement, we will pay a fine of $1 million in equal instalments over three years and we'll complete performance obligations, including compliance and regulatory practice improvement, industry outreach and recalls to remedy safety defects in certain of our chassis.

We accrued approximately $1.2 million for settlement-related costs in the first quarter of this year and booked an additional $1.1 million in the second quarter. Approximately $0.5 million was booked to each of the ER and SCV segments during the second quarter. The second quarter income tax provision was $1.1 million, equating to a 48.1% tax rate.

The tax rate in the quarter was above statutory rates due to the non-deductibility of the $1 million NHTSA fine. Now turning to the balance sheet, we saw considerable improvement at June 30 compared to March 31 of this year. Cash rebounded to $20.6 million from $12 million as we reduced inventory and collected accounts receivable.

Inventory levels decreased from $85.1 million at March 31 of 2015 to $69.9 million at June 30. Accounts receivable also decreased from $70.3 million at March 31 to $63.6 million at June 30, 2015. It's worth noting that late in the second quarter we shipped the 21 unit order to Brazil with more than $9 million of AR included in the quarter-end total.

As inventory declined by the end of the second quarter, so did accounts payable which declined from $46.3 million at March 31, 2015 to $30.5 million at June 30. Looking forward to our outlook for 2015, we expect revenue growth for the year to be in the mid to upper single-digit range compared to 2014.

We expect to see a modest revenue growth in the third quarter compared to the second quarter of the year. Revenue growth in the third quarter of 2015 is likely to be partially offset by a less favorable product mix and a lack of export or defense shipments.

As a result, third quarter operating income should be approximately equal to that that we reported in the second quarter. The fourth quarter of the year is typically one of our seasonally slowest in terms of production and sales. That is projected to be the case again this year with operating income at or just above breakeven.

For the year as a whole, we expect a modest operating profit including approximately $3 million for ER segment restructuring expenses. Now I'll turn the call back over to Daryl for his closing remarks..

Thank you, Lori. Better execution and revenue growth in what's typically a seasonally strong quarter allowed Spartan to post a profitable second quarter. Obviously Spartan's performance could have been better. While the Company reported quarterly operating income of $2.3 million, we also reported $1.9 million in nonrecurring expenses.

On the positive side, we can also see what our performance can be in the future simply by focusing on doing things right the first time. We're doing things differently today by following a disciplined data-driven approach to managing the business.

We are strengthening the business and improving operating performance through adherence to our five focal points, we are making progress in terms of fixing ER business and enhancing the operating discipline, becoming a more lean company and improving the product quality. This is the right operating strategy for Spartan and it is working.

So, although none of us would say we are satisfied with the Company's second quarter results, we are pleased to report a profitable quarter and in progress. Moving in the right direction, now our task is continue moving in a positive direction generating momentum along the way. As always, thank you for your time and interest in Spartan Motors.

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

[Operator Instructions] Our first question is from Rhem Wood of BB&T Capital Markets. Please go ahead..

Nice quarter.

I had to jump off for a second, I may have missed something, but the $1.1 million in the NHTSA charges, first, which line item was that buried in, and then Lori, what were your comments again about do you expect some of these charges to carry forward, can you just go over that again?.

So if I look, right now I'm reading directly from the 10-Q, for the three months ended June 30, $556,000 hit cost of goods sold and the other $500,000 hit your operating expenses, totaling the $1.1 million.

And we don't believe that – I'm not sure about the carry-forward, we believe that these expenses that we talked about will be – we've accrued for everything based upon GAAP. There are some things that we're doing internally with internal personnel that are not incremental costs, so they did not need to be accrued for..

Okay.

And then, so for the third quarter, I mean that's kind of the peak seasonally but you expect the earnings to be similar and that's based on – is that based on additional restructuring expenses plus less international orders and mix, and then you do expect fourth quarter to be above a breakeven?.

Yes, we do, Rhem..

Okay.

But to get back to the third quarter, I mean it seems like that that is seasonally the peak, so things should be better, but you're really – I guess is the main driver just less international orders flowing through?.

Yes. Last year in the third quarter we had 46 Peru units going through and we have none, no international going through this coming up third quarter.

We also have, and we talked about in the DSV segment, in Q2 some very high profitability for the parts and service which will come down to a more standard level but they'll be picking up with some of the units that are less profitable than the parts sales..

Okay. So can you guys maybe talk about how orders are shaping up for international orders as well as for the Velocity? I think you guys are maybe through testing at this point.

Have you started to take orders for Velocity, and then just where things stand with the international orders as well?.

Rhem, this is Daryl. International orders, we have nothing booked right now but we have a lot of activity which hopefully we'll pick some of that up. On the Velocity, due to a customer chassis change and our ability to get that chassis, the Velocity orders are going to be delayed for probably 30 days or so.

But testing is great and we're just ready to go..

Okay. And then last one, I'll turn it over, can you just kind of remind us how you see, with this restructuring and the things that you're doing operationally, where do you expect margins to go about for kind of this year and beyond, and how quickly can you get to those longer-term goals you talked about? Thanks for the time..

Rhem, this is Lori. So if we look, we've been saying all along that this is a two to three year turnaround.

We believe that we will continue to have quarter over quarter improvement but that pace of that improvement is, as we're going through them and we're going through, I'm not sure that we're really ready to talk about specific individual improvements, what our plan is.

We do believe that in three years we will get up to our performance target of the 6%, we do believe we will get there, but how that looks in between in those two to three years, I'm not sure that we're really ready to talk about that..

Operator, do we have another question?.

No, we don't have a question at this stage. I will give another reminder. [Operator Instructions] Mr. Salchow, there are no further questions at this time.

Would you like to make some closing comments?.

We thank you for your interest and we look forward to giving you a further update next quarter. Thanks for your time and have a great day..

Thank you. This conference has concluded. Thank you for joining us. You may now disconnect your lines..