Greg Salchow - Treasurer & Director, IR Daryl Adams - President & CEO Frederick Sohm - CFO.

Mike Shlisky - Seaport Global.

Good morning and welcome to Spartan Motors' First Quarter 2016 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 for Spartan Motors. Mr. Salchow, you may proceed..

Thank you, John. Good morning, everyone, and welcome to Spartan Motors' first quarter 2016 earnings call. I'm Greg Salchow and I'm joined this morning by Daryl Adams, our President and Chief Executive Officer; and Rick Sohm, our Chief Financial Officer.

For today's call, we are incorporating a presentation deck which is filed with the SEC and available on our website at www.spartanmotors.com. You may download the deck from the Shareholders section of our website to follow the 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 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. Daryl Adams will provide an operational review of the first quarter followed by a financial review from Rick Sohm. Daryl with the closing remark before we proceed to the Question-and-Answer portion of the call.

Now, I am pleased to turn the call over to our CEO, Daryl Adams for his opening remarks which begin on Slide 3..

Thank you, Greg. Good morning and thank you for joining our call. Let me begin by saying I'm proud of the team's performance this quarter. As we begin to see the results of our efforts to strengthen the business, we reported a net income of $500,000, and a $0.02 per share in the first quarter of 2016.

A considerable improvement year-over-year as you see on the slide. This represents the first time since 2010 that the company has recorded positive net income in the first quarter. In addition, we maintain our focus on the balance sheet and in the quarter with cash at $36.8 million.

All three of our segments reported stronger operator results compared to the first quarter of 2015. Delivery and service vehicles, and especially chassis in vehicles posted higher operating income and revenue growth year-over-year.

Demand for our product remains strong with sales of our most popular products showing gains for the first quarter of 2015. Returning the Emergency Response segment to profitability remains our top priority. While this segment was not profitable in the quarter, it did report a smaller operating loss compared to last year.

Material utilization in the ER business improved demonstrating the progress we have made in reducing waste and raising manufacturing efficiency. Operating expenses were also reduced as a percentage of sales and in dollar terms, compared to the first quarter of 2015 primarily due to reductions in selling and restructuring expense.

Last quarter I mentioned we were close to launching our Spartan preferred trucks. These trucks combined the most commonly ordered options into pre-engineered packages that can be easily manufactured.

We actually started two new programs, the Spartan Select Program for our custom cab and chassis customers, and the 180 Truck Program for our complete apparatus customers.

Both of these programs were publicly announced a couple of weeks ago at the FDIC Show in Indianapolis, the largest fire industry conference in North America, and we're well received by our dealers and OEM partners. The Spartan Select Program is aimed at our OEM partners. Those customers who build their own bodies on a Spartan custom cab and chassis.

The Spartan Select Program offers the most commonly selected options combined into easily ordered packages. This program will allow us to manufacture a custom chassis with less lead time and reduces the complexity to order, engineer and build a custom chassis. The 180 Truck Program offers several pre-engineered aerial and pumper model.

They are based on the most commonly ordered option packages. Both reducing complexity, we are able to streamline the ordering, engineering and production processes thereby cutting time to delivery to as little as 180 days.

As we look ahead, we will continue to focus on operational improvement while we expand efforts to increase output and become profitable. We made significant progress with our operational initiatives this quarter. Implementation of the Spartan production system that we talked about on our call last quarter has begun in Bristol and Charlotte.

Will you please turn to Slide 4; we are also moving truck body production out of Wakarusa, Indiana into the Bristol facility in an effort to reduce operating expenses and improve manufacturing productivity. We expect this move to be completed by June 30, 2016.

With a floor space in our premium in Bristol, we decided to move reach production to the Charlotte campus. DSV received an order for 348 reach vehicles bringing the total for the year to more than 1,500 units. All these units will be built in Charlotte before the end of the first quarter in 2017.

We recently developed an active braking system for motor home chassis. They were shown to our customers and received positive reviews. We will unveil this collision mitigation system to rest of the industry later in the second quarter.

It's too soon to estimate market demand or when the system might be commercialized, but we believe this will be a meaningful contributor to growth in the motor home chassis business in the future. Finally as we announced a couple of weeks ago, we broke ground on a new contract facility here in Charlotte.

This facility will produce Isuzu's new F-Series truck. The F-Series is a Class 6 truck that brings Isuzu into a new market segment. We are proud to be their assembly partner and looking forward to beginning production in early 2017. Now, I will turn the call over to Rick to discuss Spartan's financial results for the first quarter..

Thank you, Daryl. Please turn to Slide 5. As Daryl mentioned, we are pleased to report positive net income in the first quarter.

Considering that the first quarter is typically one of our weaker periods, we believe we're that we're starting to see the favorable impact of initiatives we've taken to improve our financial results, including launching the Spartan production system, implementing lean manufacturing across our production facilities and closely managing overhead and operating expenses.

Revenue for Q1 increased 4.1% to $133.7 million from $128.4 million with both DSV and SCV segments reporting strong revenue growth compared to last year. First quarter adjusted operating income improved to $1 million from an adjusted operating loss of $3.2 million in the prior year.

First quarter net income was $0.5 million or $0.02 per share versus a loss of $2.9 or $0.09 per share last year. As Daryl mentioned earlier, this is the first time Spartan has reported a profitable first quarter since 2010. Now let's take a look at results by operating segment, starting with the DSV segment on Slide 6.

DSV reported revenue of $59.3 million compared to $54.9 million last year. This is an increase of 8%. Revenue was driven by continued growth in our vehicle up-fit business.

This growth in up-fit revenue more than offset lower vehicle sales compared to last year's first quarter, which included $6.6 million of pass through chassis that are not typically treated as part of our vehicle revenue. Operating income more than doubled to $5.6 or 9.4% of sales, up from $2.6 million or 4.8% of sales a year ago.

The increase is due to a higher up-fit volume which typically carry more favorable margins and material productivity gains compared to the prior year. We are currently fulfilling an up-fit order that we expect to extend for most of 2016.

And while we expect this business to be an important part of DSV's future growth, we do not currently have a follow on order with this particular customer. Now let's move to Slide 7 in the ER segment.

Revenue declined to $39.4 million from $43.2 million as a result of lower shipments of apparatus compared to last year or revenue for our custom chassis were essentially unchanged. Apparatus production started slowly at the beginning of the quarter as we dealt with some residual production issues hanging over from the fourth quarter.

But as we exited our first quarter, our production volumes are ramping as our productivity and through put improved. Despite the lower revenue we are pleased to report ER's operating loss decreased to $3.9 million from $5.4 million.

The operating loss narrowed due to better performance on the shop floor, improved cost control and reductions in operating expenses. Excluding restructuring expenses, the ER segment had an adjusted operating loss of $3.6 million compared to an adjusted operating loss of $4.2 million, an improvement of 14.3% versus the first quarter of 2015.

Moving to the SCV segment on Slide 8. You'll see that first quarter revenue totaled $35.1 million. This is a 15.8% from $30.3 million in the prior year quarter. Motor home chassis revenue grew 13.3% driven by higher volumes increasing to $26.4 million from $23.3 million.

Demand for motor home chassis continues to be robust and we expect further growth as we become the sole chassis supplier to a major customer. And have been added to additional models at another major customer.

Increased levels of contract manufacturing accounted for approximately $1.2 million of revenue growth in the quarter and our defense business contributed $0.6 million of incremental revenue as we build additional ILAV vehicles compared to a year ago.

All these contributed to significant operating income growth in the first quarter as it increase 70% to $1.7 million from $1 million in the same period last year. On Slide 9, you'll see some of our balance sheet metrics. We ended Q1 with $36.8 million in cash, up from $12 million at the end of the first quarter of 2015.

Comparing our balance sheet to the prior year shows considerable improvement in working capital and reflects the progress we've made in running our business more efficiently. Accounts receivable were reduced by $10.8 million to $59.5 million.

And inventory showing more improvement declining to $71.2 million from $85.1 million, a reduction of $13.9 million. Improving working capital management and maximizing cash levels to support future growth will continue to be high priorities for our management team. Please turn to Slide 10 and we'll discuss our outlook for the remainder of the year.

Every detail in this morning's press release are outlook for the rest of the year has improved significantly. As we reported last quarter, our order intake is strong and continues to grow across the board as evidenced by our current backlog of $318.9 million, our highest backlog since the second quarter of 2008.

Based on the strong demand for our products, we're raising our revenue estimate for the year by $10 million to a range of $570 million to $590 million.

Our expected range of operating income is now between $7 million and $10 million based on higher revenue, favorable product mix, increased manufacturing efficiencies and lower overhead and operating expenses.

Operating income includes estimated restructuring expense between $500,000 and $1 million, and we anticipate income taxes in the rate of $1 million to $1.2 million. As a result, we now expect earnings per share to be in the range of $0.15 to $0.25 for the year, and we also expect each quarter of 2016 to be profitable.

This concludes my remarks and now I'll turn the call back to Daryl for his closing comments on Slide 11..

Thanks, Rick. We are pleased to start 2016 by recording a profitable first quarter, especially after a challenging 2015. As previously mentioned this is typically one of our weaker quarters so we are particularly encouraged by our results.

All three of our segments reported better financial results compared to the first quarter of 2015, indicating our strategy and turnaround plans are working. The outlook of 2016 has improved since last quarter, and our expectations revenue and operating income have also increased. We will continue to follow our 2016 focal points this year.

Our top priority remains the return of ER segment to profitability. We made progress during the first quarter and at the road map to achieve our goal. There's still a lot of work to do, but we can see a clear path to reach a breakeven run rate by the end of 2017. Our new management team is gaining momentum.

On our business objectives, these actions taken have already begun to show improved financial result. Although we are still in the early stages of our transformation plan, we expect better results for the year and remained focused on increasing value for our shareholders. Operator, we are now ready to take questions..

Thank you. We will now begin the Question-and-Answer Session. [Operator Instructions] Our first question comes from Mike Shlisky of Seaport Global. Please go ahead..

Good morning, guys, nice quarter. Let's start with a quick question, just on your overall outlook here. You did take up operating income.

Could you maybe give us just a little more color, kind of maybe break down for us, maybe is there a certain business that you think in particular that is the main reason for the uptick in your operating income outlook or is it really across the board or a corporate expense type of improvement there?.

I think, Mike, I would say it's kind of across the board. Each business is experiencing increased manufacturing productivity and efficiencies. We were keeping a close lid on the expenses and we've seen growth on the topline from DSV and from especially vehicle segment.

We told you before in prior quarters that we don't expect a lot of topline growth out of ER but we're focusing on getting that thing to profitability and I think we've seen some good progress in the first quarter, and that should continue to ramp the remaining three quarters of 2016..

Great, and that does lead to my next question about the business. Could you give us a sense as to how you feel ER is doing from a market share perspective? There's some companies out there that have been claiming they've been gaining share recently.

And I guess probably the question is, is your goal of breaking even by end of 2017 is that in anyway volume dependent or is that all about what you can do to improve your own operations?.

I believe, Mike, it's largely a matter of efficiency and productivity than operational turnaround and not dependent on volume.

One of things that I think we mentioned on the last call was we've been taking price increases along the way going back to probably the second quarter of 2015, and our backlog is not reducing significantly and I think we also mentioned that we've turned down some business recently for parts that we thought we couldn't build profitably..

Okay, got you. The other thing I want to ask about in your backlog comments in the press release, you did say that the ERV backlog was I think you said 13 months or less for your ERV, vehicles in your backlog.

I guess is the goal now, maybe next quarter or in the couple of quarters for it to be six months or less for the entire business or is your 180 Program only for certain models of trucks or certain kinds of orders?.

Yes, Mike, very good question. So the long delivery time of 13 months is the industry standard right now. Actually some of our competitors are higher than that. The 180 Truck is not meant to substitute for every other truck we're building. We're still a custom manufacture.

This is just another way to shorten up that lead time to get the industries of trucks that they're looking for. .

Okay. And if I can just squeeze in one last one here on your R&D expenses as well. I saw those were down over $2 million in the quarter.

Could you update us on some of your R&D initiatives? Have you changed what's on your plate? Can we expect to see that kind of run rate for the rest of the year, about $1 million to $1.5 million? And could you also maybe update us separately on your CapEx budget for 2016?.

Mike, if I can remember correctly I think that we moved the R&D from a separately lineup up being the cost-of-goods sold, so that's why you probably see the quarter-over-quarter number there. But we can get back to you on how that's changed if we want to normalize it..

Yes, but I think here to Daryl's point there has been no significant change in our R&D planning or spending, and I think there's a couple of millions up in COGS that we started to reclassify last year. So no major changes there, Mike. I think from our CapEx perspective we have a significant ramp up year-over-year.

I would expect the CapEx for the year to be in the range of $12 million to $14 million and probably half of that number being driven by the new production facility that we're building for the Isuzu F-Series..

Okay, got it. Thanks guys, I will hop back in the queue. I appreciate it..

[Operator Instructions] There being no other questions -- yes, did you want to ask another question, Mr.

Shlisky?.

Sure.

Am I the entire queue for today?.

At the moment, yes..

You are..

I was going to ask one or two more while we have a few more moments here..

Sure, Mike..

Thank you. I wanted to also ask about the active breaking system that you guys have just mentioned in your comments in your slide. I've heard of that elsewhere, similar to the Class 8 manufacturers with their own active breaking systems.

Could you tell us how you developed in-house or did you kind of appropriate one of the other sort of -- larger brands version of it? Or can you let us know what this is all about?.

Sure, Mike. It's one of the Class 8 suppliers that we've worked with and they're after their systems to work with our motor home chassis and with all the improvement issues you have on breaking, on weights and stuff. It's a Class 8 system that was tailored to meet our motor home customers and their demand..

Okay..

Mike, I'm sorry..

Yes?.

Just one thing to add, which is the first in that industry, by the way..

Got it, got it. While I've got my list of questions open, could you maybe also ask – if you'd give us, put more color on the Isuzu F-Series expansion.

Can you give any kind of color as to the volume potentials coming from that as soon as that expansion opens? Or is it currently put out there publicly at this point?.

Yes. Not able to comment for it right now, Mike, on volumes. We think the facility will be completed later this year and we expect production to start sometime late first quarter of 2017..

Mike, I will add. The facility we're building is very flexible. It's much different than our normal production facilities that you've been through any of them. It can run both the F-Series, or the N Gas, or if we want to we could put a motor home chassis down that line as well.

So its state-of-the-art 2016 lean tight systems put in place inside that facility. So it's flexible and if we don't see the volume in the future with Isuzu or something changes, that plan can be used for anything else..

Perhaps I could ask this in a different way, is the volume that you expect from Isuzu, just on its own, is that going to cover an appropriate return on your investment capital from the outset?.

Yes, it does. Absolutely..

And when I said appropriate, that means appropriate to your prior returns or to what you could have in the future as far as a higher shareholder value?.

Your second point is what we're looking at here, Mike..

Okay..

It is an acceptable return for our shareholders..

Not the historic number..

Okay, perfect. And then while I got you, one more thing on the RV side. Is it doing well thus far this year? You've seen that in I think some of the broader industry numbers.

Can you just talk about is it important for us to watch the housing market going forward to kind of see how that market may or may not do better or worse as we go forward here? I guess I'm kind of wondering if you could give us what you think as your top metrics on the watch for the health of that broad end market?.

Hi, Mike. This is Greg. Yes, we've done some research on it and you're pretty close. We think it's largely related to home equity values. When the buyers typically have a home equity, they can use that to help finance the vehicle. So yes, it is related to home values, but specifically home equity..

Okay. I'm going to do one last one here about your SG&A for the quarter as well. That was flattish. I was wondering if you could tell us if that is the kind of appropriate run rate around $13 million to $14 million for the rest of the year.

Or do you have some cuts coming in the rest of the year here? More increases perhaps?.

I think what we've said on the prior call, Mike, is that we're rebuilding the team and as we cascaded that down for the organization, we've addressed some needs to strengthen the organization in manufacturing and there are quality organizations. So we shouldn't think of it as cuts going forward..

So it's a change in the structure of the organization? But is that going to be from a dollar-perspective lower, or higher, equal, do you think for the rest of….

We are targeting to be relatively flat and as we build the organization at some point, we'll look at synergies and consolidating some of the back office operations. But nothing pending currently..

Okay. Good. Well, guys, thanks for answering all of my questions. Excellent quarter and good luck..

Thanks, Mike..

Thanks, Mike..

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

Pretty well, thank you, everybody. We appreciate your time and interest and as always, if you have any follow up questions, feel free to contact us later. Thanks again, have a good day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..