Juris Pagrabs - Group Treasurer and Director of Investor Relations Daryl Adams - President, Chief Executive Officer Rick Sohm - Chief Financial Officer.

Steve Dyer - Craig-Hallum Mike Shlisky - Seaport Global.

Good day and welcome to Spartan Motors' third quarter 2016 results conference call and webcast. All participants will be on listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Juris Pagrabs, Group Treasurer and Director of Investor Relations of Spartan Motors. Please go ahead, sir..

Thank you Sheri and good morning everyone and welcome to the Spartan Motors' third quarter 2016 earnings call. I am Juris Pagrabs and joining me on the call today is Daryl Adams, our President and Chief Executive Officer and Rick Sohm, our Chief Financial Officer.

For today's call, we have included a presentation deck, which will be filed with the SEC and is also available on our website at spartanmotors.com. You may download the deck from the Investor Relations section of our website to follow along with our presentation during the call.

Before we start today's call, please turn to page two 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 are what management believes could materially affect the results are identified in our Forms 10-K and 10-Q filed with the SEC.

However, there may be other risks that we cannot anticipate. For today's call, Daryl will provide an operational review of the third quarter followed by a financial review from Rick. And then we plan to return to Daryl for closing remarks before proceeding to the Q&A portion of the call.

As a reminder, last quarter our delivery services vehicles business segment changed its name to fleet vehicles and services to more accurately reflect our end-user target customer, including our large fleet step or walk-in can customer and our growing cargo management systems customers.

Today's press release with our form 10-Q filed with the SEC reflect the segment name change. At this time, I am pleased to turn the call over to our CEO, Daryl Adams, for his opening remarks which begin on slide three..

Thank you Juris. Good morning everyone and thank you for joining us on Spartan Motors third quarter 2016 conference call. I am pleased to report another solid quarter of growth and profit improvement for Spartan Motors. Revenues in the third quarter rose 9% to $148.7 million versus last year.

For the third quarter 2016, we reported $2.7 million or $0.08 per share. That's $8.5 million or $0.25 per share year-over-year. I am extremely proud of all the Spartan team members. They have embraced our turnaround plan and as a result of their efforts we have achieved our most profitable nine-months ending September 30, since 2009.

Our fleet vehicles and services segment posted significantly higher revenue and operating income growth year-over-year which was driven by higher unit volume, favorable mix and the continued strength in our Saltillo and Kansas City upfit business.

Especially chassis and vehicle segment saw sales and operating income decline, primarily due to lower unit shipments year-over-year resulting from a customer implemented one-time inventory adjustment related to his dealer on-hand inventory.

Shipments to this customer is expected to return to pre-adjustment levels during the current fourth quarter as evidenced by the increase in our backlog to $20.1 million from our second quarter low of $12.2 million.

Our emergency response segment continued to make good progress for returning to profitability, which is a top priority of our turnaround plan.

One of the guidepost of our Spartan production system, we are hyper-focused on lean manufacturing principles, continuous improvement and of course gaining the right talent in key areas such as procurement and quality. As a result, we are seeing improvements in quality, inventory reduction and material cost reductions.

Year-over-year, the operating loss for the quarter improved by $1.8 million despite the quarter including a legacy one-time product repair campaign reserve of $1.7 million. Rick will cover in more detail during his remarks. Please turn to slide four.

As you recall, last quarter we announced two new ER programs, the Spartan Select and 180 Truck programs, both designed to streamline the ordering process, reduce production times and improve operational efficiencies.

As a reminder, the Spartan Select program was created for our OEM partners, those customers who build their own bodies on Spartan custom cab and chassis. The Spartan Select chassis 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 designed to provide the market with faster order to delivery cycle times for custom apparatus is in the midst of a full production launch.

Concurrently, the program language has been abandoned and has instead transitioned into the S-180 line of custom pumpers as we go to market with custom trucks delivered in half the time of any competitor. Today the S-180 truck line offers several pre-engineered pumper models that are based on the most commonly ordered option packages.

By reducing complexity, we are able to streamline the ordering, engineering and production processes thereby cutting delivery time to as little as 180 days. The product line continues to gain attention. Dealers are excited and showing an increased support. We expect 10% to 50% of our apparatus shipments in the fourth quarter to be S-180 trucks.

Our first S-180 truck will be delivered to Reese Fire Rescue supporting the village of Reese, Michigan in the coming weeks, replacing a truck that was out of service which is one of an aging fleet.

The S-180's abbreviated build and delivery time, our Michigan roots and our dealer's CSI support were deciding factors in this purchase by Reese, Michigan. Please turn to slide five.

Last month, our fleet vehicle and services segment was one of six vehicle manufacturers who received a USPS prototype contract award to build six next generation delivery vehicles. We will design, develop, build and deliver these prototypes in 12 months. The contract award of $3.6 million is to help offset the prototype cost.

We are currently in discussions with an OEM chassis manufacturer and hope to partner with them and other key suppliers to help offset the prototype cost. The prototypes are required to be delivered to the USPS in September of 2017.

The USPS will then test the prototypes for six months in the range of different climates, typography, population centers and delivery environment. We expect them to award the production contract to the company's vehicle that pass their test during the first half of 2018.

This schedule, of course, is all dependent on whether the USPS approves and appropriate funding for next generation delivery vehicle program, which has not been funded to-date. Please turn to slide six.

Last quarter we announced the production of the first new Chevrolet medium duty gasoline-powered truck being manufactured in Charlotte, Michigan in partnership with the General Motors and Isuzu Commercial Truck of America. In addition, the seven Chevrolet Cavalier model that Spartan will manufacture based on Isuzu's existing N-series design.

New construction continues at a swift pace on Spartan's new Charlotte campus building which will host Isuzu's new F-series Class 6 on-highway cab-over commercial truck assembly operation breaking ground on 85,000 square feet building in April of 2016 with our partners from Isuzu Commercial Truck of America President.

We are pleased to share that the completion of this building and grounds is expected to conclude within the next several months. The facility represents a continuation and expansion of our highly successful and symbiotic relationship between two companies.

Concurrently with the $5.5 million investment, Spartan expects to leverage core competencies we have built in the contract manufacturing and assembly arenas in order to ensure a profitable expansion of the Isuzu relationship. Please turn to slide seven. Demand for our last mile delivery vehicle continues to gain momentum.

Earlier in the year, we received an order for over 1,500 Reach parcel delivery vehicles, which is extremely exciting. Reach is a Class 3/4 vehicle which was custom-designed by Spartan for best-in-class utility, durability and fuel efficiency. Reach is currently being produced in a highly efficient flexible manufacturing line at Charlotte, Michigan.

These units are expected to be delivered in 2016 to support peak holiday season. Now I will turn the call over to Rick to discuss Spartan's financial results for the third quarter..

Thanks Daryl. Please turn to slide nine. As Daryl mentioned, we are pleased to report continued quarterly progress and a significant increase in net income for the third quarter of 2016. Our improvement includes a favorable impact from implementing lean manufacturing and continuous improvement initiatives across our production facilities.

Revenue for the quarter increased 8.9% to $148.7 million from our $136.6 million. Our gross margin improved 270 basis points to 12.1% of sales from 9.4% a year ago, primarily due to a favorable product mix, which included a higher proportion of sales from higher margin parts and accessories.

Third quarter operating income rose $3.1 million to $2.6 million from a loss of $0.5 million last year. The quarter included a legacy product repair campaign reserve of $1.7 million, restructuring charges of $0.3 million and an asset impairment charge of $0.4 million for the ER division.

Operating margin for the quarter improved 200 basis points to 1.7% from a negative 0.3% a year ago. Moving to slide 10. Our adjusted operating income improved 35.1% to $5 million from $3.7 million in the prior year.

The prior year third quarter included adjustments of $2.2 million relating to asset impairment charges, $1.4 million in product recalls and $0.5 million in restructuring charges. Our adjusted net income was $3.4 million or $0.10 per share compared to $1.3 million or $0.04 a share last year.

Now let's take a look at results by operating segment, starting with our FVS segment on slide 11. FVS reported revenue of $78 million compared to $54.2 million last year, an increase of 43.9%. Revenue was driven by increased vehicle sales, primarily from Reach and continued growth in our vehicle upfit business.

Operating income rose 134% to $9.6 million or 12.3% of sales from $4.1 million or 7.5% of sales a year ago. The increase is largely due to higher upfit volumes as usual pulled ahead from the fourth quarter to meet customer demand. We are currently fulfilling a large upfit order that we expect to extend through November of 2016.

While we expect this business and this customer to be an important part of fleet vehicle services' future growth, we do not currently have a follow-on order. Additionally, as a result of the USPS contract award, as Daryl mentioned earlier, we do expect increased R&D costs during Q4.

As a result of this increased R&D costs together with more normal upfit volumes, we expect Q4 operating margins for FVS to return to more normalized levels. Our backlog remains strong at $102.2 million, compared to $107.7 million at the end of the September 2015 quarter. Moving to slide 12 and the SCV segment quarter.

Third quarter 2016 revenue totaled $28.6 million, down 26.1% from $38.7 million. Motorhome chassis revenue declined 31.1% to $22.3 million from $32.4 million primarily due to the lower unit shipments resulting from a customer implemented one-time inventory adjustment related to its dealer and on-hand inventory.

Shipments to those customer are expected to return to preadjustment levels during the current fourth quarter. You can see this in our increased backlog for the second quarter low of $12.2 million to our quarter-end number of $20.1 million.

As we noted last quarter, we continue to see an increase in our market share as a result of becoming the sole chassis supplier for a major customer and being added to additional models at another major customer. The months of June, July and August have been the first three months that the industry showed reductions in Class A diesel retail sales.

This has caused the total year-to-date Class A diesel market to be down 3% year-over-year. Our overall backlog at $20.1 million on September 30 rebounded nicely from June levels. We will continue to watch the Class A diesel trends closely during the fourth quarter to see if this trend will continue into 2017.

Operating income for the third quarter decreased 63% to $0.9 million from $2.4 million in the prior year, driven by the lower sales lines I mentioned earlier, which contribute to our operating margin decreasing 320 basis points to 3% for the quarter. Let's now move on to slide 13 and the ER segment.

Revenue declined $1.6 million to $42.1 million from $43.7 million due to fewer shipments of complete fire apparatus and custom cab and chassis compared to last year. The operating loss for the quarter decreased $1.8 million to $3.8 million from $5.6 million last year.

Included in the current third quarter operating loss is a product repair campaign reserve of $1.7 million, an asset impairment charge of $0.4 million and restructuring charges of $0.3 million. Adjusted operating loss improved to $1.4 million from an adjusted operating loss of $2.3 million a year ago.

The operating loss in the prior year third quarter includes a product repair campaign reserve of $0.6 million, an asset impairment charge of $2.2 million and restructuring charges of $0.5 million. Backlog remains strong at $149.8 million compared to $145.1 million in September 2015.

And as we have said previously, we are not necessarily looking to grow the ER business but rather return the ER business to profitability. Turning to our balance sheet on slide 14. Spartan's balance sheet continues to improve and grow stronger.

We ended the third quarter with $40 million in cash, up from $20.9 million at the end of the third quarter of 2015. Our total liquidity improved 82% or $41 million to $90.3 million from $49.6 million a year ago.

Working capital management and maximizing cash levels to support our future growth and maximize shareholder value continue to be high priorities for our management team.

On October 31, we repaid our $5 million senior note due December 1, 2016 with cash on hand and we entered into a new three-year $100 million revolving credit facility with essentially the same terms as our previous $70 million facility. Please turn to slide 15 and we will discuss our outlook for the remainder of the year.

As we detailed in this morning's press release, our outlook for the rest of the year remains strong. Order intake is strong, as evidenced by our current backlog of $272.1 million and as Daryl mentioned earlier, we received the USPS award to build fully functional prototypes for the next generation delivery vehicle program.

As a result, we expect to incur increased research and development cost relating to this program in the current fourth quarter.

Despite this as well as the fourth quarter typically been our lowest sales point quarter, we expect to see continued year-over-year operational improvements resulting in a profitable quarter, which will represent our fourth quarter in a row, an achievement not accomplished since 2009.

This allows us to maintain our previously stated 2016 mid-point EPS guidance of $0.23. We expect 2016 results as follows. Our revenue in the range of $570 million to $590 million, which is unchanged from our previous guidance.

Operating income in the range of $8 million to $10 million , including the restructuring charges of $0.5 million to $1 million, which is also unchanged from our previous guidance. Income tax expense will likely reduced to essentially zero, which has changed from our previous guidance of a range of $1 million to $1.2 million.

And finally, earnings per share in the range of $0.20 to $0.25, unchanged from previous guidance and assuming 34.5 million shares outstanding. At this point, I will turn the call back over to Daryl for his closing remarks..

Thanks Rick. Please turn to slide 16. In summary, I would like to emphasize that we are pleased with the progress we have made to-date. Results of the nine-month ended 2016 was the strongest since 2009.

Highlights include, sales were up 8.6% to $444.9 million from $409.8 million, operating income was up $102 million to $7.7 million from a loss of $2.7 million, adjusted operating income increased 111% to $12.4 million from $5.9 million, net income improved $15.2 million to $7.7 million or $0.22 per share from a loss of $7.5 million or $0.22 per share, adjusted net income rose 249% to $9.4 million or $0.27 per share from $2.7 million or $0.08 per share.

While we have made notable progress, we are one-third of the way in implementing and executing our turnaround plan. Our path to profitability has become clear and more opportunity exists. We plan to continue following a disciplined data driven approach to managing the business and to follow our 2016 focal points.

Our top priority remains to return the ER segment to profitability and we believe we are on track to be profitable on a run rate by the end of 2017. As I told you last quarter, we expect to be profitable each quarter in 2016 and we are confident in our ability to achieve that goal and meet or exceed our guidance for 2016.

Our management team is firmly established and our employees are truly excited about the direction Spartan is heading. We remain fully focused on improving the business and increasing shareholder value. Thank you. Operator, we are now ready to take some questions..

[Operator Instructions]. The first question is Mr. Steve Dyer of Craig-Hallum. Please go ahead, sir..

Thanks. Good morning and congratulations on another nice quarter..

Thanks Steve..

Thanks Steve..

You talked a little bit about the FVS segment, which was strong again and backlog was down which I don't think was totally unexpected.

How comfortable are you as you look into next year in terms of the visibility that you have? It sounds like it's lumpy? Any other color there that you give us to guide us to thinking about what next year might look like?.

Well, Steve, I think difference between our fleet business and our ER business is, we just don't have a disability to the backlog. In fire trucks, we have a year worth of visibility. I think with our fleet business, we are happy if we have five to six months of visibility. So I think it's a little too early for a good look at 2017.

But we believe some of the major customers, as we have talked about last mile delivery, have robust capital budgets that they will be spending to get more of these vehicles. So we don't have a great visibility yet but we expect by our fourth quarter call we will have a good idea of the year looks like..

Okay. That's helpful.

And then in terms of the USPS development costs, could you quantify, Rick, maybe what you are thinking for Q4? And then more fully, I know you haven't really announced a partner yet, how we should be thinking about layering those costs into next year?.

Yes. I think as Daryl mentioned, we are talking to some of our major suppliers. We will probably try to get some visibility and some agreements in place by the end of the year. I think the spending right now is not very large, less than $0.5 million or so that we would expect to spend in the fourth quarter.

And then once we reach some of the agreements with our partners, we will be able, I guess, to better articulate the path forward in 2017..

Got it. Okay. And then maybe just a broader question about capital allocation. Balance sheet, obviously continues to improve. You bought back some stock opportunistically earlier this year.

How do you think about your priorities there? And do you get to a point where M&A starts to become more of a thought going forward?.

I think that we been pretty consistent in the past year to say, we need to get our house in order and build a solid foundation. I think we are making some real good progress here in 2016. We have been opportunistic with our capital with the share buyback you mentioned. And we will continue to look at it that way.

But as we continue to generate more profits and cash then some of the M&A activity will start to appear on our radar screen..

Got it. Okay. I will leave it there for now. Thanks Rick..

Thank you Steve..

Thanks Steve..

The next question is from Mike Shlisky of Seaport Global. Please go ahead, sir..

Good morning guys..

Good morning Mike..

Hi Mike..

I wanted to start off with some questions on the field fix program that you had in the quarter. I guess it was still kind of charge you took for some issues with some prior trucks. I guess that came out of the blue. I don't recall you mentioning it last quarter.

So I guess what's happened since the last three month that caused you to take that charge? And is it going to make you have a more cautious warranty reserve going forward?.

Mike, I will address the first half and then Rick address the warranty accrual subject. We did not mention it last quarter and that's because we didn't know about it last quarter. It's something that came up early in this quarter.

And once we got into it, understood it, we tried to make sure that fire trucks are safe and that the firefighters that use them are safe. So its' something we need to take care of and that's basically what happened. When we get into this year is make sure that we cover it. I will let Rick talk about the accrual..

Yes. Mike, I think it's a relatively large population of vehicles that go back, you mentioned it correctly, this is kind of a legacy or a quality issues that goes back a number of years and that's what led to the charge of about $1.7 million for the quarter..

So will you have to change your approach going forward? This is the third, at least these -- of the last five quarter, you have had this kind of thing three times.

So calling this a one-time item and not changing your future warranty prices, I am just not sure how that's supposed to work?.

Well, I think unfortunately, there is something of a history here of [indiscernible] not enough validation and design work upfront. We spent a lot of money and resources on bulking up our engineering team here and doing more validation work ahead of time. So we think we are getting to a clean point in terms of our quality.

And unfortunately this is just one of the legacy issues we have had to deal with over the last couple of years here..

Mike, I would like to also add, I think if you been at our call, you have heard about the number of changes we have made in management. One of those was engineering, right, because of the issues. So these are, we are asked by our Board as well and we just had the meeting yesterday. 2016 is when the new engineering team has been in place here.

So everything going forward from that is things that we are designing and validating prior to that these issues come up and we need to clean them up and deal with them. And that's what we are doing..

Okay.

So I guess the bottom line with the different engineers and new design changes and the new faster production program, at this point you don't need to increase your warranty expectations, at least temporarily and then maybe true-up on the other side later?.

Well, items like this, Mike, we are addressing kind of on a case-by-case basis. So we feel good about our general warranty reserve policy and we deal with these one-off campaigns on a case-by-case basis. But based on what we know today, we feel comfortable with our accruals..

All right. Okay. I just also wanted to confirm is, housekeeping item about what is and is not included in your operating margin, operating profit guidance for the year? You do include your $1 million of restructuring as an impact to operating profit.

But I just want to make sure, you exclude these charges that we just talked about and the other small asset impairment stuff as well, correct?.

Yes. That's the difference between the GAAP and the adjusted numbers. That's correct..

So it's adjusted operating profit, but just not adjusting for restructuring, is the guidance?.

The guidance includes the restructuring charges..

Okay. Got it. All right. I also wanted to ask, you have got one customer that you said, apparently took down some order activity or shipment intake during the quarter.

Is an elevated or inventory issues, is this something you might think be an issue at any other customers, given some pretty robust trends here over the last couple of years? Does it just related to just one customer? Or are you getting the sense that there might be other higher issues like this coming?.

No. Mike, repeat the question, because we like to try to emphasize, I think you are talking about the specialty chassis segment..

The motorhome, exactly..

Right. We don't enter the entire RV segment. I think we need to continue to guide the listeners that we are Class A motorhome diesel segment only, which is much different than the entire RV business. So with our customers and insight we receive from them, we think we don't see a major downturn. We see it from our market share, we are increasing.

So we are seeing nice orders going forward which is shown by the backlog in that division..

Okay. I just got two more quick ones here. First on the Postal Service deal.

I know at this point, obviously it's a somewhat small deal, but is the revenue that you are getting supposed to completely cover your costs? And so is your effort to try and find a partner here going to help you get profit on those revenues who can actually take down your cost by having somebody else them on? And I guess the other part of the question is, can the award be award to more than one company?.

Yes. Maybe I start with the last part of your question first, Mike, is yes. The USPS has the ability to allocate awards over multiple participants and we may think that that may actually occur. The $3.6 million is not meant to make these vehicles profitable for the program participants.

It's to help defer cost and hence our desire to find not only a major chassis partner, but a series of suppliers we can partner with to help offset those development costs..

Okay.

But I guess were you award in an effort to fully offset costs that you might have had just on your own?.

No. That $3.6 million., as I mentioned, deferred are offset all costs..

Okay. And then my last question, I just want to ask about was the GM because you guys getting your first trucks off the line there.

I just wanted to get a sense as to, at this point, what run rate do you think you are running at versus where it peak or average operating level? And if you are not there yet, at what point do you see the Chevy program fully operational up and running at its normalized run rate?.

Yes. I think we have started in the last quarter our Chevy builds. And I don't know that we are at a peak run rate yet but we see that ramping and continue to ramp over the first half of 2017, Mike..

Perfect. Excellent. I will pass it along, guys. Thank you so much..

Mike, this is Juris. I just want to clarify your question regarding the GAAP guidance. So just to be clear, our guidance that we provided is strictly on a GAAP basis not adjusted. So it does include the restructuring charges, the asset impairment and repair campaigns, okay..

That's all included?.

Yes, correct, in the GAAP guidance..

Okay. Perfect. Thank you..

Thanks Mike..

[Operator Instructions]..

Sorry to interrupt. If there aren't any other questions, I want to thank everybody for participating on the call today and we look forward to talking to you at fourth quarter at the beginning of the year. Thanks everybody. Good day to everyone..

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