Juris Pagrabs - Group Treasurer and Director of Investor Relations Daryl Adams - President and Chief Executive Officer Matt Long - Interim Chief Financial Officer.

Matt Koranda - ROTH Capital Ryan Sigdahl - Craig-Hallum Capital Group Steve O’Hara - Sidoti.

Good morning, and welcome to Spartan Motors 2018 Third Quarter Conference Call. [Operator Instructions] 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 Juris Pagrabs, Group Treasurer and Director of Investor Relations for Spartan Motors. Mr.

Pagrabs, you may proceed..

Thank you, Keith. Good morning, everyone, and welcome to the Spartan Motors 2018 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 Matt Long, our Interim Chief Financial Officer.

For today's call, we've included a presentation deck, which will be filed with the SEC and will also be made available on our website at spartanmotors.com. You may download the deck from the Investor Relations section of our website and 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. Please turn to Slide 3. As of January 1, 2018, the company adopted the new Revenue Recognition Standard, ASC 606, using the modified retrospective transition method. The adoption had minimal impact to net income in Q3.

As a result, reported consolidated sales and cost of products sold were lower by $4.9 million and $4.6 million respectively. Consolidated net income net of tax was about $200,000 lower. The adoption reduced reported consolidated backlog by $32.2 million, reducing both FVS and ER reported backlog by $9.3 million and $22.8 million respectively.

For more details regarding ASC 606, and its impact on the company's financial results, see the company's quarterly report on Form 10-Q filed for the quarter ended September 30, 2018.

On the call today, Daryl will provide an overview of the third quarter alongside a business update, then Matt will provide a more detailed review of the third quarter results and 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..

Thank you, Juris. Good morning, everyone. Thank you for joining us on our third quarter conference call. The Spartan team's performance this past quarter was exceptional in the face of so many significant cross-industry challenges. I’m extremely proud of how they handled this adversity.

The third quarter proved to be very challenging and difficult for Spartan Motors, as all three of our business segments faced increasing operating pressures fueled by incredibly robust, but volatile business environment. Going into the quarter, we were optimistic that most of the headwinds encountered in Q2 were behind us.

Primarily commodity cost and chassis shortages, based on aluminum steel pricing and what OEMs were telling us. However, these headwinds continued in the third quarter and in some cases escalated, having a negative impact of approximately $6 million on our quarterly bottom line results.

If not for the significant industry-wide headwinds and the operating issues we sustained as a result, we would have achieved results well ahead of an internal operating plan for the quarter. I want to emphasis, that despite the headwinds, the underlying business and operational fundamentals in each of our segments remain incredibly strong.

Order activity remains robust in all segments, particularly at FVS, and its related backlog, included in multi-year USPS truck body, it is up 48%, compared to a year-ago. With that let’s review the quarter and the headwinds that negatively impacted the quarter. Revenue for the third quarter rose 19.6% to $226.2 million from $189.2 million a year ago.

The increase in sales was driven by strong growth in FVS and SCV, partially offset by a decline in ER.

Our strong topline results benefited from increased volume relating to USPS truck bodies, Reach vehicles, improved production volume at our vehicle upfit centers, primarily relating to an e-commerce order and a strong luxury motor coach chassis sales.

Gross profit margin decreased 350 basis points to 11.6% of sales from 15.1% of sales, which includes significant material cost headwinds of approximately $3.5 million, fueled by tariff driven increases in commodity and component cost. This is an addition to the $1 million headwinds we incurred during Q2.

While we have taken pricing actions to offset these costs when available, we are seeing large purchase component pricing increases from major suppliers.

We do expect some of these tariff driven headwinds to continue until 2019, based on industry-wide conditions, and we have proactively announced a 4% price increase effective January 1 in our ER segment.

In addition to the tariff driven increases and commodity and component cost, our third quarter bottom line was negatively impacted by production and labor inefficiencies and shipment delays, due to the following headwinds.

Chassis supply of components delays during the quarter at our Bristol facility disrupted our workflow causing a 10-day plant shut down, created labor efficiencies and led to additional operating expenses for over time that was required to meet customer demands.

Normally during such plant shut downs we would hope have laid-off workers, but with the extremely tight skilled labor market that the entire industry is facing we chose to keep them on are favorable to avoid longer term disruptions.

On a positive note, after these delays were resolved, late in the third quarter, our production efficiency rebounded quickly to over 90%, and in some weeks over 100%, which reinforces the significant impact these headwinds had on our operations, as well as our war continued progress in operational fundamentals based on the Spartan production system.

Driver shortages and freight logistics difficulties continue to have direct impact on getting components and chassis on-time to meet production timetables, and our ability to deliver finished vehicles to our customers in a timely manner.

Rate disruptions also negatively impacted our launch at our Ladson, South Carolina facility in support of our new e-commerce outfit order. As a result, on an aggressive customer dictated launch plan, we incurred unplanned start-up cost of approximately $350,000 related to the expedited procurement and shipping costs.

Additionally, due to Hurricane Florence we sustained a week-long plant shut down further disrupting operations in South Carolina.

We also experienced labor shortages at multiple locations, particularly in Charlotte, Michigan, contract manufacturing facility during the quarter, which impacted or Isuzu N-gas production capabilities and shifted units in two subsequent months.

As you can see, the [indiscernible] of increased operating pressures we faced during the quarter significantly impacted our profitability. For the third quarter of 2018, net income decreased to 5.2 million or $0.50 per share, compared to net income of 13.5 million or $0.38 per share last year.

The prior year net income does include benefit from a $6.3 million or $0.18 per share tax valuation allowance adjustment, due to the company's improved financial condition. Despite the tough operating environment, I am pleased with the underlying fundamentals of each of our business segments.

Now, please turn to Slide 5, where you can find an update of a few business highlights and developments starting with FVS. Last-mile delivery, including refrigeration continues to expand and represents a significant growth opportunity for us.

As we have indicated in the past, we’ve been working very closely with some of the largest and most innovative parcel and grocery delivery companies to product [ph] them with solution-based vehicles opted products, including new refrigeration capabilities, and electric power chassis.

Last month, Amazon and Mercedes announced a 20,000-unit order for the Sprinter cargo van. We are currently operating in Mercedes shift-through facility located in Ladson, South Carolina North of Charleston, producing customer specific upfits at a rate of 70 per day.

As we indicated last quarter, we anticipated the customer order to be split across OEM platforms. We are happy to report that we have been awarded an 1800-unit order on a Dodge Promaster platform for the same e-commerce customer. We will produce the upfits in our Promaster shift-through facility located in Saltillo, Mexico.

We continue to make good progress on our 2,141-unit truck body order for the USPS. According to plan, we are producing 7, 8 units per day and as of third quarter about two-thirds of our 80 million revenue target for 2018 has been recognized.

Our work-driven design process, blending customer needs with vehicle and upfit base solutions continues to drive sales across multiple product lines and locations. Most recently, both Frito-Lay and UPS selected Spartan’s Utilimaster go to market brand to supply them with innovative Class-3 truck bodies called small packs.

Some of which have refrigeration capabilities as well. As e-commerce grows, and the overall parcel delivery landscape changes to more and smaller packaged deliveries long time customers such as UPS have responded in time. Most recently, UPS has contracted Spartan Utilimaster to upfit a fleet of 100 Dodge Promaster vans.

Anticipated customer needs in response to sustained ability initiatives continues to be at the forefront for an investment in electrification. EV chassis development in partnership with our customers and suppliers will continue to receive a tension in 2019 and beyond.

Anticipating this future growth, we worked hard to secure proven well-established partners in EV space. New suppliers such as Zenith & Cummins Electrified Power joined Motiv to give Spartan first to market electric vehicle production capabilities across vehicles Class 1 through 6, including those that require refrigeration.

Because we are the only one in the industry, with this capability, Spartan Utilimaster now have access to a broader base of customers who wish to supplement their fleet with the Electric Power chassis. Please turn to Slide 6, and I’ll continue with the emergency response.

Our ER business saw another successful quarter of profitability despite the industrywide headwinds impacting the quarter. The operational changes we’ve implemented have resulted in continued improvements in productivity, efficiency, quality, and profitability in our facilities.

As entered in the last quarter, we are working on number of initiatives to improve our market position and enhance our margins. Our new order-to-ship process at Brandon is fully implemented and operational, and we recently started a manufacturing pilot of the same at our Snyder facility.

This process improvement will take nearly 80 days of the order-to-ship process and speed-up delivery time. We successfully shut down our fully integrated the US Tanker plant in Delavan, Wisconsin into the Brandon facility located in South Dakota.

We also successfully relocated the production of the S-180 pumper to our branded facility to maximize both commodity and labor efficiencies.

As we continue to focus on acquisition-related disruptions, like removing dealer territory conflicts during the quarter, we streamlined several single dealerships in the key mid-west markets and we expect to complete the dealer rationalization by the end of Q1 2019.

We’ve also initiated expansion of distribution coverage in Georgia and Florida, fifth largest US market and we solidified a long-term distribution contract for the Canadian dealer.

And finally, now that we have earned professional engineering certification on LTC aerial product line obtained with this new acquisition, we are reintroducing these very popular aerial products starting this quarter. Please turn to Slide 7, and I’ll continue with specialty chassis and vehicles.

In the SCV segment, our momentum continues to grow in both the over and under 400 horsepower segments as we continue to gain market share with the current and new OEMs. I am pleased to report, we had a NeXus RV for a drawing list of Premium Class A diesel RV manufacturers.

RV in their custom Class A chassis model, the Bentley Diamond is Spartan's K1 360 chassis, a new entry for them into the Class A diesel space.

Spartan’s ability to penetrate and win in this market segment grants us access to both younger buyers, as well as RV owners wishing to step down into a more nimble [indiscernible] without sacrificing the quality, durability, and innovation they have come to expect from Spartan.

Business with our long-term customer Isuzu work truck North America continues to grow. Production demands required us to add a second shift on our Charlotte campus and to our highly skilled and flexible workforce to support our contract manufacturing operations for Isuzu N gas, and the new larger F-series.

With that, I’ll turn the call over to Matt to discuss Spartan's financial results for the third quarter, as well as our outlook for 2018..

Thanks Daryl. Please turn to Slide 9.

As Daryl mentioned, the underlying fundamentals of the business remains strong in the operational and organizational improvements we’ve made over the past few years have provided a solid foundation that will continue to drive profitable long-term growth for Spartan Motors, despite the significant industrywide headwinds that continued in the third quarter.

We’ve responded as quickly as possible to these near-term challenges during the quarter and have implemented a number of proactive steps and cost reduction actions to help mitigate the headwinds, including continued the rationalization of our manufacturing footprint shutting down our ER tanker of facility in Delavan, Wisconsin and consolidating the manufacturing of the UST products in the existing Brandon South Dakota campus.

Moved production of all S 180 from Charlotte to the Brandon campus, in so doing all Spartan pumper manufacturing operations will be under one roof where you can leverage both commodity and labor efficiencies, and reductions at our Charlotte, Michigan corporate office, primarily in office in support functions.

Third quarter adjusted EBITDA decreased 17.8% to $10.6 million from $12.9 million. Adjusted EBITDA margin declined approximately 210 basis points to 4.7% of sales from 6.8% of sales a year ago. Adjusted net income decreased 18.9% to 6 million from 7.4 million in the third quarter of 2017.

Adjusted EPS declined to $0.17 per share from $0.21 per share, which excludes 6.3 million or $0.18 per share tax valuation adjustment. Our backlog at September 30, 2018 remained strong and ended at $484.9 million, compared to $537.7 million at September 30, 2017.

We had 214 million of USPS truck body in backlog a year ago, compared to 159 million remaining at the end of Q3. Excluding the USPS order, backlog on a consolidated basis was up slightly year-over-year, reflecting solid improvements in FTS and SCV. As Juris mentioned, the reported backlog was reduced by 32.2 million with the adoption of ASC 606.

Please turn to Slide 10, and I’ll walk you through the adjusted bridge from our initial expectations to our actual results for the quarter. Tariff driven increases in commodity and component costs resulted in a negative impact to adjusted EBITDA of approximately 21%, compared to our initial expectations.

Chassis availability, freight, and logistics issues combined negatively impacted our expectations by another 10%, while labor shortages and the impact of Hurricane Florence added another 6% to 7%. Partially offsetting these headwinds were the impact of positive pricing actions realized during the quarter, particularly in ER.

Now, let’s take a look at the results by operating segments starting with FVS segment on Slide 11. FVS reported revenues of $118 million, compared to $78.6 million last year, an increase of 50.6%. The revenue increase reflects increased volume-related to USPS truck body Reach vehicles and upsets.

Adjusted EBITDA decreased $1.6 million to $7.2 million from $8.8 million a year ago, largely due to an unfavorable sales mix, higher commodity and component cost, increased freight and transportation cost, and two plant shut downs, one relating to Hurricane Florence and the other due to chassis shortages, resulting in production and labor inefficiencies, as well as shipment delays.

Adjusted EBITDA margin decreased 510 basis points to 6.1% of sales from 11.2% a year ago. Backlog remained strong at 275.2 million, compared to 292.5 million at September 30, 2017. Excluding the multi-year USPS truck body order, backlog totaled 116.2 million, up 48.6%, compared to 78.2 million at a year ago.

And if you exclude the 9.3 million impact for in ASC 606, backlog was up 60.5%. Moving on to Slide 12. In the ER segment, third quarter 2018 revenue decreased $5.6 million to $60.3 million from $65.9 million last year, primarily due to lower volume and unfavorable sales mix, partially offset by improved pricing.

Adjusted EBITDA in the ER segment decreased 1.9 million to $600,000 or 1% of sales from $2.5 million or 3.8% of sales in the prior year. The decline in adjusted EBITDA reflects reduced volumes, tariff commodity and component cost, as well as supplier disruptions resulting in production and labor inefficiencies.

Our ER backlog was 175.7 million, compared to 213.3 million at September 30, 2017, which reflects the 22.8 million reduction from adopting ASC 606 that Juris mentioned previously. Excluding the impact of 606 backlog was down 15 million or 7%. Let’s move on to Slide 13 in the SCV segment.

Revenue was up 5.5% to 51.7 million from 49 million, due mainly to 1.9 million increase in luxury motor coach chassis sales as a result of increased volume driven by market share gains and continued strong industry demand.

Adjusted EBITDA increased 800,000 to 5.9 million from adjusted EBITDA of 5.1 million a year ago, primarily resulting from the strong momentum in luxury motor coach chassis and partially offset by operating inefficiencies, due to labor and chassis component shortages and higher commodity and input costs.

Adjusted EBITDA margin increased 90 basis points to 11.4% of sales from 10.5% of sales a year ago. Backlog at the end of the quarter was up 6.6% to $34 million, compared to $31.9 million a year ago reflecting continued strong luxury motor coach sales and corresponding Spartan chassis orders.

Please turn to Slide 14, and I will discuss the outlook for the remainder of 2018. It has been a challenging quarter, but we remain committed to doing everything we can to soften the impacts we have experienced today.

As we go forward, we are seeking additional ways to minimize our exposure to these headwinds as we believe they will persist through the balance of the year and beyond. Based on our results year-to-date in these are ongoing headwinds we are adjusting our current outlook for 2018 as follows.

Revenue remains unchanged in the range of $790 million to $850 million. Net income is expected to be between $14.4 million and $16.4 million. Adjusted EBITDA in the range of $29.3 million to $31.3 million. Effective tax rate of approximately 24.5%.

Earnings per share between $0.41 and $0.47, assuming approximately 35.3 million shares outstanding and adjusted earnings per share of $0.42 to $0.48. On Slide 15, you will see a bridge we’ve put together explaining the revised adjusted EBITDA guidance at midpoint for 2018.

As you can see, we anticipate the tariff impact on commodity and a component cost to yield additional operational pressures defined with the impact of chassis shortages, freight logistic issues, and tight labor markets to have a combined impact of approximately 10.2 million on full-year EBITDA.

Turning to our balance sheet on Slide 16, Spartan's balance sheet remains strong. Total liquidity at the end of the quarter was $132 million, reflecting $15.7 million in cash and $116 million of borrowing capacity, which is more than adequate to support our working capital requirements and acquisition opportunities as they present themselves.

The borrowing capacity reflects a new 150 million secured credit facility that we upsized during the quarter from the previous 100 million facility. The new facility has a five-year term with more favorable financial covenants, providing increased liquidity fund, our working capital needs, as well as our M&A growth strategy.

In accordance with ASC 606 we have 43.6 million of contract assets on the balance sheet representing revenue with corresponding profit recognized on products in process, but not yet invoiced to the customer. I would like now to turn it back over to Daryl for his closing remarks..

Thanks Matt. Please turn to Slide 17. In summary, I want to emphasize that the underlying fundamentals of our three business segments remain strong. The hard work we have done over the past three years on implementing operational and organizational improvements to drive profitable growth is not lost.

We will continue to work hard to deliver on our commitments.

Based on this new revised guidance for 2018 and a headwind still in front of us, including changing realities around low-cost country sourcing, many of you are likely to question whether our 2020 targets of 100 million in revenue and 10% adjusted EBITDA margins are still achievable? We do believe our financial objectives remain obtainable, but not within the original timetable we outlined at our Analyst Day a year ago.

Due to these recent supply disruptions and industrywide headwinds in those financial objectives will now include our M&A growth strategy as well.

While we anticipate these unfavorable industrywide conditions to persist, our long-term expectations will not change as we see opportunities for continued margin expansion through 2020 and beyond, and we remain committed to our strategic plan.

We will remain focused on executing our overall strategic plan, including our capital allocation strategy, which reflects funding our growth initiative, including acquisitions and creating shareholder value. Operator, we are now ready to take questions..

Yes, thank you. [Operator Instructions] And the first question comes from Matt Koranda with ROTH Capital..

Hi guys, good morning..

Good morning, Matt..

Good morning..

Just wanted to see if we could look at Slide 15, it is a helpful bridge to your 2018 guide, but wondered if you could kind of cover each of those individual headwinds or buckets that you’ve kind of bracketed our as it pertains to 2019? I know, you said that there are certain headwinds that persist into the early part of 2019.

So, is there a way to sort of build that bridge for us or help us understand which of those are sort of stronger headwinds than others as we head into next year?.

This is Matt Long, Matt. We’re still in the process of really getting our arms around 2019 as it stands right now. A large portion of material is still probably personal opinion on what happens with tariffs and so on, but from our perspective, many of these were simply not anticipated on our part.

So, I don't know that we’re yet ready to talk about 2019..

Got it.

Did the industry challenges change your view on your acquisition pipeline in anyway or change your capital deployment strategy going forward, just curious to get your take on that and maybe I don't know, does it make certain potential acquisitions soften up on price a bit, if you’re still willing to go that route?.

Hi Matt. This is Daryl. No, it has not. I mean, we view this as, as I mentioned, our business fundamentals are strong, the efficiencies came right back up once we had the chassis, so we are trying to keep the team focused on things that we can control, even though some of these are uncontrollable for us.

So, our M&A strategy remains – the pipeline is strong. We’re still focused on the acquisition opportunities that were laid out in our strategic plan, and our plan to build out our locations around the country.

I’m not sure if we’ve seen any softening in the multiples yet of the acquisition targets, but obviously we’re trying to get to lowest cost we can when we’re negotiating on the valuation..

Okay. That’s helpful. Wanted to drill down into the fleet vehicles segment if we could.

Is there a way to sort of help us understand, which of those buckets in the headwinds that you guys have eliminated were sort of the greatest headwinds in fleet vehicles specifically, I would assume that it is probably the tariff material impact, but maybe the chassis shortage, but what else should we sort of understand as sort of the headwinds that you faced in the quarter?.

This is Matt again. In FVS, it is – the tariff driven commodity cost is a huge portion. We also had product mix with USPS, which is a lower margin business from what our normal is. That is probably the biggest piece to your point or FVS is commodity cost and component cost..

If I can add one Matt, the logistics of getting these trucks, these trucks can't be put on a trailer, similar to some of our F-series and N-series trucks from Isuzu. These need to have drivers and driver shortage left a bunch of these products sitting on the shipping lot of Pennsylvania for us.

We’re working now to work through those and should have it cleaned up by the end of the year, but that impact impacted Q3 as well..

Okay.

Did that impact from a revenue standpoint then? So, you're saying that you weren’t able to [indiscernible]?.

Yes. Both revenue and EBITDA.

[Indiscernible] but that? Is there a way to qualify the impact that you guys felt from that specific issue?.

I’m not sure Matt that we go into the depth of detail..

Okay.

How about this from the Bristol shut down you mentioned, any way to sort of to mention that impact or the headwind for the quarter from that issue in particular?.

Well from the script, and I think Daryl talked about it, the chassis shortages impacted the Bristol plant to the point that we had a 10-day shut down.

So, while we did our best to get as much cost out of there as we could that’s a very tight labor market and so we had to be prudent with layoffs to be able to still have the skilled labor to come back when the Chassis did arrive..

Okay.

So, let me put that into the 5% headwind in the chassis shortage bucket in Slide 10, would that be fair?.

Yes. And you also had a little bit of the labor inefficiencies built into, right. As I mentioned, and Matt just reminded everyone that we made the decision not to lay people off because we know chassis were coming. It wasn't a industry or a backlog issue, it was more we didn’t have the products to build on.

So, we were doing some Spartan production system activities to work on lane and continuous improvement, but we missed over 200 chassis at Bristol in the quarter..

Okay. So, I'm trying to just make sure I understand where that falls in the EBITDA bridge that you guys provided. So, it sounds like it’s chassis component and logistics delays, as well as labor shortages.

So, essentially that whole middle portion of the waterfall chart that you’ve got is largely Bristol shut down related?.

Correct..

Okay, got it. That’s helpful. Okay.

So, let’s just talk segment backlog, really quickly on fleet vehicles, up pretty strongly, is that – is the majority of that e-commerce related, could you just comment on the mix in backlog and sort of the growth there, and those delivery timelines for the non-USPS products?.

I’ll take the broad picture Matt. I mentioned it was USPS, right. So, that could fall under e-commerce and traditional parcel delivery, as well as Frito Lay and we had the Amazon in the quarter, right. So, it falls in both last mile and more granular would be e-commerce in parcel delivery..

Okay. That’s helpful.

And then upfit capacity it sounds like or at least your build rate was 70 units per day less than, what does that equate to in terms of sort of capacity utilization, do you have the ability to go higher on that front, just some help that would be great?.

Sure. We did have to ramp it up a little bit, more to try to catch up and get the units through the process to the customer.

So, I think we did hit 90 for a period of time, but it all relates back to how many chassis can we get from Daimler? How many spinner chassis we can get and – then right now the contract that we have to meet is 70 per day, we’re on target, we can flex up and reflects down as needed. So that capacity is not an issue there or down [indiscernible]..

Okay, got it.

And then I guess lastly, just in the emergency response business, so the backlog is a bit down even if you kind of strip out the impact of ASC 606, how do you think about market share and sort of the competitive environment there, what are your latest thoughts, just in terms of how that’s tracking?.

I think we talked about a little bit last quarter and we did some more processing of what’s going on in ER. I think, we call it acquisition disruption this quarter and to explain that a little bit.

In 2017, because of the long build time and cycle time of these units let’s call it a year, in 2017, when we did the acquisition, you know the first four months or five months dealers were confused on what was going to happen and some of the sales people were confused that we're going to stay, and then we had some dealer rationalization.

So, you have to take all that and fast forward it, and it comes into this period we’re seeing right now or 18 months because we’re working on the orders before the build time starts, which is a year. So, maybe you put six months in front of that. So, it fell into this second quarter and third quarter.

I would tell you though that we’re seeing some really nice opportunities and we feel comfortable that we will land a number of these before the end of the year.

I think in our press releases, we mentioned Calgary, we have a couple other large cities that were, we know they have the funding and we’re right in there and feel confident that we're going to win those as well. So, it’s – to me the orders that are good and the opportunities are out there and we're starting to win those.

So, you will see as we win, we will have press releases to talk about them, because we feel it is important for the shareholders to understand that?.

Okay.

And just to be clear, you haven't necessarily pulled back on quotations because [even in the] economics of certain orders or anything I think we had that discussion last call, but just wanted to clarify that?.

No. I think, we’re seeing everyone’s take in pricing as we are. We took 3% as a reminder, January 1, 2018 and we’re taking another 4%, January 1, 2019 and we’re seeing the market react and basically do the same. So, we’re all seeing the same trends in pricing across the industry..

Okay. Very helpful guys. I’ll jump in queue. Thank you..

Thank you..

Thank you. And the next question comes from Steve Dyer with Craig-Hallum Capital Group..

Good morning, guys, Ryan Sigdahl for Steve..

Good morning..

Ryan, you don't sound like Steve. Good morning..

Sound better, right?.

I don’t know. That’s a risky answer..

You guys mentioned 4% price increase in the ER, effective January 1 and you 3% last year, is that enough to offset the cost pressures or I mean can you maybe bifurcate that out of how your pushing through versus absorbing by Spartan?.

I can't give you that, all that detail, but what I can tell you is, we’re taking that pricing on the full price of the truck.

So, material is not the full price of the truck and we’re not seeing that significant increase in our labor, but we’re seeing it in the component parts, right, commence [indiscernible] transmissions, some of our pulp manufacturers because these things come in from China.

So, there’s some impact and we believe the 4% will cover it and give us a little room to the bottom line as well, but I think it’s important to remind everyone that the pricing we took January 2018 this year, the 3%, we won't see that until January 2019.

And the 4% we’re taking at the end of this year, we won't see till the fall because it is about a one-year pipeline to get the product through the system. And that’s why we started taking pricing. I think we go back since I joined Spartan. We have taken some smaller ones and I will let the commodities continue to increase.

We’re continuing to price that in. And we do – we feel we’re ahead of it and it will take care of the actions we see. Again, we thought that to coming into this year, but we have a commodities pricing change like this year. I’m not sure we’ll cover all that, but we have some there..

Great.

And then I don't think you mentioned pricing on the other segments FVS, specifically, but any thoughts on taking price increases there to offset the cost pressures and what do you think your ability to do that is with your key customers?.

Yes. So, if we talk about FVS, I think we mentioned it previously, we have some orders that were in the backlog. I think, we say it four to six-month backlog approximately. So those are already priced to limited material impacts that are hitting us.

It effected those units, but the new quotes that we were submitting, we did put in current material cost and we continue to do that. So, we believe that that will work itself out. I think, the other thing that Matt mentioned is, that we did commit, I know we mentioned in the last quarter, we went out and committed aluminum pricing on volumes.

So, we didn’t hedge. We committed to taking volume because the price was going us so fast, we thought it was a right decision to do at that time. Unfortunately, a few weeks after we made that commitment, the pricing started to come back down.

So, we do have to work through some of that still and that should be cleaned up by the end of the year and then we will be – everything will be on current market price. We also put in place a policy that on larger orders, I think it was 20 or more and something around and [indiscernible] exact number.

We’re going out and committing price to volume, which would set the price and fix the price after lesson learned from this year. So, continuous improvement on how we manage pricing at FVS and anything that’s over 20 units or so are now what we go out and commit to a material so that we won’t hit the fluctuation going forward..

So, just a follow-up on that.

I know you are pretty tight lipped on what 2019 went tail, but if you are pricing the current quotes, which will flow through kind of early part of next year, is that enough that at least the materials and tariff headwinds will lessen or is that headwind accelerating faster and you guys can keep up with it basically with your current pricing?.

It is really on segments. So, it’s back to what Daryl was saying. So, the ER obviously we have got a long lead time. So, we are assuming that our pricing will compensate for the majority of that.

The segment that was impacted the most as it stands now is FVS, and FVS will be holding that next round of orders, fleet orders and we will adjust pricing accordingly. So, as we do PO’s [ph], we are able to adjust. So, we anticipate to offset a good portion of that.

You know our exposures, you know those up beyond what we have priced in will have a little bit of a miss there, but otherwise we have that covered. And in the SCV segment it is the PO basis that we adjust before we hit that PO. So, for the most part we are covered, it is just the intervening time between when we quote and when we take the order.

That answer your question?.

Yes, that’s helpful. Then lastly from me.

You mentioned margin expansion through 2020, not necessarily counting on 2019 in that statement, but with increased headwinds it sounds like limited visibility, but you guys are taking pricing, working on some productivity improvements, do you think it is enough, you know broadly speaking next year to at least hold the gross margins or potentially even expand them?.

Yes. Like I said earlier, we thought that coming into this year so my answer would be, if we don’t see the type of tariffs and material impacts in items that we saw this year, yes, we believe we will. Right now, I will say, yes, without any unforeseen type issues that we had this year we should be okay..

Great. Thanks. I will leave it there..

Thank you..

Thank you..

Thank you. And the next question comes from Steve O’Hara with Sidoti..

Hi, good morning.

I was just wondering if you could, I guess I am just confused about the materials in commodity cost pressures that you say, I mean, I guess I am curious about why the pressures are so impactful now versus, I mean commodities have risen pretty significantly in the past, and I am just wondering why the impact is now or is it more on the material side where you guys are buying materials and those costs have gone up maybe with a lag from commodity cost pressures and those prices being passed onto you..

Steve, we are talking tariffs material impact for – we are talking the 10% tariff that was put on aluminum and then the 25% that was put on steel. And now that’s starting to work through the supply base, right.

And Cummins and Allison and some of the bigger suppliers are passing that on and we have the, we mentioned, we went out and committed to material when the price was going up on aluminum. And the other thing we are starting to see now too is that that the processors we hadn’t locked in are ignoring that and increasing their processing costs.

So, it is not only the Ingrid price you are seeing going up, it is also the processing the conversion rate on the aluminum go up as well. So, it is – not so much, if you want to put aluminum in commodity, is aluminum steels a commodity, yes. We are seeing that and mostly the tariffs on those..

Okay. And then just relative to the price increases that you are putting in. Just, it seems like there, you know, would roughly meet the pressures that you’ve seen on the commodity side within different business segments I guess.

Can you, is that not the case, correct me there, but and then, what about the USPS order, how is that kind of indexed or is it indexed for any changes in pricing that you are seeing, cost pressures that you are seeing?.

Yes. So, your first question, right. The pricing we are taking is on the entire unit, not just on the material cost, so it is on a total cost for the unit.

I will remind you that we still operate in a competitive environment and we have – we saw it to be competitive on our pricing and I also remind you that we still have operational improvements at each location. We are done with those yet. Right. That will offset what we believe or add to the gross margin and adjusted EBITDA as we move forward.

Those have not stopped. We continue, right, to stick with the Spartan production system. The operational improvement fundamentals that we are working on and we still have those projects in works.

And then on the USPS, that was a fixed unit pricing across the – with all those suppliers, we all signed agreements and so that pricing is not affected by what we’ve seen..

Okay.

Maybe just a follow-up on the comments about competitive environment, I mean, are there competitors? Are your competitors maybe, I mean obviously maybe they have a better more efficient manufacturing system on operations etcetera, but I mean are competitors being logical in terms of their willingness to eat the cost increases or are they – are you seeing them kind of raise prices as well.

I mean, I would think that you know, I mean with commodity cost pressures, I mean I would think that everybody is kind of seeing the same impact and that would kind of lead me to believe the market would act rationally and increase prices, you mean as a reason not to think that is the case..

Let’s walk through each one. So, FVS, I think very competitive market.

The competitor for the most part is not a public company, but when our backlog increases, normalized backlog increases 60% quarter-over-quarter, right Q3 last year to Q3 this year, that’s telling us that we are getting market share, our pricing is competitive, and we feel comfortable with the pricing we’re taking.

We go to especially chassis, again, gaining market share, taking some pricing in, and so we feel good on all the pricing and with FVS, we can reprice every opportunity – put current material price in every opportunity. So, it’s not like we have a long-term contract with fixed material. Every PL [ph], we can adjust the pricing.

The problem was we had that backlog and we didn’t have that policy of anything over 20, we’re going to go out and commit to volume on aluminum. So, we’ve taken a bunch of actions that we feel comfortable with going forward to be competitive in the market and still gain market share and grow the business..

Okay. And maybe just last follow-up.

I mean, you talked about taking market share and taking pricing up, I mean, do you think you are gaining, do you think there is a gain in the market share, because maybe you are not being as aggressive on pricing or do you not think that’s the case?.

I don’t think that’s the case. I think, people are now not taking pricing, but then they made discount and we’re not doing that. Our side, especially..

Okay. Alright, thank you..

Thank you..

Thank you..

Thank you. And as there are no more questions at the present time. I would like to return the floor to management for any closing comments..

I take it as, no more additional questions. Okay. Thanks Keith, and thanks everyone for joining us today on our call. Please, if you have any additional questions, just follow-up with us and we will be happy to set up a call with you.

Just a heads up, we will be in Chicago next week at the Baird Conference, so if you want any opportunity to do a one-on-one, I think our schedule still has some slides open. So, feel free to reach out. Thanks, and have a great day..

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