Good day, and welcome to the Spartan Motor's Fourth Quarter 2019 Earnings Results Conference Call. [Operator instructions] Please note, this event is being recorded. I would like to turn the conference over to Juris Pagrabs, Group Treasurer and Director of Investor Relations. Please, go ahead..

Thank you, Alisa. Good morning, everyone, and welcome to the Spartan Motors 2019 fourth quarter and full year earnings call. Joining me on the call today are Daryl Adams, our President and Chief Executive Officer; and Rick Sohm, our Chief Financial Officer.

For today's call, we've included a presentation deck 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 Slide 2 of the presentation for our Safe Harbor statement.

You should be aware that certain statements made during today's conference call, which may include management's current outlook, viewpoint, predictions and projections regarding Spartan Motors and its operations may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995.

I caution you that as with any prediction or projection, there are a number of factors that could cause Spartan's actual results to differ materially from projections. All known risks that management believes could materially affect the results are identified in our Forms 10-K and 10-Q filed with the SEC.

However, there may be other risks that we cannot anticipate. On the call today, we will provide an overview of the full year, along with a brief business update, followed by a more detailed review of the fourth quarter results and an update of our outlook for 2020 before proceeding to the question and answer portion of the call.

I would like to remind everyone that with the divestiture of the ER segment on February 1, 2020, the revenues and expenses associated with the ER group as well as the assets and liabilities have been reclassified as discontinued operations for all periods presented.

With this reclassification of the ER segment to discontinued operation, the results discussed today will refer to continuing operations unless otherwise noted. At this time, I'm pleased to turn the call over to Daryl for his opening remarks which begin on Slide 3..

Thank you, Juris. Good morning, everyone and thank you for joining us on our fourth quarter and full year conference call. I'll just start by acknowledging the team's incredible effort and hard work transforming our business. For the past year, Spartan has integrated three acquisitions and completed divestiture of our ER segment.

The strategic changes allow us to significantly improve our focus within our core markets by expanding our national footprint and product portfolio. This has positioned us in the growth markets that will allow us to accelerate top-line growth and profitability.

For the full year 2019, our sales increased 33% to 757 million, while our gross margins improved 270 basis points to 15.5%, which drove the 103% improvement in income from continuing operations, the 37 million or $1.03 per share from 18 million or $0.52 cents a share.

Included in the discontinued ER operations, sales reached $1 billion compared to 815 million a year ago, which exceeded our previous guidance. Turning to Slide 4, I want to provide some context around in the recently announced divestiture. Last month, we announced the strategic decision to sell our ER business.

We appreciate the team's efforts over the past years turning around the ER business, enabling us to make the transformative move at a time that we feel is advantageous. This change will allow us to redeploy capital for higher returns in the delivery, especially the vehicle segments in order to maximize shareholder value.

The commercial fleet delivery especially vehicle markets have undergone a significant change, exciting new opportunities exist driven by the growth in eCommerce and upcoming electric and alternative propulsion vehicles. The fundamental drivers of our business moving in the right direction.

Our acquisition pipeline is robust with redeployed resources and capital, we will have the flexibility to drive accelerated growth and profitability in our core businesses both organically and through strategic acquisitions.

We believe this strategy will enable us to better serve our customers with innovative solutions and products over the long-term. Lastly, the sale provides us the opportunity to rebrand our corporate identity to more closely align with our current business and the markets we serve.

We plan to provide updates on the rebranding effort in the months ahead. Now please turn to Slide 5, I'll provide an overview of our growth strategy. We continue to see strong momentum in vehicle classes 1 through 7 as consumers focus even more on their spending online trading, higher demand for delivery vehicles across our entire portfolio product.

In 2019 consumer spent 602 billion online that's up 31% and 461 billion in 2017, which is reflected partially in our increasing backlog. This momentum has created a strategic imperative for us to establish an infrastructure to meet our customer demand. Over the past 14 months, we've acquired three companies that included 8 U.S.

manufacturing facilities in four States. We also added or expanded 4 additional facilities, which included optimizing both our walk-in van and truck by facility. These acquisitions provide us with expanded coast-to-coast flexible manufacturing capability, which covers approximately 80% of the total U.S.

population within a 300-mile radius of our facility. Now please turn to Slide 6, I'll highlight a few initiatives that support this growth strategy.

To support our customers' needs as vehicle preferences continued to move down the GV, WR class spectrum, last week at the NTEA work truck show, we unveiled the Velocity M3, a purpose built walk-in cargo van.

This new purpose built Class 3 walk-in cargo van blends the fuel efficiency, driver ergonomics and safety provisions of a cargo van cab and chassis with the expansive cargo space of a traditional higher vehicle class walk-in van.

The Velocity M3 as a lighter body design, a 70% payload improvement over its predecessor, the reach and better fuel efficiency. But the real game changer is our proprietary patent pending innovations that deliver unequaled stop by stop efficiency gains better customers demand.

This vehicle, which can be built on three OEM van chassis is receiving significant interest from our major fleet customers and as a strong example of our recommitment to bring customers thought innovation that delivery efficiency gains, best position us to meet their needs in the first, the last mile delivery segment.

Earlier this year, we also announced the opening of a new 105,000 square foot facility to support the FVS production complex in Bristol, Indiana due to increased capacity demand, and growth in our delivery vehicles.

In November, we opened a new vehicle modification center at our Charlotte campus to support the growing demand for chassis modifications requested by Isuzu dealers in support of their contract manufacturing operations.

In the luxury motor coach market, we continue to gain market share and a down market, having gained two additional points of share during the fourth quarter ending at 28% in the over 400 horsepower Class 4 diesel market.

By adopting and integrating automotive safety technologies into our chassis, over the past four years, we've increased our market share by 10% solidifying our position in this niche market. Having said that, we are well positioned when the demand for the high-end luxury motor coach market returns.

To conclude, the acquisition of Royal Truck Body has proven to be a significant addition, especially the vehicle to our specialty vehicle product portfolio.

Not only did it greatly expand our Western manufacturing capabilities across California, Arizona and Texas, it also brought an talented, especially the vehicle team that will play a significant role in our future. With that, I'll turn the call over to Rick to discuss Spartan financial results for the fourth quarter..

Thank you, Daryl. Please turn to Page 18. Our 2019 results from continuing operations improved significantly over 2018 on every key financial metric and reflect well on our ability to integrate key acquisitions, transform the company by completing the ER divestiture, while improving productivity.

For the year adjusted EBITDA was up 83% to 64 million from 35 million a year ago and margin improved 37% to 8.5% from 6.2 in the prior year. Backing out the impact of USPS truck body order, that margin would have been 9.6. Including discontinued ops, adjusted EBITDA was 50 million compared to 34 million in 2018.

Adjusted net income nearly doubled to 44 million from 23 million in the prior year. While adjusted EPS grew to $0.66 cents per share -- went from $0.66 cents per share to a 1.24 in 2019.

Demand for our products continue to grow and our backlog at year end was 337 million of 194 million or 136% from the prior year, when you exclude the one-time truck body order. Turning you to Page 9, I'll provide an overview of the quarter.

Q4 revenue increased 6 million to 180 million excluding the truck body order, our revenue grew 30% compared to 139 million in 2018. Fourth quarter income increased to 14 million from 4 million in 2018 reflecting volume mix, improved pricing in our acquisition of Royal Truck Body.

Q4 EPS grew to $0.40 per share compared to the $0.12 per share in the prior year.

On Page 10, you'll note that Q4 adjusted EBITDA grew 14 million to 23 million from 9 million a year ago and margin increased 770 basis points, the 13.1 from 5.4% a year ago, driven again primarily by volume and mix, Royal Truck Body and partially offset by lower luxury motor home volume.

Adjusted net income rose 166% to 17 million from 6 million in Q4 of 2018 and adjusted EPS grew to $0.47 per share from 17% or $0.17 a year ago. Now I will review each operating segments beginning with fleet on Page 11.

Fleet reported revenue of 133 million compared to 131 million last year, excluding 34 million of pass through revenue growth was 36 million or 37%. We reported adjusted EBITDA of 21 million up 14 million from 7 million a year ago, largely due to mix, pricing and manufacturing productivity.

And our adjusted EBITDA margin increased to 15.9% from 5% a year ago. Fleet backlog group 201 million or 191% to 306 million compared to 105 million a year ago exposing the onetime truck body order.

Moving on to Page 12 in the specialty segment, revenue was 47 million up from 46 million primarily due to revenue from the Royal Truck Body acquisition and partially offset by $9 million decline in luxury motor coach line. It was slightly higher revenue and better mix.

Adjusted EBITDA increased to 7 million from 5 million a year ago and margin improved to 13.9% up 20% from 11.6 a year ago. Although our backlog declined 19% to 31 million at year end, we are pleased as Darryl mentioned that we are gaining market share and we're outperforming the overall market which saw a 24% decline in Class A diesel volume in 2019.

Please turn to the balance sheet on Page 13, the balance sheet presented here is from continuing operations as the ER business has been classified as held-for-sale at year-end. During the quarter we paid down in another 20 million on our revolver on top of the 5 million paid at the end of Q3 immediately following the Royal acquisition.

Our total liquidity at year end was 79 million. Upon receipt of the proceeds from the ER sale, we paid down another 30 million on the revolver and we expect to make further payments over time as we continue to monitor our M&A pipeline for additional growth opportunities.

As a result of the sale, we also have a number of short and longer term plans to right size our cost structure. We expect to complete our shorter term initiatives in 2020, which will generate run rate savings of approximately 2 million annually. Longer term, we will be making several IT investments to drive down costs through our company.

And finally, I'd like to make you aware that during your ongoing assessment of our internal control environment we identify the material weakness in fleet relating to revenue recognition controls.

I would like to make clear that this issue had no impact on our financial statements at year end, but we have moved quickly to implement our mediation plan to ensure our internal controls are improved and designed to operate effectively. Now I'll turn the call back over to Daryl for our 2020 outlook beginning on Page 14..

Thank you, Rick. Overall, we are excited about 2020 and our position in the market. As far as near term outlook is strong despite the unknown impact that's going voters may have on our business. At this time, our supply chain has not been disrupted.

We continue to monitor and assess potential impact daily and we are working closely with our suppliers to ensure continuity of supply. Additionally, the higher demand of our products, we are closely monitoring the chassis supply as well.

Our current outlook for 2020 is as follows, revenue to be in the range of 730 million, 780 million as the midpoint of 755. Net income of 37 million to 43 million for the midpoint of 40 million. Adjusted EBITDA, 66 million to 74 million, the mid point of 70 million.

Earnings per share of $1.04 to $1.20 mid point at a $1.12 assuming a 22% tax rate and 35.4 million shares outstanding. Adjusted earnings per share $1.20 to $1.36, the mid point $1.28. Now please turn to Slide 15, my closing comment.

2019 we have transformed the company by expanding our geographic footprint, enhancing our product portfolio and accelerating our previously stated vision of revenue growth and improved EBITDA margins.

Today we've aligned our business to ensure we actually target opportunities with then ongoing macro and micro trends to ensure we maximize top-line growth and profitability and the delivery, especially vehicle market. And most importantly, the Spartan team has the resources to drive both organic and acquisitive growth.

As we continue to provide innovative solutions in the markets we serve, which will benefit our employees, customers and shareholders. Operator, we are now ready to take questions..

[Operator Instructions] The first question today comes from Steve Dyer of Craig-Hallum. Please go ahead..

I guess before I get to the obligatory coronavirus questions. You guys raised your 2020 EBITDA guidance pretty considerably about 10, 10 plus million at the midpoint, despite the fact that I think generally speaking the macros kind of just gotten worse.

Is that a function of the large order, several large orders? What sort of changed in the last three months relative to your outlook there?.

Yes. Good question, Steve. It's basically a function of the demand we're seeing, our backlog increases. We're here in March and you start to get visibility out further in the year, probably till September or so. So that gave us some confidence to come out with maybe a little better number than people had been expecting..

And is that a function, I mean, was that driven by, was there any customer concentration I guess in there, was it fairly broad based?.

No, Steve, its broad based as I mentioned. We're seeing growth in all of our vehicle classes 1 through 7 and all customers. I think it's ecommerce trend, significant growth there in the macro space.

And it's now with divesting ER, we're much more focused on the two segments we have left and we see operational improvements as well as growth in the revenue side..

Got it.

And then, I guess maybe what have you seen, if anything from your clients, your customers in the last couple of weeks, has there been any cancellations or conversely, just given more people seem to be having more things delivered? Has anybody told you to speed it up or any change in the last week or two or maybe what's sort of contemplated in that guidance for virus impacts, if anything?.

Yes. I think we mentioned Steve, I might answer the last question first. We mentioned this is without that because actually right now we don't see it impacting us at all and we'll obviously update if we see something.

But right now our supply is good, obviously, we have some inventory, right? When this thing kicked in we were tracking our products from China that we sourced over there last year. We also have backup suppliers, as I mentioned in previous calls.

Anything we offshore, we have backup suppliers in North America and we're in contact with them on a regular basis and we're tracking the chassis. So we're seeing it -- we haven't seen it yet, any request to speed up.

But I think, we saw the demand coming with, as Rick said, our backlog and we're actually improving our throughput at plants as I mentioned on the last call, we moved truck body from Bristol up into Charlotte to get Bristol one other line to fulfill the walk-in van demand.

And we see as we mentioned before also moving down the vehicle class scale, we now have a Class 3 vehicle that's been tested through durability, with that NTEA customers have seen it and they're excited about it. As a Class 3, the features in the cab and the increased payload, so we're hearing good things from customers in that space..

Yes. Maybe I'll just add to Darryl's point. When we talk about monitoring the chassis flow, they could be a problem in 2020, but right now that would be unrelated to COVID-19..

Okay. Got it.

So it sounds like you're more, if there's a concern, it's around the supply more so than customers canceling orders or anything like that?.

Correct..

Okay. And then the last for me, and I'll jump back in the queue, your specialty chassis margins were really strong in the quarter 13.9%, I think.

Is that a good number to use going forward or was there anything sort of one-time to the plus or to the minus in that segment or is that sort of a good way to think about that margin profile going forward?.

Yes. I don't know that I will model the entire way forward. We acquired Royal Truck Body kind of mid-September and they had a good amount of orders that needed to get shipped before year-end.

I think we've mentioned before that their merging is accretive to the overall margin of specialty and there is a somewhat seasonality impact and they tend to do I think, a little stronger in the back half of the year. So I don't think I would carry that margin all the way through..

Got it. Okay. That's it for me. Congratulations on the execution guys..

The next question comes from Justin Clare of ROTH Capital Partners. Please go ahead..

So I guess first off, given your revenue growth outlook here -- in the strong growth that you are seeing in fleet vehicles, was wondering, if you'd comment on your market share there, how are you thinking market share trending? Especially given that you have an expanded national footprint now..

Yes, Justin I would love to know that answer as well. Problem is, it's really hard to get data from our customers, especially the big fleets and when they dispose of the vehicles. We're trying different ways and we've hired a new business development person to help us obviously with M&A also a strategy by just gathering some more data.

We're talking to some new companies we haven't talked to before about registrations and we're trying to get to that answer because I've also believe, I've mentioned I'm pretty much a data guy. So I like to make decisions based on data and not emotions or trends.

Right now we can't give you that answer, but we do know with one of the newer companies into the field what we've delivered, we have a strong opinion on what we built versus what might be out there. But we also know that the customers are going to have dual sources.

So we're trying to figure out of their entire fleet how many have we built over the years. So it's something we're working on, but we don't have it right now..

Okay. All right. Thank you for the detail though. I guess shifting gears, so you indicated the Royal Truck Body acquisition is performing better than expected.

I was wondering, can you provide a bit more detail on the business performance there? How's the integration coming along and when do you expect that business to kind of be a fully integrated?.

Sure. I'll take the first half and I'll let Rick follow up with the financial section of your question. So the integration is going well. As you know, we put that under specialty chassis, which is Steve Gilliam. Trailing out there right now we have some travel restrictions, I think like every company, but integration is going well.

I mentioned they have a great team. And that's what we're really excited about, obviously when we're talking to new, different companies about acquiring them part of our requests or part of the forum that we have is that the management team has to stay. And majority of it stayed here.

The owner wanted to get out, but the functioning team is very strong operationally, financially sales wise. And you can see that through the expanded footprint that they have. Those are all independent locations, not through a dealer network. So we're excited on what we can do with Royal going forward on the sales side..

Yes. And in terms of performance, I would not say that they are outperforming. I would say they were performing in line with our expectations and like Daryl mentioned, there's a strong management team and we have good visibility of what's coming at us.

I think your longer term, the opportunity will be to take their product portfolio and take it to other parts of the country where we'll have manufacturing operations that are flexible and we think there's opportunity for their product throughout the country..

All right, great. And then one last one for me.

Can you share how much in CapEx you expect to spend for the Bristol facility that you're opening up? And then, for the full year 2020, how much in CapEx, do you anticipate spending?.

Yes. I don't know that I'll comment directly on CapEx at a particular facility. Daryl mentioned that we already moved in [indiscernible] some of our trunk body out of Bristol into Charlotte. But we do expect to see a higher amount of capital spending to not only make our plants more flexible to multiple product lines.

But there's also going to be some IT infrastructure spend and I would say a capital spending could be up 50 plus percent or more year-over-year..

And Justin, if I could add, last summer we announced we added Todd Heavin as our COO. And since then we've added a VP of operations to support him in order to continue the operational improvements that we have with the plants. And we're actually running a number of Kaizen events that I think we talked about it in the last call, one of the first ones.

We continue with those. So when you're doing that kind of not only transforming the company, but transforming your operations into lean facilities, the COO and VP of Ops are -- they're starting to hit the ground and get some traction.

It's going to take some capital to grab the efficiency, but the payback is usually short and that's what we're excited about..

[Operator Instructions] The next question comes from Steve O'Hara of Sidoti & Company..

Yes, I guess so first I'm going back to the CapEx question, can you just remind me what, maintenance CapEx is here now that you no longer have the yard business.

And then, maybe around the fleet or in terms of your business now going forward, I mean, how much would you say of your business is focused on last mile kind of leans more towards ecommerce type solutions versus maybe traditional trucking and things like that?.

Yes. You're right, Steve. With the ER divestiture, our maintenance CapEx number goes down significantly. But the returns we can get in fleet, our capital spending will be more heavily weighted there like I said to make these multiple manufacturing locations flexible enough that they can build multiple product lines..

So, Steve, if I could add, for example we bought -- acquired General Truck Body out of Montebello, California. They have a number of products that we don't have. One of them in particular at the time we didn't have, now we do is a refrigerated box trucks Class six, seven. We want to move that technology to some of our other locations.

Based on the data, I talked about earlier that Justin asked about. So we're going to use data, understand where the market is, and so now we have to buy some additional fixturing, some more foaming equipment. So that stuff does get a little expensive and we have a plan to do that in 2020 and going forward as a plan that we have put in place..

Okay. And then, maybe just on the -- kind of, old world, new world, revenue mix now. And I mean it would seem like delivery and things like that maybe picking up here and given the situation. And I mean, I would think, maybe the share of ecommerce jumps, certainly over the near term.

But, I mean, how much would you say of your businesses currently focused on maybe the high would -- I guess maybe should be considered higher growth versus maybe closer to GDP like growth at this point?.

Yes.

I think if you're looking for our breakout on -- of our revenue going forward, right? I would say it's [indiscernible] fleet, and the remaining quarter would be with a special fleet, but I think, as we really get a Royal Truck Body ramped up and able to move their product that are across the country over time some of that can -- that gap can narrow.

But we haven't disclosed in the past the revenue by product line..

Okay. Okay.

And then, can you maybe in terms of acquisitions and things like that, can you talk about maybe your expected returns or your hurdle rates and things like that for investments forward now that -- our business is no longer with you?.

Yes. I think it's a good question. We would certainly expect to invest with returns that are higher than our cost of capital. And Royal Truck Body is a perfect example like I've mentioned, it's accretive to the overall SCV segment.

And we have plenty of liquidity and we've had a M&A pipeline that remains active and we've told the people in the past that absent a deal, we would delever the company, but very quickly, we expect the leverage ratio right now to be under one. So, we will continue to look for growth opportunities.

We've added talent to manage a larger company and manage a better. So, we'll be selective, while we'll focus on last mile delivery, if there are opportunities to complement the specialty chassis business, be it RGB or contract manufacturing we'll look at that as well..

Okay. And maybe just a quick follow-up on that.

I mean, is there a way to think about acquisition size? I mean would you guys be open to doing something transformational in terms of maybe, if not comment on that, but maybe on, where your comfort is, taking the leverage ratio up to and then, if you're seeing anything interesting in the near term given the disruption in the market. Thank you..

Yes. I think a good question again we are comfortable doing bigger deals. In the past, we had talked about kind of bolt-on acquisitions, but we've transformed the company already by giving rid of the ER. And you'll remember that we've told people we're very selective about our M&A activity and we don't feel we need to chase a deal.

We've also told people we didn't feel real comfortable above two times on our leverage ratio, but I think there's a lot available to us and we'll continue to look..

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Juris Pagrabs, for any closing remarks..

Thanks everyone for joining the call today. Normally, I give you an update on some of the conferences we will be attending here in the near future. But given the environment, it seems like that's not going to happen. I will reach out to you.

If you want to talk with management, we can certainly set up virtual calls in the short-term as we get through this process. First quarter earnings will be around the first week of May. And I look forward to keeping you updated. Thank you..

Thank you..

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