Shyft Group Inc (SHYF) 2007 Q2 法說會逐字稿

Good day everyone. Welcome to the Spartan Motors second-quarter 2007 earnings call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Jeff Lambert. Please go ahead, sir.

Good morning everyone and welcome to Spartan's second quarter 2007 conference call. I'm Jeff Lambert with Lambert Edwards and I have with me today two members of the Spartan Motors management team -- John Sztykiel, Chief Executive Officer; and Jim Knapp, Chief Financial Officer.

I assume all of you saw this morning's release on the wire or through e-mail or fax. We wanted to take a few minutes to discuss the results of the quarter. However, before we do, it is my responsibility to inform you that certain predictions and projections made in today's conference call regarding Spartan Motors and its operations may be considered forward-looking statements by the securities laws. As a result, I must caution you that as with any prediction or projection, there are a number of factors that could cause results to differ materially. These risk factors are identified in our Form 10-K filed with the SEC.

A quick word about today's call. John Sztykiel will begin the call with a brief overview of the quarter and then go over the operational results for each business segment. Jim Knapp will then discuss the financial results for the quarter and we will conclude with a Q&A session, at which time the operator will instruct you on how to enter the queue. With that. I will turn the call over to John Sztykiel.

Thank you very much and good morning to all of you that are listening and to those on the Internet as well.

As you saw from the news release, this quarter was another example of what I would refer to as performance plus potential. This was our 10th consecutive quarter of year-over-year increased results, a new record for second quarter results, and we posted year-over-year improvements in sales, earnings, return on invested capital and backlog. Simply, it was another very good quarter. But we also have significant potential for future gains as well.

We remain on track for the best year ever in the Company history and see additional growth potential in the second half of '07. Honestly, this growth did not surprise me. The opportunity does not surprise me. Some of the fluctuations or trends in the stock price over the past few weeks have surprised me, especially with zero negative news relative to our operations. And just to inform everyone, and there will be a release coming out later on today, the Board has approved the authorization to buy back up to 1 million shares of Spartan Motors stock in the financial marketplace. The Board has confidence, we have confidence. We see performance and we see potential.

It's also important to keep in mind that we have made these accomplishments despite very difficult challenges in our markets and our operations.

First, let me go over some of these challenges, and for those of you that are new to the Spartan model, this is really normal. We not only talk about the good, but we talk about the challenges or the bad as well.

First challenge -- RV market. We are hearing from our customers that their forecasts are flat to slightly positive from a Class A sales perspective. The retail market for Class A diesel units is down 8% while total Class A shipments, gas and diesel, were up 5.0% year-to-date. We will have to be effective and efficient to grow this marketplace. It was very positive to note how Spartan Chassis sales increased 2% in '07 versus the second quarter of last year, and I will talk a little bit more about that later on.

From the Fire Truck Chassis perspective there has been a bit of an engine transition class challenge. Some of our OEM customers are having challenges as they manage their 2006 transition engines which have created some delays for Spartan Chassis. In addition, there has also been some what I would call operational delays from an OEM perspective. Those customers that received chassis from Spartan are honestly having difficulty ramping up production as fast as what they would like to do. Thus, Spartan Chassis has had -- did not necessarily scale back Fire Truck Chassis production, but basically we're running at a rate of about four units per day.

From a military perspective, we're in an excellent position to gain new MRAP orders. However, margins have been constrained, or as we look forward, will be constrained basically because of two reasons. One, there is increased competition in the marketplace as everybody competes for new military orders. Second, as we ramp up production, one goes through production ramp-up costs, whether it be delivery from suppliers, training and educating new people, working out the bugs with the increased capacity. So while we're excited about military, margins will be constrained, at least moving into the third quarter versus the second quarter, and as we move forward into '07.

However, let me focus a little bit on the positive, because this gets back not just to the potential, but to the performance as well. Very positive increased production capacity. As a company, whether it be military, RV or emergency rescue, we're increasing our production capacity. Over the past six months, we have increased our capacity approximately 27% on a square footage basis. As you saw from the news release this morning, specifically relative to the military, Spartan Chassis has won another subcontract award with nearly $30 million from Force Protection. We also believe we are in a very good position to receive additional MRAP subcontract awards in the near and far future. However, as I mention on every call, we will continue to report news related to any MRAP or orders, whether it's RV or emergency rescue, after we receive the orders, which reflects SEC disclosure regulations and other investor relations best practices. We must remain sensitive to the needs of our customers and we will not announce orders relating to any product unless we have a firm purchase order.

From a capacity perspective, we are currently at 27 units per day, or 432 per month. That is at a four-day work week on a single shift. Plus, over the next three to six months, we are looking at the opportunities to increase our capacity to 42 units per day, or 672 per month, on a single shift. Those numbers it's important to note are for what we call roller units, basically where we install the engine, transmission, the axles on the hull, and then it goes onto the next stage to the next OEM for final vehicle integration. On some contracts or a portion of the contracts we receive, we also do final integration. When we do final integration, in essence those numbers get cut in half, because from an hours perspective, we're literally now doing almost a complete unit from an automotive and a final integration perspective. So sometimes when the numbers or units vary, that's because we may get an order, not a portion of that order, we will do rollers, and then on a portion of that orders, we will do final integration.

I also think it's important to note when people ask why are we moving forward to increased capacity, working hard as we are right now? On July 18, Deputy Director John Young indicated in some congressional hearing that the military is focused on obtaining 1300 MRAPs per month by December of this year. That is a very, very large number. We are very focused and excited about our relationships. We're executing on a daily and consistent basis, but we're also working to increase our capacity because we see tremendous potential and we're focused on delivering the right performance.

Switching over to fire truck chassis, Spartan Chassis' willingness to build what the fire department wants, its strong relationships with the OEM and dealers and its commitment to stand behind our products, is really what's driving the business. We continue to make investments in not just the business model, but also we'll be introducing a new custom commercial which we call the [Furion] in August of this year that will first go into fire apparatus and then you will see it as an ambulance product in 2008.

As we look at the Emergency Vehicle Team, while they made progress in the second quarter, what's more important is we have added some very, very good people to the group of companies. Kevin [Crump] is now Crimson Fire's Executive Vice President and General Manager in South Dakota, Gary [DeCox] is now the President of Road Rescue. Both of these individuals bring not only a sense of urgency, but they bring an automotive operational experience and they also have industry experience. And what's nice is, as I look over the past several weeks, the trends have moved dramatically in the right direction relative to production, invoicing and improvements in efficiencies.

Return on invested cap and operating margins - we posted a return on invested capital of 22.5% of the second quarter and believe we can maintain or be in the range of 15 to 20% or slightly above in the second half of this year. As mentioned earlier, 15 to 20% has been our long-term target. We're very focused on the earnings per share and the gross margin. However, those may fluctuate due to the timing of the orders, some of the ramp-up issues which we're going through as we accelerate production in some of our market segments over the next three to six months.

As I mentioned at analyst day in May, which I continuously stress, Spartan Motors Inc. is a three to five-year investment. And as you look at our history since we went public in 1985, an investor in the Spartan over three to five years has a tendency to do very, very well.

Looking at the consolidated financial results, we reported second quarter net earnings of $6.5 million, or $0.20 per share. All these numbers are adjusted back for the stock splits of June '07 and December '06. From a top line perspective, sales increased about 40% to $152 million, another record. Backlog was up 20% to a record $290 million. For the first half of 2007, sales increased 39% versus six months of last year, earnings increased 45% compared to the same six months of last year, and the backlog was at $290 million. This is performance plus potential.

Getting into the business units. Spartan Chassis, our largest operating business unit, sales increased 43% to $137 million, grew dramatically and is now about 90% of the consolidated sales of Spartan Motors Inc. Spartan Chassis' second quarter earnings increased about 26% year-over-year, backlog increased 31%. As mentioned earlier, Motorhome Chassis sales increased 2% really in a difficult market. As we look to the future, there are unstable fuel prices, the consumer confidence is what I would call nebulous, uncertain, and interest rates appear to be stable, which makes for a difficult RV market. So as we go up and gain 2%, that means we're gaining profitable market share. RVIA as mentioned earlier, is forecasting about a 5% increase in Class A motorhomes in 2007. We are more excited about the second half of the year then we were about the first half of the year. Again 11,000 people a day turn 50, and over time the prospects for the RV industry Class A motorhomes is very, very good.

Last couple of notes. Our focus on the RV chassis business, our strategic partnerships. We are very, very focused and I believe as I see both the operations, the initiatives, the actions, that we will add another significant partner, increase our motorhome model base, which we will offer to the market in 2008. Today, we have four significant strategic partners. I believe we will have another one onboard in 2008. Why is this happening? Simply that demand for the product of Spartan continues to grow. We deliver custom products, we are easy to do business with and we're known for doing the right thing.

From a Fire Truck Chassis perspective, sales of Fire Truck Chassis increased 8% year-over-year. Backlog at the end of the second quarter was at $72 million. It was a 36% decrease, but honestly the turnover rate is increasing again in the Fire Truck Chassis into the marketplace. Spartan Chassis grew dramatically over the last 12 to 18 months because they were known for fast deliveries. And honestly, we got to a point where we went from delivering chassis within a 13-week period out to over 20 weeks. Now we're working that number back down again. The new plan [A] while we're painting and assembling chassis is up and operational. We're starting to see both the labor and operational efficiencies within that gap, and we're excited to what that will bring to us in the second half of 2007.

Over the long-term, Fire Truck Chassis continue to have excellent growth progress. First, in the large custom end, which we're currently in today, 54% of all fire trucks are more than 15 years old and they will need to be replaced. Next, we will be bringing the Furion into the marketplace which is focused strictly as a commercial part of the marketplace. You will hear more about that as we get into the third week of August. As you take a look at our core markets and you take a look at the opportunities, we are really just touching the iceberg. Today, in we compete in market niches of about 62,000 units per year. We have about 7% share. By the end of 2010, that number will be up to 245,000 units a year, but we will have the opportunity to compete. As society changes, vehicles will change, our opportunities will grow.

Turning our attention to military vehicles, specialty vehicles, the sales of specialty vehicles, primarily the military business increased 486%; very, very good growth. As noted in our press release, the total backlog for specialty/military is at about $132 million as of June 30. This does not include the most recent order, which was announced today. We are pleased with our growing relationship with Force Protection, General Dynamics, which is a partner with Force Dynamics. We're also very pleased and look forward to growing the relationship with BAE Systems on both [ILAB] and MRAP type vehicles. We continue to build a truck with our customers and focus on delivering the right product, which is custom, being easy to do business with and doing the right thing.

Likewise, as a company and as reported last week, MRAP is a very, very big issue. And as I made the comments earlier, when you hear the military indicating to Congress that they are focused on delivering 1300 vehicles per month by December of this year right now, this is a buy what you can build type of business model. It won't be like that forever, but over the next 12 to 24 months, we have very, very good opportunities.

The sad fact is, this is all coming about because of a rapidly changing warfare/business model in Iraq. Today, about -- approximately 70% of all fatalities are IED or roadside bomb related. The MRAP type vehicles will and can reduce that body count very, very quickly. What is interesting and on a personal note, we had an individual here at analyst day who was a Humvee driver in Iraq, suffered -- or his vehicles went through four different IED blasts. On the last one of the five people in the vehicle, he was the only one that came out of the blast with all of this legs and limbs -- with all of this legs and arms. One individual in that blast lost both legs and one arm. He was the only one to come out without a significant change to his lifestyle. These vehicles are important, thus we and others are very focused.

Emergency Vehicle Team -- they continue to move in the right direction. However, we do look for better results in the second half of 2007. Sales grew 5%, a positive indicator of the growing strength. The backlog has also moved in the right direction. I think first and foremost though, when we look at Crimson and Road Rescue is we're now focused on bringing in people and have brought in people that not only have industry experience, but also have demonstrated operational experience. While both companies have made progress, the progress has been too much of a grind. It has not gone up in the right geometric way, which both you, the shareholder, I the shareholder and other stakeholders expect, even the associates. Thus, we continue to make changes to move the companies in the right direction. As we take advantage of their strengths and the wisdom of current associates, we expect better days ahead.

Why are we committed to the Emergency Vehicle Team? One, 80% of all emergency rescue calls are EMS or ambulance related. Second, once every 20 seconds, there is a call for help, and that number will actually accelerate, or the number of seconds per call will actually go down over the next three to five years as more of us get older and older. As 11,000 people a day turn 50, not only is that good for the RV business, and you've heard me say more than once, but more of us are going to take a ride in an ambulance whether we want to or not.

In addition, for example, Crimson Fire with their Boomer, that product is focused on the 82% of all fire departments that do not have an aerial waterway device. And it takes about 12 to 18 months for a new product to truly become successful, generate large momentum in the emergency rescue markets. Thus, there has to be patience. But as we look to the future, emergency rescue is critical to us not only today, but to the future as well.

At Road Rescue, Gary DeCox, their new president, brings to us over 14 years of ambulance experience. He was a previous Road Rescue employee, left to work for another ambulance manufacturer, which was honestly owned by a private investment firm. He now understands the sense of urgency, the focus on operational excellence. What is interesting in talking with Gary, one of the comments he made to me as to relative to his plan for Road Rescue, he said, John, up in Minnesota, Road Rescue had about 1600 years of ambulance experience. When you made the move down to South Carolina, that number dropped about 250. Now we're at 400 to 450. What is nice is I see that in their weekly production rates. They're now producing more units on a consistent basis, on a weekly basis, than what they were 60 days ago, and they are doing it in a more efficient way. We're finally moving the ball for the Company in the right direction at a faster rate than where we were going.

In closing, we're excited about the future. We're focused on generating returns on invested capital above 20%. As a point of clarification, we do anticipate that operating margins and EPS will be less predictable in the second half of the year than the first as we continuously work to ramp-up our specialty vehicle and military business, and it's hard to predict exactly how fast that will grow when all of the parts come to the others to deliver the vehicles, not only on time, but in the most efficient way. I will say this -- we had been meeting our commitments to date. It has not been easy. We've had to work a little bit more over time what we have desired, but we're focused on meeting those commitments in the future, because honestly, lives depend on it.

As we look to the future, when we go from here? First, sales were up 39% in the first half of 2007. The backlog is at $290 million, the highest it has ever been. We are focused on exploiting the strengths of SMI. That is, we are a customer-centric, custom-built Company. Strategic partnerships and a deliberate yet agile business model. As we look at emergency rescue, RV and military, we have new products in the pipeline, not just the Boomer, not just the Furion, not just column drive and RV, not just MRAP vehicles, but there's more to come. For the first time I am looking at sales forecasts over the next two to three years that show continued significant growth opportunities above the 39% we have demonstrated in the first half of 2007.

Next, as I've mentioned to some people over the past few weeks, we will now become very focused on selling our products produced in North America worldwide. What is important to note is Europe today produces a majority of the custom or specialty vehicles worldwide. When we look at the dollar versus the euro today, we are provided with a significant competitive advantage from a currency perspective. What is also important to note is as we look worldwide relative to competition, we are significantly more custom or customer-centric than some of the other European or overseas partners/players in those markets. We are now very focused on developing opportunities, developing the relationship to sell particular products, not just within North America, but worldwide as well built within the U.S.

The interesting thing is people say, John, this (inaudible) or the stock price, etc., it just shocks me. I sort of look at them with and astounded look. I been with this Company 22 years and I've seen a lot of people make a lot of money on our stock. I've seen a lot of people make a lot of money working within the SMI business model. And the simple reason is, as society changes, the vehicles have to change and the pace of change is accelerating and that lends itself toward companies like us who are focused on being customer-centric, speed is an asset, yet you're deliberate that you can replicate what you do on a daily basis. Our challenge though remains making sure we are effective, i.e. doing the right things, not too many things, and whatever we're doing, we're doing right.

So in closing, not only am I thankful for where we have gone, but honestly I'm more excited about tomorrow than what I was three months ago on the last call. Jim?

Thank you, John, and good morning everyone. I will hit the highlights of the financial statements and then we'll move onto Q&A. Remember, all of the financial information for the quarter and the year includes the adjustment (technical difficulty) stock splits in June and 2007 and December 2006.

Looking at our top and bottom-line results for the quarter, sales and earnings were our best ever second quarter results. As John mentioned, quarterly sales increased 39.7% year-over-year to $152.6 million. Earnings for the second quarter increased 30.5% over the same period last year. This was our 10th consecutive quarter of increasing earnings on a year-over-year basis.

Consolidated gross margin as a percentage of sales decreased to 15.7% in the second quarter of 2007 compared with 17.1% for the same period in 2006. The gross margin decreased during the quarter primarily from a change in our product mix combined with margin pressure on military units due to increased competition. Operating income for Spartan Motors increased to $10.7 million for the quarter versus $8 million in the second quarter of 2006. Total operating margin in the second quarter was 7% compared with 7.4% in the same quarter of last year.

Consolidated backlog at the end of the quarter was $209.4 million, a 20.1% increase over what it was a year ago and the largest backlog in Company history. We expect to ship these backlog orders by April 2008.

Sales in Spartan Chassis increased 43.4% year-over-year to $137.4 driven by sales of RV chassis which were up 2%, fire truck chassis which were up 7.9% and sales of specialty vehicles which were primarily military chassis which were up 486%.

Earnings at Spartan Chassis improved 25.5% in the quarter compared to the same quarter of last year. Sales of the EVTeam were $20.8 million, an increase of 5.1% compared to last year's second quarter. Operating cash flow declined by $1.5 million during the quarter. We utilized cash in the quarter to increase working capital by $4.2 million to support our growing sales, and to fund $7.5 million of CapEx.

We had approximately $1.6 million in cash and cash equivalents at the end of the quarter. Depreciation for the quarter was $870,000. Our effective tax rate was 37.4% for the quarter and we're projecting a tax rate of approximately 36.9% for the year. For the six months ended in June, our sales increased 38.8% compared with the same period of last year, while earnings increased 44.8% compared to the same six-month period in 2006. We reported net earnings per diluted share of $0.42 for the first six months of 2007 compared to net earnings per diluted share of $0.32 in the same six-month period last year. We are forecasting about $27 million in CapEx for 2007, the majority of which will be used for Spartan Chassis, including the recent purchase and renovation of two facilities focused on specialty and military chassis production.

We continue to monitor commodity prices and there appears to be less price pressure relative to the commodities that impact Spartan with notable exception of stainless-steel. This metal is growing in demand and causing a rise in price. We exceeded our ROIC target of 15% to 20% for the quarter with an ROIC of 22.5%. This was up from 22.2% that we achieved in the same quarter of last year.

ROIC has been a key metric for Spartan for many years. It is linked to our SPAR bonus program, which is based on an economic value added and we use it to set our goals for the SPAR program. It is an important measure for both Spartan associates and shareholders.

Some of the challenges that John mentioned will continue into the second half of 2007. However, we're confident that we can achieve our ROIC target of 15% to 20% for the remainder of the year.

With that, I would like to now turn it over to the operator for Q&A. Operator?

(OPERATOR INSTRUCTIONS). Joe Maxa, Dougherty & Company.

Thanks. I actually have a few questions here. The gross margin, you commented that a lot of it had to do with these lower ASPs you're getting for the military vehicles. The order you got today appears to maybe a little bit higher. Is that due to maybe a better negotiation or are you doing more work with final assembly or what should we look at? Maybe going forward, not only on those margins but as you're able to utilize these buildings, how should we see these gross margins in Q3 and Q4 develop?

There continue, as I said in the past, Joe, that there will be pricing pressure. And as we have said, we expect the markets to decline. But we do expect to be able to achieve our operating income targets of 5% to 7% and still achieve our ROIC targets of 15% to 20%.

I think what you're going to see is from an operational perspective, when we do the final integration, the gross margin's growth, because obviously we're adding more value adds. And second, what you will see over time is the gross margins will improve from the third quarter over to the fourth quarter. Anytime you get into new buildings, there is just a lot of extra effort to get things done. So as a group of companies, or I should say, as I look at Spartan Chassis, historically whatever they get into, they start off slow and then they ramp up, and then two to three months later you find the ramp-up becomes very geometric in nature.

Can you quantify how much these startup costs were during the quarter and if we should expect those to go down now that you're in the facility?

Well the actual transition costs were not that significant. I think empire in part what John was addressing too was just the efficiencies as we ramp up production and become more efficient in what we do. We are going to improve the margins.

It's really more -- it drives back to the labor efficiencies. It's not so much that we have high cost relative to materials or other things, what we're saying is that as time goes on, the labor and the operating efficiencies will improve month over month, just because you will have people in new buildings and the work methods and processes will become more efficient.

Are you currently staffed up to your levels you need to ramp to this potential 20 a day military vehicle, or do you still need to add?

Actually, the capacity is at, by the end of August, will be at 27 units per day on a single shift. We are not at that capacity -- I should say, we're not at that employment level yet from a capacity perspective, but we're very, very close.

You're saying the end of August, up to that level?

Correct.

Okay. Looking at -- that is going to be your capacity level. Do you expect to be producing at that level?

If everything arrives on time, we have the ability, but honestly, that is one of the struggles which we're going through right now is just the parts procurement issues to ensure that we meet that unit level. Right now, honestly, it's still a little bit too early to say whether we're going to be at that production level or not just from a parts availability perspective.

Where are you currently running at, current rates for the military?

We averaged for the first six months, Joe, we average about 5.5 units a day for six-months.

Has that improved now?

It increased over the last quarter. I think at times, we had as high as eight or nine a day. But, what is important to note in that number, a fair amount or a significant amount of those units, we did the final assembly. So as I mentioned earlier, if you use the number of five units, but when we do a final assembly unit, it's like we're doing two units, but it's only on one set of wheels. When you do final assembly, that almost doubles up the hours.

Understood. Are you expecting a big percentage of your coming orders to provide final assembly on as well?

I think there's a good opportunity for that to happen, but also out of respect to our partners, they are also working very hard for them to do final assembly, and that honestly is a value-add opportunity within their business model. So do I think we're going to do as much in the future as maybe we did in the past? Probably not. I still think it will be significant for us, though.

Your current order that you just got from Force does complete by end of January 2008. I would imagine all your other vehicles you would have then provided by the end of the year, the ones you currently have orders for?

If all of parts come in, that is correct.

Okay. Looking over at the Fire Truck side and the EVTeam, it looks like the order intake rate in the quarter was significantly lower than past quarters. Can you talk about that and what your expectations are in Q3 and Q4?

The order rate will go up in Q3 versus Q2 for a couple of reasons. One, we are now getting past the '06-'07 engine transition change, so we will get back to a more normal rate. Second, I have confidence that the OEMs who Spartan Chassis is shipping product to will improve and increase their production throughput. We are seeing that not just at Crimson, who we own, but we're also seeing that at other OEMs. Second -- and third I should say, it's typically the second quarter of the year is one of the lighter parts of the year from an order perspective because most budgets run out the first of July. And honestly, by the time you get to the second quarter, most the departments have spent most of their money in the first nine months of the year. So just historically, the third quarter is much better than the second quarter.

What were seeing why the OEMs were having more difficult to getting the vehicles out?

I think part of it was, they under anticipated the complexity of increasing production 10, 20, 30, 40%. If you look at Spartan Chassis' growth, their fire truck production is almost up 100% in the last 18 months. That is a lot, which means if chassis is up 100%, then their OEMs must be up 100%, otherwise you get a stack up. And I think, one, the basic answer is, a lot of OEMs under anticipated what had been changed within their business model from a people-process-facilities perspective to accommodate the increase in orders flowing not through just from chassis, Spartan Chassis, but on commercial products as well. That is something, which with Crimson, they have had to make some significant changes in process and people over the last six months to accelerate and improve their production because, and we saw it in their return on invested capital. We saw it their inventory. They were just not accelerating production as fast as what Chassis was delivering in orders. Thus, we back out the earnings when we go to consolidation.

So back over on the military side, you made comments you're expecting you could get orders in the near and far term presumably with General Dynamics and BAE. Are there other potential military manufacturers you're working with that you could see orders from?

I mean, we have been contacted, but as we look at our current partners, we are very, very focused on July on securing and ensuring the needs of our current strategic partners before we take our focus elsewhere. That is just -- I was with this company in 1995, and we were selling to over ten different motorhome OEMs at that time. Yet, we're making more money today and the business model has a stronger foundation and we are selling to just [Ford] today. So it gets back. Do the right things and do things right. So have we been contacted? The answer is yes. Do I see us rolling or developing those other opportunities short-term? Probably not, because we want to make sure that we can deliver product first at a rate of 27 units a day, then at a rate of 42 units per day as we look over the next six to nine months with our current strategic partners.

Hey, Joe, I'm going to ask you step out of the queue and just get somebody else online. You can jump I can.

Frank Magdlen, The Robins Group.

Good morning. John, you had some pretty robust visions for the future top-line growth, and I want make sure I understood that right. Is it over the next two to three years you think your top-line growth opportunities put you near 40% per year sales growth?

The opportunity with the current military setup which we have today, absolutely.

Alright. Can you give us a little more color into what's going on with Road Rescue and production rates, and also the Aerials? Were Aerials profitable this quarter, or did we break into profitability in the third quarter?

They were not profitable this quarter. However, for the first quarter and the last two years, they exceeded plan from an actual versus forecast perspective. And their gross margins were above plan in a very positive way. They still need the chassis at a rate of about three units per month to achieve profitability. I don't see that happening in the third quarter. I think they will continue to improve in the third quarter versus the fourth quarter. But if we can get the chassis there at three per month in the third quarter based upon the gross margins they demonstrated in Q2, they will become profitable.

As we look at Road Rescue, they're currently building about 16 to 18 units per month. They are developing the people and the processes to deliver 20 units per month or one ambulance per day. As a look at their production rates in the month of July and the process and trend lines, they won't do that in the month of July. I think they probably have an 80% chance opportunity to hit that in the month of August. But as a leader, I made a mistake at Road Rescue, and that is -- and I had been in the micro niche business for 22 years. And while we brought in some very good process operational people, I did not focus enough on the ambulance industry wisdom at Road Rescue. And Gary DeCox brings a wealth of experience. He has also brought in since he has come on board three other additional people who have what I would call strong industry experience. And on the negative side, we have had to let some people go, but it's interesting to see the change. And in Gary's term, he said you had a lot of things going right from a process perspective, but he said all of the systems weren't working in unison. And I honestly, I think that's where the industry wisdom is starting to bring the glue together. So for the first time, I feel confident that this company is on a path to make money over the next four to six months. The first key is to get to one unit per day or 20 units per month. And like I said, that will not happen in July, about an 80% chance opportunity in August. Right now, I really have no doubt that they will do it in the month of September. I'm just very excited about what is happening and people I talk to say, John, it is a different company today versus what it was 60 days ago.

Alright. If everything ran right for all of your divisions, do you still stick with an operating margin target of that 5% to 7% range?

I think it would be higher than that.

If the EVTeam was running on all cylinders and we were effective, I think we would exceed that. But I think our minimum target is that 5% to 7% range. We want to always be at least in that range, if not more.

You know and, Frank, you ask a good question, but if everything ran right, and a large part of it too obviously getting all of the parts here to ensure we deliver these military vehicles on time, and we have people working six, seven days a week, in some cases 24 hours a day seven days a week on what I would call the logistics part of the business to ensure we have that opportunity. Yes, then you would see the operating margins get above that.

That is on a companywide basis?

Right.

I know you have had your problems. You're working your way through it, but you have also had some robust growth at the same time and I just don't want to lose sight of what the longer-term target should be or could be going out several years.

The interesting thing is, and that is where the opportunity is. People have asked me, where is the opportunity for Spartan in the future? Well it's not just North America, but it's now really becoming worldwide, not just for the emergency rescue or the RV, but even for the military product as well. There is demand for these kinds of vehicles to other countries, although the first requirement is to the U.S.

Thank you very much.

Ned Borland, Next Generation.

A couple of military questions here. First of all, just kind of a follow-up question on one of Joe's questions. What percentage of your current backlog is in final assembly, has some final assembly work attached to it?

I don't have that. Actually, Ned, we don't break that number out, because honestly it can change on a weekly basis, and that is the production OEMs, our partners look at what's in their schedules, then they give us notification. So that honestly is a bit of a moving target. It's something in which we're trying get a better handle on, but in defense of our partners, these orders, these capacity and the run rates continuously grow at a rather astounding rate. So everybody is trying to get their handle on it, but the mark always keeps moving and it seems to keep moving up.

As John said, with the changing schedule, that has a big impact on that mix in the backlog, so that's hard to predict.

Okay. If we could just map out production rates in military, 42 is the ultimate number. Third quarter, you can get to 27 by the end of August, I think is what I heard?

That's correct.

So in the third quarter, do you expect to average somewhere around that 25-27 level? And what do you think it ramps to in the fourth quarter? Are we looking at high 30s there, or where are we, I guess?

Well a lot of it still is based on, as John said earlier, on scheduling for parts and release of orders. So with the fact that we won't be actually getting to the 27 level until August, we'll be almost halfway through the quarter before we're at that level.

And actually, the next number, Ned, for a point of clarification, I said capacity of 42 from a roller perspective, that's the end of March 2008. So, while we will have second shift or additional day opportunities, until we get the parts, which we anticipate will happen somewhere in the third order to deliver on a consistent basis, 27 units a day from a roller perspective; until we're doing that on a consistent basis, we're not going to increase to a second shift or add another workday. And the current setup from a 42 perspective, that additional capacity won't be in place until really the end of March.

(inaudible).

Good quarter. Just had a couple of questions I wanted to drill down on the military side. First, are you still doing all chassis work for Force Protection?

I really cannot comment on that because I don't know exactly where they break out or where they may be sending other product to, whether it's General Dynamics or some of their other strategic partners. I do know this -- we are still a key strategic partner to them.

Okay. And business from BAE -- what does that look like now than going forward given their recent acquisition?

Well I think we are still a key strategic partner. Were excited about the relationship, which is why we're increasing capacity, hiring people, ordering parts and increasing additional capacity to take us from 27 to 42 over the next six to nine months.

Jamie Wilen, Wilen Management.

BAE recently received a large order. You have not received anything from that contract yet, or they haven't announced anything from that?

Correct. We have not received the formal PO from that contract yet. In their release, they did note that work would be done in Charlotte, Michigan. However, with every contract, then you work through the specifics. The units, whether it be the rollers, final integration, timing, deliveries, et cetera, currently working through that process right now.

When you say units per day, how much does a unit mean in dollar value?

It can range from as low as 105 to probably $130,000, depending on which particular product it is, whether it's four-wheel-drive, six-wheel-drive, and whether there's assembly as well as auto integration.

Joe Maxa, Dougherty & Co.

Thank you. You made some pretty positive comments regarding the RV market, even though it seems to be a little bit weak. Just a question -- are you expecting the second half of '07 to be stronger than the second half of '06?

You know, Joe, I think it should. The interesting thing is, there's some new product coming out, obviously, from the OEMs just because of model changeover. RVIA is fairly optimistic that the second half of '07 will be better than the first half of '06. So based upon those two comments, and when I look at the marketplace, fuel rates have actually stabilized. While they have gone up, they're now basically stable, anywhere from $2.90 a gallon for unleaded to $3.20, depending upon where you are in the U.S. And so you start to see people to start to come back into the business or into the market. They don't take themselves out of it forever, they just sort of delay the purchase. So the OEMs which we're talking to, while they say it won't be difficult market, they feel that the second half should be better than the first half.

So better than the first half, which was pretty strong, relatively speaking -- you know from the back half of last year.

Exactly.

The other question I have had is, you talk about your market opportunity, 62,000 going up to 245,000. Can you just give us a little better indication of what that 240,000 -- or 240,000 units consists of?

Absolutely. That's a very good question. A key part of it is the Furion product. That product will first be focused on the fire truck market, then it will be focused on the ambulance market, then it will be focused on other commercial markets where the opportunity for a custom product to replace a commercial is very, very strong. You are looking at significant increased opportunity, not just for the current MRAP products that are out there, but I'm not sure how many of you are aware that there will be requests for proposals coming out within the next 60 to 90 days for MRAP 2. That has a higher GVW, a more technically complex product with increased armor-carrying capability. The military has spoken that over the next three to five years, they see over ten different variant configurations of MRAP products moving into their fleet. That is important to a company like us, a micro niche player.

Next, as we look at the Boomer, that product is focused on those 25,000-plus fire departments that do not have an aerial waterway device.

Next, we have a number of projects working within the RV arena that not only take us into niches which we are in right now, but could take us into other markets outside of the Class A diesel marketplace, yet still within the RV arena. The exciting thing is, while we have had significant growth, I think the biggest change I've seen within Spartan over the past 24 months, it's not only reflected in our performance and earnings, but I see very deliberate products, very deliberate process initiatives, very deliberate people initiatives to ensure that whatever we have today, we are increasing our opportunity of turning potential into performance tomorrow. As a company, we have been very focused since we have been founded in 1975 is to increase our opportunities to succeed. And as we create those opportunities, then our job is to change the marketplace, for lack of a better term, from commercial to custom. And so we are excited about that. Again, the difference is now though, we are not focused on 40 different initiatives. We are focused on a number much smaller than that, but really with much greater opportunity both from a top and bottom line perspective.

(inaudible)

Just one more question. Can you comment on any discussions you've had with [CeraDyne] regarding chassis work for their entry into the military vehicle market?

Unfortunately, I can't. We just cannot -- whether it be RV, emergency rescue or military. One of the things, because we do supply product to a variety of different OEMs, we just cannot discuss future R&D product opportunities and name a specific OEM.

Jamie Wilen, Wilen Management.

On the EVTeam, currently, we're doing 80, $85 million in revenues, and in the red 4 or $5 million a year. When you look out two to three years in this business, does this have the potential to be 100, $120 million of business with let's say a 5% operating margin business?

Well, Jamie, first, it has the opportunity to be a significantly larger business than that, especially if you throw in the advent of Spartan delivering custom ambulance chassis to the ambulance marketplace. So from a top line perspective, I think you're on the low-end there. When we look at the operating margins over the next two to three years, I would see this business being a 2 to 4% operating margin business, not a 5% operating margin business. It is a little bit more difficult to make money in the body side of the business just because you are bending metal, where in the chassis side of the business, you have the opportunity for more product, technology, complexity and for the customer to pay more for it.

Will the chassis volume be recorded in the EV business, or as separately in Spartan Chassis?

No, it's within Spartan Chassis. Spartan Chassis records the profit on the chassis.

Which I know makes it a little bit difficult for people in your end of the business in something maybe which we should note on future conference calls. For example, today, Crimson Fire, they utilize 100% Spartan Chassis; Crimson Fire Aerials, of their products, assuming 200, approximately 57% of their products are on a Spartan Chassis; Road Rescue today, 0% of their products are on a Spartan Chassis if you look at about 17 units per month. You can do the math there. So that's something we could start to talk about on future conference calls, is just the number or percentage of Spartan Chassis utilized by the business unit to give you a better understanding of what the total pull-through effect is.

[Jason Pulaski], JP Capital Management.

My question is regarding the buyback. Was that a 1 million share buyback that has been authorized?

That's correct.

I'm not sure of the history with buybacks in this company. Do you view that as a buyback that you declare and execute rather quickly, or do you sort of see that as something that you have that's available to you but might not use?

I think, one, historically when we have made the buybacks, we have executed against the buybacks. However, the track record has been as we have typically done it in what I would call a judicious or a cautious/wise way. It's not honestly like you see us announce a buyback, and then four weeks later, that buyback is executed. Typically, you see it done over the length of the agreement, or I should say the release.

Okay, and what is the duration here?

One year.

John Rogers, Ferris Baker Watts.

Good morning. I just had a question for you on the Fire Truck Chassis side of the business. Now that you are in the new facility, I was wondering if you had a better idea about what your maximum capacity or vehicle per day is in that new facility, and how long you think it takes you to ramp up to that number?

Actually, right now, we are running at a rate of about four units per day. The capacity on a single shift is about 1200 units per year, but currently we don't have the orders to take us up to that rate. As we look over to next nine to 12 months, I think we have a very good opportunity to get good to that rate on a single shift. Now that takes into account the Furion product line and introduction as well. But that facility is not designed to be just a fire truck cab assembly or facility. That facility is designed to be a high-volume custom cab assembly facility. So the Furion product is a key part of that facility. And as I bring that up, as we build more Furion products within the cab, you will see the capacity increase, so the amount of time to paint and assemble a Furion cab is approximately 50% less than what we do today.

That concludes today's question and answer session. I would like to turn the conference back over to Mr. Sztykiel for any additional or closing remarks.

Ladies and gentlemen, thank you for your time. Appreciate your support, appreciate the questions. Look forward to executing each and every day, not just in the third quarter, but throughout the rest of this year to ensure we not only bring potential, but turn it into performance. Thank you very much.