Shyft Group Inc (SHYF) 2007 Q3 法說會逐字稿

Good day and welcome to the Spartan Motors third-quarter 2007 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Lambert. Please go ahead, sir.

Good morning, everyone, and welcome to our third-quarter conference call. I am Jeff Lambert with Lambert, Edwards & Associates 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 for 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. 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 would like to turn the call over to John Sztykiel. John?

All right, Jeff. Thank you very much. Good morning. As you saw in the press release this morning, some would maybe say this was a mixed quarter, however, as we look at it, we honestly feel we did a very, very good job.

In some areas, there was a little bit of suffering. One of those being earnings. But if we had to do it all over again, make the same major decisions primarily to increase capacity, which we focused on, we would make the exact same decisions because focusing on increasing capacity was the right thing to do.

And I guess what I am saying is we do not feel bad about this quarter at all. We are actually quite proud of it because we accomplished our most important objective and that was to increase capacity to put us in a position from a people, a process and a building perspective to ensure not just a good day today, but honestly a better day tomorrow.

But as we increase the capacity, we can now focus on improving the processes and move forward on improving the efficiency of the business. And as I looked forward, I believe this quarter will be an aberration and Q4 will be more in line with past quarters.

What is interesting is, as I look at this business and if you look at Spartan over the last three to five years, I am not sure if we are the kind of company anymore based upon the change in our business, the growth opportunities in our business, where we can have year-over-year back-to-back record quarterly growth in sales and earnings.

What is interesting is we had similar one-quarter blips in '04 and '05. 2006 was actually the only year where there was none and if you look at the history of the past and where we are today, we had a blip and then we moved forward with some very, very good growth in sales and earnings and honestly that is why I look forward to the future. This is an extremely complex business. Q3 is now behind us and we are moving forward into Q4.

Why did we do what we did? And that is focus on increasing capacity the way we did in Q3? And that was simply because of an urgent need and the future opportunity relative to our military business. The military is demanding MRAP vehicles to save lives in Iraq and that they do. Those products do work.

This in turn is putting tremendous pressure on our OEM partners, on ourselves and on our other suppliers. Because of this acceleration, we absolutely had some startup costs. We had some capacity increase costs. Gross margins were impacted by these production inefficiencies.

We were also impacted on the gross margin side and a shift in product mix in the RV area, some competitive pricing on the specialty vehicles and lower margins on fire truck chassis and emergency vehicle teams and I will talk about those in a few minutes and most of those we have seen behind us, however, we did succeed in our capacity increase.

And what is interesting, in just six months, we have increased our military production capacity by more than 300%. As a matter of fact, in the third quarter, we not only purchased a building, but within six weeks, we have purchased the building, we converted the building, we are now producing product within that building all within less than six weeks.

How have we been rewarded? Just take a look at the growth of our backlog. And what is interesting is that growth has tremendous opportunities to go forward as we move into 2007.

As we look at the past and as we look at the future, we are optimistic. In just two years, we are looking at doubling our revenue and we have expanded our production capacity by over 175%. In terms of square footage, that is about seven football fields of capacity we have added this year.

During this ramp-up, it has not been easy. It has primarily all been at Spartan Chassis, however, the troops, the people there have done an excellent job. It is not easy though.

At the same time, we have also had some temporary missteps at Crimson Fire and Crimson Fire Aerials, which increased a lot year-over-year, however, we did see some measurable improvement at Road Rescue and I will talk about each one of those business units a little bit later on.

(inaudible) some of these issues were out of our control, most were within our control and we are focused on addressing all the issues and moving the ball in the right direction. As we look to the future, we have challenges and opportunities ahead of us. As mentioned in the past, one of the challenges, which we went through in the third quarter and we are working through right now, is just the transition from 2006 engines to 2007 as it relates to fire trucks and RVs.

This engine changeover was a little bit more than what we anticipated and that has affected the margins of both the RV and the fire truck chassis group. What is positive though, as I sit here today and as I look at the data, the trends in the margins are moving in the right direction.

Another challenge, slowdown in fire truck chassis orders. As we look at the fire truck business, and as I look ahead, I believe the second half of '07 and 2008 will be a soft market from a fire truck chassis perspective. I believe our margins will improve as we improve our efficiencies within fire truck chassis, however, it is going to be difficult to gain profitable marketshare.

Another challenge, MRAP margins. And this is a function really of three different issues. One, unpredictable hull deliveries due to the sheer demand from the military, which creates schedule of challenges. What is interesting is a year ago there were less than 50 MRAPs produced a month. By the end of December, the military expects to see more than 1200 MRAPs produced a month.

When I was with a General last week, I was talking to him about this exercise or opportunity, whatever you want to call it, which we are in and I said, why the focus? This General replied to me. He said, John, this is the largest wheeled vehicle effort initiative in a wartime situation since World War II. Now that is over 60 years. And when he said that, I said whoa. Now I understand the focus.

Another challenge within the MRAP is obviously, as the volumes grow, there is increased competitiveness from a pricing perspective, so we have to deal with that. Third is we have ramp-up costs, increased capacity costs and we have gone through this historically and what is interesting is part of this ramp-up and while we have done a great job, but to give someone perspective, Spartan Chassis in less than 12 months has gone from 550 people to now over 1100 people in less than 12 months. And [not] everybody shows up and they become efficient immediately. However, our results, the data, the past trends have demonstrated both excellent and performance as we move into a business model, as we move from start-up into the efficient stage.

From a positive perspective, we made considerable progress on several fronts. One is the increased production capacity. As mentioned in the military business, we have increased our capacity in less than six months by over 300%. When we look at total capacity -- fire trucks, RVs, etc. -- we have increased our capacity as a company by 175% compared to the same time in 2006. This increased capacity has enabled us to grow our sales by more than 40%.

What is interesting is 2007 is on track to exceed more than $700 million in sales and if we are able to get that done and that is going to be a bit of a stretch, it will more than double the revenues as to where we were in 2005 in a complex manufacturing business. I will tell you what. I am extremely proud of the people and what we have done.

Another extreme positive -- the additional MRAP orders. We had four significant orders in the last quarter totaling approximately $163 million. And what is interesting is if you look at that and you look at the opportunity, there is more yet to come and I will talk about that in a few more minutes. But this increased capacity and the growth in backlog at $383 million, as I mentioned in the release, over the next four to six weeks, it's very realistic that by the end of November our backlog could exceed all of what we produced in 2006.

For those of you that follow the military business, what you have seen over the past several weeks is now a commitment both from Congress and the military to secure and move into Iraq approximately 15,000 MRAP vehicles between now and the second half of next year.

Including last week's orders of approximately 2400 units, that means they are roughly just over half way there of that 15,000. So if Congress and the military are true to their word, that would mean there is still a significant amount of the current MRAP design from an order contract perspective yet to be placed over the next two to three months and it has to happen over the next two to three months otherwise those products are not going to show up until the third or fourth quarter of next year just because it takes at least six months to move through the supply chain to deliver a complete vehicle.

The interesting thing is if we would not have made the decision to go from approximately 15 units a day from a capacity perspective, I should say six units a day because that is where we were at the end of the first quarter, six to eight units a day from a capacity perspective this year to now at 40 units a day from a capacity perspective where we are effective November 1, we would not have been able to participate in the orders we received or potentially participate in the future orders yet to be [let].

To be involved in this opportunity of both saving lives and providing product, one must have the buildings, the people and the processes to even be considered as a potential suitor and we, as a company, made that commitment.

Another positive -- the new products. As we look at the Furion, it is an extremely great product. We're very, very excited about it relative to the emergency rescue business. When we look at Crimson's Boomer, they have now sold their first one. Another very, very exciting product from an aerial water weight perspective designed to address the 83% of the fire departments in the US that do not have a water weight device.

Another positive development is honestly the weakness of the US dollar. Today, Europe supplies just over 80% of all the specialty vehicles in the world. And you look at the exchange rate of the dollar versus the euro and it is amazing just how many opportunities are now being presented to us in the business unit to either export or become a partner relative to exporting a portion of their product overseas just because the currency exchange rates are so valuable. Do I see this affecting the top or the bottom line over the next six months? No. Do I see it being very positive over the next two to three years? Extremely.

Last, the new leadership at the emergency vehicle team. With the addition of Kevin Crump as Crimson Fire's Executive VP and Gary DeCosse as President at Road Rescue. We made some very, very positive steps in the right direction.

From a financial perspective, a quick summary. Net earnings were at $2.6 million or $0.08 per share. From a sales perspective, sales rose to $149 million. Our backlog is now currently at $383 million. For the first nine months of 2007, sales have increased 38% versus nine months of last year. Earnings have increased 20% and the backlog has grown approximately 66%. We continue to move the Company in the right direction.

Now as we look to each business unit. Spartan Chassis, our largest operating subsidiary, saw a sales increase of 49% to $139 million, which is about 93% of the consolidated sales of Spartan Motors and a large part of that was the military specialty vehicle business. Spartan Chassis' third-quarter earnings were up 3% year-over-year. Backlog at the end of the quarter compared to last year was up 94% compared to the third quarter of last year, 41% compared to the second quarter of this year.

From an RV perspective, motorhome chassis sales increased 10.8%, which exceeded a 3.6% industrywide increase for wholesale shipments of Class As in July and August, which is the latest data we have. We did see some decrease in margin due to product mix, a shift in sales for our midline motorhome chassis and also submissions relative to the implementation of '07 engines in the emission changeover. [RVI] is forecasting an increase of 5.8% of Class A motorhome shipments in 2007 and this mirrors what we are hearing from dealers and OEMs who are surprised and were also cautiously optimistic.

You know what is also exciting though relative to RVs is that Dr. Curtin of UofM, RVIA's consumer forecasting [link], is forecasting growth in the Class A business over the next five years from approximately 35,000 units in 2007 to over 45,000 units by 2012. His basis for this is part the growth in baby boomers, but also that the pricing value structure of Class A motorhomes will become more in line or competitive with towables and other products in the RV marketplace and thus making them more attractive. And as Class As go up from a total volume perspective, we will benefit as well.

In addition, we are making progress with increasing the foundation or the number of models offered on the Spartan chassis and we are very excited about the upcoming RV show the last week of November in Louisville from a product and a marketing perspective.

Shifting over to fire trucks. Sales of fire truck chassis declined in the third quarter year-over-year by 10.5%. The backlog at the end of the quarter was $67 million, an 18% decrease versus last year. Some of this decline in sales is due to the general softness in the fire truck market compared to last year when pre-buying occurred and some from delays in transitioning of new engines at customers and parts issues from suppliers.

I will say that the severity of the slowdown caught all of us by surprise. On the positive side, we introduced the Furion chassis, a chassis aimed at the commercial side of the fire truck marketplace, in August. The product was extremely well-received. Products will be hitting the demo/show circuit in early 2008 and that excites us. And so while in one respect, there will be a softening in the more difficult emergency rescue market over the next 6 to 12 to 18 months, when I look at the Furion and some of the other initiatives, I believe when I look at quarter-over-quarter opportunity, we have probably seen the bottom and we are going to have more good days than bad days ahead of us as we look at fire truck and emergency rescue.

Turning our attention to military/specialty vehicles. This by far is our fastest and largest growth segment. Sales of specialty vehicle chassis increased 236%. As noted in our press release, total backlog for specialty/military is at about $229 million, a 307% increase as to where we were last year and this backlog includes the large MRAP orders we announced in the third quarter.

As mentioned earlier, over the next four to six weeks, we expect to see some additional or substantial orders relative to the current MRAP design and what is interesting is all of the orders we are receiving are to be built within the next nine months. This product is to be delivered between now and the end of the second quarter of next year. We are extremely thankful and pleased with our growing relationship with our three OEMs in the MRAP business -- BAE Systems, Force Protection and General Dynamics Land Systems.

So far, the military has placed orders for approximately half of the 15,374 MRAPs, which they are looking for delivery in the first half of 2008. Though this number seems to change on a weekly basis, it appears that Congress and the military are unified around this number.

In addition, there is the MRAP II product and those product submissions are now going through vehicle testing and if everything goes according to plan, one should see contracts for award either in the fourth quarter or the early first quarter of 2008. However, as I've mentioned several times and more than once, it is our policy only to announce major subcontract orders, not all orders, and we do not announce anything until we have a [PO].

In addition, as we look forward, in the five new facilities, we now have 387,000 square feet dedicated to the military moving forward. We are now operating on a second shift in certain areas. Currently we're building at a rate of approximately 15 to 20 units a day depending upon product configuration, etc. compared to the first quarter of this year. That rate was six to eight units a day. So we have increased not only our capacity, but as we are now moving into the fourth quarter, things are starting to ramp up in a rather effective and efficient manner. However, we still have a long ways to go.

In addition from a return on invested capital perspective as we look to the future being the first and the second quarter, I expect to see our return on invested capital grow considerably in the right direction through the effective utilization of the second shift and delivering the product and turning the backlog into profitable income and profitable sales.

Moving over to the emergency vehicle team and switching gears. While many things went right at Road Rescue, we had measurable improvement there. There were some missteps at Crimson Fire. Sales for the EV team did increase 8% in the third quarter resulting in an increase loss. The backlog was also down 6.4% and while we don't break out the results of the individual companies, I will talk a little bit in depth about each company.

At Crimson Fire, part of the reason the backlog came down was identical to Spartan Chassis, just the changeover to 2006 or I should say 2007 engines from 2006, the prebuying and second, just not able to move the orders through. However, what is positive is the order trend has been up over the last couple of months at Crimson Fire. They have got some very nice products, primarily the Dakota and the Boomer, which are lower-cost products. In particular, the Dakota is more of what you would call a quick attack, first response unit to support ambulances, wildfires, etc. It appears that product is taking hold quickly.

From an operations perspective, Crimson Fire was a major disappointment for us in the third quarter. We mismanaged the labor costs and generally we just failed to execute. However, as we look at where they are in the month of October and what their plan is for Q4, I see them moving back in the right direction and being back to where they were six, nine, twelve months ago and that is continued improvement and becoming a significant contributor to our bottom line.

Looking at Crimson Fire Aerials, we continue to get positive feedback on the Boomer, have now sold our first product and continue to move that product in the right direction. As we look in closing though, Crimson Fire will continue to struggle -- I should say Crimson Fire Aerials will continue to struggle over the next three to five months as they ramp up delivery, deliver the product to the marketplace and secure the right amount of chassis and continue the flow. That is just now starting to happen.

Spartan Chassis is now starting to deliver fire truck chassis on time, which will not only help future sales, but will also help not just Crimson Fire Aerials, but other OEMs improve their production methodologies to move the product through the marketplace.

I think what is important to note and that is from a Crimson Fire and Crimson Fire Aerials perspective, they had one of their largest quarters ever from a Spartan Chassis pull-through. Thus when you start to add back in the chassis, Crimson Fire and Crimson Fire Aerials was a positive contributor for Spartan Motors, Inc.

Moving over to the last group being ambulances and I have not said this in a long time. As I noted in my Board report, it has been a very long time when I made the statement that Road Rescue moved the [products] in the right direction out of all the business units. And honestly that is a complement to Gary DeCosse and the leadership team.

The biggest change is over the past eight weeks through change-outs, not additions, the industry wisdom at Road Rescue has increased by 126 years. For the first time, when I go down there, I look at the data and talk to people in the marketplace whether it is the fires, (inaudible), dealers etc., it is like, okay, we have got an ambulance company. This is nice.

On an important note, the ambulance market is not forecasting a soft market for 2007-2008. They expect the market to be good, pricing to be hard. Road Rescue has already notified their dealer base and end-user base that they will be having a price increase January 1 and this is the end of October, so they are not only the first ones out of the gate, but have not seen much pushback from it from anybody.

And why is this? Simply the demand for ambulances is growing. 50,000 people a day turn 50. According to U.S. Census data, by 2050, and I know I am not going to be involved in this business by then, but I will probably still be a shareholder, maybe, maybe not, I'm not even sure if I am going to be alive, but the number of people over 65 will at least double from 22 million to 44 million. Today, the age group of 65 and above is the fastest growing segment in the US. (inaudible). As more of us get older, more of us are going to take a ride in an ambulance whether we want to or not and this not only bodes well for Road Rescue, but this also bodes extremely well for Spartan Chassis.

As I mentioned earlier, the Furion, while it is first showing up in fire trucks, the ambulance industry will see in April of next year the first custom ambulance chassis brought to them by Spartan Chassis based on a Furion. Today, the ambulance market is approximately 7000 units and growing. There is not one custom chassis within that market. Today, the fire truck industry is approximately 5500 units a year. About 52% of that market is a custom chassis.

So as we look to the future, we are excited about all that we are doing, but we do have a difficult task ahead of us. In closing, our challenge remains making sure we are effective, doing the right things and being efficient doing things right. And honestly, that is not easy.

A lot of people ask me in closing why invest in Spartan, why invest in Spartan. And the answer has always been as society changes, vehicles will change and as the pace of change accelerates in society, the pace in which vehicles change will accelerate as well and the military, the war, it's really just a part of society. While it is a vicious part of society, the reality is it is a part of society.

This business model, which we are in today, did not exist three years ago. Today, it is our fastest growing segment. We are not only focused on it operationally; we're also focused on it strategically.

And what is interesting as I look at the point of being effective, I have been involved in this business for 22 years and I have never seen so many great opportunities in front of us than what I see today. It is military, it is RV, it is emergency rescue, it is commercial as we look to the Furion. 12 months ago, 18 months ago, I never spoke about overseas, I never spoke about Europe. Today, it is right in front of us, right on our radar screen. Why? Anything built in the States is at a 40% discount versus a European product.

And what is interesting as you look at the past and you look to the future, we are very focused on doing the right things and we are actually focused on doing less things and becoming more efficient and I think because of that, our five-year average, again not including 2007, our top-line growth has been about 19% a year. Our bottom-line growth has been just over 36% a year. Those are great numbers.

And as I look at 2007, I believe we are focused and we will be able to execute in such a manner that '07 and also 2008 will continue that outstanding performance because those numbers are outstanding. And I think from a support perspective or a Board perspective, it was nice to see the approval of the special dividend of $0.03 a share. This is the fifth year in a row we have increased dividends and this demonstrates the Board's confidence in Spartan not just short-term from an operational perspective, but long term from a strategic perspective as well. Jim?

Thank you, John and good morning, everyone. You should have received the press release along with a financial statement and sales and backlog information by operating segment this morning. I will hit the highlights of the financial statement and then we will do Q&A.

Remember that all financial information for the quarter and the year includes the adjustment for recent stock splits. Looking at our top-line and bottom-line results for the quarter, as John mentioned, quarterly sales increased 36.8% year-over-year to $148.9 million. Net earnings were lower than last year's third quarter at $2.6 million or $0.08 per diluted share.

Consolidated gross margin as a percentage of sales declined to 11.8% in the third quarter of 2007 compared with 15.8% for the same period in 2006. This decrease was due to production inefficiencies, a shift in product mix, competitive pricing and competitive pricing on specialty vehicle chassis.

The inefficiencies were driven primarily by a substantial ramp-up in capacity, as John mentioned, over 300%, schedule changes and the shortage of components. Operating income decreased to $4 million for the quarter versus $6.2 million in the third quarter of last year. Total operating income in the quarter was 2.7% compared to 5.7% in the same quarter of 2006. This decrease in operating margin was the result of lower gross margin and increase in the operating structure to support higher sales volumes.

Operating expenses declined to 9.1% of sales in the third quarter of this year compared to 10.1% in the same period last year. Consolidated backlog as of the end of the quarter was $383.1 million, a 66% increase over what it was a year ago and the largest backlog in Company history. We expect to ship all this backlog by the end of 2008 -- I'm sorry -- by July of 2008.

Sales of Spartan Chassis increased 46% year-over-year to $138.9 million driven by the sales of RV chassis, which are up 10.8% and sales of military vehicles, which were up more than 236%. Net earnings of Spartan chassis improved 3.3% in the quarter compared to the same quarter last year.

Sales of the EV team were $19.7 million, a decrease of 8% compared to last year's third quarter. Operating cash flow declined by $7.5 million during the quarter. We utilized cash in the quarter to increase working capital by $13.6 million in support of our growing sales and to fund $10.1 million of CapEx.

We had approximately $3.6 million in cash and cash equivalents at the end of the quarter. We are forecasting $30 million of CapEx for 2007, the majority of which will be used for Spartan Chassis, including the addition of five new facilities we have mentioned in the past.

Depreciation for the quarter was $1.1 million. We purchased -- we repurchased 50,000 shares of stock during the third quarter. With our increase in demand for working capital to support the growth of specialty vehicle sales and the recent acquisition of facilities, we do not expect to buy back additional shares of stock during the next nine months.

Our effective tax rate was 35.7% for the quarter and we are projecting a tax rate of approximately 36.6% for the year in total.

For the nine-month period, our sales increased 38.1% in relation to the same period last year, while earnings increased 20.3% compared to the same nine-month period in 2006. We reported net earnings per diluted share of $0.50 for the first nine months of 2007 compared with net earnings per diluted share of $0.46 in the same period of 2006.

Our ROIC for the quarter was 8.5%, which did not exceed our ROIC target of 15% to 20%. This was directly related to the challenges that we have already mentioned. This is disappointing for everybody at Spartan Motors. ROIC is linked to economic value added, the approach we use to measure our performance and award bonuses. However, we are confident that we can return to our ROIC target range as production issues that affected our margins in the third quarter are resolved.

With that, I would like to turn the call over to the operator and we will begin Q&A.

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

Thank you. First, I just wanted to ask, John, what was the comment you indicated on what you're expected to -- your sales were on track to hit for 2007? I just missed that number.

Well, I said, while it would be a stretch, I said sales are on track to exceed or to double what we did in 2005, which would be about $345 million I believe in 2005.

Right. Okay. Thank you. Regarding the capacity, it sounds like you said you are running 15 to 20 per day today. What needs to happen to get up to that 40 level?

Really the parts have to flow in from the hulls, the wheels, the tires, the axles, the engines, the transmissions. I mean really what you have got is a whole new industry working within a very limited supply base trying to secure all or a lot of the same parts. So really from a building perspective, there is no longer an issue here. From a people perspective, there is no longer an issue here.

Really it is just a matter of working and really getting the parts to assemble the product and our customers who, in some cases, are suppliers and our suppliers, people who are working more than one shift. They are working very, very hard and very, very smart. But the ramp-up schedule -- as I tried to give people perspective from 50 a month to 1200 a month in less than 12 months on a very complex product is a daunting task for the industry.

Right. So looking ahead, I mean do you have enough orders in hand if everyone were to ship it to even get close to that number say in Q4?

Yes, absolutely.

Great. I just wanted to ask a little bit along the lines where you talked about Q4 could be in line with Q3. I mean that seems pretty -- or the first half of the year. That seems pretty conservative based on the revenue you just talked about. Are you looking at earnings still struggling where you might see a lower or an earnings numbers in-line? These numbers would suggest much higher than that.

It's a function of one -- of a couple of things. One, it is a function of getting the units through in an efficient manner and I still believe we are going to have ramp-up increased capacity costs because if you go from 15 to 20 to 25 to 35 etc. as you make those segment leaps, you are going to have costs be higher than normal until you start to get into a rhythm. Everybody is driving the business model for us to deliver a lot of product very, very fast. So I think from a margin perspective, our margins will grow and improve. I can't say as I sit here today they are going to hit where we want them to hit.

The other side, which obviously affects it, is just the pure top-line perspective, which comes back and is interconnected with the bottom-line perspective, getting the hull, getting the parts all to affect the top-line perspective. If everything worked, do we have an opportunity to exceed where we were in the first or second quarter of this year? Absolutely. But as I sit here today, I can't guarantee that. I do believe we will be significantly better than the third quarter and I believe we will be moving in the right direction or in line with where we were in the first and second quarter.

(Multiple speakers).

Just to add to what John was saying is that if we have continued to have some parts shortages and schedule changes, that definitely has an impact on our delivery utilization and so that has an impact on our margin. So if those can be reduced during the quarter, which we expect they will be --

Well, they are being reduced. Versus where they were in the third quarter, they are definitely being reduced.

Absolutely. And if we have fewer of those disruptions during the quarter, obviously that will have less impact on it.

Okay. Just one more and then I will jump in the queue. Employees. You need to add significantly yet or are you pretty well set with your 1100 plus?

I mean right now with the way we are staffed, we are probably, to be quite blunt, we probably have too many people here right now. But this is a very complex manufacturing product and we have spent a lot of time working upstream with all of our suppliers in this project to see where they are at. So the decisions have been made to keep the associates here. One, because it is the right thing to do. When you hire someone, you want to try to provide for them long-term employment, but also two, we are working through and improving the training, the operational execution, etc. So from an associate perspective, no we don't see any future hires.

Okay. Thank you.

Ned Borland, Next Generation.

Good morning, guys. Just a follow-up on the last question about fourth-quarter guidance. I guess if we could look at what has gotten better in terms of the issues that plagued you in the third quarter versus what you're going to see in the fourth quarter. I mean you are going to see a steadier production of vehicles because you have got a higher productions rate, so I would think that would absorb a lot of your capacity. Are there any conversion costs from the new facilities that hit you in the third quarter that go away in the fourth quarter?

There wasn't any real traditional conversion costs. It was more just production inefficiencies related to ramping up capacity and what we experienced due to parts shortages and schedule changes.

Okay, because it would seem -- it is tough.

I mean, Ned, if you think of what looks better, I mean simply we are producing -- as I mentioned, we are now producing 15 to 20 units a day. Earlier in the third quarter, midway through the third quarter, we were probably at a rate of maybe 5 to 10 units a day. So I mean each month, the strategic supply chain and the group of companies working together are getting more effective and more efficient, which is honestly why you saw in the last go-round of orders instead of those orders being released to a larger group, the military reduced the size of the group. I mean that is the best evidence right there. The customer said we have faith in these groups of individuals/companies to produce the product.

Okay. And then just switching gears to sort of outlook issues. On MRAP II vehicles, what is the difference between your content per vehicle or the work you expect to do per vehicle for MRAP II versus MRAP I?

Ned, we really can't comment on that because we could be providing competitive information. That is something we have been given guidance on by our strategic partners.

Okay. But I mean is it higher? I mean is it more or is it more in line?

Well, it weighs more. I mean it does weigh more.

Okay. And then on the fire truck both in Spartan Chassis and then also at Crimson, I mean outside of product launches, what do you think gets, outside of California fires too, what do you think gets the fire truck market going again?

Well, the California scenario will accelerate some of the demand, but where I perceive honestly Spartan Chassis and Crimson will gain profitable marketshare next year is, and I hate to say it, but there are some very large OEMs in the emergency rescue business struggling right now and not just Spartan, not just Crimson, but there is a large part of the marketplace focused on capturing that profitable marketshare. And so while we -- the industry as a whole is moving into a soft market, there are some large companies out there going through some very difficult times and people are focused on taking advantage of that.

Next, from a chassis perspective, the Furion, when it was introduced in August, the market loved the product. It's a product that is focused on the commercial part of the market and the customer base loves it and we will be moving into the demo/show circuit in the first quarter of next year.

From a Crimson Fire and a chassis perspective, they have introduced or modified products to reduce their price point in the marketplace a little bit to make their products more attractive with other OEMs, other [in cities], dealers, users, etc. in the marketplace. So I think as I look forward, the three drivers from an emergency rescue perspective will be one, some competitive capture opportunity; second, the Furion and third, some modified or newly released product modifications from both Crimson Fire and Spartan Chassis, which puts them in line with probably captured growth market price competitiveness of the marketplace.

Okay. I will jump back in queue. Thanks.

Frank Magdlen, The Robins Group.

Good morning.

Good morning, Frank.

Can we get into the production levels for the ambulance side and what does it take -- again, the elusive profitability there and what numbers do you need, what volumes do you need?

Frank, this is John Sztykiel. I mean currently they need to build about one unit a day or 20 units a month and they are averaging right now about 17 to 18 units a month. Second, they have got to reduce their labor costs or improve their labor efficiency from about -- they are currently running at about 79%. They need to get about 85% and the trend line is up there. Third, they need to bring their SG&A down by about 10% to 15% and as I look at their 2008 plan, they have that in place.

The biggest change, which I have seen, is just this increase in ambulance wisdom and those 126 years were really within the leadership team. They have also added some people in the management team and on the floor as well. I mean it is a totally different attitude. You have people that believe that they are going to be a profitable ambulance company.

They have increased their production rate versus 12 or 13 units a month where they were in the first half of the year and now they are 17 and 18 units a month. They are slowly reducing their bill of material costs. They are improving their labor efficiencies and they have got a plan to reduce their SG&A costs.

So will they cross over to profitability in Q4? Absolutely not. Do I see them having a profitable month right now in Q1 of next year as I look at their '08 plan? It is in there. Do I think they will be profitable for all of Q1 next year? No, but I have no doubt now we have an ambulance company on our hands because they are doing the right things mechanically.

The nice thing is the dealers are excited about the product and haven't seen a whole lot of pushback relative to their proposed price increase January 1. So it's like, okay, guys, now we have got to start to rock and roll and move the ball in the right direction even faster.

Okay. Second question, in relation to the fire engine cabs, you went -- you increased your capacity, but what is your real run rate?

Well, we increased the capacity from a fire truck cab perspective, but the run rate now is approximately 3 to 3.5 units a day per se.

And your capacity is what?

About 1200 units a year, so about 100 units a month.

Okay. On the Aerials side, what are they -- they were waiting for chassis. Now, can we assume they don't have to wait for chassis?

Yes, chassis are no longer an issue. So now literally what they are doing is now focused on improving their operating efficiency based upon getting the right number of chassis through on a monthly basis. I think they have got a realistic opportunity to cross over somewhere not in the fourth quarter this year, but in the first quarter or early second quarter of next year. But the chassis are now finally moving through and they can design a business based upon a reliable production supply. Spartan Chassis has done an absolutely fantastic job and they are no longer the issue at Crimson Fire Aerials anymore.

And what are the parts shortages or the component shortages in that area, not in Aerials, but fire trucks in general?

Oh really, just parts shortages related to the engine emission changeover. When the industry, not just chassis and this is true whether it be fire trucks or RVs, when they changed over from 2006 to 2007 engines, it was a new exhaust system, a new radiator, a new air-to-air cooling system, a different engine. I mean it was basically like saying, okay, we are going to have a heart transplant and we are going to get it done in less than 90 days and imagine doing that for everyone.

So it is the new generation of parts, but it is not a specific part, but a collection of parts?

That is exactly it and ironically enough, most of the parts are fabricated because they are mounting brackets, etc. or exhaust tubes or air-to-air cooling tubes and you have to work through that. You just can't design it all on a computer and says it works. You have to actually design it, install it, put it on and when you are in a custom specialty vehicle business, for example Spartan Chassis, one of their foundation marketing points is build what you want, get what you want and when the average common bill for Spartan Chassis, the emergency rescue perspective, is less than 1.2, which means every truck is unique. You really have to work through these engine changeovers and honestly it caught them by surprise, I think everybody by surprise a little bit.

But on the other side of the fence, you also had, because all the business units run lean from an SG&A perspective, you also had a fair amount of people doing whatever was necessary to increase capacity, accelerate the military ramp up. It is not like we hire just tons of people here for every business unit and so you say, okay, we are overstaffed here, we are adequately staffed here. No, people do a variety of different functions honestly to keep our SG&A low.

All right. And one last question. Were there any bonus accruals in the third quarter?

Not at this return on invested capital.

There wasn't much.

There wasn't much, but you didn't reverse anything?

Well no, no. The expectations for the year are still very strong.

Okay. Thank you very much.

Brian Rosenhouse, Sidoti & Co.

Yes. Hi, guys. Last week, your military partners, Force Protection and BAE Systems received about 58% of the total $1.2 billion MRAP order totaling about $700 million for them. Perhaps you could give a range in terms of what percentage of these orders you expect to receive?

Well, that's a very good question. The best thing I can say is if you listen back to my earlier comments and that is as we look over the next four to six weeks, we have the opportunity for our backlog to grow substantially whereby the end of November, our backlog could be larger than what we produced in all of 2006.

Regarding MRAP II, do you expect to supply chassis relating to Force Protection's Cheetah vehicle?

At this current time, we are not a strategic partner on the Cheetah vehicle. Honestly we have so much on our plate relative to MRAP I and looking forward relative to MRAP II that we are just staying focused on doing a great job here.

Okay. And last question, can you just go into again why you were able to handle $153 million in revenue last quarter, yet only $149 million this quarter given that your new capacity came online about a month before 3Q ended?

While the capacity came online, we weren't real efficient at doing what we were supposed to be doing in some respects and second, we just did not get the parts. And the parts applies not just to military, but also applies to fire trucks as well as we talked about part availability issues. The parts issue applies not just to military, but also to fire trucks -- I should say fire truck chassis as well.

Now as we look forward, we see an increased top line and increased bottom line as we look at Q4. Obviously most of it or a large majority of it will be driven by the military side of the business, but we expect to see both top-line growth and margin improvement on the fire truck chassis side of the business as well.

Okay. And last question if I can. Last week, when the Pentagon placed that order for $1.2 billion for MRAP, they mentioned that they were probably going to order 6500 vehicles in December. Do you think that is going to be for MRAP I or MRAP II?

No, that will be for MRAP I. There was a very good article out about three to four weeks ago and Senator Biden was quoted that the MRAP I program needs to be accelerated and funded because realistically by the time the MRAP II decisions are made and then you look at the six to nine months delivery and then you have to get them overseas, etc. that there would be a huge, huge gap of no product flowing overseas unless these orders -- these units were ordered by the end of the year. So that came out about four weeks ago. What is exciting is you see both the military and Congress unified.

What's even more exciting honestly is I think you're starting to see the body count coming down. I mean we have a lot of great American individuals and other people involved in this conflict overseas and one General mentioned to me, he said, John, the reason these things are in such hot demand is the products do work and that is a compliment to BAE, General Dynamics Land Systems division and Force Protection. I mean these products really do work.

All right. Thank you, guys.

(OPERATOR INSTRUCTIONS). Jim McIlree, Collins Stewart.

Thank you. I know that the $700 million you're talking about for '07 is a stretch, but if you did stretch it, you are talking about a fairly significant increase in revenues over Q3. Is that expected to come primarily from military or are there other segments that is getting you that much of an increase and I am talking a quarter-to-quarter increase.

(Multiple speakers).

Excuse me?

Primarily from the military side of the business. That is where most of the growth will come in the fourth quarter.

Terrific. Thank you.

You are welcome.

Jamie Wilen, Wilen Management.

One question. Okay. If it has got to be one, what is the difference between MRAP I and MRAP II and how do your capabilities in MRAP I translate to your market position you may have for MRAP II?

That's a very good question, Jamie. This is John Sztykiel. One, the biggest difference is the weight, the density of the metal on MRAP II and this is not a competitive proprietary information, the government has stated it. The metal weighs about 150 [pounds] per square foot. Think about that. That is dense stuff.

Second, a rule of thumb is as the vehicles get heavier, and this is true whether it's a fire truck, ambulance, RV, etc., as the vehicle gets heavier, the bill of material cost dollar (inaudible) goes up.

Third, as the vehicle gets heavier, it becomes more complex both from a design and a manufacturing perspective, which honestly moves more to a strength of which Spartan is noted for.

Just to add to what John was saying, Jamie. The vehicle is going to look basically the same, but they are putting additional armor on the sides to protect against EFP, the explosive form projectors.

Okay. Can I sneak a second question in here?

Go ahead, Jamie.

Sure.

The additional capacity you just put on was for you said not the military, but the RV business. What additional volume -- what types of business are you looking at in the RV business that you needed to get that additional facility for?

Well, you listen well, Jamie. This is John Sztykiel. That additional volume in the RV business will actually be increased value add where we are doing more work for our current OEM partners. Think of an RV chassis, it flows into an RV plant, then they have a station, typically the first station is chassis prep, but it basically takes the chassis and do a lot of work to get it right for the body because Spartan Chassis has been noted for very, very good inventory turns, very, very good engineering, timely turn of materials and labor, etc.

OEMs are starting to realize that Spartan Chassis can improve their balance sheet and become a significant strategic partner by our allowing Chassis to do more of the value add or the chassis prep here at Spartan Chassis rather than at their facility.

Due to time constraints, that will end our question-and-answer session today. I would like to turn the conference back over to John Sztykiel for any additional or closing remarks.

All right. In closing, I do appreciate your support, but also to make no bones about it. None of us were happy with the earnings, me included. But at the same time too, as I mentioned earlier, when presented with the decision do we increase capacity and first save lives and ensure our opportunity to compete tomorrow or focus short term on the earnings, I have no doubt we made the right decisions.

And as we look forward, we are excited about the future. We have some stretch targets, we have some stretch goals. Honestly it is not going to be easy to do all that we want to do, but as I look over the next 12 to 18 months, I see nothing out there that says we should not be able to be in line with what we have been doing over the past five years and that is to grow the income at least 36% and to grow the revenues at least 19%. Thank you very much and have a great day. Bye.

Thank you. That will conclude our conference call today. You may disconnect at this time.