Shyft Group Inc (SHYF) 2007 Q4 法說會逐字稿

Good day, and welcome to the Spartan Motors fourth 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.

Thank you, and good morning everyone, and welcome to Spartan Motors fourth quarter and year-end 2007 conference call. I'm Jeff Lambert with Lambert, Edwards & Associates, and I have with me today several members of the Spartan Motors management team. John Sztykiel, Chief Executive Officer; Jim Knapp, Chief Financial Officer; Karen [Morrow], Vice President of Finance; and Dave Reid, Spartan's newly-appointed Vice President of Public Affairs and Brand Management. I assume all of you saw the earnings release on the wire or the internet. I want 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 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 operational results for each business segment and the outlook for 2008. Jim Knapp will then discuss the financial results for the quarter. And then, Karen, Dave and the rest of the crew will be here to answer questions.

We will conclude the Q&A session. And with that, I'd like to turn the call over to John Sztykiel. John?

All right, Jeff. Thanks so much. First of all, good morning and thank you for being here, and listening on the internet. Some of you are on the West Coast, so therefore you are waking up very early.

Today, we're going to keep our comments a little bit shorter in the beginning to allow more time for Q&A. We've listened to your comments from the past call and we're quick learners. The fourth quarter of 2007 was a great way to close a record year. It was the year of rapid sales growth. However with this increase in sales, in the backlog, we needed to increase our production capacity. And with this ramp-up in capacity, there was definitive pressure to our margins. Something we're focused on reversing in 2008, but it's not going to be easy.

In 2007, we increased our capacity in Spartan Chassis by 177%. And when we combine the sales growth with the increase in capacity, that's an astounding achievement I wish to compliment Rich Schalter and all the people at Spartan Chassis, and really and absolutely fantastic year. It's also important to remember that we are a mass customization model. Therefore, it's almost virtually impossible to have a clear linear succession of growth in earnings in this type of model. As we went through the growing pains of the third quarter, margins improved in Q4 versus Q3. The cash conversion cycle improved in the right direction as well, a double digit increase on the positive side.

Looking at gross margin percentage of the fourth quarter while it was down year-over-year, it was up nearly 8% over the third quarter of 2007. Obviously not great, but moving in the right direction. We are very focused on gross margin improvement. However, and Jim will comment a little bit more on this later on. The model mix competitive pricing will make it a challenge to continue this improvement in 2008.

During the fourth quarter, we realigned some of our operations in Michigan, South Dakota in terms of human resource and head count to meet our anticipated needs in 2008. We are now a bit leaner today than what we were three months ago. We've also added some support though in our service, parts, and accessories area as this business continues to grow in almost triple-digit kind of format from a percentage perspective.

Taking a quick look at our segment results for the fourth quarter and year-end, Spartan Chassis represented 89% of Spartan Motors Inc.'s consolidated sales in the fourth quarter while the EVT made up the other 11%. The chassis focus on 2008 is an improving margins, especially in light of some difficult margins or I should say market conditions. We continue to have an excellent relationship with Force Protection, BAE Systems, and General Dynamics Land Systems. We also expect additional orders in the near future from our military partners, and excited not only about the hardened military vehicle market today, but we are very excited about the opportunities in 2009, 2010, and beyond. As mentioned on every call, we can't talk about military orders until we receive the PO from the customer. When we have the PO, we will issue a simple press release as soon as possible.

And as we look forward, we see no reason to see any difference in the future relative to past performance. And honestly, as I said earlier, we have very, very good relationships. On service parts and accessories side, sales increased almost 240% over the same quarter in 2006. Part of this is being driven by the growth in just number of Spartan users of products out in the marketplace. And us having what I would call a more effective business model of operations in 2007 than what we did in 2006 or 2005.

The second fact is we're now starting to see a significant increase in the service parts and accessories business from the military as the units which Spartan has been associated with are start or -- are being put in service whether it be in Iraq, Afghanistan, or other parts of the world. We expect this growth to continue in 2008 as well.

RV sales increased in the fourth quarter despite a flat industry of wholesale shipments. This is a reflection of our growth and market share within the luxury motor home market, but also a reflection of the strength of the Spartan brand. You know, if there is something -- and again, 2008 is going to be a tough year for the RV industry. That I have no doubt.

However, 2007 was a tough year for the RV industry. And Spartan was able to buck the market trend through the strength of its brand by doing the right thing, building a product that performs and having great customer-first service. And again, while 2008, I believe will be tougher than 2007. On the positive side, we've got the strength of the brand. On the other positive part of the side, we've also got the greatest number of models on the Spartan Motors Chassis ever, being 40. But it is going to be difficult in 2008. I'm not going to argue that.

From a fire truck chassis perspective, sales increased in Q4, though the backlog decreased. Part of the reason the backlog decreased was one, due to a softness of the market. Second, due to some of the emissions changeover. And third, due to an inappropriate, inefficiency of production. So those three items, one represented efficiency improvements that which obviously contributed in part to the margin improvement. But the other two items the softness of the market due to municipal budget under pressure and the market soften due to a [27 preline]. There's still a little bit a hanging over there.

From an emergency vehicle team perspective, Crimson Fire and Road Rescue both made progress operationally. However, I won't say this. We're extremely disappointed in their range of progress. We are excited about their potential for 2008. The back logs are moving in the right direction as we look at order intake in the first quarter of this year. However, the focus on those three business units is increasing. However, the wisdom of the leadership team is definitely improved versus where it was six months ago.

On the other hand, too, another very positive but I shouldn't use the term "other hand," Crimson Fire, Crimson Fire Aerials, and Road Rescue have all instituted price increases for 2008 which help us in the second half of the year. Actually, the ambulance market is strong enough right now where Road Rescue is considering another price increase. Because while the demand for fire trucks is a little more difficult than the demand for ambulances, part of it is as more of us get older, more of us are going to take a ride in an ambulance whether we want to or not. So, our fire trucks may be a soft-pricing market. The ambulances are a hard-pricing market.

As we look ahead to 2008 in the foundations for growth, there are several challenges in front of us. One of them is the economy. That in the Consumer Confidence Index, that obviously is having an effect on the RV industry and the economy and the reduction in municipal budgets will effect the emergency rescue market. However, from an opportunity perspective in the emergency rescue part of the market, there is a call for help every 20 seconds. Thus, there's demand for the product. It's not like a motorhome, where you can decide whether you want to go out or not. That call happens.

Second, there are some large competitors in the emergency rescue industry that are definitely struggling right now. That's about 15% of the market. And on the positive side, Spartan's Crimson Fire, Road Rescue, and Crimson Fire Aerials are still small enough where they can take advantage of those competitive opportunities.

Next, we're excited about the operational improvement potential at the emergency vehicle team. We also expect to see higher margins for fire truck chassis in 2008. I've talked a little bit about the RV side of the business and the difficulties there. As we look at 2009 and beyond, Spartan today competes in three markets: emergency rescue, RV, military/specialty. Within those three markets, we're currently in seven different niches.

As we look at 2008, we will enter anywhere from seven to eight new what I would call "market" or "micro niches" within those three respective industries in 2008, starting in April at the FDIC Show with new product. We'll be ranging from multipurpose Furion-based fire trucks/ambulance chassis to the Boomer to vehicle outfit in our RV business to a multipurpose ambulance rescue unit between Road Rescue and Crimson Fire and a couple of others as the year goes on. So, while we expect 2008 to be a year of sales and income growth, we're not sitting back on our laurels. We are moving forward to continue the trend in the right direction. So as we close out 2008, hopefully, we are sitting on another record Q4 backlog, which will drive us into the next year.

In closing, I was excited about the year, excited about a lot of the opportunity, but we do have our work cut out for us. We're very focused on efficiency improvements to utilize our cash in an effective manner, which drives the return on invested capital, which drives both shareholder value and stakeholder value.

And in closing, the past is the past. And now, we're focused on Q1 in 2008. Jim?

Thank you, John. And good morning, everyone. You should have each received the press release along with consolidated income statements, balance sheet, and segment results this morning. I'll provide an overview of the financial statements and then we'll do Q&A.

Operating cash flow increased $9.1 million in the fourth quarter of 2007, compare to the same quarter of 2006 driven largely by increased earnings and improvements in the cash conversion cycle. The operating cash flow for the fourth quarter was $2.2 million, and we ended the year with $13.5 million in cash and cash equivalent. Depreciation for the fourth quarter was $1.3 million and $4.1 million in total for 2007. Our effective tax rate was 34.4% for the quarter and 35.9% for the year.

We ended the quarter with $62.7 million in long-term debt, which includes financing for Spartan Chassis' new facilities and growth and working capital to support its increased sales. We expect operating cash flow to increase significantly in the second half of the year, which allows us to make substantial reductions to debt.

Our consolidated ROIC for the quarter was 27.4% which exceeded our company ROIC target of 15 to 20%, and demonstrates what we can do when we have normal production flows. For the year ended 2007, ROIC was 19.8%. We are pleased with both of these numbers which are linked to our bonus program for management and associates, which is based upon an economic value-added financial model.

Our goal in 2008 is to achieve ROIC within the range of 15 to 20%. We repurchased 250,000 shares of common stock in the open market during the fourth quart of 2007. In total, we repurchased 300,000 shares for the year.

In December 2007, we paid a special dividend of $0.03 per share of common stock along with our regular cash dividend of $0.05 per share for total dividend payments of $0.13 per share in fiscal 2007. We feel that dividends are important way to directly return value to shareholders, but we look at ourselves as a growth and value stock. We also try to differentiate ourselves from other public companies by paying dividends.

Looking at CapEx, we spent $31.2 million in 2007. We are forecasting CapEx of about $2 million -- I'm sorry, about $20 million in 2008, which includes some roll-over from the expansion launched in 2007. We expect lower CapEx in 2009 and 2010. I did not foresee the need for the additional capacity increases in the next several years. We are focused on improving margins in all our product lines in 2008. The consolidated margin may decline this year as the military business becomes a higher percent of total sales ahead of the lower margin. The increase in military business does provide us with a good opportunity to leverage SG&A and add to the bottom line.

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

Thank you. Today's question-and-answer portion will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll pause for just a moment to assemble a queue. We will take our first question from Ned Borland of Next Generation.

Good morning, guys. I just had a question about the gross margin. You know, this margin drag, is this more a function of the capacity coming online? Or is it, you know, the fire chassis have the highest margin, I mean, is it -- or is it more mix? I guess is what I'm getting at.

I would say it is more mix, Ned. I think we saw significant improvements in our military margins because of the improved component flow. But the military margins do have a lower than the average margins. And so as the mix of the business changes with more military, it's going to have a impact on consolidated margins and it will decrease the consolidated margins. But on the other side, because the military doesn't require a lot of SG&A, we can leverage our SG&A and add more dollars to the bottom line.

Okay. So I mean, if you're looking at SG&A as a percentage of sales going forward, I mean, is it going to stand basically? You know, is it going to trickle down by or is it going to kind of remain flat?

Well, it should decline as the business grows in sales. As percent of sales, it should decline.

Okay. And then in the fire market, I mean, you get the market weakness but you have the potential for share gain. I mean, is it fair to assume that basically unit-wise you guys will be down in 2008 versus 2007?

Hi, Ned. This is John Sztykiel. Right now, I can't necessarily say that. Because Crimson Fire, Crimson Fire Aerials, Road Rescue, and Spartan Chassis are all increasing their production rates in Q2 versus Q1 of this year. And again, part of the opportunity of us as a group of companies is we're still relatively small versus some of the other competitors in the marketplace. And with those -- some of those competitors being about 15% of the market, I think all four business units are doing a very good job working to take advantage of those competitive opportunities. So, there will definitely be less municipal funding. But in the fire truck area, I think there is a very good competitive opportunity. It's not going to be easy.

But the good news is they're forecasting increased production rates on the ambulance side of the business. When I talked not just the Road Rescue but other competitors in the ambulance business model, they all say even though municipal budgets are going to be tighter, there's just a need for more ambulances whether it be public or private. So, I think that where you just get some of this aging population. You know, the calls every 20 seconds, people are going to get hurt or die or whatever. I mean, even Defense Secretary Gates, the other day slipped on a sidewalk and fractured his arm. He needed an ambulance. So, I mean, that is just reality.

Okay. Then, the EVTeam business as collectively, are we finally looking at profitability as a whole in 2008 for those guys?

You know, this is John Sztykiel and I'll be blunt. You know, I have overpromised to that question in 2006 and 2007. And it grinds me like no tomorrow. I think their potential to improve operationally is there in 2008. As I sit here today, am I ready to state that, as a group, they will be 100% profitable in 2008? I cannot state that. I believe the potential to improve is there. However, and we're committed to all three business units. But I can't make the same commitment I've done over the last two years because honestly we nor I have kept that commitment. So, I'm now more cautiously optimistic but very focused.

Okay. Last question on some of these new product launches the Furion and the Boomer. I mean, I guess, would these be in line with the similar product launches that you guys have launched over the years? Or is the opportunity even bigger?

Well, the opportunity is bigger. It's just one thing which to remember in the emergency rescue cycle or I should say business model. It takes about 18 months for a new product introduction to really gain traction. So, the Boomer and Furion, honestly, are not going to be a large part of the sales model in 2008. And really, that's okay. Because we've got the military business and some other things. However, the products which we're launching and even some of the stuff with Road Rescue, et cetera, we don't expect to see much sales or income growth in 2008. But if we do our job properly, we should see that in the second half of 2009 and beyond.

Okay. Great. Good quarter.

Thank you.

Thank you.

We will take our next question from Frank Magdlen of The Robins Group.

Good morning.

Good morning, Frank.

A couple of questions on the gross margin. From what level are you measuring that when you say it's going to be more down a bit because of mix in 2008? Are you using the consolidated 2007 average or using the fourth quarter as a base for that?

I would say that it's mostly -- most of my comparison would be to the year in total.

Okay.

Because of the fact that we had a fairly rich mix in the fourth quarter of military business. And so, that margin will depend on the consolidated basis. It will depend on how rich the mix of military business is going forward.

All right. And whether much in the way of revenue from kit sales in the fourth quarter?

Yes, there were and we expect that to continue to grow in 2008.

Are you willing to quantify that a little bit?

You know, Frank. This is John Sztykiel. I don't think we can quantify that right now because we haven't done in the past. It is something which we are investigating relative to the future because it's becoming a greater significance within our business model. So actually, that is something which we're looking to address as we look at the results and prepare for the Q1 of 2008 call.

All right.

There is a opportunity, Frank, to have a substantial increase in 2008 on that sale.

Okay. When I look at your backlog and lead times, I realize that the RV business has a very short lead times. But what should we expect then in the a way of normal backlog or lead times when you look at the fire truck chassis and EVTeam?

Well, emergency rescue -- This is John Sztykiel. Emergency rescue to normal backlog to delivery time cycle is about six to nine months. You know, one of the things which I think is exciting. And I was excited to see the backlog go down because our cash conversion cycle improved by 28% in Q4 versus Q3. So as a company, the backlog was very large. But what also excited me was the improvement in the cash conversion cycle, which then helped to generate positive cash.

But it means okay. We're becoming more efficient and we know we can gain market share if we have shorter delivery times whether it be RVs, military specialty, or emergency rescue. For example, Spartan Chassis, as I have talked about in the past with Fleetwood in particular, they're not doing more and more of the chassis upfit, which is value add for chassis, but it's also a very positive for Fleetwood because it's a very effective utilization of cash and that is helping to produce a higher quality product with a shorter lead time bringing into the marketplace. So, I'm not sure if I can say what an ideal backlog is.

Personally, I would like to see the cash conversion cycle improvements go up and backlogs come down a little bit. As we do that, we seem to be moving both the sales, the income, and the cash utilization in the right direction.

What are the lead times in this fire truck chassis?

About six months.

Okay.

No, wait. I'm sorry. About 13 to 16 weeks. What I quoted earlier the six to nine months is for a completed fire truck or aerial and about 13 to 16 weeks for a fire truck chassis, and Spartan Chassis is unquestionably the fastest delivery time along custom fire truck chassis in the business. Just like in the RV business, their delivery time of custom chassis range anywhere from 30 to 45 days, depending upon the model again. They are by far the fastest deliverer of custom chassis or chassis period in the RV business.

All right. Just two other questions. The cost of debt might be for the next couple quarters.

The cost of debt. It should be declining, but it's going to be a little hard for me to estimate, Frank. I can probably provide some of the range.

Okay.

Let's see. I would --

But while you are looking at that, the tax rate and then, which to expect any more stock repurchase activity?

Let me add to the interest first. I would say interest expense will probably range $3.5 million for the year. Obviously, that depends on where the interest rates go. Because a lot of our debt is based on LIBOR plus 40 basis points. From a -- to answer your question about the stock buyback, our first priority, Frank, is really funding the growth of the business. As we increase our operating cash flow in the second half of the year as I mentioned earlier, we expect to pay down debt and will consider other uses of cash such as buying back stock.

Okay. And then tax rate?

The tax rate is for next year, I would say it will be around 35 -- between 35% and 35.5%.

Okay. I'll turn it back in the queue. Thank you, gentlemen.

(OPERATOR INSTRUCTIONS) We'll take our next question from Joe Maxa of Dougherty & Company.

Well, thanks. I just want to ask a couple of questions on the military side to start with. The backlog looked pretty good in the quarter given that you only announced one major deal. Can you give us a little more color where the rest of the revenue came from? Did you have another large deal or several small deals regarding parts or maybe it was other specialty vehicles?

You mean from -- and Karen, why don't you jump it? This is Karen [Hildebrant].

Hi. there was some shift from -- I think what the analyst expected in the third quarter for the orders that we took in. Some of the specialty sales actually hit in the fourth quarter that I think many people anticipated hitting in the third, just for the reasons of getting our suppliers up to speed in terms of our run rate. So, I think what you saw is the proportion of the orders we have received. The split was heavy to the fourth quarter.

Actually, I'm just talking about the, you know, if you look at your backlog at the end of Q3 plus any orders you announced, which is one order in the quarter for like $49 million. Less what you shipped in Q4 would suggest your backlog would have been quite a bit lower than it is coming out at Q4. So, I'm just wondering what did you receive for orders in Q4? Was that more another large order that you just didn't announce? Or was that more parts related? Or just a part --

No, that was really more parts related.

Right. We don't announce the other orders that we see another in fire trucks and RV. And there's small military orders that we received two (inaudible) vehicles that we don't include.

Right.

We don't announce all the major orders.

Right. Okay. So, if you look at --

And I think that's a positive. Because one of the things which it demonstrates is that one the growth in service parts and accessories, but also that in the hardened vehicle military market that there are other for lack of a better term "micro niche" products being purchased by the armed services and those orders flow into the business model, but they are so small, we really don't post them.

Right. Right. You did indicate on your -- the event back in December that your service parts and accessory you were expecting about $28 million in sales for 2007. Is that about where it came in?

Actually, it came in at about 33.

Okay.

It's either a very nice quarter. No, very nice year. That was total for the year.

Okay. And then, going forward, you are saying you still expect that whether certain growth rate you started thinking or?

Well, it is too early to forecast the growth. But we expect the number to go up substantially just because as we have more vehicles show up in the theaters of operation, then the increase for service in parts and accessories obviously grows.

One of the other nice aspects is also now, you know, I want to use the term the "excellence" of Spartan Chassis service parts and accessories group. We are now quoting and actually receiving orders from a few other people in the military business that have nothing to do with the MRAP or the hardened -- you know, the MRAP-type of products. So, whether it be emergency rescue or RV or military, something we are very focused on as having the right part at the right place at the right time.

When you talk about expected orders from your three main customers, I mean certainly it is the BAE [US 1200] that they haven't let out. How confident are you going to get those orders as well as the ones the smaller orders left from Force and General Dynamics?

Well, I think we're fairly confident enough to put the statement in the release, which we did today.

Okay. Fair enough. I want -- next, I want to ask about your intercompany sales. It was $1.2 million in the quarter. And so when you look back, it was very high in Q3 compared to historical numbers and then it dropped off drastically in Q4? Was that something to do with timing of shipments? Did you ship a bunch of product into Spartan Chassis to -- maybe Crimson Fire in Q3? And then, it got shipped out in Q4 from Crimson Fire. Is that how you look at it?

Sure. I mean, it's a very good showing. We -- it is all impacted by the units of Spartan Chassis ships to Crimson Fire and the units that Crimson Fire Aerials ships to Crimson Fire.

Right.

And the -- so, there's a timing issue on that. And there's also a mix issue in some quarters. Crimson Fire will produce a higher mix of commercial chassis products than they'll do custom chassis products depending on customer demand.

Would that affect your margins as well? Would there be more costs which would have hurt the margin in Q3 and then given that there weren't many shipments in Q4 that would have benefited your gross margin?

Not necessarily.

Okay.

No. Actually, that was one of the drivers, though, the improvements in the cash conversion cycle and return on invested capital. That obviously Crimson Fire reduced their inventory substantially. Therefore, you know the effectiveness of their operations improved.

So, should we be looking for more historical number going forward?

Pardon?

Should we be looking for more of a historical $6 million per quarter going forward? Or are we going to see this bounce around for the last couple quarters?

That is hard -- it's hard for us to say. It is based on customer demand. I think if you are trying to develop a model, I would focus on historical numbers.

And then Jim, the SG&A was up significantly in the quarter. Is that how much had to do with the bonus versus typical increases, I guess?

Part of it had to do with the bonus. Part of it had to do with the fact that we grant stock appreciation rights in the last quarter of the year. Those are probably two big factors.

What would be a normalized number to look at into 2008?

I would use more -- take a look at more like the third quarter would be more probably indicative.

I see. Okay. Then on the RV side, what you're seeing now -- have you been seeing. I mean, your orders are pretty good in the quarter. But what have you been seeing so far in Q1?

It's been -- I mean in Q1, it is definitely more difficult from an RV retail perspective than what it was in December or November. And I think it varies by pockets of the different geographical areas of the country. I mean, some geographical areas where the economy is still fairly resistant, fairly strong, you don't have for lack of a better term, some of the mortgage or financial crisis impact.

You talk to those dealers. To say like business is actually pretty good because people are seeing a little bit lower cost of financing and a little bit better deals on the product. But as a whole, I won't say this. The RV market will be definitely more difficult at least for the first six months of 2008 than what it was versus the first six months of 2007. You know, if there's one silver lining to all that's going on within Congress and some of the other things is -- you know, the cost of the motorhomes is starting to come down a little bit from a finance perspective.

And so if there is an increase in the second half of 2008, it could be better than the second half of 2007. But right now honestly, that is a little bit too far away. So from an RV perspective, we are very focused on the right marketing, the right dealer relationships to pull through the product and very focused on improving the margins and efficiency of our RV product because it is going to be a difficult market in 2008 versus 2007.

So, it sounds like maybe best case scenario. Your revenues are roughly flat with the first half of 2007 at least the way it looks now? Is it fair to assume?

They should be up, Joe. We expect them to be higher in the first quarter.

Okay. Great.

No. In the first half.

In the first half.

In the first half and part of that is, Joe, while the unit shipments could be down a little bit, our value add is improving. So again, we are focused on not so much units as we are in dollars per unit.

Okay. Okay. Great. Then lastly, I'll just ask you about your whole deliveries from your current customers has. I know it sounds like Force and GD may have been going all right. But has BAE picked up and were through similar issues to get you some more timely shipments?

Well, everybody has improved. Because obviously we invoiced substantially more in Q4 than what we did in Q3. However, if I was asked the question, "Is everybody within the business model operating like a fine Swiss watch right now?" The answer is no. Everybody's still working through logistical issues to improve both the delivery, the production rates and the efficiency. So, there are definitely challenges in Q1, which were working through no different than Q4.

Okay. I got one more question. When you look at the year, how do you see these vehicles shipping out? I mean the delivery dates for the first batch without any additional orders coming in March were mostly around July. But it appears that it could be dragging out. What are you guys seeing or expecting?

Really throughout the course of the year, vehicle shipments, parts will flow in. Vehicle shipments will move out through Q2, Q3 and maybe a little bit into Q4. But right now, it is basically a Q2 and Q3 business model shipment format.

Okay. Great. Thanks a lot, guys.

Thanks, Joe.

We'll take a question now from [Walt Lestek] of [Errington].

Hi. Thanks. Good morning, guys. And congratulations. Have a nice quarter.

Thanks, Walt.

Most of my questions have been asked. But I wonder if I could drill into the gross margin a little bit more. You know, you gave us some color on how some of the product categories might have looked. I wonder if you could provide some more detail, for instance in the EVTeam. John, you know, you sound disappointed. Does that mean that it's still operating at a loss on the gross income level?

Well, on a gross margin level, I don't think that they're in the negative. No, they're definitely in the positive. But you know and that is a step in the right direction.

But the disappointment is absolutely because I have been on this call more than once over the last couple of years and said, "Okay, the EVTeam is going to be profitable as a whole." And honestly, we haven't kept that commitment. Until you know, I'm a shareholder like a lot of other people. And I'm extremely disappointed.

The good news is I believe the management teams are much better than what we were six months ago. For example, Crimson Fire, their inventory reduction in 2007 versus 2006 was about 23%. That's very, very good. Road Rescue reduced their inventory. So, they are moving the ball in the right direction. Is it fast enough? Absolutely not. Have we increased our focus? Absolutely. Because as we look at the emergency vehicle team as $100 million in sales, waiting or in expectation to be profitable. So the focus, the intensity is greater today than what it was 90 days ago or 30 days ago. Absolutely. The ball is moving in the right direction but we have not gotten into the rest zone or into the touchstone end of the line, yet.

So, it's slightly profitable low single-digit gross margin and it should keep getting better in 2008. I wonder if you could do the same thing on motorhome. You know, you talked about new model wins and some of the value add that you're doing. Where was the gross margin during the quarter? And where do you think it could go?

You know, and what we really can't disclose that just because of competitive situations. We don't get into specific gross margins of the fire trucks, the military chassis, or the motorhomes. Other than the fact, I believe we have opportunities to improve and we are focused on that. But I can't get into specific ranges because then to be quite blunt, our customers or our competitors will know exactly what our costs are.

Okay. Fair enough. But one of the things I think you really need to drill into is what the military gross margin looked like. I mean, it was in the prior quarter -- you know, in the third carter, it was low and that's because of the ramp. It sounds like you are in the double-digits at least in this quarter -- in the fourth quarter.

I think you could make that assumption, Walt. There was substantial improvement in the margins on the military side because we had a pretty good flow of components in the fourth quarter. As you can see, we shipped a lot of military units, especially in the month of November and December. And when we can have a system component flow, we can have a very high level of efficiency and production.

Okay. All right. Can you talked in this quarter, too, about the richer mix? So, the expectation is that we are not going to -- is this the peak margin that you are about getting military? Or are we going to see military margin come up as the flow of components gets better?

I think as long as we have a good flow of components and we are always at risk there to some extent that there might be interruptions with component flow. But as long as components continue to increase, I think we can improve efficiency and improve the margins on the military.

Fair enough. And then just to switch gears to your commence, John, about the second quarter of production, I believe in Crimson and in the fire chassis business. If the backlogs are down, how are they going to be -- where are you getting the visibility that production is going to be up in the first half of 2008, especially in the second quarter? Or did I hear that wrong?

Well, the backlogs were down again as of Q4. But the order intake was good in January. And based upon expectations, as we look at quote activity and bid activity and honestly competitive capture opportunity, you know, it is good. We have had one large competitor.

About 300 units a year declared Chapter 11 a couple of weeks ago and now I feel sorry for those individuals. But honestly, the distribution groups of Spartan Chassis, Crimson, and Road Rescue, as a lot of other people, are very focus on going to those cities in the current contracts and saying, "Okay, why do you want to keep an order with a company that is now in Chapter 11? Recognizing your purchase is a 3- to 5- to 15- to 20-year purchase?" So --

All right. Do you have dealers where American LaFrance was strong?

Absolutely.

Okay.

I get really -- you know, that's why -- I wish to compliment Spartan Chassis and the other [SVUs]. They recognize a competitive opportunity and everybody recognizes the emergency rescue market for fire trucks will be more difficult in 2008 because of just the drop in municipal spending. You know if you think about 15% of the market in a state of flux. That is a tremendous opportunity. It is I really compliment those SVUs having a very, very direct focus for saying business is normal. Now, they're focused on trying to take advantage of these opportunities.

Okay. Okay. Thanks, guys.

We'll take a question now from Brian Rosenhouse of Sidoti and Company.

Hey, guys. Great quarter.

Good morning, Brian.

Good morning. I guess my first question is -- I know that you don't release all military subcontracts. There's $199 million figure from fourth quarter 2007. Does that include the October and December MRAP orders from partners, BAE and Force?

The MRAP orders for BAE, the 1200 they received are not orders that we have issued a press release on yet. We haven't received those orders.

They're not -- they would not be reflected in our backlog. The only thing reflected in our backlog numbers are those orders where we have actually received the contracts on.

Exactly.

Okay. I guess given the fact that in the press release you mentioned military backlog being filled by October of 2008. Do you see that there is a chance that could get pushed back with slight delays from your partners. I guess my real question is like what do you expect in 2009 in terms of sustainability of these military subcontracts?

Well, one, it could get moved back obviously if there is delays in the shipment of components, et cetera. It also could move out into 2009 as Spartan Chassis continues to receive orders. So, we, as a group of companies, in Spartan Chassis in particular, do not believe that the military market for hardened vehicles is going to disappear.

Will it downsize some in 2009 versus 2008? Absolutely. Will service parts and accessories grow in 2009? Probably versus 2008? We believe it to be so. However, we don't believe that the hardened vehicle market will disappear 100%. Products and niches will probably shift or change some and Spartan looks forward to working with their partners in a long-term manner.

All right. I guess my last question is I mean, do you see a chance at 2009 could be as richer as 2008? Or do you definitely see a decline occurring?

Well, I think you know again I believe RV will be up versus RV in 2008. I believe emergency rescue will definitely be up versus 2008 for one simple reason. In 2009, you are going to start to get a lot of pre-buying of vehicles again because in 2010 there is a major emissions change. So, you could see increase to 20 to 30% in emergency rescue in 2009 versus 2008 similar to what transpired in 2006 for emergency rescue.

Again not just for Spartan, but for other companies as well in emergency rescue. You know we expect to see a decline in military vehicles shipments. We expect to see growth in service parts and accessories. Plus, we've got these seven new product niches. So as I sit here today, I believe we've got the opportunity for top-line growth in 2009 versus 2008. The answer is yes.

Excellent. Thanks a lot, guys.

Thank you.

We'll take a question now from Kathryn Thompson of Avondale Partners.

Hi. Thanks. My questions are primarily focused on the RV segment. First, are you seeing any pricing pressure from some of your RV partners like Fleetwood and Newmar? And any color on that it would be helpful?

You know, Catherine, we are not seeing pricing pressure. Where we are seeing pressure is one to reduce the cycle time of the product, okay? Because everybody is trying to reduce their exposure from an inventory perspective. So, we are seeing a lot of focus there. We are also seeing probably greater focus on some change or modifications to both chassis and product platform plans. And again while the RV market is going to be soft, people still expect about 30,000 Class As purchased this year. They expect vehicles to be a significant number. And so, I think we're seeing -- it's the pressure. Okay, let's reduce the cycle time. How can you make some changes in the chassis to take advantage of this segment of the niche where there is excitement and definitely customer pull through whether it is geographic or particular product segments? But honestly, we are not seeing push back things. Hey, guys, you've got to reduce your prices to sell more product.

How does the reduction cycle time any patch of margin does it at all?

Well, actually, it probably improves our margins. Because that means we are becoming more efficient. I mean, when we reduce our cash conversion cycle, we reduce our lead times whether it be a fire truck, an ambulance, a motorhome, a military vehicle. I mean, you almost see direct correlation in improvement in growth margins.

We reduce our working capital. That process as well does lower our interest rate.

Sure. Yes, absolutely. And then on -- are you seeing any changes in the market share, particularly again from your top two customers in the motorhome segment? And are you -- I would assume that you would benefit from this. In particular, any comments you have about Fleetwood and their revamped motorhome products.

Honestly, we cannot comment. That would be inappropriate whether it be public or private to make a comment. Other than the fact, they are great partners and they're very focused on gaining competitive market share. Other than, that we really can't say anything. It would be inappropriate.

Okay. Great. Thank you very much.

And we'll take our next question from Steve Barger of Keybanc Capital.

Hi, good morning.

Good morning, Steve.

I want to go back to the American LaFrance situation. Did that bankruptcy result in an increased in finished truck inquiries? And do you or the dealers have a rolling stock inventories that you can be competitive with in the short term?

Well, this is John Sztykiel. Jim or others cannot -- we really can't comment on the cause of their bankruptcy. I mean, other than what they have put out over the wires and what was in the Wall Street Journal. All of our business units did increase the production of what I would call "stock/demo products," as they anticipated something like this happening. And those stocks/demos will start to roll into the marketplace late Q1 and Q2. Now, it's not a large number. But the opportunity is that you have existing customers or past customers who are thinking about a product.

Now, your number one competitive advantage is to reduce your delivery time. So you know, there is an opportunity with the stocks. The companies did that. However, it is not a huge number. That is why you see the focus on reducing the lead times from when the order's placed to when the product's shipped. That is your greatest competitive opportunity.

Okay. So you haven't seen conquest sales yet then. It sounds like. Are any of your dealers overlapped with American LaFrance dealerships think they can get permanent market share gains? Or is it too early?

Too early. To give you an idea and again, these are orders. But it give you an idea in one geographical area, a dealer again for Crimson. And I know this is representative of other dealers, there are non-Crimson around the U.S., has 33 aerial opportunities working in an area where last year at this time they had four. And again, it's not just American LaFrance, but there are some other companies that produce aerial that are struggling in the marketplace.

So when you buy a product, whenever a company gets within a state of flux. What happens is customers start to look elsewhere because they buy the product, not just for one year, they buy it for three, five, for some of these cities. A lot of these cities, it's a 15- to 20-year purchase. One thing which we did right with Road Rescue and we are still working through it. But nowhere did the market or end user perceived they are either going to be closed or we were going to sell them or whatever.

So therefore, their order rate went down a little bit but has henceforth rebounded. You know, so I think, it's not just out. That's a great opportunity. But there is others out there which not just Spartan or Crimson-related taken advantage of. There is a lot of people within the industry.

Okay. That kind of leads me to my next question which is a little bit conceptual. But we know we have emissions standards coming up. But also NFPA standard in 2009, I think that is going to drive chassis costs and complexity. How much opportunity is there from changing standards with respect to further migration of the smaller fire OEMs towards you or another custom chassis competitor?

Well, I think one. You know your statement both extremely well for the Furion. I mean, the Furion is the lowest-priced custom product out there. Spartan is taken a very, very what I would call, I don't want to use the term "cautious" but I would call a "deliberate market introduction process" to insure the right product at the price with the right quality and the customer service. But typically the emission and an increase in complexity from a standard, whether it be RV or emergency rescue or whatever, has been a market competitive opportunity for Spartan because 11% of our work force is in engineering.

So, where others cannot change their product to adapt changes because of government or industry regulations, we've been able to. For example, within Spartan Chassis in the last emissions change, they did not drop one engine offering, while other fire truck OEMs who built their own chassis dropped several engine offering. And that allowed Spartan Chassis to gain market shares. So, honestly while NFPA change and the emission change will definitely be a challenge because it is not going to be easy and engineering probably doesn't like it. The reality is like we have been in the past we should come out with greater competitive market share in 2011 than what we start in 2010.

Yes, I would agree with that but that implies to me that custom chassis in the marketplace becomes less of a competitive advantage of these other fire OEMs to migrate to your chassis or whoever and that means nonchassis are indeed becomes more the focus for fire equipment sales growth. So thinking about that strategically, where is your real focus? On organic growth in Spartan Chassis or continuing to find the competitive edge in Crimson? Are they mutually exclusive?

No, it's really everywhere. You know the interesting thing, Brian, the data would illustrate because we have been through several emission changes and NFPA changes, whether it be RV emergency rescue. I mean, the reality is 10 years ago, we were probably building 500 units a year. You know, this past year we were almost 10 times that. So as the products have become more complex, and the business models become more customer-centric. What's interesting is great or -- Steve, I'm sorry, greater market niches or an increased number of micro niches developed, which bowed well for Spartan, whether it be emergency rescue, RV, or military.

So actually, you know, complexity is a benefit. Because we have been able to address it in the past. I will say this. If there is one thing where we are definitely more focused on today than what we were two years ago is reducing the weight of the product and reducing the cost to assemble, which is not just building materials but all the processes internally because we know that if we can reduce the cost of bringing a product to market, we could really gain substantial market share in 2010 and 2011.

All right. Thank you.

A question now from John Rogers of Ferris Baker Watts.

Good morning.

Good morning, JC.

Just a quick question on the fire truck chassis market. You saw a pretty strong growth sequentially in what is normally a seasonally slow quarter and based on the backlog that was in the face of slow order growth. I was wondering what led to that strong sequential growth?

Well, as we look at it, I mean, really it was just an increase in through put. But I wouldn't classify it as strong. I would say you know, it was an improvement in the right direction. I wouldn't classify it as strong. Now, service parts and accessories were up over 200%. That I would classify as strong. I would say it was moved in the right direction just like some people would say on new improved gross margins 8%. Some people perceived that to be strong. I would say we moved the ball in the right direction.

Then as John said earlier, we do see some positive trends in the emergency rescue markets and that is why we have increased our capacity in the second quarter.

And again, while we are doing this, municipal budgets are coming down from a spending perspective. So, I don't want anybody to perceive that Spartan believes there is going to be more money in 2007 versus 2008. I said no. The answer to that is definitely no. Our biggest opportunity is the strength of the brands but also this competitive flux of about 15% and how do we make the right operational decisions to take advantage of this in 2008, rather than just assuming it's going to be a tough year.

My question was, generally in the fourth quarter, you see a decline. You close down for the last two weeks of the year. Did you not close down this year? Or did you just have a --

We usually close down for one week at the company's -- during between Christmas and New Year. This year because of the fact that the military business was -- the orders were very strong. We worked lots of overtime on the military side of the business during the fourth quarter and through the holidays. We did not shut down the military side.

So, you just increased your production of the fire truck chassis in the balance of the quarter?

Well, we.

I think, part of what you are saying too is our average selling price in the fourth quarter. We had a mixed thing on the fire truck side where we are heavier toward our higher end fire truck. So, some of that average selling price is playing in the numbers you are seeing as well.

Okay. Thanks. Then also in the fourth -- I was wondering what percentage of 4Q 2007, especially vehicle sales were to the hardened vehicle market outside of the MRAP program?

That is something we don't disclose.

Okay. And then finally, I missed your CapEx and depreciation numbers for next year.

Sure. Let's see. CapEx for next year or for 2008, rather, we expect around $20 million. And depreciation, you were asking depreciation for the current year or an estimate for next year?

For next year.

An estimate for 2008? I would say this is once again I'm going to have to give you a range because I would say in the $5 million range for 2008.

Thank you.

Would you take one more question, operator?

We will take our next question from Jamie Wilen of Wilen Management.

A couple quick questions at the end. Part of business you said was $33 million in 2007. What was it in 2006?

It was about $10 million.

$10 million? Okay. And RV around 40 models. What was it a year ago at this point in time?

36.

36? Okay. In emergency vehicle, you said you had some price increases. Could you quantify what they were?

They would be in the ranges of about 2.5 to 4%, Jamie.

Okay. Let's see. Couple of other quick questions. Working capital obviously from the growth of the business inventory account receivable is up $90 million in 2007 versus 2006. Where would you expect those numbers given were current level of business to end 2008? Do we need anymore -- do we need any additional working capital or will that stay pretty confident these levels? Or can we actually reduce that?

I think it's going to go up to some extent in the second quarter, Jamie, as military business grows. Later in the year, as the business tends to flatten on the military side, I think we are going to see a declining working capital and we'll be generating more operating cash flow and paying down debt.

By the end of the year do you expect receivables and inventory to be less at end of 2008 than it was in 2007? Or no comment at this time?

I would say it will be down, yes.

Okay. Lastly, on emergency vehicles as well, with American LaFrance, you didn't supply them in any chassis or do you or did you?

No. no, we are direct competitor, a chassis direct competitor

So if you pick up the business for somebody else to accept the business, there is an opportunity chassis-wise in addition to vehicle-wise?

Absolutely. There is a huge job opportunity chassis-wise.

Okay. And then, last question is what are the opportunities overseas within all your businesses? I mean you have a product you basically do domestically but you have a lot of expertise. Are there opportunities outside the United States?

You know, there is opportunities whether it be in the military. For example, the domestic product which has been where we have worked with Force Protection on. They are a great company. That's gone overseas. There is opportunities from an RV perspective in certain parts of Europe with certain OEMs. Spartan Chassis is talking to.

We probably sold again it was a small number, less than ten. But we sold the greatest number of fire truck chassis to China over the last couple of years. From a product perspective, the Furion is a tremendous product from an overseas perspective, especially for emergency rescue and other specialty vehicles. If you look at the exchange rate of the dollar versus the Euro and it also has a European design, it's a very, very appropriate product. I won't say this, the business unit Spartan Chassis is doing the right thing to talk to people, developing the relationship. Haven't really shipped anything yet because they want to make sure that the product is right and they are able to judge that close to home.

Crimson Fire actually about 15% of their bodies, now 10 to 15% actually go overseas right now as they actually produce just raw bodies and ship them to a couple of OEMs that actually turn those into complete fire trucks. So, they've got a small road going forward. They look to grow that. They've got a definitive arrangement on the Boomer. That is actually very attractive overseas and they are actually working on developing some what I would call "demo or prototype contract" to ship probably in Q3 of this year. There is some large emergency rescue shows in Europe and Southeast Asia in the third quarter of this year.

Road Rescue, right now honestly, they are not focusing on it at all. They have got enough opportunity to improve their performance within the core North American market that I don't want really them going overseas. If it is to reduce the cost of the business, improve their efficiencies, great, they have had a couple of trips overseas. If it is to chassis sales overseas, honestly they are staying very focused on improving their margins internally.

Okay. Great. Lastly American LaFrance was in trouble. Any other -- you said 15% of the market was struggling with it. Are there others besides or --

I mean, there are definitely others out there that are struggling from a competitive perspective. I really can't comment on the names other than the one company that made their situation public. But there are definitely companies struggling. It is the greatest amount of struggle I have seen in the emergency rescue market over the last 22 years I have been in this business. However, it does not surprise me.

In the emergency rescue market, there has to be some consolidation because the vehicles are becoming more complex, costs are going up. And if you are not investing in the engineering to produce the right custom products at a reduced cost base that meet the new standards, you are either going to be industry or market obsolete or nonprice competitive.

Jamie. We are going to cut it off now.

All right. Thanks. I appreciate it.

John, will I conclude?

Well, in closing, honestly, I want to say thank you. Hopefully, we increased question-and-answer time. It was more fruitful than what past calls have been.

You know, while we are cautiously optimistic about 2008, and we have got you know a record Q4 backlog and many companies cannot say that we also know we have a lot of work ahead of us. And as a company, we really don't take the time to enjoy the past so we are really focused on executing today and tomorrow. Thank you very much.

And that does conclude today's conference. We thank you for your participation. Please have a good day.