Shyft Group Inc (SHYF) 2008 Q2 法說會逐字稿

Please stand by. We are about to begin. Good day and welcome to the Spartan Motors second quarter 2008 earnings conference call. Today's conference is being recorded. At this time I would now like to turn the conference over to Jeff Lambert. Please go ahead, sir.

Thank you. I'm Jeff Lambert with Lambert, Edwards & Associates. Welcome to this morning's conference call. 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, Vice President of Public Affairs and Brand Management.

I assume all of you saw this morning's release on the Newswire and the Internet. We 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 on 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 and the outlook for the future. Jim Knapp will then discuss the financial results for the quarter. And Karen and Dave will be available for the Q & A session. We'll conclude with that Q & A, at which time the operator will instruct you on how to enter the queue. With that, I'd like to turn the call over to John Sztykiel. John?

All right, Jeff. Good morning to those that are listening today. I appreciate your time. Before we get into the results, as an individual, as I stated on the release, as a Company, as we look to the future, we're optimistic. We're cautious. But what you saw in the second quarter, as we look into the future, is our multiple-market, diversified business model with a flexible manufacturing structure provided very, very solid results.

And the interesting thing is, while the rise in fuel prices will definitely cause some hardships, vehicles will change. There will be a restructuring in society and that will happen fast. And over the past 33 years Spartan Motors has taken advantage of that restructuring. We've either led the evolutionary change or we've anticipated the evolutionary change or we have reacted to the evolutionary change. So what's interesting, as I sit here today after being 23 years within the Company, probably going within the most difficult economic time period we've seen in the last 20 or 30 years, I'm more optimistic about our long-term opportunity and our short-term opportunity being 3 to 5 years and over the next 12 to 18 months than what I've been in the last 23 years.

So starting with the results. We reported net sales of $197 million, an increase of 29% compared to the second quarter of 2007. Earnings of $0.32 per share, increasing 60% versus last year. Consolidated backlog of $320 million, increasing 10%. Return on invested capital of 28%, increasing 23%. Gross margin of 17%, an approximate increase of 10%, our third quarter in a row of improvement in the gross margin area. Obviously the focus on effectiveness, efficiency, a Lean operating methodology throughout all of our business units, is bearing fruit. Last, we had an operating cash flow of $35.3 million.

We mentioned earlier in the release our earnings of $0.77 per share for the first six months of '08 surpassed our earnings of $0.75 per share for all of 2007. Honestly, not many companies can say that; we take great pride in that.

The second quarter was also another illustration again of our flexible manufacturing model. From a negative perspective, and again it's really not much of a negative; it's really just a shift. Because of some design modifications and improvements of the latest MRAP models and the related parts delay, we had to shift most of the production scheduled for Q2 for a significant group of orders into the third quarter and fourth quarter of 2008. The order is still in the backlog and we expect to produce all of these units in the second half of 2008. And again, this is not unusual. As we have seen in past quarters, military vehicle production can be difficult to forecast month to month as the suppliers of these vehicles are involved in a new design. You have design. You have engineering. You have procurement. And sometimes this ramp-up takes a little bit more time than anticipated. However, our focus on operational excellence and as moving forward with our customers, this shift will go from Q2 over to Q3 and Q4. And so we expect actually military volume to flatten out into a more consistent pattern in the second half of '08 versus the last three to four quarters.

Let's switch over from an RV perspective and the Class A motor home market is a challenge, as is the RV market is a challenge. As Dr. Curtin from RVI in the University of Michigan recently indicated, the next 12 to 18 months are going to be very difficult from a consumer spending perspective, due to some issues with the economy -- rising fuel costs, reduced home values. It will take some time to work through this. However, the Company -- we're very focused on innovation. We're very focused on working with our customers. And we're very focused on bringing models and products to the marketplace that compel the customer to buy and to do it fast.

So is this a challenge? Absolutely. However, and despite all of these challenges and a focus on bringing new models to the marketplace, we've maintained significant control over our cost structure. We've adjusted our operating structure accordingly. And the second quarter is an example of how quickly we can ramp up or down, based upon market conditions.

As mentioned earlier, society in general is becoming more customer-centric, demanding specific experiences that are tailored to individual wants and needs. And how are we posed, or how are we able to take advantage of the evolution, to lead it or react to it? Again, it drives back to the fact that within our group of associates, approximately 1,500, 10% of the workforce is in engineering. Where other companies get bogged down moving through the engineering tasks to bring innovations or exciting products to the marketplace, Spartan is able to move through it much faster.

From a core competency perspective, our customer-centric vehicles bring speed to the marketplace. The flexible design, the disciplined material logistics, and all of this you saw come to fruition again in the second quarter as demonstrated by our third quarter in a row of gross margin improvement.

And as mentioned earlier, when you combine the two together, the diversified business model, the flexible manufacturing structure, we're excited about the next 2 to 5 years and the next 12 to 18 months. There will be bumps along the way though and it's not going to be easy to work through, especially in the RV arena.

However, another positive is the emergency rescue. As I mentioned on the last call, we expect the second half of 2008 to be better than the first half of 2008 from an emergency rescue perspective. And as I sit here today, I expect that to hold true. The backlog is stronger, i.e., larger. We saw improvement at Spartan Chassis. The emergency vehicle team as a whole posted a 25.2% improvement in the segment's bottom line versus Q2 '07. So we're moving the ball in the right direction, both from a sales perspective and a bottom line perspective, as we look at the emergency rescue market.

Now let me just take a few minutes to talk about the segments in particular. Spartan Chassis represented 92% of the Spartan Motor sales in this quarter, while the EV team made up the other percent. I've already talked quite a bit in a detail relative to the military, so I'm not going to spend really much time there, other than the fact there's been a lot of press lately talking about the need for vehicles now for Afghanistan. And what's interesting is it appears some of the shift is going from Iraq over to Afghanistan. And something which I think is important to note is the terrains are different between both countries. In Afghanistan you've got a very hard terrain. You've got a rocky terrain. You've got more mountains, et cetera, which means the vehicles will probably have to have a lower center of gravity. There may be the opportunity for less IEDs because there is more rocks, less sand. How does that bode well for Spartan and other people who are participating in this market segment, being MRAP or mine-blast-protected vehicles? The vehicles will probably have to change some because the terrain is different. The competition or the enemy is different and that bodes well for us.

And as I mentioned earlier, some people perceive that from a military perspective that while our business is expected to decrease some in 2009, which we concur. We see ourselves being a long-term player in the defense marketplace. On another very positive side, relative to military and service parts, accessories as a whole, the business increased 160% year over year in Q2.

And I mentioned earlier from an RV perspective, it is a difficult time. Class A sales fell a remarkable 40% year over year in May. And again, the products will have to change. If the products don't change, you will see these same kind of numbers, or possibly worse, as the future moves on to reality. However, Spartan is committed and we're focused on working with our customer base to change our products quickly to react to opportunities in the marketplace. Because the market hasn't disappeared; it's just much smaller right now.

On another very positive note, RVIA recently posted the results of a study showing that a typical family on an RV vacation will spend 27% to 61% less than what is spent on other types of vacations. The reality is when you take a vacation in a Class A diesel or a towable, it is a less expensive vacation than many other methods, whether it be staying in a hotel, a timeshare, a cruise, et cetera. North America is still one of the most beautiful places on the planet and the RV lifestyle gives people the opportunity to go wherever they want, whenever they want. in a very, very affordable manner.

Let's switch over to the emergency rescue market. While sales were down for fire truck chassis at Spartan Chassis, our profitability was better year-over-year. Again, the focus on Lean is producing results. As we look at the production rates in the second half of 2008 from a fire truck chassis perspective, we will build more fire truck chassis in the second half of 2008 versus the first half of 2008. In addition, as we look at fire truck chassis, and I should say fire truck bodies, Crimson Fire and Road Rescue will be building more products in the second half of 2008 than the first half of 2008.

In addition, we have some new products which will be coming to the marketplace, actually being displayed this week at a show in Baltimore where, literally, this is Crimson Fire's and Road Rescue's first joint combination effort into the first-response, all-calls part of the marketplace. It is a combination fire truck pumper/ambulance for less than $185,000. Once every 20 seconds there is a call for help. Budgets are getting tighter. As budgets get tighter in any marketplace, people then look to increase the amount of which they can do with a particular tool, whether it be a vehicle or whatever, than what they had before. This product, the first-response all-calls product, FRAC as we call it, can carry six people, a patient, is a rear pumper and can facilitate a fire as well. So in essence, a fire department no longer has to be one unit down. This product is truly revolutionary and I'll be in Baltimore tomorrow, excited to see the market's response.

As we look ahead to 2009/2010, obviously we're watching fuel prices, the consumer confidence level, the tax base and materials pricing. I will say this -- from a materials pricing perspective, whether it's Spartan Chassis, Road Rescue or Crimson Fire, all three business units or all four business units, including Crimson Fire Aerial are on the proactive side of the fence from a materials pricing perspective, which is another reason why you saw gross margin improvement the third quarter in a row. We are not going to put ourselves in the same position we were in in 2004 where earnings dropped off dramatically, gross margins dropped off dramatically in that we did not monitor, follow the price increases the way we should have from a materials -- bill of materials perspective and pass those onto the marketplace. The other nice thing which you're seeing is that sales have gone up and our prices have gone up. What that demonstrates is we're bringing products to the market that compel the customer to buy. And they're actually paying more for our products under the Spartan Motor group of companies.

As we look to 2009/2010 another big positive from an emergency rescue perspective is next year and late this year we should see pre-buys from a 2010 emissions changeover. In 2006, late 2005, we saw a significant increase in emergency rescue orders, approximately 50% over a 12 to 18 month time period prior to January 1st, 2007, as municipalities purchased products to take advantage of a lower cost prior to the 2007 emissions changeover. We expect to see that happen again in late 2008/2009. Do I think it will be at the same 50% increase? Honestly, no. Do I think it will be somewhere between 25% and 40%? That's a range I feel very comfortable with. So from an emergency rescue perspective, we expect the second half to be better in 2008. We expect 2009 to be even better than 2008 as a whole.

As we look to the military area, we expect to see vehicles to change as the products are shifted from Iraq to Afghanistan. We expect Spartan's core competency of speed, engineering excellence and a customer-centric philosophy to bode well for us. In addition, we've had some much smaller orders, orders that are too small to warrant an individual press release. However, that's one of the reasons why you've seen our backlog grow versus last year at this time.

And last, from an RV perspective, it will be challenging. And that's probably the most difficult market segment which we're in today. But in closing, I have no doubt that by the time another year rolls around, Spartan Motors will be into at least one other major market segment. So it will not just be RV, emergency rescue and defense. There will be one other major market segment. Why? Vehicles will have to change as society changes. Our challenge right now is not creating opportunities to be in front of us, but determining which of the opportunities that represent the greatest opportunity to increase both shareholder and stakeholder value.

In closing, we had a very solid quarter. We're excited as we look to the future. However, there are some definite economic issues which cause our optimism to be cautious, as well. However, we will manage our business model the best way possible to insure we get through this, so over time we represent growth and opportunity from a stakeholder perspective. Jim?

Thank you, John. And good morning everyone. As John mentioned, operating cash flow increased by $35 million in the second quarter. This increase was driven primarily by a reduction in the need for working capital.

We reported $3.2 million in cash and cash equivalents at the end of the quarter, compared to $13.5 million at the end of last year. We ended the quarter with $53.4 million in long term debt, a 14.8% reduction when compared to the end of last year. The reduction was related to lower working capital due to lower production volumes in the second quarter. As we move through our solid consolidated backlog, we expect we will generate significant cash flow in the fourth quarter of 2008. This will allow us to make substantial reductions in debt, grow the business and strengthen our balance sheet.

Depreciation for the second quarter was $1.4 million. We expect depreciation for the year to be about $6.7 million. Our effective tax rate was 34.4% in the second quarter and we are expecting the tax rate for the year to be in a range of 34.5% to 35.5%.

Our consolidated return on invested capital for the quarter was 27.7%, which exceeded our Company ROIC target of 15% to 20% by a wide margin. Although we may not be able to maintain this level of ROIC, we do expect to exceed the target for the year. Within Spartan Motors and each of our subsidiaries, we use ROIC as they key measure of our progress. It's also related to our bonus program for management and associates which is based upon an economic value-added financial model.

We continue to forecast CapEx to be in the $15 million to $20 million range for the year, which includes some rollover from our facility expansion launched in 2007. We're expecting lower CapEx in 2009 and in 2010.

Finally, this morning we announced our Board has authorized a repurchase of up to 1 million shares, or 3% of shares outstanding. This replaces the stock repurchase plan from June, 2007, which has expired. Under last year's buyback, we repurchased 300,000 shares of common stock on the open market at an average price of $9.23 per share. Given our long term potential to grow sales, profit and return on invested capital, the Board and Management believe that our current stock valuation does not fully reflect this potential. As the year progresses we will focus on various options to increase shareholder value.

We also welcomed a new addition to our Board of Directors with the addition of Richard Curtain who is the current CFO of Neogen Corporation here in Lansing.

With that, I'd like to turn over the call to the Operator who will begin Q&A. Operator?

(OPERATOR INSTRUCTIONS) And we'll take our first question from Joe Maxa with Dougherty & Company.

Hi. Thank you. A question on the military side. The push out into Q3 and Q4, are we now looking at revenues split roughly equally between those two quarters? Or should it still be kind of Q3 loaded?

You know, Joe, as I sit here today -- and this is John Sztykiel -- I think we'd probably see probably at least half to maybe five-eighths in Q3. It's really dependent upon the parts flow. But as I sit here today I'd probably see at least 50% to maybe 60%, possibly 70% in Q3 and the rest moving over into Q4.

Are you talking about total backlog or just the stuff that was pushed out?

No. Just the part that's pushed out.

Right. Right. Okay. And looking at next year with military being down and MRAP kind of winding down here, are we thinking that Q4 levels of military are indicative of what next year would be?

I think it's a little bit too early to tell and that's probably not the answer you're looking for. However, we've got some other contracts, or potential contracts, which we're working on, some which could represent a fairly significant potential into 2009. So I think at this point in time, honestly that's a bit too early to tell. I'll honestly. or we'll have better clarity as we get closer to the October timeframe. But it's too early to provide the kind of clarity you'd like to see on that answer. And the reason simply is, as the papers indicate, there's a greater military shift moving from Iraq over to Afghanistan. It's a different enemy. It's a different geographical environment, thus the vehicles have to change.

Right. The smaller orders you talked about for the military, your order flow was larger than you reported by $40-some million. Were these like $5 million deals? Or were they $20 million? Can you give us a little more color on size of some of the vehicles con- -- that you got?

Jim? Jim, why don't you respond to that?

I think there was a mix of product, Joe. There are some new variations on some of the MRAP product. I don't have specifics on the actual order sizes.

Did you get additional orders from Force Protection during the quarter? Or is this all BAE related?

I would say most of it was BAE-related.

Okay.

And they both work on the [ILACK] program. This is Karen Morrow. We continue to see smaller orders on the ILACK variance which is a joint venture between the two. So we do get orders from both entities.

And Karen, I appreciate you bringing that up. This is John Sztykiel. What's interesting and what we're seeing is once a product gets brought into the marketplace, then there may be different units or operational groups within the military that say okay, we like that particular product and it's relative to our current need. So they don't order a super large quantity, but they order a few more.

We have a very similar approach in the emergency rescue business where you'll have a city that will, for example, order a certain number of fire trucks or ambulances. And then you'll have a neighboring city that will come along and say do you mind if I tag onto that order. I'm not going to order as many, but I'd like the identical product for this location. And really that's what we're seeing in these smaller orders. And Karen, I appreciate you bringing that up.

Can I ask on the motor home market? Obviously it's been difficult environment and there have been a lot of struggles all the way around. Have you gained any additional models? Are you gaining -- your thoughts on additional OEM customers. Is this an attractive environment where you'd expect to add an OEM customer? Or do you think these customers are trying to keep their employees and maybe potentially bring stuff in-house for when the market does pick up if it's a year from now?

Well first, we definitely don't believe people will bring stuff in house from a chassis perspective. If anything, what we're seeing is the value-add portion where people are looking at the chassis and saying okay, how can we at Spartan Chassis do more? We are seeing that increasing. Why? Because Spartan Chassis, if you look at the financial, has significantly better inventory turns. Has significantly better material logistics management. And from a cash to balance sheet perspective, it makes sense for OEMs to actually have Spartan Chassis do more.

Second, as we sit here today and as I look over the next 12 months, I have no doubt when I look at some of the prototypes, the R&D projects, et cetera, that by the time we get to the first quarter of next year, Spartan Chassis will be under more models in the marketplace with greater dealer space than what we sit today. And the reason is, again, Spartan is known for having speed relative to reaction from a product R&D to marketplace perspective. And OEMs are not stopping. They're taking a look at what's selling in the marketplace -- obviously, some smaller products. What can we do to improve the fuel efficiency, improve the living area, et cetera? How can we increase the attractiveness of the unit to compel the consumer to buy? So I think from an R&D and a prototype perspective, the activity at Spartan Chassis is probably the greatest it's been in the last 24 months.

Jim, what was the parts in the quarter? I think you guys indicated $17 million last quarter.

They were around $25 million this quarter.

Okay. Very strong. And are you expecting that level to continue?

We think we're going to be at -- I'm not sure we're going to have the same level next quarter, Joe. But I think we've been saying overall that we would more than double what we experienced last year. So last year we had about $33 million. So this year we'll more than double that.

Okay. And that would have led to some of the out-performance in your gross margin line, I would expect?

Oh, absolutely.

As well as less vehicles, I suppose? So in Q3 we might see gross margins tick down a little bit if vehicles are similar and parts slow down?

Yes, that's true. If we have a higher level of vehicles, we carry a little less margin than the parts. Yes, it would [inaudible] that.

Thanks a lot for the time and I'll jump back into the queue.

Our next question will come from Frank Magdlen with The Robins Group.

Good morning.

Good morning, Frank.

John, you eluded to a new segment for '09. Can you tell us how significant that might be in its first year out there? And will it have a separate line under business segments?

Well, I mean, one, I'm not going to qualify from a dollar potential, other than the fact I believe in 2009 it will probably be very, very small. And what I mean by that, I wouldn't be surprised if the sales are going to be less than $5 million to $10 million. So in 2009 I would not expect a significant increase in sales relative to this fourth market segment. However, I think the opportunity for growth past 2009 is very, very significant. And it just bodes back. Two years ago, or three years ago, we were primarily an emergency rescue and RV company. Today we're an RV, emergency rescue, defense company. I have no doubt by the time we get to the second half of 2009 we will be in another market niche.

But more importantly Frank, or just as important, is I'm very excited about the growth opportunity for our service parts and accessories and that. And second, the value maximization. Value maximization is one of our six strategic objectives. And we look at making money at the vehicle, at the point of delivery. We look at making money on the base vehicle plus the value-add at the point of delivery. We look at making money, improving our sales and income level on the service parts and accessory level. After delivery, we look at making money at component sequencing and assembly, where we don't do the whole vehicle but we sequence a group of components and ship it to a partner. For example, we're doing this in the military business right now.

And last, there's the opportunity for vehicle refurbishment, especially in the military business. So as a company, we're not only focused on creating another market segment, but we're also extremely focused on increasing the value which we can bring back to both the top and bottom line within each market segment. And two years ago we did not have this strategic focus. Today we do and you're really seeing that in the growth and service parts mix. That's the re- -- the growth in the Liberty Project, especially with Fleetwood. And last component sequencing and assembly in the military business, as well.

All right. And then vehicle refurbishment is not currently in your backlog?

It's not currently in the backlog. It's something which we're in the process of quoting and going after. We may or may not be successful. But the opportunity is absolutely there.

All right. And the EV team, do you have any guestimate now or what your expectations for the second half or by the fourth quarter? Could we might be breakeven? Or where do you think you're going to be?

Well they will continue their improvement. As a consolidated group I don't believe they're going to be at breakeven in the second half of this year. On a very positive side, Road Rescue did have a profitable month of June, which was nice, the first time in several years. Part of that was due to a vehicle carryover. But Road Rescue in particular has seen the greatest gross margin increase of any business unit which we have from January to June of this year. I feel very confident that, from a profitability perspective, the EV team will definitely be profitable in the first half of 2009. However, when we look at the whole emergency rescue business today and you bring in the chassis, the bodies and the aerials, the emergency rescue group is a very, very positive event for Spartan Motors, Inc. and the shareholders.

All right. And in Crimson Fire, can you give us an idea how many units you're building there?

I would prefer not to get into that. We really don't break it down from a segmentation perspective. I mean, Jim? Karen? I'm not sure if you want to provide any light there. We don't get into the details.

The aerial side?

[We don't] break that down, Frank, within the segment.

Frank, this is Dave Reid. The one thing that you're going to see that has been released this morning is an announcement that Crimson Fire did secure an order for 36 pumpers for Montgomery County, Maryland which I believe is the largest order they've ever received.

All right. That's exciting.

Very.

And is that -- over what period of time when you deliver those?

A handful in the fourth quarter and then the rest in Q1 and early Q2 is what we're forecasting at this time.

All right. Thank you very much.

Our next question will come from Jamie Wilen with Wilen Management.

Hi, fellows. Nice quarter. A couple questions. First in the parts area. How does it work? You get an order for X amount of MRAP vehicles and how long is the tail on that business? You get $1 million today and spare parts from that $1 million will be how much and over what period?

It actually varies quite a bit, Jamie, from order to order. I think the lead time could be in some situations we may be able to turn it around in a matter of weeks. And sometimes it could be a couple of months.

And what we're seeing right now is there are sets of kits that we send right away to kind of fill the depots and get them ready to go, to kind of feed the supply lines, if you will. So that we kind of have a good sense of how that's flowing right now. And what we're still developing is what those models are going to look like over the life of the vehicle. We just started shipping those less than a year ago. So that part of our model we're still developing a little bit.

Given that you're shipping more [MRAPs] currently, would you expect your volume of spare parts to increase in 2009 over 2008?

Well, I think as we sit here today, Jamie -- this is John Sztykiel -- I think the opportunity is very strong for that. I think one of the things and Karen was alluding to or indicating, it's hard to forecast on service parts because different vehicles are used for different purposes. And so you can't say the replacement, the service cycle, is the same across the board. And so, depending upon where the vehicles are used, the duties, et cetera, that's a big driver relative to the service parts business. But relative to '09 versus '08, the opportunity for increased service parts accessory sales, especially in the military, is very strong. But also we see tremendous upside opportunity in the RV and the emergency rescue area, because now we're extremely focused on that. And we've got a very good team in place, working to address the two other market segments from a service parts accessories perspective.

Certainly we'll have more vehicles in the field, so that would lead you to believe there's going to be a higher demand. And we're definitely gearing up to make sure we're in a place to really service those vehicles quickly.

Okay. Very good. John, you talked about potential market segments that you could be in and there are several. Can you give us some idea what you're talking about, without giving away the company store?

Well if you just take a look, for example at the delivery business. Okay. Where people deliver packages, services and I'm not talking about a UPS, Fed Ex, et cetera. But when you take a look at the opportunity relative to deliveries and the focus on reducing costs, whether it be the vehicle operating cost, the workman's comp cost, et cetera, there is significant opportunity for vehicle improvement today. For example, Amazon.com just reported record earnings. I just came back from Europe last week. The Internet service business is tremendous because the price of fuel is almost twice the price versus what's here in the States. So people are using the Internet more and more from a shopping, procurement perspective so they don't have to drive. The interesting thing is if you look at the vehicles within the U.S. today, most of the vehicles are designed around gas or diesel being $1.50, $2.00 to $3.00 a gallon. Well that cost has gone up dramatically. So has workman's comp costs. How does that relate back to the vehicle? You look at a lower frame height. You look at a higher square cube area, et cetera. You reduce the frame height. You reduce the number of steps or the amount of feet a person has to get in and out. That's one particular area.

From a municipality perspective, when we look at emergency rescue, a market we do not compete in today effectively is Homeland Security. What's interesting is there's 571 bomb squads within the U.S. That money for vehicle procurement comes out of Homeland Security dollars. However, those decisions are made by fire departments, departments we have a great relationship. We're now developing a strategic focus to go after Homeland Security products and take advantage of not just our products but our distribution opportunities.

So that gives you a little bit of color of where we're looking, relative to a general or a specialty vehicle market perspective.

Okay. And lastly, on this order you just got for Crimson Fire, 36 multi-function pumpers. What was previously your largest order you had ever received?

From Crimson Fire? Boy, you know, honestly I can't answer that because this is so much larger than what they previously received. Jim? Karen?

I don't have a good feel either, John. I'm aware of some that have been in the range of 6 to 8.

We've done some for the City of Chicago that have been probably double digits. But clearly not to this level yet.

Does this put us in another league? Why are we finally able to compete and win in orders for 30 units where we've never been able to compete and win in that before?

I think for a number of reasons. First I want to compliment the people at Spartan Chassis. I think their excellence, from a chassis perspective, just created a great aura when Montgomery took a look at Crimson Fire. From a Crimson Fire perspective I believe what enabled them to be successful is they were not, I should say is they were competitive on the bid was they were able to provide the customer with exactly what they want, in a very timely perspective from a delivery point of view. And one of the things which we've seen in Crimson Fire over the past 12 to 18 months is reduced delivery times, improved quality, improved operational effectiveness. And if you can deliver to a customer exactly what they want in a shorter time period, you've got the opportunity for more good days than bad. And simply I think that's why I think Montgomery County chose not only Crimson Fire, but also Spartan Chassis to provide the complete unit.

And you have always mentioned that the age of the fleet of fire trucks is very old and therefore there's opportunities there. Will there be other similar types of orders like this coming out for bid throughout the country? And is this kind of a replacement of these 15 year old pieces of equipment?

Jamie, if we do our job properly. And I think we have very good clarity, not just with Montgomery County. Because these are multi-function trucks; they have both EMS and pumper capabilities. But, for example, the products which Crimson Fire and Road Rescue are showcasing in Baltimore this week at the emergency rescue show is a combination pumper/ambulance. Close to 54% of the 125,000 fire trucks out there are more than 15 years old. And as a group of companies, we're very focused on delivering an increasing number of multi-function products which can do more than one task to help fire departments justify not only purchasing the product, but purchasing a greater number of products to accelerate the fleet change.

So in answer to your question, I think we have clarity as to what needs to be done. Now the question is can we execute. I feel confident we can execute, but we have to demonstrate the results over the next two to three years.

Okay. Thanks, fellows. Appreciate it.

(OPERATOR INSTRUCTIONS) Our next question will from Jack [Hayne] with Barrington Research.

Good morning. I have a couple of questions related to the subcontracts that were affected by the upgrade from MRAP to MRAP Plus. First of all, can you tell us how big these orders are in terms of the total military background, either in absolute dollar or percentage terms?

Jim? Karen?

That's something we don't normally disclose.

Okay. Well obviously these are larger chassis. And you're going to have to incur more costs as a result. Have you renegotiated the contracts on those?

Well, yes. If there's additional content that's going into the units itself, yes. We increase the price accordingly. Those are always negotiated.

Okay. What do you foresee the impact being on overall military gross margin as a result?

I don't see the military gross margin changing substantially from what we've been seeing because we're just adding additional components that we would mark up and in the same manner.

And also if you could, can you provide a breakout of gross margin by segment?

No. There is some detail by segment that is attached to the press release this morning. And there is a little bit more information provided in the 10-Q. But that's all the breakdown we provide is on a margin basis.

Okay. And that's all I have. Thank you.

You're welcome.

It appears there are no further questions at this time. Mr. Sztykiel, I would like to turn the conference back over to you for any additional or closing remarks.

All right. Well first I want to say thank you very much, both for your time and your support. As mentioned earlier, we're optimistic. At the same time we're a bit cautious because the economy is about as uncertain as what we've ever seen or at least over the last 20 to 25 years. But as a Company we've been in business for 33 years. And our methodology is simple; as society changes and evolves we expect to either react or lead relative to the marketplace from a specialty vehicle perspective. And therefore, over the next 2 to 3 to 5 years, the next 12 to 18 months, we've got optimism. It's a bit cautious. But we're as excited as we've been over the last 20 to 25. Thank you very much.

This now concludes today's conference call. We thank you for participating and hope that you have a great day.