Shyft Group Inc (SHYF) 2008 Q4 法說會逐字稿

Welcome to the Spartan Motors fourth quarter 2008 earnings conference call. Today's conference is being recorded.

At this time I'd like to turn the conference over to your moderator, Mr. Ryan McGrath.

Welcome to Spartan Motors fourth quarter and year end 2008 conference call. I'm Ryan McGrath with Lambert, Edwards and Associates I have with me today several members of Spartan's management team. Including John Sztykiel, President and CEO; and Jim Knapp, Chief Financial Officer. I assume all of you saw our earnings release in our newswire Internet this morning. I want to take a few minutes to discuss the results for the quarter, however before we do so, 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 under the securities laws. As a result I must caution you that as with any projection or prediction, there are a number of factors that could cause Spartan's results to differ materially. These risk factors are identified in our Form 10-K filed with the SEC. A quick word about format of today's call. John Sztykiel will begin with a brief overview of the quarter and then go over operation results for each business segment and then conclude with an outlook for the future. Jim Knapp will then discuss the financial results for the quarter. We'll conclude with the Q&A session at which time the operator will instruct you in how to enter the queue. With that I'd like to turn the call over to John Sztykiel.

Ryan, thank you very much. First. good morning to all of you. To start, this was the best year performance in the Company's history, which is something we're extremely proud of. Particularly given the recession, as well as some of the legal issues we worked through in the second half of the year. As we look at the fourth quarter, though the results reported were $146 million, net earnings of $0.09 per share, gross margin of 21%, up 66% versus a year-ago, consolidated backlog of approximately $169 million and the announcement of a $0.03 special dividend until the continuation of our regular dividend. It's interesting to note in these uncertain times, issues relative to credit liquidity, et cetera, I take great pride, we all take great pride in the fact that we're not just announcing the continuation of the regular dividends, but the special as well. It's just many companies are not doing that.

To give you a sense though, of our operational performance in Q4, EPS would have been $0.26 per share excluding the one time charges. That being said though, I want to go over highlights of the fourth quarter and then Jim Knapp is ging to get into the financials in a few minutes. The highlights are really grouped into five areas. One, we had continued strength for all emergency rescue products. We reported improved sales, improved operational performance and we look forward to a strong 2009. We see emergency rescue as one of our largest, most stable platforms and we expect continuous growth in 2009 and into 2010 as well. As we are not only just riding some, what I would call industry regulation opportunities which are moving, the sales mark in the right direction, but simply we are gaining market share because we are out executing our competition.

From a service, parts, and accessories perspective, it was another year of very, very good growth where sales increased 173% versus a year-ago in Q4. Service, parts and accessories should continue to grow in 2009 and we look forward to continued growth in 2010 as well.

From a financial perspective, item number three, we are extremely sound. Jim Knapp will talk in greater detail about this, but we have minimal debt, an open line of credit, we had very strong cash generation in Q4, and operations have been scaled to meet the current demand. Our current focus is on cash flow. Cash conservation, but at the same time, we have numerous initiatives from an organic and investigating some potential M&A opportunities to drive the top line in the second half of the year and into 2010. From a leadership perspective, we have tremendous depth. As we look at the leadership teams, management teams, we have the right depth with the right people in place to execute a strong strategic plan. We are looking for some people from a leadership perspective, however we have a very very strong group of people. Honestly, this was evidenced by the strong performance in Q4 and throughout the course of 2008 as well. And last, there were significant operational improvements across the business units, whether it be the emergency vehicle teams, service parts and accessories, fire truck chassis, military, what you saw was a Company represented by the gross margin of 21% that as we not only get wiser, we are executing more effectively from a lean perspective.

Now what I'd like to do is take a few minutes to review our results by each market. As we look at the military business, we have supplied or currently supply more than 20 different thread-specific variants of mine protected vehicles for the US. In addition, we now have products that have gone to six different nations relative to the mine blast vehicle business. As you saw in Q4, our role has evolved from the phase of rapid production to long-term sustainment and it's a business model based upon partnership of designing and building specialized variants. As we've mentioned in the past, as we look forward to the future, we expect the military business to be a key part of our strategic plan.

The reality is the world is a very dangerous place. What's interesting is if you look at today's headlines, there's obviously not alignment between congress and the military, quoting a military general today, the amount of troops being deployed in Afghanistan will enable us to have a stalemate. Now that represents, on one respect, opportunity from a vehicle perspective, from a life's perspective, obviously there's potential negatives there. But over 1,000 people are killed each day as a result of military conflict and while in the US and certain other parts of the world we take for granted the safety going from point A to point B, the reality is the world as a whole is not a very safe place to live.

In addition, as mentioned earlier, we're continuing to work on smaller runs of mine blast protected vehicles. The important thing to remember is what makes us attractive, is our speed to market. Manufacturing flexibility, on time delivery, product performance in service, parts and support. As mentioned earlier, service, parts, and accessory sales closed at $107 million for 2008. This relates to sales of $33 million in 2007 and $10 million in 2006. Obviously the growth was substantial. And there is no doubt that service, parts and accessories will be an additional source of profitable revenue growth in 2009 and beyond. But at the same time too, I do not want individuals to lose sight of the fact that it's not just military. For example, we now have a service, parts, support warehouse just outside the Dallas, Texas area. That's not just to support emergency rescue, but to support RV and other specialty markets as well. As a Company we're becoming disciplined with the right people and the right plans in place to grow service, parts and accessory sales in emergency rescue, RV, and other specialty markets.

I talked a few minutes ago about Afghanistan, but the reality was, in 2008, there were approximately 2500 Spartan related MRAP vehicles in service. By the middle of this year there'll be more than 6,000. In addition, we're working very closely with key strategic partners relative to upcoming M-ATV opportunities in Afghanistan. Obviously that's a very, very competitive process. It's a process which is extremely critical relative to our nation's war on terror. However, I feel excited about our opportunities and I'm excited about the relationships and the partnerships which we have with our current customers.

Moving over to the RV market. Motor home chassis sales were down in the quarter reflecting the industry as a whole. For the first half of this year, I would anticipate RV sales to be extremely difficult. Between the lack of consumer confidence and the tight credit, the reality is, it's extremely difficult to sell a motor home, whether that motor home is big or whether that motor home is small right now. However, as liquidity and credit improves, I believe that over time, and not just myself, but as I look at other data and talk to other individuals, consumer confidence will start to improve as we move throughout 2009 and the reality is that the RV industry typically leads us out of a recession and is the first into a recession. While I'm still cautiously optimistic, our anticipation is that second half of 2009 will be better than the first half of 2009 from an RV perspective.

In addition, long-term, we see the RV industry as a tremendous market and a tremendous opportunity. Over 11,000 people a day turn 50. With the current exchange rates, when you look at the dollar versus the euro, the yen, et cetera, more and more individuals are looking to travel within North America. There is a decrease in the price of fuel, whether it be diesel or gasoline and that's expected to be in place for the next 12 to 24 months. The reality is the RV business, as a whole, represents tremendous opportunity. As a Company, we will have four to seven major new product initiatives displayed into the RV marketplace in December of 2009, which we believe will position us in a great way to take advantage of a strong uptick in RV sales in 2010.

As we look at emergency rescue, fire truck chassis had another very good quarter compared to 2007. Sales increased 12.9%, backlog increased 21.7%, obviously we have momentum. The momentum was driven in two parts. One, there was an industry change in standards, which became effective January 1, 2009, NFTA, and obviously that helped to drive some of the order backlog, but the reality is the Spartan brand name is extremely strong in emergency rescue. And so from a competitive perspective, we continue to gain profitable market share. That also holds true to the emergency vehicle team. Which made 12% of our total sales in Q4. It was another quarter of very, very solid improvement. While the group is still in the red as a whole, they saw 78% improvement in the bottom line in Q4 of '08, versus Q4 of '07 with a net loss of 390,000. So obviously we are getting extremely close to total profitability and we are excited about that happening in 2009 In addition, the backlog for the emergency vehicle team grew substantially in 2008 versus 2007, which will drive us into 2009 and again, part of that was driven by NFTA, the industry change in standards from a Crimson Fire perspective. However, whether it be Crimson, Fire or Road Rescue, both companies are gaining competitive market share.

One of the things which we are doing though is we are becoming more and more aligned, or we're becoming more effective at implementing best practices across multiple business units. While road rescue has made tremendous progress in 2008, and I wish to complement their leadership team on the progress they made, we are now implementing a lot of what's going on at Spartan Chassis at Road Rescue. We have people in place in South Carolina, Spartan Chassis employees working with Road Rescue associates. Road Rescue is now under the jurisdiction of Spartan Chassis. For two reasons. One we see tremendous opportunity for growth in the ambulance side of the business. 11,000 people a day turn 50. While that is good for RVs, the reality is, it's also good for emergency rescue. More of us are going to take a ride in an ambulance whether we want to or not. The reality is every 1.4 seconds there's a call for help. And as we work to leverage the strength of the Spartan brand name in fire trucks over into ambulances, we believe that will accelerate the profitable growth of road rescue in a significant manner.

As we wrap up from an emergency rescue perspective and we look ahead in 2009 we will launch ten new major product innovations into the emergency rescue market through Spartan Chassis, Crimson Fire, Crimson Fire air and Road Rescue in 2009. And this is being driven by one simple fact. One--it's a large market. One of tremendous opportunity, but at the same time, two, based upon our solid financial position, over the last 12 to 18 months, we've been investing in R&D. Those R&D expenditures will be brought to market in 2009 and we look forward to above industry average growth in 2010 and beyond. Simply we are excited.

Something I do want to make a quick note though, before I close, is if you look at emergency rescue, I get asked a lot of questions, will the recession cause a significant drop in emergency rescue? I've been in this business over 20 years, have been through a couple of recessions in this business, relative to emergency rescue, and a simple fact, a lot of people lose sight of, is 80% of the emergency rescue business is driven by volunteers. And while those volunteers, their jobs are important to them, the reality is, the reason they're volunteering into emergency rescue is it's extremely important to them. So, while state and local funding is key, it is not the biggest driver of the emergency rescue business from a purchasing perspective. It is the volunteer, it is the raising of local funds. One of the things which is critically important to remember is a fire truck and ambulance, they're one of the most sought after, one of the first statements relative to a community and the pride which that community takes in and of itself both from an image and its desire to provide the best service possible from a life-saving perspective.

As I wrap up, and as we look into the future, as a Company, we're very focused on a customer-centric lean methodology. From a strategic perspective, there's are six directives in place which really encompass all of our objectives, initiatives, action plans, charts et cetera. In the end it is the people that make things happen. We take great pride in the turnover rate voluntarily of less than 2%. Second is innovation. Innovation that compels the customer to buy your products, that provides barriers to entry from a competitive perspective, that enhances gross margin.

Third is brand leadership. Leveraging the strength strengths of the brands, improving the opportunities to enhance the value of the product. Value maximization, you've seen tremendous growth in service, parts and accessories and as a Company over the last 24 months, we've not just become very cognizant of the fact we have tremendous opportunity over the life cycle of the product, but we are executing against disciplined plans and we are delivering results. I take great pride in that. We all take great pride in that.

Number five is lean. Whether it be in the office or the shop, there's tremendous waste to be gained. I should say, tremendous waste to be eliminated. The reality is as you look at our results, you look at the improvement in the gross margins, do I foresee we're a lean Company across all of our business units today whether it be in the office or the shop? The answer is absolutely not. It's amazing how much waste there is still within the systems of how we operate. And last is global. Today, less than 3% of our sales are for export.

As a Company we are now developing the plans, we are actually looking to hire the right individuals, we have one individual already in place, but as we look at the euro, the yen, the exchange rate opportunities which we have, some of the initiatives which we have in place, export, represents a tremendous opportunity for us. In the given example, Crimson Fire will be introducing a new body at FDIC, the Legend. It's really quite revolutionary, but what's nice, is that body is designed around being, is designed to be exportable. For example, those of you that are familiar with IKEA. Imagine a fire truck body showing up in a flat panel box that could be assembled in another country at a much lower lower labor rate. As we look at our future product development plans and one of the things we're focusing on is the product development, how it can can be designed and manufactured to be exportable. Not to be totally built in North America but portions are kit built within North America but to be assembled in other countries to not only take advantage of lower cost labor rates but also to create customer pull through because we're adding jobs in those respective countries.

Simply, while 2008 was great, I'll be the first one to admit, is I do not expect 2009 to surpass the results of 2008. It is going to be a difficult year in some of our markets, however, as I look at the year, I am excited about the opportunity. As society changes, vehicles change, and actually recessions are times of great growth. Emergency rescue will be a very good market for us. We have significant opportunity in the second half of the year, as we quote and work to develop the opportunities and the M-ATV, Afghanistan, et cetera. From a motor home or an RV perspective the first half will be difficult but I'm fairly optimistic about the second half of '09 that theere'll be an uptuck -- uptick I should say.

And last, as a Company, we have demonstrated over the past 15, 20, 25 years that recessions have been times of opportunity for us. As I mentioned earlier, recessions cause society and business models to restructure. As that restructuring takes place, vehicles change and we have been able to take advantage of that either by leading the change or reacting to the change very quickly. In closing, service, parts and accessories is the umbrella. In any market in which we enter, I expect this to be in at least one to three additional new markets between now and the end of 2010. We will now continue to look at the total life cycle of the vehicle and how we can take advantage of that to maximize the value from both a stakeholder, a shareholder, associate, a market perspective. Jim?

Thank you, John and good morning, everyone. I'm going to focus primarily on the balance sheet and cash flow this morning. We had $13.7 million in cash and cash equivalents at the end of the quarter compared to $13.5 million at the end of 2007. We generated $59 million of operating cash flow during the last quarter of 2009. We are already generating significant cash flow in the first quarter of the new year. As of January 31, we have $32 million in cash on the balance sheet. We ended the year with $16.6 million in long-term debt. Our $50 million line of credit with JPMorgan Chase is totally available to fund any future needs. As noted last quarter, this line is at a very favorable rate.

Our cash position and available credit gives us the flexibility to pursue multiple avenues to create shareholder value such as investing in the business or evaluating strategic acquisitions. Our Board and management team are carefully looking at opportunities. And we'll make decisions based on what fits our strategic plan and the prevailing conditions in the economy. Some of these opportunities may be potential acquisitions that can enhance the future of Spartan Motors. Depreciation for the quarter was $1.8 million and $6.1 million for the year. Our effective tax rate was 58.8% in the quarter, and 36.6% for the year. Both of these tax rates were impacted by the previously noted penalties.

Our consolidated ROIC for the quarter was 7.2%, below our Company ROIC target of 15 to 20%. Within Spartan Motors and each of our subsidiaries we use ROIC as a key measure of our progress. It's also linked to our bonus program for management and associates which is based upon an economic value-added financial model. For the year-ended 2008, ROIC was 25.8%. This compares to 19.8% in 2007. CapEx for 2008 was $16.3 million. We're forecasting CapEx of 7 million to $9 million in 2009. Our balance sheet is healthy with cash and available credit at favorable rates to support the growth of the business. We believe we have taken the correct steps to control our cost structure and put the company at a sound footing for the future, despite the recession. Overall, we are in a strong financial position going into 2009. We have the cash flows and bank line to strengthen our position in the market during this downturn. We are optimistic that 2009 will position Spartan well for future growth. With that I'd like to turn the call over to the operator who will begin the Q&A. Operator.

Thank you. (Operator Instructions) And we'll first hear from Frank Magdlen of The Robins Group.

Good morning.

Good morning, Frank.

Good morning. Congratulations on good financial management with the financial balance sheet, Jim. Can you help us out a little bit, John, in what's going on with the EVTeam and when do you break into profitability there? Is it now a volume issue or is it still not getting the efficiencies you want with the volume you're putting through?

Jim, I'll let Jim answer first Frank and you know that I'll jump in. I will say this. In all honesty, we have a little bit of a different perspective as to how we view their progress based upon how you asked the question.

Frank, we've made a lot of progress this year, we have, as John mentioned, we had a very small loss, in the fourth quarter this year. Two of the units were profitable in the fourth quarter. One unit, which is Aerial, is -- needs to have more volume to really be able to leverage the operating assets they have in the business, and the operating expenses they have in the business. So I think they're making progress. I do believe they will be profitable in 2009. As John mentioned, Road Rescue has now come under the management of Spartan Chassis. Even though Road Rescue made significant process during 2008, we think there's an opportunity obviously to make more progress under Spartan Chassis in 2009. I do believe it'll be profitable in 2009.

Frank, this is John Sztykiel. As Jim mentioned, the group that wasn't profitable in Q4 was Crimson Fire Aerials. Both Road Rescue and Crimson Fire were profitable in Q4 of this year. The other point which Jim mentioned which I think is important to note is that the Company, it's not just at Road Rescue, but if one took a look at the, what I would call interdiscipline, or interbusiness unit, best practices, we now have more multiple best practices working within all the business units to improve the operations than what we did at this point last year. So from a Company perspective, we honestly are excited about the progress they made in 2008, we're excited about the momentum carrying into 2009, and the primary reason which we made the change relative to Road Rescue which we did was to accelerate the progress. Because there's so much tremendous opportunity. And second, that opportunity is around operations, but also, Spartan has a very, very good brand name in the fire truck industry and more and more fire departments are making the buying decision relative to the ambulances which they purchased. So from an emergency vehicle team perspective, we're very, very close to crossing over, but as we look to 2009, 2010, we're extremely excited, which is one of the reasons we've been investing so much from an innovation technology perspective and between all three companies, or all four companies, I should say will be really unveiling ten major new product innovations throughout the course of this year.

Now, on the service parts and accessories, will it be a significant amount of seasonality in that business?

I don't think there'll be a lot of seasonality in it. One thing we should mention about service parts too, is that there are no service parts in our backlog. Because they turn over so relatively fast that they're not in the backlog and we should probably mention too, if you go back to 2005, we had $6 million in part sales that year, and service and accessories. In 2007 it was $33 million. In 2008, it was up almost $108 million. It is really grown substantially as John was saying, and we expect that to continue to grow in 2009.

The thing that, one of the biggest items that driving the growth in service, parts and accessories, whether it's military RV and military rescue. What's amazing is a rather large percentage of our RV part sales goes for chassis that are actually competition, but it's the core focus on delivering what they want, do the right thing and easy to do business with, that attracts people to us from a business perspective in service, parts and accessories. There's a request, we provide the right part at an attractive cost, much faster than other people in the service parts business model and it's amazing how that excellence attracts. So I should say some people think it's amazing, I think it's not amazing. If you can deliver the right part at the right place faster than other people in a service part situation, in essence what you're doing is reducing the amount of time someone has a headache and that really is a very very good day. As I tell people, the reason our parts sales are growing, is we're just reducing the amount of time someone has a headache. That always is a great day. So we think there's tremendous growth. We think, we believe it's not just military-based. We see tremendous opportunity, but it's simply about having the right part at the right place at the right time faster than everybody else. And thus we reduce someone's headache time.

All right, I'll jump back into the queue. Thank you.

(Operator Instructions) Next we'll hear from Joe Maxa of Dougherty & Company.

Thanks. Regarding the parts and service business, how much of, that can you give us a percentage, was military versus your others and what you've seen and the growth of the, let's call it the RV line you talked a little bit about over time?

We don't, we don't disclose the break down, Joe. I don't have that available.

We can assume majority of it is military though, right?

Yes.

Seeing that it's going to be such a large line item, are you going to break that out separately at some point? Just the parts and service?

We're giving thought to that, Joe, but one of our concerns, obviously is because of the competitive posture, that's an area that we're, we're very sensitive to.

Okay. I wanted to ask you about the -- what you're seeing this quarter in your emergency rescue as far as order rates. Obviously very strong. Q4 sounds like some of that was due to the prebuys. Are you still seeing Q1 strength continue or is it slowing down to a maybe more typical quarter? How should we look at it, at least so far this year?

Well, one, we all expect it to slow down a little bit, in January and February, just because there was such a large number of orders to process in Q4 of last year. However, when we look at the bid activity, log books, of the business units, the bid activity is very, very strong and so as I challenge people, we've also got another major driver for emergency rescue in 2010 or 2009 and that is the 2010 emissions change. We had an industry standard change 1/1/2009. Well, now we've got an industry, I should say a diesel emissions change 1/1/2010. So as an industry, I would expect not just us, but a variety of other firms, still to have a very, very good 2010 from an order backlog perspective.

We're extremely focused on 2010 and '11, which is one of the reasons we're introducing so many new product innovations this year. Because typically in emergency rescue, it takes 12 to 18 months to generate the sales momentum because 71% of all emergency rescue products are purchased after they see the product i.e. a demo. Rather than waiting to bring innovations out in 2010, when things would probably have an opportunity to be softer, both from an industry perspective and a recession perspective, we're bringing out these product innovations this year to ensure we've got competitive, attractive markets, capture opportunities in 2010 and '11, that's one of the reasons we're excited about not just '09, we're excited about 2010, is because, as we look at our strategic plan, relative to emergency rescue, we think we're just at a much better position. Most of our competitors we talked to are not introducing much new in 2009 for two reasons. One, they don't have the financial strength, which we do. But second, to be quite blunt, I believe they took their eye off the ball.

Okay. What are you hearing about from municipalities regarding their spending and potential slowing due to the, obviously the environment?

Oh, most municipalities are definitely spending less money. The good news is, is typically emergency rescue is one of the last items to be cut. And again, in 2009, what's working in our favor is this emissions change. 54% of all fire trucks today are more than 15 years old. So a very, very large number are very old, very aged. And so, as an industry, we've got a lot of momentum behind us. But it is a concern, state and local budgets definitely do have less money, but as evidenced, we saw very good order intake in 2008 and let's face it, the second half of the fourth quarter of 2009, was not a good quarter for us. Or I should say of 2008, was not a good quarter for us from a macroeconomic perspective, yet it was very very good from an order intake perspective. So again, emergency rescue, that's one of the reasons it's a key cornerstone to our business model and we're focused on the growth is typically very, very recession resistant.

Okay, very good. On the military side, what do you see as kind of a base run rate for your vehicles that you're producing? Given MRAPs over and excluding maybe this M-ATV opportunity that would be later in the year?

Oh, Joe, that is hard for us to extrapolate. We don't forecast earnings. The orders come in much smaller lots right now. The business model is becoming more customer centric i.e. the vehicles are becoming more special. The production or the order lots are becoming smaller. Prices are becoming higher, so there is some positives to the way the process is going, but honestly, it's too early for us to say because we don't have the experience in this business model like we do in emergency rescue. The interesting thing is the military business is becoming more and more like the emergency rescue business. Where i's becoming very customer centric. Much smaller order lots, prices are going up. Because we're still very new to this, we don't have the kind of experience or wisdom, I'd like to say we've got in the emergency rescue business. So I really can't answer that for you.

Okay, fair enough. Gross margins, Jim, were up nicely in the quarter. What should we expect in 09?

Let's see, Joe, we were running, I think in the, I'd think they're going to be, I anticipate they're going to be down a little bit, what they were in the, in the year. A little below the average for the year. But there's opportunity on the upside. If there's continue to be a richer mix of the parts, which carries a higher margin, then we could get back to probably closer to the average we had for 2008.

I see. Just two real quick ones. Headcount and -- well, I'll leave it at that. What was your headcount at the end of the year? And would you expect to reduce more in '09?

We're around 1200 at this point in time.

Now that's a total, Joe, and reduce, is maybe, maybe not. Because, for example, Road Rescue, Crimson and Spartan Chassis are growing on the rescue side of the business. Obviously from an RV perspective, we've definitely gone through those exercises relative to right sizing in the appropriate places from a labor perspective. On the military side of the business, the SPA continues to grow, the vehicles are becoming more customer concentric from a vehicle perspective, but right now, here, as we sit, it's a little bit too early to say whether we'd downsize. Because we have also got some opportunities to upsize if necessary based upon receipt of some expected orders.

The other thing we should mention to John, is that the SG&A is going to be a little higher than we would normally have at this volume level, because of the fact that we have to maintain and actually develop the 2010 emission standards to be able to, to have that in place on January 1. That's quite an undertaking for us across all the different models.

Would that be your SG&A or your R&D line?

I'm sorry it'll be, when I say SG&A I mean the whole thing, I look at the operating expenses, but you're you're right, it would be in R&D.

Actually, Jim, I'm glad you brought that up. Because one of the reasons Spartan Chassis continues to gain profitable market share in the fire truck, chassis side of life is there was a major emissions change 1/1/2007. We made a conscious decision to not reduce the number of engine offerings. And where other OEMs who built fire truck chassis made a conscious decision to reduce the number of engine offerings. In engine, for lack of a better term, is like the heart of a fire truck. That's where you have a lot of service and maintenance, that's where you have a parts been established, et cetera, so as a Company we made a conscious decision to not reduce the number of offerings. We henceforth have gained profitable market share. And as a Company, we're making very much the same decisions today as we look into 2010. Jim, I appreciate you bringing up that, from an SG&A or an R&D perspective. Those costs will typically be higher than normal as a percentage of sales; however, we believe we will benefit from that in 2010, '11 and beyond, just like we've benefited in 2007 and 2008 from the last emissions change over.

All right, thanks very much. I'll hop off the line.

Next we'll hear from Walt Liptak from Barrington Research.

Thanks, good morning, guys.

Good morning, Walt.

I guess, you know the backlog has dropped pretty substantially and and I know you've been taking costs out. I guess, how would you like us to think about revenue levels and like a break even profitability? Can we get a little guidance on that?

We don't forecast and provide guidance, Walt. We, I think as John said earlier, we, we does not expect 2009 to be as strong, obviously, as 2008. The parts and accessory business, we believe that's going to be stronger this year. We believe emergency rescue will be stronger this year, just by looking at the backlog. And if there's opportunities in the military area, if we, if our partners are successful in getting orders on M-ATV that could be a nice boom to the second half of the year for us.

Okay, maybe another way to talk about it, is that some of the accounts receivable and other working capital items have been drawn down pretty nicely. As you mentioned, cash generation is good. Is it -- can we expect that those, you're going to continue to generate more cash, and at what point do we start thinking about like a cash burn in 2009? Or is that something that's out of the question? You expect to continue to increase your cash balance during the year?

I didn't catch that one part, Walt. Cash burn you said?

Would your cash balances, as you draw down working capital items, get cash inflow from those, add to your cash balances this year or do you expect that you're going to have a cash burn, where at some point you have losses that lead to cash outflow?

I don't -- we don't anticipate having -- we don't anticipate our cash balance throughout the year declining, we expect it to continue to grow. We expect to have strong operating cash flow this year again.

Okay. Okay, good.

And Walt, that's a very good question. We've invested a lot from the CapEx perspective over the last couple of years, but that'll be substantially lower in 2009. I think it's important to note that at Spartan Chassis, not only did we more than double the manufacturing capacity, but we have literally reset or redone every building on the whole complex here at Spartan. And what's interesting, is as we sit today, we're probably at about 40% capacity on a single shift. At $800 plus million in sales. So as we look over the next two or three years, I would probably foresee very, very low capital expenditures. Which means we'll be driving the return on invested capital hopefully in the right direction and making wise utilization of our cash elsewhere. As a Company, we've really done a lot over the last couple years to reset the business for our next stages of growth and first couple of quarters are not going to be easy. We're excited about where we're going and we think the second half of the year represents really some very good opportunity.

Okay, and can you, is, is cash flow -- is the CapEx number going to match kind of a G&A expense or do you think it'll be lower than that?

I think it's going to be, I think CapEx for 2009 will be in the 7 million to $9 million range and I would say depreciation will be probably 7.5 million to $8 million.

Okay. Okay. And then I guess just one last one, in your commentary, you mentioned that motor homes typically lead out of a recession, but this seems to be kind of like, this is much more severe recession and consumer-led and with the banking system the way that it is, I mean, some of the order numbers were really terrible during the fourth quarter for RVs just as an industry. Is it possible that that product class that it just takes a lot longer this time for it to come back? And if that's the case, wouldn't you want to take more costs out of the business? And prepare for kind of a longer trough in RVs?

Well, I mean, one, the vehicles are definitely going to change. I think from a motor home or a towable perspective, the units will be smaller, more fuel efficient, lighter. From a cost perspective, because we're a Company with, where we've got very good demonstrated, what I would call background and experience in market, operational and strategic agility, from an operational perspective, I think we've done a great job relative to right-sizing our business for the current point where the RV marketplace. Do I believe the RV industry is going to come back in the second half of this year to levels of '04, '05, '06? Absolutely not. But do I believe the second half of this year will be better than the first half of this year? The answer is yes because as consumer confidence improves, more than 50% of the RV owners pay cash for their unit, whether it's a towable or a motor home. Typically, what I've seen in the past, I've been in the business more than 20 years, the number one metric I follow is consumer confidence. As people start to believe the economy has bottomed out and is moving in the right direction, versus the wrong direction, people have been putting off their purchase, but they'll also realize, okay, now could be a good time to buy because if I wait six to nine months later, then prices will be higher. The other thing though, I think working in our direction, is you've seen every RV OEM, whether it be towable or motorized reducing their inventory either on their lots or at the dealer level. So the good news is, as that inventory winds down in the first half of the year, I believe we'll get closer to a true consumer pull through kind of demand cycle. So whatever uptick there is in the second half of the year, will be much more dramatic from an OEM perspective, supply-base perspective because we'll finally be back to a 1 to 1 ratio which I think will be healthy for the industry.

Okay, thanks guys.

Next we'll hear from Ned Borland with Next Generation.

Good morning, guys. Just want to follow-up on Jim's comments on gross margin. As I look at it, you have got spare parts, which is the highest margin products in your, of anything you do, growing aggressively, well maybe not as aggressively as last year, but certainly should show better growth than anything else, comes in at high margins. That should be up, that should help margins. You have got low contribution from RVs which is low margin. You've got fire which is pretty healthy which is up, plus you've got lean manufacturing initiatives. You've got the only thing that goes against it, really that I think see is maybe lower utilization in military vehicles. Can you help me out with why these margins shouldn't be at least at the average of 2008?

I would say Joe, the only -- I'm sorry, Ned, the only thing that would bring it down, would be the fact that we have more overhead. We put a number of facilities in place and so we're carrying a higher overhead rate in 2009. So that would be the only thing. But if we continue to uh, grow parts at a, at a higher rate than we're currently anticipating, that will obviously bring it in at a higher level for the year, along with other things we talked about. M-ATV and some of the other opportunities.

The other point too, Ned and the reason it's wise for us to be cautious on that statement, is, as I mentioned earlier, recessions are times of opportunity. So basically because of that, what that cautious statement is indicating is we want to give ourselves the opportunity to look at certain strategic decisions, whether it be in the RV, emergency rescue, military or another market from what I would call a growth, capture perspective. Maybe we would be a little bit more focused on volume, market penetration, we may decide to go after that business at a lower margin than let's say what we've been in the past for the past two or three years. And so we've got a lot of positives moving in the right direction for us.

However, at the same time, too, if there's something which is very, very different about this recession, and I think Walt indicated earlier, in this recession companies are eliminating, not just market niches, from a product perspective, but they're eliminating brands, for example Daimler-Benz has made the decision to close the Sterling truck brand. That's a $12,000 a year product line they made the decision that volume is not high enough. What we take and make of that with our Furion product, we're now working through, et cetera, but as a Company, there are tremendous opportunities, actually some very high volume opportunities in front of us today, in a number of markets outside of what we're currently in, and we're looking at that from a strategic perspective.

Another element Ned, is the fact that the EVTeam, and we do believe they'll be profitable in 2009, the EVTeam, their margins are not as high because their margins are all based on the value add and when they buy the chassis, using Road Rescue as an example, they buy the chassis primarily from Ford, that's probably about a third of the cost. So there's almost no margin on that pass through product. So their gross margins are lower.

Okay, and just to clarify on the EVTeam profitability, you're talking about profitability for full year '09 or hitting profitability at some point during 2009?

Well, we'll definitely hit profitability during 2009. I believe it will be profitable in the second half of 2009 and I think there's a good opportunity that we'll be profitable in the second quarter. But I feel more comfortable to be profitable in the second half of 2009. We didn't lose much money in the fourth quarter as John pointed out. And I would expect that we should be able to make some improvements over that number in the first half of the year as well.

Okay, and then I guess uses of cash going forward? I mean, are you still going to continue paring down debt? What's going to go on with that?

Well, we have, there is $10 million of debt that's coming through in November with JPMorgan Chase and we're going to pare that down. Obviously that's going to be paid down. So our long-term debt right now at the end of the year was $16.6 million. And we have, that is all fixed term. We're not using our line of credit at all right now. So depending on whether we make acquisitions, depending on the kind of growth opportunities we'll have to reassess whether we want to make any changes in that longer-term.

Okay, thanks.

[Jamie Wilen] of Wilen Management.

Couple different areas to follow-up. In spare parts you talk about your growth expectations in the future, obviously Ned said it can't be as large as the percentage increases we have had in the past, but what kind of growth could you expect in that area?

I think as we look to the future Jamie, obviously over the past couple years, we've demonstrated very good double-digit growth. The opportunity is there for us, as we look in 2009 for double-digit growth, what I expect the opportunity in 2009, from a range to be equal of that of 2008, that's probably unlikely. However, it's a little too early to forecast. Because what's interesting is it just gets back to the statement I used earlier. Excellence always attracts. Every time we think we've plateaued or we think we're going to plateau, we continue to gain some new business from an order intake perspective relative to parts, kits, et cetera. What's interesting is, we honestly continuously surprise ourselves internally. I think it's driven by the fact if we deliver the right part at the right time at the right price, we reduce someone's headache and then they tell someone else just how good of a job we've done then that individual organization calls us. Again, I think we have got the opportunity for double-digit growth. However, right now as I sit here today, do I think it'll be as high or as good as it was in 2008 versus 2007? I would say that's probably unlikely.

Could we model the range of 115 to 150? Is that -- would you be comfortable within those two frameworks?

Since our, since we're not a guidance, since we don't provide guidance and we don't forecast, I can't really give you, I think any more clarity than what John has already provided, Jamie.

What's the inventory required to service this business? Service the spare parts part of the program?

It's a good question, we can't give you specific numbers, other than the fact it turns unbelievably fast. And I will say this, one of the key reasons I think we do so well as turning the inventory, but providing the right part at the right place at the right time is from an electronic data perspective. We are very well linked with our supply-base, second, we're financially sound. So we're obviously paying our bills on time. But third, because one of our core focus points within our culture is deliver what they want, do the right thing, easy to do business with, that's the basic mantra within service, parts and accessories. When we take that thought approach, that culture over to RV, emergency rescue, military or other markets, it's amazing how the business grows. So I cannot give you a number, however I will tell you the turns are very, very fast. I've given you some insight as to how we do it. Part is culture, part is results from an electronic perspective. If you took a look at how we operate, you'd be amazed how efficient we are from an electronic data orientation perspective. We are linked with our strategic supply base.

Your revenue and spare parts for the fourth quarter was how much? I don't know if I caught that.

We're going to switch back to our speech. I got to -- it was spare parts. It was almost $45 million, Jamie.

Almost $25 million?

$45 million.

Say that again.

It was almost $45 million in the fourth quarter.

Wow. And what was so unusual about the fourth quarter that might not be a number that could be somewhere in the ballpark moving forward?

These opportunities, it's hard to forecast these opportunities to come along. And we often will receive an order that could be for $10 million at one crack and it depends on the timing. So we had a lot of good opportunities that arose during the fourth quarter. And the thing to remember, none of those are in the backlog. Because they turn very quickly.

Were they mostly military-type of refurbishments? Is that what happened?

They were mostly military opportunities in the fourth quarter, yes.

And because again we had 2500 out there last year. Now there'll be 6,000 in the field, that are Spartan made, it would seem like the wear and tear on them could create continual opportunities of this magnitude moving forward?

That's a logical assumption.

It is. And one of the things that's been growing if the parts business too is the kiting we talked about before. We'll kit axles, make axle kits. We'll do kits for different components in the vehicles. That adds not only parts dollars, material dollars, but also adds labor dollars.

And as Ned mentioned, spare parts is your highest operating business, is that true?

That's true.

It's important to note though, again, there's growth again not just in military, we're seeing double-digit growth in our service parts location outside of the Dallas, Texas area. That's been a great investment. It's been a great decision for us. So right now we're also looking at a few other locations to expand that business model because what's interesting is just, the large vehicle business, for example, there's been over 2500 trailer, logistic companies that went out of business in 2008. One of the things that is happening within this recession, is a lot of smaller companies are going out of business either due to poor financials or lack of credit availability. Vehicles, trucks, trailers still have to run.

So we see an opportunity to grow the service parts business, not just within our core markets, but slowly move into other markets just because the access to parts is becoming less and less in certain markets just because companies are going out of business. So again, if positioned properly, with wisdom and financial strength, recessions can be times of great opportunity and I use the analogy in football a team is never going to score a touchdown on every time they get the ball. So some quarters, or some series you play for field position. If you look at the first half of this year, that we're playing for field position to start to score some touchdowns in the second half of '09 and we move into 2010.

Last question on spare parts. You talk about nonmilitary spare parts, can you talk about the growth in the nonmilitary spare parts?

We don't have it broken out separately.

Other than the fact it's been very good and we've got plans against it.

We don't really track it separately, Jamie. It's all in one, one category as far as we're concerned. We don't break it out between military and RV.

Okay. Three questions on EV real quick? Can we hit $100 million in revenues in 2009? Is that possible ?

For the EVTeam? Yes, I think it's possible.

Okay. You mentioned you buy chassis from Ford, there was always the concept that we'd make our own chassis in Road Rescue. Is that a thought?

Well, actually, Spartan Chassis, their ambulance chassis line-up is starting to move in the right direction. So the plan was, eventually Road Rescue will be building upon that product, but I mean, Spartan Chassis, as a definitive plan, based around the Furion product line to take the ambulance market from a chassis perspective to turn it from commercial to custom and what's nice is when I look at the plan for the number of ambulance chassis built by Spartan this year, I'm extremely excited about what's in the plan. We still have to execute against the plan. But the Furion product was originally designed to go after the commercial part of the emergency rescue marketplace and move into other markets. We believe we've got very good traction now in the fire truck side of the market. Now we're very focused on the emergency rescue side of the market. So in answer, are we very focused, not just on Ford, but the other people, whether it be Navistar, Freightliner or et cetera, that Furion product is core focused in ambulances to take the market from commercial chassis primarily being Ford, GMC, Navistar and Freightliner and turn those into Spartan Chassis.

It appears there are no further questions at this time. I'll turn the conference over to Mr. McGrath for any additional or closing comments.

John, do you have closing comments?

Really just want to say thank you very much for your time and efforts, and at the same time, too, we completely understand that while in one respect 2008 was a record year, the fourth quarter was very good from an operational perspective. The past is the past. And we're very focused on executing, very focused on executing not just for today, but also to ensure that 2010, '11, and '12 are not just good years from a top and bottom line perspective, but it's in line with our culture and also that as a Company we're very, very sound financially. If I look back to where some people were trying to drive us 12, 18 months ago, relative to increasing our leverage et cetera, we chose not to move down that path, and because of that we are in a very, very good position today. We appreciate the past, but we're focused on today and tomorrow as well. Thank you very much.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.