Shyft Group Inc (SHYF) 2009 Q1 法說會逐字稿

Good day, and welcome to the Spartan Motors Fourth Quarter 2008 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 First Quarter 2009 Conference Call. I'm Jeff Lambert with Lambert Edwards & Associates, and I have with me today several members of Spartan's management team including John Sztykiel, President and CEO; Jim Knapp, Chief Financial Officer; and Dave Reid, Vice President of Public Affairs and Brand Management.

I assume all of you saw our earnings release in the news wire on the Internet this morning. We're going to take a few minute to discuss the results for the quarter; however, before we do it 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 and with caution view 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 the format of today's call. John Sztykiel will be begin the call with a brief overview of the quarter and then go over the operation results for each business segment and conclude with an outlook for the future. Jim Knapp will then discuss the financial results of the quarter. And Dave Reid will be available to answer questions toward the end. We'll conclude -- with the Q&A session at which time the operator will instruct you on how to enter the queue.

And with that, I'll turn it over to John Sztykiel. John?

All right. Jeff, thank you very much. And good morning to all of you listening today and those of you on the Internet as well. Overall this was really a good first quarter, especially given the uncertainty in the economic conditions. We are obviously very pleased with our improved gross margin for Spartan as a whole and the performance of our emergency rescue group and service parts and assembly business.

Quickly as we look at the results -- we reported net sales of nearly $116 million, earnings of $0.19 per diluted share, gross margin of nearly 23% -- up 47% versus a year ago, a consolidated backlog at quarter end of about $218 million, and return on invested capital of 14%. As I mentioned earlier it was really a very good quarter in light of the current economic conditions.

Notably our emergency vehicle team operating group as a whole was profitable in Q1 -- the first time that's happened in quite some time. And that honestly is very pleasing to us and we look forward to the future as well. We also saw a boost in emergency rescue related sales and the backlog. Emergency rescue remains Spartan's most stable platform with significant growth potential.

We are very pleased with our financial liquidity, the stability and really our financial position which gives us great ability to take advantage of future opportunities tomorrow which we're addressing today. The quarter was an indication of Spartan's agility, market, operational and strategic.

But first as you look at market agility, we are very focused on transforming products ahead of society's changes as some of you saw with last week's new products announcement at FDIC -- the Emergency Rescue show in Indianapolis. Relative to mine resistant vehicles, we're currently working with a number of customers on MATV related products for Afghanistan and other survivable markets.

In total we are introducing ten new products over the course of 2008/2009 to capture competitive market share and that is in emergency rescue alone. As we take a look over the next six to nine months when we look at defense, when we look at RV, and we take a look at our opportunities to expand into other strategic markets, you will see Spartan introduce at least a minimum of 15 new products or major technology innovations to position us for growth in 2010 and beyond.

That honestly is what financial stability does for you. It gives you the ability to not just weather economic uncertainty or a recession as we call it, but to take advantage of the opportunities as society and markets evolve.

From an operational perspective, we have successfully repositioned ourselves in the RV business for, obviously, the downside from a sales and top line perspective. We've moved a significant amount of our capacity utilization over to emergency rescue, over to defense, over to service parts and assemblies, and we are in the process of taking advantage of that.

And something I wish to bring up -- something we are noted for is flexible automation and that we can literally revamp or change any assembly facility to a different product / production process flow in less than 48 hours. Not many companies can do that.

From a strategic perspective, we are focused on new market niches and are able to react with speed. A demonstrated fact of that was in the past in 2005 in the defense business -- we went from not being within the business to being within the defense business in less than nine months from ideal to production with our partners in that industry. Not many companies can say that.

And as we look to the future, there are significant strategic new market opportunities and strategic agility is absolutely critical to our future. As we look to the future though, society is changing -- vehicles are changing. You will see a greater desire for vehicles that have improved fuel economy, a greater desire and need for vehicles that are multi-purpose, multi-function, a greater desire that enables whatever is to take place for it to happen faster, i.e., getting in and out of the vehicles faster, less time between operational stops, or if you're in the RV business -- or I should say the RV lifestyle, that you're able to travel and to see North America in the lowest cost possible with the greatest flexibility.

Simply as you've taken a look, or if you do take a look at past recessions -- the last couple -- the most recent one being in 2001 when the dotcom bubble burst, Spartan in the last two has had significant above average industry growth when the past two recessions have ended. We are very focused on insuring that happens in late 2009/2010.

Now as we look at the markets -- in the defense business we are working very closely with our military customers in the R&D stage on developing new lines of mine resistant survivable vehicles. Some of this R&D and prototyping has been for the MATV program which will be a product for the next large scale ramp up to support our forces in Afghanistan.

The US military has recently indicated of plans to order between 2,000 to 6,000 and that number could grow in 2009. As we mentioned earlier, we do not expect clarity on these specific orders until somewhere in the latter half of the second quarter of this year. So, if you're thinking of a question as to when those vehicles are going to be ordered everything which we read, everything which we have been told is it will be somewhere in the latter half of the second quarter of this year.

We are also continuing to work on smaller runs of mine protected survivable vehicles, items such as the Iraqi light armored vehicle, the medium mine protected vehicle, and a variety of variance that go to unique market niches within the defense industry. As you look at Spartan, one of our great strengths is we are able to address multiple market niches within any market and we do it with speed and with high performance products.

In our other products market, i.e., service parts and assemblies, sales were at $108 million -- a high for the year ended in 2008, with most of this revenue related to support for military vehicles in the field. In contrast, we reported service parts and assembly sales of $33 million for all of 2007 and $10 million for all of 2006. We expect to expand the SPA of our business not just for defense, but for emergency rescue and RV as well.

SPA is a key part of our value maximization strategy because obviously within the life cycle of each vehicle there are tremendous opportunities to provide great customer service -- as vehicles do have problems, but also vehicles change or evolve as they are put or kept in use. And since 1989 Spartan has sold over 6,000 units and each one of those represents an opportunity from a value maximization perspective.

As we look to the motor home market or the RV market, it is still in a very, very distressed state. As mentioned earlier, we have proactively right-sized our RV business model to match demand. We are currently working on a number of initiatives to take advantage of some of the changes in the marketplace.

As we look at the industry from a recovery perspective, there are still opportunities for some recovery in the second half of 2009; however, we do not expect it to be gigantic. As we look at 2010, obviously we're more excited about 2010 than we are about 2009, but for the first time consumer confidence is starting to stabilize -- tick up a little bit. Consumer spending as a whole is starting to stabilize.

We see a large inventory adjustment in a variety of industries which bodes well for a variety of industries in the second half of 2009. So as a whole, from a North American perspective, a lot of positive things are happening within the current markets or economic conditions to honestly provide some growth in the second half of 2009 into 2010 and we expect to take advantage of that.

On a very positive side, despite the bad economy, people still intend to drive or use RVs. And what's interesting is a recent RVI survey in March of 2009 indicated that 55% of the respondents intend to use their RVs more this spring and summer than last year, and 45% are considering another RV purchase. Only 4% say they will use their RV less.

And after being in the business 23 to 24 years, this does not surprise me really for two reasons. One, the biggest economic indicator I've seen that drives the RV business is consumer confidence. As consumer confidence stabilizes and starts to tick up, people will start to buy RV units. Most RVs are still bought for cash, not financed -- over 50% -- which means as consumer confidence starts to move in the right direction, RV purchases will start to move up.

Another positive is there has been a significant inventory correction over the last, basically, nine to 12 months which bodes well for a potential significant up tick just from a wholesale perspective. The third -- and this just gets back to the use and the confidence. With fuel prices significantly lower this year than last year at this time, we are seeing increased attendance at shows. We're seeing increased number of units on the road.

So as people travel, as people move, and as their attitudes move in the right direction, right now we're cautiously optimistic that the second half of 2009 will be positive from an RV perspective versus the first half. And last and not least, there's 8.2 million RV owners in our nation and the market is there.

As we look at emergency rescue, and first looking at fire truck chassis, we had another good quarter compared to 2008. Sales increased 11.8% and the backlog increased 38.6%. Part of what was driving our sales in the backlog was demand related to industry regulation changes from an industry standard, which is called NFPA 1901 that took affect on January 1, 2009. And typically fire truck chassis lag the body side of the business by at a quarter or two.

We also are still optimistic that in the second half of 2009 due to a 2010 emissions change that there will be continued buying from an emergency rescue perspective whether it's fire truck chassis, fire truck bodies, ambulances, etc. As a whole what we're saying is that 2009 should be a very good year from an emergency rescue perspective.

As we look at 2010, let's just cover a couple of data points real quick because in the end data is a significant part of what drives or evolves markets. Fire departments respond to a call for help every 1.4 seconds. Last year, property loss was $14.6 billion -- that's just a lot of money. The number of Americans over the age of 65 will more than double over the next 30 years, and as more of us get older, more of us are going to ride in the ambulance whether we like it or not and that call for help will not be 1.4 seconds, but that number will become less and less.

Number four is there's 120,000 fewer volunteer firefighters under the age of 40 today than what there was 20 years ago. And there also is a reduction in state and local budgets because of the economic recession. What does this mean? What are the potential outcomes? Emergency rescue equipment must become easier to operate, more multi-functional, lower in cost, carry more equipment, lighter in weight as budgets shrink and firefighters themselves get older.

As the population ages calls for help will increase, and the need to prevent property damage will grow -- thus, products are evolving. And as I mentioned earlier, in emergency rescue alone in 2008/2009, we will be releasing at least ten new products or we have released products over the 2008/2009 time period to drive market share growth -- not in 2009, but in 2010.

And honestly, it just gets back to our business model. Society evolves, but when you have financial stability you're able to position yourself to take advantage of restructuring in society, restructuring in changes within the market. So, as the market comes back you're able to grow much faster.

However, emergency rescue realistically has an opportunity to be less in 2010 versus 2009. Why? Because of lower budgets from an economic perspective, and second because of a pre-buy potentially because of emissions. And so, we are very focused on doing the right things today in 2009 to ensure that we can gain competitive market share in 2010. So while others are struggling, we are growing. And this is nothing new. This is very similar to what we've been doing for the past ten to 15 to 20 years.

As a whole -- as I mentioned earlier, the emergency vehicle team made up about 19% of our total sales. They were profitable for the first quarter and we look forward to Q2 and Q3. They have improved considerably over the past six to 12 to 18 months. We continue to move the ball in the right direction and we're excited about the future.

As we look into 2009/2010, it is first important to understand that financially Spartan has taken some very, very wise and effective steps to weather the recession and to handle the uncertainties today. We have reduced our cost structure. We are introducing new products to address new markets or niches. We're developing new markets or niches both today and tomorrow.

Our diversified, multiple market strategy with operational market and strategic agility reduces our downside risk, while increasing our upside potential. We have demonstrated ability when it comes to transforming markets, and we honestly have a strong portfolio of brands.

We are very focused on our six strategic objectives -- directives; customer centric, innovation, lean, brand leadership, value maximization, and global. And as we focus on those six strategic directives, it doesn't mean business or life is going to be easy for us. There is a lot of work to do. But, it means that over time we expect to transform and improve not just the shareholder value, but the stakeholder value of each one of the customer groups we interact with.

As we look to the future, the first quarter was solid, but the reality is 2009 is still fraught with numerous challenges and those challenges are not going to be easy to overcome. As the release demonstrated or illustrated, the RV market is basically almost zero right now, but yet there's signs of life coming back and that gives us opportunity -- it give us hope, but there's still significant challenges.

In each one of our markets I should say there are challenges. In defense, while we anticipate a year-over-year sales decline in the first half of 2009, there is significant opportunity in the second half of 2009 relative to MATV and other potential orders with our customer group. As we look at the RV business, we are expecting flat to declining sales with really the potential growth in late 2009 moving into 2010.

Last, on the service parts and assembly side of the business, we expect to grow as a percentage of sales in 2009 and 2010. And on a final note, we plan to relaunch or I should say update our Roadcast virtual management presentation on our website within the next one to two weeks. Excuse me, we've had a tremendous response to this over the last couple of years, but honestly we've been a little negligent -- or severely negligent in updating it.

Well, honestly, we've had a lot of things on our plate trying to get a lot of things done and this is one of them that fell through the cracks, and I apologize for that. We're excited about the update. We took a look at some of the drafts this morning. We've got a few bugs to work out, but within the next one to two weeks that will be out there. The biggest differences though, is that the Roadcast will now be updated on a quarterly basis from a financial and a data perspective.

In the past, it was kept the same or stayed the same for a 12 month time period. On the new Roadcast version, we will be updating it quarterly and actually it will be updated the day before or I should say, the night of our earnings release. So that means you'll be able to listen to us on the conference call or the Internet, and then you'll be able to dial into the Roadcast presentation and take a look at the updated data on that part of the Roadcast for each quarter. And we're very excited about that.

When it is released and fully operational within the market we will be running or presenting a press release just to inform everybody. But we're excited about that initiative as well.

And now, I'm going to turn it over to Jim.

Thank you, John, and good morning, everyone. We reported $27.7 million in cash and cash equivalents at the end of the quarter, compared to $13.7 million at December 31, 2008. We ended the quarter with $16.6 million in long term debt virtually unchanged from where we were at the end of 2008.

We continue a $50 million line of credit with JPMorgan Chase which remains fully available at favorable rates to fund future strategic investments. We also have $30 million available on a $40 million shelf from Prudential Capital. Depreciation for the quarter was $1.8 million. Our effective tax rate in the quarter was 34.5% and we expect it to be in the range of 34% to 35% for the year.

Our consolidated ROIC for the quarter was 14% -- just below our company ROIC target of 15% to 20%. SG&A decreased year-over-year, although R&D cost did not decline due to the support required for NFPA and 2010 emission changes. With lower year-over-year sales, our ROIC was pressured despite our high gross margin percent. Within Spartan Motors and each of our subsidiaries, we use ROIC as a key measure of our progress.

CapEx for the quarter was $800,000. We continue to forecast CapEx spending in the range of $7 million to $8 million in 2009. We have positive cash flow of $16.1 million in the current quarter. Our strong cash generation is giving us the flexibility to pursue multiple avenues to create shareholder value such as investing in the business, funding the special dividend, or evaluating strategic opportunities.

It also allows us to repurchase shares. We have repurchased nearly 141,000 shares of common stock in the open market since January 2009 at an average price of $3.09 per share. This repurchase was the first under the 1 million share buyback program announced in July 2008.

The management team and the Board believes our share price was and is trading at a discount in relation to our long term earnings potential, balance sheet strength, and market opportunities -- including the opportunities John mentioned. We'll continue to evaluate future stock repurchases wisely in light of other opportunities, making decisions based on what fits with our strategic plan, the prevailing conditions in the economy, and contribution to shareholder value.

As we move into the second quarter, we remain on financially solid ground with minimal debt, available credit, strong cash generation, and operations scalable to meet current and growing demand. In light of the economic recession, we are placing strong emphasis on improving cash flow, leaning out cost, looking for short payback periods for any new investments. This year remains challenging given the economy, but based on our positive result in the first quarter we remain cautiously optimistic.

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

Thank you, sir.

(Operator Instructions)

And we'll take a moment to assemble the queue.

And our first question comes from Ned Borland with Next Generation Equity Research.

Hi, good morning, guys.

Good morning, Ned.

Can you give us the spare parts contribution to the other product sales for the first quarter?

It was -- we had a richer mix of spare parts, Ned, but that's not something that we disclose publicly.

Okay. All right. I thought you guys disclosed it last quarter, but okay.

What about the EVTeam backlog? It looks like you saw some sequential decline there. I was just wondering you know did you step up your production rates there given that you achieved profitability this year, or were orders slowing? What -- can you help us out there?

Ned, this is John Sztykiel. The biggest reason for the sequential decline in the backlog was just that there was a slowing of the order intake primarily at the Crimson Fire perspective. The order intake in Q4 was substantially higher at Crimson and I think for the industry as a whole than what's been in the past and so in Q1 their orders were significantly below the normal order intake rate which isn't surprising.

I would expect to see order intake increase in Q2 versus Q1. I'm not sure if it's going to be at the Q4 2008 level, but that's the number one reason was -- there was just less order intake in Q1 of this year.

Okay. And then the backlog in fire chassis grew substantially probably due to the standard change. Given that you had the standard change at the beginning of the year and then you've got potential pre-buy activity at the back half of the year, I'm just trying to ballpark a kind of a run rate for sales per quarter here. Do you think that it stays consistent with where it was in the first quarter throughout the year?

You mean from an order intake perspective or a revenue perspective?

Revenue perspective.

Well, I would think from a revenue perspective that you could probably look at the Q1 run rate and say that could be a good average for fourth quarter this year. From a top line -- or from an order intake perspective, I think what you'll see is Q2 will be a little bit better than Q1. You'll probably see Q3 be a little better than Q2. And then you'll probably see again a significant increase in Q4 versus Q3 as people start to realize they have to make a decision.

Now on the fire truck chassis side, a life at Spartan Chassis, they typically lag the body side of the business by one to two quarter just because those orders have to be processed. For example, Spartan Chassis still had a very good order intake in the month of April as OEMs continue to work through the processing of orders and what have you.

Okay. And then on MATV, I know you don't want to get into too many specifics here, but can you just kind of give us a sense of what the playing field looks like? How many participants are involved? How many OEMs do you envision that they're going to select and that type of thing?

Well, there's currently you know five players involved -- there are five companies. Our defense could choose anywhere from one to five. Past history has indicated that they'd like to keep more than one production line going. I think industry -- I don't want to say consensus, but a variety of people within the industry who have better experience in this business model, being defense, than I do indicate that there will be two, potentially three companies chosen for this project -- or I should say for this product up fit.

And you're working with out of the five participants -- you're working with two of them, or --?

Well, we can't comment specifically on that. In the past, we worked with three different companies; BAE, GDLS, and Forest Protection, and I think we've got very good relationships with all three.

Okay. And then finally on RVs and then I'll get back in queue. The amount of cost reduction you've done in that side of the business and given that volumes are in a sorry state right now, do you think that you've improved your cost structure in that business enough that when volume does come back you're going to be making margins that are -- or gross margins that are greater than say the low teens level that I think you guys were at before?

Oh, I think we've definitely improved our cost structure where we've got upside opportunity on the gross margin side from a business perspective. I mean one of the things which we take great pride in this quarter is the size of our gross margin. I think one of the things which we're seeing in Q1 is the Company as a whole is operating more effectively with the people and the processes we have in place.

However, in the RV business we also perceive that the products -- the business structure will change which really should give us some more opportunity I believe to increase the value or the dollar amount which goes out the door with each chassis we provide. If you take a look at the industry today and you took a look at the inventory turns of other public companies, and if you look back a couple of years at those that were in business, what you'll see is historically Spartan Chassis' inventory turns have been at least double of those of the body manufacturers out there.

And so, one of our direct strategic focus points is to work with our partners because we don't have a desire to get into the body business, but how can we work more effectively to improve or reduce the cost i.e., improve the effectiveness of the whole operational value chain? And if our inventory turns are double of a body manufacturer, one of the first rules or schools of thought would be how do you offload as much either from a bill of material content or process perspective to the higher performing, more effective company?

So I see two upsides as the RV business moves forward is one, I believe our gross margins will improve. But also, two, I believe that our dollar value or our bill of material content per chassis we ship will grow just because we're more effective. And these kind of economic difficulties or restructuring bring to light just the efficiency and effectiveness that needs to take place to be competitive in the marketplace.

Okay.

Sort of a long-winded answer, but those are the two biggest things we expect to see as the industry comes back, which both bode well for us.

Okay, thanks.

And our next question comes from Jamie Weiland with Weiland Management.

Hi, fellows. You've had higher quarters in the bottom line, but I don't think you've ever had a better quarter on the bottom than what you've done in this environment.

A question for you about service parts and assemblies. When I look at a Navistar, in their business and that part of the business they have operating margins of 19%. How does Spartan compare to Navistar there?

As I was saying with Ned, Jamie, we don't comment publicly on the gross margin by the different product categories. But we can say that it's -- our parts business carries a higher margin than the rest of our business, which is pretty traditional for most companies in this business.

Okay. But you've put backlog figure now in there for service parts and assemblies and it's a pretty decent number, too. Would I assume that service parts and assemblies in the second quarter mean that you have higher revenues than they did in the first quarter -- whatever those revenues may have been?

It's -- I'll be I would say as good, but potentially better.

Okay. And on the emergency vehicle side, you were profitable in the quarter for the first time in a long time. Were you profitable in each and every month, or was there a momentum that has built throughout the quarter, or how would that profitability have --?

I would say, Jamie, that we don't -- we don't want -- we don't normally comment on the months within the quarter and it's going to vary by company within the quarter. So -- I mean, I think we have a very positive trend. It's up substantially from last year. It's up from the fourth quarter of last year. So I think we have a good trend going.

And you'd expect to stay profitable I assume in that business as --?

Our goal is to be profitable in that business for 2009.

Okay. And lastly on the raw material cost front, obviously it's been a rather volatile couple of years. But, where do your costs and pricing stand right now?

We are benefiting to some extent because of the reduction in some of the material cost, especially in the area of aluminum and stainless steel.

Okay. And when you bid on these things you're -- the selling prices are pretty much fixed throughout, or how flexible are your selling prices --?

Our selling prices on emergency rescue and on the military are pretty much fixed once the contract is in place.

Okay. So it can be a positive or a negative, and it looks it will be positive moving forward?

Jamie, this is John Sztykiel. I appreciate your opening comment where you said, while we've have other quarters where the top line has been much higher, but I don't think we've had as good a quarter in light of these kind of economic conditions. And you know I would concur 100% after having been with this Company now going on my 24th year on a number of fronts -- from a margin improvement perspective, the effective and the efficiency is improving dramatically.

Now that we have Road Rescue under the jurisdiction of Spartan Chassis, I'm very excited about the lean and the efficiency initiatives moving with in that area. One of the reasons you've seen Crimson Fire improve dramatically is that under the guidance of Kevin Crump and a variety of individuals -- Jim Salmi etc., they've not just embraced lean but they've executed lean.

So -- in the reality is that we have a long ways to go. We are not truly a lean company throughout the whole value chain. But on the other hand also, too -- and again I spoke of it probably more than once in the opening comments, I absolutely believe that this is our best quarter and I think 2009 will be our best year from a positioning perspective for new market niches and also new strategic markets.

Our financial stability under this guidance of Jim Knapp and a great finance group has put us really in a very, very good position to not just weather the storm, but to really accelerate in such a manner so that when the storm or the uncertainty subsides a little bit that we have greater than industry average momentum whether it be in an existing market or a new market.

Outstanding. Thanks, fellows. Nice job.

Thanks, Jamie.

Thanks, Jamie.

And moving on, we have a question from Joe Maxa with Dougherty & Company.

Thank you and nice quarter, guys.

Thanks, Joe.

I have questions on the strong backlog parts business, fire truck -- the highest margin business is I guess that would indicate your margins should stay near your Q1 levels. Is that fair to assume -- at least in Q2 from Q1?

I think there's an opportunity to continue for some period of time this year at a higher margin level, but that's going to depend, Joe, really on the mix of products that we're going to have in each of the quarters. So, if we have a richer mix of the parts business, we'll be at a higher level. As the RV business begins to come back, as you know the vehicle business isn't quite as heavy in margin as the parts business so that will eventually cause our gross margin percentages to decline.

Right. John, you mentioned on the order rates for the fire truck chassis -- if I heard correctly -- that you expect the order rates to improve basically sequentially each quarter for '09. Is that correct?

Correct. The opportunity is there from a fire truck chassis perspective. We're still processing orders from OEMs that took a large number of orders in Q4, and so April was really a very good month from an emergency or a fire truck chassis sales perspective.

Now May and June could possibly be a little bit soft, so -- let me retract that statement. Q2 could maybe a little bit less on a chassis side, but then I see Q3 and Q4 potentially could be very positive not just from a body perspective and a chassis perspective.

But if I -- convey sequentially that Q2 would be better than Q1 from a chassis perspective, I don't think I'm ready to say that, Joe, because I'm not exactly sure what May is going to look like or June is going to look like.

You know -- I'm just -- because I'm thinking when you talked about revenue being maybe flattish with Q1, but it looks like your backlogs and order rates are increasing significantly from last year -- I mean, even if they're somewhere near the Q1 levels, which would suggest you need to increase production to get these fire trucks out the door in your typical ten month timeframe.

Well, we are absolutely attempting to increase production. The one area which we do not have control of and that is the OEMs we don't own. And again Spartan Chassis supplies products to over 50 different fire truck OEMs out there, for those of you that are new to our business model. And while we may own Crimson Fire and Crimson Fire Aerials and, obviously, we can affect their production rates to some degree, it is hard to accelerate the industry's production rates as a whole.

But as a company, you are very, very astute and correct that from a chassis perspective, while we have a definitive plan in 2009 for fire truck chassis, we believe we can grow production because we believe there is opportunity to gain more market share on the fire truck chassis side of life.

Absolutely. So when we look at the fire truck and the EVTeam as the year progresses, we should see orders and backlog -- well, really kind of maintaining or possibly growing is how we should think about those? For the full year --

Well, I hope orders grow and I believe orders will grow. I hope backlog does not grow, which means we will reduce our lead time and accelerate the throughput of products, so I would concur with order take increasing. I would expect our backlog to either stabilize or ideally come down a little bit as we reduce the lead time and accelerate the throughput of our emergency rescue products.

One of the things we believe is that as we reduce the lead time -- whether it be for a fire truck body, a fire truck aerial, an ambulance body, or a fire truck chassis, as we reduce the lead time we can gain competitive market share in the emergency rescue market.

One of the reasons we were able to grow in the RV market -- for those of you that are new to the Spartan business model -- was we were able to reduce our lead time versus our competitors out there in the marketplace. So, we were able to gain competitive market share with a higher priced product before the market fell apart really in the second half of 2008.

Joe, this is Dave Reid. You might also want to take a look at what we did introducing the Legend at FDIC. That Legend body at Crimson is a very high quality body and it's built modularly.

And so it kind of goes together a bit like LEGOs, so there's a lot of different options you can have with that body. But the way that it was engineered significantly reduces our labor hours in the construction of it so that improves our cost and it increases our speed. And everybody on the dealer level thought that was -- it was very well received because of those two elements.

Okay, well that would make a lot of sense because my next question was going to be your suppliers -- as they are the primary for your customer chassis, the cabs for the fire trucks, and if they had enough capacity to maybe meet your demand. But it sounds like you may be shifting to a new product, which would help alleviate that potential issue.

We're doing -- I think as we've mentioned before, we're expanding both the breadth of our product line, i.e., the different models and types of vehicles that we offer, and also the depth and paying attention to moving down in price point as well.

But one of the things and we are doing and that is we do have a strategic initiative in place where we are establishing a strategic fabrication for small parts. And this gets back to how do we accelerate the speed or improve the response time, i.e., reduce the lead time. And one of the areas we've identified in the value chain is that small parts, whether it be defense, RV, emergency rescue, etc. was a consistent bottle neck.

So as a company, it will be operational in the second half of 2009 -- very, very small capital investment, but you -- actually for those of you that will come view and view the facility in Charlotte, Michigan what you will see for the first time is a what we would call a small parts strategic fabrication initiative. And those parts will not just be for Spartan Chassis here, but will also go to the outlying locations of Crimson Fire, Crimson Fire Aerials, and Road Rescue, or other strategic partners as we see fit.

So again, as you look at the Spartan business model and you think back to agility, one of the definition points within the word agility is nimble or quick and as we improve response time or reduce lead time, we believe we can grown market share yet do it at a higher price.

Jim, one last question for you is the OpEx levels -- would we -- do they look like they'll be maintained around current Q1 numbers?

The operating income?

No, just the expenses --

Oh, the expenses?

Development and SG&A.

Well, R&D as I mentioned earlier, is at a higher level than we would normally be at in this situation due to the fact that we have two designs in for NFPA and also [in] emissions. So that will continue for some quarters, but we're going to leverage and drive our -- the rest of SG&A down as the year progresses. Hopefully, as the volume comes back and the RV industry, we'll have more latitude with maintaining SG&A.

Okay. Thank you very much, guys.

Thanks, Joe.

And our next question is from Frank Magdlen with The Robins Group.

Good morning, and that was a good quarter. Part of the question was answered, but the SG&A expense given whatever your capacity utilization is is this more of a baseline number going forward just to maintain everybody?

No, I don't think it's a baseline number. I think that the SG&A we still have opportunity as John was saying to lean out those numbers going forward. The R&D side it'll be a little more difficult to lean out as we are preparing ourself for all the NFPA and also the 2010 emission changes.

Okay. But - I mean you were at 10.4% of revenue, but I mean your -- what are -- your idle capacity is what? You're operating at what percent of capacity, do you think?

It depends on the different part of the business. We have lots of capacity in the RV business, and we're operating at higher levels as John said in the fire truck chassis business. And we're ramping up the volume in the -- EVTeam.

But from a capacity utilization perspective, if you took a look at it as a company today, Frank, we're probably maybe at 30% to 40% capacity on a double shift. We have a significant amount of room where we could grow the business without adding much CapEx.

Okay, and you've made those expenditures --

Right.

And you got -- you should have reasonable operating leverage going forward.

Exactly. And one of the things we talked about, and you see it on the Roadcast, is from a compensation perspective a key part of our compensation -- the largest part is based upon a form of return on invested capital/EVA which we call Spartan profit in return.

So while 2009, realistically, will not be as good relative to 2010, if we look at year over year compensation levels -- if we do our job properly and execute the right way in 2009, we should be back on a very positive upward trend in 2010, '11 and beyond.

All right.

You know sometimes we're no different than a farmer. Sometimes you've actually got a plant in the ground and wait a little bit of a time to really reap the fruit.

All right. On assemblies, will there ever be a time where you have a large backlog there that would not ship in the following quarter simply because it takes too long or the customer has asked for a future delivery?

It's possible where the military may request orders to be shipped over over a longer stretch of time and where the parts require a significant lead time of probably eight to 12 weeks.

You know, Frank, it's possible, but I will say this that goes against one of our strategic directives which is lean. One of the reasons our SPA business has grown so dramatically is we get very, very good reports from consumers, customers, dealers, etc. saying, "Wow. I order the part, i.e., the parts, the assemblies, etc., they show up faster and everything is correct."

So as we improve our response time, reduce our lead time, ideally you don't want order that represent a longer time period than a quarter. It just gets back how do you accelerate the turns -- accelerate the turns because as we accelerate the turns the business grows. So you know ideally it could be, but that's against one of our strategic directives which is lean, i.e., improve the response time.

All right. And, John, do you have any comment on what you're doing with Aerials now and where are they on the road to profitability?

Well they continue to make improvements. I can't say I'm pleased with their success because they're not profitable yet; however, they continue to improve in the right direction. They continue to pull through profitable Spartan Chassis and the other part is they continue to generate bodies that are profitable as well.

So again when we look at the total consolidated picture -- not just of the emergency vehicle team, but the pull through of Spartan Chassis as well, emergency rescue is by far our most stable business unit, one that has been very profitable, but also one that represents significant growth.

All right. And then just one other comment about what do you think is going to happen to your export sales in the next 12 to 18 months?

Hopefully up. I mean, the reality is our export sales are dismal at best. They are very, very low single digits and when you look at the value of the dollar versus the pound and the euro, we have tremendous opportunity.

I think one of the things Dave Reid spoke about a few moments earlier is the Legend body done by Crimson Fire is really -- it's the second product that's been designed and built by Spartan where exportability was a key component of the design and build process. The other product is the Furion fire truck and ambulance chassis. That has a European look to it.

So for the longest time, honestly, that's really a fault of my lack of leadership. Export or global awareness was not high on my priority -- the objectives to get done list. It is now. I see tremendous opportunity and I hope the answer is up. I expect it to be up.

Frank, this is Dave Reid. Commenting on the global to build on a couple things that John just mentioned is that we're really looking at moving from an opportunistic to a developmental strategy with this business. And we're evaluating assembly and distribution capabilities and markets that have low barriers to entry, have financial stability and demand for US-type products.

So we are looking at this in a pretty systematic focus right now and are evaluating how to best capture the opportunity that's out there, but we're prioritizing our focus.

All right, thank you, gentlemen.

You're welcome.

(Operator Instructions)

And our next question comes from Jack Hain with Barrington Research.

Good morning, and I'd just like to echo everyone else's sentiments of congratulations on the quarter. Real quick -- I was wondering if there were any specific drivers you could talk about that got EVTeam to profitability in this quarter?

I mean, this is the second quarter of year-on-year revenue declines, but the press release mentions efficiencies and that's what drove the profitability. I was just wondering if you could drill down into that any further?

Well, from a financial metrics perspective, I think the data is out there, but philosophically I think it's just the structural shift we need probably about I would say 12 to 15 months ago to not just discuss lean, but to embrace and where lean becomes a part of the everyday thought process. And while we talk about six strategic directives, probably the two we talk about the most is customer centric and lean.

And customer centric means you deliver to the customer what they want. You're easy to do business with, and you do the right thing with each customer group. And lean is just you eliminate the waste in all that you do and as Crimson Fire, Crimson Fire Aerials, and Road Rescue -- as they have embraced that methodology and it has start to become a part of their normal, everyday operational, their financial results have improved dramatically.

As Dave Reid spoke a few moments ago, that Legend body -- this new fire truck body is 15% lighter from an aluminum weight perspective which means as commodity prices if or may they go up we're at a very good position, but from an hours assembly perspective it's a least 30% less from an hours to assemble perspective than the previous body design.

And so -- I mean we feel very, very not just comfortable but excited about what that opportunity brings to the marketplace, and that's a body that's been designed with a lean thought process in mind, not just to be attractive to the customer, but it's got to be lower in cost to produce, purchase the parts and assemble.

We should also mention, John, that I think we've also benefited from some reduction in the cost of aluminum and stainless steel.

Okay, so -- I think that some of the answer of the answer to that first question will translate over to this second one. I was wondering if you could just give us any direction in terms of how we should think about modeling consolidated gross margins going forward considering that there's been a pretty wide variance over the last couple of years, and given the fact that a lot of other industrial companies right now are reporting lower gross margins on fixed costs under absorption and things like that?

Well, first and then I'll -- this is John Sztykiel, I'll let Jim Knapp jump in. It will be very difficult for us to continue the growth in gross margins. As Jamie Weiland spoke earlier, this was a very, very good quarter from a gross margin perspective. Are there opportunities to improve? Absolutely. But there are also competitive pressures out there because it is a very, very uncertain economy and price is becoming more important in the marketplace.

As Jim Knapp spoke a few minutes earlier, as the economy recovers, commodity prices will probably go up not go down. So there are pressures there as well. At the same time though, what you're also seeing is the benefits of a diversified multi-market business model.

Five years ago, service parts and assemblies were not even a key part of our strategic plan -- our operational structure. We've got some great leadership within that group. They've done a fantastic job. So what you're now seeing is that on the value maximization side of not just each vehicle we've produced, we're looking at the opportunities relative to service, parts, accessories to maximize the value of the vehicle within its operational life style.

So as we look to the future, it will be very, very difficult to improve where we're at today because there's tremendous -- there's a tremendous amount of pressure to bring the gross margins down some. However, at the same time, too, we're challenging ourselves to improve where we're at from today because obviously we're pleased with the results. And we improve our gross margin results, it gives us greater operational flexibility to execute certain strategic decisions.

Okay, that's all I have. Thank you very much.

You're welcome.

And our next question comes from Ed Lefferman with First Manhattan Company.

Yes, hi. Good morning.

Good morning, Ed.

A question on the RV industry. What's the implications of a Fleetwood bankruptcy, whether you have any receivables with them? And obviously with only $3 million in sales in the quarter I mean we know the industry -- that's a pretty de minimis level. What's the status of your other customers like Tiffin and -- what's their financial condition these days?

As far as Fleetwood goes we have a very small amount of a receivable there and it's been fully reserved already, Ed, so there's no future impact from that. As far as the other customer goes, we really can't comment on the financial health of our other customers.

Well it can't be very good, so what's the confidence that when the market turns that all the business doesn't just go to Winnebago which isn't one of your customers?

Ed, this is John Sztykiel. I mean one, there's no guarantee for the future. I believe as Fleetwood, Newmar, Tiffin and Travel Supreme, which is now a part of Jayco which is the Integra group -- as we look to the future we still see us being a very viable chassis partner with those four respective companies.

As we move into the future though there's a huge benefit to the situation in the RV business today and that is the business model is basically broken -- about zero for lack of a better term, which means that you can't get much worse. Really what you've got is upside opportunity. You have a chance not just to participate as the model rebounds, but also to help create a much more effective business model.

And as we look to the future, we believe that we will be a partner on an increasing number of platforms and whatever we provide to the marketplace, in addition to having an increasing customer base, i.e., size, we're selling to more customers, whatever we sell the dollar content will be higher. So from an attitude perspective, I'll be the first one to admit I would love it if the RV business was similar to the numbers of 2006, '04, '05, but the reality is it's not.

So the beauty of it is it can't really get any worse -- when you're at zero you can't go negative in this business. So, how do you make the best? And the good news is, it will come up at something different -- speed, agility, innovation will all be tenets of that and we're excited about the initiatives which we have ongoing.

Now it doesn't guarantee we're going to have a great future, but we were at zero in 1985 and it became a great business model for us. So we've done it more than one and the challenge is now for us to do it again, and we have absolute confidence we can make that happen.

Well, my question again is just with your level of confidence in the customer base if they're going to be around to participate. You only participate if they're there, or you can sign up someone new.

Absolutely. And one, we believe they will be there in some way, shape or form, but we also believe that we will be participating with an ever-increasing number of OEMs in the RV marketplace. One of the things we're absolutely focused on is we cannot accept the position we're in today and that is to be a partner with just four companies. We have to be a partner with more than four companies.

Okay. Fair enough. My only other question is it looks like with your cash flow in Q1 that you generated some good cash out of working capital, how do you see that for the balance of the year?

I think we'll continue to have a very positive cash flow for the year. And I would think that it'll -- our cash position will increase as the year goes on.

Okay, thank you.

Thank you.

Thank you, Ed.

Well, Operator, I'll only take one more call -- one more question.

Okay. We have another question from Joe Maxa with Dougherty & Company.

Hi, John. I just wanted to clarify on your comments regarding the MATV opportunity. I think you said 2,000 to 6,000 this year is what you're either seeing or thinking with -- the grow?

Yes, if you look at -- if you look at what is in the data points, whether it be the Defense News or other publications out there you see numbers ranging from 2,000 to 6,000.

Oh, okay, I just wanted to see where you got your info.

Yes.

That's all I have. Thank you.

Thanks, Joe.

John, do you want to wrap it up?

All right. You know in closing, again I want to say thank you very much for your time. We take great pride in what we do. We look forward to the Roadcast being out in the marketplace within the next two to three weeks -- we're excited about that. But as a company, we are cautiously optimistic. This is a very uncertain economy, but there's also tremendous opportunity. So while we're pleased with the quarter being the first, it's obviously past us and now we're focused on Q2 and the rest of 2009 and 2010 and beyond. So thank you very much.

That does conclude today's conference. Thank you for your participation.