Shyft Group Inc (SHYF) 2009 Q2 法說會逐字稿

Good morning and welcome to the Spartan Motors second-quarter 2009 earnings conference call.

All participants will be in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Spartan Motors. If anyone has any objections, you may disconnect at this time.

I would now like to introduce Mr. Jeff Lambert on behalf of Spartan Motors. Mr. Lambert, you may proceed.

Thank you and good morning, everyone, and welcome to the second-quarter 2009 conference call. I am Jeff Lambert with Lambert Edwards, and have with me today several members of Spartan's management team, including John Sztykiel, President and CEO; our new CFO Joe Nowicki; and Dave Reid, Vice President of Public Affairs and Brand Management.

I assume all of you saw our earnings release on the newswire and Internet this morning. We want to take a few minutes to discuss the results for the quarter. However, before we do, it is my responsibility to inform you that certain predictions and projections made on today's conference call regarding Spartan Motors and its operations may be considered forward-looking statements 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 the format of today's call -- John Sztykiel will begin the call with a brief overview of the quarter and then go over the operational results for each business segment and conclude with an outlook for the future. Joe Nowicki will then discuss the financial results for the quarter. Dave Reid will be available for questions at the end. We will conclude with a Q&A session, at which time the operator will instruct you on how to enter the queue.

With that, I will turn it over to John.

All right, Jeff, thanks so much. To all of you listening today on the call and on the Internet as well, thank you for taking your time.

This was another good quarter and our consistent performance through the first six months of the year is one that has demonstrated our diversification and the strength and the depth of our management. Challenging times -- but in reality, Q2 and Q1 have really been very, very good in light of some very, very difficult times.

As we look at the second quarter and the financial results -- and Joe is going to go over it in greater detail -- but we had net sales of $124 million, net earnings of $0.16 per share, gross margin of 20%, up 18% versus a year ago, and actually the fifth straight quarter of year-over-year improvements in gross margin, consolidated backlog of $161 million, and return on invested capital of 12%.

Our EVTeam as an operating group was again as a whole profitable. Our fire truck or emergency rescue market, the sales and backlog continued to grow, and this is extremely positive and exciting as we look to the future because emergency rescue is without a doubt one of our most stable markets with really very, very good growth potentials ahead of us. Beyond our financial results, we also undertook several other initiatives in the quarter that we expect to bear fruit later in '09 and 2010.

Operationally, we will continue to take steps to manage costs, improve efficiencies, and size our business correctly with demand across all of our business units, product lines and market segments. This includes adjustments to staffing and as we continue to lean out our facilities, whether it be from a process/people perspective to ensure we are the right-sized company relative to the backlog and the business at hand. We have already seen the effectiveness of this effort in the first half of the year. However, there are still tremendous opportunities for improvement as we move ahead.

Another initiative which we are moving forward on which over time will reduce our cost base, both short-term and long-term, is that of strategic fabrication. We are taking proactive steps to better control our supply chain through strategic fabrication. This is simply in certain selected areas, both metal cutting, assembly, weld, and fabrication.

We will begin producing certain value-added components in the third quarter of this year, starting in our Michigan location. Over time, these parts will be utilized at our other assembly facilities outside of Michigan as well.

Why are we moving in this direction? Today, the marketplace values the complete vehicle and no longer separates the chassis and the body as it used to be. We have tremendous opportunity to capture higher margins through enhancing the uniqueness of both the chassis and the vehicle, reacting with speed but also reducing our cost base. If there is something which is inherent within the custom vehicle businesses when you order parts with short delivery time periods and small volume, you pay an absolute premium from the supplier. That is a major initiative for us to reduce at this particular point in time.

Another major initiative which was accomplished this past quarter which I think will bear tremendous fruit as we move forward was the addition of two experienced executives to our leadership team. Tom Gorman is our newly created Chief Operating Officer, and Joe Nowicki, who is succeeding Jim Knapp as the Chief Financial Officer. While Tom is not here today, he will be on calls in the future.

Tom's role as COO is to oversea the four current business units in addition to implementing strategic growth initiatives. We have been looking for an experienced person for quite some time, who has both a big-picture view, a strategic view of both the operations and the opportunities but at the same time has the demonstrated experience to ensure operational results each and every day.

In addition to that, Joe Nowicki brings with us an experience on return on invested capital, and we see a tremendous fit, both within our culture, both from an operations perspective and a strategic perspective.

I also would like to thank Jim Knapp for his lasting contributions, his seven years here and what he has done to both not only drive results but position us for a very, very strong future. We wish Jim well as he moves into retirement.

With the addition of both Tom and Joe, we bring global experience, we bring demonstrated excellence from a strategic perspective, and we also bring demonstrated excellence from an operational perspective. Both of these individuals I think will contribute significantly to SMI, both in the short term and the long term.

Before I get into the market segments, there are definitely going to be some challenges for us over the next few quarters. While Q1 and Q2 have demonstrated our ability to work through uncertain times, to work through difficult times, the next several quarters will be challenging as well. However, from an optimism respective, ours is not diminished today. While there are challenges, one of the most exciting things about the times which we are in today is that society continues to change at an ever-increasing rate, and the opportunities for vehicles to change and the opportunities in front of us are the largest I've seen in the past 20 years.

Now, I would like to review our results by the end markets which we serve. Looking at the defense market, Spartan Motors was not part of winning the M-ATV bid, but we continue to supply components, vehicle integration under several contracts with our defense customers primarily in the mine-resistant vehicle area. We certainly have proven experience and production capacity to handle additional defense vehicle contracts. We are actively pursuing additional orders for variance, whether it be ILAV, MRAP, etc. Simply, while we were not successful on the M-ATV bid and we potentially could be a supplier. And other than that I really can't comment any further as we make it a standard protocol not to comment on potential opportunities from a detail perspective.

We are in the defense business today. I see us being in the defense business tomorrow. I see us being in the defense business ten years from now. We bring to the market customization; we bring to the market innovation and we bring to the market agility. Those three things are attractive in almost any market segment, for any product line in the global marketplace today.

Moving over to Service Parts and Assembly, sales were increased year-over-year by 110%, along with strategic fabrication, SPA or Service Parts and Assembly is a key part of our value maximization strategy. Simply, there are over 65,000 Spartan-related vehicles in service today, and each one of those represents a tremendous opportunity not only when it leaves our facility but also relative to maximizing the opportunity to both provide value and increase sales and income as time goes on.

SP&A should also continue to be a revenue opportunity as we look into the future and other markets. As I mentioned earlier, we have over 65,000 vehicles out there and as we move into the future, this is a very, very important initiative for us.

Let's move over to the RV business. Sales were again down in the quarter, reflecting the industry as a whole. While the RV industry remains challenging and it will be a slow growth cycle up, we are finally starting to see some improvements very, very slight, in May and June.

What's interesting is, if you look at the backlog sheet, the backlog for motorhomes is actually up from a percentage perspective substantially. The number is still very, very small, but for the first time in quite some time, we have gone from order push-backs to forecasts to POs, and so it appears we have met the bottom and the industry is now starting to come out of the depression/recession which it has been in.

Again, it is going to take some time for the RV business to recover as a whole. However, as a company, we will be introducing for to six new product technology initiatives at RVIA. These will be some very, very what I would call forward-looking, some in line with today's opportunity in the marketplace, but the RV industry as a whole remains very, very important to us.

What's interesting, as I pointed out that the YVRV industry is an important industry, more than 0.5 million people enjoy an RV. So that's a pretty astounding number. Then when you look at the cost structures and some of the changes going on within society today, an RV or a vacation to the outdoors, which involves either a motorhome, a passenger car pulling a towable, etc., still remains one of the most cost-effective vacations within North America today.

So as you look at costs or value becoming more important in the future, and you look at the scenery which we are blessed with within North America, and you look at a population opportunity, getting back to the fact 0.5 million people each day are enjoying an RV somewhere, this is still a great market to be in and we are very, very committed to it.

As we move ahead to Emergency Rescue, first looking at the fire truck chassis business, we had another good order compared to a year ago. Sales increased 51% and the backlog increased 12%.

Our sales and backlog reflected higher demand, some of which is from the 2010 emissions change which will be coming up. We also believe, in the quarter, we are gaining in some areas from a competitive market share perspective as we continue to execute relative to competition.

The reality is we have a strong order backlog for the second half of '09. There is an emissions standards change being implemented in January of 2010. Our operational performance is very responsive relative to adding new customers. And as a company, we will be bringing or have brought at least nine new products between 2008 and 2009 into the emergency rescue marketplace.

Now, while we will see very little results from those new products in 2009 and I doubt we will see much momentum from those new products in the first half of 2010, we are very excited about the opportunities for those new products in the second half of 2010 and beyond. While in one respect that may seem like a long time period, the reality is within North America -- being Canada and the US -- there's over 30,000 fire departments and it takes a significantly long time to introduce a product and develop that market. On average, it is 12 to 18 months because, financially and physically, it is very, very difficult to create the exposure, the awareness with 30,000-plus fire departments.

Sort of an astounding fact is a fire department typically makes a purchase after it has seen the vehicle 71% of the time. So, you've just got to do the math. When people say, "Why does it take so long for an emergency rescue product to gain traction?" think of the number 71%. They've got to see the product. You do 30,000, it just doesn't happen overnight.

From an emergency vehicle team perspective, which made up about 22% of our total sales in the quarter, it was another solid quarter and again, as a whole, it was a profitable quarter. This was largely due to our efforts to streamline operations at all three companies within the emergency vehicle team, Crimson Fire, Crimson Fire Aerials, and Road Rescue and from increased fire truck sales. Moreover, we expect the same factors to continue to gain momentum in Q3 and Q4, but there are challenges ahead of us, as there are in every market and every day, but we are very focused on ensuring the operational execution.

To wrap things up in the emergency rescue market, it clearly remains our largest, most stable platform. We see very, very good opportunities for growth in the future. We hold a positive outlook for '09 and we are excited about 2010 and beyond.

In closing, as we look at the first six months of 2009, our diversified multiple market strategy/business model and our operational and strategic agility have reduced our downside risk while increasing our upside potential with really very good results in light of the circumstances which we are in today.

We have demonstrated Spartan's ability to transform markets and establish a portfolio of strong brands. In addition, this current recession, as I mentioned earlier, is causing massive changes in our society and as society changes, vehicles and markets will change.

As a company, we are very focused on protecting our R&D costs, we are very focused on ensuring product development, because to develop a market to develop a vehicle is not a three to six-month process. It definitely takes some time. You not only have to ensure that you are delivering a safe vehicle, you're ensuring a high-quality vehicle, but you also have to work to ensure that the amount of invested capital you are putting into the project is going to have the right return on investment.

To give you some idea relative to validating the opportunity for vehicles to change, attendance at the March 2009 National Truck and Equipment Association show in Chicago -- attendance was up 19% in the midst of the most difficult economy North America has endured in quite some time. The fact that attendance was up is really a validation that people as a whole are not satisfied, are unhappy with the vehicles they are using today. They expect cost to go up, they expect work to change or operations to change, so they are looking for something different and that is where we fall in.

So as we look to the future, as mentioned in the release, I have no doubt we will be in 2 to 3 new strategic markets within the next 9 to 12 months. And how can I say that? Taking a look at the number of initiatives which we have going on internally, whether it be from an M&A perspective, whether it be from an organic perspective, whether it be from an opportunity perspective, as a company, we are moving forward from a strategic growth perspective.

To reiterate our expectations for the rest of the year, we believe the next few quarters will be challenging from an earnings perspective. We said that right at the beginning of the phone call. We expect our consolidated 2009 results to be less than 2008 because of macro market conditions as well as the year-over-year reduction is specialty vehicle sales for large-scale defense contracts.

Operationally, as mentioned earlier, we are taking the right steps to manage costs, improve efficiencies and ensure our business is sized appropriately with demand relative to the market segments which we are in. However, as Spartan transforms from an opportunistic organization to one of balanced strategic growth, the long-term opportunity is there.

What do we mean by balanced strategic growth? First, you have opportunities where you take advantage of opportunities that come to you with agility and demonstrated speed. Organic -- you look at innovation and opportunities where we create or we develop, through an innovative process or product, we develop a new product or a new market niche.

Then on the mergers, acquisition and partnership side of life, while we have been very involved and we haven't brought the right partnership or acquisition to the table yet and executed, we are very, very much within that field of play because there are opportunities out there and Joe Nowicki will go further into that. But it's got to not only be the right strategic fit, it's got to be the right financial fit. Both have to be the right fit. Simply, we are being quite choosy.

From a final note respective relative to investor relations, will be update -- or I should say we have updated our RoadCast virtual management presentation on our website with second-quarter information. This really separates us from a lot of other public companies out there. So if you are not familiar with our RoadCast, please turn to it. You will see the second-quarter information up there. What will also be taking place in Q3 as well is Jim Knapp, our past CFO, is on our RoadCast, and in Q3 of this year, Joe Nowicki will now move onto the RoadCast as the update from a CFO perspective.

So in closing, I want to say thank you very, very much, appreciate your time and look forward to the days ahead. Joe?

Thanks, John. Good morning, everyone.

Before I talk about the highlights of the financials for the quarter, let me provide you with a little bit of information about my ground. In my previous position, I spent 17 years with a top office furniture manufacturer located here in Michigan, most recently as Treasurer and Vice President of Investor Relations, but I also enrolled as a CFO of their international business as well as CFO of several operating units. I've also worked in financial roles in the automotive industry and the computer industry. In addition, I've work in consulting and began my career in public accounting. My previous position was in an organization with a similar culture to Spartan Motors, a culture based on innovation and focused execution. Further, Spartan's emphasis on return on invested capital fits with my background with economic value-added financial management.

Looking at my financial philosophy for Spartan, I plan to continue all of the things that have been working here, including a conservative approach to financial matters, keeping a low breakeven point and guiding decisions to improve SPAR or SPAR profit and return, which is the key economic value-added financial model we use. I am excited to join this excellent organization and to be speaking with all of you today and in the future.

Turning to our financial results for the second quarter, we posted solid second-quarter operating performance driving a 6.6% operating income level despite difficult macroeconomic and market conditions which caused a revenue decline of almost 37% from the prior year. The bulk of the revenue decline was in the motorhome sector as well as the defense sector, reflecting the completion of several large orders for defense customers in the second half of 2008. It was partially offset the increased volumes in the fire truck chassis business.

Gross margins improved for the quarter as a result of the improved product mix and also lower commodity costs.

From a balance sheet perspective, we reported $16.8 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 $16.3 million in long-term debt. Depreciation for the quarter was $1.9 million.

Our effective tax rate was 33%. Our return on invested capital for the quarter was 12.1%. In Spartan Motors and each of our subsidiaries, we use ROIC as a key measure of our progress. As noted in the press release, we define ROIC as operating income less taxes on an annual basis, divided by total shareholder equity. This was below our company ROIC target of 15% to 20%. With lower year-over-year sales our ROIC was pressured to spite our higher gross margin. It is also related to our bonus program for management and associates, which is based on an economic value-added financial framework.

We forecast CapEx spending of almost $5 million to $6 million in 2009 to maintain our current operations. For operating cash flow, we use $5.1 million in cash to support current working capital needs.

Looking forward, we are going to continue to structure the business to operate profitably at the current demand and product mix levels, in addition to retaining our focus to further strengthen the balance sheet all the while accelerating the development of new products and in new markets.

With that, I will turn the call over now to the operator, who will begin the Q&A session.

(Operator Instructions). Ned Borland, Next Generation.

Just looking at the backlog in other specialty, it has held pretty dramatically. I know that the spares, parts and accessories are in there now. You said the installed base of vehicles out there is 65,000. I mean, how is the installed base going to trend going forward? Have you shipped already enough sort of spare parts kits in order to sustain this level of revenue that you have been seeing recently?

Well first, Ned -- and this is John Sztykiel -- from a service, parts and assemblies perspective, what has driven the business the most over the last 6 to 12 months has obviously been the defense portion. There are still tremendous opportunities out there to both grow -- to both develop and grow that part of the business.

The interesting thing is about the turn cycle on service, parts and assemblies -- is it has a very, very short turn cycle in that, when people want the parts, they place the orders and part of our demonstrated excellence is that we turn the orders very, very quickly. So we see tremendous opportunities for us to grow the business.

On the other hand, though, the reality is that there are a fair amount of our vehicles which are in Iraq, and the situation in Iraq today is not as violent as what it was 12 months ago at this time.

So, from a pure use perspective, there is the potential for less service, parts and assemblies relative to those vehicles overseas, in particular Iraq. However, there is also the opportunity for refurbishment. As the military takes vehicles out of service or reduces their service, they typically look to upgrade, refurbish, etc. So we are now starting to see those opportunities come to bid in the marketplace.

As we look at service, parts and assemblies, we still see it as one of our key business segments. Will we have the same demonstrated percentage growth over the next six to nine months which we've had over the past six to nine months? Honestly, it's a bit too early for me to tell today. But the backlog is down in that particular area, and I think part of it is just the fact that the vehicles are not being used as much in a violent situation as what they were 12 months ago.

Okay, yes. It just seems like the installed base is sort of plateauing here, and absent any other military programs, significant ones, that to grow it, it would you would have a hard time matching what's already an impressive last 12 months of spare parts volume.

No, I would concur with that. It will be hard to match percentage growth, percentage growth, percentage growth. However, there is the potential for the shift to go, for example, from servicing what is operating to now refurbishing or updating what is not being used. That is something which we are actively involved with.

The other thing, too, which to note is Spartan Chassis continues to receive numerous awards from the defense industry or the purchasers of these products, relative to on-time delivery, really standards of excellence. So what's exciting for us internally from a strategic team perspective and an operational team perspective -- when we look at both vehicles and service, parts and assemblies, we really do have a very, very strong team today and they are very focused on growing the service, parts and assemblies business outside of just MRAP-related products.

So as we look to the future -- and again it is too early to tell -- but as we look to the future, we expect our opportunity, for lack of a better term, to be a service/parts provider on vehicles in the defense business which are non-Spartan to grow, not become less.

Okay, that's helpful. Then switching over to the fire or emergency rescue side of the business, you've described it as sort of stable at this level. Since we have all read about tight state and municipal budgets, is perhaps the hangover effect after the emission deadline going to be a little less pronounced this time around than it was in '07?

Oh, I would concur with that 100%. I think one of the things which the industry as a whole is going through right now is the uncertain economy and the reduction in state and local budgets is definitely affecting, in some respects, the order intake. However, we saw that happening a year to a year and a half ago, which is why we accelerated a lot of product market development initiatives relative to emergency rescue.

I don't believe you're going to see the drop-off in orders in Q1 and Q2 of next year versus maybe Q3 and Q4 of this year to be as great as to what you saw in Q1 and Q2 of '07 versus Q3 and Q4 of '06. Dave Reid is shaking his head yes, and Dave leads Crimson Fire/Crimson Fire Aerial. So David, I'm not sure if you've got any comments relative to that as well, but I am pleased to see, at least visually, you are agreeing with what I'm stating.

Yes. Ned, what we saw was the impact of a huge amount of orders that we received at the end of '08 coming into '09, so '08 we received an inordinate amount of orders prior to the NFPA safety standards taking effect in January of '09.

We are seeing our sales log right now also increasing, which is a good thing to see because when you are trying to work a bubble through I think Q1 and Q2 orders, where a lot of them were pulled through last December. So we have seen an uptick in the sales log as well. So we are keeping our fingers crossed.

Okay, that's helpful. On EVTeam, it looks like operating margin came in at about 2% for the quarter. I mean, what has to happen in order for that to get to, say, like a 5% level or better? How long would it take to accomplish that?

Well, a couple of things need to happen. One, we need to continue to reduce the labor hours, the assembly cost. I will say this. Crimson Fire's new Legend body is a huge step in that direction. The assembly hours of their new Legend body series is more than 35% less than what the previous or current body design is. That needs to take place at Road Rescue. Now, that will not happen until probably Q2 or Q3 of next year, where they are working now on what they call their NGA or Next Generation Ambulance body, which for lack of a better term utilized a lot of the same methodologies that were utilized on Crimson's next-generation body design.

So first the labor hours have to come down. Second, you have to reduce the bill of material costs. For example, Crimson Fire's new Legend body weighs 15% less than what the current body design was. Obviously, that lower weight translates to a low bill of material structure.

It's not just aluminum or steel. There's also a reduction in electrical, electronics and other parts of the vehicle as well.

So from a Road Rescue perspective, while they are making progress, I don't think they are going to make what I would call the large incremental progress until probably Q2, Q3 of next year, when they bring on their next-generation ambulance design. I feel confident that will happen because we've seen very, very good success just showing up in Crimson Fire as a result, relative to their next-generation body design which is now in production.

From an Aerials perspective, they continue to really need to do the same thing. That is to reduce the hours to assemble an aerial product and at the same time reduce the bill of material costs. That organization is focused on exactly the same methodology, reengineering the product to reduce the hours to assemble, reengineering the product to reduce the bill of material costs.

Walt Liptak, Barrington Research.

I guess my question is on the gross profit. I wonder. You mentioned that EVTeam is profitable. I wonder what kind of gross margin you're getting there. I imagine that, in motor home chassis, that you're gross profit negative observing overhead. What kind of gross margin you might be getting with the other products?

You know, Walt, this is John Sztykiel. Normally, Joe would answer this when he's been on the job that long, we really don't break down gross margin by market segment for a simple reason. A lot of our honorable competitors listen to the exact same call, and when we start to get into that kind of detail, you can really start to get into the numbers, drive down to the sales price, and to be quite blunt, we put ourselves at a disadvantage (multiple speakers) additive procurement process.

Okay, yes. I am certainly not trying to get you in trouble with your customers. But with the military part of the business --

(multiple speakers) -- give our competitors an advantage.

Right, disadvantage, right. With the gross margin maybe being higher in the other products and the military business winding down, I just wonder about some of your comments in the press release about the next couple of quarters being tough. I am just trying to get a read on how tough those might be.

I would think, from a gross margin perspective, if you look at a percentage, I mean relative to where we are in Q2, I think we have got a reasonable opportunity to maintain the gross margins in Q3 and Q4. I'm not saying it's going to be easy, but as a company we continue to get wiser.

As I mentioned earlier, we've had some very good what I would call successive quarters in a row where gross margins have improved, and so it's not like all of a sudden we are going to stop, okay?

On the positive side of the fence, we are not seeing large increases, or really increases at all per se from a commodity or a bill of material pricing perspective, so that's very positive.

I think, relative to reengineering our products to reduce our bill of material cost base, we are wiser, more efficient than where we were 12 months ago. That's reflected in our improvement in gross margin.

So as we look over the next couple of quarters, I think we've got a reasonable opportunity to maintain the gross margins which we've seen in the second quarter of this year.

Okay, good. Let me try and ask the question again in a different way. You know, in some of the commentary, you said that the gross margin improvement was product mix, some of it was lower commodity costs. So what percentage -- or how would you break out the improvement, product mix versus the price/cost relationship?

This is Joe. When you take a look at those two pieces, it's really a pretty even split between both of those elements combined. It doesn't really lean towards one or the other. To add onto John's earlier comment, as we look forward to the third and fourth quarter, the challenge obviously is going to be the demand piece and its impact on the fixed overhead cost structure. So clearly, the commodity piece has been a benefit to us; the mix piece of it stays in that same order will help us as well too. But the issue which is going to be the challenge will be offsetting the fixed cost associated with the overhead costs and manufacturing. So the demand declines are where we are looking cautiously to how that will impact the financials going forward.

Walt, as you look at a number at the trade press this month, you're going to see some very aggressive work that we are doing to increase demand. We bought stainless steel on the spot market when it was being dumped a couple of months ago and we're offering stainless steel bodies at the same price as aluminum. Next month, you're going to see some ads hitting with some very aggressive base prices. So along with the focus on rightsizing the business and the commodities, we are being very aggressive on increasing sales activity and excitement around the products that we have. So we are continuing to invest in that area as well.

Okay, thanks. Yes, that helps.

You know, and really for the group as a whole, something I do want to obviously jump in there -- and I made this statement earlier. While we've got a reasonable opportunity to maintain those gross margins or what we had in the second quarter going forward, on the other hand too, it is a more competitive market. As you see earlier, the backlog is down, and the RV business, while moving up, is not great. You've got cities and budgets which are tighter (inaudible) the city going forward. The defense business is not where it used to be, which typically means that, from a pricing perspective, as you go out to try to attract and gain new business, we may be making the operational decisions to take projects or orders or to execute initiatives at a lower gross margin structure than maybe what we've done in the first six months of the year.

So I think we've got a lot of positives moving forward in the right direction, but at the same time I am also trying to provide both wisdom and qualification that, if we deem it to be the right fit, we probably would take orders at a lower gross margin over the next three to six months than maybe what we've done in the last three to six months just because this recovery which people say we are talking about, it's not going to be a dynamic recovery up. It is going to be a recovery that is represented with high unemployment and slow growth, which typically means a little bit more aggressive pricing structure.

Okay. Then I will get back in queue, but after one last question. What are you doing to address the SG&A expenses? Is there any reductions that you can make there to help mitigate the slowing?

This is Joe. I will take just a quick stab at this answer for you. As John mentioned earlier, in my kind of vast three days of experience so far, I will give you all I do know. Between the new CLO, Tom Gorman and myself, we have just started to kind of dive into the cost structure across the organization, looking for ways that we can try to improve things. Tom and I have several ideas of actions that we could take to really look at getting the team working collectively in a little different way than they do today, which will have a favorable impact on the SG&A piece.

So we've got a lot of good ideas yet. I don't have a specific number for you, but stay tuned on that, and there will be a lot of good work going on looking at it.

Okay, got it. Thank you.

But you know, I would tell you that's a very good question in for the group, but one of the things that Joe Nowicki brings to us is his previous employer had to through a rather dramatic rightsizing in the early 2000s when the .com bubble sort of burst, or did burst for lack of a better term. We had a decent recession and they had to change the structure of their business. Maybe, Joe, you just want to not so much expound on what Herman Miller did but the lessons which you learned and how that will be applied to Spartan, because Joe has a demonstrated experience within this area.

We have -- unfortunately, the furniture industry is a cyclical environment and that's a discretionary capital good. So that forced us to keep a very lean structure in place, a highly variable structure in place from an SG&A perspective, and also forced us to keep a very close eye on our balance sheet and capital structure as well, too.

So we were constantly looking across the board to not only keep our cost structure highly variable, but in addition to that looking for ways to make a step functions from time to time as you need to as demand changed. That's the same type of philosophy I think we will be looking at here is, one, how to create a variable cost structure as much as possible, and also how to adjust when the demand requires you to make step functions in that cost structure as well, too.

Joe Maxa, Dougherty & Company.

John, I wanted to dive a little bit back in that SPA business. You know, your backlog in the other line is, at $23 million, down significantly. Are we at a level that you think is sustainable in your military parts over the coming quarters, or do you think we will see that drift lower given the lack of activity you talked about?

Well, I think -- I tell you what, honestly it is -- in one respect, it is hard for me to forecast because there is such short turnaround cycles on the SPA side of the business. I think we've got a very good chance to maintain where we are at.

However, I will say this. The need, or the opportunities, because the vehicles are not being utilized as much, we definitely saw that from a backlog perspective in Q2. So, that will probably continue some as we move into Q3. So realistically, what you may see is probably a lower revenue stream from a service, parts and assembly side of business over the next couple of quarters and then a ramp up as w increased some of our opportunities relative to other markets, whether it be defense, emergency rescue, RV, or refurbishment contracts.

There is more quoting going on than what there was three months ago in the SPA side of life right now. Part of it is for other defense-related markets; part of it is for emergency rescue and RV and other products as a whole, but part of it is for what they call refurbishment or upgrade.

So let me just see if I can understand the dynamics of the SPA. I mean, it ramped up pretty strong over the last couple of quarters. Was this because of activity or were they more stocking up to have stuff in their warehouses ready to go when something happened, and now they are basically full and don't need to have that product still coming in? You know what I mean? So I mean looking at more of a --?

Actually, I think it was quite a bit of both. I mean, when you have vehicles being used in a violent situation, stuff happens. When you have a $700,000-plus object which you can't move, then that's an asset which is undervalued, not being utilized. So, what you had was parts being bought to ensure they were in operations, parts being bought to be ensure, if something happened, they were put in operation quickly. So there was a period of both going on.

I was just wondering if there is a potential to see like a lumpy quarter as you get to -- big orders come in maybe a couple of quarters from now to re-supplement stuff that has been utilized, or do you think it will be more --?

Oh, now that I would say the opportunity is definitely there, because when they to refurbishment, reset, upgrade, they are typically a large number with a large volume quote. This is true not just on the MRAP product but other defense-related products as well. So I think that opportunity is probably greater today than what it was nine months ago for a large potential upgrade, for lack of a better term.

I don't think it is going to happen, honestly, within the next probably 90 days. There is an opportunity in Q4 as we look at some of the quoting activity going on, but I don't think you would see something like that happen in Q3.

So your inventory levels are pretty consistent with last quarter, and I think, if I remember right, a lot of that was due to the spare parts and being ready to ship them. What are we looking at inventories right now? How should we be thinking about them, and how will maybe they come down as the revenues start to ramp down?

Yes, I think, obviously, the demand will start to decline the revenues going forward -- or decline the inventories going forward. So, as you kind of traditionally would see in any industry, we will see those inventory levels come down with the demand.

Okay. You talked about doing some more fabrication welding in-house. Is that going to lead to increased CapEx in the near term?

No, not in the near term, no. That CapEx was really spent earlier, so not in the short term.

You talked about rightsizing the business or keeping it at the right size. You talked about staffing levels. Are you talking about any type of meaningful adjustments there?

I think what was stated earlier is probably as far as what we would like to go with that right now, Joe.

It is too early to give you a specific answer. We are looking at a lot of things right now and what that might be. As we get a better handle on it, you guys will be the first to know.

Okay. Talking about the challenging earnings, are you still expecting to be profitable in the back half?

The answer is yes.

One last thing -- you talked up out I think delivering a more complete vehicle versus chassis. Can you expand on that a little bit, what you're looking at? I obviously knew the fire trucks and ambulances, but I'm just looking for a little more background on what you are expecting out of this.

You mean out of new strategic markets?

Yes.

Well, and I've mentioned this a little bit before, but if you just look at, for example, the Delivery or Do market, which we call DoD, the Delivery or Do, and if you look within large cities in particular, there's a lot of vehicles being utilized where they are not optimal for the work conditions being done. The frame rails could be too high; the vehicles could be too heavy and now you've got excessive fuel consumption, etc. So one of the things which you're seeing is there is a tremendous amount of activity as to how to change the vehicle to improve the optimization for entrance and egress from the vehicle.

Now, the nice thing is, is when you create vehicles that have some of those character traits, then that takes you into other markets where potentially the product could be utilized, such as tow and recovery, such as waste management, have applications in emergency rescue.

So you know, as we look to the short-term future over the next 9 to 12 months, a key area we are focusing on is the Delivery or Do marketplace, where the vehicle today -- they have primarily been purchased around a low price but not optimization from a work perspective. That provides opportunity for us from a vehicle perspective and a chassis perspective.

Another area of significant opportunity is in the alternative fuel area, not so much from a public perspective or a commercial perspective but more from what I would call a state and municipality perspective. There have been over 800 mayors that have signed up for the Clean Cities Act, and there are opportunities and interest from cities/municipalities for vehicles which are non-diesel or non-gasoline based. Could be a hybrid, could be a pure electric. Part of that is being driven by increased federal funding or support for the products or projects where the vehicles have some kind of alternative fuel-based platform. So that's another key area of focus.

Another key area of focus would be in the aging population. The reality is 11,000 people turn 50 a day. There's over 140,000 taxicabs in service today, but when you have an aging population, you have transport and you have medical needs. There are opportunities in what we would call the nonemergency ambulance transport arena.

So that is a broadbrush overview. Last, you know, as I mentioned earlier would be that one of the projects we expect to show at RVIA -- a rather exciting combination Class A, Class C towable product. So we've got some very exciting initiatives ahead of us, but from a new market strategic perspective, I think that gives a pretty good overview.

Okay, and then lastly -- thanks, John. Lastly, you mentioned opportunities about the -- in the M-ATV program. I know you didn't want to expand too much, but are you talking with the potential supplier that -- or someone that -- or if there is an order issued to a second supplier?

You know, I really can't comment other than the fact that all are pursuing all opportunities available to us which make both strategic and operational sense. There is definite time and activity allocated relative to being a potential supplier in the M-ATV project. Other than that I really can't provide any other comment.

(Operator Instructions). Amy Norflus, Pilot.

Can you tell me when we are going to start to sell the cement mixers, and how big can that be to the revenue stream -- for the concrete mixers, sorry?

Well, Amy, this is John Sztykiel. One, relative to cement mixers, I don't see that over the next six to nine months. I do see a variety of other products, as I mentioned just a few moments ago, in the Delivery or Do market the nonemergency ambulance transport market, potentially in the tow and recovery market. But while concrete and waste management are two opportunities for us, the reality is the cement mixer business -- and we have done them in the past, okay? We've actually built over 75 front-discharge concrete mixers. That is probably a slow-growth opportunity similar to the RV business because it is very, very related to housing. While we talk about strategic initiatives and we are excited about our opportunities, the reality is the RV business is going to take some time to recover, and the energy which we are spending is really towards market -- new strategic markets where the recovery or opportunity is significantly faster with a higher ramp up than concrete and RV.

Are any of these markets have to do with the infrastructure market or the stimulus packages?

Yes.

How big can that be and --?

You know, what's interesting is there were over 800,000 vehicles sold in 2006, which were basically dedicated towards what you would call infrastructure relative to society within North America. Now, that is Class III through class VIII, but when people talk about the opportunity for specialty vehicles and chassis, if you said what is the total market opportunity in one year, it is about 800,000 vehicles. That is a 2006 number, and we use that number because that is, for lack of a better term, a more normal year than 2009, but that gives you an idea, from a North America perspective, just how large the opportunity is for specialty vehicle/specialty chassis.

How long would something like that take to get into the potential of the revenue stream?

Well, as mentioned earlier, when we are not going to be -- all of those opportunities over the next 9 to 12 months, but we will be in 2 to 3 new strategic markets within the next 9 to 12 months. So then you will start to see that within the revenue stream.

The strategic market, will it be just a chassis or will it be making a complete vehicle?

Probably both, in some cases the chassis, in some cases the complete vehicle.

Okay, great. Thank you.

Just one additional comment -- this is Jeff Lambert. There was a news report on the cement mixer, Spartan's opportunity in cement mixers. We have not indicated that as one of the strategic markets. I know there was some discussion in the investment community about that but that is not a market that we have said is an opportunity or the opportunity. It is one of many we are looking at.

Brett Hendrickson, McComas Capital.

Thanks for taking my question. I think it may have just been answered because you said you are looking to doing both chassis and completed projects -- products for both any of these potential markets, whether it be the waste management or the concrete mixers, right?

Well, don't focus in on concrete mixers, okay?

So that market kind of sucks for the next two years, right? [laughter]

I'm not going to use that term, but it's going to be a slow-growth market.

Yes.

As we look at where we are investing our time and our capital, we are looking at markets which have a significantly greater or faster ramp-up opportunity relative to not just the economic recovery but also what we bring in has value, okay?

For example, if we brought something of really great value into a market that was just going to have zero to tiny, tiny growth, then that would not work well within our Spartan return on invested capital structure. Basically, we would be working for negative compensation, for lack of a better term.

(multiple speakers)

(multiple speakers) but you're not going to add capacity to these already capacity-constrained markets unless you have something that is truly new and different for people who are afraid about (multiple speakers)?

That's exactly it. That is exactly it. So what's interesting is, because we have got a couple of markets (inaudible) the reality is if you look at the defense business, you look at the RV business, the RV business will probably have slowed growth for the next two or three years. It probably will. Now percentage-wise, it could up rather substantially but still if you look at the number of units as a whole and if we all believe that we are probably going to be an economy of relatively high unemployment with low GDP for the next couple of years, then the RV business growth ramp-up will be slow or fairly -- you know, you're not going to see a rocket ship or as some people use a V shape going up. The defense business is more of like a boom or bust kind of scenario.

So we've got a couple of markets, one with what I would call slow growth, the other one with boom or [bots]. So for us, as we look at our other strategic opportunities, we are very, very focused on those which would have much faster, higher incremental growth. It gets back to where are we going to spend our time? Where are we going to spend our capital?

I think another issue that we've discussed, John, is also that diversification of that revenue stream across those, so that is not as dependent on the highly volatile ones but instead by having a portfolio of end markets and products you are serving, you are going to levelize and create a more stable demand over the long-term.

You know, Joe brings up a good point. If you ask yourself what goods or services or what transportation activities basically have to happen regardless of the economy? And honestly I don't want to give away too much competitively of where we are going. That would be a pretty good visualization.

John, sorry it's been so long; it's been a while since I've talked to you. So I just had a couple of other questions on the RV while I got you, real quick. Did I hear you say the new product RVIA is going to be some kind of combo product? Can you just clarify? I didn't catch that.

Yes. Basically it will be -- actually it will be a rather exciting product which will have applications in the towable business in the Class C business, and in the Class A business. So instead of potentially a partner for just the motorized OEMs, which would be less than 30, I mean what's interesting is there's over 100 RV OEMs today if you combine Class Cs, Class Bs, Class As and towable. This product could actually have application to that group of 100. It is a rather exciting concept.

So without making you say too much, John, are you saying that you are getting into towable chassis, or is it something totally different from chassis?

Come to RVIA! (multiple speakers)

You know, you would have to come, but I mean it truly is it innovative. What's interesting is some of the OEMs we've shown it to who manufacture both towables and motorized have said "Wow, now this is neat!"

I remember from last time I was at RVIA -- and this is my last question, John -- that Fleetwood was a big customer for you. I know they are going through their I guess a bankruptcy/reorg or something. Are you still able to ship to them through this?

Yes, we are. Honestly, Fleetwood was a first-class customer for us prior to their reorganization. We look forward to a great partnership in the future. They have been a first-class company to do business with.

Okay, thanks. Well, I look forward to meeting new people and maybe I will see you all at the RVIA or something if not sooner.

We hope so.

Thank you. At this time, we have no further questions. I would like to turn the call over to Mr. Lambert. Mr. Lambert?

Go ahead, John.

Well, one, you know, I just want to give thanks to everybody for spending your time here. You know, as I mentioned earlier, the next couple of quarters are definitely going to be challenging but at the same time, too, it is really nothing new than what we've been going through for the last quarters.

However, as a company, we are focused on execution, both strategically and operationally. We are focused on rightsizing the business but we are also focused on entering two to three new strategic markets and making sure that, whatever we do, we utilize our time wisely, we utilize our capital wisely.

So thanks for the support. We thank you for your time, and we look forward to spending some time in the future as well. Thank you.

That concludes today's teleconference. You may now disconnect your telephone lines.