Shyft Group Inc (SHYF) 2009 Q4 法說會逐字稿

Good morning and welcome to Spartan Motors' fourth-quarter and final-year 2009 earnings conference call. (Operator Instructions). 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 Spartan Motors' fourth-quarter and full-year 2009 conference call. I'm Jeff Lambert and I have with me today a couple of members of Spartan's management team, including John Sztykiel, President and CEO, and Joe Nowicki, Chief Financial Officer.

I assume all of you saw this morning's earnings release on the newswire and Internet. Management will take a few minutes to discuss the results for the quarter.

However, before we do, it is my responsibility to inform you that certain predictions and projections made in today's conference call regarding Spartan Motors and its operations may be considered forward-looking statements under the securities laws. As a result, I must caution you that as with any prediction or projection, there are a number of factors that could cause 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. Joe Nowicki will discuss the financial results and go over the operational results for each business segment, and then John will conclude with an outlook for the future, and then both gentlemen will be available to answer questions following that. With that, I'd like to turn the call over to John Sztykiel. John?

All right, Jeff, thank you very much and good morning to those listening on today's call and on the Internet.

First item, a quarterly loss is simply not part of our culture and something we do not take lightly. The moment one does, soon losses will define you, and the words however and but will be the two most popular words in a release.

In Q4, we were focused on two priorities -- reducing our cost structure, an operational focus, while investing for growth, a strategic focus. If not for the transaction costs and inventory valuation associated with our purchase of Utilimaster, we would have remained profitable during the fourth quarter, despite this significant fall in revenue which we experienced. In fact, excluding these items, we would've reported an adjusted EPS of $0.01 on the positive side instead of a loss of $0.01 a share.

Quick summary of 2009. It was a year of operational accomplishment and strategic transformation. The operational accomplishment -- annual profitability despite a 49% drop in sales.

We did not reduce our dividend payment. We ended the year with moderate debt, and at the end of 2009, our backlog stood at $247 million, up 45% versus 2008.

Not many companies can say that they accomplished all of that in 2009, especially in light of the next statement, the strategic transformation. We purchase Utilimaster, which will be at least 20% of our sales in 2010, an important diversification strategic initiative into the delivery and service market segment, a segment that not only represents great opportunity for bodies but also represents great opportunities for chassis and for integration to reduce our overall cost structure.

Back to Q4 2009. The work we have done to make our cost structure leaner and strengthen our balance sheet has enabled us to continue pursuing our growth strategy. Even as we've integrated the purchase of Utilimaster, we were able to maintain our cash, limit the amount of debt we added to fund the acquisition.

Still, we must remain disciplined in managing our balance sheet by limiting debt and continuing to generate cash that will provide the foundation we need to fund future growth. Our CFO, Joe Nowicki, will go into further detail on that, but really, I would like to compliment all the SMI associates for making great progress on this side of the fence in Q4 and in all of 2009.

In a few minutes, I'll talk about the progress in the area of transforming our markets from commercial to specialty, including the role of our recent acquisition in this process, Utilimaster. But first, a quick recap of the financial results for the quarter, and again, Joe will go into detail.

As we saw in the third quarter, we continued to experience challenges in demand as we closed out the year. Sales in the quarter decreased 31% from last year's level, driven by the conclusion of a large defense contract in 2008, combined with a decrease in service, parts, and assemblies in those associated revenues.

Sequentially, compared to the third quarter, our net sales increased 12% with the addition of one month of incremental revenues from Utilimaster.

With the year-over-year decline in sales, combined with a shift in revenue mix toward lower-margin areas of our business, our gross margin fell to 14.9% of sales, down 21.1% from last year. In an effort to counter the fall in gross margins, we also reduced our operating expenses by 37% from the prior year. Again, my compliments to all SMI associates for reacting so fast. Speed and agility is something we take great pride in.

On our balance sheet, we increased our cash position by 34.5% and added only $18.6 million to our long-term debt, even with the $43 million net cost of acquisition of Utilimaster, completed during the past quarter. In addition, we have continued to invest in internal R&D as we will set the stage for future growth. We have significant efforts underway in preparing new chassis and body products to meet the coming emissions change in 2010, as well as a major new product line at Utilimaster. It is this incremental R&D spend that will cause Utilimaster to not be immediately accretive in 2010.

While the fourth quarter was operationally tough on our financial results, not up to past expectations and performance levels, we are pleased with the efforts of our team and the accomplishments we made in the quarter from a strategic perspective. And again, in a few minutes, Joe will provide key detail and review the numbers, the financials, and what it means to us both short term and long term.

Before that, I'd like to share with you some insights in (technical difficulty) conditions of (technical difficulty) where we (technical difficulty). In the outdoor recreation RV industry, we are starting to see an increase in the volume from motorhome chassis, as well as improved order flow and backlogs. Total motor home sales increased 172% in the quarter, and our backlogs have increased nearly fourfold over year-ago levels, suggesting that demand is heading in the right direction.

However, I also wish to temper that statement with a caution, as while there are no negative trends and the order backlog is up, there's still a lot of global uncertainty.

In addition, in late 2010, we will move from 2009 engines to 2010 engines, and there will be a chassis/cost increase. I've been in the RV outdoor recreation business since 1984 and have only seen an emissions change once affect the marketplace, in the mid-1990s. There have been several emissions changes, thus we are aware and cautious.

We had a very positive RVIA show in December. In this segment, there are several R&D initiatives and innovative projects in the pipeline. The Spartan aura is starting to grow.

Switching to our other segments, which includes defense and specialty vehicles, sales were down in Q4 year over year by 85% (technical difficulty) to 2009 year over year by 71%. Backlog in this area is down as well, down by approximately 235%.

As I mentioned on the last call, over the next two or three years, small wins growing as time goes by will define us in the defense part of life. There are some large opportunities in the defense arena which may be decided over the next two to three months from a business perspective.

Long term, the reality is that IEDs will be around for quite some time. There are over 100,000 kidnappings per year. Over time, the demand for mine-resistant survivable vehicles will evolve, and it will continue to grow.

Let's move over to emergency response, which continues to be a very strong market for us. But there was also a lowlight. However, first the highlights. Fire truck chassis were up 15%. The EB team, comprised of Crimson fire and road rescue, were up 13.3%, and emergency response, that market segment again should be strong for us in 2010.

Spartan chassis just concluded their dealer OEM partnership meeting with record attendance. Again, a positive sign.

In regards to 2011, there is some concern due to the macro uncertainty. However, every 1.25 seconds there is a call for help. Plus, we have introduced over 10 new product/technologies over the last 2.5 years and we are focused on gaining market share in 2011, even if the market is smaller.

From a lowlight perspective, road rescue, while there was significant progress, and this may seem like a strange statement to say, it's still not acceptable. We are focused on looking at strategic and operational options, those that are out there, to ensure we allocate our time and our dollars wisely.

However, let me reiterate, there is tremendous strategic opportunity in the ambulance market from a chassis, body, and parts perspective.

Last, from an emissions perspective, as you look at the emergency response market, that could have some effect on the 2011 business model. However, as I mentioned earlier, we have introduced over 10 new products/technologies over the last 2.5 years, and again we are focused on gaining market share, even if the market is smaller. And it's important to note, for those that are new to the Spartan business model, in emergency response it takes about 18 to 36 months to develop that market from when you introduce the product, simply because there are about 35 (technical difficulty) fire departments in North America and it takes a long time to get past the awareness stage, the spec writing stage, the order to bid stage.

Moving over to delivery and service, obviously the inclusion of Utilimaster has helped to raise our backlog. This business, and I like Joe Nowicki's term (technical difficulty) is the orders come in bunches. However, we expect 2010 to be slightly ahead of 2009.

A big positive is Internet commerce continues to grow, helping to drive demand. A data point there is from 2002 to 2007, Internet retail commerce grew 182%. Plus, we are in the initial stages of developing a Spartan chassis for Utilimaster but, again, that will be a 24- to 36-month initiative. It takes a significant amount of time, and we talked about that on the conference call when we announced the acquisition of the Utilimaster, develop (technical difficulty) for very, very new market segments.

Last, Utilimaster can be a significant player in the emergency response market. They recently delivered a (technical difficulty) body to Prescott, Arizona. A strategy is now being developed as to how we leverage the brand name of Spartan to grow Utilimaster (technical difficulty) in this market in a large way. There is a definite need for what they produce, adapted to emergency response.

Last market segment, service, parts, and assemblies, which in the future we will be talking about as aftermarket parts and assemblies, or the acronym APA, (technical difficulty) did see a sales reduction of 77% in Q4 to just over $10 million. This was (technical difficulty) anticipated as some orders were delayed. However, we expect this to be the bottom.

Versus 2009, SPA, service, parts, and assemblies, will continue to be or have an unfavorable impact in 2010 versus 2009. However, long term, there are over 10,000 vehicles that Spartan has either produced or been a part of, thus the opportunity is great.

Tom Gorman, our Chief Operating Officer, has recently appointed a new lead in this market segment, Ms. Vicky Black. She has demonstrated experience and success in this area, and we look forward to growth as time moves on.

In the past, service, parts, and assemblies has been an operational or opportunistic focus for SMI. However with Vicky on board, the strategy and the structure are being developed. We are now focused on this group, service, parts, and assemblies, or APA, as it will be called in the future, becoming or developing into a strategic impact to SMI.

Last, we are continuing to position ourselves for strategic growth into 2010 and beyond. And as we move into the future, we are committed.

Now I'd like to turn it over to Joe to get into some detail from a financial and an operations perspective, and then we'll have a quick wrap-up before we get into Q&A. Joe?

Thank you, John, and good morning, everyone. Despite the disappointing bottom line, we had some significant accomplishments during the quarter, most notably coming to an agreement on the $43 million purchase of Utilimaster, and then quickly completing the acquisition and beginning the integration.

We also remain focused on controlling costs and retaining agility in our operations. In fact, if it were not for the acquisition costs, we would've remained profitable in the quarter.

Fourth-quarter net sales were $100 million, down 31% from the prior year, down 40% excluding Utilimaster. The majority of the decrease was from -- from the prior year was really in our other product sales category, due to the conclusion of a large defense contract in 2008, as well as a decrease in related SPA sales.

On the positive side, our motorhome chassis sales more than doubled. Sales of fire truck chassis increased 15% in the quarter and total emergency vehicle team sales increased by 13%.

On a sequential basis compared to Q3, sales were up 12% with the addition of one month's revenue from Utilimaster. Excluding Utilimaster, sales sequentially were down roughly 3%. While we did experience sequential increases in our motorhome and EV team sales for the quarter, these were offset by continued declines in our defense and SPA business.

Quarters in backlog were definitely a highlight for the quarter. Excluding Utilimaster, orders for the fourth quarter were up 66% from the prior year, driven by improved demand for motor homes and fire trucks. The significant improvement in order intake translated to improvements in backlogs as well.

Spartan's consolidated backlog was $247.6 million at December 31, 2009, compared with $169.9 million a year earlier. The number for 2009 does include $34 million in backlog from Utilimaster, but even excluding the increase from the acquisition, backlog still showed a healthy 25.7% increase. The growth in back orders was primarily the result of increased orders of transitional chassis ahead of the new emissions requirements slated for 2010. [Within] the total fire truck chassis backlog increased 68.5% and motorhome chassis backlog increased over 260%, which is certainly an encouraging sign.

EV team backlog fell 25% from the year earlier, due to a large order they had in Q4 of 2008, but it's remained mostly unchanged over the last three quarters.

Moving on to gross margin, our percentage in this quarter was 14.9%, down from 21.1% last year, due mainly to lower volumes and also a shift in product mix from defense and SPA to motor homes and fire trucks, as well as a one-time charge of approximately $500,000 related to the inventory valuation associated with the Utilimaster acquisition.

Moving on to operating expenses, we reduced operating expenses by $8.8 million to $15 million in Q4, an improvement of approximately 37%. The majority of improvement in operating expenses was mostly due to the $6 million in one-time settlement costs that occurred in the fourth quarter of 2008, accompanied by the favorable impact of the cost-reduction efforts that we began in Q3. Excluding the impact of the one-time settlement costs, operating expenses improved by $2.8 million, or 15.7%.

As a percentage of sales, operating expenses were held constant at 15%, proof that we have been working hard to realign our cost structure to the current sales levels.

Within the fourth quarter, we faced a number of costs as we integrated Utilimaster into our operations. These costs include legal and accounting costs that are typical at closing (technical difficulty) and amounted to approximately $700,000. In addition, we saw a number of accounting adjustments that impacted Utilimaster's results for their first month of operations as part of Spartan, most notably the $500,000 inventory valuation adjustment.

In addition, we incurred higher-than-anticipated R&D expenses, as John described, with some new products we have under development. We expect these costs to remain elevated in the first half of 2010 as we continue to invest in our future.

Our effective tax rate was 34.8% for the full year. Fourth quarter was impacted by some nondeductible costs related to the acquisition of Utilimaster.

The net loss for the quarter was $413,000, or $0.01 per diluted share, although when you (technical difficulty) the impact of the acquisition, our adjusted diluted earnings per share would've been a positive $0.01. Please review the accompanying tables and explanatory notes in our press release reconciling our non-GAAP disclosures to EPS reported in accordance with GAAP.

Despite the fall-off in earnings, we had positive operating cash flow of $7.5 million in the fourth quarter and $38 million for the full year, driven by our improved working capital position, primarily the result of our continued focus on Accounts Receivable collections. We ended the year with $18.5 million in cash and cash equivalents, as well as $35.2 million in long-term debt, mainly due to the financing of the purchase of Utilimaster.

While we made strength -- while we made progress in strengthening our balance sheet in the quarter and throughout the year, we have more work to do as we remain focused on managing inventory and receivables for our combined company.

(Technical difficulty) and amortization for the quarter was $2.3 million and $7.8 million for the full year. Our full-year ROIC was 6.8%. Spartan Motors and each of our subsidiaries uses ROIC as a key measure of our progress. It's also related to our bonus program for management and associates, which is based upon an economic value-added financial model. As noted in the press release, we define ROIC as operating income less taxes on an annualized basis divided by total shareholders' equity.

CapEx was $5.8 million for the full year of 2009, and we are now forecasting CapEx spending of around $6 million to $8 million in 2010, due to the addition of Utilimaster. In addition, we have some increased R&D efforts in the current year.

With that, I'll now turn the call back to John, who will share some final thoughts on our outlook as we move into 2010.

Thanks, Joe. As I mentioned earlier, 2009 was a year of strategic growth and operational accomplishment.

We made significant progress in positioning ourselves with a lean cost structure and a strong balance sheet to support our long-term strategy. And although we are pleased with the increase in our (technical difficulty) and improved results, companies do not succeed over the long term by just cutting (technical difficulty) alone. You have to grow the business.

Simply, as leaders and individuals, each day we must act operationally and focus the organization on short-term results. In addition, each day all of us must act strategically, positioning the organization for future growth.

What's interesting is a lot of companies don't do that. First, they don't perceive it, then they don't do it or execute it. One of the things I think I take great pride in is we've been pretty consistent on that since our (technical difficulty) in 1975.

The acquisition into the delivery and service market, Utilimaster, was a major step in executing our strategic plan to grow into two to three new markets over the next couple of years. We believe diversification beyond our current outdoor rec/RV, emergency response, and defense markets is critically important to our long-term growth, plus it also represents a reduction in risk.

As we enter 2010, our new combined company will also face challenges as well as significant opportunities. What's interesting is Utilimaster's (technical difficulty) delivery and service market reminds me of a number of our other core markets over the past 30 years. Whether in RVs, fire trucks, emergency rescue, we have successfully transformed these markets from commercial commodity markets into specialty vehicle markets.

30 years ago, 95% of the fire truck market rode on a commercial chassis. Today, 55% of the fire truck market rides on a specialty or a custom chassis. We played a significant role in this evolution. We're a very, very market-centric, customer-centric company, and we see the same transformational opportunities with Utilimaster, and that truly (technical difficulty).

As Joe also noted, we have made some significant investments in R&D over the past year, and that will continue into 2010. As I've said many times in the past, we are a market- and customer-centric driven company, and our efforts to develop new products to meet the evolving demands of society absolutely must continue. If you don't plan and execute for the future, there will not be a future. And as society changes, vehicles and services become more customer-centric, and Spartan is there to take advantage of this evolution.

From a capacity perspective, today we have capacity. Thus, as Joe noted, CapEx should be small. We have room to grow. EVA or ROIC should improve as should our balance sheet. Executing against this opportunity will provide operational results and strategic growth as time moves on.

In closing, in 2010, at least the first half, will definitely be more challenging than 2009 from an operational perspective. From a strategic perspective, we are absolutely transforming in the right direction with some great opportunities for strategic growth.

Over the last 10 years, the compound annual growth rate of Spartan's stock has been 13.69%. Since 1984, the year we went public, or just over 25 years, it has been 10.5%. Any time you are in the double-digit range, you are doing more right than wrong.

However, we will not rest on the past. We are focused on the future. What we have done in 2009 and the strategy we will execute against in 2010 should enable those trends to continue. I'm excited about the future; I take pride in the past. However, the past is the past, and today and tomorrow is what both you and all of us at SMI care about.

Now, Operator, let's start the Q&A.

(Operator Instructions). Ned Borland, Hudson Securities.

A couple of questions here with regard to Utilimaster. Obviously, one month of sales, $13 million. If you annualize that, that would be about $150 million, and I -- I don't think that's probably the right move to annualize it, but was there something in the month in that business? Was there a big order? Is there a seasonality factor that we should be thinking about with Utilimaster?

Actually, Ned, I'll take that one. This is Joe. Really what you saw for the December sales was -- tied a lot into the inventory, the market adjustment that I described that we made. Out of sales at closing that didn't get into prior closings, so they ended up in the inventory and WIP and finished goods. They're just about finished goods. So you saw a higher amount of sales go through in December, things that really weren't done during the month of November.

That's really what drove -- it was kind of a carryover of prior month's business that really got moved into the December results. And the impact that it had to us, then, was on the inventory and market valuation that I described. Because what you really do is you have to take all that higher inventory and market to whatever the market value is at that point in time. And that's -- it's increasing it kind of to the selling price.

Then, that increased market value flows through cost of goods the next month, which is really why, in December, I mentioned we had this $500,000 inventory valuation adjustment, really as a result of that. So all those pieces tie (technical difficulty) that help?

Yes, that is helpful. And then, the backlog of $35 million, roughly. What -- how quickly does that backlog turn? I mean, I saw in the release, we know your core businesses and how they turn. But what about Utilimaster?

It's a much quicker business than our markets and our turn in the backlog. For Utilimaster, it can be somewhere between a 30- to 60-day kind of turn that that will start to roll through. Their backlogs tend to be a lot quicker than ours.

Although the piece I would add, though, is what John described. Their business is more lumpy. So, what you'll get is a large order that will come into their backlog, and it may stretch over a longer period of time to kind of turn it through. It really depends on whether it's a big lumpy project that came through or it's a bunch of smaller orders.

And then, on the -- switching over to the sort of core chassis businesses, if -- obviously you guys and Tom Gorman have been making operational improvements. I was wondering if it's -- if there is a way to compare the margins in prior RV, even the military, businesses with the exit from this emission-standard period to, say, 2007 when you exited the last one?

You know, Joe, let me jump into that. Ned, typically what happens into the group is, short term, you typically have a little bit of gross margin reduction because what you do is you bring new products into market, the supply base is not set up, you've got some product design changes as you move through production. And that may be a one- to two-quarter mix kind of scenario.

However, on the very positive side, and I use the term very, what we have seen is typically an emissions change enables the vehicle and the market to structurally change, which enables the margins to go up over time.

What's interesting is our margins have gone up substantially since 2000, and I think we've had two different emissions, two to three different emissions changes in the last 10 years. So you have a short-term hit, maybe two or three quarters, and it's not large but -- I would expect some gross margin reduction, but then long term, you start to see gross margin enhancement or improvement, whatever you want to call it.

And then, with respect to RV, obviously that looks like it's the most rapidly growing, although there is warning flags with regard to the economy and so forth. But, given that that seems to be your lowest margin chassis business, what can you guys do to sort of improve the margins there and keep it from being -- exerting too much downward pressure on your gross margin?

I'd like -- first, let me talk a little about the innovative side, and then I think we've got some opportunities to reduce our cost base if we look at some of the synergies with Utilimaster and just the operational improvements, and Joe, why don't you jump in there.

But one of the things I feel very excited about in 2010 versus where we were in 2008 is, and I used the term the Spartan aura is starting to grow. The reality is, for the past three years, 2005 to 2008, there were not a lot of innovative platforms, product technology developments brought into the RV arena. So we enabled our chassis, our product base to become commoditized, for lack of a better term.

Extremely excited about Tom Gorman's focus, the group's focus. We displayed a concept, [DNGP], at RVIA. They are working on turning that into a product that will not so much have legs in 2010 from a sales perspective, but hopefully 2011.

But the focus on innovation, which compels the market, i.e., the consumer, to buy our product, is definitely back within the outdoor rec/RV group. So, again, we've got caution relative to the backlog, but there's two ways to enhance the gross margin. One is to get a little bit more for your product on the consumer side, and I think Tom Gorman has got a great focus there. Second is on the operational side to reduce your cost base and, Joe, I'll let you jump in there.

The only things I would add to what John said is obviously one of the ways to help improve that margin net is through the additional volume to offset some of the fixed costs that we have, the buildings, etc., where we've got extra capacity on the motor home side.

Clearly the new agreement that we have with one of our clients, Fleetwood, is working out great to our advantage in those regards. They've been driving a lot of additional volume through.

On top of that, we're also looking at other ways -- other products from, really, other -- what I'd call market areas to utilize some of that fixed cost and capacity as well, too.

The last piece that I would put in there is, being an EVA company (technical difficulty) that whole cash collection time as well, too. So we've been spending time, also, on how do you increase the overall speed of the cash collection by looking at the back half of it on the receivable part as well, too. So we spend a lot of time in working with some of those vendors on terms in order to increase the speed of the cash collection, the receivables down, improve our balance sheet, and that way also driving value from the business. And not just from a gross margin, but looking at it from a total profitability.

Thanks.

Thank you, Ned, and congratulations on the switch over (technical difficulty) securities.

Jamie Wilen, Wilen Management Company, Inc..

I just want to go back and ask a question about the MRAP business and what we're going to be doing moving forward. When you look back at it, the reason that the people we work with did not get the Afghanistan business was a function of the suspension systems, I believe, and how could we have altered that? Is our product just as good as the competition? How are we going to evolve moving forward in what businesses in the military specialty vehicles business?

Jamie, this is John Sztykiel to the group. One, relative to why the military chose a firm other than our current partners, there were a number of criteria ranging from price to product performance, etc.. So it really wasn't just one, i.e., being the suspension system and the performance of the product.

Relative to the future, okay, and as I mentioned earlier, as we look at the defense government services, the opportunity in defense is really no different than in our other markets. Do we have innovative product technology platforms that compel the consumer, i.e., the market, to come to us?

There are a number of R&D initiatives underway in that arena, led by Roy Bierwith. 1.5 years ago, Roy was not leading that team from a strategic and operational perspective. Today, he is.

Another opportunity when you look at defense and government services is how do you leverage the brands of Crimson, Road Rescue, Utilimaster into that arena as well? Our federal government buys a large number of emergency response products, as does the defense group. They buy a large number of delivery service-type vehicles, as does the defense group.

So what's exciting, again, under Tom's leadership as he works to develop these market and leverage teams, our core focus over the last three to four years has been very opportunistic from a Spartan chassis perspective. Now we're moving to a strategic perspective where a cornerstone of that (technical difficulty) that compels the market to buy, but another cornerstone of it is how do we take advantage of (technical difficulty) brands we've got as defense and government services buy a large number of those products.

And what's interesting is we see also, and I noted it -- I used the term survivable vehicle -- there's tremendous opportunity in products that the government buys which are not so much defense-oriented, but they do need to be survivable. They do need to be special, and therefore a variety of markets, whether it be for border patrol, etc., could be export because the reality is the world is a pretty dangerous place in a lot of areas today, even within North America.

And secondly, on the fire engine chassis, congratulations on the order in China, and apologize if you mentioned this before. I missed the early part of the call. But how much is the opportunity not just in China but throughout the world for selling our chassis and can we make the same margin selling them abroad that we do domestically? And if that does evolve into a real business for us of major proportions, is it worthwhile to actually produce the products somewhere outside the United States?

First, from a global perspective, our past performance has really been not -- has not been very good, which is one of the reasons why Joe is here, which is one of the reasons why Tom is here, because they've both got demonstrated success overseas.

While I don't know the exact number in 2009, 2008 export sales were, I think, 2% to 3% of our total sales. So we have tremendous opportunity to grow, especially when you look at the currency rate. First, relative to China, one, we are pleased with the order.

What's exciting is China as a country likes big-box fire trucks. Now these products are going to Beijing, their capital. China likes big-box North American fire trucks. That is great for us -- for our competitors, but it's a great opportunity.

We've heard a data point that over the next 10 years, the country of China will be building 3,500 fire departments. Now that may seem like a lot, but if you think about it long term, we have 35,000 in North America and we don't have as many people as China. There is tremendous strategic opportunity within China, and it is a global focus for us.

Tom Gorman has been over there just recently. I expect he will be going back over again within the next two to three months. That is a core focus for us from a global perspective. We had a nice small win. I see our export or our global business being small wins.

You know, relative (technical difficulty) question, the opportunities for all of our brands really is very good overseas in certain areas. By product, for example, in Europe, do not see a lot of opportunity. Very, very hard to compete.

South America, Africa, certain parts of Asia, Australia, very, very good opportunities. The Caribbean. So there are opportunities from export perspective, which is the first path we are going to take.

We will be focused on leveraging our opportunities with partners who we have today, either from a body perspective, a component perspective, etc.. Longer term, relative to our products being assembled in other countries, while we've talked about it, we have just talked about it. I can't see that on our horizon over the next two or three years. That could maybe be in the horizon in the three- to five-year time frame, but over the next two to three years we see a significant amount of opportunity addressing a similar path or utilizing a similar path to what we did in China.

Jamie, as I look at our intents overseas as well, too, a lot of your questions are great around kind of sourcing. And most of those are in the -- what I'd call the to-be-determined bucket. As we're kind of working through right now our sourcing strategy internationally, as well as our go-to-market strategy as well, too, we're (technical difficulty) there is a ton of opportunity there that we are not touching on yet.

And now it's just Tom and John and I getting our arms around how best to get at that opportunity.

You know, one thing, and Jamie, I just wanted to bring up to note, for the first time ever, we will be at the world's largest emergency response show in Germany in June. Over 135 (technical difficulty) people attend this five-day show. It's called Interschutz. It only happens once every five years.

We've been in business since 1974, but from a strategic perspective, we've made a decision to go to this exposition. It gets great world exposure. So that's one part of developing, as Joe said, the go-to-market, executing against a strategic plan.

At the show, are you bringing your entire emergency vehicle product line or just the chassis or --

We will bring a selective number of products/visuals because it is an expensive show, but we will not bring the entire everything because it is just simply too expensive.

No, but I mean you'll be showing Road Rescue, you'll be showing Crimson, or not?

Either visually or through a product, the answer is yes.

(Operator Instructions). Walt Liptak, Barrington Research Associates, Inc..

Congratulations (technical difficulty) profitable. Just a follow-on on the military discussion. Your backlog -- it looks like it grew from about $13 million to $28 million, if you include the SPA and specialty vehicles. Is that related to the BAE ILAV award?

Yes, it is. That's correct.

Okay. And then, Navistar and Oshkosh recently got orders because of the troop build in Afghanistan. Is there (technical difficulty) for other BAE-related business?

You know, as I noted in the earlier statements, Walt, there is activity going on, thus there's potential. It is way too early to qualify that potential.

We'll leave it at that. Does the $28 million ship next quarter? Or what is the time frame for that?

No, a lot of the ILAVs go within the second and third quarter, mostly.

Then, if I can switch over to Utilimaster, you filed that 8-K with their financial statements through the (technical difficulty) 2009?

That's correct. That short reading document?

Yes, and it's pretty impressive that the gross margins held up with the big revenue decline at 13%, and maybe even more impressive is the company, even before you bought them, took a lot of costs out, overhead costs out, to maintain a nice operating margin, right?

Correct.

So I guess my question is on the neutral accretion assumption that you've laid out because of R&D spending. If volume is going up, it seems that there would be a lot of leverage in this business. How much are you spending on R&D, I guess, during 2010?

First to your question -- this is Joe. First, Walt, your question in regards to the leverage piece. Absolutely. As their business grows, because of the great changes that they've made in their cost structure, that positions them really well to take advantage of the opportunity of some incremental profitability as volume grows.

As we've said looking at the 2010 numbers, they will be pretty comparable for them in 2010 as 2009, a slight increase in volume but nothing too dramatic (technical difficulty) right now that we see in the works. So we won't see any of that (technical difficulty) in the 2010 numbers.

Second on your question to R&D, really I'd prefer not to get into the specifics of the R&D details with you as a lot of it are some great products that they've got in the queue specifically going after that delivery and service marketplace. When you look at the combined amount of R&D from an expense and capital expenditures, it is several million dollars that we'll be spending, investing, in that business to get at some of these new products (technical difficulty).

Walt, this is John Sztykiel (technical difficulty). Let me just make a couple of other quick comments. We appreciate the positive comment in Utilimaster, but really what -- a couple of items you said was one of the things that attracted us very much to them. (Technical difficulty) gross margins and, within their industry, they are known to be innovative, very customer-centric. They are the brand leader in the walk-in industry, so they are very similar to our thought-process methodology there.

And then you mentioned the operating margins, again. They are in line with our lean operational philosophy. So I just take pride and feel very, very good that you were able to pick that up as you got into the detail, and those were one of the strong attraction points of moving forward with Utilimaster.

Okay, so the products they're developing were -- they were developing prior to Spartan acquiring them?

Yes, that's correct (multiple speakers)

And some are moving midstream right now in that product development. As we noted earlier, they are on track for a new product line introduction in 2010.

2011.

Yes, 2011, I'm sorry. (Multiple speakers)

And did you make a comment that you are going to -- that Spartan is going to make a chassis for Utilimaster? Is that where some of the R&D spend is coming from?

Well, there is development starting in a chassis for Utilimaster. However, (technical difficulty) it will be 20 to 36 months before you'd start to see significant topline revenue from that happening because it takes a long time in the R&D, the product development process, the evaluation and testing, then moving into the market development process. In this particular (technical difficulty) because the fleets keep the vehicles for a long time.

Yes, the R&D expenditures that we described in the first half of the year are partially related to the Utilimaster new product, and the other big half of it is really related to the 2010 engine and cab design work that's going on right now. That's a significant amount of effort. It's not just a light change that's going on as a result of the change in emissions standards. It's a pretty significant change to our chassis and to our cab design.

Okay, got it. Since you mentioned the 2010 engine change, how many months of -- or units of transition engines do you have? Can you go into -- through the first half of 2010 with 2009 engines?

Yes, we can. I think right now we have approximately $20 million of inventory on hand, of engines on hand as we ended 2009. About (technical difficulty) dollars of engines on hand (multiple speakers) help us build into pretty much the first half of 2010 and a little bit further. It kind of varies a bit, depending on the type of engine and the timing of when those transition orders will be filled.

And that also applies to the outdoor rec/RV market segment as well.

The other thing, our sound financial position has enabled us to pick up engines when available to serve our customer base, so really, in one respect, when the opportunity is right, we're into the market, picking up the right engines to serve our OEM and our customers (technical difficulty).

So working capital ought to be pretty good, especially in the first half of the year as you work down that inventory.

I've got a big focus on working capital. As you've seen, we've done some great things on the AR side of it. Our receivables teams across the company have done a tremendous job of driving cash flow to help us to pay down that debt sooner, which is our intention.

But secondarily as well, too, we're going to keep the focus on, as well, not only on receivables but also on the inventory part. We'll see the cash flow from the transition engines certainly as we sell those. Take that out of the equation, our (technical difficulty) inventory, take out the 20 in engines, still at $80 million of inventory, it's still a high number. And we're going to have to try to reduce that as well.

That's going to continue to provide the balance sheet strength and that's what allows us to do things like we also announced today, the continuation of the dividend, which we plan to do.

Okay, where -- can you give us an expectation of where total debt could be at the end of 2010? I mean, you ran through a couple of items already that we could subtract from the total debt.

If you look at our total debt number that we have out there, roughly that's $46 million. About $30 million of it is on the revolver. So that's on our line of credit, and the $15 million of it is long term. The $15 million long term, that'll still be there.

$16 million.

That will still be there when we end the year. The opportunity is for us to take down that $30 million on the revolver as soon as possible, and you'll see us make some improvements to get at that, and by the end of the year, should we have (technical difficulty) taken care of, I would say absolutely.

Nice, that would be a good goal. Okay, what is D&A expectation for 2010?

Total CapEx -- D&A was running around $2 million a quarter now, currently. I think it ran $2.3 million of D&A in the fourth quarter, and that's probably a good estimate going forward because our CapEx numbers for next year aren't going to be too different from this year. A little bit more, but not too different.

So I'd say $2.3 million per quarter (multiple speakers)

Per quarter. Okay. And then, let me just ask a couple more. The interest expense, what kind of run rate should we be at for 2010?

From an interest-expense perspective?

Yes.

Again, that number is going to start to come down as we pay down the debt quicker. So you'll see that work itself off.

I think our weighted average cost of debt right now, if you include the long-term debt and the parts on the revolver, is running (technical difficulty) around 5%, and then, whatever assumptions you want to work in regarding the timing of how we work it (technical difficulty) (multiple speakers)

Fair enough. Thanks, guys. Good job.

Thank you. At this time, we have no further questions. I would now like to turn the call back over to Mr. John Sztykiel. Mr. Sztykiel, you may proceed.

All right. You know, in closing, first just wish to say thank you for those of you that are on the call, for those of you that will be listening to the call later on on the Internet or some other device, thank you for your time.

As mentioned earlier, the past is the past, and while we are thankful and appreciative of some of our accomplishments, we're paid to execute for today and tomorrow as well, and we look forward to doing that. Thank you very much and have a great day.

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