Shyft Group Inc (SHYF) 2010 Q2 法說會逐字稿

Good morning and welcome to the Spartan Motors second-quarter 2010 earnings conference call. All participants will be in 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 objections, you may disconnect at this time. I would now like to introduce Mr. Jeff Lambert on the half of Spartan Motors. Mr. Lambert, you may now proceed.

Thank you and good morning everyone and welcome to Spartan Motors second-quarter 2010 conference call. I am Jeff Lambert with Lambert Edwards and have with me today a couple 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 and newswire on the Internet. Management will take a few minutes to discuss the results for the quarter, however before we do, it's 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 a number of factors that could cause the Spartan's results to differ materially. The risk factors 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 will discuss the major initiatives undertaken during the quarter and then Joe Nowicki will then talk about financial and operating results for the period. John will then conclude with an outlook for the future and John and Joe will both be available for questions at the end. With that, I'll turn it over to John Sztykiel. John?

Alright, Jeff, thank you. And good morning to all of you listening on today's call and on the Internet as well. First we'll briefly discuss our progress in Q2, providing detail on the quarterly results, our markets, our operations and the followed by a Q&A session shortly thereafter.

In the second quarter, we focused our efforts on three key areas; Exiting the road rescue business to focus on more profitable markets - ones with greater growth, aligning our cost structure with current and near-term sales volumes; and third, investing in promising and profitable growth opportunities.

While we have a lot of complexity in our financial reports this quarter, when you peel back the results, you will see that we made solid progress in key financial metrics and also continued to invest in our strategic growth initiatives. The foundation of our strategic and operating plans remain simple and straightforward. Compelling products and services, growth and profitable market share, cost structure management and balance sheet management. Now let me address our core strategic initiatives from a Spartan-wide perspective.

First the balance sheet, once again we made great progress in the quarter in managing our balance sheet as we focused efforts to reduce our investments in receivables and inventory, resulting in improved cash flow and reduction in debt. On a cost structure perspective, we took a number of other actions and the restructuring we announced a few weeks ago which further reduced our cost structure to better match current levels of revenues and profits.

The results are starting to become apparent as we saw sizable improvements in our operating expenses, down $4.2 million or 26% compared to the same quarter in 2009, when one excludes restructuring charges and operating costs of Utilimaster which were not present in the prior year.

Our third focus, compelling products and services, represents our vision for growth and perhaps is best illustrated by the investment in our new 2010 emission compliance chassis and the new next-generation commercial van and NGCV as we call it that we are developing with Isuzu. Combined we invested $1.2 million in R&D on those two projects in the second quarter on top of the $1.8 million we invested in the first quarter.

So this year we have invested over $3 million in some very, very major projects in all of us would like to see the growth happen overnight. Now the growth in the top line, the bottom line (inaudible) but that's not reality.

Sometimes it's no different than a farmer. You have to plant the seeds in order to harvest the fruit a little bit later on.

We're excited by these new products and are looking forward to their market entry and the growth in profitable market share we expect to gain with them. Perhaps most notably, this long-range product planning is a new discipline for Spartan.

I've been here since 1985 and it is a new discipline and requires a level of strategic market insight which we have today, but also the patience to see these programs yield returns. We are confident we are on the right path and we also encourage shareholders to join us in this long-term view.

We're on schedule with NGCV, as this week -- or this past week the first two prototypes were produced. Consumer or fleet [line] drives will begin to take place in early October.

Again as mentioned in the release, production or sale into the marketplace will be in the second half of 2011. But when you are delivering products in the delivery and service marketplace, they have to work.

So we're very disciplined as we work with Utilimaster, as we work with Isuzu to make sure we go through the right methods, the right products that we not only have a very attractive product, but one that has great reliability and durability. As I said earlier, we're pleased with our alliance with Isuzu and the opportunities we see for growth for both of our teams.

Isuzu is the world's largest commercial diesel engine manufacturer and has more than 300 dealers in North America and the Isuzu N-series is the market and brand leader across its markets. The alliance with Isuzu with the assembly of the N-series gas chassis is another strategic growth path for us that will improve our capacity utilization, provide inroads into new markets and will broaden existing markets.

Now I would like to share a quick recap of our quarter's financial results. And again, Joe will get into much more detail.

Sales in the quarter fell 2.6% from last year's levels driven by reduced sales of specialty vehicles, aftermarket parts and assemblies and emergency response bodies. This was partially offset by the incremental revenues from Utilimaster as well as higher sales of motorhome chassis.

Again, Joe will provide a more detailed review of the numbers. In the outdoor recreation/RV industry, we saw continued strength in our motorhome chassis revenues which increased by $18.5 million compared to one year ago. While backlogs have nearly doubled and these increases were driven by stronger industry demand, the overall level of growth seems to have leveled off at the dealer or retail level, suggesting that the recent inventory replenishment by RV dealers may have hit a plateau as noted by the drop in the Q2 backlog.

Our efforts in the outdoor recreation/RV market continue to be based on regaining our market position where Spartan is noted for being a market leader in innovative concepts and products supported by tremendous customer service. Let's switch over to defense and specialty vehicles.

From the first quarter, sales were down year over year by 23.9%, reflecting the conclusion of a number of significant defense contracts over the past year. The backlog in this area was up $11.5 million to $14.3 million which reflects as we've mentioned in earlier releases or earlier conference calls, the small wins and the longer-range growth strategy that I have discussed.

The reality, with more than 300 IED blasts per month outside of Afghanistan, the overall demand for mine-resistant vehicles or some variation thereof will only grow over the long term in addition to looking for new opportunities in defense and other specialty niches to grow as well where a survivable vehicle is very, very important. Emergency response posted very solid results in the second quarter as [ER body] revenue was up 13.7% year to date compared to a year ago, very solid results for Crimson Fire and Crimson Fire aerials.

Although we are pleased with these results, we do remain cautious on the markets as noted by the drop in the backlog. There is definitely pressure on state municipal governments around the country relative to the effects on economy and the tax base.

From an ER emergency response chassis sales perspective, sales were up 7% year over date. However the backlog was also down 6.5%, again representing concerns.

As I mentioned earlier, we have high federal deficits, there are tight state and local budgets, both are reason for concern. On the positive side though, Spartan Chassis and Crimson Fire have introduced 12 major new products or technology innovations over the last 24 months.

We are now focused on market development and expect those backlog numbers to change. And for those of you new to the industry, it takes on average 24 to 36 months to develop a market in the emergency response marketplace.

And why does it take so long? The absolute reality, you've got 35,000 fire departments, 80% of those are volunteer. It just takes a long time to hit all those different departments, all those volunteer houses throughout North America and to get the job done.

But I would love it to be faster, absolutely. Are we working through a number of different methods to shorten up the market development time frame? Absolutely but right now it just takes some time.

Aftermarket parts and assembly saw a year-over-year reduction of 76% to approximately $12 million in the second quarter. Although this is still much lower than our historical rates, it was an improvement over the first quarter and was the second consecutive quarter-over-quarter improvement. And that's important.

We now have a trend in the right direction. We continue to work with our customers to grow this business. Our forecast for the rest of the year includes some additional growth as noted in the Q2 backlog increase of over 300%.

Over the long term, we remain very optimistic about aftermarket parts and assemblies. More than 70,000 vehicles that Spartan has either produced or been a part of are still in service today.

When we combine that with another 150,000 vehicles from Utilimaster, this gives us an installed base of more than 220,000 vehicles, providing a ready market for APA or aftermarket parts and assemblies over the long run.

Let's move over to delivery and service. Sales remained somewhat softer than anticipated in Q2 at $22.5 million, however, we saw continued improvement in backlog in Q2 versus Q1, up over 20% suggesting improvements for Utilimaster in the second half of 2010 as we move into 2011.

As mentioned earlier, the NGCV is a key strategic investment as this product's numerous innovative, hard to replicate features will not only enhance Utilimaster's sales, but will also enhance their gross margins as well, starting in the second half of 2011. It's also important to note that while Utilimaster generated a loss for the second quarter, those results included incremental costs for R&D as well as some restructuring costs.

In the past we've mentioned that Utilimaster's breakeven point was approximately $100 million in revenues. Results for the second quarter were at a run rate that was $10 million below that level and we expect to make that up in the second half of the year. And again, Joe, is going to go into much more detail from a financial data metric perspective than I.

Overall, we are pleased with the progress of Utilimaster since our acquisition closed last November. We are slightly ahead of plan from an integration perspective. We're excited about the market opportunity we see in the delivery and servicing.

But in the near term, we will continue to invest in new products and markets which will affect our short-term results. However, as we look forward to the second half, we are more upbeat and we have greater opportunity than what we did in the first half. Joe, I will turn it over to you.

Thank you, John, and good morning, everyone. First I would like to cover a couple of housekeeping regarding the structure of the financials.

As I'm sure you've noticed that consistent with accounting guidelines (technical difficulty) the details of our financials. Instead they're all included within the one line called Discontinued Operations Net of Tax. So all the sales, cost of sales, operating expenses, other income expenses from Road Rescue have been pulled out and put into that one summary line item.

Second we've also taken the opportunity change our reportable segments given the exit from Road Rescue, the recent acquisition of Utilimaster and also the realignment of our operational structure. Our reporting will now be based on two segments, the first is Specialty Vehicle which includes firetruck chassis, motorhome chassis, other vehicle chassis for the defense market, aftermarket parts and assemblies and firetruck bodies. And the second segment is Delivery and Service Vehicles which consists of the Utilimaster progress.

Although we faced a number of challenges in the quarter, we continued to post solid results in terms of improving the strength of our balance sheet and reshaping our constructs to reflect the current realities of our markets. We made some tough restructuring decisions to align our cost structure to the current near-term demand, focusing on the profitable core competencies.

Our operating results excluding one-time charges are already showing positive results. We expect this trend to continue into the future.

From a revenue perspective, second-quarter net sales were $115.7 million, off 2.6% from the prior year. The majority of the sales decrease from the prior year was due to Specialty Vehicle segment, partially offset by $22.5 million in incremental Utilimaster sales.

On a sequential basis compared to Q1, sales were down 1.7% due to softness across both segments. Specialty Vehicle revenues fell $0.7 million or 0.7% from last quarter while Delivery and Service Vehicles posted a sequential decrease of $1.3 million or 5.4%.

Our consolidated backlog was $205.7 million as of June 30, 2010 compared with $150 million a year earlier. Now the backlog for 2009 did not include the backlog from Utilimaster, however, excluding Utilimaster, the backlog was still up $12.4 million or 8.2% for the prior year driven by increases in defense vehicles, motor homes and aftermarket parts orders.

The backlog decreased for the firetruck chassis and firetruck bodies by $5.5 million and $12 million, respectively. This decrease was driven by the (inaudible) orders for the 2010 emissions change.

Sequentially our consolidated backlog was essentially flat from the first quarter as we continued to work through the firetruck industry orders, offset by increasing orders in our Utilimaster and APA businesses.

It is worth pausing here to note the benefits we're seeing in our sales and backlog from our purposeful move to diversify our revenue stream. It has clearly allowed us to maintain a more stable overall topline even as the parts underneath are shifting around.

As announced, we incurred $1.8 million in restructuring charges net of cash in the quarter related to our decision to exit our Road Rescue operation. In addition there's another $1.1 million of restructuring charges net of tax in the quarter and other parts of our business.

Although these changes weren't significant, they will provide savings over the long term as we size our infrastructure to match our current level and mix of business and will position us long term for the future. As I will discuss for many items in the quarter here, I refer to our reported numbers and those line items excluding restructuring charges or a non-GAAP number. I would refer you to the table and reconciliation of GAAP to non-GAAP numbers that appears in our press release regarding these items.

Gross margin percentage in the quarter was 14.3% or 15.1% without the $1 million of restructuring charges, down from the 20.7% last year due mainly to a shift in product mix, from defense and APA and motor homes and delivery service vehicles. As I've mentioned in previous conference calls, lower gross margins will be a reality given the new mix of our sales within the markets we operate. So we have recognized there is clearly room for improvement.

For the second quarter, operating expenses decreased by $700,000 to $15.5 million, excluding the restructuring charges. In addition, operating expenses in the prior year did not include the criminal costs from our Utilimaster acquisition which was $3.5 million in the second quarter 2010.

So if you exclude the restructuring charges and the recently acquired expense of Utilimaster, our operating expenses in the quarter were really reduced by $4.2 million or 26% compared to the same period in 2009. Also included in those operating expenses in the current quarter were $1.2 million in one-time R&D costs associated with our recently announced next-generation commercial van and also expenses related to the development of our new 2010 emission standards.

As a percentage of sales, adjusted operating expense decreased to 13.4% from 13.6% last year and 13.6% in the first quarter. As we mentioned last quarter, we expect that our R&D costs will remain elevated as we incur the expense of prototyping and testing of new products though these should begin to dissipate over the second half of 2010.

Given the reduced gross profit levels and increased operating expenses, reflecting the restructuring and heightened R&D spend, operating income fell to near breakeven in the quarter, operating income though included $1.8 million of pretax restructuring charges in the second quarter. On the bottom line, we reported a net loss from continuing operations of $172,000. Excluding the restructuring charges from that number, we would have reported income from continuing operations of $900,000 or approximately $0.03 per diluted share.

Although we have made significant progress on many fronts in the second quarter scaling the business and controlling costs, one of our major accomplishments occurred on the balance sheet. We continued to work out receivables and inventory to control our working capital investments which resulted in a $22 million operating cash flow in the first six months of 2010. We made some great progress in inventory this quarter, although we still see additional opportunities for improvement.

With regard to receivables, our DSOs were 32.7 days in the second quarter which is well within our internal targets. Inventory turns were 4.5 days or 81.3 which are heading in the right direction [but as we close the area] for great potential.

Our solid cash flow enabled us to continue paying down debt in the quarter as debt stood at $20.3 million at June 30, down from $46.4 million at the end of 2009. Really some great progress there.

With regard to Road Rescue, as we mentioned in our press release a few weeks ago, we intend to exit this business while seeking opportunities for sale. Since that announcement, we have been encouraged by the level of interest from potential strategic and financial buyers.

With the high level of interest, we've also established a time frame for submission of bids and completion of the due diligence process. We are hopeful that we may complete the exit from Road Rescue business earlier than we had initially anticipated. Now I'm going to turn the call back to John who will share some closing thoughts on our outlook as we continue into 2010.

All right. As mentioned earlier, the second quarter market turning point for Spartan as we decide to exit the Road Rescue ambulance business and while this entailed significant costs short term, we believe it was the right action for the long-term health of Spartan Motors.

And again, this decision, while it's behind us, we must conclude the exit from this business and also continue our focus on growing the business in our other profitable market segments. And clearly we have a number of challenges ahead of us, from the restructuring activities that have continued challenging conditions in a number of our markets.

Something I do want to point out though as I look at the release is if you look at the backlog from March or Q1 and Q2, the nice thing is it's basically flat. Not a lot of companies can say that today. Combine that also with what Joe mentioned and got into detail a few moments earlier, the increased cash, less debt; another very, very positive.

Third, we do have a lower breakeven point versus 90 days ago. Financially, as I go through the major points, we're sound, generating cash, reducing debt and developing plans to use it wisely.

Number two, we are beginning to achieve very good market diversification. As one looks at the sales breakdown for Q2 in the release, you will see a company no longer dependent on one or two markets or business segments to drive the revenue, to drive the income.

Are we perfect? No, but we have made tremendous progress in market diversification. Now we are focused on enhancing growth and we are improving the operating income within each market.

Number three, catalysts within each market. It is a difficult economy out there. But we have some great catalysts as we look going forward.

NGCV, a major catalyst for increased profitable growth in Delivery and Service. The project is on track, ride and drives start in Q4, production in the second half of 2011.

The Isuzu lines assembly agreement, N-series cabin chassis, that will be a new multimarket opportunity which I have no doubt will take us into other markets because the Isuzu N-series today competes in a number of specialty vehicle markets of which there's at least 58 plus within North America. Crimson Fire, Spartan ER chassis, numerous product technologies, now it's onto market development.

As time goes on though, more major catalysts will be unveiled as innovation, effective innovation, disciplined innovation will be unveiled from Spartan Motors in the business units within our groups. Number four, data, demographic trends that are in our favor.

Emergency response has a call for help every 1.25 seconds. In defense, GSA, commercial survivable vehicles, you have over 100,000 kidnappings per year, over 300 IED blasts per month outside of Afghanistan.

As mentioned earlier, we've got an installed user base of over 220,000 vehicles. We have a great team now developing opportunity in aftermarket parts and assembly as noted in the growth in the backlog.

Outdoor recreation/RV, 11,000 people a day turn 50. That also benefits emergency response as more of us are going to make a call for help and an emergency response product whether we need it or not.

Delivery and Service, economy moving in right direction, again referenced by the backlog, slowly. But we are a consumer nation and that was a key part of our acquisition decision for Utilimaster.

Number five, the team, the reality is sometimes you will not score a touchdown every time you have the football. Sometimes you play for field position and you have to improve that field position and we are doing exactly that as demonstrated by the results once you peel back the restructuring charges.

In addition, this quarter is the one-year anniversary of our Chief Operating Officer, Tom Gorman, and Chief Financial Officer, Joe Nowicki. We are unequivocably much stronger because of them. We're more disciplined.

To others as well, I really want to complement the people within the Spartan Motors team. A lot of hard work, a lot of great things done. You are all improving the field position of us as we go forward.

As mentioned earlier, the integration of Utilimaster is ahead of plan. Difficult decisions have been made and a lot of hard work and again, thanks to all.

In summary, as I mentioned last quarter, the ivision of SMI is transforming the world through specialty vehicles. Our mission, our plan is simple. Compelling products and growth in profitable market share.

And the reality is great companies accomplish this in all three areas. And again, I'm not saying we're great, but a huge difference versus two years ago.

The three areas we accomplished growth is organic. Well you can look at NGCV. This is a market changing product.

Saw it last week, it looks better in reality than what it does in pictures and that doesn't happen very often. The acquisition of Utilimaster, been with the Company since 1985. It's the first integration where we are ahead of plan, where we've got disciplined processes for due diligence and disciplined processes for integration. Again, my compliments to Joe, Tom and the team.

Third, alliances. When you look at what we've been able to accomplish so far with Isuzu, some of the things which we've got going forward, again starting to come out in 2011 when you look at organic acquisition and alliances, we've now got three fronts, great companies do this.

Again, are we perfect? No, but you know what? We've got a lot going in the right direction. Last relative to cost management, balance sheet management, Joe covered a lot of those.

Everything revolves around our 10 strategic directives. As we implement, we are becoming a more professional, i.e. effective and efficient organization.

We're making progress and the data and financials support that, especially when you peel back the restructuring charges. And something else to consider.

Isuzu is one of the world's leaders in truck sales and is the world's leader in commercial diesel engines. They sell in over 120 companies and yet they make a decision to partner with us in North America. That in and of itself says a lot of how we have evolved over the past 12 to 24 months.

In closing, Q2, there was progress. The future is brighter but it's also very, very challenging. We are excited, we're focused and we're working together as a team. Thank you very much. Now, I'd like to turn it over to questions and answers. Operator?

(Operator Instructions) Ned Borland, Hudson Securities.

I apologize, I joined the a little bit late; on an overlapping previous call. But did I hear a run rate for Utilimaster? I think you said you were below plan for this quarter but you expect to make that up in the back half of the year? Where do things stand now for the full year in terms of sales in Utilimaster?

Giving you a quick update on the Utilimaster part of our business, it ran a little bit behind and we're slightly soft during the first half of the year. But as you can tell from the backlog which is up substantially from the first or second quarter, they're going to see the pacing of their business kind of wrap up quite a lot in the second quarter.

(technical difficulty) second half of the year. We don't give specific numbers, giving a forecast by entity or in total, as you know. But directionally, their improvement in their backlog that you're seeing, that is going to give you a good idea of where that business is going.

Okay, but I think the previous target when you guys announced the acquisition was $105 million. Can we at least acknowledge that it could be north of that?

Yes, I think the $105 million number was what their prior year numbers were and we said they are pacing for this year. We said it was about the same.

And yes, our expectation is they'll be higher than that number because of the strength we're seeing in the back half of the year. And if you think about it, Ned, that was really our objective in buying Utilimaster - trying to get another business that would diversify our revenue stream, that had different variables and different timings to it.

So on one half of the business, we all know that the firetruck industry is slowing down a bit as a result of municipal budgets and funding. But on the good side is we have a company like Utilimaster that's more of an early cycle business.

But they're going to start to see their business start to ramp up which is really what the backlog is depicting and what we are describing for them in the second half of this year. So it's working well.

And again, Ned, and to the others, what's nice is you're also seeing growth in the backlogs when you look at other heavy truck manufacturers, etc. So, while the recovery, we all would like to see it much greater and probably a greater ramp-up, at least the good news is it's moving in the right direction.

And so what's nice is our backlog data is also -- we're seeing the same thing in others as well that means it's not just us, we're not the exception. But as a whole, things are moving in the right direction.

The good news on the Utilimaster part is the backlog is up 23%. We should exceed the initial numbers we had thought of when we put the acquisition together.

So everything is actually ahead of all of our estimates when we initially did the acquisition. Not only in that business itself, but also the progress on NGCV and our success with Isuzu. So we are feeling really good about that acquisition.

Okay, and then sticking with Utilimaster, and again this is (inaudible) me joining late. Did I hear that delivery of the new vehicle would start in the second half of 2011?

You're absolutely right. The first couple of prototypes rolled off the line a week ago. We're now going to testing and validation and fleet ride and drives will start in Q4. Again a very, disciplined process.

From an investor relations perspective, people like yourself are actually going to start to see pictures of it somewhere mid to late August. We'll also start to set up some visual demonstrations of the product in Q4 of this year.

But relative to production on the product, we are on track for it to be a second-half 2011. And again, it's not just a sales increase, but also will enhance the margins of Road Rescue -- I should say of Utilimaster,.

And third, this is a very, very difficult product to replicate. We should have at least a two to maybe five year competitive advantage over our [honorable] composition. This is a difficult product to replicate but it is exciting.

It's also probably important to note in clarity since we talked about it last quarter but just to refresh everybody's mind, we've got two great initiatives going on with Isuzu currently and the NGCV program is one of them and just to be clear on that, and it's a great relationship we have with Isuzu on the NGCV and the launch of this product from Utilimaster as John just mentioned, mid 2011.

The other half of that though, our relationship we have with Isuzu is on the N-series vehicle that we've talked about as well too. And that N-series vehicle again is a separate product, another relationship with Isuzu and that is slated to also occur in middle of 2011, around that second quarter now.

The N-series vehicle, that will start kind of early in the second quarter. The NGCY vehicle which is the Utilimaster product, that will really start more towards the latter half of the second quarter.

I think one of the things then the group as Joe talked about, the N-series, from a numbers perspective, you are going to see improved capacity utilization for both the NGCV but also the assembly of the N-series [gas]. So from an overhead absorption (inaudible) of other things, honestly we've got some very, very good things going on with Izuzu which will improve our financial metrics in the second half of next year.

Okay, and then restructuring costs, what do you expect in the third quarter? I think you guys called out when you were announcing the Road Rescue potential sale, you were talking 6 to $7 million of restructuring costs and I think you booked like 1.8 this quarter? So does that imply the balance of that falls in the third quarter?

No, there's the tax, aftertax thing (multiple speakers)

Okay, year end.

We described 6 to $7 million in total that we would see in the second through fourth quarters. We're still on track to that same number.

So far in the second quarter we have booked approximately $5 million. So the pretax number of restructure that we've recorded is about $5 million in this quarter. So there's another couple million dollars coming in the third and fourth quarter. Does that help?

That helps, thank you.

That's good clarity because you are right. We've taken the bulk of it right now. I don't want folks to believe the expectation is there's a lot more coming. It's just the remainder of what we previously announced and we're on target towards that same 6 to $7 million range.

That's all I had, thanks.

Walt Liptak, Barrington Research.

Good morning, everyone, and good job on the heavy lifting with the restructuring and Road Rescue. I wanted to ask about the payback from the work that you are doing and specifically what SG&A is going to look like in the third and fourth quarter.

So, I've alluded about what's in the restructuring charges. So if you take that -- we just described roughly $5 million that's in this quarter, the bulk of it is in Road Rescue part of our business. That's a little over $3 million of it is there.

Separate discussion around payback on that part obviously. If you take the rest of the restructuring charges which amount to somewhere around $1.1 million before tax, $1.2 million, that number is primarily related with severance and people related costs.

So if you're thinking about a payback on that, it's tough to say but usually the traditional severance, I would say you start to get a return on that in six to nine months. Does that help?

Yes, does that mean then on a quarterly basis we could see lower SG&A by about a quarter million?

By the time you start getting out to 2011, you'll start to see a much lower run rate. But if I look at the 2010 numbers, keep in mind, we've been doing some restructuring for the last couple quarters.

You continue to see our SG&A costs come down first quarter to second quarter. You'll see them come down a little bit further in the third quarter as well and then even further in the fourth quarter.

Because not only is it the restructuring costs, but we're also going to get some benefits of some lower R&D costs. As you know, we did kind of a front-end-loaded on our R&D costs related to some of these new programs we had.

Okay, so you're saying R&D in the third quarter is going to be below the second quarter number?

Absolutely.

And the fourth quarter will trail down again.

The fourth quarter will trail down in R&D a little bit further yet as well too.

What do you think your annual run rate is going to be on a normalized basis for R&D?

I don't know for R&D, but we have described is where we are moving to is trying to get to a operating income number that is in that mid-single digits range. So in the midterm here, so in the interim where we're trying to get at, obviously longer term we would like to improve that even more. But an operating income perspective in that mid-single digits as we kind of get into next year. Actually as we get into the last half of this year and into next year as well too.

So as we're modeling 2011, we could use like a 5% operating margin?

In mid-single digits, yes.

One of the things from a pure R&D perspective, the NGCV is by far our most expensive product technology initiative and most of those costs are being in the first half of this year, and as Joe mentioned earlier, are going to get less as Q3 and Q4 go on. And while we have a number of other what I would call exciting and major projects going forward in R&D which will start to flow out as we move over the next six to 12 to 18 months, none of them are as expensive as what we're going through with NGCV.

Okay, Joe, I want to go back to a comment you just made about the charges. It's a little bit confusing before tax and after tax. But I think you just mentioned that the charge excluding Road Rescue before taxes was $1.1 million. Is that right?

Yes, that's in the current quarters. That's excluding the Road Rescue part of it. Our restructuring charges in the quarter were roughly around $1.1 million; $1.1 million, $1.2 million.

Before tax?

Exactly.

Okay, but in that first chart you've got in the press release, you've got gross margin related of almost 1 million of restructuring charge and then 841 of operating restructuring charge.

I apologize there. I was also confusing the before and after tax numbers so (multiple speakers)

Okay, 1.8 before tax, 1.1 after tax.

It's $1.8 million on a before tax perspective.

Got it, so anything related to Road Rescue charges, adjustments to the valuation or whatever went through that discontinued op.

Yes, that's correct. Sorry for the confusion there, Walt.

And, Walt, to the group -- if you go to the non-GAAP financial summary which is on page 3 of the release, I think there's a really good breakdown and clarity which this time is very healthy for all of us.

Okay, I wanted to ask about the Utilimaster backlog. When I was out visiting, the Utilimaster business had just taken in a big order from a customer and you were hiring people.

So I was a little bit surprised that the backlog wasn't higher given the visibility that you seem to have. And I guess I'm wondering about what you can talk about publicly with the order, who it was from, how large the order is, the number of trucks, when it ships and just provide a little more detail about the improvement that's going on in that early cycle business.

One, relative to your first -- or I should say your second question to be able to talk about the size of the order, the customer, etc.; that honestly is a challenge Joe and and I are working through with the Utilimaster team. What's interesting is in the delivery and service market, they get very large orders but their customers really don't want any public announcements going out there.

So we are working through that. We don't have an end answer because all of us, even the associates within SMI would like to know as well.

So we don't have the answer which you are looking for today other than the fact it was sizable, it's reflected in the backlog. But in addition, they're also seeing some nice fleet orders from smaller fleets.

It's not just driven by one customer. So they're seeing some orders come in from a variety of different areas which is in line with the economy starting to move slowly in the right direction.

IN regard to the number being higher, when you have a 20% increase in backlog from one quarter to the next, that's a pretty sizable increase. So we are pleased with that.

Well the other part that I would add is unlike the rest of Spartan's business, at Utilimaster they have much shorter lead times as well. So you won't see a nine month or three quarter backlog sitting out there.

They churn through it a lot quicker. So you'll see additional orders and we expect a much stronger kind of third and fourth quarter. I think the backlog gives you a good indication of that. But again, with the shorter lead times of their business, you'll see even more orders start to pop in which could drive even higher than what the backlog (multiple speakers)

Actually what Joe says is true, and what's amazing is within their business in some of their models, they can take in an order and ship it before the end of the quarter where they cycle the products less than 90 days.

Well maybe the way they ask the question is, you've got two big express package companies out there, right? That when they place an order, do they give you an indication or do they give you -- like other truck orders are usually like a five-year contract or a one-year contract. What do they do? Do they give you an indication and then give you monthly orders or something?

Well I think the term Joe has used in the past is the business is sort of lumpy, but no, they have a defined buying pattern and they may place orders once, two or three times a year but they give you a firm order but they do not give you -- most of them don't give you three or five year agreements.

Joe Maxa, Dougherty & Co.

Joe, on the restructuring, how much of that $2 million left is going to run through the continuing operations?

All of it. The remainder of it is primarily all related. There is a little bit of stuff that won't be, but most of it's going to run through the Road Rescue, that discontinued ops line.

Discontinued operations, okay.

He asked discontinued ops.

I apologize, discontinued operations. So the remaining of it is all related to the Road Rescue discontinued operations, so it will run through that line.

Okay, all right, thank you. Just wanted to clarify that. On the -- I wanted to talk a little bit on the firetruck chassis side.

Tough market of ,course orders have been down last couple of quarters, backlog is down. What are we looking at for run rates in the next couple of quarters given the lower backlog? Are you going to have to pull that down from recent levels and significantly?

Well you are going to see a comparable run rate in Q3, a slightly lower run rate in Q4. We anticipate that as we look at Q1 and Q2 of next year, the run rate will stay flat relative to Q4 and possibly go up.

Really that's what we're focused on, market development, for right now. On the positive side though, we still have a very good order book in emergency response chassis.

We have a number of new products out there. So while the market -- I would say it is very, very challenging; been in the business since 1985, have never seen the emergency response market this challenging. But we've never seen this kind of high-single digit unemployment, double-digit unemployment in some states and then a difficult economy.

On the other hand, I really want to credit the Spartan team, the Crimson team, at a number of new product innovations and technology innovations they brought into the market one and two years ago. Because they've got some very, very good opportunity to gain competitive marketshare (multiple speakers)

So just wanted to -- based on your comments, it sounds like even though it's tough, you're starting to see a pickup in order or at least in RFPs of some sort to get you up to that 35 to $40 million order rate per quarter. Is that fair?

Well the -- one, just the [transformer] alone which is truly a unique product, which Crimson showed on a Spartan chassis (inaudible) FDIC, the one mistake Crimson did make was they did not build enough demo.

The demand for that product has been so great from their distribution group, they don't have enough of them to go around the company and they're working through that. But getting back I guess to answering your question, we've got some major products, technology innovations out there.

We're going through the market development and talking to the teams over the past couple of weeks, the bid activity has been better over the last four to five weeks than what it was in the previous first half of the quarter. So that's a positive sign.

Okay, the comments of expecting growth in the second half of the year, are you talking sequentially or second half over first half or are you just talking more year over year?

Second half over first half sequentially, Joe.

Okay, great, that's helpful. And the drivers of that, clearly Utilimaster and mostly military?

And the parts business as well too. So our parts business, some good defense vehicle business that we have talked about with [ilevs], the MMPV kits, and a few others as well too that's driving some defense, parts business and Utilimaster, yes.

I think if there's an area where people may have overreacted was they thought that, okay, when these large military contracts disappeared that we were going to disappear altogether. And as we have said over a number of calls, we see the business model being one of small wins now.

We're just executing and delivering on those statements. So the backlog is up a little bit with with this reflecting in the Q3, Q4 comments as we look going forward. But there's still very good opportunity in the small win area in defense where a company that's agile, delivering a very customer-centric product in a very, very short timeframe and that's our niche.

Right, the last question for me on the mid-single-digit operating income, are you talking on a quarterly basis and you're expecting to see that in Q3 and Q4?

Yes, that's correct. We are talking about a quarterly number and based on the work that we've done and where we have been targeting to get to for the back half of this year and into 2011 as well too, we should be able to get into that range.

Great, all right, thanks, guys.

Walt Liptak, Barrington Research.

I guess my last question is on the motorhome business and the sequential decline in backlog. What can you tell us about the market trends and your customer base?

I think, one, what you're seeing in the reduction in the backlog is similar to what you've seen at other manufacturers in the Class A area, that some of the bump up in retail and dealer replenishment is now starting to flatten out. I think part of what you have also seen is some of the consumer confidence numbers sort of flattening out for lack of a better term, especially in the large ticket items is affecting the industry and that is just reflected in the backlog.

If there is an area where we do not have enough catalysts or major product technology innovations right now, that is the market segment. We have a great leader in that group. And over time, we will deliver some catalysts, major innovations in the marketplace.

It's not going to happen overnight. So for lack of a better term, we're sort of riding the consumer confidence index and the macro part of the economy from a big-ticket large purchase item perspective.

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

Well first, again, I'd really like to say special thanks to all of the SMI associates. We've made a lot of progress in Q2, made some very difficult decisions. The future is bright but it's also very challenging.

To the investment community and our other stakeholders, we're extremely excited. We are focused and we're working together as a team. It's not going to be easy.

But we're more confident about the second half of the year than we were about the first half of the year and we're focused on delivering results in the right direction. Thank you very much.

Thank you. The conference is now concluded. You may now disconnect your lines.