Shyft Group Inc (SHYF) 2010 Q4 法說會逐字稿

Good morning and welcome to Spartan Motors fourth-quarter and full-year 2010 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. Anyone has any objections, you may disconnect at this time. I would now like to introduce Ms. Paula Droste, Director of Investor Relations and Treasury for Spartan Motors. Ms. Droste you may proceed.

Good morning, everyone, and welcome to Spartan Motors fourth-quarter and full-year 2010 earnings call. I am Paula Droste, Director of Investor Relations and Treasury for Spartan Motors.

I'm joined on call today by John Sztykiel, President and CEO; and Joe Nowicki, our Chief Financial Officer.

I assume all of you saw the Company's earnings release on the newswire and Internet this morning. John and Joe 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.

All known risks our management believes can materially affect the results are identified in our Forms 10-K and 10-Q filed with the SEC. However, there may be other risks (inaudible). With that, would like to turn the call over to our CEO John Sztykiel.

Thank you, Paula, and good morning to those listening in on today's call and those on the Internet. Today we will share an overview of our operational and strategic achievements and highlights of our Q4 results.

We'll also give you an update on current market conditions, their impact on 2011 and beyond. We will conclude by sharing our strategic direction that will pave the way for future Spartan opportunities followed by Q&A.

And again as usual, Joe will get into a deep dive on the financials and some of the impacts going on from an operational perspective within each one of our business segments.

A year ago, we shared our top two priorities, reducing our cost structure and operational focus and investing in profitable growth, a strategic focus. While our work is not done, we are proud of our progress on both of these fronts.

During 2010, we rounded out our initiatives to include balance sheet management and developing compelling products and services. And again, we've made large strides in both of these initiatives that position us for future growth but also help to deliver results as 2011 moves on.

Moving onto key milestones, and again there are a lot of accomplishments in Q4, some of which have been noted in the release, some of which we will cover as well on the call including continued growth in our top line, reduction in our operating expense as a percentage of sales, a strengthened balance sheet with significantly lower debt and working capital. Our biggest challenge is the backlog and we will discuss that in more detail later in the call.

Utilimaster was acquired just over a year ago and the work to integrate the business into the Spartan system was completed during 2010. As a result, service and delivery sales are now the largest portion of our sales mix and about 31% for the last quarter.

This market also contributed to our operating income in the second half of the year, fulfilling our goal of investing in profitable growth. We must still make improvements in gross margins and ensure that strategic initiatives are implemented. And the good news is we are making progress on both fronts.

During the fourth quarter we also completed the sale of Road Rescue and finished all related transitional services. This sale hit three of four areas of focus as resources supporting that effort are redirected towards other activities aligned with our operational and strategic plan.

In reality, the pure ambulance market was not the right strategic fit for us plus we struggled operationally. Although difficult, it was the right decision. Simply if we cannot be a market leader within a reasonable timeframe at an acceptable investment, we will not be in that particular market.

A significant Spartan transformation that's important to mention is the added depth of talent and wisdom to our Board and leadership team. This talent top-grading continues today and includes personnel from other industries in specific functions.

We also have a lot of very, very good people within SMI as we work to both rotate and move them up from a leadership responsibility perspective. But those added talents broadened to include expertise in global commerce, lean manufacturing, innovative processes, acquisitions and alliance formation. We are fortunate to have the leadership caliber from a Board or operational perspective and all stakeholders will continue to benefit from them.

When I look at the SMI Brands of Spartan Chassis, Crimson Fire and Utilimaster, all have delivered a number of innovations over the years that compel the marketplace to buy our products and services. Today we have 13 active or pending patents.

As time goes on, I have no doubt we will have more and we will continue to develop new products that will ensure our competitive advantage i.e. compel the marketplace to buy from us that are difficult to replicate. A significant achievement supporting our pursuit of profitable growth opportunities was our alliance with Isuzu announced early last year in the April timeframe.

During 2006 through 2008 as a point of note, we upgraded every facility on the Charlotte campus support the hypergrowth from the defense business and record revenues were achieved in 2008. What's interesting is those upgrades include state-of-the-art paint booths, we also constructed some new purpose-built buildings. But in summary, those upgrades were a significant part in helping us to secure our relationships as Isuzu's North American partner.

Combined with Isuzu, worldwide leading diesel and commercial vehicle manufacturer, our alliance will allow us access to 48 of the 58 specialty vehicle markets in North America. The opportunities are great and they broaden SMI's reach to additional market niches, a global distribution network, and access to a broad engine line for our customers from a diesel perspective. What's interesting as a point of reference, prior to the Isuzu lines, we only touched 17 out of 58 specialty vehicle markets.

What do we offer to Isuzu? Flexible assembly expertise with state-of-the-art facilities, access to US markets, a stable partner plus customization. This alliance has resulted in the N-Series assembly agreement, a low-cab-forward lineup which will reach volumes of 4000 units a year and hopefully beyond, and effectively utilize plant capacity that was previously devoted to the production of defense units.

Production is scheduled to begin in Q2 of 2011. A point of note, the alliance was announced with Isuzu I believe April 22 or 23rd of last year and within 12 months, we will be in production at a rate of just over 18 units per day. Now that is speed, that is agility, that is smart people working together as a team. I complement Isuzu as well. They have been great partners.

Interesting to note, from a leadership perspective, as I mentioned being a market leader, the N-Series low-cab-forward for Isuzu has been the market leader in the low-cab-forward business for 23 straight years. Again another perspective moment and it's sort of apples to oranges in some respects as not all the products are the same from a size or price perspective.

But in 2009, we built 2401 vehicles; in 2010, 8362. You add in the N-Series assembly capacity at 4000, and we're on a path to over 12,000 units a year. Our markets and leverage opportunity is growing which also illustrates how we are evolving.

Quick financial recap. The fourth quarter was a great way to end the year with solid top-line sales, an increase of 31% from the comparative period in 2009, largely impacted by the addition of Utilimaster in the service and delivery market. Although aftermarket parts and assemblies and specialty vehicles saw a marked increase over the same period as well and that was sequentially sales are up 5% from Q3 also driven by the service and delivery market.

While the addition of the Utilimaster improved our top line and diversified our annual revenue stream by more than 20%, and that is a positive, it did put pressure on our margins. And as I mentioned earlier, we're very focused on improving the gross margins at Utilimaster but to counter this impact, we put added focus on our expenses, reducing our operating expense ratio by 300 basis points to 11.7% from 14.7%.

My complements to all Spartan associates for responding to this tough challenge in a very, very short timeframe. Earnings from continuing operations were $3.7 million or $0.11 per diluted share compared to breakeven results from continuing operations the prior year.

Our balance sheet strengthened with the $10 million payment of debt in the quarter and an $18 million reduction in inventory. Again my compliments to all Spartan associates. And also, Joe will provide a more detailed review of the financial results. Now let's just give you a little bit of insight into the markets.

In the recreation specialty chassis market, sales remained flat quarter over quarter but actually that's sort of good news because it is still a bit of a tenuous economy and the RV market is really doing reasonably well. However, on an annual basis, sales were up $53 million or 150% while order flow is up 70% over the same time period, again reflecting overall industry improvements compared to last year.

According to RVIA, the Recreational Vehicle Industry Association, shipments of Class A motor homes were up 145% for the first 10 months of 2010 compared to the same period in 2009. The increase in Class A motor homes was the most rapid among the motor home segment in a long time period and indicates a good trend for this market as that is the market we serve.

You know again, another point of note is that renewed interest in affordable travel and vacations and the increasing costs and the inconvenience associated with air travel, and all of you know about that, the motor home industry or the RV industry stands very well relative to the future. There's also another very positive demographic, 11,000 people a day turn 50 and again, that is still one of the prime buying audiences.

Another point of note though, as you see in the boomers, the Xs and the Ys, the younger generation does want to spend time outdoors and the low-cost nature of an RV vacation will support industry growth patterns amongst a younger demographic group. And this is good for all of us.

During the quarter, we had a very good show at the RVIA show in December. Our success was driven by customers seeking reliable partners with a history of innovation and an ability to react with speed to changing markets. Speed and agility, one of our 10 strategic directives; a very, very important separator for Spartan.

In summary, the recreation specialty chassis market has further upside potential as the US population ages, as the economic climate continues on a path of recovery, as consumer confidence continues to improve and our product innovations take hold. As 2011 moves on, we expect to have several more announcements in this area and we look forward to the rest of 2011.

Let's switch over to defense and specialty vehicles. Fourth-quarter sales were up 72% to $4.7 million in 2010 reflecting [ILAB] and SOCOM orders; again specialty vehicle, small volume orders in the defense arena; again mine-resistant, blast-protected kind of product. Our backlog of $8 million primarily reflects the armored utility vehicle or AUV, again an MRAP variant announced this past quarter as well as a few drill rig orders.

The interesting thing to note about the drill rigs is in the specialty vehicle business, custom and niche products often start out on a very, very small scale escalating to larger volumes. Our drill rig product has the same opportunity.

While it does not guarantee the future, we have a great product, it actually looks very, very good as well. And while it may be small today, it may become a larger part of our business tomorrow and it is quite profitable.

From a data point perspective, an alarming global trend is the growth of improvised explosive devices or IEDs as they are more commonly called which are over 300 per month excluding Afghanistan but surged to over 14,000 when one includes Afghanistan in 2010 or a 62% increase over 2009, a threefold increase over 2008.

This threat is clearly alive and well. Again unfortunately but in a company with speed and agility and all that we bring to the marketplace, we expect to be in this business of mine resistant and bush protected products or variants for not just today but the future as well.

We coupled this with our ISO 9001 certification and again, we are positioned extremely well. In summary, there are fewer smaller order opportunities in the defense market. I should say there are a few small order opportunities in the defense market, which we are pursuing.

However opportunities in the defense industry is currently challenged on two fronts. One, there is a smaller need as the wars in Afghanistan, Iraq wind down and the Department of Defense focuses on reducing costs and limit funding for new program starts.

All right, let's switch over to the emergency response market. It continues to soften as a result of tight fiscal budgets and pull ahead orders in 2009 in advance of the 2000 emission change.

Those of you that have been in this market for quite some time know that emergency response, typically last into recession, last out of recession. Emergency response chassis i.e. Spartan Chassis sales were down 17% for the fourth quarter of 2010 compared to the same quarter in 2009. Year to date sales for ER chassis were only down 5% compared to the prior year due to the fulfillment of orders placed in late 2009.

As I mentioned earlier, with tightening fiscal budgets, we are witnessing a shift in the orders being processed with also a longer purchasing cycle. At the same time too, we continue to invest in innovative solutions that will compel fire departments and municipalities to choose a Spartan product.

A perfect example, the Metro Star rescue transit, a two-door rescue option. So it's not just a pumper, it's now a combination rescue pumper product.

Another new product of which announcement came out earlier from Spartan Chassis was the Force, a new model fire truck cabin chassis that complements our product lineup. It's is a pre-configured purpose built chassis strategically priced as an affordable option to fire departments that are under strict budget constraints while still providing the quality and the content desired from a custom chassis.

Again custom chassis are still the dominant part of the marketplace. But as prices become more important, we're doing a variety of different things to make the products at Spartan Chassis more affordable, again to not only drive the backlog in the right direction, but to continue our leadership position.

The Spartan Force will be showcased at the FDIC show in Indianapolis in late March. That is the largest emergency response show in North America. Plus some orders have already been placed for this product and strong -- which reaffirms its market opportunity and acceptance.

In addition we also invite any interested investors to come to the show at FDIC. And if you are, please contact Paula Droste and she will be more than happy to facilitate your requests.

In the emergency response chassis group i.e. Spartan Chassis, we're focused on three areas -- speed, innovation and ease to do business with. The good news is there are a number of initiatives in place, the Spartan Force is just one. Momentum is now in the right direction and we are also committed to accelerating it.

Let's move over to emergency response [body] i.e. Crimson Fire and Crimson Fire Ariels. Sales were up 4% for the quarter compared to the same quarter in 2009.

We also anticipate that Crimson Fire will be impacted by the overall softening of the emergency response industry. However they have had only modest declines in their backlog to date.

We attribute this to the broader market it serves but also they do provide products on less expensive commercial chassis plus over the last two to three years, they've had a number of innovations come into the marketplace i.e. the Legend, the Transformer, some aerial products and they are simply just gaining profitable market share.

Something which we did from a lean perspective last quarter was we moved Crimson Fire Ariels to a new facility in Ephrata, Pennsylvania which provides not only more space really without any significant addition in cost and with the added space, improved operating structure, we will be able to reduce the cost of each aerial we build. Again, working smart before you work hard.

Again, Crimson Fire will be showcasing a number of new innovations at FDIC as well which will take place in March. Long term, we see the emergency response market recovering and it is a great market.

Demographic trends will only increase the need and demand for emergency response vehicles. Today what is amazing is there is a call for help every 0.73 seconds and with this aging population, this statistic will likely increase. Another point to note is direct dollar loss from fires is up 32% 1992 versus 2007.

Another data point is the existing national fleet of fire trucks is also aging. Approximately 54% of the fire trucks in service today are more than 15 years old. And to give you a point of perspective, that means they don't have antilock brakes.

Imagine driving a 30,000 to 40,000 to 50,000 pound vehicle on rain, snow and a little bit of ice and you you don't have antilock brakes; a pretty precarious situation. And last, remember that fire departments are often the first responders to any serious event.

Again on also a positive note, in talking with the market groups, bid activity is up in Q1 versus Q4 of last year. And while those are not orders, that's also a big step in the right direction.

With aftermarket parts and assemblies, we experienced a 78% increase in quarterly sales year over year driven by the completion of the Medium Mine Protected Vehicle or MMPV as we call it. With over 220,000 vehicles in service today, we have tremendous opportunity from an aftermarket parts and assembly perspective.

There's also opportunities in the refurbishment area especially from an emergency response perspective. We have a customer centric focus, we expect profitable growth in our aftermarket parts and assembly area and this applies to all three brands -- Spartan Chassis, Crimson Fire and Utilimaster.

Sales in the service and delivery segment, let's switch over to Utilimaster. Our last major market increased $25.9 million over the same quarter in 2009 driven by three full months of sales from Utilimaster which was only present for one month in the respective quarter of 2009. Sequentially service and delivery sales were up 42% from the third quarter of 2010 due to the completion of a large sales order for a major customer.

Backlog for our service and delivery vehicle business is down $10 million or nearly 30% from the prior year driven by large customer orders placed in 2009 in Q4 that were also completed but were not present in the backlog; customer push for those deliveries before the end of 2010 driving up sales, reducing the backlog. Another point to note relative to service and delivery is the economic climate continues to improve and consumer spending increases, this will benefit the service and delivery market.

In the second half of 2011, we will benefit from the launch and production of the next-generation commercial van to be unveiled at the NTEA, the Work Truck Show in Indianapolis on March 8 in partnership with Isuzu Truck of America. This is an industry-changing vehicle.

It improves fuel efficiency by 35%. From a green perspective it cuts CO2 emissions in half or 22,000 pounds per vehicle per year while looking a heck of a lot better and a variety of other functional improvements from cargo capacity to ease of entrance and egress.

You know what's interesting? I have been with the Company since 1985 and now you'll probably pick up on my passion. You've been through some pretty exciting products like the EC-2000, Gladiator, Eurospace and the MRAV business and I have never seen a more exciting product than the NGCV.

When I started with the Company in 1985, we were $10 million in sales. We've had a variety of different positive events and challenges. But this truly is a market transforming product.

A unique microsite has been set up at www.nextgenerationcan.com and we are excited about this big unveiling event, a countdown clock is included. If you're not able to make the event, a video of the unveiling will also be posted on YouTube. We are now getting into the 21st century from a market development perspective and I am excited about that as well.

In the aftermarket parts and assembly area, there are a variety of neat initiatives or exciting initiatives going on as to how do we take advantage of the existing customer base of our products and again creating a value-added revenue and income stream. We have successfully developed and launched the retrofitting of keyless entry systems and a safe-load mechanism which will also be reflected in our 2011 results as time moves on. I have taken a lot of time to cover the markets and now, Joe, I would like to turn it over to you to get into the deep dive on the financials and some operational achievements.

Thank you, John, and good morning, everyone. Our fourth quarter results reflect the achievement on the commitments we made last quarter. As I mentioned in the past earnings calls, we expected a positive outlook for the second half of 2010 which we delivered on in the third quarter and then again this quarter.

The $8 million sale of Road Rescue was also finalized in the fourth quarter along with the completion of related transitional services, the proceeds of which were all in line with our previously reported estimates. In addition to improving our balance sheet, the completion of this sale freed up resources and capital which we have been able to redeploy to other activities within the business.

While pleased with our proactive efforts to curtail costs and rightsize the organization, we understand that our work is not done. Given the market conditions and trends in our backlog, we will continue to effectively manage our cost structure. What we have accomplished is putting in place a culture of continuous improvement that will allow further changes to occur more rapidly.

Now turning to our income statement results, fourth-quarter sales were solid at $127 million for a $30 million or 31% increase over the same quarter last year. The majority of the increase period over period was due to the expansion of our product portfolio that includes service and delivery vehicle market, which we entered in December of 2009 through the acquisition of Utilimaster. Our results reflect a full quarter of related activity compared to single month in Q4 2009 excluding Utilimaster revenues increased over 5% for the same periods.

Additional sales increases came from defense and APA markets. The defense sales increase for the current quarter was $2 million over the same period in 2009 driven by [ILAB] and SOCOM unit sales. The MMPV sales drove the $8 million comparative increase in the APA business.

Sales of fire truck chassis decreased 17% in the quarter compared to the same period in 2009, again as John described, reflecting the softening in this market and also the completion of the orders we pulled ahead due to the 2010 emissions change. Specialty vehicle sales were higher in the same period of 2009 reflecting a shift towards ambulance chassis. Motorhome chassis and fire truck body sales were fairly flat over the period.

On an annual basis, sales were up $71 million or 17% with the addition of 11 months revenues from Utilimaster. Excluding Utilimaster sales were down 7% driven primarily by a reduction in sales from our aftermarket parts business. The parts sales as you recall had a record year in 2009 as a result of the military orders received as part of the MRAP program.

Gross margin in the quarter was 15.3%, down from 15.5% in last year's fourth quarter due mainly to the shift in our product mix from emergency response chassis to service and delivery vehicles. The shift to lower overall gross margin compared to prior years was expected and will continue due to our more diversified sales mix. However, we remain committed to improve our margins in each market we serve as we focus on continuing our cost reduction efforts.

Despite operating expense increasing by approximately $0.5 million in the fourth quarter, our operating expense as a percentage of sales fell dramatically to 11.7% from 14.7% for the same period in the prior year. This is a significant achievement particularly as we folded in the operating expenses from the acquisition of Utilimaster this year.

Furthermore we accomplished this while major R&D projects were underway for the development of a next-generation commercial van and the cabin chassis we designed in our emergency response market. Reflected in the operating costs are R&D costs related to the development of those two, which amounted to $900,000 in Q4 and $4.8 million on an annual basis.

Excluding restructuring charges and Utilimaster operations, operating expenses were reduced by an estimated $1 million or over 10% savings compared to the same period in 2009. Annually this estimate in reduction of operating expenses amounts to $10 million or over 20% savings compared to 2009.

The increased sales and effective cost management strategies drove the positive operating income result of $4.6 million for the quarter. This was up more than sixfold from just under $1 million in the same quarter of 2009.

In addition as a result of recently enacted tax legislation related to R&D, we were able to reduce our effective tax rate in the fourth quarter to 22% and to 29% for the full year. Proud to report net earnings from continuing operations for the quarter of $3.6 million or $0.11 per diluted share.

Now moving onto our balance sheet results. Another major accomplishment came from our reduction in working capital need as we managed our resources more efficiently which helped drive over $38 million in operating cash flow in 2010. Our inventory balance has improved with a reduction of over $36 million since December of 2009 representing a reduction of 36 days in inventory.

Our accounts receivable were up almost $8 million due to the timing of some shipments at Utilimaster and Crimson Fire. We made great progress in managing our balance sheet and will stay vigilant in continuing to do so. We do believe we have even more opportunity here to improve.

Continued strong cash flow from operations enabled us to pay down maturing debt of $10 million in the quarter. At December 31 our debt balance was at $5 million, down substantially from $46 million at the end of 2009. Depreciation and amortization for the quarter was $2.6 million and for the full year, it amounts to $10.7 million.

Capital expenditures for the year were $3.9 million in support of continuing operations and strategic investments. Proceeds from the sale of discontinued operations and the sale of operational PP&E was $7.4 million and $800,000 respectively.

Reflecting our positive long-term outlook and strong financial position, the Board approved an annual dividend that amounted to $3.3 million with a final payment of $0.05 per share made in Q4. Now I'll spend a couple of minutes on our backlog, which represents the one challenge in the quarter's results.

At December 31, 2010 our consolidated backlog was approximately $134 million compared with almost $234 million a year earlier. The majority of the decrease in our backlog year over year is a result of orders received in 2009 in advance of the 2010 engine emissions change.

This pull-ahead effect primarily impacted our fire truck chassis and body product lines. We saw our backlog rise in Q4 of 2009, we talked about it at that time the impact the engine emissions change was having, so no surprise there. Each quarter this year we have seen the emergency response backlog decline as these pull-ahead orders were filled.

But that's not the only reason for the decline in the emergency response backlog. As John described and as everyone knows, market conditions in this area are very challenging right now.

Municipal budgets have tightened considerably. As a result, the industry is preparing for a 2011 that is estimated to be down 30 to 40%.

Although as John described, we have numerous initiatives in place to internally offset this decline. Also as we have experienced before, the industry is cyclical and declines are offset by high periods of growth as the economy rebounds.

The third major area impacting our backlog is the mix shift that's occurring in our business. As we have diversified our revenue stream, we have moved into areas that have shorter leadtimes and tend to be more project oriented or I think lumpy is the technical term. We have seen this primarily in our service and delivery business, Utilimaster, but also in our recreational specialty chassis business.

This occurs in the service and delivery side as fleet customers tend to place large orders on a periodic basis. We experienced this in Q4 of 2009. We had a large fleet order in the backlog. Again in Q3 of 2010 was another fleet order in the backlog.

The end of Q4 2010, the majority of those large orders were shipped and the ending backlog was lower. So it's difficult to look at their backlog at any one point in time and draw conclusions.

The good news with Utilimaster is that they are the market brand leader and that market responds early to economic changes and we're confident should benefit in 2011 as the economy recovers. The conclusion you should take away from my backlog discussion is that the year-over-year comparison looks worse than it is. But, yes, our backlog is weaker than we would like primarily as a result of conditions in the emergency response and defense markets as John described. The good news is that we have diversified our revenue stream and over 60% of our business is now outside of the emergency response market. And we have spent considerable time on new products and new lines that will even further diversify our revenue in 2011. While the first half of 2011 will be challenging as a result of the opening backlog, we remain optimistic on the second half of 2011.

In closing, we made solid progress on improving our results, scaling the business to current revenue levels and keeping costs at sustainable levels. While we are pleased with the quarter's financial results, we remain guardedly optimistic for 2011 as we continue to drive top-line growth while aggressively controlling costs. I will now turn the call back to John who will share some closing thoughts.

Joe, thank you very much. 2010 was a year of transformation as we completed our integration with Utilimaster, exited Road Rescue and made significant strides in leaning out our cost structure and improving our financial strength.

From a strategic top-line perspective, we will continue to pursue a blended growth strategy focused on three fronts; organic growth through our existing markets in product innovations i.e. the Force, the next-generation commercial van, refurbishment, etc.

Second tenant or foundational point, alliances such as Isuzu. And to give you an idea again of some of the opportunities or what we now have going forward with Isuzu, what's interesting is from a diesel perspective, we have the broadest lineup of diesel engines in North America from a specialty vehicle perspective from 3L to 15L.

Second we now touch 47 out of 58 specialty vehicle market niches. And again, those are opportunities but through the right strategic and operational initiatives, those opportunities will become positive realities.

Last, acquisition, and we already talked about the integration of Utilimaster and how that has moved in the right direction. And what's nice is we have a tremendous balance sheet, low debt position with available credit lines as Joe mentioned. So we have opportunity in the future as well.

In the past, again as a point of perspective or reference, our growth strategy was primarily organic and today we have a blended strategy with great initiatives in place for each one. Although a number of our markets have challenges ahead of us, particularly those affected by the weakened US economy and increasing municipal constraints, we are confident that over time, our efforts to restructure, diversify our business and our commitment to the four strategic and operating initiatives will align us for gains and profitable market share.

For 2011 and beyond, the four pillars are simple, compelling products; growth in profitable market share, strengthen our balance sheet and effectively manage our cost structure, always in line with our revenue stream. Simply, we are realists.

Long-term we will continue to execute on strategic and operational fronts that are supported or enabled by our diversified product portfolio, plant capacity to support future growth, flexible operations that enable us to adjust to changing environments, strong financial health, including access to sizable unused credit facilities, a talented and experienced leadership team from our Board to management team, literally throughout the whole organization; and leveraging our facilities, processes and people where appropriate.

Quick note, two years ago, SMI was like almost every other specialty vehicle company in North America. Each location or business unit operated with great autonomy.

Today and tomorrow, SMI will continue to leverage the facilities, the people, the processes across our markets locations where appropriate. And as Joe went over a number of achievements which we've accomplished in 2009 and 2010, it is because of this leveraged approach or working smart as we call it that these results went from being an opportunity to reality. As time moves on, this market-centric and leveraged team will guide us in the right direction.

In closing, 2011 will be challenging and exciting. As both Joe and I have mentioned, Q1 and Q2 will be tough in this year. However as 2011 moves on, we have some exciting things going for us.

In service and delivery the N-Series chassis assembly starts in mid Q2. On March 8 at the Work Truck Show there's the kickoff of the next-generation commercial van; again the microsite. It is one exciting product.

And emergency response as I mentioned earlier, bid activity is up in Q1 versus Q4 of last year. We also have some major events in March, the Crimson Fire dealer meeting, the Spartan Chassis partnership meeting and FDIC, the largest ER show in North America of which there will be not just process announcement, but some product announcements as well. And this is just the first half of 2011.

As we go forward, compelling products, growth in profitable market share, cost and balance sheet management will guide us operationally and strategically. From a top-line trend, it will be our blended strategy, organic alliance and acquisition.

In summary, people. We have some great talent and a lot is being done in the right direction and I wish to compliment everyone for the accomplishments over the last two years in very, very challenging market conditions.

From a positioning perspective, in our markets, we are positioned very well and we have room for improvement in a variety of initiatives are in place to take advantage of that. From a purpose perspective, in all that we do, we bring value i.e. we are committed to transforming the world through specialty vehicles. I wish to thank all of you and now I'll turn the call over to the operator to begin the Q&A session. Thank you.

(Operator Instructions) Joe Maxa, Dougherty & Co.

I just wanted to see if you could give us a little more clarity on your thoughts for 2011 by your product line. You gave us some nice color last quarter. You gave us some indications. But what are you really thinking here? What you will see as far as growth or -- meaningful growth or meaningful decline in your different areas?

Sure, this is Joe Nowicki. I'll give you a little bit of direction.

As you know, we don't give guidance, so I can't get you any specific numbers. But I will walk you through by market some of our thoughts as we look at 2011.

As we go through them segment by segment, emergency response as we kind of described, the market there is looking at a 30 to 40% decline. So in our emergency response chassis business, that will be a tough environment next year.

The defense and government piece, I think as we talked about, we had some pretty strong business with several programs this year. Next year we already have some product wins in place that are on contract regarding [ILAB], SOCOMs, AUVs and also the completion of the MMPV program. But you'll still see our defense business down slightly year over year.

Recreation and specialty chassis business, now that's one as John mentioned we're pretty optimistic about. That market itself in total has been pretty stable year over year and as we look at 2011, it will probably continue to be stable. And we've got a lot of good news which could help us to see some nice growth in that market next year.

Joe, that's a good question. Just for all -- one of the reasons the RV business [not just that] continues to move in the right direction and I think one dealer said it best. He said with the financial market stability and some of the appreciation we've seen over the last 12 to 18 months, the wealthy know they are going to be wealthy.

So now they are out buying expensive or luxury items per se whether it be purses, cars, motorhomes etc. So I think as long as we see continued financial stability in the markets and consumer confidence slowly ticking in the right direction, you're going to see the RV business continue to move in the right direction.

When we look at the margins, given your change in product mix, should we see more of a decline to back half? Sounds like Utilimaster has a big chance pickup in the back half and in other areas. But where are we looking at gross margins going forward? Would 15% be fair?

First off, I'm going to kind of close off on your prior question there, Joe, and kind of go back to the other markets. We talked about the chassis, the defense, the rec business.

If I look at the rest of them, the aftermarket parts and assemblies, there's two parts to that, motorhome and fire truck. The team is doing a great job there on motorhome and fire truck parts. You're going to see some nice growth in that part of the business.

The APA or our parts business on defense, that you will probably see fall off as that defense business has declined. A lot of that parts business is going to decline as well too.

We're going to pick up on the Isuzu [and gas right]. That's brand-new business to us which we will see. That will start up in the second half of the year.

The delivery and service vehicle, the most optimistic one, early cycle business, great new product growth coming. So you're going to see some significant growth in that segment for us.

Overall on the revenue piece, Joe, it really is market by market. You'll see different conditions in each one. That's part of our diversified revenue approach here and we are going to have some that are down but we've got some that are up as well too offsetting it.

So are you looking full year to be flattish?

I think if you look at our grand total of all those, again we don't give specific guidance, but if you look at the math of all those pieces, probably it's fair to say that, John, wouldn't you assume that our business would be flat to down slightly?

I think that would be a reasonable estimate as we sit here today. While we have a variety of initiatives in place as we sit here today, I think that would be a good way to phrase it.

But I think the thing to consider as well though, Joe, is the first half will clearly be more challenging than the second half of the year. The backlog that we have says the first couple quarters will be more difficult and a lot of all the new initiatives that we have in place with Isuzu, the next-generation commercial van, several other new initiatives in other areas of the business, they all start to kick in more in the second half.

Exactly, and just the gross margin?

That was on the revenue side.

Understood.

One more time your question on gross margin?

I just wanted to see what your thoughts were on the trends in gross margin as it appears that lower margin business might be picking up faster than some of your higher-margin in the past at least in the back half of the year.

Well, your assumptions could be correct if our traditional kind of patterns on gross margins continue. But what we have done is we've got a lot of work going on as John described about how do we improve the margins, not take as a given some of the low margins we have in some of those areas of the business, but what can we do to improve on them.

There's a lot of lean initiatives going on not only in our delivery and service business, within our motorhome business and others that have traditionally lower margins to improve them and work them up. We also have several new products as well too, next-generation commercial van which which should help with the gross margin picture in the service and delivery business as well as some new work that we have going on on the recreation vehicle side as well too. So I don't think it's necessarily true, Joe, to make the assumption that our historically low-margin areas will always be low margins. We are working on that.

You know, I think to the group it's important to note as Joe mentioned earlier and I mentioned earlier, there's only so many good hours in the day and you also have to focus. In 2010 we focused on the integration of Utilimaster, bringing the NGC from a product development perspective to a market development perspective.

Now we'll be focusing on improving the operations at Utilimaster and going into the market development part of the next-generation commercial van. So just because we are where we are at today doesn't mean we are acceptable or satisfied with it relative to tomorrow.

Last question and I'll move onto the queue. Do you anticipate to be profitable in both Q1 and Q2? And are your operating expense levels at I guess the correct levels currently? Or do you see improvements there?

Well as I mentioned on the operating expense side, to get to your last question, Joe, we are always looking at achieving the right balance of our operating expense cost structure with our revenue stream. So that's a given. We are continuing to look at that. That's part of this focus on continuous improvement on operating expenses.

In regards [to specific the] profitability, again as I mentioned earlier, we don't give guidance specific to quarters on the conference call.

Alright, fair enough.

Ned Borland, Hudson Securities.

Just following up on Joe's margin related questions, just maybe coming at it a different way. If we look at the gross margin, there's certainly some things that are somewhat out of your control like raw materials and so forth.

How do you expect to deal with that and how would that sort of manifest itself on your gross margin at least in the early part of the year? And then the second part of it with the op expenses, you've done a good job of bringing them down to 11.7% but are there any kind of launch costs, any kind of one-timers as we get close to the launch of the NGCV we should be thinking about?

(inaudible) question. There's one around launch costs related to the next-generation commercial van. And certainly there are some in place. We do have a little bit of a higher level of cost structure in the first quarter of the year, a little bit in second quarter because a lot of the shows, the promotions, kickoff of (inaudible) commercial van do occur in the quarter.

So you're right, we will see some incremental spending that's a little bit high in the first quarter that we have got the NTEA show, we have got FDIC, we have several dealer events as well too all stacked up in the first quarter. So that is true. You had a second question in there but I think I missed it. Can you backtrack on that one?

Okay, all the way back up then. I guess raw materials as it affects your gross margin if you could just comment on that.

To this point, we haven't seen any significant impacts on the raw materials. Our supply management team has been on top of it working with vendors as questions have come forward. But to this point, I don't have anything to point to that says we're going to see significant raw materials in any one area yet.

Ned, this is John Sztykiel [into the group] I just remember what we went through a number of years ago with steel surcharges and other things, a variety of other things. I think again while we have not seen that, we are concerned about it, but that's also why we're being proactive, not just from a purchasing perspective, but also from a design respective, a facilities perspective.

I mean, one of the things which we got on our radar screen is as the world's economy starts to improve, there's only a limited supply of raw materials or commodities out there. And in the end, what we produce has material or components in there.

So I think again, I really complement our people. They've done a very, very good job in ensuring that commodity prices have not affected us yet or commodity price increases have not affected us yet, and it's a number of things from purchasing to engineering to facilities; again, working smart in addition to working hard.

Okay and then just one more margin related question and then I'll get back in queue here. But the spares business as it relates to the delivery and service segment with Utilimaster.

One, do you expect that sort of percentage of delivery and service sales that's related to spares, is that going to climb higher with the new product launch and are they -- are those spares sales of comparable margin to what you make on the military spares?

I mean again, this is John Sztykiel. I think one relative to the NGCV, it's a little bit too early to tell from a spares perspective because the product is not in the marketplace.

When I look at this service and delivery business as a whole, I think we have got very good growth prospects in the service and delivery business just because there's so many vehicles out there plus we have got a very good leadership team and they've got some nice innovations bringing into the marketplace from a keyless entry system to a lift, etc. Relative to the margins, Ned, I think it would be inappropriate for us to comment on a particular market relative to another market, just know the margins are positive and they are moving in the right direction.

As a follow-up, you do see better margins on the parts business than you do on see on some of the core products. So, yes, you are right there.

And I would just echo John's comment. I think the Utilimaster team has done an excellent job in bringing kind of new innovations in what they call that up-fit market to being things like as John has described keyless, some other things we're doing with some carrier and interior storage devices, which I've seen a lot more of those come to the table and in their revenue stream. So I think that is good and will help their overall sales and their margin improvement as you look at 2011. So all good news there.

You know, the interesting thing just to the group, that is one of the positives the people at Utilimaster have expressed about the relationship with SMI. We have a strategic directive called value maximization which is really part of aftermarket parts and assemblies.

And so, Joe, Tom, all of us, myself here, we have not just embraced their desire, but we have supported that desire to look at all the vehicles they've got out there and then okay, where do we allocate our time to say okay, just because the vehicle is out there doesn't mean you can't bring items to the marketplace which the customer wants to put on. Because in the service and delivery marketplace, people keep their vehicles a very long time period.

(Operator Instructions) Mike Ruggirello, Barrington Research.

Good morning, Joe, John and Paula. Nice end to the year there. I know you guys had mentioned launching the NGCV in March. I was looking to maybe get -- if you could walk us through what happens after that?

Well, good question, Michael. But basically what is interesting is they have got a variety of road locations where with Isuzu they will be taking the product on the road. They have got -- they've already had a number of customers come visit the product in Wakarusa, go through ride-and-drives.

So that's pre-unveiling for lack of a better term. But there is a very, very disciplined exciting road strategy. It's called the Good to Go Tour, and the product will be in Chicago.

So we will be getting in touch with you, making a number of stops around North America. And I'll tell you what. It is one exciting product.

The engine is quiet, a very low DBA, composite floor, composite walls, tremendous fuel economy. The CO2 emissions, imagine 11,000 tons less per year. That is a huge number.

So again, the Good to Go Tour plus the microsites out there, it looks great. But the Good to Go Tour will be published on March 8. So literally it's going to be sort of a touch me, feel me kind of experience. So any investors if you have a desire to be a part of that, obviously get in touch with Paula.

Two other points, Mike. There is no material change. The start of production as we described would be in the third quarter. So that's still on track.

And as we've talked to you before, they're still anticipating somewhere around 1000 units during the course of this year 2011 in the third and fourth quarter that would get completed. So that still hasn't changed, we're still heading down that same path.

Perfect. How are sales conversations going now? You said they have done the ride-and-drive but I guess I'm trying to understand -- so are they going to delay purchases until they see this thing? Are they going to have the orders ready to go as soon as it's out? Just how are the sales conversations going with your big customers.

Well the product is pretty -- it's significantly different than the larger (inaudible). The GBW is 12,000 pounds where a number of the other products with Utilimaster producers are 18,000, 19,000, 20,000 pounds on up.

So we really don't see customers delaying their purchases because this is really addressing another market segment for Utilimaster. The reviews have been extremely positive and I think that is just referenced by Joe's statement relative to what the production is still slated to be in the second half of this year.

We are still seeing a lot of the fleet customers start to come forward as well right now on some of the old vehicles. There isn't really a kind of waiting approach going on. Plus I think folks also know that it's limited production this year. So they're not going to wait for the whole year until 2012 when it really starts to kick in.

Yes, and the last question on the NGCV. If I understand correctly, you said it's going to be -- the price of that product is going to be more than the comparable product previously (inaudible) price to the customer?

I think to the end customer, the total end selling price will be slightly above what they're paying for a comparable -- the old mild vehicle today, that's correct. That was Joe, sorry.

The operating cost is significantly less.

That's a good point.

And what is interesting is in the service and delivery business, these vehicles are kept anywhere from 200 to 300. Some of the other larger fleets keep their vehicles and they actually put over 700,000 miles on them which is why it's so important to have a commercial truck engine.

So what's nice is they're so sophisticated or however you want to say -- they look at their business. So they're willing to pay a little bit more from an acquisition cost because they see a much lower operating cost.

Yes, and I understand from your perspective, you guys expect a unit increase but there's also going to be a price increase, right? So you get a little bit of a double lift to your revenues, if I understand that correctly.

(multiple speakers) that is a wise statement.

Okay, just a few modeling questions. Obviously you guys had a huge sizable drop in inventory. How should I think about that going forward?

You know, we have been mentioning for a while that our intent is to keep the focus on inventory and drive it on out. And we've done a great job making the first step.

There's still some further room for improvement. I think we made a big jump by dropping it down to $60 million where we are at.

You'll see it come down a little bit further because our turns are expected to kind of improve even more so. So we're really going at it from a turns number.

But you'll see the inventory value come down a little bit more yet as we go through the current year. It might bump up a bit in first quarter because we get a lot of the stuff through the backlog at the end of the year. But by the time you get to the end of 2011 here, I think you will see another nice kind of improvement downward on it.

And where else are you guys looking to improve? I'm sure it's a lot of places, but what is the focus?

Inventory and accounts receivable are the two big balance sheet items where we're going to continue to drive some improvements in the DSO and improvements in the days inventory [we have got out there] the turns. Those are the two big areas for us on the working capital.

Great, last question I promise. The tax rate looked pretty low this quarter. How should I look at it in 2011? I know you mentioned that you have got some R&D credits. Do those keep going? Or just how should I think about it this year?

I would go in 2011 back to our traditional kind of rates which vary. It's somewhere around 35%.

Perfect. Thanks for answering the questions, guys.

Alright -- were there other questions?

No, that's it.

Alright, then, I tell you what. We really do appreciate your time today. Again fourth quarter was solid, great way to close out 2010.

We've got some challenges in front of us especially in the first half of 2011. But we also have some tremendous opportunities.

Please visit the microsite on the next-generation commercial van. And again, appreciate your time. We look forward to serving you and implementing all that we have talked about and going forward. On behalf of Joe Nowicki, Paula Droste, myself and all the SMI associates, we thank you very much and wish you a great day, John Sztykiel.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.