Shyft Group Inc (SHYF) 2011 Q1 法說會逐字稿

Good morning and welcome to Spartan Motors' first-quarter 2011 conference call. All participants will be in a listen-only mode until the question-and-answer session of the conference. This call is being recorded at the request of Spartan Motors. (Operator Instructions).

At this time, I would like to introduce Ms. Paula Droste, Director of Investor Relations and Treasury for Spartan Motors. Ms. Droste, please proceed.

Good morning, everyone, and welcome to Spartan Motors' first-quarter 2011 earnings call. I'm Paula Droste, Director of Investor Relations and Treasury for Spartan Motors. I'm joined on the 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 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, 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 could materially affect the results are identified in our Forms 10-K and 10-Q filed with the SEC. However, there may be other risks we face.

With that, I would like to turn the call over to our CEO, John Sztykiel.

Thank you, Paula. Good morning to all of you listening on today's call and those on the Internet. Today, I will review the financial results, followed by our strategic plan and growth agenda, as these lay the groundwork for all that we do. Next, I'll give you an overview of each of our markets; then Joe Nowicki, our CFO, will provide detail of the quarterly financial results. In summary, we'll wrap it up with a Q&A session.

First, an overview of the first-quarter financial results. First-quarter sales were down 19% compared to the same quarter in 2010, a reflection of our depressed Q4 backlog. Revenues were largely down in the ER market as expected, given the continued tightening of the state and municipal budgets and the pull-ahead orders received in the prior year, as a result of the EPA's 2010 emissions standard.

Consolidated gross margin dropped, due to the shift in product mix, away from more profitable APA business. However, margins also dropped within our existing emergency response lines, as we are selling less complex and lower content products.

Operating expense improved by nearly 2 million compared to the prior year, truly reflecting the achievements we've made in realigning our cost structure. As a percent of sales, operating expense increased to 15% from nearly 14% in the same quarter of 2010, driven by the revenue dropped. In the quarter, we had a $900,000 loss or approximately $0.03 per diluted share compared to breakeven results in the prior year.

On a very positive note, order intake was up 43% year-over-year and also up sequentially from Q4 of 2010. Despite the significant achievements in our strategic plan, we generated a loss in the first quarter of 2011, driven in part by the softening of three of our four markets due to the tough economic climates, plus also the timing of investments in new product launches and one-time costs associated with trade shows, partnership meetings, and items relative to marketing in the first quarter.

To be frank, although we expected a tough first half in 2011, a loss is a loss, and it's tough to handle. It does not happen very often for SMI. The next quarter will also prove to be challenging, but we do see improvements in the second half of the year, with continued recovery in our service and delivery markets; launch of new products, that I'll talk about shortly, that fit nicely into lower-priced niches in the marketplace; the rebalancing of our operational expense base; and continued pursuit of profitable growth initiatives.

Again, Joe will cover the financials in more detail, but next, I'll review our strategic plan and then I'll go into detail into each one of the markets.

From a strategic plan perspective and a growth agenda perspective, we are guided by our 10 strategic directives. Operationally, we have a four-part plan and it is very, very simple. And the simple plan has helped Spartan to weather the tough economic climate over the past two years, and also enhance our strategic position as we look to the future.

First, growth and profitable market share through Spartan's blended three-point plan. Second, compelling products and services; third, cost structure that is in alignment with our top line while supporting our strategic plan; four, managing our balance sheet with a strong focus on working capital and our liquidity. I will get into a little bit of detail of each one.

Growth and profitable market share. SMI's blended, three-point strategic plan is disciplined and has been in place for over the past (technical difficulty) [two] years. The tenets for growth are as follows -- alliances, acquisitions and organic development.

This growth strategy is integral to our plan for long-term profitability, topline growth, and shareholder value maximization. We are proud of the accomplishments in this area and the speed with which our team is able to seize opportunities and follow through on the plans.

A few of our recent successes that fall into these growth strategies are -- and we'll start with organic products such as the Force, the Reach, the Transformer. Growth through alliances have been achieved with Isuzu, a leading world-wide diesel and commercial vehicle manufacturer.

This alliance has generated two major opportunities for us -- the assembly of the N Series gas and cab chassis, an Isuzu product; and the development of Utilimaster's Reach vehicle. This alliance with Isuzu will also allow us to access 48 out of the 58 specialty vehicle markets identified in North America. Again, we will not access all of them at once. Some have a greater priority than others, but what you see is a broadening of SMI's opportunities to reach additional market niches, a global distribution network, and access to a broad diesel engine lineup for our customers.

Lesser-known alliances include our work with existing and new suppliers, including the Navistar Engine Group, to supply another clean diesel option for our customers with the EPA 2010-compliant MaxxForce 13 Big Bore Engine.

Now let's move over to acquisitions. Our acquisition of Utilimaster at the end of 2009, followed more recently by the acquisition of Classic Fire, demonstrates our commitment to the acquisition growth strategy and our ability to execute it. While small in sales, the acquisition of Classic Fire is large from an ER -- from an emergency response perspective. And I will cover more about that in a minute.

Our growth strategy not only allowed us to diversify our revenue stream that was once dominated by a single market, but also strengthened it with more stable income. Compared to contract-driven military programs, the service and delivery in emergency response markets, which we have expanded through our acquisitions, provide additional levels of consistency and balance. To be clear, we will aggressively pursue orders in the defense area, but the revenue stream is much more volatile and less predictable. And while we are focused on growth, we are also focused on reducing risk.

A core component of our strategic plan is building a portfolio of compelling products and services. This will enable us to gain market share while counteracting the pressures of a poor economic climate, and meet the needs of the increasingly cost-conscious customer.

Compelling products and services -- we made great strides in this area. We introduced several new products that are compelling, and I will cover those right now. At FDIC, Spartan Chassis introduced the Force -- a purpose-built, custom cab and chassis for the emergency response market, with customized options at a very, very aggressive price.

Crimson Fire introduced the Classic series at FDIC, a firetruck product line geared for high-performance ease of operation, simplified maintenance -- again, targeting a more price-sensitive market. At the National Truck and Equipment Show in March, Utilimaster revealed the Reach, an organically-developed new product in alliance with Isuzu, effectively addressing two market segments -- the commercial van market and the step-van market.

Other key products introduced in the first quarter include the secondary power system, an auxiliary system that reduces the drain on the main power supply, i.e., the engine, while reducing exhaust emissions, noise pollution, by an estimated 51%. This product not only saves hard dollars but is also a compelling reason to go green. As mentioned earlier, the expansion of the engine offering in Spartan Chassis line up with the MaxxForce 13 diesel engine.

Another item is Isuzu's 4JJ-TC 3-liter diesel engine in the Reach product. What's interesting today is Spartan offers products that range from 3 liters up to 15 liters. We have the broadest product lineup of diesel engines in the specialty vehicle marketplace.

When we look at field solutions, up-fit solutions on installed vehicles while in service that are also generating customer value and having both a positive top and bottom line impact; a couple that are destined for the service and delivery market, keyless entry pads, and safe-load systems. Both of these increase the value of an existing vehicle and, again, provide positive top and bottom line impact.

The positive result of all of what I just talked about -- backlog at $166 million as of the first quarter, up nearly 24% compared to the end of Q4. And what's interesting in the first quarter report -- the fourth quarter release of 2010, one of the things I noted was one of our biggest challenges was to raise the backlog. And I'm very pleased with the positive results we were able to generate in Q1.

As mentioned earlier, Joe will cover the last two parts of our operational plan reducing our cost structure and managing our balance sheet. However, now let's move into a little bit of the markets.

Because we are consistently, constantly, continuously seeking ways to optimize our operations, including the review of our operational footprint across all our campuses, and we are not done with that work yet. One of the items we announced in Q1 was the relocation of the production of the Reach product to Michigan, the Charlotte campus in early 2012.

This relocation made a lot of sense from an expense perspective, but it also made sense from a customer-centric perspective. The Isuzu N Series is also assembled on the Charlotte campus. This relocation will improve efficiencies, reduce overhead, and provide a customer and competitive advantage. This relocation will require some capital investment; however, it also generates opportunity for future tax credits of up to nearly $9 million over the course of the next several years.

Now let's move into some of the markets. In our recreation and specialty chassis market, sales were relatively flat compared to Q4 of 2010 but down 31% compared to the same period in 2010. We did have some big success in our motorhome business, being selected the sole supplier of chassis for Integra's gas-fired product line. This award effectively makes Spartan the sole supplier of Integra diesel's product line of chassis. Production will begin in the second quarter of 2011. This win is expected to offset some of the market declines, and we are expecting annual sales to be slightly up year-over-year in this market. In reality, this is pretty good for the Class A market.

Long-term, the RV market is one of growth according to Dr. Curtin, the Director of Surveys of Consumers at the University of Michigan and the RV market specialist for RVing -- Class A motorhomes are expected to increase in 2011, although not at the same pace in 2010. In 2010, shipments of Class A motorhomes were up year-over-year 122%, while in 2011, they are expected to increase only 6%.

With costs increasing, the inconvenience to fly, there is a growing interest in affordable vacations. The low-cost nature of an RV vacation will support long-term industry growth. The increase in the price of fuel will dampen the industry some, so we remain cautiously optimistic. Long-term, the industry is one of growth, which is why we're committed to it, with the alliances with Isuzu; and over time, we will bring more compelling products to the marketplace.

Now let's switch over to defense and government. First-quarter sales were up over $3 million compared to the same period in 2010. This increase is the result of the armored utility vehicles contract with VAE and additional shipments of some drill rigs. Our backlog of $7 million reflects the additional contracts secured during the quarter to produce 26 additional SOCOM MRAPs. These vehicles are identical to those built in 2010, and production of those will begin in Q2 of this year.

The defense industry, though, is affected, obviously, by the federal budget. Money is tight. The need is not as great, and this market will remain very, very difficult over the next couple of years. However, Spartan remains committed to pursuing opportunities in this market, and continues to work with partners to develop products and bid on new opportunities.

Let's switch over to emergency response, which is proving to be a challenge, as well -- simply reflecting tight state and municipal budgets. We expect this market to be tough for the next couple of years. Long-term, though, it is one of very, very, very good growth.

First the challenges and the tough news. The 2011 ER market as a whole is expected to be off 25% to 35%. Emergency response chassis, i.e., Spartan Chassis, sales were down nearly 19% for the first quarter of 2011 compared to the same quarter in 2010. Sequentially, ER chassis sales were down only 2% compared to the fourth quarter of 2010, indicating we are nearing a level of stability, though at a lower level.

Also, though, on a positive note, as I mentioned earlier, the Spartan Force, a low-cost custom chassis, was launched, introduced in Q1. Reception has been excellent. We're receiving more than simple interests, but we're receiving actual orders and we will ramp up for production in Q2.

We continue to innovate, offer compelling products and services to our customers. Spartan Chassis kicked off its exhibition at FDIC, showcasing the Force, the integrated secondary power systems, and announced the expanded engine lineup to include the MaxxForce 13 engine by Navistar -- all of which I mentioned earlier. And again, compelling products is something that will continuously drive growth and profitable market share -- not just for Spartan Chassis, but for Crimson Fire as well.

Now let's switch over to emergency rescue bodies, representing Crimson Fire and Crimson Fire Aerials.

Revenues were down 49% for the quarter compared to the same quarter of 2010. Crimson Fire is also being impacted by the overall softening of the emergency response industry. However, their product lines fell into the medium and high-end niches. In today's market and tomorrow's market for the next couple of years, this was simply too narrow of a focus, thus the big impact on the backlog. However, with the strategic acquisition of Classic Fire, Crimson's product lineup has been broadened significantly with a complementary set of products, products that are known for high performance, durability, lower in price, focus more on the price-sensitive parts of the marketplace.

And to give you an idea from a perspective relative to bid activity, bid activity on the products of the Classic series through the Crimson dealer network since April 1 has exceeded what Classic Fire historically saw in 90 days -- the reception from a bid and [pull] perspective has been that large.

Two of the Classic Series products were shown at FDIC less than 60 days after the letter of intent was signed. Again, this demonstrates our speed and agility, one of our 10 strategic directives, but also demonstrates how far we have come from an integration perspective. On a positive note from an integration perspective as well -- and this focuses on cost -- what is exciting is over the past 30 to 40 days, the Crimson pump panel for their Legend Series, the cost to bring that panel to the marketplace has been reduced by over 30%.

In closing, Classic was very profitable before the acquisition. They expect it to continue to perform in the same manner throughout 2011. I'd also like to congratulate the Crimson team on their success and being awarded a multi-year international contract to build and deliver up to 30 vehicles for use in Chile. This win involved a substantial time and effort. Five of these units are scheduled for delivery in Q4 of this year. And again, global is one of our 10 strategic directives. We're moving in a very, what I would call, cautious but wise approach, and it's nice to see a win happen.

Now something from an emergency response perspective -- have been in this business since 1985. There have been some down market; typically ER is last into recession, last out. However, over those years, we've had many more upmarkets. Why? Because the need is there and it is growing. Fire departments are often the first response to any serious event. Today, there's a call for help once every [0.73.72] seconds. And as the population ages, that call for help will only grow.

In addition, the existing national fleet of firetrucks is also aging, as over 54% of them are more than 15 years old and the need for replacement will also grow. So while the next couple of years will be very challenging, we've got a lot of operational plans in place to gain competitive market share. What is exciting is the order rate for both Crimson and Chassis has been on the positive trend up in the months of March and April, so that is exciting. But long-term, this will be a very, very good market because the need is there.

Over to sales and service and delivery. Let's switch gears.

That segment was flat, with sales of nearly $24 million compared to the same quarter 2010. However, the backlog for service and delivery improved $49 million compared to year-end 2010, driven by new large customer orders. We continue to anticipate this market benefiting from any improvement in the economic climate, customer spending, but also the price of gas and oil going up. I'll talk about that in a few moments.

The quarter also highlighted the unveiling of the Reach at the MTEA Show in Indianapolis. The Reach is a revolutionary new product developed under our alliance with Isuzu Commercial Truck of North America, offering over a 35% improvement in fuel efficiency, cutting in half CO2 emissions, and other aesthetic and functional improvements.

Just quickly on the price of oil -- what's interesting to note is as the price of oil rises, Internet shopping increases, which benefits Utilimaster, which benefits the Reach product line. It's also interesting to note that in yesterday's Wall Street Journal, there was a small article discussing how Wal-Mart was testing home delivery, i.e., Internet, in the US.

The Reach is an ideal product for B2B or B2C business models, and Utilimaster is positioned extremely well there. Production of the Reach will begin in late Q3/early Q4 at a lower level than initially planned, and is now estimated to be at 400 units for 2011. This is primarily due to a slightly longer testing and validation stage.

Now it is simple. We've learned some very hard lessons over the years, and you only bring a product to market when it's right, because when a product stops running, it's a very, very bad day for the consumer; a very, very bad day for the customer that's delivering the product. Utilimaster continues to offer other compelling products and services with ongoing fieldwork to retrofit existing fleets. For lack of a better term, field solutions for existing fleet is a tremendous opportunity.

Two such examples include installations of a keyless entry system and safe-loading systems. Both of these save time and money for the customers. The orders have been excellent, and that will continue to drive the top and bottom line in 2011.

Let's talk briefly about the N Series, another part of our alliance with Isuzu. Spartan's alliance with Isuzu resulted in the assembly agreement for the N Series cab and gas chassis, and plant five, which used to build defense products, is being capacitized at just over 4,000 units annually. Spartan began assembly work during the month of March. And despite shortages that slowed down the initial production schedule, our projected run rate is expected to continue during 2011. However, we are cautiously optimistic, as the impact of the earthquake in Japan is just now being felt.

And while Utilimaster's backlog is up substantially, the profitability is not where it should be. Joe will spend more time on that, but simply our brand leadership position and our continued efforts to align costs and improve our build of material and labor efficiencies must improve, and will improve, as time marches on.

Let's move over to the last segment, the aftermarket parts and assemblies. We experienced a 21% decrease in quarterly sales year-over-year, largely affected by decreased defense sales, partly due to the completion of the MMPV or the Medium Mine Protected Vehicle kit order. Although we continue to see strength in the parts business for motorhomes and firetrucks, the defense business is very challenging and, again, will be for the next 12 to 24 months, as even in parts and assemblies, you deal with the federal budget but also a declining need overseas.

Now in closing, while we've got a lot of opportunities ahead of us, again the loss was not something which we take pride in. We take great pride in some of the strategic things which we've accomplished. We've got a lot of work to do in front of us.

I'll turn it over to Joe to address how we are doing on the operational plan, our costs and balance sheet management. Joe?

Thank you, John, and good morning, everyone. As I mentioned in the last earnings call, we expected a challenging first half of 2011 due to the economic climate, tightening government budgets, and timing of our new growth initiatives. That still doesn't make it any easier to be here today talking to you about a loss for the quarter. While we continue to make progress, it's clear to us we still have more work to do in driving our revenue growth and further aligning our cost structure. This will remain a top initiative on my agenda.

I'm going to start with a quick review of our income statement results. Our first-quarter sales were $95 million, 19% decrease compared to the first (technical difficulty) [quarter of] 2010. That's over a $22 million decline from year-to-year, which was our biggest challenge to overcome for the quarter. It was also our most profitable markets, which made the gross margin impact even more challenging. We did a good job in offsetting some of it, but we weren't able to impact it completely.

Firetruck chassis sales decreased 19% in the quarter compared to the same period in 2010. Firetruck bodies declined nearly 49%, as John had mentioned. Both of these markets were negatively impacted by the softening in the ER market as a whole, driven by continuing tightening of municipal and state budgets. Also negatively impacting this market was the 2010 completion of a heightened order volume related to the 2010 emissions change.

Sales of firetruck bodies were also impacted by a tougher comp in the prior year due to higher volumes in 2010, as a result of the orders received ahead of the NFPA safety changes. Q1 of 2010 also had more aerial unit sales completed, and they completed a large, multi-unit order of higher-end firetrucks that we didn't have in 2011. Outdoor rec vehicles sales fell nearly 31% from the same period in 2010, but were relatively flat to Q4, indicating some stability in the market. We had a tough comp from the first quarter of 2010, as manufacturers at that time were rebuilding their inventories.

Our service and delivery sales were flat over these same periods. However, the addition of Utilimaster continues to represent a larger portion of our sales mix, increasing to 25% of our total sales. While doing a great job of diversifying our revenue, adding the service and delivery market at the current profitability levels to our portfolio puts pressure on our consolidated margins. That (technical difficulty) [part] I will address in a minute.

Our defense and government vehicles experienced a nice increase of over -- to over $4 million in sales when compared to the first quarter of 2011. The AUV military units John noted earlier drove the defense business. As our defense business becomes driven by smaller projects, you'll see more volatility in this market from quarter-to-quarter. Our strategy is to develop an increasingly flexible structure to handle all the business we can get, but without incurring high fixed costs. We intend to flex up and down with the volumes.

APA was down nearly $3 million, or 21% -- again, all as a result of the soft defense business. Gross margin in the quarter was 13.6%. The two major causes for the decline were volumes and product mix. As I mentioned earlier, with a loss of $22 million in revenue, we had a significant negative impact on our fixed overhead absorption. In addition, our sales volume shifted from ER vehicles to service and delivery vehicles.

The mix shift to lower overall gross margin products compared to prior year was expected, and we're (technical difficulty) all costs as we strive to improve our margins. We have a focused effort on lean going on at both Utilimaster and Crimson Fire. In addition, we are vigorously reviewing our bill of materials for other cost-reduction areas.

As you all know, pricing on many raw material components continue to rise in the marketplace. To this point, we have not seen a significant impact on our financials. Spartan has purchasing contracts in place with our core suppliers to minimize the volatility with price fluctuations and to leverage our buying power. Also, we continue to improve our bill of materials and work with our suppliers to ensure the best component quality while managing costs. We're also sourcing more fabricated parts internally. Even with all that, we're cautious on the impact the supplier market price -- that supplier market price increases may have on our product cost later in the year.

Operating expenses decreased nearly $2 million in the first quarter of 2011 compared to the same quarter of 2010, and over $500,000 compared to the fourth quarter. The declines were driven by lower R&D spending and continued cost management efforts. These savings were offset somewhat by higher selling costs, primarily related to trade shows and partnership meetings, as these events were pulled forward into first quarter that has historically been in Q2. However, operating expenses as a percentage of sales increased to 15%. This is directly attributable to our lower revenue levels.

Obviously, our work here is not done. We'll continue to scrutinize our cost structure to ensure maximum leverage. We need to again align our cost structure to the current revenue stream. We're in the process of analyzing our cost structure, as we've done successfully in the past, but this time we'll be much more surgical in our approach. We've already taken a significant amount of cost out of the business across the board; now we plan to look specifically at areas most affected by the revenue declines and in areas of non-value add to the customers.

Interest expense is down to one-third of that reported in 2010, driven by our aggressive paydown of the debt, which is all in alignment with our efforts to strengthen our balance sheet while minimizing costs. Our effective tax rate decreased to 33% [contained] to the same period in 2010, as we were able to take advantage of the recently extended R&D income tax credits. We expect to sustain this rate for the balance of the year. The net [loss] for the quarter was $900,000 or $0.03 per diluted share compared with breakeven results in last year.

Moving on quickly to the balance sheet, we continue to make significant progress in improving our balance sheet position. Accounts receivable decreased to nearly $42 million compared to $53 million at the end of 2010. Although our days sales outstanding and AR crept up a bit this quarter, and we have some work to do here as well, a good deal of change, though, is structural, due to how municipalities are now paying with less prepayments and opting for longer terms. Fortunately, we have a strong balance sheet and plan to use that to our advantage to drive more topline growth.

Our inventory has successfully been maintained at the conservative year-end level of approximately $60 million. Total debt is down $33 million from the same period last year. This year-over-year improvement is reflected in a 17-day reduction in inventory.

In our cash flow statement, depreciation and amortization for the quarter was just over $2 million. Managing our resources more effectively helped to drive nearly $12 million in operating cash flow during the quarter. The strong cash flow from ops enabled us to fund our continuing operations, the Classic Fire acquisition, and other capital investments without the need to incur outside funding from credit facilities.

Capital expenditures for the quarter were just over $1 million. At March 31, our debt balance remained at approximately $5 million.

I'd also like to remind everyone, we continue to have capital capacity of up to $70 million on existing credit facility and another $40 million available through private placement notes. This credit availability and current financial strength positions Spartan well to continue to fund our strategic initiatives and ensure our long-term growth.

On the equity side, I'm proud to announce that the Board approved the first 2011 semi-annual dividend that will approximate $1.6 million. This approval reflects a positive long-term outlook and a strong current financial position. Although moving in the right direction, our backlog continues to challenge our subsequent quarterly results. At March 31, 2011, our consolidated backlog was approximately $166 million. The sequential quarter improvement was entirely driven by new orders in our service and delivery market, primarily as a result of significant orders from some major fleet customers.

Now I'd like to spend just a quick moment talking about the financial implications of the Classic Fire acquisitions. As you know, we completed the acquisition of Classic Fire effective April 1. The business will represent approximately $10 million in annual sales to us and is expected to be immediately accretive to our bottom line.

The purchase price comprised of four components -- $4 million in cash; the issuance of 187,500 shares of restricted stock that invests in two years; and an earnout portion contingent upon achieving set sales levels; and last, a true-up of networking capital. No additional debt was incurred to complete the transaction. The valuation work is not yet completed but will be finalized during the second quarter of 2011, and at that time, we can talk more specifically about the final numbers.

In addition to the great reception the Classic Fire products have had with the Crimson dealers, we have also identified ways to reduce cost and add value to our products with the Classic Fire acquisition. Work has already begun to reach synergies from purchasing power, particularly with raw materials sourcing. Additional savings are also expected with availability of proprietary pump modules and aluminum extruded tanks, which can now be sourced internally.

In closing, while I'm not pleased with the quarter's results, we did continue to gain ground in managing our costs, improving our balance sheet, and generating cash. In addition, we have made large strides in our long-term strategic plan with acquisitions, alliances, and compelling product offerings. We do expect a challenging second quarter as well, but remain optimistic for an improved second half of 2011 based on our new growth opportunities that we have in place, and further cost realignment work that we've begun.

Now I'll turn the call back to John, who will share some closing thoughts.

All right, Joe, thank you very much. 2011 will prove to be a year of continued execution of our four-part operational plan -- growth in profitable market share; compelling products; strengthening our balance sheet; and effectively managing our cost structure. Our blended three-point strategic growth plan has been disciplined; it's around acquisitions, alliances, and organic; and it will drive our topline.

Not surprisingly, to make a quick comment -- and I emphasize, surprisingly -- we continue to improve our strong market position as the price per barrel of oil in the US and worldwide continues to go up, now up over (technical difficulty) [380%] since the beginning of 2000. The green movement grows and price becomes more important.

Again, some areas where we're addressing this -- and when I talk about being well positioned -- first, the Reach, which utilizes recycled materials; a composite structure; a three-liter Isuzu, very efficient diesel engine that improves fuel economy by over 35%; next, the secondary power system at Spartan Chassis. And third, smaller ER vehicles and our new Classic Series product line. Organizationally, SMI has successfully incorporated a matrix organization to leverage facilities, people, processes across all of our markets.

Progress is being reflected in our improved efficiencies, reduced cost and the heightened teamwork. Our drive is to create a sustainable structure that maximizes value for all stakeholders -- our associates, our customers, our suppliers, OEMs, dealers, shareholders, and the communities which we live and operate in. We will continue to implement processes that will enhance our manufacturing efficiencies, and better flex our costs and operations with our expected level and mix of volume.

As I noted earlier, plant five, which is now assembling the Isuzu N Series, three years ago, was assembling MRAPs. That's a defined part of our strategic directives, but it also shows how we can flex and adapt. This quarter reflects many initiatives, more of which are strategic in nature. This quarter reflects a strong rise in backlog, all positive; the negative of $0.03 loss, and over time, that will change as well.

In closing, 2011 will be tough operationally. We knew that last quarter and we mentioned then. The good news is that we are financially sound; we've got a great balance sheet and a diversified revenue stream, as a single market focus is never a good model for a specialty vehicle company.

Last, challenging markets create opportunity. Since 1975, we have weathered numerous tough markets; yet over time, we have grown in sales and income, and I have no doubt the future will be no different.

Now we'll open it up for Q&A.

(Operator Instructions). Joe Maxa, Dougherty & Company.

This is Ashwini for Joe. My first question is when we look at the gross margins, well, given the change in product mix, what are we looking for the trends for the rest of the year? If you can comment on that.

Sure. If you can think about going forward for the remaining portion of the year, so if I look specifically at second quarter, what we'll end up seeing -- it will look a lot more like the first quarter. The emergency response volume because of the lower entry, that part of it, our emergency response chassis business, will start to drop off a bit. And also the defense and the APA will continue to be light.

We're going to see great improvement, as you saw from the backlog on the delivery and service part of our business. Right? So that mix, even though we'll probably see slightly more volumes in the second quarter, the gross profit dollars that will generate will be about the same point.

Now the really good news is when you get to third and fourth quarter, we'll see that volume pick up even more, certainly from the delivery and service part of our business. The Classic Fire business is going to start to ramp up [as] more, which will help our improvement on the volumes. While the Isuzu business starts to kick in as well, too, which will also help to improve our volumes, along with the new Reach product that will kick in towards the end of the year also.

And on top of that, the work that we've begun to really relook at and realign some of our cost structure, specifically on margins, should help to drive the improvement in the margins as you get to the third and fourth quarter of the year.

Does that give you a little bit better sense?

Yes, sure. So would you say we're still focusing more towards 15% gross margin for the full year? Are we still targeting that?

Yes, if I look at our targets long-term have been changed as we've kind of described and talked about, 17% gross margin target. I know we moved a bit in the wrong direction this quarter just as a result of the mix of the business, but we're still heading operationally to drive towards that 17% gross margin.

And long-term, we still have the right initiatives in place -- there's the new products we've launched; the acquisitions that we've made through Classic Fire, which drives to improve margin level combined with some of the new products (technical difficulty) [that we have] as well to the Reach product, the Spartan Force and others will help us get to that point.

Ash, this is John Sztykiel and I think it's important to note what Joe said a few moments ago, when he talked about the delivery and service business, the Reach product, et cetera, there's something which we really take great pride in.

And we did note it in our fourth quarter release of '11, was that one of our biggest challenges was the backlog. And we made substantial improvement in that in Q1. Now the challenge is you take that backlog and you improve both the gross margin and the operating margin.

But as you look within the markets today, again, it's very positive when you see the backlog move up, because when you have backlog, you have opportunity. When the backlog is not going up, then you don't have quite as good opportunity. We know we've got work to do, but as the year goes on, we honestly made a huge step in the right direction not in just delivery and service, but also with the acquisition of Classic as well.

Sure. Can I talk to you more about the backlog? There appears to be unusually high order intake for your Utilimaster business it looks like. And I was just wondering if you could comment on that and how much of that is pre-orders for the Reach?

Well first, Ash, I'll just make a couple of quick comments. One, there have been no pre-orders for the Reach. I think Joe is going to get into the definition of the term lumpy, okay? But relative to delivery and service business, there's a lot of data articles talking about how the rail industry continues to move in the right direction.

One of the interesting things or exciting things about the Utilimaster product line is that freight or packages move to either rail or large truck, they don't go door to door. So Utilimaster's product line is a business to business or business to consumer business model. So that business model or Utilimaster business not only benefits from an improvement in the economy, but as the price of oil goes up, Internet shopping goes up, which in turn aligns itself very, very well with Utilimaster's core products. Joe?

Yes, you're absolutely right -- great increase in the backlog on service and delivery of the Utilimaster side. Not surprising to us, as John mentioned, one of the big goals with the acquisition was, we previously had all these late cycle businesses like the emergency response business that tend to follow into a recession and out of recession, right? -- late cycle.

The delivery and service business, the other side, they are very much on the early cycle business. So this really is their time to shine. We expect to see these orders come in. So what we're seeing is a lot of major fleet orders. It's a combination of new vehicles that -- keep in mind the delivery and service business has been pretty depressed, right? They were, at one point, three or four years ago, running $200 million in sales in 2008. And they have since lowered to where they were running closer to $100 million pacing last year. So you had a lot of vehicle purchases that were just put on hold for a couple of years that now, being in the early cycle business, they are ramping back up.

The other part which is good to note is -- and we've heard this from several of the fleet customers, is with the most recent tax legislation that began -- and I think it was in September, allowed for an accelerated depreciation on many items. One of those items is our -- these vehicles. So you're seeing some of our buyers -- really, the more astute economic buyers, taking advantage of this quick tax advantage of accelerating the depreciation on these vehicles, therefore, the decision to buy them becoming that much more pertinent.

The other element that I'll just mention right quick is on the service and delivery side, we're seeing a great increase in our business, on that up-fit business. So we've talked about their parts business, right, being strong, but a lot of their parts business isn't necessarily parts, but it's retrofitting and up-fitting in vehicles they do.

This is kind of the solutions side of the Utilimaster business, where they go beyond just providing a part, and instead, they look at our -- what's the customer need to make that more efficient? And that's some things that we've done around keyless entries, some things that we've done around some more efficient loading and unloading devices for some of our other vendors as well too, or customers that we supply product to. So great growth there. So they are hitting on all four cylinders and doing a great job.

Great. Just one follow-up. So would you expect this backlog to ship in quarter three, quarter four -- like the second half of the year?

Yes, that's a good point. So some of it will actually -- their backlog is quicker than the rest of our business, because if you think about the firetruck business, usually it's a six-month or longer timeframe from when you get an order to when it ships.

Here, in this business, it ships sometimes within the quarter but usually it is a quarter or so out. Most of the demand in the orders we have so far, some ship within second quarter so you'll see them ramp up some of the second quarter, but even more goes into the third quarter. And based on what we have in the bid basket, they'll flow into the fourth quarter as well, too.

Okay. That's it for me. Thank you.

(Operator Instructions). David Fondrie, Heartland Funds.

Can you -- the Classic acquisition was completed on April 1. So, Joe, does that mean that there were no Classic backlog included in your backlog numbers?

Yes, that's correct. It will all be rolling into the Q2 numbers, so there's nothing at the end of Q1 there.

The only thing you will notice is on our balance sheet there's $4 million of cash that has been set aside for the acquisition. That was taken out of cash and put into some other long-term assets. That's the only one element of the transaction that you would see recorded.

I see that here. Can you describe a little bit what happened -- a little more detail, and maybe I missed it -- in firetruck body, if I read these numbers correctly, in the fourth quarter, you had $14 million and first quarter, a pretty significant drop.

Is your question in regards to firetruck bodies or firetruck chassis?

I'm sorry, firetruck bodies.

Okay. And it's in regards to the revenue line?

Right, yes. In fact, I think, if I have those numbers right, from a little bit over $14 million to just shy of (technical difficulty) [$8 million] plus [$1 million] decline which seems (technical difficulty). Backlog stayed pretty constant -- not a lot of change.

Sure. Let's talk about one of the $8 million, the first quarter sales, the emergency response bodies around $15 million. That was in 2010. 2011, that number was around $8 million. So a pretty significant drop there year-over-year. So the year-over-year drop you saw was a few things.

One of them is a softening in the marketplace. It's also -- they had a tough comp. They did a great business in terms of volumes in 2010. They were ramping up, they had a lot of order to meet some safety requirement changes in place. And they also had a large order in place that they'd filled in that time as well, too. So they ran a lot through in the 2010 calendar that we didn't in the 2011.

So then your second question is probably getting into the fourth quarter. So in the fourth quarter of just this past year, we had roughly $14 million in sales as compared to the $8 million right now.

Yes, right, yes, that was the question. Thanks. (technical difficulty)

So now let's get to that element of it. A lot of it is just demand for when those fire trucks fall in place. There were -- they had four fire trucks that actually -- a lot of it comes to acceptance at the end of a quarter. We had four fire trucks in the emergency response that didn't get the final signoff in the Fire Department, so they're sitting in the inventory ready to be invoiced, just waiting for the final sign-off.

A lot of those is tough to gauge whether you can get calendars and folks in place to actually be there and accept them. So one of the things is just the timing of getting some of the trucks out. And a lot of it is just the timing of the orders coming in as well, too. We had a big push towards the end of the fourth quarter, where we had several municipalities that wanted deliveries at the end of the year. So we ramped up to get some out the door in the fourth quarter of last year -- of this past fourth quarter as well, too.

So most of it -- more just timing than anything else. You're right, if you look at their backlog, it's been pretty good.

So you would expect second quarter would be somewhat better in the body's area then, I presume?

Yes. Yes, I would.

And could you talk a little bit more about the impact in Japan, particularly on Isuzu? There's been a lot of talk in the press about how automobile companies have been adversely impacted by a shortage of parts. And I know that you were a bit concerned about availability of chassis earlier on. So has that been exasperated by the issues in Japan?

Great question, David. I'm glad you asked. Because you're right. It is a question mark that I'm hoping a lot of the investors are asking many companies today, because it can have a big impact. So for us, there's three different areas that I will talk about the impact of the Japan disasters on.

The first one is on the N Series vehicles. So those are the ones we're making here in Charlotte. We started the production of them just this month, so there were some of them actually that began during the month of April. Because of the disaster, we actually went into a three-week shutdown, because we didn't have parts availability for most of those components that come from -- a lot of the key components that come over from Japan. After the three-week shutdown, we've got a slower ramp-up phase going on; but by Q3, we expect to be back to the initial plan, which is shipping somewhere around 85 a week.

So a three-week shutdown, slower ramp up. By Q3, we'll be back on plan to where we had expected it to be from a pacing perspective. Okay?

Second element, the Reach product. So the Reach product as well, a lot of those chassis coming over. At this point, we're not seeing as all that -- we're being told that one's not going to have an impact on our plan to get those chassis on the boat by July. Keep in mind, those we weren't expecting to start shipping until third and fourth quarter.

We did take our volume down slightly. We were expecting about 1,000 of those units this year. We took it down to about 400, but it really didn't have to do with the impact of the Japan crisis; it was more, as we were going through the durability testing -- it took a little bit longer than we anticipated, and we lost about two or three weeks because of the durability testing.

We take a very rugged standard to our testing, especially on the service and delivery vehicles, so they want to be sure that they're absolutely correct. Okay?

We do have, by the way, in Reach, after the durability test, and we've got 10 of those products now that are out in customers. So they're in the field, live tests being done through UPS and FedEx today with 10 vehicles currently. So that's going on even as we speak.

The third element of the impact in Japan, just looking across the rest of our markets. So our supply team went out to all our key suppliers and asked them to look to their supply sources as well too, to find out what we might have. So we took a very proactive approach to going out there and finding out what else might be in a delay situation from Japan. And the good news is nothing came back. So everyone is saying, nope, we're okay on all fronts. So really the only place we're seeing an impact is on the N Series ones, as I've described it.

Great, thank you. That's a comprehensive answer.

My last one is just a little bookkeeping question. The retrofit and the -- well, the keyless entry and the unloading piece of revenues -- is that included in the Utilimaster revenues? Or is that down in the service parts area?

Actually, it's in Utilimaster. If you look on the press release, the schedule that breaks out on the back by the segments, you'll see there's a table at the top. And there's a line that says Service and Delivery, and it's broken down between vehicles and also parts, I think it's called, or APA.

Thank you. Yes, I've got it, I'm sorry.

That shows you the [stuff] between the [scope].

Thank you very much. Appreciate the information.

(Operator Instructions). Ned Borland, Hudson Securities.

Just want to follow-up on this delivery and service segment and the expected time to fill backlog. You've got it out to about eight months now. On the fourth quarter release, it was two months. I know you alluded to the fact that customers seem to be indicating they want to take delivery later in the year. Is there anything else that's going on that would drag out the production process here?

Ned, you know I think -- I mean, there's really nothing going on that would drag out the process. I mean, what you've got is orders, when you look at Utilimaster, they're no different than any one of our other product lines where they're our specialty in nature, okay?

So -- and also too, they always -- or I should say the customers, which Utilimaster delivers product for, they've also got certain times of the year where they accept product. So there's really nothing there that is dragging it out, other than what Joe mentioned a few moments earlier, where, on the Reach product, we've got some delays going on or pushback relative to increased validation durability testing. So instead of 1,000 units, we're now down to a level of about 400 units.

But from a delivery order intake perspective to getting the product out the door, no, I mean, the reality is that the orders come in, the individuals at Utilimaster and within SMI are working at a very rapid pace to get the orders out -- not just quickly, but also in the time frames which the customers are asking them for.

The good news, Ned, is we're really starting to utilize our asset base there much more effectively. So in addition to putting out a second shift because of the volumes, we may even trip into a bit of a third shift activity as well, too. So we're really going to start to utilize our assets at the Utilimaster facility even much better, which, as we've talked to you before, is the direction we're trying to head to at all of our plants.

Now the other piece that is going on, which has a slight impact to it, but doesn't really delay the orders at all, it really impacts how quickly we bring up the (technical difficulty) [third shift] is we'll also be utilizing one of the buildings out there at Utilimaster to begin the initial productions of the Reach vehicle. So one of the buildings that today is doing the traditional step-vans, we're actually going to move and have just be doing these step-van products, or the Reach ones.

So that will cause us a little bit of shift in volume around and changes the capacity a bit, but still, plenty of capacity there, too. It's more driven, as John had described, by customer request.

Okay. That's helpful. And just one other question here about -- you cover the gross margin and how that's supposed to track. I was wondering if, sequentially, it could go into some of these one-time costs -- trade show costs; any expenses that were booked in the quarter related to the acquisition of Classic or anything that you don't see recurring in the second quarter on the operating expense line?

Sure. Very little cost from the acquisitions. So I'll take that one first, on the Classic Fire acquisition. We're getting pretty good at doing the work associated with it. We get a lot of that work internally. There's some costs in the first quarter but pretty small -- under $100,000, and I think some of the closing costs will be in the second quarter as well, too. But even that will be pretty minor. That's in that same $50,000 to $100,000 range as well. So pretty minor on the Classic Fire.

Second, in regards to the trade shows, we had approximately between $600,000 and $700,000 of incremental trade show events costs during the quarter. Now, a good chunk of those costs, usually $200,000 to $300,000 of them, occur in the second quarter and they got pulled forward to the first quarter instead.

Okay. Thanks.

Ladies and gentlemen, at this time, I'm showing no additional questions and would like to turn the conference back over to management for any closing remarks.

All right. Ladies and gentlemen, thank you very much for spending some time today with us and to those on the Internet as well.

In summary, Q1 can be consolidated this way --strategically, backlog, balance sheet, cash management, really was a quarter of great progress. The challenges, obviously, gross margin, operating expense, we were well below our targets and we need to execute against those targets. The net result was the loss of $0.03 per share. However, as time goes on, there are numerous initiatives in place to turn the loss into a positive. And as we move forward, we're committed to making that happen. Thank you very much and have a great day.

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