Shyft Group Inc (SHYF) 2011 Q2 法說會逐字稿

Good morning and welcome to Spartan Motors' Second Quarter 2011 Conference Call. All participants will in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Spartan Motors. (Operator Instructions). I would now like to introduce Paula Droste, Director of Investor Relations and Treasury for Spartan Motors. Miss Droste, you my proceed.

Good morning, everyone, and welcome to Spartan Motors' Second Quarter 2011 Earnings Call. I'm Paula Droste, Director of Investor Relations and Treasury for Spartan Motors. And 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 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 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 those listening on today's call. First, I'll briefly cover our Q2 financial highlights followed by the operational plans, growth agenda and the market overview. Joe Nowicki, our CFO, will then provide a detailed review of the quarterly financial results and a covering of the restructuring charges. We will then conclude by sharing our strategic direction that will pave the way for future profitable growth followed by Q&A.

First, an overview of our second quarter results, on our 2010 year-end call we indicated the first half of 2011 would be challenging from a demand perspective. We also talked about our optimism for the future based on our intent to develop new products and alliances to drive top line growth while aggressively managing our cost structure. Both of these statements were reinforced this quarter.

Sales in Q2 fell 14% from last year's level driven by tightening of state and municipal budgets and reduced revenues in emergency response in part due to pulled ahead orders in 2010 ahead of the emissions change. In addition, the defense and motorhome markets continued to soften. These decreases were partially offset by increased revenues in the delivery and service segment and related field service projects. Compared to Q1, sales were up 3% as a result of increased sales in the delivery and service segment and also from emergency response bodies, even when excluding Classic Fire sales. In the second quarter, we swiftly and successfully contracted our cost structure to align with the demand of our markets. During this quarter, we incurred nearly $3 million of restructuring charges before tax as part of our continuing effort to align our cost structure with current levels of revenue.

Our new leaner operations will enable us to continue to build our balance sheet and invest the right resources in the most promising growth strategies. Net result, we experienced an adjusted net loss of $424,000 or $0.01 per diluted share when excluding the one-time restructuring charges. Again, we anticipated a tough half in 2011 being the first half from a financial perspective. Reality the softening of three of our markets, continued efforts to develop new products and the timing of investments for these new products all seemed to come together in the first half of 2011. And although our restructuring efforts were necessary, they are never easy. They're very, very difficult given the impact on some of our associates and the related communities. However, as we move forward, these are the right moves to ensure the long-term success of Spartan Motors and to the benefit of all of our stakeholders.

On a positive note, compelling products and strategic efforts drove our backlog up for the second straight quarter to $179 million. This is an increase of 8% over the first quarter and 33% from Q4 of 2010 driven in part by delivery and service vehicles, emergency response bodies, field service solutions and emergency response chassis. And if you just take a moment to reflect on the two quarters in a row of backlog increase, very, very difficult in the specialty vehicle business, something we take great pride in.

We expect growth in both revenue and earnings in the second half of the year as reflected in our improved backlog. The momentum in our service and delivery market, the higher than expected order intake for emergency response chassis and bodies, the integration of Classic Fire and the launch of our new revolutionary commercial van product, The Reach, plus the retooling of our operational structure will drive us in the right direction as we move through 2011. Joe will review the financials in greater detail shortly.

Next, I'll cover the review of our strategic plans. From an operational perspective, the framework for our actions combined with our 10 strategic directives guide us in the right direction. Our four-part operational plan is really quite simple--growth in profitable market share through a disciplined three-point approach; compelling products and services through a broad and attractive product service line up; construction management to efficiently utilize the resources and support profit generating product and services; four, maintaining our balance sheet to sustain financial strength and liquidity to act nimbly on new opportunities when they present themselves. And as we move forward, just simply, a conservative financial structure.

First let's address growth and profitable market share. The first point of our operation plan is growth and profitable market share achieved through a blended three-point approach, acquisitions, alliances and organic. This growth strategy is integral to our plan for sustainable long-term profitability, top line growth and shareholder value maximization. The reality is, which is great, today 55% of our business is dependent on B2B or B2C, i.e. business-to-business or business-to-consumer, type markets, i.e. non-government related activities. This is a dramatic change compared to 2008 when only 11% of our business was non-government related. The effective implementation of our growth strategy has created a diversified business model driving us to the future, limiting our risks and yet providing a more stable revenue stream. While our revenues and income were great in 2008 and the first half of 2009, imagine our business today if we had not diversified with the acquisition of Utilimaster at the end of 2009.

Now for a simple overview of our markets, in the recreation and specialty chassis market, sales were down 26% compared to the same period in 2010. While the RV market as a whole has improved slightly, gains were primarily in the smaller sized motorhome and towable markets. Motorhome sales mix has shifted some from high-end diesel to less expensive models in the Class A and Class [E] markets. However something, which we've recently announced, is the relocation of our motorhome chassis manufacturing operation to Wakarusa, Indiana, moving from Charlotte, Michigan. This will take place in 2012 and this location is within minutes of our end customers and located in the heart of the motorhome production capital, as more than 70% of all recreational vehicles are produced in Northern Indiana.

As mentioned earlier this relocation is planned for 2012 and we'll take advantage of state tax incentives and is in line with one of our 10 strategic directives being customer centric. Outside of being within minutes of our customers I just want to give you a broad synopsis of the RV market and why we're very, very focused on it. The RV market in 2010 was an $8.7 billion industry, of which $3.3 billion was from the sale of motorized motorhomes. As mentioned earlier, more than 70% of total RV production is in Northern Indiana. Nearly 58% of the Class A motorhomes were built there as well. And while our current focus is on motorized RVs, over time it will move into other segments as well as we leverage the Wakarusa location.

We're committed to the RV market first because the size of its value from a dollar perspective. Second it is a great industry from a demographic perspective. Simply, RVs from a vacation perspective are a very, very inexpensive vacation. A recent national study around the typical RV indicated that an RV vacation was on average 27% to 61% less expensive than other types of vacations analyzed, even considering the increase in the cost of fuel. Simply, as you look to RVs not is it inexpensive but it gives you the freedom to go wherever you want whenever you want. Thus as we look to the future we're still very, very excited about it.

Let's move over to defense and government. Second quarter sales were down over $5 million compared to the same period in 2010, down $1 million compared to Q1 of this year. During the quarter we completed the build out of the armored utility vehicles contract with BAE Systems. We also began the production of SOCOM MRAP units under a 26-unit contract also with BAE. The bulk of these units will be completed in Q3 and it is reflected in our other product backlog of nearly $4 million. SOCOM vehicles are identical to those we built in 2010.

The reality of the defense market remains suppressed as existing government programs conclude and the defense department is aggressively cutting costs by limiting new vehicle purchases. To give one perspective the reality is the MRAP program including the production of MATVs representing more than 27,000 vehicles over the last four years approximately $44 billion were funded primarily from supplemental funds, and those funds are currently not available today. So what you've got is not only depressed funding but also a reduced need as the wars in Iraq and Afghanistan wind down.

However, we're committed to the defense business long-term. Why? We're in a great position. We provide significant value to the marketplace. We will continue to work with current partners and look to new partners as we take advantage of opportunities to move forward in the defense and specialty government arena.

Let's switch gears over to emergency response, in the past couple of quarters have been a challenge especially from a sales perspective as we noted last quarter. But the good news was in Q2 orders for both body and chassis indicated we're gaining market share. Long-term the emergency response market is a great market. Why? Simply the need is there as there is a call for help every 0.73 seconds.

Let's move over to emergency response chassis, i.e. Spartan Chassis. Sales were down 43% from the second quarter of 2011 compared to the same quarter 2010. And as mentioned, a large part of that was driven by build up of orders where OEMs and cities bought -- placed orders in the second half of 2009 going into 2010 to take advantage of the pre-emissions purchase opportunity. However, order intake was up nearly 63% for these same periods. Sequentially order intake is up over 22% when compared to Q1 of last year. Our backlog is also up as well by nearly 10% or approximately $5 million. These trends indicate the strengthening of the Spartan brand driven by compelling products, which is also driving us to increase production in the second half of the year as we look at Spartan Chassis.

Why are we gaining share? Because we are becoming more -- because our compelling products are driving us in the right direction. Innovation such as the Spartan Force, again driving us into the marketplace. Another innovative product from Spartan Chassis, a great green initiative, is the Idle Reduction Technology, a robust auxiliary system that literally reduces the use of the engine while providing full functionality for emergency lights, HVAC, and other standard electrical needs when one is [at a seat]. This technology expands the vehicle service life, reduces maintenance need and reduces fuel consumption by up to 50%.

Again as one looks at markets, they just don't disappear when they go down. However as one drives innovative products into the marketplace, you drive the opportunity to gain market share. And that is happening at Spartan Chassis. Another innovation, which will take place in 2012, will be air bag technology, which will be offered on Spartan emergency response cabs and chassis. Vehicle safety is a huge issue in the emergency response arena and Spartan Chassis will be the leader in this area.

Let's switch gears over to Crimson Fire and emergency response bodies. Revenues were up 20% for the quarter with nearly $14 million in sales compared to the same quarter of 2010. This increase was mostly driven by the incremental sales of Classic Fire. Sequentially sales were up over 75% or nearly $6 million from Q1, resonating the recent strengthening of the emergency response market coupled with the addition of Classic Fire. Compelling products, backlog is up nearly 30% over the prior year to over $30 million with roughly half of that related to the acquisition of Classic Fire, which was not present last year at this time. Compared to Q2 of last year, order intake for emergency response bodies increased by almost 234% and is up nearly 90% compared to Q1 of 2011.

Crimson is not only gaining market share in a challenging market, but also the acquisition of Classic Fire, a strategic acquisition, has broadened Crimson's product line with complimentary products. The Classic Fire product line is a high performing durable product line that is geared towards the most price sensitive part of the marketplace, which is critical in these challenging economic times. From a global perspective, we've been very active in pursuing international sales opportunities. Some orders have been secured and we're optimistic about the future.

Let's just talk briefly about integration relative to Classic Fire, Crimson Fire. Once again we had demonstrated our speed and agility, one of our 10 strategic directives, with the acquisition and integration of Classic Fire in our family of operations. As mentioned earlier, we are offering their products through our dealer network and taking advantage of synergies that include leveraging raw material purchases, overhead activities, internally sourcing certain technology capabilities and components. And while most of the work has been done over the past two or three months relative to Crimson Fire, we're now also starting to move into initiatives relative to Spartan Chassis as well. So as we look to the future, the integration of Classic Fire will not only benefit Crimson Fire but will also benefit Spartan Chassis as well. And the market will see that as we move into the second half, the late half of 2011.

Again as we look at emergency response as a whole it is still a great market. As mentioned earlier, there's a call for help every 0.73 seconds. Unfortunately that data point will probably get less as the population ages but another important point to note is that 54% of all fire trucks out there are more than 15 years old. Thus the need for replacement will grow.

Let's move over to delivery and service, where we are experiencing sales growth in light of a heightened backlog. Sales were up nearly 73% compared to the same period in 2010 and up 64% from Q1. Compelling products, improved profitability per unit moving us in the right direction. There are two additional factors impacting the market sales volumes. First, consumer Internet shopping is increased, which is impacting the delivery and service business in a positive way. Sorry I'm getting a bit tongue-tied here. Second, recent tax legislation allows for full depreciation of new vehicle purchases placed in service during 2011, which many of our customers are taking advantage of.

In addition, as we look to the future there are also some new proposed federal rules on driving limits for drivers of commercial trucks, primarily Class [H], which could significantly change the industry. If placed into law in October, as expected, many companies, including our large fleet customers, will be forced to reconfigure their delivery networks increasing the need for more step vans. So as we look to the future, there's a lot of moving step vans of the delivery and service in the right direction. You have Internet shopping. You've got some changes in government regulations, plus you've just got an economy moving in the right direction--slowly, but at least it's moving in the right direction. Net result, backlog is up nearly 96% to almost $85 million at the end of the second quarter compared to the same quarter last year. Currently, Utilimaster is working on a two-shift schedule. Production capacity for walk-in vans has peaked and we're also implementing a third shift operation. This is a good problem to have.

We're also very excited about the approaching launch of the Reach, a revolutionary new product developed with our alliance with Isuzu Commercial Truck. The Reach simply improves fuel economy by over 35%, cutting CO2 emissions in half, with a variety of other functional improvements of huge benefit to the step van and commercial parts of our delivery and service industry. The best part about the Reach is that it uses technology that is available and widely used today. It's on a three-liter Isuzu diesel engine. It's easily serviceable by mechanics across the country. It's readily available with parts, conveniently fueled with standard diesel. Use of diesel fuel is very efficient, very cost advantaged, and compared to other alternative fuel vehicles out there, it makes it a very, very attractive choice. As mentioned earlier progress continues in the right direction relative to the Reach. It will come on line at the end of Q3 and move into production as we go into Q4 of this year.

Last, relative to the Reach, it will be distributed as well through Isuzu's approximately 280 dealers throughout North America. During this quarter, the Reach went to five major cities as part of Isuzu's good-to-go tour. The response was excellent. Orders are in-house today for the Reach as we ramp up for production.

The nice thing is Utilimaster continues to offer compelling products and services with its ongoing fleet service, which is part of value maximization, one of our 10 strategic directives. Today we have over 225,000 vehicles in service and a big shift versus where we were five and six years ago, is now we look at each vehicle and say, okay, even though it goes into the field, what is the opportunity to maximize, bring value to the marketplace but also bring value to Spartan. A couple of examples are keyless entry, safe loading systems and custom shelving units. And that was reflected in this quarter's sales and also this quarter's margin. So my compliments to the Utilimaster team not only delivering great products into the field but also maximizing the value of existing units in the field. And as we look to the future strategic diversification, the increased revenue and income from Utilimaster, it's been a great acquisition. But as we look to the future we have even higher expectations for it.

In addition this quarter, we celebrate the start up production on the N-Series low-cab-forward gas cab and chassis with our partners Isuzu Commercial Truck of America in a ribbon cutting ceremony. With an 11 month compressed timeline, and literally this project has come online in less than 11 months, we now have vehicles rolling off the line at a rate of approximately 70 units per week and we'll achieve a production rate of 100 units per week by the time we get to Q4.

You look at speed and agility, you look at customer centricity, you look at brand leadership and you look at the opportunity of how we've changed relative to Isuzu, and it's really setting up for a lot of tremendous opportunity as we move to the second half of this year and we move into 2012 going forward. Last thing relative to Isuzu, is we now touch 48 out of 58 specialty vehicle markets. As mentioned earlier we have access to their 280 dealers. We are developing plans, initiatives are going forward and we continue to change as an organization.

Aftermarket parts and assemblies was negatively impacted as we bring the market overviews summary to an end, reflecting our continued decline in defense business, which is effecting the industry as a whole. If products are not being used and as I mentioned earlier there's 27,000 MATVs MRAPS out there and we're primarily focused on MRAPs, but if those products are not being used, that aftermarket parts and assemblies business is going to be less. Total APA sales decreased 58% in the quarter compared to the same quarter in 2010, and again as mentioned earlier simply reflects drastic cuts by the Department of Defense and the completion of the MMPV or medium mine protected vehicle kit order, which we received in 2010.

We continue to see strength in part sales for motorhomes and emergency response and as we look at our service center in Charlotte. However the largest niche was defense, and that is now coming not to an end, but is being reduced dramatically. As we go forward we see growth in non-defense opportunities, but we're also focused on value maximization or field service opportunities similar to what Utilimaster is doing.

Now I'd like to turn it over to Joe, then I'll have a short wrap up at the end and then we'll get into Q&A. Joe?

Thank you, John, and good morning, everyone. As we stated in the last two earnings calls, we anticipated a tough first half of 2011 driven by the overall economic climate, compressed state and local budgets and the timing of our new product launches. Even so it's disheartening to show a loss. I mentioned last quarter that we're doing work to resolve this by further aligning our cost structure to levels consistent with our market demands. We have made substantial progress in this area during the quarter but we'll continually revisit to ensure resources are properly allocated to our most profitable revenue streams.

I'll start with a review of our income statement results. Second quarter sales were $99 million, a 14% decrease compared to the second quarter of 2010. Similar to Q1 the large revenue decline of $16 million is hard to overcome, particularly when it's from our most profitable markets. Adjusted gross margin in the quarter was 14.6% of sales compared to 15.1% of sales in the prior year when excluding restructuring charges of $1.7 million and $1 million respectively. The drop in revenue to $16 million had a negative impact on overhead absorption. In addition our product mix shifted from more profitable emergency response to [vans] and APA over to delivery and service. However margins also dropped within our existing emergency response lines as we sold less complex and lower content products.

As announced, we incurred $1.8 million in restructuring costs net of tax in order to align our operations with the market shifts. We took deliberate and focused actions to reduce our costs in those areas where demand had declined. The restructuring along with other actions enabled us to reduce our cost structure by about $4 million annually. Charges were taken primarily at Spartan Chassis where our operations supporting the softening defense and motorhome markets exist. Our restructuring actions included exiting a facility, reducing the workforce, reserving for surplus defense inventory and writing down tooling and inventory associated with an eliminated product line.

Although these charges were sizable, they'll provide savings in both the near and the long-term. As I discuss our quarter's financial results I will refer to both our GAAP numbers and to non-GAAP numbers for those items that have been adjusted to exclude restructuring charges. I would refer you to the table on reconciliation of GAAP to non-GAAP numbers that appears in our press release regarding these items.

Since last quarter, we've gained momentum in offsetting the expected pressure on our margins with improvements in material costs, labor efficiencies and reductions in our overhead costs. Our lean initiatives have propelled our success and included a thorough review of our bill of materials. Our adjusted gross profit excluding restructuring charges was up to 14.6% of sales compared to 13.6% in Q1. We'll continue to review our costs for further margin improvement. For some of our markets I'd like to review the financial results in a little more detail.

Fire truck chassis sales decreased 43% in the quarter compared to the same period in 2010 explained by the softening of the overall ER market in light of tightening municipal and state budgets that drive purchases. Since Spartan Chassis commands north of 20% of the custom chassis sales in the emergency response market, it's more difficult to make up the overall market decline of 20% to 30%. Also negatively impacting sales was the prior year pull ahead of revenues related to the 2010 emission change. In contrast, fire truck bodies showed an increase of 20% for the same periods mainly due to the addition of Classic Fire, which wasn't present in prior year. Excluding Classic Fire, fire truck body sales were relatively flat compared to the same quarter a year ago.

Our delivery and service sales increased to represent 39% of this quarter's total sales compared to 19% for the same quarter in 2010. While pleased with the market diversification this shift provided, we were also aware that our total margins would be negatively impacted due to the competitive nature of this marketplace. We acted swiftly to refine our margins in the segment but recognize that we still have much work to do. The results of our efforts to improve margins combined with a favorable product mix shift, enhanced profitability for this segment compared to a year ago.

Our defense and government and motorhome markets are experiencing a large contraction. As John stated, these shifts reflect the overall market movement. In both of these operations we have thoroughly reviewed our cost structure and made adjustments this quarter to align with expected near-term revenue levels. Our adjustments included reassigning operating assets and cross-training personnel to increase multi market support, which increases our flexibility within each market's volume as it changes.

Consolidated operating expenses declined slightly by $265,000 in the second quarter of 2011 compared to the same quarter of 2010. Both periods had a similar level of restructuring charge. However adjusted operating expense as a percentage of sales increased to 15.4% from 13.4% without restructuring for the same periods. This is directly attributable to the lower revenue levels. Our growth strategies that John discussed and our recent restructuring efforts will help to improve these results in future quarters.

Interest expense is down $179,000 from Q2 of 2010 driven by the $15 million decrease in outstanding debt. Other income is positively affected by investment returns, particularly with the $20 million increase in cash relative to the prior year. Excluding restructuring charges, adjusted net loss from continuing operations for the quarter was $400,000 or $0.01 per diluted share compared with earnings of $900,000 or $0.03 per diluted share for the same period in 2010.

Moving on to the balance sheet, we continued to make significant progress in improving that balance sheet position. Our accounts receivable decreased to nearly $34 million compared to $53 million at the end of 2010. Our inventory balance has been maintained at the conservative year-end level of approximately $60 million but has decreased nearly $19 million since Q2 of 2010. This year-over-year improvement is reflected in the reduction of 19 days in inventory. But we're not done yet.

In our cash flow statement depreciation and amortization for the quarter was just under $3 million. Managing our resources more effectively help drive over $8 million in operating cash flow during the second quarter. Capital expenditures for the quarter were just over $1 million in support of continuing operations and strategic initiatives. And at June 30, our debt balance remained at approximately $5 million. Our capital capacity includes up to $70 million on our existing credit facility and another $40 million available through private placement notes.

With this credit availability, $30 million in cash and the extremely low debt level we'll have significant financial flexibility to fund our growth initiatives.

Our backlog continues to move in the right direction with the second consecutive quarter uptick, ending the quarter at $179 million. This is still down compared to the same period in 2010 across many of our markets for the reasons previously discussed. On a positive note, our delivery and service backlog continues to expand to nearly double the levels from the prior year. Sequentially our consolidated backlog is up $13 million or 8% with improvements in our emergency response chassis and body markets as well as continuing improvements in our delivery and service vehicles.

Now I'd like to take a moment to provide you an update on the Classic Fire acquisition. This is the first quarter that the results are included within our consolidated results. We completed the acquisition effective April 1, 2011. We're very pleased with the addition of Classic Fire to our family. We expect this business to represent approximately $10 million in annual sales. The purchase price comprised of four components - $4 million in cash, the issuance of 187,500 shares of restricted stock that vest in two years, and an earn out portion contingent upon achieving net sales levels, and also a true up on net working capital. With our strong cash position, no additional debt was incurred to complete the transaction. The valuation work was complete during the quarter and resulted in approximately $2.4 million in goodwill and $1.6 million in intangible assets comprised of trade names and trademarks, technology, customer and dealer relationships and non-compete agreements.

In closing, I'm not happy with the quarter's loss but acknowledge our success in improving our margins and reducing our overhead, while improving our balance sheet and generating cash. In the quarter we also successfully executed our growth strategy with the acquisition and integration of Classic Fire. We do expect an improved second half of the year as a result of our improving backlog, new product launches and recent restructuring efforts.

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

All right, Joe. Thank you very much. As mentioned earlier, 2011 will be a difficult year from an earnings perspective as we transition in support of our newer markets. We made some cost restructuring. We invest in new product launches and continue all that we're going forward from a strategic perspective. The reality is we anticipated these crossroads long ago - really late 2008, 2009. The nice thing is as the plans were developed, as we've executed those plans, we're now starting to move in the positive direction. There's growth in the backlog. We have the Isuzu's N-gas series production, which continues to ramp up. The Reach is coming online. Today more than 55% of our business is non-government dependent.

I want to stress for a moment again, if you think of where we were in 2008, approximately 89% of our business was government dependent either through emergency response or defense. Today it's just 55%. And if we would not have moved forward on a strategic plan of diversifying our business into B2B, B2C type markets, we're a specialty vehicle automotive company, we really would be in a tragic position today. But the reality is we're not. As mentioned earlier the backlog is up. We have significant cash. We've got opportunities for acquisition alliances as we move forward. We have a number of organic initiatives moving forward. We're gaining market share in emergency response, which is a very, very difficult industry. But yet we're gaining market share, not just at Spartan Chassis but at Crimson. We're going to be relocating the RV business down to Wakarusa because it's a great $8 billion market, the RV industry, one of the lowest cost forms of vacation with the greatest amount of flexibility.

You'll see our strategic and operational plans move forward first in motorized and then into other market niches as well. From an operational perspective in summary, we will continue to execute against a very, very simple plan, compelling products. Because if you're products don't compel, your gross margins will suffer and the backlog will go down. We will execute against growth and profitable market share. All the other avenues to drive the market share in the right direction. The blended three point strategy - acquisitions, alliances and organic where appropriate.

We will continue to reduce our cost structure. Clearly we are not at our gross margin goal at 17%. However we have a number of plans in place that over time we will get to that goal. We have been there before and we will get to that goal as time moves on. From an operating expense perspective our target is 11%. Again we have plans in place. We have tremendous discipline within the company and we will get to that goal as well.

If there's something I look back over the last two or three years where we have evolved as a company is now we have plans in place. We are much more disciplined than where we were, and that is reflected in our last point of our operational plan, our balance sheet. When you look at how much cash we have generated over the last couple of years, over $30 million in line today just from a balance sheet perspective or cash in hand perspective, we are positioned extremely well to invest it from an organic perspective, invest it from an acquisition perspective or invest it from an alliance perspective. Not many companies have transformed the way we have. We have generated cash, realigned the cost structures and honestly moved the ball in the right direction strategically.

We are a different company today. We are now a specialty vehicle transportation company. We will continue to make progress as we move into more business-to-business and business-to-consumer markets. But you know what? As we look to the future there are challenges. Longer-term, we're moving toward the more solid ground. We will look at the right opportunities that will drive profitable growth in the right direction. And in closing before we turn it over to questions, again we're not happy with the loss but we've made tremendous progress. We have tremendous opportunities ahead of us but there are also challenges as while the economy is moving in the right direction, it is not an easy economy. But in closing we are evolving in the right direction and that is the Spartan story. We have a great future ahead of us. Time for Q&A.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Ren Wood of BB&T Capital Markets. Please go ahead.

Hey, good morning, John, Joe and Paula. First, I know that you mentioned you'd start production of the Reach in the third quarter, did you say that you had orders in house already? Did I hear that right?

Ren, this is John Sztykiel, I made the statement that we do have orders in house. We're not going to comment on the amount of those orders but as the Isuzu has gone to their good to go tour, obviously they've taken the product to market and we're moving the ball in the right direction.

Okay. Excellent. With regards to Utilimaster, that business was up nicely. The aftermarket parts and assembly especially, can you comment on that? How we should think about that piece going forward?

And this is John Sztykiel and I'll make a couple of quick comments and then I'll turn it over to Joe as well. One of the interesting things about the delivery and service business is the vehicles are built really for a 15 life or 750,000 miles. And up until about a couple of years ago, at Utilimaster they took an approach that they would really just make money when the product left the door. However under their new leadership recognizing the vehicles are in service for such a long time period they have realized that in the products which are in the field they can bring updates to the marketplace which enhance the value of the product. Don't necessary lengthen the life of the vehicle but provide more value while the vehicle is in operation.

So the customer receives value, improved operating efficiencies, lower service maintenance cost, et cetera. Obviously Utilimaster receives value. And I think it's important to note the vehicle life is not extended but they're looking to improve the value of the product because a lot can change over 15 years just like this keyless entry system where the delivery and service people can move in and out of the vehicle much faster. And I think if there's a shift at Utilimaster which has been very, very wise and it's inline with our strategic directive, value maximization, that is as society changes, as technology changes, let's take a look at the fleet of vehicles that are in service today and how can we bring the right field service solutions to the marketplace where the customer says, hey, this is a win for me. It's obviously a win for you. And let's set up a program to retrofit X number of existing vehicles. Joe?

Yes, the only thing I would add to what John just mentioned is, it also further supports your strength of the customer relationship as well too because you're not just selling them a product. You're really part of the solution that they're looking for of how do you either deliver a product or a good or a service to an end customer. So you're really part of that solution package too. So it further solidifies your long-term customer relationship as well too.

And if there's something I'd like just to bring up to Ren is Utilimaster is actually very, very unique in the marketplace relative to this approach of field service solutions. That's another strong point of Utilimaster. Very customer centric. But it's also very unique to them from a competitive perspective.

So what you saw this quarter was a nice shift in their product mix to more of this service versus the truck sales. Now that'll shift around to the next couple of quarters and go back because they have as you saw and as you know from the backlog some big customer orders for end product or trucks that are out there. So you'll see that portion shift back again. But it was a great quarter this quarter. John mentioned a couple of items that we were doing from some keyless entries to some shelving units and some others as well too.

Ren, the one piece that I wanted to back up on was is the order question that John and you mentioned a moment ago in regards to the Reach product, our current backlog does not include any orders in it for the Reach product. What we have, what John was referring to are what are called reservation flats. So what happened is, as the pricing has not yet been finalized from the dealer pricing part with the Reach product, we couldn't put an exact order within our backlog. So there's no orders in the backlog today for Reach. But instead those dealers as John described, excited about the product. They've put what are called reservation slots in place for these pending the final resolution of the pricing.

That's good clarification. And so with regard to the Utilimaster, have you guys started to move the Utilimaster products through the Isuzu dealership network of what, 280 dealers yet?

Ren, this is John Sztykiel, the answer is no. All that we've done is really done the marketing relative to the Reach good to go product. We've also done a large number of customer visits or fleet visits through the Isuzu distribution network where the N Series product is built in Charlotte. I think what you'd say right now we're at the market development stage of working with Isuzu and their distribution network but really no products are going through the system yet other than those N Series products, which are on the gas chassis. Those are being assembled in Charlotte and they're moving through the distribution network. So I'm not sure if you're asking about Reach or the N Series gas. The N Series gas is definitely moving through. The Reach and what I would call modified N Series, we're at the beginning stages now of market development.

Okay. To shift over to the motorhome, the backlog is of course down. Do you think we're kind of at a bottoming point here especially since you picked up a new brand with the Integra?

You know, I would think --- I'm not sure if we're at the bottom. My analogy is we're probably like a bobber on the water from a fishing perspective. Sometimes you're up, sometimes you're down a little bit. The reality is there's a lot of positives from the RV lifestyle and what you have now are newer models going into the second half of the year. So right now we're still very, very cautious as our OEMs bring new models into the marketplace into the second half of 2011. I'd like to think we've hit the bottom but yet I cannot say that because we still have a bit of an uncertain economy. We've seen a shift towards some smaller motorhomes and it's too early to tell yet whether our other OEMs who we sell product to, how those new models are being received in the marketplace. We're at the very beginning stages of those rolling into the marketplace.

It's interesting as you look at our end markets, Ren, that the motorhome is the one that there's still some softness out there, that we're still getting our arms around it what it could mean and are we at the bottom or not. That's the interesting part about being in the multiple markets as we are, we have some like that that are approaching the bottom. Maybe not at the bottom yet. But we have others that are just beginning to take off on the up cycle, the delivery and service market as an example. The emergency response market as you saw actually went through that bottom and started to tick up a little bit this quarter. We had a little bit more strength there as well too. And then defense market clearly kind of at that bottom point as well too as we've described. So we've got of those four main markets they're in varying stages of at the bottom or just the beginning at the top as well too.

Okay. Thanks. One more and then I'll turn it over, with your fixed costs, you've taken $4 million out, how much more do you think you can take out and when will we see additional restructuring charges with the relocation of the RV to Wakarusa?

Yes, a couple of questions in there, one around the fixed cost structure. First I want to be kind of really clear, as we went through our fixed cost structure changes, the [construction] that we did this time, very deliberate. Very focused. Really targeted the areas. Where did we have some issues around our revenue and declining business patterns. We really went after those markets where we saw our cost structure wasn't aligned with the revenue stream that we were kind of targeting to go after. Feel real confident about the changes that we've made. There's a few other opportunities that we're looking at, Ren. It's something that we never kind of put away on the shelf and say, we're done. I don't think you can in today's market or business environment. You're always watching for opportunities to change and lower and improve your cost structure. So that work is kind of ongoing. There's a few other areas that we're looking at.

None that I can speak of to you right now that would amount to any significant restructuring costs of any amount. As I look at the move of product as well too, there will be move costs but I don't think there's going to be anything that will be significant from a restructuring perspective, no.

Okay. Thanks for the time. Appreciate it.

(Operator Instructions). Our next question comes from Joe Maxa of Dougherty. Please go ahead.

Yes, hi, this is Ash for Joe. Good morning.

Good morning, Ash.

I had a question regarding the Utilimaster orders and backlog, how much do you expect to ship in second half of this year from the backlog?

Yes, if you look at their backlog now, it's a great question because as you know in our different markets the backlog has different timetables in terms of when it ships. On the emergency response and some of our fire trucks it can be in our backlog for six months before it might actually ship out. On the Utilimaster business it usually ships out within a quarter or two. So what you see in the backlog for Utilimaster traditionally their volume will ship in a couple of quarters from when those orders are in place. So, by and large, most of what's in the backlog currently should ship out during the back half of the year.

And Ash, this is John Sztykiel, and what Joe just said a few moments ago by and large most of it. Because one of the things we do put on the -- like on the last page of the release is we outline like the anticipated time to fill backlog orders and for service and delivery we put eight months. So you'd probably see most of it within a six month, so the next couple of quarters, but the reality is it's not all going to ship.

Great. So just to get some color on the orders for second half, it seems like you suggested that there was some pull in from 2012 because of accelerated depreciation and shift to Internet shoppers. Do we -- and there was lumpy quarter for the Q1 orders for Utilimaster. So do we expect to see a steady $30 million to $40 million orders for Utilimaster going forward, including the Reach?

This is John Sztykiel, relative to the orders going forward, you saw a big jump in the order backlog from Q4 of last year to Q1 of this year. Then you saw a smaller jump as you took a look going forward. Okay? I think something that's important to note is that as we look going forward you're probably going to see a trend line similar to what you saw from Q1 to Q2 versus Q4 to Q1 of this year. So what I'm saying we expect to see some growth in the delivery and service business but do we expect to see the high double-digit growth, which we saw from Q4 to Q1 that answer is probably not.

But from a Reach perspective, relative to sizable orders you're probably looking late Q4 this year, Q1 of next year because you've still got to go through fleet validations et cetera. And even though we've had products in the marketplace with a number of fleets, even though they become happy with the product it's not like they release and say, okay we're just going to order hundreds or thousands of this product. They still make much smaller orders because remember they've got to [up fit] the vehicles as well. So they've got to go through some exercises to make sure they get their operations set up properly for a new commercial product.

So, Ash, this is Joe. I'll add a little more kind of color to John's comments in addition to that. Two things to think about in the Utilimaster business around their orders and their customers, one is it tends to be lumpy as we've described before. So they'll get big project orders in where one quarter they might get or one month they might get a couple of orders for a few thousand trucks coming in and then next month might be nothing. So there's always that lumpiness in their orders. That's one thing to keep in mind. Second thing on the Utilimaster business is there's also a seasonality to it as well too. A lot of the big service and delivery companies, think FedEx and UPS, they like to have all their trucks kind of delivered and in service by the time they get to that holiday -- before the holiday period because obviously they're in heavy use delivering all those Christmas packages kind of around to everybody's homes.

So you tend to see them ramp up with a lot of business now and then they'll be slower with orders in that fourth quarter as a result of because they've already gotten the business through. So there's a seasonality to it. In addition there's this lumpiness to it. So if you step back from that and look at the Utilimaster business in total, this year 2011 versus 2012, there's going to be one, yes there was some pull ahead because of this tax legislation. But offsetting that next year we have the Reach product being launched which gets into a whole new marketplace. So we intend to continue to see some growth in the Utilimaster business even year-over-year because of those offsetting factors in there. It'll make it more challenging because of the pull ahead but we think we have a lot of optimism around the Reach product. Hope that helps.

Yes sure and what you're saying, suggesting is that you're going to see -- you're expecting to see year-over-year growth rate in 2012, right?

Yes. There'll be a couple of factors in 2012 in Utilimaster that'll offset the Reach product is going to be a great addition to it. On the other hand you're correct on some of that pull ahead from the tax depreciation issue.

Okay. Perfect. Just one last question for me, I wanted to get some color on the gross margin trends because it looks like in the second half more business from the lower margin products might be picking up. So do we expect to see 14% to 15% gross margin excluding restructuring?

In the back half of the year, I think that's a pretty fair assumption, Ash, in terms of where our margins would be. As you know without restructuring first quarter we did about 13.6%. In the second quarter 14.6%. You're right, there's a mix shift in third and fourth quarter, which will have a little bit of a negative impact on us. But as we've talked about we're going to have higher volumes through during the third and fourth quarter than we saw in the first and second quarter. So that should help us a bit as well too. But still you're right, the gross margins in third and fourth quarter, that's a pretty good range to be thinking about us in, yes.

Okay. Great. So you'll get some off leverage from higher volume?

Correct.

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

You bet. Good questions, Ash. Thanks.

(Operator Instructions). Our next question comes from David Fondrie of Heartland Funds. Please go ahead.

Hey, good morning.

Good morning, David.

Good morning, David.

Wonder if you could give us a little more color on the ramp of the N2, the gas Isuzu engine, where you are in terms of availability of engines and chassis from Japan and a little bit of color on doing more than just assembly starting to (technical difficulty)?

Okay. David, this is John Sztykiel, well relative to the N Series as I mentioned earlier we're currently at a rate of about 70 units a week working to get up to a rate of 100 units a week by the time we move into Q4. So that equivalates to as you think of Q4 doing anywhere from 18 to 20 units a day. In the second quarter of this year there were some changes to the production schedule obviously because some of the earthquake so everything got moved back a little bit. But as we move into Q3, and we move into Q4 now you basically have a sequential ramp up plan so we don't anticipate any part shortages or any changes to the production schedule based upon the earthquake and some of the past incidences that took place in Japan earlier this year.

The nice thing is as well is that gas product is in very, very good demand. If there's an area where we're benefiting Isuzu is benefiting, is these change in diesel emission prices while they have hurt some other markets that were based around diesel engines. It's helped their gasoline products like the N Series extremely well. So as we look forward it's really just a function of market demand and bringing the parts in and delivering and building the product and as we look to the future, we don't see anything that's going to challenge us going forward. Isuzu is working extremely well. We have a great relationship. The plant is working extremely well. And I think if there's something to note -- and really -- and I didn't mention it earlier but to give people perspective, we've got the plant [capacitized], which was an empty defense plant is now building the Isuzu N Series. It's about 50,000 square feet. Employs approximately 50 people and it will be [capacitized] to do about 4,000 units a year or 18 a day.

That gives you an idea of just how far we've come from a lean efficiency perspective. Relative to moving past, your second question, relative to moving past assembly, the best I can say is we're continuously working with Isuzu to look at opportunities to reduce the cost of bringing that product to market. And so there are numerous opportunities. There's a lot of meetings, discussions, planning and analysis going on. And as we look to the future will there be opportunities for us to increase our value add on that chassis? The answer is yes, however we're taking a very disciplined approach with Isuzu because we've got a great product. We've got a great partnership with them. But all of us understand that we have to work to reduce the cost to bring the product to market.

Hey, David. This is Joe. Two of the things I'll add is one, on a total volume perspective we began talking about somewhere between 3,500 and 4,000 of these we would do this year. Even with the tsunamis and the events in Japan we'll still be able to get to that same number. So, yes, we did miss some time while we were down but the teams in Japan and here in Charlotte have done a great job of adjusting the schedules, getting the parts and pieces in place so that we'll still be able to meet that commitment. And as John said, the demand has been really high which is great.

The other part I would reinforce is what John described is we've talked about this first piece of business with Isuzu here as critical to us and to them and really being able to establish our capabilities. And it was very important for us to deliver on this flawlessly. And we have. And I think that's been recognized from the folks from Isuzu as well too, which really helps us as we look forward to future endeavors as well too. Like the work that we'll be doing with them on the Reach product and the chassis for that. And then even beyond as well too. So a great first start in this program with Isuzu.

Thanks for that clarification, Joe. Could I ask just two quick kind of housekeeping questions. One is the revenues from that particular operation, where are you classifying those in your income statement?

The revenues from the Isuzu business?

The N2 Isuzu business, is that part --

The end gas product.

Yes, they'll show up in our revenues line and they'll show up in the specialty vehicles segment.

In the specialty vehicle segment. Okay.

Yes. And in the category in there it's even called out in the statement, it falls in the other product sales vehicles.

Okay. Great. Thanks very much. Appreciate that.

All right. At this time I'd like to thank you all for your time. And turn the call over the John for some closing comments.

All right. First again thanks so much for your time. We really appreciate your interest and the excellent questions. As mentioned earlier as we look at Spartan today we are now a specialty vehicle transportation company. As Joe mentioned and I mentioned in no way, shape or form are we happy with the loss from operation. The restructuring charges, while difficult were the right thing to do. But as we look to the future and as we leave this room today and go out the rest of the day we're going forward with a backlog that's up versus Q1. We've had two backlogs -- two quarters where the backlog has moved in the right direction. The nice thing is today over 55% of our business is non-government dependent. From a financial perspective we're in a very, very sound position. And our challenges to execute on our operational plan and our strategic directives and we look forward to doing that. Thank you very much.

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