Shyft Group Inc (SHYF) 2011 Q3 法說會逐字稿

Good morning and welcome to the Spartan Motors Third Quarter 2011 Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference call begins. This call is being recorded at the request of Spartan Motors. If anyone has any objections, you may disconnect at this time. I would now like to introduce Jeff Lambert of Lambert Edwards & Associates, Spartan's Investor Relations firm. Mr. Lambert, you may now proceed.

Good morning, everyone, and welcome to this morning's call. I am Jeff Lambert, and I'm joined on the call today by John Sztykiel, President and CEO of Spartan Motors, and Joe Nowicki, 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 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'd like to turn the call over to John Sztykiel. John?

All right, thank you, Jeff. Good morning to those that are listening in on today's call and those that are on the Internet. First I will briefly review our Q3 financial highlights, then covered by our operational plan, the growth agenda, and market overview. Joe Nowicki, our CFO, will then provide a detailed review of the quarterly financial results. We will conclude by sharing our strategic direction that will pave the way for future profitable growth followed by a Q&A session.

First, an overview of the third quarter results. On our second quarter call we indicated that the first half of 2011 would be challenging from a demand perspective, but that the second half would mark a turn for the better in terms of sales and profitability. Based on the results we delivered this morning, we started the second half even stronger than what we anticipated with Utilimaster posting stellar results and proving the value of our diversified business model.

Our focus on our four-part operational plan resulted in sequential improvements in revenue and a return to solid profitability in Q3. At this point, before I go on, I wish to thank all the SMI associates for a strong step in the right direction, which took place in the third quarter. You know, it all happens by people working together, focused on the right strategy, working in alignment.

Our top line performance highlighted the strength of our diversified business lines and solid growth in Utilimaster drove outstanding results in delivering the service. The performance at Utilimaster helped to offset softness in the recreational vehicle, the emergency response, and the defense markets. It also helped reduce our exposure to government-dependent revenue streams.

Our profits for the third quarter validate the restructuring actions we have taken over the last several months and demonstrate our ability to drive significant leverage to the bottom line. The third quarter also illustrates the power and the strength of our diversified growth strategy in action as we saw vibrant growth offset softness in other markets.

As a data point, in the third quarter, 63% of our business was either B2B, business-to-business, or B2C, business-to-consumer, with the remaining third being business-to-government or B2G-related. This is a major shift from just three years ago when only 12% of our business was B2B or B2C, and sales were dominated by government vehicles, i.e., about 88%. It's amazing how we have changed in this area over the past two years. And, honestly, that foresight has provided not just direction with opportunity but is evolving us as to how we operate.

Given the significant challenges in federal defense spending, state and municipal budgets, we had the foresight to change the way, also, how we approach our markets, and we've worked diligently over the past two to three years to broaden our revenue base.

The acquisition of Utilimaster would serve the delivery and service market as benefiting from how society operates a shift. Internet shopping, increased home deliveries -- a market, which is driven by fleet operators and business customers, which includes demand cycles, which typically improved before the ER and RV-related markets and/or defense.

Our lines with Isuzu, as well, is also a great example of our diversification strategy as we leveraged our expertise in assembly to assist Isuzu in reintroducing the popular N series gas product line in an incredibly short time period, less than 12 months. And I'll talk a little bit more about that later on.

As we look at the fourth quarter in early 2012, we do expect short-term challenges in a number of our markets given the current weakness among consumers, budgetary constraints at the federal, state, and municipal levels, and a seasonal softening in the demand for delivery and service products.

However, we are focused on the factors that drive profitable growth, specifically momentum in service and delivery vehicles, particularly the opportunities in upfit projects, or field service solutions, as we call them; the recent stability in our emergency response chassis and body markets; the successful and full integration of Classic Fire; the launch of our new revolutionary commercial van product, the Reach; and the retooling of our operational structure; continued pursuit of additional profitable growth initiatives with Isuzu; and diversification into one or two other markets through either acquisitions, alliances, or organic.

I mean, really, those are seven major items, which we are very, very focused on, which will not only direct us but what you'll start to see dramatic change in the right direction as time moves on.

As I mentioned earlier, Joe will review the financials in detail shortly, but now I'm going to get into more of a strategic review.

On our four-part operational plan, it's simple and straightforward -- growth and profitable market share through a disciplined, three-point approach; compelling products and services through broad and attractive lineups of products and services; cost structure management to effectively utilize resources to leverage and support profit-generating products and services; last, managing our balance sheet to sustain financial strength and liquidity so we can act nimbly on new opportunities.

As we look at growth in profitable market share in our three-point approach, which we term the blended strategy, it revolves around three tenets -- alliances, acquisitions, and organic. This growth strategy is an integral part of our plan for sustainable long-term profitability, top-line growth, and shareholder maximization.

As mentioned earlier, today 63% of our business is dependent on B2B or B2C. The effective implementation of the growth strategy on the acquisition upside of Utilimaster over two years ago, and it has been a successful integration, is driving what we're seeing today.

And, really, we take great pride in that because five, 10 years ago, honestly, we were not known for successful integration of acquisitions. But today, or over the past two years, we've had Utilimaster and just most recently Classic Fire -- another example as to how we've changed.

But it's not going to stop there. We will continue to explore additional areas for growth and diversification just as we've done with Utilimaster, just as we've done with Classic Fire, and we will not hesitate to jump on the right opportunities from a strategic perspective when they arrive.

Let's get into the markets -- in the first half of 2011, the RV market, on the whole, improved slightly. But those gains were primarily in smaller-sized motorhomes and towables where Spartan currently does not compete. And I used the term currently because, over time, we will.

Wholesale shipments of motorhomes fell 17.4% overall. In August, Class A motorhomes fell 15.4% from August to 2010. In addition, as I mentioned earlier, motorhome sales mix has shifted from diesel to less expensive models in the Class A and Class C markets. As a result, our recreational and specialty chassis market sales were down 34% in Q3 compared to the same period a year ago. Obviously, that's not a positive data point, but there are several initiatives in place to address that.

In light of this recent softening in the RV market, the strategic relocation of motorhome chassis manufacturing operations to Wakarusa, which will take place in 2012, is an important strategic shift. This relocation is in line with one of our 10 strategic directives, being customer-centric. It provides us the opportunity to grow market share by being closer to our end customers and more responsive to their needs. This facility is located in the heart of the motorhome, or the RV production industry, as more than 70% of all recreational vehicles are produced in northern Indiana. We will be within minutes of our customers, and this is a significant benefit.

We also believe it will provide other opportunities for other areas of growth in the RV industry beyond the typical Class A diesel where we currently participate. As we look at these opportunities, the location is perfect, and we will take advantage of it as time goes on. Again, that move will take place in 2012, mid-2012.

The outdoor recreation market, because I get asked that a lot, is why are we still there? Because it is a great industry, and the demographic trends point towards its long-term growth. What's interesting, a recent campfire canvas survey of RV owners revealed that 53% intended to use their RV more this past year than what they did in previous years despite higher fuel prices while 38% plan to use theirs the same amount and just 9% say they'll use their RV less.

So it's interesting -- people plan to use their RVs more often. Another data point, 65% -- one of the reasons is to take more mini-vacations. I think if there's something, which you're seeing, instead of a long vacation, three or four weeks, people are taking their RVs for a long three-day weekend. So they're using it more. That's good for the industry.

In addition, RV family vacations are, on average, 27% to 61% less expensive than other types of vacations according to a study by international travel and tourism expert, Collier's. We know the strengths of this industry. We have the chance to identify emerging trends, identify and develop the right products and services that will win customers. It's also an industry of tremendous dollar potential. Today the RV industry is an $8 billion market. It's been as high as $14 billion. But as you look over the next three to five years, and it will be a challenging economy, the RV vacation is very attractive from a cost point, plus it is the only lifestyle that gives you the ability to go where you want, when you want, at your direction. And that is another reason that makes it so attractive.

Let's shift over to defense and government. Third quarter sales were down $5 million compared to the same period in 2010, down nearly $1 million compared to Q2 in 2011. Again, a very challenging industry. During the quarter, we completed production of SOCOM MRAP units under a 26-unit contract with BAE. SOCOM vehicles that were built were identical to those built in 2010.

The defense market outlook remains cautious, as reflected in our lower backlogs at the end of Q3. The reality is the defense department is aggressively cutting costs by limiting new vehicle purchases and curtailing new programs. As the funding is limited, we've seen a number of competitors pursue lower margin opportunities in this space. In some areas not profitable. But we will remain disciplined, as we are focused on growth in profitable market share not just growth in market share.

Part of this disciplined approach involved the restructuring done in this area to create a more variable cost structure, and I compliment Joe Nowicki, Tom Gorman, our Chief Operating Officer, and all the other individuals involved as they have reduced our cost point. Plus, they have also increased our flexibility to ramp up when required.

We will continue to work to develop the right partners. The defense industry is not going to disappear, we are committed to it and, again, our strategy is no different than what it was in Q2. Look for the small, the right, the opportunities where we fit in, and we can develop growth in profitable market share where all stakeholders are smiling at the end of the day.

Over to emergency response -- it's been a challenging market as well, as we've noted in previous quarters. Longer term, we see this as a market with great growth as there is a call for help every 0.73 seconds. And this statistic will likely grow, i.e., the time period will get less as our population ages; 11,000 people a day are turning 50. And as you've heard me say before, more of us are going to take a ride in an emergency response product whether we want to or not.

What's interesting is it's also a very dangerous profession. As in 2009, there were 78,150 firefighter injuries, or 214 per day. Innovation, technology, when applied properly, can make any job safer. Spartan has been a leader in the safety arena in the emergency response industry in the past, and we will continue to lead in the future, provide value and differentiate our products.

Let's get into the detail -- emergency response chassis, our Spartan chassis unit -- sales were down nearly 30% for Q3 of 2011 compared to the same quarter of 2010. Future indicators were mixed during the quarter as order intake was up slightly while the backlog was down sequentially year-over-year.

Despite these factors, Spartan is continuing to develop the products and services demanded by the global marketplace, which will result in improved market share. As part of Spartan's commitment to leading the industry in safety-related innovation, we will begin offering the next generation of airbag technology on our emergency response cabin chassis in 2012. These airbags will be unique to the industry, the Spartan safety system, and they will be incorporated in the Spartan chassis product.

The system is currently in development testing and will be validated in early 2012 then brought into the marketplace. As I mentioned earlier, very, very dangerous going to the scene, very dangerous coming from the scene. Spartan Chassis has been a leader in safety; we will continue to be a leader in safety.

The market share gains we've experienced in emergency response chassis have continued to gain momentum not just in North America but beyond. As came out earlier this past year, we shipped 23 Metrostar cabin chassis for the Chinese market, bringing our total units exported to China to 94. These units are slated for delivery in Q4 of this year in early 2012.

Now, again, another interesting data point -- here we are, a North American country, creating sales across the world in a market or a country known for tremendous revenue, GDP growth, et cetera, and we've got a space there. We will continue to grow there.

Emergency response revenues -- let's shift over to Crimson Fire. Crimson Fire aerials and Classic Fire -- revenues were up 23% for the quarter with nearly $12 million in sales compared to $9.5 million in the same quarter of 2010. Excluding Classic Fire, revenues were relatively flat with the third quarter of 2010. And, in reality, fairly flat indicates a little growth, which is still a great number, as the whole emergency response fire truck market is down 25% to 30%. Why is Crimson gaining share?

First, it's a great team, plus in 2009-2010, they introduced over 10 major product innovations, and they are now seeing the results in those innovations gaining market share. In the emergency response industry, it takes about 18 months to see growth after an innovation is introduced. We are obviously working at shortening that cycle to realize the top-line growth of a new product. But the reality is they are capturing profit market share.

There is a concern, though -- sequentially sales, the revenue, were down more than $2 million from Q2 illustrating our concern about the future. And while they have brought out numerous initiatives over the past couple of years, there are numerous initiatives in place as we move into 2012, and we have a significant daily focus to reverse that negative data point.

Talk a little bit about the strategic acquisition of Classic Fire that has broadened their product line. High performing durable products; very, very value-oriented; set up and geared towards the budget-sensitive department, which is critical in today's marketplace. Again, here at SMI, we used an acquisition strategy to complement the Crimson line of quickly and effectively, and what you saw was the top-line growth in sales in Q3 -- significantly different where others are in this marketplace.

Across the country from a macro perspective, it's not just a market where there is a need, but 54% of all fire trucks are more than 15 years old. And that means there is a growing pentup demand, i.e., need for replacement. And as time goes on, as we deliver the right products in the marketplace, we will drive profitable growth.

Let's switch over to our last market, I should say, then we will get into aftermarket parts and assemblies, but let's switch over to delivery and service.

Simply, Utilimaster blew the doors off this quarter by almost every measure. Sales were up 122% to the same quarter in 2010 and up 58% from Q2, driven, in part, by compelling products, improved profitability per unit. Joe will get into some of the detail plus additional opportunities in field service solutions, aftermarket parts and assemblies.

As good as Utilimaster's results were, there is still significant room for improvement from an operations perspective. There are 16 buildings on the campus in Wakarusa today where Utilimaster is located, and we have significant vehicle flow opportunities to reduce our overall cost in building the Utilimaster product. So what I'm saying is don't perceive we've come to the mountaintop as to how efficient we can be with Utilimaster. We've got opportunity, we're focused, and we're working daily to ensure the strategy delivers the right results.

The interesting thing is people say why is delivery and service growing so much? They ask me that question. And there's a number of evolving trends, which support our strategic decision made over two years ago into the delivery and service marketplace.

First, Internet commerce has increased dramatically over the last decade -- increase in demand for package and delivery service. As I tell people, Class A trucks and trains don't go door-to-door. That's where Utilimaster comes in. Internet commerce continues to grow with major players like Amazon reporting 33.7% compound annual growth in revenues from 2006 to 2010. And with more Internet retailers offering free or discounted shipping, that will move.

One large provider of package delivery indicated yesterday that they expect this holiday season to be their best ever -- a step in the right direction. The reality is, our society is becoming more customer-centric, whether it be Internet shopping, groceries, dry cleaning -- more and more is getting delivered to the home. And Utilimaster is benefiting not just because they're business-to-business or business-to-consumer, but the reality is they are benefiting because of a shift in society. It's really not housing-dependent.

It's been a great acquisition. I compliment everybody on the integration of it, and what's interesting is it's not just about the product going out the door. The improved driver, or vehicle efficiency, was another key factor driving growth in Q3, which will drive growth in the future. Keyless entry systems, for a major package delivery customer that will take or cut the time it takes for drivers to access cargo, thus increase the number of packages or stops they can make on a day.

As a point of reference, UPS recently disclosed that keyless entry, as we call it, will save them over $70 million annually. This simple technology, which has been available in passenger cars for decades, marks an important shift in the delivery and service market driving down costs, increasing capacity, while providing a return to fleet operators and Utilimaster as well. You know, really a great statement.

And as we talk a little bit about field service solutions, keyless entry, another major initiative we're on is what we call system to assist in safe loading and unloading of the vehicles -- custom shelving. The reality is delivery and service vehicles are in operation for 10 to 15 years -- 10 to 15 years. We recognize there's tremendous opportunity to update existing vehicles and provide value to the fleet operator and us as well.

Utilimaster has over 125,000 vehicles in service today. That number is growing. Field service solutions will be a key part of our strategic growth not just today. As we look into the future, as we recognize that each vehicle can be a revenue stream not just when they leave this facility but provide a revenue and income stream outside of the normal parts replacement business over a 10- to 15-year period -- another area of field service solutions where we have differentiated ourselves, really starting to hit home in Q3 of this year.

And there will be some seasonal factors, which impacted Utilimaster in the third quarter, as a large number of vehicles were delivered, obviously, to take -- to address the large shipping season, which takes place in Q4. As major package delivery fleet customers prepare for the peak holiday season, they require new vehicles to be delivered well in advance, resulting in a seasonal increase.

As a result, the backlog drops sequentially from the peak in the second quarter. However, year-over-year basis, Utilimaster's backlog is up over 38% to $53.9 million.

Let me get a quick drink of water before I go to the Reach.

We're also excited about the launch of the Reach product, a revolutionary new commercial van developed under alliance with the Isuzu truck that offers over 35% improvement in fuel efficiency, cutting CO2 emissions in half with other driver efficiency improvements.

The Reach utilizes technology that is available and widely used today. It is a very, very compelling value proposition for fleet major customers. If you're curious, just go to the UPS website, where they have a variety of notes and comments, some actual YouTube videos about the Reach product. It's amazing. Go to the Spartan Motors website. There's update on what's going on relative to the Reach product.

The Reach provides Utilimaster's delivery and service customers the opportunity to optimize both their top and bottom lines while enhancing their sustainability performance image. And what's interesting is this will not drive revenue so much in 2011, but is a significant part of 2012 as we move forward. The Reach was officially launched in Q3 of this year, will be distributed directly through Isuzu's nationwide distribution network of approximately 280 dealers. We are now receiving orders from fleets and Isuzu dealers, and we're continuously building the backlog and just starting production.

In 2012, I do want to note we will be transitioning Reach production from Utilimaster's Wakarusa facility to our production campus in Charlotte, Michigan. This will allow the Reach to be very close in proximity to the engineering production resources of Isuzu also in line with our customer-centric business model, and, over time, will reduce our cost base as well.

Another data point -- strategic diversification, increased revenue, and solid profitability on every front -- the delivery and service market is a growing $7 billion industry, and we're on a great profitable path.

A couple of other quick data points -- let's talk about the Isuzu alliance. During the third quarter, we continued to ramp up production of the N series vehicle, a low cab-forward gas cabin chassis with our partners, Isuzu Commercial Truck of America. As we mentioned last quarter, we expected to achieve production of 20 units a day per -- by Q4.

Reality, vehicles are now rolling off the line at a rate of approximately 21 units a day, and that's where the market is demanding it. Initially, things were set up at 14. Then we increased our production targets to 20 units per day in Q3 because the demand was stronger than initially anticipated. In the first quarter of this year, the reality is we're now rolling them off at 21 units per day.

To give you an idea of our evolution, the improvement in lean efficiency, 21 units per day are being produced by 49 people in a 50,000-square-foot facility that was once building defense products. Flexibility, efficiency -- absolutely great metrics. Twenty-one units per day, 49 people in 50,000 square feet. Those are dynamic metrics no matter what anybody says or what other data points you look at, and we take great pride in that. My compliments to the people at Utilimaster, the Spartan team, and the Isuzu team.

Aftermarket parts and assemblies -- the business was positively affected by several orders at Utilimaster during the quarter, which offset some softening in APA for specialty vehicles i.e., defense. Total APA sales of $25.7 million increased 2% in Q3 versus the same quarter in 2010.

Now, Joe, I'd like to turn it over to you to do a deep dive into the financials and our operational plan.

Thank you, John, and good morning, everyone. As we stated on our last earnings call, we experienced a tough first half of 2011, but we are driving for improved results and a return to profitability in the second half. Our results in the third quarter represent an important first step in delivering on that commitment.

I'll start out with a review of our income statement. Third quarter sales were $120 million, relatively flat compared to the third quarter of 2010 but up more than 21% from the last quarter. Sales were driven by the surge in delivery and service, which more than doubled to $61.2 million offsetting declining specialty vehicle revenues, which fell by a similar dollar amount to $59.1 million.

Delivery and service vehicle revenues were driven by deliveries of new package delivery vehicles ahead of the peak holiday season as well as significant orders for several aftermarket parts and assembly programs.

Gross margin in the quarter was 17% of sales compared to 16.4% of sales in the prior year and up from 12.8% last year.

Our product mix shifted to more profitable products and services. In addition, operating leverage derived from the incremental step van sales helped to lift overall margins for Utilimaster.

During the quarter, we also began to see the positive impact of the cost reduction activities we initiated last quarter, which will amount to more than $4 million in annualized reductions to our fixed cost base.

We have also continued working to improve our ability to leverage sales with savings in material costs, labor efficiencies and reductions in overhead costs. Our lean initiatives have propelled our success and included a thorough review of our bill of materials. We're continuing to review our costs for further margin improvement as we recognize this is an ongoing process at Spartan Motors.

For some of our markets, I'd like to review financial results in a little more detail. The emergency response chassis sales decreased 29.5% in the quarter compared to the same period in 2010, really as a result of the softening of the overall ER market in light of the tightening municipal and state budgets as John described.

In contrast, emergency response bodies showed an increase of 23.1% compared to the third quarter of 2010 mainly due to the addition of Classic Fire's operations. Excluding Classic Fire, we are still relatively flat in the same quarter a year ago despite a very challenging market.

Sales in deliveries and service rose substantially, up 122% from the third quarter of 2010 reaching $61.2 million in the third quarter of 2011. Our delivery and service sales increased to 51% of this quarter's sales compared to 23% for the same quarter in 2010. As we've mentioned on previous calls, the margins in delivery and service reflect the competitive nature of this business and can often have a dampening effect on our overall margins. However, in the third quarter we received the benefit from two positive developments on the margin front at Utilimaster.

First, with the higher level of sales in the quarter, we are able to achieve operating leverage to boost the overall margins. Second, we have the benefit of a significant increase in APA business.

Our defense and government and motorhome markets continue to experience a large contraction. As John stated, these shifts are a reflection of the overall market condition. Across the organization, we've thoroughly reviewed our cost structure and made adjustments to align with expected near-term revenue levels and make our cost structure more viable so we can flex those operations with changing market conditions in the future.

Consolidated operating expenses increased by approximately $100,000 in the third quarter of 2011 compared to the same quarter of 2010. Operating expense as a percentage of sales increased to 12.6% from 11.9% for the same periods.

Increase in operating expenses was driven by three main factors -- first, the inclusion of operating expenses from Classic Fire, which were not present in 2010. Second, the higher variable costs associated with the increased sales at Utilimaster. And also the $600,000 accrual for contingent earnout payments for the Utilimaster acquisition, which really reflects the good news that the significant growth at Utilimaster has exceeded our acquisition performance targets.

On a positive note, fixed operating expenses were down as a result of the restructuring actions taken early in the year which were to lower our cost structure about $4 million.

Interest expense is down $150,000 from Q3 of 2010 driven by the $10 million decrease in outstanding debt. And income for the quarter was $3.2 million, or $0.10 per diluted share compared with net income of $3.3 million, or $0.10 per diluted share for the same period in 2010.

Now moving over to our balance sheet quickly -- we continue to make outstanding progress in improving our balance sheet position. Accounts receivable decreased to roughly $44 million compared to $53 million at the end of 2010, and our DSOs were reduced from 35 days at December 31, 2010, to just 28 days at the end of the third quarter.

Our inventory has risen slightly to $65 million, but it has decreased by $13.6 million since Q3 of 2010. This year-over-year improvement is reflected in the reduction of 18 days inventory, which fell to 57 days at the end of the quarter. While we're pleased with this improvement, we've seen more opportunities to make progress as we continue to actively manage all aspects of our balance sheet.

In our cash flow statement, depreciation and amortization for the quarter was $2.3 million. Managing our resources more effectively helped to drive $1.5 million in operating cash flow during the quarter. With the improvements we've made in managing our balance sheet, our cash conversion cycle improved by 17 days from the third quarter of 2010 to just 61 days at the end of September.

Capital expenditures for the quarter were $1.1 million in support of continuing operations and strategic investments. At September 30th, our debt balance remained at approximately $5 million, and our net cash position was approximately $25 million, up nearly $16 million from the end of 2010.

Our capital capacity includes up to $70 million on our existing credit facility, another $40 million available to private placement notes. This is credit availability, $30 million in cash and extremely low debt level, we have significant financial flexibility to fund our growth initiatives.

The sequential increase in sales, along with moving past peak seasonal demand in delivery and service, produced a contraction in our backlog, which ended the quarter at $143 million. This is lower than the second quarter and the same period in 2010 for the market and economic reasons discussed a moment ago.

On a positive note, our delivery and service backlog is up 38% from the prior year. Sequentially, it's down $31 million given the fullfillment of orders for those package delivery vehicles ahead of this peak holiday season, as we described.

In closing, I am pleased with the numerous successes we've achieved in the quarter. We delivered on our commitment in improved profitable results in the second half with a strong earnings performance in the quarter. We saw exceptional performance at Utilimaster, which proves the value of our revenue versus vacation strategy and formed the basis of our financial performance.

We continue to work on controlling our operating expenses and effectively managing our balance sheet that resulted in reduced breakeven and increased financial flexibility to pursue our growth initiatives.

We continue to expect profitable performance for the remainder of the year, however, we face some challenges from lower backlogs and adverse seasonal factors.

Overall, we are excited about the long-term prospects of our new products like Reach as well as the continued development of our lines with Isuzu, which we believe will drive profitability and shareholder value.

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

All right, Joseph, thank you very much. In closing, the third quarter marked a turning point for Spartan, as we saw all the results of the many efforts we've put in over the past couple of years -- from our restructuring to launching new products that support new business growth. The reality is Spartan Motors is a dramatically different company than what we were two years ago. We've diversified our business with the successful integration of two great acquisitions -- Utilimaster and Classic Fire. We have the alliance with Isuzu, the strength of our balance sheet, which positions us to pursue the right acquisition, alliance, and growth -- organic growth opportunities.

We've seen many changes in our markets over the last few years. As I mentioned earlier, we had a dramatic turnaround in our B2B, B2C business, shifting away from government-related businesses. We will continue to address more business-to-business, business-to-consumer markets through organic alliance and acquisition initiatives to achieve our revenue diversification goals. This shift really reflects changes in how society operates, resulting in a much bigger emphasis on delivery and service and other specialty vehicle type markets.

The reality when the federal government faces significant budget challenges and the Defense Department began to cut back programs as the war in Iraq and Afghanistan have come to a close, we didn't sit back and take it. We did what we always do -- we adapted, we evolved, and are focused on leading.

The next reality is we're particularly excited about what lies ahead from an organic perspective. As mentioned earlier, the Reach is a revolutionary new commercial van that is absolutely right for the delivery and service marketplace.

We took our first orders in Q3 and expect to make our first deliveries in Q4. As 2011 comes to an end, we will be showing several exciting new concepts at the largest RV show, RVIA, late November early December.

In early 2012, several new innovations will be introduced to the emergency response industry through either Crimson and/or -- I should say both -- Spartan Chassis. But also a dose of reality, or the reality is that over the next three to five years, it will be a very challenging North American economy.

We've talked earlier about SMI being a different organization. And recognizing that North America will be a very challenging market over the next four to five years, the reality is one does not want to be a single market company without a global presence. Based upon decisions made a few years ago, today SMI is a multi-market company with a growing global presence. Plus, we are constantly looking at ways to reduce our cost base as evidenced by our third quarter results.

2011, as I close, has not been easy. Quick summary strategically -- areas that will drive sales and income in the future years, we've done a great job -- Utilimaster, Classic Fire, Isuzu, the Reach. Balance sheet management is providing opportunity in the cash to pursue tomorrow. The third tenet, or the key part, every organization has to do a great job on if they want to be a high-performing organization is operationally. We define that as those areas that drive sales and income in the current year.

The first half was not so good. We gave you clarity on that. We also indicated that we expected the second half to be better, and the third quarter was much better. But the reality is the third quarter is over, we're in the fourth, and we're focused on 2012 and beyond.

As we look to today and on to tomorrow, we're focused, confident, looking forward to ensuring not just a good today but a great tomorrow. And the reality is this was evidenced by also the dividend release that the board just declared.

And there's one amazing data point outside of the dividend, which provides some clarity on Spartan as to how we are different. We have been paying dividends 24 years in a row.

So in closing, third quarter was a step in the right direction. However, we're focused, we're confident, and we're committed to ensuring not just a good today but tomorrow as well. Thank you very much.

Operator, if we can open up to questions, please.

Certainly, we will now begin the question-and-answer session. (Operator Instructions) Joe Maxa, Dougherty & Company.

Thank you, congratulations on a nice quarter.

Thanks, Joe, good morning to you.

Thanks, Joseph.

I wanted to ask a little more -- or talk a little more about the deliveries and service. I understand the seasonality. Will the Reach vehicle help you smooth out that seasonality? Perhaps maybe not initially, but would you expect to see that? And then, also, what type of cannibalization would you expect?

Joe -- John Sztykiel, and then I'll talk about the seasonality and then Joe will talk a little bit about the cannibalization. But, you know, very perceptive on your part in that, over time, the Reach will reduce the seasonality of the delivery and service market. And the point being that product is not just geared for large commercial fleets but also for smaller and mid-size fleets.

And what you find -- and that's where the Isuzu distribution network, the 280-plus dealers comes in. Is that those -- the Reach can go to a firm or a fleet that might have one, two, three, five commercial vans. I mean, what makes a product dynamic -- it's easy to get into. A six-foot-two person can stand up inside. It's got great fuel economy delivering 35% better than what's out there today. It's a 10- to 15-year vehicle.

And as people look at Utilimaster, and as they look into the future, Utilimaster has never sold a product through 280 dealers or through a distribution network. Do I expect that to happen in 2012? The answer is no. Where we will start to see that reduce the seasonality will probably be 2013 and beyond, because it will take a little bit of time for all the dealers to get their products, start to hit the trail from a sales and marketing perspective, et cetera.

So it will reduce the seasonality, it will drive the top line and the bottom line, and Joe is going to talk about cannibalization, but I would not expect it in 2012. I'd look to see it in 2013. Joe?

Yes, I think your comment is correct, John and Joe in regards to cannibalization. As we've always described, yes, there will be some from the Reach product on the traditional step van. But keep in mind, it's a different product, and it's geared to a slightly different market, as well, too. Cargo space is probably the biggest difference, as we've described. It's a little bit smaller than the traditional step van, so what you'll see is -- and what we've already seen from some of our end customers is they're looking how they can use that product in specific routes and markets, different than what they use in other markets today.

So there will be some cannibalization, Joe, but I can't tell you an exact amount or how much. We think it's going to provide us also to play into several parts of the market that we're not at today. So that's a great opportunity for us. I hope that helps.

And, Joe, let me make one other comment to the group there, because all of you are probably used to, like, a home, you know, air conditioning and heating individuals coming to your house, a plumber or a carpet cleaner, et cetera. Most of them show up today in, like, a cargo van or even a sprinter, okay?

The Reach product carries anywhere from 50% to 75% more stuff than a cargo van. The sprinter -- a six-foot-two person can stand up inside -- I should say the Reach. With the Reach product, an individual can do work in the back of the unit. So talking to some of these people that do a lot of home delivery, or home kind of work, one of their predicaments, or issues today, is they can't take everything they want to go out in the truck and then not come back -- sort of like a UPS truck, okay, because of the size of the cargo bin.

The Reach will enable them to put everything they want to do for one complete day and not come back. That means they are more efficient from a fuel perspective, they can do more stuff because they're not wasting time coming back two or three times to the main store.

So -- and what's interesting, there's over 225,000 cargo vans purchased a year for just the workplace part of the marketplace. So while there will be some cannibalization, a huge focus point of the Reach is to go after that 225,000 unit-per-year cargo van marketplace. Is the Reach product more expensive? Absolutely. But you have a product that's more fuel operating efficient, doesn't have a lifecycle of three to five years, it has a lifecycle of 10 to 15 years both on the body and the chassis. So we've got a very compelling value proposition.

So, in closing, while we expect some cannibalization, it is not as much as what some people may perceive, because the Reach is also targeted at a very different marketplace going after the cargo van marketplace.

All right, that's helpful. Thank you. Regarding the seasonality and where the backlog is for your delivery and service here at the end of Q3, would we be looking for Q4 product sales at Utilimaster being similar to Q3? Or should we see that back off?

Was there a second part of your question, Joe? Sorry, I cut you off.

I was just wondering if Q3, you would think would be normally or a larger quarter of the year given the holiday season?

Good questions, Joe, and absolutely Q3 is our -- from a delivery and service perspective, it's the seasonal high point. So, yes, in Q4 you will see those new vehicle sales -- the vehicle sales part kind of come down in the fourth quarter from delivery and service.

And the second part, as well, too, is we did pull some business into third quarter from fourth quarter based on customer demand. Customers really wanted some of the vehicles sooner. They also wanted some of that aftermarket parts and service business that we were doing sooner as well, too. So we pulled some of that from fourth quarter into third. So, yes, you will see the delivery and service segment come down in the fourth quarter.

And, lastly, I wanted to ask about that -- you know, the APA segments for Utilimaster very strong in the quarter -- is this a sustainable number? Or what would be a good number to be thinking about, going forward?

I'm going to shy away from giving you a number, Joe, but we'll talk a little bit about absolutely do we intend to make this a sustainable part of our business, going forward? One of the big differences in the Utilimaster business model is it's not just about selling the initial vehicle. It's about being a customer solution product all the way to the end, which means all the enhancements that we do. So the things that John described as he walked through some of the APA stuff from keyless through shelving through some safe loading systems -- all those things go beyond just selling a vehicle to customer. That's really what's unique about Utilimaster.

So, yes, you'll see that continue in the future. Now was it probably at a heightened level during this quarter? It probably was, because we pulled some of the stuff forward, and we had some unusually large projects going through. But our intent is to grow that at Utilimaster but it's also to grow that same concept at our traditional Spartan Chassis business as well.

You know, I think one of the things, to Joe and the group, what you'll see because it's interesting -- there was a very good article a couple of weeks ago on this keyless entry system, actually, in The Wall Street Journal. And what you typically see is you've had one or two or three customers work with Utilimaster large fleet on this field service solutions, recognizing they keep the vehicles 10 to 15 years -- very, very good results. And you get those fleets updated, et cetera, and then you're going to see a bit of a dip, and then you'll see sustainable growth happen after that.

And the reason you have a bit of a dip is, one, you start working with an even greater number of customers. You saw all the fleets, people see the results, and it's, like, okay, the awareness is now there. Okay, wow, I've got this vehicle, and you guys will work with me to adapt or evolve the vehicle knowing I'm going to keep it 10 to 15 years. So what we are seeing at Utilimaster today is an increased number of customer inquiries as to how they can update their vehicles, okay, versus what they have today.

But we've seen good growth, there will probably be a bit of a dip, but then, as I would say late 2012 and 2013 moves on, you should see good sustainable growth as we get past the awareness into the field service solutions execution implementation.

Rhem Wood, BB&T Capital Markets.

First, congratulations on a nice quarter.

Thank you.

Thank you.

I wanted to ask about your distribution network -- a couple of things. One, do you feel at this point that you're fully covered there in where you want to be? I know you have full access to the Isuzu network. You've added some of the (inaudible) inside. Do you think there's other opportunities to add there? And then I want to know Utilimaster for the quarter -- how much of this was growth versus adding distribution networks and access to markets you didn't have before?

Okay, Rhem, this is John Sztykiel. I'll cover the distribution, and then I'll turn it over to Joe on the growth.

But, first, from the Isuzu side in delivery and service as we look at Utilimaster and the 280 dealers, you know, we're working with a great distribution network. Do we believe we've got great coverage? Absolutely. And it's not just John Sztykiel, but for all of the listeners, Isuzu has been the market leader in the low-cab forward market for the last 24 years straight.

Now, when you are the leader for 24 years straight, you're probably doing a lot right on a consistent basis. So on the delivery and service, the Isuzu -- is the distribution coverage great? Absolutely.

As we look at Crimson Fire, do we have opportunities to improve their distribution network? Absolutely. And it's in certain parts of the country. There's a number of initiatives in place to enhance their distribution network. What's interesting is the Classic Fire acquisition brought on a great dealer, what we would consider to be a Type A dealer, in the Georgia-Florida region, which is where Crimson in the past.

So Crimson is going through a very disciplined market approach. They've identified their gaps from a distribution perspective, and they are now addressing that.

So it's sort of a two-part answer -- delivery and service, Utilimaster Isuzu demonstrated greatness -- very, very comfortable there. Crimson Fire, we have some very good dealers. We've got some gaps, and they have filled some gaps, but they're also very disciplined in filling those future gaps as we move throughout the rest of 2011 and into 2012.

On the growth side, Rhem, I'll take that one real quick on what drove the growth at Utilimaster. As you saw from the numbers, it was a good even growth in both the vehicle side and also the aftermarket parts side.

I don't think strengthening of the distribution really was any of the factors on the Utilimaster part of the equation this quarter. It was really a lot -- on the vehicle side, it was kind of a combination of pentup demand and also some of the tax advantages that are out there today that we described before.

On the pentup demand, keep in mind $60 million a quarter, so that's a $240 million annual pacing, but that's not uncommon. That's where they were running in the 2007-2008 timeframe. Remember, then, that industry dropped of substantially, and that's when they were running closer to $100 million, $120 million range for the last couple of years.

So it's not that out of question, and it's really getting that pentup vehicle demand plus also in the vehicles issue, the tax advantages in the current tax law that will allow for 2011 and a portion in 2012 for the immediate writeoff. That's also been a big push as well, too.

On the APA side, it's really been the business model shift. I think the Utilimaster folks have always focused a lot on being this kind of full-service provider more than just selling the truck, and they've had that as part of their business strategy, and they've really accelerated over the course of the last year. And I think what you're seeing is a lot of that APA stuff coming to fruition with them.

You know, one of the things that I just want to talk about field service solutions where to give people, I think, the proper perspective, is when you look at the vehicle as a revenue and income stream over a 10- to 15-year period, it's also a countercyclical move from a strategic perspective as well. Because, typically, when the economy is moving strong in the right direction, you see vehicle purchases go up, et cetera. And you see that, for example, in the car industry.

And then when the economy starts to struggle, purchases start to come down some, but what industry starts to go up? Part sales -- Auto Zone, Action Auto -- all of those. And so what's interesting, again, it has not been a part of Utilimaster's strategic and operational business model in the past. But in late 2010, 2011, they really developed this field service solution, strategic and operational plan, now they're executing it. But the other benefit of it is it's also a countercyclical play as well because as the economy dips or may struggle some, people will look to try to retain vehicles. And our challenge, or opportunity, is how do we continue that revenue and income stream?

So it's sort of like an Auto Zone, Action Auto Parts, et cetera, play, and what you're seeing is the benefits of that.

Great color, thanks for that. I want to ask another question about the emergency response division. You talked about the challenges there, and we've talked about, in the past, the industry numbers. Do you still think that we're kind of at a base level for the industry at this point? And given your recent acquisitions and new products, and your international opportunities with China and maybe other places, do you think we can continue to see that grow modestly from here?

I think that's a very reasonable statement. First, I think are we at an industry low point from a vehicle perspective? Yes, is the answer. You know, we believe that, looking at the data, et cetera, within the industry, Rhem. Because the reality is two data points. One is a call for help every 0.73 seconds. Second, you've got an industry where 54% of the trucks are over 15 years old, which means they don't even have anti-lock brakes. Just imagine driving a 35,000 pound vehicle without anti-lock brakes.

I think the third area where you're going to Spartan Chassis and Crimson continue to differentiate themselves is providing compelling products that have great value. And compelling could be, for example, like the Spartan Force chassis. It's a big, large cab. It's a custom in that there's no front end like on a commercial, so you have very good maneuverability.

But recognizing that the large cab is both the transportation and the office to the scene. That's why that large cab is so important. The value comes in is that there's less budget dollars today. So we're offering a compelling product at a lower price point. That's part of what you've seen with the integration of Classic Fire, the 28% increase in the revenues, et cetera, why the Classic Fire acquisition was so important is, okay, compelling products. But you've got to provide value to society and how we define the value to society is it has to be at a lower price point because society has less money today.

And as we look to the future for Crimson, we expect to see them and Spartan Chassis grow their market share, and it will be driven around compelling products with innovation but providing value to society where, hopefully, the people spending the money. So, you know what? Pretty cool product, it really does all that we want, but you know what? The price is great. All right.

And I think we've had success with that in Q3, and that's our plan, pretty simple, going forward.

(Operator Instructions) Walt Liptak, Barrington Research.

And I'd say congratulations, too. It's nice to see the diversity with 51% of the sales coming from Utilimaster. But I wonder if you could talk, too, about the profit diversity. For example, how much of your gross profit -- was it roughly half that came from Utilimaster? Or was it something higher than that?

I think if you look in the press release, we don't really give out gross profit. But there is, at the bottom of the press release, we get at an earnings number. That will give you a good reflection on the -- oh, what is that -- page -- the net earnings or loss from the specialty vehicle segment as compared to delivery service segment is shown on the segment tables at the back of the press release. As you can see, a good portion of it, really, our profitability came from that delivery and service vehicle segment this quarter.

Oh, okay, yes. I hadn't noticed that. So the $4.8 million net earnings offset by some losses in --

It really drove our profitability. The specialty vehicle segment, the other segment of it, really pretty much -- yes, a small loss, too, but it kind of broke even. Really, you had all the profitability from the delivery and service vehicle side.

Okay, and, presumably, the parts are more profitable than the trucks within delivery and service?

Traditionally, that's the case, but, you know, one of the comments, as I mentioned earlier, was when you get that big of an increase in the volume, and we're running along at $60 million a quarter, that's just a great leverage of the overhead there, which really helped to drive our profitability of the vehicles up quite substantially.

Because, remember, we've talked in the past about it's a tough market, competitive from a pricing perspective, and that makes it a challenge for our profitability perspective with the margin on the vehicles. But what we demonstrated this quarter is when you have the volume, and you drive the volume through the plan, so from the vehicle side it drives really good vehicle margins for us.

So it's a combination of both. Yes, we did get -- you get good margins from the aftermarket business, but, yes, we're really doing a good job of fixing, improving, leaning out the operation side of the business and, with the additional volume, that drove great margins on the vehicle side, too.

Okay, and I understand that the fourth quarter will be seasonally weaker than the third.

Right.

Will you still get that -- you know, the production leverage even though it's at a lower level or would some of the profitability follow on the fourth quarter?

It will fall a bit in the fourth quarter because two things -- you'll have mix a little bit away from that -- the APA, or the parts business. So that will take away from the profitability of it. And, second, you won't see as much new vehicle sales going through in the fourth quarter so less volume to leverage through it. So you'll see the margin come down, as well, too.

On the APA side, was it primarily the keyless entry that drove the incremental APA revenue in the quarter?

No, really, it was several. The nice part about it, it wasn't just one event. Keyless was great, but we had a great shelving program that we had gone out and part of our major customers, as well, too. And then we also had some systems that helped for the safe loading of trucks that we had in place and a couple of others. So it was spread out nicely.

Okay, and are those going to continue into the fourth, or were those projects -- you mentioned some trucks and parts got pulled forward? Are we looking at a lower level of part sales in the fourth?

Yes, we are. We had customer request to pull some of the shelving and the keyless stuff into the third quarter. So we pulled some of that stuff forward based on their demand request to it.

Okay. You know, you beat my revenue number by, I think, $12 million out of the D&S segment. Is that about the amount of the pull forward?

Gee, I don't know that off the top of my head, but it was a substantial amount that we pulled forward, yes.

Okay. And your backog -- just kind of talking about the whole business, the backlog is down about 20% sequentially. As we think about the seasonality for the fourth quarter, is that about the amount of the revenue -- lower revenue for the fourth quarter because of seasonality?

Not that perfect of a science with it. So you can't just assume that the revenue would be down by $20 million in the fourth quarter. A good portion of it is from the aftermarket part business doesn't really show up as much in the backlog, so that kind of comes through dramatically. So -- and keep in mind the orders that were in the backlog at the beginning of the quarter got built up over the prior couple of quarters when they came in.

So, remember, we started to see that backlog for Utilimaster picking up at the end of the second or -- excuse me -- the end of the first and the second quarter, we started to see those orders for UTM coming in.

Okay. And if I can ask about the gross margin for the fourth quarter, you know, seasonally we should have a weaker fourth quarter revenue. Does that flow through to a lower gross margin for the fourth quarter as well?

Yes, as I mentioned earlier, when you have less volumes and also a shift in the mix of the business, that will drive lower gross margins for us next quarter, absolutely.

Can you give me an idea about the magnitude? Like you're running about 15%, maybe above that, year-to-date. Would you come down towards the three-quarter run rate?

We don't really get to disclosing a financial forecast at that level of detail.

Okay. Okay, then one last one -- I apologize for going this long, but --

No problem.

When you talk to UPS and FedEx, you know, obviously, there's a lot of macro things and worries with the economy. What are they thinking about for their aging fleet and the level of purchases that they might put in place for 2012?

Well, I mean, when they continuously evolve the business model, but I think, you know, they are actively looking at upgrading their fleets because the price of fuel continues to move up. Second, the vehicles from Utilimaster are becoming more efficient. You know, and, again, while you've got an existing vehicle and while the keyless entry system, or a safe load system may make sense short term, long term you get benefits of improved fuel economy, a variety of different areas for safety entrance and egress, et cetera.

So as we look into 2012, I mean, honestly, we get excited when we start to see people publicly indicating some of the larger fleets saying they're expecting their best holiday season ever, and that they actually see an uptick in GDP growth in the economy in 2012 versus a variety of people that are forecasting potentially a double dip.

So right now I'd say we're probably cautiously optimistic, fairly positive, as we look at vehicle purchases in 2012.

Okay, and they usually place orders in early part of the year, like, January and February. Is that right?

No, it's more -- you know, it goes through all through the year, but the large fleets really, they place orders throughout the year, not all at the same time, which is good because if they all came in at once, we couldn't build them all at once.

One thing, it would just barely consist of with the large fleets is that really don't want them -- or they want them all delivered by the end of October. You know, it's interesting, there's a saying in the industry, "nowhere to be seen after Halloween."

More towards the end of the first quarter into second. Thanks.

Thank you. At this time, we have no further questions. I would now like to turn the call over to Mr. John Szytkiel for closing remarks.

All right. First, I want to thank all of you for your time. Really some great questions, you know, tremendous insight.

In closing, the reality -- Q3 was a glimpse. And while we appreciate the comments on a great quarter, okay, it was a glimpse as to what we can do. And we understand that. The result is we are -- our passion to deliver improved financial results, to ensure that all stakeholders smile through differentiated, profitable growth is greater today than what it was, really, three months ago because we are now seeing the potential of what we can do as a team with actually very reduced revenues versus two and three years ago.

On the other hand, versus two to four years ago, when sales and income were really much higher, the reality was it was short-lived as most of that was specific event-driven, i.e.., the war. And as we sit here today, while we will always be opportunistic, speed and agility to take advantage of those items in front of us, as an organization, as a group of people, we are very focused on diversified, sustainable, profitable growth, and that's our focus.

And what's nice is Q3 demonstrated that. We continued to move the ball in the right direction in 2011 and, in closing, we're a stronger company than where we were three to five years ago, and especially vehicle business continues to evolve in moving the right direction as society becomes more customer-centric.

Thank you very, very much. Have a great day.

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