Shyft Group Inc (SHYF) 2012 Q1 法說會逐字稿

Good morning and welcome to Spartan Motors' first quarter 2012 conference call. All participants will be 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. If anyone has any objections, you may now disconnect your lines.

I would like to introduce Mr. Greg Salchow, Director of Investor Relations and Treasury for Spartan Motors. Mr. Salchow, you may proceed.

Thank you, Amy. Good morning, everyone, and welcome to Spartan Motors' first quarter 2012 earnings conference call. I'm Greg Salchow and I'm joined today on the call by John Sztykiel, our President and CEO; and Joe Nowicki, Chief Financial Officer of Spartan Motors. I assume all of you saw the Company's earnings release on the Newswire and Internet this morning.

Before we start the call, I need to inform you that certain statements made today during our conference call which may include management's current outlook, viewpoint, predictions and projections regarding Spartan Motors and its operations may be considered forward-looking statements under securities laws.

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. Please note that during the question-and-answer period, we will take one questions and one follow-up per analyst. That should allow everyone the opportunity to ask a question. After asking your question, you are welcome to rejoin the queue for additional questions as time permits.

Now, I'm pleased to turn the call over to John Sztykiel for his opening remarks.

All right. Thank you, Greg. Good morning and thank you for joining us today. We have been busy at Spartan working to diversify and grow our business and deliver consistent profitability. We will keep our prepared remarks fairly short today so we can discuss the quarter, our growth strategy and how we're defining emergency response. Joe Nowicki will then provide a review of our first quarter financial results. Following that, we will have time to answer your questions.

But as we look at the first quarter, there were four major points to note in the first quarter. First, Spartan's operating income was $2.0 million compared to an operating loss of $1.3 million a year ago. Spartan earned an adjusted net income of $0.04 per share in the first quarter of 2012 versus a loss of $0.03 per share in the first quarter of 2011. Note that our first quarter 2012 results excluded $5.4 million in restructuring charges.

Second, the first quarter of 2012 marks the third quarter in a row that Spartan has posted an adjusted operating profit. Third, we diversified our revenue base. In the first quarter of 2012, over 65%, nearly two-thirds of our revenue came from consumers or businesses rather than government buyers. Fourth, we posted revenue growth of 25% in the first quarter of 2012 versus first quarter 2011. This rate of growth shows the strength of our brands and the benefits of our diversified growth strategy.

Now, I want to update you on some of the steps we took during the first quarter. First, we continue to move ahead with our plans to relocate Utilimaster's operations to a more efficient plant in Bristol, Indiana, as we execute our strategy for Utilimaster. We expect to begin transferring production to the Bristol facility in the late Q3-Q4 time frame.

As you will recall, we forecasted annual cost reductions of at least $4 million by moving our Utilimaster operations to Bristol, Indiana. This remains our target. We continue to make progress towards relocating our operations in realizing these savings.

Next, the outlook for Delivery and Service, that market is good and we are on track to post revenue growth in 2012 compared to 2011. We need to execute the move to Bristol, continue to bring the Reach to market and to improve the Reach's financial performance.

As you know, the launch of the Reach occurred one quarter later than we planned. This delayed initial shipments and is pushed out most of our volume targets by about one quarter. We are also working to reduce the materials and manufacturing cost of the Reach as we work through the start-up of this new and exciting product. Customer interest remains strong in the Reach and we are confident in our volume targets.

As the volume increases and as we make some changes to the bill of materials, we improve the build processes, we should be on track to our profitability goals. In closing, as we execute the plan of Delivery and Service, 2010 will build upon the progress we have made in 2012.

Now, let's talk about emergency response. By now, you would have probably heard or read about the actions we took to redefine global emergency response leadership, including the record number of new products we introduced at FDIC, the major trade show a couple of weeks ago. Emergency response is our second largest market and as such is very important to our business.

FDIC or the Fire Department Instructors Conference is the largest conference and trade show in North America for emergency response. As such, it is an ideal venue to introduce new products and illustrate how Spartan is redefining emergency response. Just prior to the conference, we announced we would consolidate Crimson Fire and Classic Fire businesses, as well as Chassis business into Spartan ER. We did this to take advantage of the global strength of the Spartan brand. We realized we needed to take advantage of that brand strength as we intensified our focus on the ER sector as both a growth opportunity. Thus, one brand Spartan ER made absolute sense.

We also appointed Dennis Schneider as President of Spartan ER. Dennis previously headed our Crimson Fire subsidiary and has years of relevant experience, including serving as Chief Operating Officer of Doosan Infracore International, formerly Ingersoll Rand Bobcat where he was responsible for global operations, including manufacturing, lean, Six Sigma, among other functions.

Anyone who has heard of the Bobcat brand knows how powerful of a brand it is, a brand that is an absolute leader in its market. That's the type of leadership we want in our Emergency Response business. With Dennis' background, we believe he is the right leader to help Spartan ER reach its potential as the leader in emergency response.

I want to make clear that we view emergency response as a growth opportunity for Spartan. While the ER market has declined more than 30% over the past year, Spartan is gaining market share in North America, as evidenced by our growing backlog. Innovation is also a key component that will drive our global growth in emergency response. Over 13 new products and concepts were introduced at FDIC.

One of our newer products recognizes the budget constraints many fire departments are operating under today. The 21 ST is a very capable all-calls truck that delivers the most truck for the price. The 21 ST offers more storage, compartments to maximize the amount of equipment that can be carried aboard. This is just one example of how our product development is becoming more consumer focused than ever before.

Another exciting product we introduced at FDIC is the Advanced Protection System, APS as we call it. This advanced air bag seat belt system fitted to the cab of Spartan ER vehicles greatly improves crash protection against occupants -- or I should say against occupant ejection and other issues that go on in a crash. This is an important development for firefighter safety, since more firefighters are injured in traffic collisions than really in fighting fires. With this advanced system, Spartan is leapfrogging as Steve Jobs turned the competition in terms of capabilities and we have plans to make this system standard on our cabs in the near future.

Also, through our new relationship with Gimaex, we introduced two new product concepts, the Spartan 4 X 4 Wildland Crossover and the Spartan R XO Cab and Chassis. Both of these concepts offer enhanced off-road performance for fighting wildfires and will be built and sold as Spartan ER vehicles. The need for such vehicles is highlighted by a data point from 2009 that shows that there are nearly 79,000 wildfires each year in the US or even more important, 215 per day affecting over 16,000 acres per day.

This is an area of emergency response that is a wide-open market since the technology in use is over 20 years old and much of the equipment is in need of replacement; simply no one has focused on wildfires, we being Spartan is about to change that. These are just a few examples of the exciting products, vehicles and features we introduced at FDIC. The customer response was outstanding, our dealers are excited and we're energized about the future.

As I've stated before, we believe that global emergency response is a growing market as well. We believe that the market continues to grow as countries grow and develop, adding infrastructure and population. As populations and economies grow, there is an increasing demand for infrastructure and basic services such as fire protection emergency response. Through innovation, working with the right partners, Spartan plans to be a part of this global growth. Alliances with Gimaex, with Renault, place us in a great strategic position to take advantage of these growth opportunities.

I will be also happy to discuss this further during our Q&A session later in the call. But before we get to that, Joe Nowicki, our CFO, will talk in greater details about our first quarter operating results. Joe?

Thanks, John, and good morning, everyone. I want to begin my remarks by reiterating what John said about our first quarter performance. A 25% increase in year-over-year sales, a 100 basis point improvement in adjusted gross margin over the prior year, a 210 basis point decrease in adjusted operating expense over the prior year, and excluding non-recurring items another profitable quarter. Solid results, but we recognize that the level of profitability should have been even higher. We have more work to do to continue to improve our operating efficiencies and drive more profit to the bottom line.

Our revenue increased 25% to $118.8 million in the quarter due to strong sales growth in our Delivery and Service segment. Utilimaster continued to perform well with revenue growth in both vehicle sales and aftermarket parts and service solutions. Utilimaster's total sales for the quarter were up 148% compared to the first quarter 2011. Utilimaster's vehicle sales nearly doubled to $37.1 million from $19.4 million, while parts and accessories sales rose to $21.7 million from $4.3 million in the first quarter of 2011.

Revenue in our Emergency Response business was down approximately 16% year-over-year, but our order backlog grew 14% during the quarter to $82 million. Since there was a time lag of up to six months from order to delivery, a growing backlog provides some encouraging signs of our ER revenue in coming quarters.

Our motorhome and bus chassis business showed signs of stabilizing in the first quarter. Sales were down only 1.8% year-over-year and backlog increased 7% from the end of 2011 to $10.7 million. Although motorhome and bus chassis production volume remains low, order intake so far this year has been fairly steady. However, as you know, one of our larger customers is moving to a low-priced chassis and we will see volumes declining in the second half of this year as a result.

During this quarter, a dedicated team intensified their efforts to improve the performance of the motorhome and bus chassis business. The team made considerable progress in a short period of time to improve operating performance and reduce costs throughout the business unit.

Due to the loss of a major customer, our motorhome business will post lower revenue in 2012 and 2011. However, due to the work we have done to reduce cost, we expect operating results for 2012 to be improved from 2011. We recognize we have more work to do to return the motorhome and bus chassis business to our profitability targets. We are working to increase our revenue base as well as lowering the cost side of the business and are committed to be in this business for the long run.

You remember from the fourth quarter of 2011 conference call that we announced the Utilimaster relocation project. That project has three parts. The first is the asset impairments charges of $4 million to $6 million, the second are the move-related expenses and the third is the additional capital needed at the new Bristol facility. During the quarter, we incurred a total of $5.4 million in restructuring charges. Of that total, approximately $4.7 million is associated with the Wakarusa write-down, another $700,000 is due to employee separation cost at other -- at our other campuses.

The second part of the move consisted our move-related expenses. These which totaled about $4 million include the cost of moving the Utilimaster to Bristol and the reach to the Charlotte campuses. These costs will be incurred evenly over Q3 and Q4, and will be -- actually, they will be incurred evenly from Q2 through Q4 and will be called out as restructuring charges.

Finally, the third component is some capital spending which will total approximately $8 million. This includes the cost of improvements to the Bristol facility and new equipment includes the modern paint line to improve the quality of our finished vehicles.

In my discussion of operating results are present both adjusted results that exclude the impact of restructuring charges as well as our results reported under GAAP. A reconciliation of our adjusted results to GAAP can be found in our first quarter 2012 earnings press release.

In our first quarter results, the cost of goods sold includes a restructuring charge of $3.6 million mainly resulting from the impaired asset value of the Wakarusa, Indiana complex. The resulting charge reduced our reported gross margin under GAAP by 300 basis points. Excluding the impact of this charge, our cost of goods sold was 14.6%, up from 13.6% in the year-ago first quarter. Including the restructuring charge, our gross margin percentage was 11.6% of sales.

This performance shows where we are headed in terms of our gross margin percentage and is approaching the 15% to 15.5% gross margin we targeted in the full-year guidance we shared last month. We are making progress in margin improvement while we have more work to do in terms of leveraging incremental sales and higher margins.

Part of the issue at Utilimaster stems from the late launch of the Reach product. Because the launch of Reach was delayed, sales have lagged our initial projections. It's likely to be the case at least into 2013 since fleet customers typically evaluate new vehicles for several months before placing additional orders. For 2012, we expect to ship about 750 to 1,000 Reach vans and approximately double that number in 2013.

In conjunction with moving the Reach production to Charlotte, we are working to modify the design of the Reach to make it easier to assemble and are changing some part specification to reduce cost and improve manufacturability. We are receiving positive feedback from fleet customers, indicating we got the basics right with the Reach and that we expect some follow-up orders from all vehicles.

We also posted a restructuring charge of $1.8 million in our SG&A line. This charge is primarily related to the write-off of equipment at Wakarusa, plus cost related to the move to Bristol. This charge raised our operating expense as a percentage of sales by about 150 basis points. Excluding the $1.8 million charge yield operating expenses of 12.9% as a percentage of sales. This compares to the first quarter of 2011 operating expense of 15%, great improvement. Including the restructuring charge raises our operating expense as a percentage of sales to 14.4% for the quarter.

On an operating basis, you can see that we are getting close to our targets for the year. With some additional volume, we believe we can reach our targets and make further improvements throughout the year and into 2013. This in turn gets us closer to our [17-116] plan that we are targeting for 2014.

For the quarter, adjusted net income was $2 million or $0.04 per diluted share, which is a net loss of $900,000 or $0.03 per diluted share. Including the $5.4 million in restructuring charges that we incurred during the quarter, we reported a net loss of $2 million or $0.06 per diluted share for the quarter.

We ended the quarter with $39.4 million in cash, up from $31.7 million at the end of 2011. We made further progress in improving accounts receivable collections and reducing inventories during the quarter, allowing us to free up more cash. Compared to the prior-year period, our days sales outstanding receivables declined to 32.7 days from 37.9 days. So we had another quarter of excellent balance sheet management. We expect to enter the heavier investment portion of the Bristol Project in the second quarter of this year as we described earlier.

In 2013, a new set of emission standards for diesel engines goes into effect. To avoid production disruptions, a certain number of pre-2013 engines must be purchased and used in production until we re-engineer our chassis to accommodate the 2013 engines. This means we'll need to pre-purchase 2013 engines in larger numbers than we normally would hold. We believe we will invest approximately $12 million to $15 million in the fourth quarter of this year to purchase those engines.

As we produce and sell vehicles, we will work off this inventory of engines and convert the inventory into cash once again. By mid-2013, we expect to have our engine inventory cleared out and most of those receivables returned to cash. We will keep you posted on our expectations for our cash balance but emphasize that we project Spartan to remain in a net cash positive position throughout the year and continue to maintain a strong balance sheet. We also expect to have sufficient cash and borrowing availability to fund future growth initiatives.

Finally, as most of you know, we've provided some guidance for 2012 back in mid-March. We believe that guidance is still accurate. To a fresher memory, we project revenue growth in the mid-single digits, gross margin in a range of 15% to 15.5% for the year, and operating expense in the range 12% to 12.5% for the year excluding restructuring charges or other non-recurring items.

We expect each quarter in 2012 to have higher sales than its 2011 counterpart. As we progress through the rest of the year, we'll provide further updates.

Now, I will turn the call back over to John for his closing remarks.

All right, Joe. Thank you very much. As I stated on our last earnings call, I expected Spartan to show improved operating results in the first half of 2012. We did exactly that with our first quarter results. I want to emphasize though that although we are pleased that Spartan was profitable during the first quarter of 2012, we know we are not where we can be and we must continue to execute our plan.

Our results show though, we are making progress. We are confident absolutely we can improve our operating performance and margins in future quarters as we execute the plan and deliver profitable growth. Our plan to continue growth is centered on alliances, acquisitions, inorganic growth, and we are making great progress in several areas.

In terms of alliances, we first entered into a relationship with Isuzu to assemble the N-Series trucks. That relationship is going absolutely great. And that relationship, while working very well, has also taught us a great deal about building more standardized vehicles in higher volumes at lower costs. More recently, we announced new relationships Renault Truck and Gimaex, two leading companies in their respective fields.

We've also made several acquisitions in the past couple of years, including Utilimaster and Classic Fire, both of which have been integrated into Spartan and are contributing significantly to our profitable growth. We expect organic growth to make a greater contribution this year, as evidenced by the 13 market-changing ER innovations at FDIC. At FDIC, there was not another company in the emergency response industry that demonstrated greater leadership than Spartan Motors, been in the industry since 1985, by far the most outstanding show and it is absolutely amazing the bounce we have gotten from that.

Our backlog in ER has increased and based on the reaction to our new product introduction at FDIC, we expect to see above-market growth in 2012 versus 2011 from an industry perspective. But we also need to execute in our other markets from an organic perspective to drive growth and we are in the process of doing that and will be unveiling those plans and those innovations as 2012 moves on.

In summary, the first quarter was another quarter of operations moving in the right direction. I wish to give thanks to all the Spartan team members out there. We've also made some strong strategic moves in terms of our new alliances with Renault Trucks and Gimaex, our Utilimaster relocation, and our initiatives at Spartan ER. Again, I wish to give thanks to all the Spartan associates and partners in moving forward with those initiatives. We look forward to the second quarter and accelerating profitable growth as 2012 moves on.

Now, we'll be happy to take your questions. Thank you very much.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Walt Liptak, Barrington Research.

Hi, thanks. Good morning, guys.

Good morning, Walt.

Good morning.

A nice quarter guys and especially on the cash flow. And so I wanted to ask about kind of the sustainability of the cash flow, you talked about the $12 million to $15 million of inventory build later on in the year and with the relos going on that the reductions to inventory, how are you thinking about working capital accounts, including inventory next quarter and into the rest of the year?

Yes, I think you caught on the right big items, Walt. This is Joe, by the way, I think you caught on the right big items when you think about cash and you got my point from wanting to bring up those items as well too. While we have seen great growth in cash, we are continuing to manage some of the working capital items. So we are continuing to see the inventory come down a bit as we go through the year. We've got a little bit more room. We have to take the inventory levels down. But we have made great progress.

I think what you're going to start to see though is our cash balance will come down as we go through the year, second, third and fourth quarter, as a result of primarily of the Bristol cost. So you've got all the move-related expenses in capital costs that I described. And then, also the engines, the pre-buy of engines as we have done in the past will occur primarily in the fourth quarter. So what you will see is our cash balance [steadily should] work itself down a bit in the second, third and fourth quarter. And then obviously, as we sell the transition engines through the first quarter, you will see that bump back up again.

Okay. And the engine inventory build, I'm not sure I understand why you are pre-buying them. Are you buying Tier 4 engines? Are there Tier 4is that you are going to buy?

Actually, Walt, what we do, and this is John Sztykiel, very good question, but it's not just us but a lot of companies do it. Not everything works the way it's supposed to always work in a perfect world and we live in an imperfect world. So between all of the suppliers bringing on the new emissions platform and then dealing with the OEMs that receive the chassis, the vehicles, the products, et cetera, we have to carry engines to ensure a good buffer over a period of three months to six months.

So the reality is that they're going through this for the last 10 to 15 years, if you try to do everything where on this day, you end and that day you start, and also align with the OEMs who you supply product to, you'd probably have a train wreck at the end of the day. So what we've just learned over the years is we carry a buffer of engines and it allows us to sequence the new products in line with when the OEMs are able to receive the products.

So, yes, I guess and we don't have to go into it right now, but what is the change to the 2013 engines, because 2010 emissions is we are well into that, right?

Right. It's just another set of electronics and configurations which improve the quality of the air. I mean, the reality is in a lot of cities in North America, the engines will be producing cleaner air out of the exhausts than what's in the city in and of itself.

Okay. (multiple speakers) I guess switching topics to the emergency business, the change that you made where your Emergency Response group, the backlog grew there and it was stable in chassis. As you become more of an OEM, as you're going to be more of an OEM supplier, won't compete with some of your fire truck chassis customers?

Well, the reality is we are very focused on the Spartan brand name as a complete vehicle, Spartan ERV. And in some respects, one could perceive that we would be competing with our customers, but the reality is the Spartan chassis, it's so strong and we are not leaving the OEMs who we currently supply product to and because Spartan has one of the strongest brands out there actually, our plans today are more affective than what they were three years ago because we're working with our other Spartan chassis OEM customers out there and they're leveraging around the strength of the Spartan brand to pursue the other leaders in the emergency response marketplace.

So what's interesting is, of the custom chassis at the show, Spartan was under 36% of all the vehicles out there, there was not another custom chassis lineup that was close, that had to that kind of market penetration from a custom chassis perspective. So in reality, and that's one of the reasons why we are seeing the chassis backlog grow because we are actually working smarter, more effectively to line their strengths around the strength of the Spartan brand from a chassis perspective and we're gaining market share from the larger companies in the marketplace.

Okay. Okay. Good work on your transition. I'll get back in queue and let someone else do a few more questions.

All right. Thank you, Walt.

Thanks, Walt.

Joe Maxa, Dougherty & Company.

Yes. Hi, guys. This is [Ash], for Joe.

Good morning, Ash.

Good morning.

Yes. I had a question regarding your Utilimaster orders and the timing of those. From what we expected, we expected a stronger first quarter and it was sequentially strong, but what would you expect for second and third quarter for Utilimaster? Would it be in the $50 million range or -- because the backlog has come down sequentially and year-over-year?

Well, Ash, this is Joe Nowicki. And the backlog being down year-over-year, we will tackle that one first and we will get in a little bit to our thoughts on Utilimaster going forward. The backlog down year-over-year, if you recall, last year in the first quarter, we had some really significantly large orders that kind of came into play as a result of couple of our key significant fleet customers on the packaged delivery side. That all happened in the first quarter that drove the Utilimaster volume really high in the first quarter of last year. So that's a piece which was unusual last year, that wasn't here in the current year. As we've said in the past, a lot of the Utilimaster orders can come in kind of lumpy in phases, right. You get these big project orders that come in at different times.

Right.

So that wasn't here in the first quarter this year. But let's talk about Utilimaster then going forward for the full year. We're still anticipating seeing a great year for Utilimaster year-over-year, 2011 versus 2012. If you look at the growth there, we've had great growth in the first quarter year-over-year. For the full year, it won't be that same level, but we're still anticipating growth being in the high-single digits in our Utilimaster entity year-over-year.

And you're talking about revenue, high-single digits?

Correct. Revenue growth, high-single digits on a year-over-year basis at Utilimaster.

Sure. Joe and John, maybe you can -- can you talk about this aftermarket parts for Utilimaster was quite strong and quite frankly way above our estimates. And what is in there in the aftermarket parts and is there any one-time items or is there -- is it strong because of strong product sales? How do we model that going forward?

Well, really aftermarket parts, I'm not sure if you can model it going forward strictly because you work with a variety of different customers on vehicles that are already in the field. There were some very good drivers to the aftermarket parts at Utilimaster. One, the keyless projects by UPS; second, a variety of projects working with Cintas on their safety load; and third, shelving relative to FedEx vehicles and other vehicles as we move forward.

I think if there is something, Ash, which you bring up which is very positive about Utilimaster. And again, it's going to be hard to model. But what Utilimaster is demonstrating and illustrating is that there is revenue, there is value to be gained after the vehicle is shipped and after it's been serviced three to four to five years. And so now that they are having to some success, they're now working with a variety of other customers because remember, they've got over 125,000 vehicles in operation every day in North America. So they're working with a variety of other customers that develop the same kind of initiatives. So it was very, very positive. Do we see other opportunities? Absolutely.

I think it's difficult to model as we sit today because they are at the beginning stages. They've only been into it really for about the last 12 to 18 months. But what you're seeing from Utilimaster is not only, as Joe said, is there topline growth from just new vehicles going into market, but there is also top line increased profitability from a field service solutions model as we call it in Utilimaster on vehicles in the field today. Did I answer your question?

Yes, yes, sure. A good clarification. Thank you. I actually did have one quick clarification before I jump back into queue. For the Reach guidance, did you say 750 to 1,000? Did you increase the -- because I -- from the last conference call in mid-March, you had 500 to 1,500. So did you increase that to 750 to 1,000 and did you say double in 2013?

I don't believe we increased. I think that was the same guidance we gave before of 750 to 1,000. But yes, you did hear correctly, next year in 2013, the Reach volumes should double from the current-year levels, that's correct. And one of the reasons, Ash, is it is an exciting product, a market-transforming product, as I mentioned earlier. We are about a quarter behind, but there is so many great things around the product. It looks great, large queue capacity on an extremely durable chassis, improved fuel economy.

So again, our excitement around the product is probably greater than what it was 12 to 18 months ago. But we are also very, very focused on delivering high-quality products to market because we know in our industry, word of mouth, especially just physically but also through social media, is probably one of the best marketers of your product. So we're taking a very, very methodical and diligent approach to make sure we deliver high-quality products to the marketplace.

Hey, Ash, this is Joe. One other kind of clarity that I wanted to add to your earlier point around the APA business out of Utilimaster, just to give you a little more depth, we did have a great first quarter on it. Those projects John mentioned, came through [Stellar]. Do we expect that to continue at that high-level for the rest of this year every quarter? No, absolutely not. We did have some good one-time sales in a few of those programs. So you'll probably see it come down as you go through the remainder portion of the year. But as John described, will this continue to be a big part of our business at Utilimaster going forward? Absolutely. So there is several new and other creative ideas on there on APA which will help us in the future. But this quarter was unusually high and you won't see it recur in futures. Hope that helps.

Yes. Thank you, Joe. And I will jump back into queue.

Thank you.

Rob Kosowsky, Sidoti & Company.

Yes. Hi, good morning, guys. How are you doing?

Good morning, Rob. Good.

Yes, just had a quick question on the Utilimaster revenue guidance, you said high-single digits. So was that for just the truck sales component and not the truck sales plus the parts?

Full-year total revenues for the Utilimaster entity which would include both truck sales as well as the parts sales on a full-year basis 2012.

Okay. So really looking for like a pretty big step-down in one of the few quarters coming up, because if you just look at the last -- this quarter plus the last three quarters of last year, that gets you up 21%?

Yes. Traditionally, as you know, the fourth quarter is pretty low for us. So our fourth quarter sales at Utilimaster usually come down quite a bit and that won't be any different this year. (multiple speakers).

If I am -- if I just use 1Q like the revenue growth we saw in 1Q and I just assume no growth for the balance of the year, that still gets you to about 21% growth for the segment?

Right. That's correct. So what I will draw attention is, remember last year during the third quarter, we had a huge revenue period for Utilimaster based on a lot of the truck sales that went through and that was primarily that number, the 2011 tax advantage that there was. So we had a huge amount of orders that went through, that was the backlog that was up in the first quarter of last year, drove huge vehicle sales in the third quarter of last year at Utilimaster. That's a quarter which we won't see continue as high the pace year-over-year.

Okay. That's helpful. And then, do you have the one-time items by segment?

Yes. As a matter of fact, I do. So if I look at those restructuring charges by segment from our two segments, [with that] earlier, it's roughly -- the restructuring costs on the Specialty Vehicles segment are around $700,000 and the Delivery and Service Vehicles segment is about $4.7 million and that gets you your $5.4 million total.

Right, $700,000. And it's $4.7 million in the Service and Delivery?

Yes, the bulk of Service and Delivery was all the building impairment-related charges and of the $700,000 in Specialty Vehicles, that was primarily all reduction in force related costs.

Okay. Thank you very much and good luck with the balance of the year.

You bet.

Thanks, Rob.

(Operator Instructions) Walt Liptak, Barrington Research.

Hi, just a follow-up on that APA question. So if you've got fewer of these keyless things or shelving or whatever going in our second quarter in the back half, does that mean that gross margin will be down sequentially in the next couple of quarters?

From a Utilimaster's perspective, that's a correct assumption. But the other thing to keep in mind, as we get to later in the year, one of our gross margin drains this quarter was also Utilimaster with the Reach startup. So as we get through the year through the fourth quarter, we should get better at the Reach [projects] as well too, so that should give us a little bit of opportunity but overall your assumption is pretty fair.

Okay. And then, you brought that up in the press release too about the profitability of Reach. What were the start-up costs, like can you quantify it?

I can't quantify the numbers. I can give you a general kind of [sense still] of the items and it's really what you might normally consider with a startup, right. So it's inefficiency, then the build process from a labor perspective, as they don't have the processes quite perfected yet.

As you recall, at the end of fourth quarter, we had 100 and -- I can't remember the exact number, 120 units or thereabouts which we didn't have shipped out because we needed to do some rework on quality. So all that quality work was done in January, that was a lot of rework labor that went into that product as well too. In addition to it, even from a materials perspective, we are still buying and we're still changing some of the material components as you would in some of these initial products and are working with our suppliers to get some of those cost down as well too. So we've several items in there Walt.

Okay. But it sounds like -- at least the inefficiency could be out of the way already and does profitability for Reach come up at least like a breakeven or something in the second quarter?

Well, in the second quarter, keep in mind, our volumes in the second quarter will still be low. We won't have as many going on. Towards the end of second quarter, we will also be moving the Reach product to Charlotte. Remember how we described we're taking the Reach product, we are going to move it from Wakarusa to Charlotte to tie in with the rest of the work that we do for Isuzu. So it will all be part of our Isuzu kind of campus here and the Reach is going to move. So the volumes will be pretty low in the second quarter and it'll be some of those costs to [shipped] around.

And then, the third quarter will be the startup here. So really by the time we get to fourth quarter is where you'll start to see some more marked improvement in the Reach [profile, of course].

I think one of the things Walt, and this is John Sztykiel, just a couple of comments. One relative to a consolidated gross margin, while you have the gross margin prior to restructuring charges in Q1, we're still on track for gross margin. If you looked at a range of 15% to 15.5% for 2012. So as the year moves on, even though some of the aftermarket parts or field solutions, the keyless will drop off at Utilimaster, we will be building more emergency response products, plus we'll be doing a -- executing a variety of other initiatives to improve the gross margin. Okay. So as you look at us as a year, we still except -- expect to see gross margin improvement versus 2011.

Second, relative to the Reach, I think as Joe said earlier, would agree with his comments. One of the reasons we are moving the Reach up to here is not only is it on an Isuzu chassis but the N-Series which has been a great product for us. We are assembling basically 21 units a day with 49 people and 35,000 square feet, not a lot of variations. And so we've got a demonstrated success with a very, very good return on both time and dollars in that project, and it's not going to happen overnight in the third quarter, but it'll be under the same operations team up here in Charlotte and the Reach does not have as much options on it as some of the larger other Delivery and Service Vehicles which Utilimaster offers into the marketplace.

So one of the reasons we are moving couple -- I mean really the two basic reasons we are moving the Reach is not only to align it with Isuzu but also to align it with an operating group that's done an absolutely great job building a very highly profitable product with Isuzu in making sure we get the same results from that from Reach.

Okay. Yes. Thanks for that color and that's a good point. And I would like to switch gears to back to just the Utilimaster backlog and I understood the reasons, Joe, that you talked about for it being down, but from a big-picture ACT data, when it came out in March, it was weak and there has been some weakening in heavy truck and medium truck kind of industrywide. Did you see some of that, just where the customers started getting cautious and slowing some of their order activity?

Walt, I'll give you two perspectives. One of our -- I don't know as much weakness we saw on the customers concerned lowering their order activity. Lot of the weakness we saw was somewhat expected because of that departure of the tax incentives. We saw a lot of folks last year really beef up their orders on the Utilimaster vehicles because of that 100% accelerated depreciation tax advantage. We knew we had several large orders of trucks go through the last year that would hurt us in the current year on the truck sales at Utilimaster. In that part, we have seen and have experienced, not as a surprise to us. I don't think though outside of that, are we seeing anymore consumer demand on it.

And the other thing to note, Walt, in that is relative to Utilimaster, they did not feel -- fill all the orders they could have in 2011, not just from a large fleet perspective but from a smaller fleet perspective. One of the constraints we had in Wakarusa was in the paint shop area. And so, while I'm really pleased honestly with high-single-digit forecasted growth in 2012 versus 2011, we would expect stronger growth in 2013, one around the Reach but also two, we will be taking away one of the bottlenecks of Wakarusa, Indiana and that is the paint shop.

And if there is something that clearly separates Utilimaster from other vehicle manufacturers and the Delivery and Service marketplace is their ability to customize more of the vehicles and that is very attractive to the marketplace. And I don't think -- I think something we did not do a very good job of in 2011 was indicating that we actually turned away orders at Utilimaster, because we physically could not get them through the system and so in 2012, remember, we are going to be moving it in Q3 and Q4. So high-single-digit growth is very, very good when you are moving 40% of your business and as we look at 2013, we will have Reach, but also we will have eliminated the biggest major bottleneck at Utilimaster and that is the paint shop.

So honestly, I felt very, very good with the market in the high-single-digit growth which we are forecasting in Delivery and Service. Do we expect that to be greater in 2013? Absolutely, because we will have a great product, plus we will also be able to supply more with the market demands.

Okay. All right. Thanks, guys.

Thank you, Walt.

(Operator Instructions) Rhem Wood, BB&T Capital Markets.

Hi, a nice quarter, guys.

Good morning, Rhem.

Good morning, Rhem.

Good morning. So I just want to make sure I got something right. Is your guidance for the Reach, is it 700 to 1,000, or 700 to 1,500, what was that? I think I missed that.

750 to 1,000.

Okay. And can you talk a little bit just about what you're seeing from the Isuzu dealerships in particular? And maybe, what kind of buyers you're seeing out of there, what they (multiple speakers)?

Okay. Good question. This is John Sztykiel. What we're seeing from the Isuzu dealers is, one, they really like the product. Second, they would probably like it faster. Okay. Third, the type of buyer is, for example, shipped about 16 units to a firm on the East Coast, where they do automatic powerwashing of vehicles, buildings, et cetera. And the reason they switched over from a more commercial van kind of product was because of the durability of the chassis and the body. They had 16 vehicles in their fleet. They carried heavy equipment in the vehicle and the equipment moves around and after two or three years, the body is short, the chassis is short, and they got to go out and buy another $35,000, $40,000 vehicle.

For example, one of the things UPS has talked a lot about on the Reach is they love the durability of the chassis and the body. So our challenge with the Isuzu dealers is they have to find and develop more accounts like that and the training, the go-to-market process, very excited about how Utilimaster is working with Isuzu and vice versa. But what makes this product attractive to a commercial small fleet individual is the durability of the chassis, the durability of the body, the ease of entrance and egress, and the improved fuel economy. This is a vehicle again that has 300,000 -- 350,000 life cycle miles for both the engine and by much longer than that on the chassis, the body, much longer than that. So the kind of buyer will value durability, fuel economy, ease of entrance and egress, and honestly, it just looks great.

That's great color. And on the fuel economy, are you getting with the initial test reported, the 35% fuel economy?

Well, right now, collectively as a whole, are we getting what the test reported, the answer is no. Part of it's dependent upon the drivers, okay, who operate the vehicle. Second, there is some work that needs to be done between Isuzu and Utilimaster to improve the fuel economy of the vehicle even more. Are we within the range of where we'd like to be? We are very, very close to that, but we are not exactly where we want to be yet and that's something which we're working on.

Okay. Give me, I mean, on average, what kind of fuel economy are you getting? How long do you think it will take to get to the 35% level?

Well, again, we are probably at the 35% level depending upon the chassis you're comparing it against. Okay. So if I look at a typical delivery and service chassis today, Rhem, that uses a 5.9-liter engine, we are getting that 35% fuel economy. Okay. I guess my answer I gave you a few moments ago was against a smaller kind of product where we want to improve the fuel economy even more, so we can be more competitive in the commercial van part of the marketplace.

So against the 5.9, a typical delivery and service chassis, which Utilimaster uses today, yes, we are getting that 35% plus improvement in fuel economy against other products in the marketplace to increase the market attractiveness out there, we're not satisfied with the fuel economy. So we're pushing even harder to improve it even more. And does that give you a little bit better understanding?

Yes, that's good. So I think what you're talking about is you maybe against the spread or depending on how [it's spec], but yet, you are going to beat that on durability and life cycle and other things, right?

Absolutely. And I [try to] answered -- asked that question because it gets big -- again, the Reach looks great. It is a very, very durable body. It's a very durable chassis and what we've been told by a variety of people, whether be Sprinters and other commercial vans, you get the fuel economy up even more and now you fall into our value proposition where it makes sense for us to buy it. So, it's like, okay, while this is good, if we do this, this and this, we can get even more sales or touch other parts of the market we didn't think we could touch quite so easily, so you hit the nail right on the head.

That's great color. And then, last, anything new on the military side that's going to kind of stay at this run rate or anything that works there?

Rhem, this is Joe. No real new news on the military side. We think it'll probably still continue at the run rate that we're seeing. As we described before, the market conditions have been pretty soft there. We -- at this point in time, we've got a few opportunities that we're working through, but we don't see any significant changes in that business currently.

Great. Thanks for the time. Keep up the good work.

Thank you, Rhem.

Rob Kosowsky, Sidoti.

Yes. Hi, Joe. Just one last question. Do you see the operating losses in the Specialty Vehicles segment narrowing, I guess, as we get through the year?

A good question. So in regards to the Specialty Vehicles segment, what really drove that operating loss was on the emergency response side of the business and really it was volume related. If you looked at the volume that went through there, as we talked about it being down 16% kind of year-over-year on the ER side.

And if you look at the backlog, which is up as we described it, yes, the more volume goes through there, it'll offset more of the fixed overhead cost that we have associated with that business, plus the changes that we described in our ER business that John went through around really relooking at Spartan ER in total. All of that will help to change our cost structure; with the additional volumes, will drive a much increased level of profitability as we go through the year, yes.

I think Rob, this is John Sztykiel. Well, Spartan ER, and we used the term FDIC was a lot about the brand, the sales, and driving that part. However, at the end of the day, it's good defense that wins. And now, as we move it into the second half of the year, we have a lot of momentum, very good initiatives in place on the top line side of life. Now, we're going to become very, very focused on the good defense and that is reducing our breakeven point, reducing our operating cost as we look at the synergies, the process duplication and how we can eliminate those within emergency response.

All right. Thank you very much and good luck.

Thank you, Rob.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. John Sztykiel for any closing remarks.

Again, just want to say, thank you very much for your time. Want to say thank you to all the Spartan associates. As I mentioned in the wrap-up or the summary, while we're pleased, we are not satisfied. And as we move past transforming the organization, we are now very focused on accelerating profitable growth and we look forward to executing that in 2012. Thank you.

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