Shyft Group Inc (SHYF) 2012 Q2 法說會逐字稿

Good morning and welcome to Spartan Motors' Second 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 disconnect at this time. I would now like to introduce Greg Salchow, Director of Investor Relations and Treasury for Spartan Motors. Mr. Salchow, you may proceed.

Thank you, Andrew. Good morning everyone and welcome to Spartan Motors second quarter 2012 conference call. I'm joined today by John Sztykiel, President and CEO of Spartan Motors and Joe Nowicki, Chief Financial Officer. I assume all of you have seen today's earnings release on the Newswire and Internet. In addition to our earnings release, we also have a press release concerning an order for 150 new Reach vans from UPS. This order was mentioned in our June 25, 2012, update on the Reach.

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 the 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.

Also, please note that during the question-and-answer period, we will take one question and one follow-up per analyst, that will 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.

Finally, John Sztykiel is joining us on the call from Denver where he is representing the Company at the International Fire Apparatus Show. Now I'm pleased to turn the call over to John for his opening remarks.

All right. Thank you, Greg. Good morning everyone and thank you for joining us on today's Spartan Motors second quarter 2012's conference call. As you know, from reading our press release, our latest quarterly results showed a great deal of improvement from the second quarter 2011. Results also demonstrate that Spartan continued its momentum from the first quarter of 2012 through the second quarter with Spartan reporting greater profitability of $0.08 per diluted share excluding restructuring items, growth in orders, and growth in backlog to $173.3 million.

We ended the second quarter of 2012 on a positive note. And enter the second half of the year in a stronger competitive position than at the beginning of the year. At the same time, all of us are aware that the global economy and financial markets can change very, very quickly today leaving me to be cautiously optimistic about the environments in which we operate.

For the first time in over a year all of our business units showed improvement in their operating results. Revenues were up across the board during the second quarter of 2012 and our businesses converted that revenue growth in the earnings growth as well; simply results. Simply put, our blended growth strategy of acquisitions, alliances, and organic innovations is delivering the revenue growth and the focus on operations is improving profitability.

The main points I and we hope you take away from this morning's call are Spartan's growth in revenues and earnings plus higher orders and order backlog throughout the Company. The major factors behind Spartan's growth are product and industry leadership and delivering positive results by executing our strategic and operational plans.

Joe Nowicki will talk about the quarterly results in greater detail, but I want to mention a few of the highlights especially in our delivery and service, and Emergency Response businesses. You'll remember that in the second quarter, we combined Crimson and Classic Fire in the Spartan ERV, which stands for Spartan Emergency Response Vehicles. We also named Dennis Schneider to lead Spartan ERV and Spartan ERC, our Emergency Response Chassis Business. So we have now one combined entity, Spartan ER. These moves along with our new products grabbed a lot of attention for Spartan's Emergency Response businesses in generating growth in revenue and the order backlog; simply results.

Spartan's ER Chassis business grew by $5.8 million from the second quarter of 2011 to 2012, while ERV sales were up $1.7 million for the same period. Combined ERV order backlog in the Vehicle group at June 30, 2012, was up by $3 million to $83.3 million. While ERC, the Chassis group, the order intake in June was the highest we've seen in the last four years. Higher orders in ERC is especially encouraging since it indicate that despite budgetary pressures, municipality still recognize the advantages and total value of a custom fire truck chassis.

We're doing a lot of things right in our Emergency Response businesses and our customers are noticing, the market is noticing. We will continue to execute the plan, which is to develop and bring market innovative new products that leapfrog the competition and leave them behind. That's what we did with our Spartan Advanced Protection System or APS as we call it.

TelStar, a new high articulated aerial in a new low-cost, high-performance fire truck, the 21 ST. We also expect our alliance with Gimaex which brought us the TelStar to be a large growth driver in 2013 and beyond.

Let me talk briefly about our Advanced Protection System or APS and how it leapfrogs the competition in safety with innovation that is very, very difficult to replicate. First, we partnered with Takata, a world leader in safety in the automotive industry, to create an integrated system that offers unprecedented levels of safety in Emergency Response Vehicles. APS offers more airbags throughout the cab, the only full-side side curtain airbags in the industry. Other industry firsts includes active pretensioning seatbelts, outside sensors to determine the type of the crash event, driver's side knee airbag in addition to passenger or officer's side knee airbags. And the first APS units are scheduled to be shipped to OEM starting in late Q3, early Q4. And why is APS significant; there is over 16,000 accidents a year going to or from the scene in an Emergency Response Vehicle. Safety is a huge issue in Emergency Response from a vehicle perspective.

Briefly over to Recreational & Specialty Chassis reported much improved performance during the second quarter due to revenue growth as well as the operational improvements we implemented during the first half of the year; my compliments to all the associates. RSC posted higher revenue for the second quarter of 2012 as well as sales and order intake exceeded our expectations.

At June 30, order backlog stood at $10.9 million, its highest level in nine months and $3.6 million higher than at June 30, 2011. To understand why the Recreational & Specialty Chassis group is showing revenue and order growth, we believe it's because we are providing what the customer wants; compelling, innovative products. This was cited in an RV industry news magazine story dated, June 27, 2012. In the article, our customer, Entegra Coach, credits their use of Spartan Chassis as one of the major factors why they have more than tripled their production over the past year and are currently sold out for the foreseeable future. I would say that is absolutely great.

Now between us and them, we have to accelerate production. We are proud to be a part of their success and look forward to helping them grow in the future. We believe there are other opportunities for growth in the RV industry as well as it is a $7 billion plus industry, one that is growing and we are committed to what has been historically an important contributor to the Spartan Motors' business model. We are investing in the RV sector working with our current customers and potentially new customers to create new products and drive incremental growth.

Late in the second quarter and let's move over to delivering services; we alerted you that we encountered some ongoing launch issues with the new Reach delivery van. We've taken step to correct these issues and -- but these issues deserve some clarification. Prior to the Reach van, delivery vans have been viewed as tools by their owners.

The view of the walk-in van as tools continues to be the case with our current products. However, we believe buyers of the Reach expect a higher standard of fit-and-finish to convey the underlying quality of the Reach and to enhance their own brand; the owners of the Reach vehicle.

The Reach has performed very well in real world usage meeting the challenges of operating under different climates and duty cycles. Because of this performance, as Greg indicated earlier, we announced a new order of 150 Reach vehicles from UPS. In addition, in July of 2012, that's this past month, we received an order for an additional 100 Reach vans from another major fleet package delivery carrier.

As you can see, the Reach is meeting the needs of our fleet customers, but we're taking the necessary and deliberate steps to ensure it also meets the appearance quality expectations of our buyers who are also the end users of the Reach. Simply the Reach has higher level of fit-and-finish and attractive looks; our key differentiators of the vehicle and are viewed as important to enhancing the customer's own brand image.

We also mentioned we have relocated Reach production to Charlotte, Michigan. That was part of our plan all along as everything around Isuzu will revolve in Charlotte. As we mentioned in our press release in June, we have also hired a very experienced professional, Frank Faga to lead the re-introduction of the Reach. Frank has extensive automotive experience in developing and launching new products, having worked on over 25 new product launches and has worked with automakers including Chrysler and Daimler-Benz. He has a long track record of success. He brings the skill set needed to ensure that Reach meets all of our targets for engineering, quality, cost, and delivery; EQCD as we call it and we are making progress.

Restarting production in Charlotte is on track. We are moving the ball in the right direction and we are on a deliberate pace of shipping 500 to 750 high quality units in 2012. Let's move over to keyless, as we continue to discuss delivery and service. The keyless entry product was a strong contributor to Utilimaster's results during the second quarter of 2012. Keyless accounted for over one-half of Utilimaster's aftermarket parts revenue for the first half of the year. While keyless was a great product for Utilimaster, the program was also completed in early July. So Utilimaster's aftermarket unit will not have the same impact on our profitability as in the first half of the year.

Although Utilimaster has developed some new aftermarket parts and field solution initiatives, keyless was an exceptional product that cannot be easily replicated. As you are forming your expectations for the second half of the year, keep this in mind and keep in mind that DSV's aftermarket parts units will be a smaller contributor to our consolidated results, but also remember that our other businesses are generally showing improvement in their operations as well, in essence we are becoming more blended, a little bit more diversified, so we're not dependent on one market or one particular item.

What is important to note and to give you an idea of the opportunity with Utilimaster in delivery and service, sales are on pace to increase by more than 50% from 2009 revenue of approximately $111 million. Obviously, we're clearly outpacing the growth in the economy. Utilimaster is simply the link between businesses and consumers and the beneficiary of the growing popularity of Internet shopping with a bright future ahead of it.

In closing, before I turn it over to Joe, I'm pleased with our performance during the second quarter of 2012. Our execution was generally good. Our products are generating a lot of customer interest, resulting in orders, the growth in backlog, the growth in order intake, very, very pleasing, very, very positive. We've done a lot of work to strengthen and promote the Spartan brand. We're now seeing that work pay off as our businesses report higher revenues year-over-year, while our order backlog has increased since March 31, 2012.

Now, I'll turn it over to Joe, before I wrap it up with a small closing, we get into questions. Joe?

Thanks, John and good morning everyone. To follow-up John's remarks during the second quarter of 2012, our teams performed very well. While we still have opportunities for improvement, our list of goals and targets achieved outweighed our lists of areas to improve.

I'll cover some of both as we review our performance during the quarter. Spartan's revenue during the second quarter of 2012 was up 15% from a year ago to $114.4 million. All of our business units except for defense posted revenue growth compared to the second quarter of 2011. Both Emergency Response Chassis and vehicles recorded higher revenue in the second quarter of 2012 compared to the same quarter of 2011.

Our delivery and service vehicles business had another solid quarter with both vehicle sales and revenue from aftermarket parts and field service solutions showing gains in the quarter. As John mentioned, sales of our keyless entry product boosted aftermarket part sales substantially during the second quarter of 2012, rising to $22.7 million from $15.8 million in the year-ago second quarter.

Vehicle sales increased to $25 million during the second quarter of 2012 from $23 million a year ago despite no additional sales of the Reach. DSV still booked higher revenue in the second quarter of 2012 due to higher sales of traditional walk-in vans and truck bodies as more of our customers add to their fleets or replace older vehicles. The Recreational & Specialty Chassis unit had a better second quarter than expected.

Order bookings in production were above expectations during the second quarter as the RV industry showed signs of a slow recovery, as John mentioned in his remarks.

The gross margin for the second quarter 2012 increased to 16.4% of sales on a GAAP basis compared to 12.7% in the same quarter 2011. Excluding the $600,000 in restructuring charges due primarily to the [missed] Bristol move, Spartans adjusted gross margin in the second quarter of 2012 was 16.9% of sales versus 14.5% in the second quarter of 2011. In 2011 that excluded a $1.7 million in restructuring charges.

Higher sales which rose 15% from the second quarter of 2011 in most business units helped the Company leverage costs. Sales of aftermarket products at Utilimaster also helped raise the gross margin during the most recent quarter.

Expense control during the quarter ended June 30, 2012, was also quite good with operating expenses declining both in terms of dollars and as a percentage of sales. Operating expenses for the second quarter totaled $14.9 million or 13% of sales, down from $16.3 million or 16.4% of sales a year ago.

Operating expenses for the respective periods include restructuring costs of $100,000 and $1.1 million representing 0.1% and 1.1% of sales.

Research and development expense during the second quarter of 2012 totaled $3.2 million, which included spending to bring to market Spartan's Advanced Protection System, as John described.

In the second quarter 2011, R&D expense totaled $3.6 million. Spartan ended the second quarter of 2012 with net income of $2.4 million on a GAAP basis or $2.8 million when adjusting for restructuring charges. Spartan earned $0.07 per diluted share on a GAAP basis and $0.08 per diluted share on an adjusted basis.

Balance sheet management is always a major priority for us. At June 30, 2012, Spartan had a cash balance of $33.3 million, down from our balance of $39.4 million at the end of the first quarter, but still above our year-end balance of $31.7 million. As I mentioned during our last quarterly conference call, Spartan will experience some demands on its cash during 2012. During the quarter, we had capital expenditures of $4.2 million mostly due to the Utilimaster relocation to Bristol.

Our accounts receivable balance increased by $7.5 million from March 31, 2012 to June 30, contributing to the increase with the timing of sales, which were more heavily weighted towards June in general and the latter half of June in particular.

Accounts receivable on a days sales outstanding, DSO basis, were up to 34 days at June 30 versus 32 days last quarter but still down from 37 days last year. Inventories however showed a year-over-year decline to $57.5 million compared to $61.7 million at June 30, 2011. Inventories also declined sequentially by $1.2 million for March 31, 2012, due to a relatively high proportion of vehicle shift towards the end of June.

Now looking at our expectations for the second half of 2012, we anticipate good performance but need to temper your expectations after a strong second quarter. As we mentioned earlier in the call, sales of our keyless entry product ended in July and there is no direct replacement on the horizon.

We do have safe load and shelving solutions in production, but the contribution from these will not replace our goals away with the end of the keyless program. Our order backlog at June 30, totaled $173.3 million, up from $135.7 million at March 31.

Our current backlog is down about $6 million from last year due to a decline in backlog in the DSV units but our specialty vehicles backlog is higher than a year ago. In fact our ERV unit has most of its production slots booked for the rest of the year.

You'll also notice that the motorhome chassis business backlog has increased, both relative to the first quarter and second quarter of last year. A combination of more RV and bus chassis orders over the past quarter leads us to believe that revenue in this unit may be about even with our 2011 units.

Combined with the turnaround actions we've taken earlier in the year, performance in RSC will be much improved over the prior year, although we would not currently expect a significant contribution to our overall profitability this year.

In our first quarter 2012 conference call, we informed you about the upcoming 2013 diesel emission standards. We will need to purchase a number of pre-2013 engines to use in production until we have engineered our chassis to accommodate the 2013 engines. At the end of the first quarter, we estimated that we would spend $12 million to $15 million in the fourth quarter of this year. We've since revised that estimate downward to approximately $10 million; all that we would spend during the fourth quarter. As we produce and sell those vehicles, we'll work off this inventory of engines and convert the inventory into cash once again.

In addition to the engine purchase, we expect to invest approximately $600,000 during the second half of 2012 to engineer our chassis to accept the new 2013 compliant engines. Other investments anticipated in the second half of 2012 total approximately $4.8 million; most of that amount allocated to the Bristol facility.

Our expectations for Spartan's financial performance during 2012 remain largely unchanged overall, revising our projected revenue growth rate up slightly to the mid to upper single digits while reducing our estimated gross margin slightly to a range of 14.5% to 15% for the full year with estimated operating expenses of 12% to 12.5% for the full year excluding restructuring charges or other non-recurring items.

Our overall expectations for the year then are essentially unchanged with additional revenue growth, offsetting a slight reduction in our projected gross margin. We expect revenue in the second half of 2012 to approach the first half of 2012 levels, but the second half of this year will not include as much higher margin aftermarket parts revenue at Utilimaster as we saw during the first half of 2012. I encourage you to keep that in mind as you develop your own models and expectations for the remainder of the year.

Now, John will conclude this portion of the call with his closing remarks.

All right, Joe, thank you very much. The message I hope you take away from today's call is that we are executing a plan that works, again in various challenging environments from a global perspective and even from a North American perspective, the growth is not easy. We are following our blended growth strategy to drive revenue growth while we also work to improve our operating efficiency to drive growth and profit as well. It's a simple, effective plan and it's working.

Our blended growth strategy focuses on acquisitions, alliances and organic innovation, all three. On the acquisition front, the contribution made to our results by Utilimaster which we acquired in 2009 shows what can be achieved when the company is the right fit for us and it's the right strategic decision to make.

As we have mentioned in the past, we've cash on our balance sheet and available borrowing power we can put to work if we find the right acquisition, and we are focused on doing exactly that. Alliances are another key part of our growth strategy. When we partner with another company to create opportunities both parties to grow and benefit, that is when an alliance makes perfect sense. We found such an opportunity with Isuzu. We found recently such an opportunity with Gimaex which help -- led to the development of the TelStar. As we look to the future, we expect the Gimaex alliance to provide more growth and opportunities in the future and that contribution to be of greater significance in 2013.

Organic innovation is something Spartan does well. You saw several new products and features during the second quarter as we unveiled Spartan APS, the safety system, TelStar, the new fire truck 21 ST among others. We are working on many more new product technology innovation throughout the Company and look forward to when we can share those with you at a future date. All three of these initiatives drive revenue growth. To maximize return on these new product, these initiatives, we continue to work to improving operating efficiency throughout the Company, especially in Emergency Response Vehicles, the ERV group. We made a good deal of progress with our RV chassis business as well. We have more work to do there and at other operations within the Company.

Let me talk about Utilimaster and the move to Bristol in a second. Those are benefits you should start to see as we enter 2013. Probably not so much in the first quarter, but more in the second quarter as we are moving the Utilimaster walk-in van business from Wakarusa, Indiana, to Bristol, India. This move represents a $4 million cost reduction opportunity that we are working to realize.

Finally, we are pleased with our second quarter performance is that Spartan is a healthier Company today than it was a few years ago with 60% of its revenues derived from non-government sources. We believe we are well positioned for the second half of 2012 but again, we remind you that the global economy is not entirely healthy and events can take an unfavorable turn in a very short amount of time. What's interesting is with these challenging times come opportunities. As society changes so do its needs for new and different vehicles. These changes are where Spartan finds growth opportunities entrenched. Though while the world is unpredictable, we are realistic, we're cautiously optimistic about the remainder of 2012 and we look forward to executing in the future just as we did this past quarter.

Now we will open it up to take your questions. Greg?

Okay. Thank you, John. Andrew, we're now ready to take some questions.

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

Thank you and congrats on a nice quarter.

Thanks Joe. Good morning to you.

Good morning. My question is on the Reach vehicle. It looks like you may have lowered your expectations on shipments for the year and I'm curious on what's your order intake spend this year and what your expectations are for not only this year, but next year as you've given those metrics in the past?

Sure you bet, Joe. We can give you some details on the Reach. John, you probably might be the best to kind of walk through some of those specifics on that.

Joe, as we look at the Reach, the Reach is really around five different factors when you think about an order intake perspective, operating efficiency, vehicle efficiency, durability, ease of repair and great looks. It is a revolutionary product. So in some respects the issues which we've gone through is not surprising. The good news is we have made significant progress. We have lowered our expectations a little bit this year.

So now we are on a path that deliver and ship somewhere between 500 and 750 units. As we look forward to 2013, we expect that number to grow in what I would call a positive way. I think it's a little bit too early to put percentages or numbers against that because -- and the reason I say that you've got a revolutionary product and we've now seen some very good orders from a couple of the very large package delivery carriers. Okay.

We've got product, which will be going out into the distribution group for Isuzu as it is right now and moving out in Q3 and Q4 as well. So, we are still at the beginning stages of the growth cycle. And so I would probably expect you're going to see a gradual rise up and as more people use the product, repeat orders will come in just as we just recently received one for another 100 units, okay. And then you will get word of mouth which will create new business and opportunities.

So, an answer to that, I know you would like something very, very specific, we're very positive about the Reach. We still believe that the product that will transform the delivery and service business. However, we're taking a very, very deliberate pace because if there is one thing I think we might have underestimated a little bit is how important the looks are. And you have seen the Reach and then you look at our aluminum walk-in van vehicle, I will tell you one thing which is clear about the Reach, we have people buying that product. And one of the reasons they are buying it, it is because it looks great. It doesn't look like the traditional aluminum walk-in vans or a truck body or honestly or a commercial van, it looks very, very good.

And so we underestimated the importance of the brand image, which is why we're taking this very deliberate pace, but the good news is I think our customer opportunity for us to grow the sales is wider, yet at the same time, we're being very, very deliberate in what we do, because every product is a word of mouth sales opportunities. So that is probably the best we can answer that right now.

Okay. Okay, great. My follow-up on the Reach is how much higher is the gross margin on that product or will it be when you are ramping production and then looking ahead a couple of years, what percent of your -- ballpark number -- of your total Utilimaster Vans, do you think the Reach can contribute?

In regards to the gross margin, I'll take that first question and then I'll lean over to John a bit on the second part of it, which was your question regards to -- it sounds like it's getting more cannibalization and how does that impact the market. So I think, John, you can handle that after.

Okay.

First on the gross margin piece, Joe, our gross margin piece Joe, our gross margin expectations haven't really changed on the Reach. Right now currently it's I mean it wouldn't be appropriate for me to give you a margin number now with volumes this low, we're in the learning phase, plus also we're just in the start-up phase because we just completed the move of the program from Indiana up here to Charlotte, in fact they are just running some of the first units through now getting the test done on them.

Our expectation on gross margins haven't changed. As we've said all along, we expect this to be much improved margins over the existing van today and a lot of it based on as we looked at how we produce and build the product and the materials to it, we changed around a lot the processes and the assumptions there. So our expectation is, we're going to be able to make some nice moves forward in the gross margins and the stepped market versus where they are at today.

And Joe, thank you very much, Joe Maxa. Relative to the cannibalization, relative to the current product, we typically look at a range internally of 20% to 35%. And the reason we have the range is for two reasons, one as mentioned earlier we are at the beginning stages of this, but also two as we've talked about on previous conference calls, once we go through the move of Bristol, or we move the operations from Wakarusa to Bristol, Indiana, we will also be going down a path of bringing the market in 2014, an evolution of the current walk-in van. One that will be lower in cost to produce, one that will probably be a little bit more attractive, and one that will be more compelling to the marketplace from an operator efficiency perspective.

So, what's nice is, we look at the Reach product line, it won't definitely cannibalize a certain portion of the walk-in vans to be in that range, it's somewhere from 20% to 35%. But it's also very focused on cannibalizing parts of what I would call the truck body business, but also cannibalizing parts of the commercial van business which is the Ford Transit, the Transit Connect, the GMC van, the (inaudible) vans, et cetera.

So, it's still a product of tremendous opportunity, but I think something which is important for everybody to known from a Utilimaster perspective, while Reach is important and a key part of our success, we will also be bringing to market in the 2014 timeframe an evolution of the current walk-in van, and to give you an idea how old the current walk-in van from a design perspective is, it's over 20 years old. So even though we've good result at Utilimaster today, they will improve with Bristol, but we're also very focused on updating the design, the lean ease of manufacturability of the current walk-in van and that should happen in the 2014 timeframe. Did I answer your question, Joe?

You did. That's helpful, thank you, and I'll jump in the queue.

All right. Thank you.

Robert Kosowsky, Sidoti.

Hi, good morning guys. How are you doing?

Good morning Rob. Doing well.

Hi. And I -- yeah just had a kind of question like the keyless entry program was obviously very huge for the aftermarket portion of the business, like how much more room to go is there from kind of just like [read pressure fit] in the installed base out there of all the Utilimaster trucks? And kind of like can you talk about maybe other opportunities to get another contract like that on the horizon, the next year or two?

Sure, this is Joe, Rob and I can handle I think most of your question, for you. In regards to keyless, so our current retrofits on keyless and it's with UPS are pretty much be completed this month or next month in July and in early August. So, all of that work is just about done. You'll see a little bit carry over into the third quarter then but not too much. Most of it's finished up in the second quarter. So that phase of it has been completed. Your second question, are we looking at other opportunities for it -- absolutely. It's a great product and we've talked to other customers about how we might be able to extend it and move it to other applications as well too.

We've been looking outside of just the delivery and service market. Does it apply to some of the other products that we do across Spartan Motors as well too. So we are looking at other alternatives for it. We haven't given up. The bulk of the big project there though have really pretty much ended at this point in time.

But on top of this, I also want to be clear, we have a lots of other initiatives that the teams are working on, so our aftermarket team at Utilimaster, they've got a demonstrated capability in trying to find these type of solutions. There is the safe load solution, which we've kind of demonstrated, I think you were there and do that as well too. We've got some safety systems. We have a bunch of shelving programs we do. They do an excellent job of really selling more than just the truck but where all the solutions that make the truck more effective to the end customer. So there's a lot of that in the works.

Okay, but did you retrofit all the UPS trucks that you could potentially retrofit or is there more opportunity there?

No, we're pretty much completed with that one. Yes. It's done.

If I could just jump in with a couple of quick comments here. One of the reasons, there will probably be -- we expect to see more keyless, maybe not in the size, but what differentiates us, is we've very, very tight focused customer relationships and we know the walk-in van products are out there for 5, 10, 15, 20 years. And you can just look at your own personal life, when you have a close relationship with some enterprise or individual, you typically get much better operating results and you combine our tight relationships with our focus on innovation. And as Joe said a few moments ago, we've now got this demonstrated skill set not just on keyless but safe load with (inaudible) et cetera.

The nice thing is in 2008, there was not a dedicated team working to develop what we call field service solutions for existing products within Utilimaster. Okay. For opportunities like keyless, now there is. No it gets back, we have had, we have got the team, we've had success. Okay, now let's build upon that success. It's not going to happen overnight, but do we expect to see other parts happen or other opportunities from the portion in the future. Absolutely, because the world changes but everybody wants greater efficiency and that is something we're very focused on, not just on new product but on existing product as well.

Okay and then just the fire truck side of the business, there was nice growth there on the fire side. What you think the market was up or will be up in 2012?

So in regards to the Emergency Response or fire truck market. John, (inaudible) at one of the events with the industry right now, so maybe you can talk a little bit about that.

Well the industry, it will be up a little bit. People are saying, anywhere from maybe 2% to 5%, maybe as high as 6%, but remember the industry is off anywhere from 25% to 40% depending upon which data points you look in. I'd like to have something much more specific than that, but honestly there's something in the ER industry, it's not like what I would call we've got in the absolute perfect database.

So people are seeing growth, but it's still challenging in North America. I think one of the reasons we are getting above average growth is simply we are very focused on delivering compelling solutions to the marketplace, where the products are either lower in cost but they also drive greater operating efficiency or they handle a very, very specific need or concern. For example APS, the safety system, is an upcharge of about $7,000 a vehicle, okay. So with the cost increase. But safety is such a huge issue in the vehicle and the chassis today that a lot of departments are very, very excited about it.

So, this is a case where I believe, we'll drive incremental growth above the industry, okay, because of innovative products, compartmentization and other things, the TelStar, the 21 ST. I think Emergency Response [in all pick] you'll probably [see you need] little bit better growth next year as well, why because of an aging fleet. Remember, over 60% or about 75,000 fire trucks are more than 15 years old, they don't even have (inaudible). So while this year growth 3%, 5%, maybe 6%, next year mostly we believe will be a little bit better than that. Outside of North America, tremendous Emergency Response opportunities not just within Spartan but you have seen it from other public companies as well. And really it's an infrastructure point.

All right. Thanks very much and good luck with the back half of the year guys.

Thank you.

Thanks Rob.

(Operator Instructions). Walt Liptak, Barrington Research.

Hi. Thanks, good morning guys.

Good morning Walt.

I wonder if I could just ask a couple of follow-ons on the Reach product. You mentioned the Isuzu has got some products in their distribution with their dealers. I wonder how many trucks do they have and how long have they been testing those?

John do you have the specifics you wanted to talk to in regards to the Reach, the Isuzu vehicles out there.

Rob. In regards to the Isuzu vehicles that are out there, that number is approximately I'd say it's between 100 to 150 units right now that are all in the field. Okay. And those were units that were shipped last year, during the course of last year.

Okay. What and what kind of -- I'm sorry -- what kind of feedback have you gotten from that distribution channel?

Well, the feedback has been positive in a lot of respects, except in the fit-and-finish or the appearance and the quality. So as I mentioned earlier, probably the biggest thing we had to work on was how the products looked. And that became very, very important for us, okay, to make significant improvements in the fit-and-finish of the [claving], et cetera relative to the vehicle.

Okay. And where do you think you are now with fit-and-finish. You had some time to work on there Are you delivering trucks now that you think meet the customer demands for fit-and-finish?

We are going through the retrofits, okay, of the fit-and-finish and we are just starting the next batch of shipments to the Isuzu distribution group. The fit-and-finish issues have been solved. And what's nice is the retrofits, which we're doing, the vehicles look great, but just as important Walt is the first vehicle that came off the line in the pilot build which we started a few weeks ago, the trim, the cladding et cetera, the fit-and-finish was extremely good.

So we've got the solutions for the issues which we've had and we're retrofitting those units as we discussed on the Reach release, but also the initial pilot build units. The units look extremely well from a fit-and-finish perspective as well. But again, we're being very, very deliberate because we don't want to deliver a product into the field that is going to come back upon us. You know honestly what works best is when we delivered a 100 units to one fleet carrier and then they come back and they order another 100 units. That's exactly what we want.

Yeah okay, okay good that--

Hey Walt, this Joe, I'll add two pieces of clarity. One of them, when John mentioned last year, John meant in first quarter and in the first quarter it was only shift those first units out to the Isuzu dealers so just to clarify that.

Yeah that's a good point, Joe.

Second thing, second point was when they found the great opportunity to fix lot of the fit-and-finish is as they move the manufacturing process from Wakarusa to Charlotte here. So as we've moved it over the last 45 days what they've done is as they started up the new line they've really enhanced every single step along the line to, here is all the problems identified or the fit-and-finish issues identified by the dealers and they're incorporating all right into the new build process.

So as John said, so as the products come up the new line here in Charlotte we will have to address the issues and incorporated the fixes right into the process.

Okay great, good point.

And Walt, to give everybody a little bit color relative to that how we operate from a process perspective, obviously we've got the Isuzu on site working with us each and every day, but a few weeks ago we had key members of the Isuzu dealer advisory council in there to look at the product they came away very, very pleased not just with the product but the process which Joe mentioned et cetera.

So again everybody is extremely excited about the product but the move has presented a very good opportunity for us to reset the business and help us understand and to solve the issues as we have a great product we just want to deliver it to the marketplace in the right way at the right price with the right quality levels.

Okay, perfect. Thanks for the clarity on that. And I guess my second question was just to get an idea about the timing of the manufacturing moves, especially the move to Bristol, does that happen during the third quarter and when do you get up to kind of a normalize production level there?

Sure. This is Joe, Walt, and I can take you through the details of the timing on the Bristol move. It's already underway. We started the move in during the current quarter. The first phase of all the move is really the prep work on the building. So if you can think of the new building we're moving to the first phase has really been all that designing layouts plan flows but it's been also about getting the building itself ready. So there is this small addition on the building that they're building in and they're improving the overall, some of the infrastructure to the building, that new building we're moving to as well.

The physical move of the product, we've started to move some of the people office, so some of the office folks have already kind of moved over there. The manufacturing lines will start to move during this, primarily the end of the third quarter but mostly in the fourth quarter when the manufacturing lines will kind of move over and be put in place. So by the end of the calendar year they're slated to have all of the processes kind of moved and then up and running next year at the new Bristol facility.

Part that I mentioned it, it's not as easy it's not just taking what they have today and just picking it up and moving it to a new building. They're really utilizing this time in the new building to change everything about how they manufacture and build product to Utilimaster, well this isn't just about move, this is about a complete change in philosophy for how they build product to really get at a much improved manufacturing process, tons of changes in that process to really drive efficiency through.

And it will be noticeably different, I know Walt, you've been out to the old facility, when you get to the new facility and you see how the product moves through it, you'll just be amazed how they -- how much they're really changing at it.

Okay, got it. An improved process flow and that equates to that $4 million of overall costs, okay.

Correct, it's all on time and it's all on budget according to our initial estimates.

Okay, do you need to build, yeah?

And just remember and Joe gave tremendous color on Bristol but what's important to remember is when we get out through that we're still building a 20 year old design, so this execution of the plan relative to the Utilimaster and delivery and service, it's been very, very methodical, improving your operating efficiencies in Wakarusa, bring Reach to market, move from Wakarusa to Bristol and then you bring in to the traditional walk-in van business at 2000 what I would call a 21st century kind of product and you move past the 20 year old design.

Okay, got it. The -- with the move happening I guess later in the year for the manufacturing lines [and the third] do you need to build inventory during this quarter so that you can make shipments during the fourth quarter as those production lines move?

No, not very much at all. Most of it, they will be finishing production at the Utilimaster facility, a lot of the big ramp up in volumes. As you know, third quarter is the big quarter in Utilimaster, right, that's in a lot of that product needs to get shipped out by to meet their seasonal demands. All that will be done at the existing Wakarusa facility. So there won't need to be much inventory ramp up, I think there is a little on the schedule, but not a lot.

Okay, got it. And then, the last one I had was just on that 2013 engine. I wonder if you could just talk, I guess I'm unfamiliar. Is it just the new 2013 engines? Is there a major change to them? I imagine you're using mostly SCR engines that you would have already been designed in a couple of years ago.

I guess the question is what changes have to be made to the product. Sure, good question on the technical specifics there. John, did you want to give a little bit of a walk through on the 2013 emissions changes?

That we walk through is just greater complexity or increased technology in the engine and the exhaust system to clean the air or the exhaust even more, okay. It's not as dramatic as what we went through in 2010, okay. But when we get through 2013, it is just simply more technology, the increased engine complexity within the SCR, the exhausted, I mean how the engine operates, okay. So what just comes out of the exhaust system is cleaner. It's nothing as dramatic as 10, but it is a -- it will be a little bit more complex of a product and a little bit higher from a cost perspective.

Okay, good. Okay, thanks guys.

I don't think you wanted to get into all the details of the electronics and the size of the exhaust pipe, et cetera itself.

Rhem Wood, BB&T Capital Markets.

Hi, good morning.

Good morning, Rhem.

First, nice quarter.

Thank you.

My first question I wanted to ask. I joined in a little bit late, but I want to make sure the UPS order for 150 was an additional order to the June order, is that correct? And then you had 100 on top of that from another big fleet carrier?

So to provide some clarity on the Reach orders. We've had two orders from UPS and then one from another fleet carrier you had mentioned. I think we doubled up on the UPS, so there have not been three UPS orders, just two.

No, no, no, yes, that's right. So I guess my question is it's -- these orders keep trickling in for the big fleets, but you've lowered kind of your expectations for the year. Did you have to change some of the specs to get them into these bigger fleets or what's going on there maybe? I guess you talked about building a bigger box around it to get better fuel economy and that kind of thing.

Sure, sure. Yes. I'll give you a partial answer and then I'll let John talk a little bit more on it. So to the question of, did we change the specification of the trucks to get them into the fleet. No, the only thing that we have -- it's the same specification of the truck -- the only thing that we've changed, Rhem, really is the work around the fit-and-finish as John was talking about earlier during the conference call, getting some of those [deals sales] worked out. The rest of the truck in terms of its specifications and design have all been the same with the exception of some of the things we've done to fix up the fit-and-finish, which effect everything from some of the interior stuff to some of the cladding we have in the side as well too, but no major structural changes. John?

Joe is absolutely right. I mean obviously UPS has a slightly different spec, than some of the other fleet carriers and the smaller ones as well, but the basic vehicle design and bill materials content is exactly the same. I think the change from a production schedule or a shipping schedule is really a reflection on our part to be very, very deliberate to ensure that from EQCD perspective; engineering, cost, quality and delivery perspective, that we really deliver a great product to the marketplace. We were not excited to hold shipments of the Reach product in Q2. It was the right thing to do, but we're, as we mentioned earlier, we're using the move to reset the business from an operation to a production flow perspective and make minor modification or address issues you know when the bill of material, the fit-and-finish, et cetera. But excited about the product, but from an EQCD perspective, it's really our control not so much the market, we are just being very, very deliberate.

Okay, that's good color. And then my second question is, I guess you kind of think (inaudible) in the back half should look similar, you raised your revenue, we kind of tempered the margin guidance, but -- and in terms of the keyless entry, but you know with the backlog, things are all kind of picking up off of a base level and really from an earnings perspective, I know you don't give specific guidance, but things should continue to look better in the back half of the year, right?

Yeah, Rhem this is Joe. So I'll take your question. I think the way to think about our bottom line performance is almost in segments. So there's kind of the short term, the mid-term and the long-term kind of piece to it. In the short term, so if you look at the next couple of quarters, I think what you'll see is, as we said, the revenue in the second half of the year will be about what the revenue in the first half of the year was in total, but the mix of business will shift and it will shift a little bit of the less profitable business. So we won't have all of the profitable APA business. We will have some of our other more traditional vehicle business, plus we will also have the inefficiencies of the move going on at the time as well to around not only Reach but the Bristol complex.

So that says your prophecy are profitability in the second half of the year, it will be a little bit more constrained. That's the short-term answer. Now in the mid-term perspective, when you get to 2013, then of course we've got the Bristol move in place. From day one, you won't see all of that [$4 million] savings but you'll start to see the improvements from that. You'll see the efficiencies that start to kick in the place and the rest of our manufacturing operations as long as the volume continues that will help the benefit there as well too. So the mid-term, you'll definitely be able to see some of that pick back up and improve.

And the third piece is on the long-term part. We're still on that same path and heading towards the [17, 11, 6] goals that we've established with you all, so we've said that, by the end of '13 and into '14, we'll be getting to those 17, 11, 6 criterion goals that we're heading for. That hasn't changed. That will help a little bit with the landscape of our profitability.

Yeah, that helps. One more thing, can you tell us how much the keyless entry contributed during the quarter?

We don't break it out specifically. It's incorporated in that -- in the quarter, delivering service had $22.7 million of sales. They weren't all of that number, but they were a significant portion of that revenue number during the quarter.

This is Greg, Rhem. We did say earlier in the remarks that that was a little more than half of the revenue in Utilimaster's or Delivery & Service Vehicles aftermarket segment.

A little over half of that revenue was related to the keyless piece.

Okay, great thanks, thanks for the time.

You bet.

Thank you Rhem.

There is a follow-up from Joe Maxa of Dougherty & Company. Please go ahead.

Just a couple of quick questions on housekeeping. The gross margin guidance for 10.5% to 15%, is that a GAAP number or is that excluding restructuring.

That's excluding restructuring Joe.

Okay. That's what I figured, but I just wanted to make sure. And then secondly on the acquisition you talk about, what's -- just trying to get a sense, I know Utilimaster was a nice acquisition for you, works out very well, but what type of size do you think you would contemplate at this point?

Sure. I will hand that question over to John to talk a little bit about our acquisition thoughts and strategy.

Joe, it's a very good question, one from our blended growth strategy perspective, I mean acquisitions are obviously a key part. So I think first, as we look at acquisitions, we're always asking ourselves, okay from a goals perspective, how does it tie to our port, which is chassis. You know what can you do to expand current markets, three what can it do to bring it to new market.

Utilimaster was a new market when we purchased it in 2009, Joe, correct me if I'm wrong but I think it's about $100 million in sales.

Correct.

Classic Fire, which we executed last year was about expanding our current market and that was less than $15 million in sales, both tied to the core of chassis, okay. And so, as we go into the future, the best way I can answer that as we've demonstrated a range of slightly less than $15 million to as a high as $109 million. So you could see something in between there or you could see something a little bit larger than that, but again we're always going to ask ourselves, how does it tie back to the core relative to chassis, expanding current markets and bringing new markets. On the positive side, we've got the cash, the borrowing power and there are a lot of opportunities to look at. So we're being very, very -- what's the term -- disciplined in our process because prior to Utilimaster, prior to Classic, for those of you new to the Spartan story, our history with acquisitions was not very good, and so the last two have worked out very, very well for us.

So from a size and range perspective, I think I've given you pretty good clarity perspective there. From a goals perspective. I think I've given you pretty good clarity there, but we will be very, very disciplined in all that we do because we want to ensure that the acquisitions we make, we deliver the results no different than what we're doing with Utilimaster and what we've done with Classic Fire.

Thank you.

Thank you. At this time we have no further questions. I would like to turn the call over to Mr. John Sztykiel for closing comments.

All right. First I want to thank all the associates at Spartan Motors, Inc. Lot of very good things happened in Q2, not just versus Q1 of this year but also versus Q2 of last year. A lot of disciplined, smart hard work like decisions took place. Also appreciate everybody's time on the call. As mentioned earlier, we are cautiously optimistic, had nice growth in orders, nice growth in the backlog. Yet the markets are challenging and we've got some significant initiatives ahead of us, moving Utilimaster's business, bringing the Reach product to market, you combine that with some of the challenges just from an economy perspective, also very, very unsettled political landscape, means that we should be cautious in all that we say, run the business seeing that of Spartan Motors in a very disciplined, a very wise way, one that we execute the plan, we adapted or evolve it where it makes sense and we're very focused on working together as a team along. I look forward to working and being a part of the Q3 call but we have a lot of work ahead of us and we've got a lot of opportunity, but we also have a lot of challenges. Thank you very, very much.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.