Shyft Group Inc (SHYF) 2012 Q4 法說會逐字稿

Good morning everyone, and welcome to the Spartan Motors fourth quarter and full year 2012 earnings results conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity for you to ask questions. (Operator Instructions). Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Greg Salchow, Director of Investor Relations and Treasury. Sir, you may begin.

Thank you, good morning everybody. I am joined on the call today by John Sztykiel, our Chief Executive Officer, and Joe Nowicki, our Chief Financial Officer. I assume everybody has seen this morning's earnings release on the Newswire. 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 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 could materially affect the results are identified in our Forms 10-K and 10-Q, which will be filed with the SEC. However, there may be other risks we face. And as we typically do, please remember that during the question and answer period, we ask you to limit yourself to just one question and one follow-up per analyst, that will allow everybody the opportunity to ask a question. After asking your question if you have an additional question, you are welcome to join the queue.

Now I am pleased to turn the call over to John Sztykiel for his opening remarks.

Alright, thank you, Greg. Good morning everyone, and thank you for joining us on Spartan Motors fourth quarter 2012 conference call. We appreciate your time and interest in Spartan Motors. The main message to take away from today's call is that Spartan ended 2012 with a return to revenue growth, adjusted earnings growth for the full year, recovering markets, strong financial position, and continued implementation of a plan to improve profitability in 2013.

We did many things right during the fourth quarter of 2012 and throughout the year. A few of those highlights include we consolidated our Emergency Response chassis and Emergency Response vehicle businesses into one unit, Spartan ER. Positive results, our combined Emergency Response backlog totaled $98.1 million at the end of 2012, up 32.6% from the end of 2011.

Next, we transferred production of the Reach commercial van to Charlotte, Michigan in the July timeframe, and have made dramatic steps in efficient and quality improvements. To give you some color, since transferring production from Indiana to Charlotte, we have reduced the total hours required to build the Reach by more than 50%, and reduced the number of defects per vehicle from over 50 to less than five when coming offline. That is dramatic progress. There is more progress to be made and we are not done yet. Also during the fourth quarter, we completed an order for 150 Reach vans for UPS, and started production on our second order for 100 units for FedEx to be completed in the first quarter of 2013. In total, we built and shipped 577 Reach vans during 2012, and expect that number to more than double in 2013.

Next, the major relocation of Utilimaster's operations from Wakarusa to Bristol, Indiana, about 25 miles apart, remains on schedule. With most of the move to be completed by the end of the first quarter of 2013. We are currently doing validation builds of walk-in vans at Bristol, and expect to begin ramping up production volumes within the next couple of weeks.

When I look at our accomplishments for 2012, it is clear that we have accomplished a great deal. Our fourth quarter results shows that we have the right products, products our customers demand and value. While we did a good job of generating revenue growth during 2012, the reality is we did not convert that revenue into profit to the extent that we should have. Frankly, we underestimated the scope and the timeframe required to achieve the goals which we set before us, relative to improved profitability gross profit margins. Later in the call I will share the plan to change that. Joe Nowicki, our CFO, will discuss that as well, but before we get into your plans for 2013 and beyond, I want to discuss our segment results for the fourth quarter.

Our Emergency Response business grew modestly to $44.9 million compared to $44.3 million inthe fourth quarter of 2011. The sales increase came from the Emergency Response Vehicles unit, which recorded revenue of $23.6 million in the fourth quarter of 2012, up from $19.3 millionin the fourth quarter of 2012.

In terms of revenue growth, I believe it is absolutely clear that we are outperforming the industry and gaining market share, as again, our ER backlog, Emergency Response backlog grew 32.6% in 2012. Spartan ERV in Brandon, South Dakota hit an all-time high run rate, and expanded its production capacity during the fourth quarter of last year. Switching over to sales of Emergency Response Chassis, those actually declined slightly to $21.3 million in the fourth quarter of 2012 compared to $25 million in the prior year. We adjusted the line rate downward during the fourth quarter as some of our customers pushed out their delivery dates into 2013.

On a very positive note, Spartan's reputation as the industry leader in safety was enhanced and demonstrated by the high order rate of our Advanced Protection System, or APS as we call it, an industry-leading advanced air bag occupancy system. APS equipped chassis carry a price tag of approximately $5,000 higher than one without. Our most recent order rate was in the mid-60% range, above our expectations, indicating the value of our innovative products, and the opportunity for improved profitability.

Switching over to delivery and service. Delivery and service sales were up to $52.6 million from $41.9 million in the fourth quarter of 2011. For the quarter, our truck body business increased sharply, while our walk-in van business was reduced compared to the fourth quarter of 2011. This was primarily due to a large UPS order that took place last year, plus the scheduled ramp down for the move to Bristol.

In the past, and to give you a quick market overview as to why delivery and service is performing so well from a top line prospective, in the past delivery and service was about delivering packages and services, and is now moving into mobile retail as well. This increase in demand is illustrated by the growth rate in our delivery and service business, Utilimaster, which has nearly doubled since 2010 to $208.2 million. Or an annual growth rate, over the last three years of 35.7% per year. Simply, society craves mobility and we are in a great spot to take advantage of it. The order backlog at the end of 2012 for Utilimaster stood at $37.9 million, down from $47.7 million at the end of 2011, mainly due to the timing of orders, also influenced by the move of the walk-in van production to Bristol, Indiana.

Switching over to our third core segment, specialty vehicles, reported fourth quarter revenue of $27 million, up 8% from $25 million in 2011 for the fourth quarter. Sales of Spartan recreational vehicle chassis rose during the fourth quarter to $20.4 million from $17.5 million. This increase in sales comes from consumer demand for superior ride and handling found only on a Spartan. Spartan is the high end, high performance chassis brand leader in the RV industry. Nice, the overall RV market continues to grow, with motor home sales from an industry perspective through November up 11.8% from 2011 levels. Sales of larger Class A motor homes, the segment in which Spartan operates, were up 13.3% through November, and up 70% for the month of November in 2012 compared to 2011.

These industry sales gains correspond to what we have seen in the market which is a dramatic improvement. With order trends in the RV sector remaining positive, we look for expanded growth in 2013. Sales of aftermarket parts increased to $5.5 million from $5 million in the fourth quarter of 2011, largely due to the higher sales of defense-related aftermarket parts. Offsetting growth in these two business lines was a slower build rate of Isuzu N-Series trucks, as Isuzu worked down inventory, and also the lack of defense vehicle business during the fourth quarter of 2012.

Now I would like to turn it over to Joe Nowicki to provide a more detailed review of Spartan's fourth quarter 2012 financial results. Joe.

Thank you John, and thanks everyone joining us on today's call. As John mentioned, Spartan has a lot of accomplishments to its credit for the fourth quarter of 2012, as well as for the full year. We are proud of what we have accomplished, which has put Spartan in a strong competitive position, strong financial condition, and a more efficient and still improving operating condition at the end of the year. Of course, there are often some costs associated with these initiatives, and these costs impacted our revenues for the fourth quarter and full year 2012. To provide you with the most accurate performance of Company's performance during the period, we have provided you with some non-GAAP measures that show our results excluding the impact of some of these actions and related costs.

Now turning to Spartan's financial results for the fourth quarter of 2012. We ended the year on a strong note in terms of revenues. Our fourth quarter sales were $124.5 million, up 12% from the fourth quarter of 2011. Sales for the full year were also up to $470.6 million, an increase of 10.5% from 2011.

As mentioned in our press release, all of our operating segments generated revenue growth in the fourth quarter of 2012. One of the key drivers of our growth was our product development effort. A couple of examples you have heard us talk about during the past year includes the Reach delivery van, and Spartan's Advanced Protection System, or APS, an industry-leading active safety system featuring front, side, and roof air bags that provide unmatched protection for firefighters.

Our gross margin fell short of our expectations for the quarter and for 2012 as a whole. Despite good revenue growth, we didn't convert higher revenues into profit. We incurred a number of higher costs in the fourth quarter in particular that had a negative impact on our gross margin. Higher labor costs in our Emergency Response Vehicles and Utilimaster operations were not fully absorbed as both units added labor in advance of production increases in the fourth quarter. Higher material costs also added adverse impact on gross margin during the quarter, primarily due to product mix. This was especially true in our Emergency Response and delivery and service segments, both of which had a less favorable product mix than we had forecast.

Emergency Response vehicles produced during the quarter tended to have a lower option rate and feature content than projected. DSE saw a higher mix of truck bodies, which typically carry a lower margin than our walk-in vans. And of the walk-in vans that were produced during the fourth quarter, the mix was less favorable due to lower option content average than average. This led to materials accounting for a slightly higher percentage of the selling price than is typically the case. Included in the gross margin for the fourth quarter is a restructuring charge of $0.8 million related to Utilimaster's Bristol relocation project. This charge reduced gross margins by 0.6% during the quarter, excluding the restructuring charge our fourth quarter gross margin was 11.2% compared to 13.1% in the fourth quarter of 2011.

For the full year, Spartan booked $6.5 million of restructuring charges into costs of goods sold, most of which were related to the Utilimaster relocation project, that compares to $1.7 million booked in the prior year. So excluding those restructuring charges, full year gross margin for 2012 was 13.8%, which is 14.6% in 2011. We reported operating expenses of $15.9 million, or 12.8% of sales in the fourth quarter of 2012. Operating expenses in the fourth quarter of 2012 included $0.6 million of restructuring charges, and $1.9 million in the Utilimaster earn out accruals. The earn out accruals are based on Utilimaster's revenue growth exceeding the sales targets that were put in place at the acquisition, and are a result of Utilimaster's success at growing its business as John described.

Since the fourth quarter of 2012 accrual was substantially higher, we decided to mention it so you could see the underlying operating expense levels more clearly. Adjusting for the restructuring charges and earn out accruals, our operating expenses in the fourth quarter of 2012 down to $13.4 million, or 10.8% of sales versus 12.2% in the fourth quarter of sales in the fourth quarter of 2011.

When you look at our adjusted operating expenses, you can see that Spartan continues to demonstrate a high degree of financial discipline and cost control. Despite year-over-year revenue growth of 12% in the fourth quarter, we actually posted lower operating expenses in dollars than in the fourth quarter of 2011. The story was much the same for operating expenses for the full year. In 2012, we reported operating expenses of $61.2 million, or 13% of sales compared to $59.3 million or 13.9% of sales in the prior year. During 2012, we recorded $2.6 million total in restructuring charges compared to $1.1 million in 2011, in addition, the earn out accrual for 2012 totaled $2.9 million versus $1 million in 2011. Again, adjusting for the restructuring charges and earn-out accrual, our operating expenses for 2012 totaled $55.7 million or 11.8% of sales, compared to 13.4% of sales in 2011. It total it amounted to a reduction of more than $1.5 millionin operating expenses year-over-year.

On a GAAP basis, Spartan booked a net loss of $2.5 million, or $0.07 per diluted share in the fourth quarter versus net income of $0.7 million, or $0.02 positive per share in the fourth quarter of 2011. After the restructuring charges, after tax and the $1.9 million in earn-out accrual that has no tax impacts, Spartan posted adjusted net income of $0.5 million, or $0.01 of diluted share in the most recent fourth quarter.

For the fourth quarter of 2011 after excluding the $0.1 million reversal of an earn-out accrual in that quarter, our net income totaled $0.6 million, [$0.002] per diluted share. For the full year 2012, Spartan reported a net loss of $2.5 million, or $0.07 per share versus net income of $0.8 million, or $0.02 positive per share in 2011. Again for 2012, adjusting for $5.9 million in restructuring charges, and $2.9 million in earn out accruals, our adjusted net earnings totaled positive $6.3 million, or $0.19 per diluted share. That compares in 2011 again excluding $1.9 millionin restructuring charges and $1 million in earn-out accruals, our adjusted earnings were $3.6 million, or $0.11 per share. So when you compare our adjusted earnings, Spartan'snet income increased 75% from 2011 to 2012.

During the fourth quarter, we also took steps to strengthen our financial position. In November, we amended our private placement shelf agreement with Prudential to extend the term by three years to November 30, 2015, the amendment also increased availability under the agreement to a maximum of $50 million from $45 million. The amount will provide us with additional flexibility as needed to support Spartan's future growth initiatives.

We ended 2012 with cash of $21.7 million, down from $31.7 million at the end of 2011, due to the investments in our Bristol facility, and also the transition in engine inventory. Accounts Receivable end of the year stood at $47.1 million versus $40 million at the end of 2011. The balancewas higher due to the year-over-year revenue growth of $13 million from the fourth quarter of 2011 to 2012, and a greater proportion of our sales occurring during the latter half of the quarter. Our full year Accounts Receivable DSO, days sales outstanding, actually still remains strong at 34 days.

Inventories rose to $67.6 million at December 31, 2012, versus $67 million at the end of 2011. The increase of inventories was really due to the addition of $9.6 million in 2010 spec diesel engines we purchased prior to year end. This was an advance of a more stringent diesel emission standards for 2013 and 2014. We purchased these 2010 spec engines to allow us to continue vehicle production, while we make engineering changes to adapt our chassis to the newer 2013 spec engines.

This advance purchases of engines more than offset a reduction in base inventory levels of $9 million compared to the end of 2011. We are currently working through our inventory of 2010 spec engines and expect to use all of those by the end of the second quarter of 2013. We invested $2.8 million in capital during the quarter, with the majority of that related to Utilimaster's Bristol relocation project. For the year, Spartan invested $12.5 millionin capital, compared to $5.3 million in 2011.

We ended 2012 with a backlog of $164.4 million, up 20% from $137 million at the end of 2011. When we look at our total order backlog, we are confident of a generally favorable outlook for revenue in 2013. As we mentioned during our third quarter 2012 conference call, we expect the first quarter of 2013 to reflect lower sales in the DSC segment, due to the Bristol relocation project that is actively underway. We expect Utilimaster to begin its ramp up from pilot builds to higher volume production within the next few days.

We have also recently encountered shortages of strip chassis used for walk-in vans due to major suppliers ceasing production of these chassis. These shortages have affected all users of strip chassis and have put pressure on remaining chassis manufacturers, and their suppliers to meet demand. The remaining high volume producer of strip chassis is now taking steps to increase capacity, but we do not expect additional supply to reach the market until late 2013. We have been in contact with other chassis providers and with our customers regarding alternatives such as the Reach, and using alternative chassis for some delivery vehicles, but we still anticipate chassis availability issues will have a negative impact on our 2013 revenue, primarily during the first half of the year.

In early 2013, we announced a new distributor for ERV in the Pacific Northwest and Western Canada. We have been working on strengthening our presence in these markets for the past several years. During that time, we determined that our previous distributor was in a critical financial situation, and could not continue as a viable partner in that region. After considerable study, Spartan intervened to minimize disruptions to our customers.

We named a new dealer to represent Spartan ERV in the region, and are working to strengthen ties with our OEM chassis customers. We expect costs of these steps to result in expenses in the range to $0.5 million to $1 million to be incurred in the first quarter of 2013. We elected to complete the fire trucks that were in the process of being built to minimize the impact to the customers. We look at this as an investment in our brand, and a step in increasing our presence in that region.

While we expect our other operating segments to post revenue growth in the first quarter of 2013 compared to last year's first quarter, we don't expect higher revenue at those segments to offset the decline in delivery and service revenue as I mentioned previously. We therefore expect consolidated revenue in the first quarter of 2013 to come in below year ago levels, and to book an operating loss for the quarter.

For the balance of 2013, we expect to return to revenue and earnings growth compared to 2012. At the end of the quarter, when we complete the bulk of the Bristol move, we expect to provide more detailed expectations for 2013. We will share our outlook for the rest of the year at that time. Our longer term 17-11 fixed targets for 17% margin, 11% operating expense, and 6% operating income remain in place.

Now I would like to turn the call over to John Sztykiel who will make his closing remarks.

Alright, thank you, Joe. First, as we move into 2013, our area of greatest focus this year will be gross margin improvement. We have the products our customers want to buy, as demonstrated by growth in sales and the order backlog. We must now turn revenue growth into profit growth. The reality is that this will not happen in one quarter. In the case of Bristol, the Reach, for example, we believe it will take two to three quarters to see meaningful results from these initiatives, as they are very, very large in both scope and complexity. There has been and will continue to be a dedicated focus on gross margin improvement. As I mentioned earlier, we underestimated the complexity and time to achieve certain objectives. The objectives having been set and they will be met. I am confident we have the right focus, the right people, and the right plan to move the ball in the right direction.

For the last several quarters, I have talked about our diversified growth strategy. That strategy has been a great success as we have transformed Spartan from being heavily dependent on government customers to where it is today, a diversified company that derives approximately 59% of its revenues from consumer and business buyers. Combine the diversification with the growth and sales in backlog, and it is evident the strategy, diversified growth is working extremely well.

As we enter the new year, we are combining those efforts with an enhanced focus on improving operating efficiency in growth and profit. I refer to this combined approach as structured growth, since it is profitable growth resulting from disciplined, structured initiatives executed effectively and efficiently. The strategy is simple. We call it Drive. It is as follows, number one, diversified growth. We will continue to pursue growth opportunities in all three of our operating segments, delivery and service, Emergency Response, and specialty vehicles. We will maintain and grow a diversified revenue stream, so that we are not dependent on any one market and can weather the cyclicality that affects all markets.

Number two, redefining technology and innovations. Spartan is a leader in its markets. We are a high-end, high-performance brand in each of our markets and customers pay more for our products because they value the solutions and experience we provide. It is clear that we have momentum, and now is the time to accelerate and continue to differentiate in the competitive marketplace.

Third, integrated operational improvement. We must match our product innovations with an improved ability to manufacture those products efficiently. We must generate and attract a product so that we can reinvest in the Company, and earn an even higher return for our shareholders. Number four, vibrant culture. To enhance our product leadership creativity, we need to nurture a culture that fosters those qualities and rewards the associates.

Extend our core markets, number five. We have two great brands, Spartan and Utilimaster, that serve our three core markets. We expect to be the first name consumers think of, whether it is for services, parts, or a new vehicle. A solution to their needs, the experience they desire.

In summary, looking back on 2012, I believe Spartan has many notable achievements to its credit. In reality, it was another transformational year, as there were a lot of moving parts. We also have work to do to reach our potential, and bring our operating performance, our profitability where it needs to be. I have outlined for you some of the initiatives we have underway to make that a reality in 2013. In 2012, we have demonstrated that Spartan is moving in the right directions, that we are a diversified, growing, profitable Company. I am confident we are heading in the right direction, and that 2013 will be a year of structured growth, increased sales, and increased profits while positioning us for an even more exciting future. On behalf of our associates, the leadership team, I thank you for your interest in Spartan, and we now look forward to taking your questions.

Operator, we are ready to take questions now.

(Operator Instructions). Our first question comes from Joe Maxa from Dougherty & Company. Please go ahead with your question.

Thank you. I will just ask on the gross margin side. What kind of range are you thinking about for Q1? Then how do you see that progressing as the year goes on? Do you think you can get back to that 15%, 16% by the last, second half of the year?

Hey, Joe, good morning, this is Joe Nowicki. How are you doing today?

Good, Joe, thanks.

To answer your question on gross margin. Our long-term goals hasn't changed at all. As you know we are heading towards the 17% margin target for us, the 17-11-6 piece. The first half of the year will clearly be more of a challenge, and we have said that 17% margin was a 2014 kind goal, but as we get to 13 towards the back half of the year we should be getting there. The first half of the year will be a challenge, but when we get to the second half of the year, Joe will start to get close to that amount, and back to where as you had described in that 15% to 16% range by the second half of the year, absolutely.

This is John Sztykiel. I think the Bristol movement, it is a major, major project, you are moving the largest part of Utilimaster's business, even though it is 25 miles, you are moving a fairly, fairly large multi-million dollar company, and as Joe mentioned earlier, there is an estimated $4 million of financial improvement in that project, so that really doesn't start to kick into gear until the second half of the year. Then Reach, while it really is a market desirable product, the operating performance from an improvement perspective again, will be more of a second half result, even though a lot of initiatives are taking place in the first half of the year, it will take some time for those two projects to come to reality.

Great. My follow-up would be on the DSV line. I wanted to understand to make sure that I understand on your Q1, you are looking for revenue from delivery and service vehicles to be down year-over-year, but the other segments up? Is that correct?

Yes, we expect growth in most of the other segments. DSV will be the one that will be significantly down. It will be down and offset the increases of the other segments, which is why the full quarter we expect should be less than what it was last year for the first quarter.

Right. Alright, thanks, I will jump back in the queue.

Thanks, Joe.

(Operator Instructions). And we do have a follow-up from Mr. Maxa from Dougherty & Company. Please go ahead with your follow-up.

Hi, guys. What is that, the crux of the chassis shortage? Are we just seeing increasing demand out there in the industry, and the supplier doesn't have the capacity, or what are you seeing?

Yes, it is two-fold Joe. It is increasing demand and it is also less competition too. One of the other chassis suppliers is no longer around, so that has created a bit of a void. In addition to it, there is increased demand in a lot of the end markets, from the motor home marketplace, obviously is one that is seeing it, and in others as well, too.

This is John Sztykiel. There is a positive to this negative, and that is as Joe mentioned a few moments earlier, there is a significant chassis manufacturer that is no longer supplying chassis in the delivery and service business, which opens up the door for us to bring into the market a Spartan Chassis for the delivery and service business. While we do not expect that to happen in 2013 we do expect that to happen in 2014. So while short-term there are some challenge issues, the good news is there is a lot of consumer or fleet requests for another chassis, or other chassis options out there. So the good news is, people are very, very interested in asking us, okay, when is Spartan going to have a delivery and service chassis in the marketplace. Obviously, it is going to be a high-end, high performance chassis, we will start at the top end of the marketplace and work our way down over time. The good news is there is a desire for a Spartan Chassis in that marketplace.

That makes sense. Joe, what was cash from operations in the quarter, or utilized? What is your outlook for the rest of the year?

Cash from operations, I want to look that one up real quick for you. Total cash from operations was just about even actually. For the quarter ended December 31, net cash provided by operations was just about flat, so almost zero. It is really a combination of we did work down inventories, but as you know we invested in the transition engines, so that cost has a big outflow. The other big thing, we continued to make some of the investments in the Bristol facility into the quarter, so you have the CapEx for the Bristol facility that caused an impact as well. Those are probably the two biggest ones driving it. Receivables gave us kind of a benefit as well, too.

And what is your outlook for this year on your cash generation?

For the full year-to-date, cash from ops in 2012 was up a little over $6 million. As we look into 2013, I don't have an exact number for you, Joe, but directionally it should be improved from that number. One big shift is going to be a reduction in the CapEx, so the current year we spent $12 million in CapEx. Next year, a lot of that was driven by the Bristol facility relocation, and also that was the biggest driver to it. This year we don't have that, so I think the CapEx this year will be more around the $5 million to $7 million in total, that is our traditional level of CapEx.

Great, thanks, guys.

You bet.

Our next question comes from Robert Kosowsky from Sidoti & Company. Please go ahead with your question.

Good morning, guys. How are you doing?

Good morning.

Good morning, Rob.

I was wondering if you could maybe just elaborate on what is happening with the product mix in the ERV segment? What can you do to counter this trend towards I guess lower margin trucks that you are going to be selling with higher material content? Maybe a little bit more color as to what's exactly going on there and what can you do to rectify it, or combat it?

Very good question. This is John Sztykiel. First, the reason you have seen a shift towards lower-priced Emergency Response products is just simply a direct result of cities and states having less budgets. Less tax dollars coming in, the calls for help continuing to go up, so as they take a look at their needs, they are really no different than any other consumer market. They are looking at lower cost products. So what we have done to address that is, one, we are very, very focused on the gross margins side of life of reducing our bill of material costs without taking away any of the value of the product.

As Joe mentioned earlier, it is a company-wide effort, but in each one of our lower-priced segments, there is a dedicated focus to reduce our bill to material costs without taking out value. One can accomplish that really by just trying to utilize more common parts. The second thing which we are doing though is you will be seeing a number of innovative products coming into the marketplace in April of this year from our Emergency Response group, where they are priced for the lower end of the second segment, but with increased profitability. So the reality is, while we have been addressing sales in the lower priced segment, it has been with, for lack of a better term, a product line that was probably designed three to five years ago where the cost structure was higher, so the prices came down, but the cost structure was higher. Really no different than the automotive business where you see them now with smaller cars, but yet with improved profitability. You will start to see that unfolding with Spartan ERV in April of this year.

The third item, which we are doing, is really focusing on the marketing side of life, the go to market, and to leverage innovations or marketing to shift the mix. A perfect case in point, this will really start to kick in again in the second half of the year. As I noted earlier in the call, the success rate of APS, our Advanced Protection Safety Systems, we have got approximately a 60% order rate. It is just slightly more than a $5,000 increase per chassis. It is clear the market likes it, they are paying more for it. So as we deliver more of those products, you are going to see an increased margin.

And again, within that product mix, how do we drive more customers to our higher end products, Gladiator in the chassis side of life, and Emergency Response, the K series and the RV side of life, then you have got the Star series and the ERV body side of life. Again using marketing to increase the awareness, the focus, and to change the product market mix to drive people, or to create the consumer demand back to a higher margin, higher performance project. We have really got four platforms we are very focused on to improve the gross margins, but also address this shift to lower margin products in particular, in the ER segment. Did that give you good clarity, Rob?

Yes, definitely. It seems like a few of those issues, or a few of those solutions are longer term. In the near term, do you still have a lower margin backlog sitting there until you get to the Fire Truck Show in April, where you start booking some of these more appropriate priced or designed options?

Another good question, Rob, and you are absolutely right, it does have an impact on our backlog and some of the mix of product that is currently in there as well too. That is why as we described the first quarter, even though, yes, we will have the weakness in DSV, stronger revenues in some of the other business units, but the mix of it will hurt us a bit in the first quarter as well too.

How do you think about your fire truck, or the ERV body business versus the chassis business, because the body business really took off in the fourth quarter here? Just for modeling purposes, how do we think about that going forward?

One, we are very excited, but I think what we are seeing is the combination of bringing everything under one brand being Spartan, which is now the second strongest brand in the Emergency Response industry. It was a very, very good move on our part. We killed or terminated the Crimson Fire brand. Everything is now under Spartan, so we are leveraging our resources around that area. I think one of the things which people are seeing in that is, as you continue to focus on innovative products that redefine an industry, even in a very challenging market, you can still gain market share and move the ball forward, not just in Emergency Response, in any market. One, we are excited, but we are also seeing the effects of a strategy that where two to three years ago, Crimson Fire which is now Spartan ERV, was very focused on innovation, so we are seeing very good top line growth. I think net/net sum, we have got some good redefining innovation that was introduced two or three years ago which is generating top line, but you are also seeing the effects of the Spartan ERV brand come together.

Other addition I would add to John's comment is, as you know, we have lower market share on the ERV side of it than we do on the chassis side, right. A lot of the efforts that we have done have been really have been trying to grow our brand and presence, a lot of it on the Spartan ER piece, really which gets to the ERV finished vehicle side. I think you will see just like this year probably stronger growth in the ERV business than in the chassis business, just as that market share starts to increase, but then you will get to the point where those two start to come together and you will see more consistent patterns of growth in the chassis, and also the ERV business. But in the short-term, if you think about this year, we will probably continue to see more growth on the ERV side than the ERC side. Just as we are increasing our market share there.

Okay, so ERC side should be more whatever the market grows, and the ERV side will be growth in excess of that, because of you taking some share?

Correct, good way to look at it, yes.

Could you give us your longer term outlook of the fire truck industry in general? Seems like Pierce are they rededicated some capacity from ambulances to fire trucks? We are also in a cyclical trough here, and I am wondering how pricing will play out? Will you see fewer fire truck manufacturers, given it was a pretty fragmented industry, or is a pretty fragmented industry?

First, it is a very fragmented industry. I have been in this business for 27 years and I am not sure if we ever have less fire truck manufacturers, only because it is an easy business to get into. I think you will see a greater separation between those that are growing and those that aren't. As an industry as a whole, I believe in 2013 the industry will see better growth in 2013 than what it saw in 2012, in part due to pent-up demand, but second in parts due to an improved economy.

One of the things which is becoming clear is there is about a 2-year lag time between housing starts and growth in Emergency Response sales, so as we look over the next two or three years, not just me but a number of people in the industry, perceive okay, we are now going to move on a growth path. I do believe this though, those organizations that focus on what I would call products that are attractive from a price point with a very good value proposition that are multi-functional in nature have the opportunity to have what I would call very, very good double-digit growth in the Emergency Response industry, because if there is one thing that isn't changing Rob, that is the call for help continues to go up. Whether it be Sandy, Nemo, wildfires, just houses, you have more people texting while they drive, even though they shouldn't. The reality is there are more things today happening within North America that are raising the calls for help, so from a pure infrastructure prospective, it is a very, very good industry to be in, but those organizations, I think that focus on the right price with the right, what I would call multi function value proposition, will see very, very good growth in the Emergency Response industry. Because the demand is there.

Okay. I guess the key takeaway, is that you do think probably the likes of you and Pierce and the bigger companies will end up taking share over time?

Yes, I think that is correct.

I think that is correct.

Alright, cool. Thank you very much.

Thanks, Rob.

Thank you.

(Operator Instructions). And at this time, showing no additional questions, I would like to turn the conference call back over to management for any closing remarks.

This is John Sztykiel. First, I just want to say thank you very, very much. 2012 is now behind us. It was a year of revenue and adjusted income growth. As we look to 2013, we are very focused on what I would call a very disciplined, structured growth plan where we deliver growth in sales, and also growth in income. Thank you very, very much for your time today. Have a great day.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.