Shyft Group Inc (SHYF) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Spartan Motors, Inc. first-quarter 2013 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Greg Salchow. Please go ahead.

Good morning, everybody and welcome to Spartan Motors first-quarter 2013 call. I am joined today by John Sztykiel, our President and CEO; Lori Wade, Interim Chief Financial Officer; and Tom Gorman, our Chief Operating Officer.

I will assume that everybody has seen our release on the newswire and Internet this morning. Before we start the call, I need to inform you that certain statements made today during the 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-Q and 10-K filed with the SEC. However, there may be other risks we face.

And as usual, we ask that, during the Q&A period, that you ask one question and one follow-up and then if you have any additional questions, if you would reenter the queue. Now I am pleased to turn the call over to John Sztykiel for his opening remarks.

All right, Greg, thank you very much. Good morning, everyone and thank you for joining us on Spartan Motors' first-quarter 2013 conference call. Joining me today for the first time on the call is Lori Wade, Spartan's Interim Chief Financial Officer. This is Lori's, as I mentioned, first quarterly conference call. A few of you have already had the chance to meet with her in person or speak with her during a phone call.

As most of you know, Joe Nowicki accepted a new position late in the first quarter. We appreciate all of Joe's contributions to Spartan in his time with us and wish him the best in his new position. His recommendation, which I fully support, was to name Lori as his successor. She has agreed to this on an Interim basis. She is obviously excited about the opportunity as well for the future and she brings a great deal of operational expertise, including management, cost accounting to her new role and she is already making a positive impact and influence in a job, which she has been in for less than six weeks.

Q1, quick summary, was about a loss, $0.13, greater than was expected or in plan. Part of it was the revenue, working through the unexpected challenges of Bristol, the high-volume line ramp up and ERV's operational issues. Lori will provide greater detail, but many of the issues relative to Q1 from a loss perspective are Q1 specific and Lori is going to cover that.

Before we get into the detail, Q2 is expected to be profitable, not fantastic as there will be some carryover from Bristol and ERV. However, significant progress in Q2 versus Q1. As the release stated as well out this morning, we expect 2013 to be a full year of profitability and expect improvement throughout the course of the year.

As we move forward and as the release talked about, the first quarter was about three items. First, we completed the move of Utilimaster's walk-in van business from Wakarusa, Indiana to Bristol, Indiana. Our high-volume line is now running at expected rates. We are now implementing ramping up production of the lower volume mixed-model line, which should ramped up to expected rates during the second quarter. This has been a lot of work. We are excited to see more than 12 months of hard work come to fruition in the form of a high-quality product coming off the line 100% complete.

The second part was about the market validation, the acceptance of Reach. Clearly, it is defined by the order or a couple of orders that totaled 1900 units from Federal Express or FedEx as more commonly known. We built 577 units in 2012. There was a lot of pain, a lot of suffering, but we have a great product in the marketplace and now, we are very focused on improving not just the operational performance and the financial performance of Reach. I will get into that detail, as will Lori, a little bit later on.

The third part of Q1 is simply the growth in the order backlog. As you look at the order backlog of $228 million, up from $162 million in 2012 and $135 million from a year ago, this growth represents an increase of 41% compared to the last quarter and over 68%, or approximately 68% from a year ago. This illustrates the strength in our brands, our marketing and our market expansion activities.

As we shared with you during our year-end 2012 call, the first quarter was to be impacted by seasonally slow rates throughout most of the Company, as well as completing the Bristol move and the ramp up. Total revenue for the first quarter of 2013 was $96 million. We expect that to be the low point in 2013, down from $118 million in the first quarter of 2012.

As planned, DSV was our only segment that posted a negative revenue comparison to the first quarter of 2012. Revenue declined to $31.9 million from $58.8 million in the first quarter of 2012. A large part of it was just moving and all the implementation of a significant part of a $200 million business model. Granted, only 22 miles away, but this is not just about a move; it's a variety of other things, which I will cover a little bit later on.

When we look at Utilimaster's and the DSV field service solutions aftermarket parts and accessories, there was a sharp drop in revenue from $21.7 million to $5.7 million. The drop was primarily due to the end of the keyless field service program. This drop was expected as the keyless order was abnormally large. The good news, keyless validated the significant field service solutions opportunity within Utilimaster's business. To a certain extent, it is sort of like a Lowe's or a Home Depot. People have a house and then you try to determine how you can enable others to improve and enjoy it more as time goes on without necessarily having to buy a new one.

Utilimaster's vehicles are kept in service 10, 15, 20 years. Society changes, technology changes, market changes and not everyone desires or needs a new vehicle, nor can everyone afford one. There is now a dedicated sales, engineering and production group pursuing securing opportunities. We are currently working on a nice order for Cintas. That is in-house. That will be more of a Q3 event. Plus we have many other small orders already in house.

[Summary] relative to field service solutions, tremendous opportunity for existing product. 2013 field service sales revenue and income will be below that of 2012, but, as we look to 2014, we expect field service solutions to be above that of 2013 based upon the orders, the bids and all the activity that is going on.

As we move forward, there is a lot going on. But on the positive side, again, relative to Utilimaster and the Delivery & Service business, their order book has gone from $40 million to just over $100 million in 12 months. This illustrates the strength of the brand, the quality of the people. This growth is simply dynamic.

To give you an idea where it comes from, it is about doing a lot of little things right. In the month of March, and we probably should have done a release on it, but we didn't, but in the month of March, Frito-Lay PepsiCo awarded Utilimaster the Supplier of the Year Award. Yesterday, I was in Bristol, Indiana with Frito-Lay. We are doing a variety of units, truck bodies this month, profitable units for us. We are talking about a variety of other initiatives. But when a world brand-name company like PepsiCo Frito-Lay chooses one of our brands as Supplier of the Year from a group of over more than 200, it is not surprising to understand where the growth in the backlog comes from and again, I saw it yesterday as well.

Let's switch gears over to Emergency Response. Revenues rose 3.1% to $34.9 million from $33.9 million in the first quarter of 2012. The sales increase came from the Emergency Response vehicles unit, which more than offset the decline in the Emergency Response chassis area.

In terms of revenue growth, backlog growth, where is it coming from? It is simply the strength of the Spartan brand, exciting products and marketing that, when coupled with the brand and the products, we are simply gaining share and we have introduced a variety of exciting products over the last three to four years that is driving obviously backlog in the right direction. We introduced several new products at the recent FDIC show, the largest Emergency Response show in North America. One of them was the MPA 65, a pumper with aerial capability at a very attractive price point, the result of the Spartan Gimaex JV.

Another positive event that took place in Q1, Spartan's advanced protection system, which is on our Emergency Response chassis. It is a margin enhancement item. It is now being specked on over 60% of all Spartan chassis. So as time goes on and we build more Spartan chassis with APS, as we call it, we expect the margins to grow and that will grow in numbers as we move through Q2, Q3 of this year.

Total Emergency Response backlog rose to $104.1 million at the end of March 31 versus $82.2 million at the end of the first quarter of last year. An increase in Emergency Response vehicle orders accounted for a majority of the increase.

Now let's switch over to the specialty chassis and vehicle segment as that group, which is primarily made up of Isuzu, defense and RV business, reported a revenue increase in the first quarter of 2013 compared to the prior year with sales rising to $29.3 million versus $26.1 million. Most of the growth was driven by the sale of Spartan RV chassis that rose from $18.4 million to $20.4 million. Part of this increase came from a market recovery or growth. I think we are past the recovery point in the RV industry; we are now in the growth. But, also, when you look at the high horsepower, high performance parts of the marketplace, we have the dominant brand and that is reflected in the statistical data, but it is also reflected in our sales and we expect this to continue throughout 2013.

In a moment, I will cover the details or I should say, in the closing, I will cover the details of the plan to turn backlog into income. Lori is going to cover some details as well. But as I wrap up this section and as we move into 2013 and when you look at the backlog growth of 41% versus the last quarter, approximately 68% versus a year ago, this is a very big deal. A lot of companies just struggle bringing exciting product to market and as I tell people, an important part of having a strong backlog is it gives you the opportunity to drive every other part of the business in the right direction. Without a backlog, one has no opportunity. All the other aspects of an organization are sort of a moot point or an expense. We have the backlog, we have the opportunity and through a disciplined plan, drive as we call it, opportunity will become reality, which we call net income. Lori?

Thank you, John and thank you to everyone for joining us on today's call. I have had an opportunity to speak and meet with a few of you already and look forward to meeting more of you in the future.

Bristol had a significant impact on Spartan's total revenue during the first quarter of 2013 and in fact, we were not building walk-in vans for approximately a month during the relocation phase, which dramatically reduced DSV's revenue during the first quarter of 2013. Revenue from vehicle sales fell to $26.2 million in the first quarter of 2013 from $37.1 million last year. Likewise, strong sales of keyless entry product during the first half of 2012 made for a very difficult year-over-year comparison with aftermarket parts and solutions declining to $5.7 million in the first quarter of 2013 from the $27.7 million in last year's first quarter.

Note that although we were not producing walk-in vans during the move, we continued to book new orders and saw a dramatic increase in our order backlog, which grew to $100 million as at March 31, 2013 compared to approximately $40 million at the end of 2012 and March 31, 2012. So although our first-quarter 2013 revenue was significantly impacted by the Bristol move and seasonally slow sales, our rapid growth in backlog should tell you that demand for our products remains high.

With low revenue, combined with higher cost, it is not surprising that DSV's financial performance suffered during the most recent quarter. DSV posted an operating loss of $4 million in the first quarter of 2013 compared to an operating income of $1.3 million in the first quarter of 2012.

Moving on to the Emergency Response. The Emergency Response, or ER segment, fared somewhat better than DSV in the first quarter, but still faced significant headwinds and posted an operating loss. Quarterly revenue in the ER segment increased 2.9% to 34.9 (technical difficulty) million this year from the $33.9 million in 2012. Now breaking that down a little bit more, ER chassis revenue (technical difficulty) declined to $17.4 million from $19.3 million in the first quarter of 2012 while the ER vehicle sales grew to $17.5 million in the first quarter of 2013 from the $14.6 million in the same period last year.

During the first quarter, ERV incurred approximately $0.5 million related to an aerial unit recall and service campaign, plus an additional $600,000 to establish a new distributor in the Pacific Northwest. Expenses related to this project came in at the low range of our estimates of $0.5 million to $1 million that was mentioned during the fourth-quarter 2012 call. For the quarter, the ER segment reported an operating loss of $2.6 million versus an operating loss of $2.4 million in the first quarter of 2012.

The Specialty Chassis and Vehicle segment recorded improved results for the first quarter of 2013 with both revenue and operating income coming in higher than the first quarter of 2012. Segment revenue totaled $29.3 million in the first quarter of 2013 compared to $26.1 million in the same period last year.

Revenue growth versus the prior year came from the higher production and sales of motorhome chassis and aftermarket parts and accessories. During the quarter, we also produced and sold six ILAV units. Operating income for the first quarter of 2013 was $1.3 million versus a $100,000 loss a year ago. Improved operating performance was due to higher sales and operating efficiencies in the motorhome chassis, higher aftermarket parts and accessories revenue, plus the contribution of the six ILAV units produced during the quarter. The segment was adversely impacted by an accrual of $1 million for certain motorhome chassis.

Spartan's overall gross margin for the first quarter of 2013 was 6.6% of sales versus 11.6% of sales a year ago. Gross margin for the respective periods were $6.3 million and $13.7 million. The first quarter of 2012 includes restructuring charge of $3.6 million. As shared with you during the fourth-quarter 2012 conference call, we anticipated gross margin to be adversely impacted by the seasonally slower sales and the additional costs incurred for the Bristol relocation project.

During the most recent quarter, DSV incurred approximately $1 million of additional expenses due to inefficient operations during the rampup of the production in Bristol. ERV's aerial unit recall of $0.5 million and $0.5 million related to the (inaudible) up of the new fire truck distributor in the Northwest, plus the $1 million accrual for certain motorhome chassis also reduced gross margin and profit for the first quarter of 2013.

Operating expenses totaled $13.2 million in the first quarter of 2013, down $4 million from $17.2 million in the first quarter of 2012. All of our operating segments recorded lower operating expenses for the most recent quarter due to operating expense control. As a percentage of sales, operating expenses totaled 13.7% in the first quarter of 2013 versus the 14.4% in the year-ago first quarter. The first quarter of 2012 includes restructuring charges of $3.6 million. No restructuring charges were booked in the first quarter of 2013.

Spartan recorded an operating loss of $6.8 million in the first quarter of 2013 compared to an operating loss of $3.4 million in the first quarter of 2012. Spartan's loss for the quarter totaled $4.3 million or $0.13 per diluted share in the first quarter of 2013. This compares to a net loss of $2 million or $0.06 per diluted share in the first quarter of 2012.

Now turning for a moment to the balance sheet, we ended the first quarter of 2013 with a cash position of $16.6 million, down from the $21.7 million at December 31, 2012. Cash at March 31, 2013 was reduced by the $10.1 million increase in inventories, a large part due to the higher work in process at ERV and due to the Bristol relocation project at DSV.

Accounts receivables declined by nearly $7 million from year-end 2012 to $40.3 million. Accounts Payable rose $300,000 at March 31 compared to year-end 2012. Capital investments totaled $1.4 million in Q1 2013 versus the $1.1 million in last year's first quarter. With our Bristol facility now fully equipped and running, our investment requirements have declined. For 2013, as a whole, we expect capital investments to total the $5 million to $7 million range. This compares to the $12.5 million we invested during 2012, most of which was to support the Bristol project. We believe that our cash position will increase throughout the year as our financial performance improves and due to lower capital requirements as compared to 2012.

We announced today our semiannual cash dividend of $0.05 per share. This marks the 20th consecutive year of paying a dividend to our shareholders, a tradition we are very proud of and it reflects our Board confidence in our financial strength and strategic direction.

Now that we are at the final stages of the Bristol project, we are able to share our expectations for Spartan's operating performance for the rest of 2013. We expect the remainder of the year to be profitable and to show revenue growth. Factors that we expect to be positive for the year include growth in all of our segments for the rest of the year and our efforts to increase gross margin throughout the Company.

Headwinds include the remaining work to bring Bristol's operating efficiencies to expected levels during the second quarter. We are making steady progress and are on track to meet our targets by the end of the second quarter. We also have more work to do at ERV to improve operating performance as we increase production this year.

Our expectation for 2013 is to post revenue growth in the mid-single digits with all of our segments generating growth the rest of the year. We will continue to manage our operating expenses carefully, but recognize we need to add resources in certain areas to support growth in 2013 and beyond. So for the year, we expect an increase in operating expenses in dollars, but project a range of 11.5% to 12% of sales. Operating income is estimated to come in between 1.5% to 2.5% of sales for the year.

We expect each of the remaining quarters in 2013 to be profitable. We will continue to be in the launch phase (inaudible) and are working through production issues at ERV, which will constrain profitability in the second quarter. By the end of the second quarter, we expect most of the Bristol issues to be behind us and for output to increase, leading to higher profitability in the third quarter of this year. We project that the second half of the year, particularly the third quarter, should post significantly better profitability in the second quarter of 2013.

Now I would like to turn it over to John Sztykiel for his closing remarks.

All right. Lori, hey, great job and thank you very much. It is interesting, when I was asked about my thoughts regarding the first quarter, my initial thought was a sense of relief that the heavy lifting is behind us and for the first time since late '09, we are not integrating an acquisition or will physically be moving a part of the business.

As I mentioned earlier, I believe the worst is behind us and although the remaining tasks are not a walk in the park, we are making progress every day. That progress will happen as we execute the I in DRIVE -- integrated operational improvement. DRIVE is our strategy and it is diversified growth, redefining technology and innovation, integrated operational improvement, vibrant culture and extend our core. The I, integrated operational improvement, is really centered around four key objectives and really this is where most of our time is spent today in a very disciplined prioritized way.

The four key objectives are gross margin -- Bristol, Reach and Spartan ERV. As the release talked about, gross margin is a disciplined focus on gross margin improvement that permeates every operational aspect of Spartan. We have got dedicated people leading us companywide. We expect to see the second quarter to show improvement, significant improvement, compared to the first quarter and look for continuing improvement throughout all of 2013.

Moving over to Bristol. Bristol is not just about moving a facility. It is about literally creating a facility, the processes, the people, which in some respects is more dynamic than the product that continues to gain marketshare, but also delivers significant operational savings.

We are up to line rate, as mentioned earlier, on the high-volume line. We are now ramping up the mixed-model line and we will overcome those challenges, which are presented to us, both known and unknown, in Q2. It is just simply mechanics and honestly some expense, but it will be done, but we will get through it.

So Bristol, what's interesting -- and again, with a customer yesterday, I mentioned them earlier, Frito-Lay and was with another significant customer three weeks ago down in Bristol, one of the first things they said is they said, you know, in the specialty vehicle business, this is the first time I have seen all the parts fully enclosed for my product. Because the reality is you go to a variety of other specialty vehicle companies and Spartan is unique in that we store our parts inside under roof. Wakarusa, they were all over the place. Bristol, they are under roof and it is amazing how those customers -- one of the first things they notice is, wow, the products which you are building for me, the parts are actually under the roof.

When we look at Reach, in the third quarter, we start the production of the 1900 unit order for FedEx. When we restart Reach production and there is a pause right now and it is a disciplined policy, okay, it will be with a new, more efficient design that is easier to build, that requires less labor and offers substantial material savings. By the time this order is complete in late 2013, early 2014, we expect the Reach to show much better financials.

The positive news at the end of Q1, Reach was ahead of plan from a financial improvement perspective. We expect Reach to be on the positive side of gross margin somewhere in Q3, probably late Q3, but we will get there. We have got an exciting product knowledge, just a simple process of mechanics. We have the right people, mechanically (inaudible) executed.

Now let's go over to the last part of the I in DRIVE, the four most important areas that are going to turn backlog into income, Emergency Response. And it is clear we have more work to do at ERV. To give you some background, over the past three to four years, industry volume has dropped by approximately a third. While volumes may have improved slightly, they are still very depressed. Along with volume declines, pricing has dropped somewhat.

In Spartan, ERV has been very successful at gaining marketshare during the industry as shown by the 47% growth in backlog from the first quarter of 2012. However, we have been less than successful when it comes to producing vehicles profitably.

The issues at ERV, which will cover the plant at the same time, revolve around three areas -- one, low-margin pricing; number two, issues associated with an accelerated production rampup to accommodate the order growth and leadership.

When we look at the pricing and the operational and financial results, we have made price increases or implemented price increases that have rectified what we call the margin discrepancy right at square one. As we move through the balance of 2013, pricing pressures are going to be there as we have an order backlog, which is not in the position it should be.

So you should be asking the question, okay, what are you going to do or what is your plan to overcome that? Well, one, we have done a variety of different things from a bill of material cost perspective working with our supply base. Engineering is very, very focused to develop more efficient common bill of materials sets at a lower labor rate. Simply we have a dedicated focus to improve the gross margin and the profitability of every product produced today. It is not going to happen overnight, progress is being made.

The second area relative to an accelerated production rampup, in hindsight, we probably tried to ramp up too quickly and ended up with bringing too many people onboard too fast and we encountered problems. Today, the line rate has been reset at a lower rate in line with the current capabilities. Business is no different than one respect, emergency healthcare or healthcare. You have to stabilize the patient before you can work on improvement. We have stabilized ERV. We are now on the improvement side. Progress is being made and over time, we will ramp up production, but it will be done in a disciplined way where we will see both the operational and financial results, which we expect to see from the increase in production.

Move over to the third item and that is leadership. We realized we needed to increase the level of management experience, especially as it related to the Emergency Response industry and have brought Kevin Crump back to oversee the manufacturing at all three ERP locations. As mentioned in the release, Kevin was most recently working on our Bristol project and prior to that, he led Crimson Fire, which is now Spartan ERV and he led it profitably. He actually turned it around from a negative into a positive and then we moved him on. We, obviously, made an error relative to our leadership capabilities in the depth in ERV. We have realized that and the good news is Bristol is moving in the right direction and Kevin can now come back and focus 100% of his time at ERV reporting to Dennis Schneider.

So when we look at the pricing, when we look at the accelerated production rampup and the issues behind it and the leadership, we have addressed all three. We expect progress to be made in Q2, even more in Q3 and as we sit here today, we expect the ERV group to be profitable in Q4 and beyond. So in essence, we will have fixed the business. Obviously, we are trying to accelerate that, but we are excited about the opportunities going forward. Again, coming back, the I in DRIVE is all about gross margin, Bristol, Reach and Spartan ERV.

As I bring this to a close, one of the reasons I feel confident about our outlook in 2013, and I mentioned it earlier, is we are moving to a simpler business model.

Let me just give you a quick summary of what we have done over the past four years, okay and it is a lot. One, we have endured the greatest recession since the Great Depression. We have figured out how to rebound from over $400 million in lost defense revenues since 2008. In the RV industry, over 30% of the motorized Class A business has disappeared since 2007, 2008. When we look at Spartan as a whole, we have moved from being dependent, over 80% dependent on government business in 2008 to approximately 45% today. Doesn't stop there.

We purchased two companies, Utilimaster, absolutely huge and transforming for us and we have integrated it. Classic Fire, a smaller Emergency Response acquisition, we have integrated that. We have also set up an assembly agreement. Took a totally empty defense facility, 35,000 square feet, now have an alliance with Isuzu, producing 21 N-Series chassis a day. And we did all of this in less than 12 months.

The interesting thing is when you look at our ability to improve our operations when we have a dedicated focus, that Isuzu plant, out of 22 facilities worldwide Isuzu has for assembly, we are number two. We have gotten there in less than 24 months.

What is also very positive, which will drive our gross margin in Q2 and the second half of 2013, is our labor efficiency. We have gone from building 21 units a day with 49 people a year ago to now building 21 units a day with 43 people in less than 12 months. That is over a 10% labor efficiency improvement. So when we are focused, we can execute. We also have to make sure we limit the amount of moving piece.

But it doesn't stop there. We sold Road Rescue, takes up a major amount of time. We eliminated one brand, Crimson Fire, brought all the ER products under one brand. We brought Reach to marketplace. Not only did we bring Reach to marketplace, we then moved Reach in the middle of last year up to Charlotte, Michigan from Indiana because everything around Isuzu will be around the Charlotte campus.

Then we made the decision to move Utilimaster from a campus of 15 plus buildings to a campus, okay, of one building and to give you a space perspective, we are decreasing the acreage size from 102 acres to 46 acres. So we are taking a business and we are reducing the size of all that we can utilize down by 55%. Utilimaster is not just about moving, it is moving into a business model where it is about different tooling, assembly process, jigs and fixtures and everything else, because the reality is, and you took a look at today's release, Utilimaster has been very good for us over the last nine quarters, over the last few years. Tremendous growth, 3% operating income with all the restructuring charges. We are very focused on delivering that $4 million in operational savings in a timely manner.

In summary, the last four years has been a lot of work, probably at times too much on our plate. I really don't believe we had a choice because you can either stay where you are at and probably go out of business or go through something disastrous or you can make a decision to control your own destiny.

As I mentioned earlier, we were probably two to four people short from a leadership perspective; that is hindsight. Typically small companies are probably a little bit too lean at times on the leadership side. (inaudible) and that's my counsel I give to others. If you're going to put a lot on your plate, make sure you have got the right people and the depth in place to make it all happen.

Reality, late Q2, second half of Q3 -- or second half of 2013, 2014, business and life will be simpler. It is going to be about simply turning great backlog growth into net income. In other words, let's just sell products profitably. I tell you what, it is not a walk in the park; there are challenges.

If it does seem like I am excited or upbeat, the reality is I really am. I tell you, over the last three to four years, there has been a ton of work. We have done a ton to transform and move the Company in the right direction and it is exciting to move to a simpler business model where it is all about building products profitably.

In the past, we have done it in a very good way. I have no doubt, as 2013 moves on, and you will see significant improvement in Q2, that we will move the ball in the right direction. Thank you very much.

Okay, Chad, we would now like to open it up for questions. Please ask one question and a follow-up. Then go back into the queue if you have more than one question.

(Operator Instructions). Robert Kosowsky, Sidoti & Co.

Good morning. A quick question on DSV. Production was down for about a month. Did you miss shipments and can you maybe talk about products on back order maybe versus backlog and if that is the case?

Rob, this is Tom Gorman. We purposely worked with our customers knowing that we wanted to keep volume lower in the first quarter as we were moving. We ran at a rate of about 50% versus Q1 2012 with the design. The customers worked with us very well with regard to the orders being able to push things out. So we are on target for where we are and did not miss shipments.

Okay, that is good to hear. Otherwise, on the new big Reach order, so 1900 units, is that all from FedEx? Can you guys give us a timing of how long these orders are going to be, when they are going to hit the cadence and how much of it does extend into maybe 2014?

Rob, this is John Sztykiel and all of the orders are from FedEx. I have got to tell you what, that is a great win. They are paying more for this product than what they are for other products and we delivered them over 300 last year and they obviously saw the value in it. One, it is a great win. It is all for FedEx.

From a delivery perspective, production will start in Q3, okay. Whether we deliver it all in 2013 depends really upon us, I should say working with FedEx relative to the integration of the vehicles within their fleet. Do we have the production capacity and the capability to do it? Absolutely. However, integrating 1900 vehicles into a fleet even the size of FedEx, there is a lot of mechanics that have to go on in their direction as well. They are excited about the product as evidenced by the order, but it is really dependent upon FedEx. We have the capability. If it does go into Q4 -- I should say if it does go into 2014, I don't think it is going to go too much into 2014.

Okay, so that means you have ramped up production pretty substantially at Reach because it seemed like, at the beginning of this year, you were talking about maybe 1500 for the entire year, 1000, 1500.

Well, actually, your 1000 was probably right. We built 577 last year. We indicated that we expected to more than double that in 2013. This order is now on the books. So we are going through the production and the operational plans provide us the capability to deliver not just the 1900, but we do it from a right or I should say the appropriate financial perspective as well.

I tell you what, the quality of the product is absolutely dynamic today. Now we are taking the pause to make sure we do all the other things right to get to the financial outcomes, which we all desire and that should start to happen from a positive GM in Q3 and improve even more in Q4 and beyond.

Okay. What can we, on the outside, kind of look at to get some confidence that this is going to be earnings coming in from this 1900 units and not just a lot of revenue at no margin?

Rob, this is Lori. As we have stated previously, we have always done our pricing around the 2000 to be our sweet spot, to be that spot that is our base pricing, so we are very confident that we are going to attain profitability. Again, we have talked before that we have brought Frank (inaudible) on, an expert in manufacturing and he is working diligently with the team and with the engineering to reengineer, to redesign this product for manufacturability. We've talked about that before. It was never designed for manufacturability. So now we are going through and as we do this redesign, we are also taking costs out of the product. They have a great cadence and they are already exceeding where we had them pegged. So we are really I think -- we believe we are poised for this to be a profit in the year.

John Sztykiel. Rob, this is John Sztykiel. To give the group some color, you should be asking the question, okay, how did you get in this position, okay. You've got a great product, but why is it difficult to make money on. And the reality is, when we purchased Utilimaster, the product was being designed by a firm in the greater Detroit area and the Reach product was designed around a lot of automotive tooling orientation. It is a very complex product to build. And to give you an idea, to bring the two walls together, the roof and the floor and the back of the [deal] requires over 450 screws or rivets. Now that's just a lot. That is a ton, way too many.

So in essence, we have a great product, which was designed for a lot of automotive tooling, jigs, fixturing, etc. but that is not in line with Utilimaster or ours or really any specialty vehicle business model. So the design is around making it easier to build so your breakeven point and your profit point all happens at a lower volume level, okay.

The good news is, when I look at our ability into the future, okay, last year, as I mentioned on the previous call, the Q4 call, quality issues were over 150 per units in Q1 of last year. By the time we had gotten to Q4 of last year, defects per unit were less than two. So we have made significant improvement with a disciplined focus.

As I mentioned earlier on the call, Q1, from a financial perspective, we were slightly ahead of plan relative to Reach from a financial perspective, so that is exciting. We now have a very disciplined focus. Are we guaranteeing we are going to get there? No, but do we expect to get there? Absolutely. The good news is when we look at other challenging issues, one, just going to the quality issues and making such dramatic progress in a 12-month period, I am excited about our team's ability to drive the financial or I should say to improve the gross margin opportunity within that productline.

Okay, that is helpful. Then, finally, just like a broader question. So it seems like 2011 was a great year for DSV deliveries. 2012 was really good for keyless and '13 is shaping up to be a good year for deliveries. And I am just wondering is this a business where, from outside looking in, we are just going to be kind of whipsawed by the end market, not really knowing a firm way of forecasting the out year? And kind of what are your thoughts on like a growth rate for (inaudible)? It's just a very short cycle, you just get used to up and down pretty significantly?

Well, I think, one, you are always going to have in Delivery & Service some of the lumpiness of the orders just because of the larger fleet, okay. In regards to keyless, I think our growth into the future will be like that of a bulldozer going uphill. It's probably going to be slow, but in the right direction, very gradual and over time, it will go from being a small part of the business to a significant part of the business just because Utilimaster has over 100,000 vehicles out there.

If there is something that excites me about Utilimaster relative to reducing the lumpiness of the business because I think Utilimaster will still grow in single digits from a pure holistic perspective when you combine vehicles with field service solutions. What could help some of the lumpiness is they are now moving into what I would call the mobile retail end of the business -- mobile kitchens, a variety of different things. So right now, their primary business is around services and packages.

Now they are starting to move into mobile retail and I'm sure a lot of you have either seen in in the larger cities or articles, etc. where people are trying to figure out how you take brick and mortar establishments, put it on wheels, get closer to the consumer. That is the third market, which wasn't on anybody's radar screen three years ago relative to Utilimaster. The good news is we don't foresee there is really going to be cyclicality around that business model.

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

Joe Maxa, Dougherty & Co.

Thank you and good morning. So it sounds like you are making tremendous progress in all your different segments. Are you going to be at a point where you think you'll maybe hit those target goals by the end of the year or is that more of a 2014 event? I am talking the 17, 11, 6.

So I will take that question, Joe. So we believe, again, the 17, 11, 6 was always a 2014 goal, we know that and so the four points that John talked about -- the gross margin improvement, the Bristol, the Reach, the ERV -- all those things are huge impacters to the gross margin because if you look, we believe we have got our operating expenses in line; we are poised for that. So with this focus, we believe that we are poised to go into and hit that target in 2014. And you will see by the end of this year that you will see that cadence that we are stepping up from where we are today.

Joe, this is John Sztykiel. And if you listened to the summary of all the things which I indicated we have done over the last four years, I mean literally would love if this could happen in 2013, but I will tell you what, we just underestimated all that needed to be done to transform the business. I think if I did one thing right, I probably didn't share all that we were going to be doing with Tom Gorman and Jo Nowicki in the recruitment process because I am not sure if they would have come on and joined the Spartan team in 2009, 2010. The good news is it is coming to an end though.

I see. Okay. And just for clarity, the Reach vehicle, that's still -- you still keep it in your Delivery & Service segment, correct, even though you brought it up to Charlotte?

Correct. Yes, it is still a Delivery & Service segment reportable.

Okay. So the disclaimer kind of at the end of your press release said Delivery & Service in less than four months, that excludes the Reach obviously?

I think you are talking about --.

Delivery times of your various (multiple speakers).

Greg Salchow" Okay, right. That would be kind of a mathematical average and you'd be right. In the case of the Reach, that is a longer order period than would be typical for us. So what we are trying to convey with that, I guess, disclaimer or just data point rather is that if we receive an order today and we figure that time period would be what we need to process the order from ordering materials to shipping it to the customer.

And I'll ask one more. So your backlog obviously very good and that does suggest you should see some year-over-year growth in Q2. Your OpEx looks like it will be down year-over-year. So the next point is gross margin. How should we look at gross margin improvements? You have got a lot done, but if we can throw a number, give us an idea, are we at 12%? Where should we be looking at? What is your best range you could give us?

No, I think we are better than that, Joe. If you look at the ranges of the expected net income and operating expenses, that should get you a pretty close approximation of where we think the margin would be for the year. Obviously, with the first quarter having so many headwinds that impacted us, you are going to see most of that improvement as we move through the year, especially in the second half of this year.

Okay, thank you.

Rhem Wood, BB&T Capital Markets.

Good morning and welcome, Lori.

Thank you.

So my first question, specifically when will the better profitability for the redesigned vehicles in fire and Delivery & Service, when will that hit?

It improves over time. I think the main point we were making was really regarding the Reach and when we introduced the redesigned vehicle that started production in the third quarter, and as we increased that production volume, we see the profitability improving. I think John mentioned that that crosses into positive gross margin territory probably towards the end of the third quarter. And when you get into ERV, then I think we are looking at making some operating improvements throughout the year, so we see progress there. And as we work through the existing backlog, then we get the benefit of some better pricing. I don't know if we are looking towards the end of this year or more likely early '14 for that, but --.

So your margin guidance includes some of that, but maybe not all of it?

I think we -- no, the guidance would include all of that. I think any impact on the ERV side late this year is going to be from probably new orders that come in and that might get into the production schedule, but I wouldn't look for that as being a major contributor.

This is John Sztykiel and just to the group, Reach, that is really about a product -- not the whole thing, but key parts of the product, which we are redesigning, which will deliver a more profitable product as time goes on in Q3 and Q4. Relative to Emergency Response, it is -- the ERV group, it is a number of areas, but they are on a path to move where we expect them to be profitable for Q4. And part of what Greg said is product, the right pricing for the product, but a number of operational improvements we are driving throughout 2013.

Now I would like for Tom Gorman to jump in. He is here with us, our Chief Operating Officer, to also shed some light as well.

A few things (inaudible) Reach, in particular the concentration on what we have done with quality and delivery we have established and stabilized. Going forward in Q2, Q3, the excitement that we have got going on is in redesign of componentry, some of which will take some validation towards the end of the year, but much of which we can realize in Q2, Q3 that will drive cost reductions.

We have marshaled our supply base very, very well and they have come to the table with a number of ideas as have our own associates inside the plant. Been very pleased with our man hours, person hours per unit that we have had that we have driven down to within the forecast where we are coming through and bringing the product through the plant with a very, very minimal rework and the quality that John talked about on fewer than two defects per unit.

Okay. All right. And then can you talk just a little bit more about your cadence of earnings? You implied that Q2 would be modestly profitable and then substantially better in the third quarter, but that kind of implies $0.10 to $0.15 or more in the back half, assuming your EBIT margin is 1.5% to 2.5%. So I guess you expect kind of substantially better revenues and margin improvement. So kind of what are the biggest components that get you to the higher end of that?

Yes, I think your math is headed in the right direction. Our business has some seasonal component to it. In the third quarter, we look for that to have some pretty strong revenues. Fourth quarter, again, we expect it to be profitable. It is seasonally a little bit slower than the third quarter and just to give you an example, you will probably recall this. With our DSV business, most of our larger customers will want walk-in vans shipped to them and received by the end of the third quarter so that they have them in service for the holiday shipping and delivery season. So those are some things to keep in mind. We do expect each of the remaining three quarters to be profitable and third quarter is typically one of our stronger quarters.

Okay. Last one, just you mentioned some of the product -- a couple of product recall calls, I think an aerial ladder and then [distributors] in the Northwest. Were those the only ones and I guess that is just kind of a one-time thing in the quarter?

Correct. Those are one-time events and we had mentioned to you on the last earnings call that we had the aerial issue looming out there and it really was right within the range we expected. And the motorhome one is a new issue; it is out there. It is being released and being vetted as we speak right now, but those are one-time events from some historical builds that we are working through.

This is John Sztykiel and one of the things, and I will tell you, we are a dramatically different company than a lot of organizations, whether it be Emergency Response, Delivery & Service or Specialty Chassis & Vehicles when it comes to quality, warranty, recall campaigns. We always take probably a bit of a more proactive approach because, at the end of the day, we want to make sure that we have loyal customers, not just customer satisfaction. And as we looked at these campaign recalls, as they are labeled, I will say a variety of organizations probably might not have gone down the path we did, but that is Spartan because when you are focused on customer loyalty -- part of the reason we are getting the backlog growth we are today is because people trust us.

The interesting thing is the Frito-Lay PepsiCo Supplier of the Year Award was not around product innovation, but was around how fast we solved the corrosion issue for them, which enabled their fleet to stay on the road, operate efficiently, etc. So what I loved about that Supplier of the Year Award, it really wasn't driven around driving sales growth through an innovative product, but it was accepting -- okay, you have an issue, you solved it fast, we were amazed at how fast you did it and our operators, fleet salespeople, etc. said, man, now this is a great product and a great company to work with.

So we look at them as one-time events, but I will say this, and again, we are very, very focused on a warranty cost 1.5% of sales, which is world class. We are going to be above that, so we are driving a variety of initiatives to bring us back to that 1.5% of sales because, one, you not only drive a loyal customer base, but the reality is when we go through some of the campaigns and recalls, which we are today, you are taking shareholder wealth or we are taking value creation and we are moving it out into the marketplace to keep the customer loyal. That is a sign of an efficient business, as well as we understand that. So while we take a progressive proactive approach, in no way, shape or form are we satisfied or do we find acceptable these campaigns and recalls. We are determined, sort of fanatical about a comp Q or cost of (inaudible) quality at 1.5% of sales.

Great, thank you.

(Operator Instructions). Robert Kosowsky, Sidoti & Co.

Two quick follow-up questions. One is how do you see defense aftermarket sales, do you see a risk to that? Secondly, last quarter, you mentioned introducing some lower price point fire trucks that have decent margin in there. And I am wondering how the sales of that went or the inquiries of that went with FDIC and if you think that is going to be a material way to kind of tackle this pricing power or pricing pressure?

Rob, I will take the defense. So we are starting to see order intake in our defense parts, sales starting to go down a little bit, having a little bit of impact by the sequester. We've really -- it is sort of too soon to tell, but we are starting to see a little softening in the quotes, so we -- but we are still diligently working to drive through other resources to try and feed distributors there. So we are still working, we are not seeing anything significant at the moment though.

Also, Rob, this is John Sztykiel. The acceptance of the product on the MPA 65, we call it, was very, very good and the simple reason being, for your own edification, the group is about 24,000 fire departments in North America today that do not have an aerial device. Number one reason is cost. Through the Gimaex JV relationship, we have actually taken a lower-cost body design, an aerial, which actually has a European lower-cost body design and applied it to a pumper.

So again, this was the soft launch at FDIC, so we have taken an automotive approach where we will introduce it to the marketplace, refine the product specs, refine the pricing, refine the go-to-market plan. The hard launch will be in August of this year, but -- and it is going to take about 12 to 18 months to drive significant volume of this product, which we would estimate over 50 units a year at a sales tag of about $400,000. So it is a high volume, high sales opportunity.

But I will tell you this, the initial market response was fantastic. There was one department from Colorado wanted to buy the vehicle on the floor. Tom Gorman is shaking his head yes where he said I was in the market to buy a $350,000 pumper, which is the average price for a pumper on a custom chassis, but he said I know I can get my department to spend another -- or the city to spend another $50,000 or $75,000 more because we have three retirement healthcare facilities or retirement homes and they are all two to three stories and today, we do not have an aerial device and this 65-foot allows me to get up there. That is the absolute target market.

Lori answered the defense. We expect a very good response and as we used the term the MPA65 is a price-performance breakthrough product, but we are confident the margin is positive as well. I'm glad you asked about that because we are confident the margin is positive as well.

Thank you very much.

There appears to be no further questions at this time, so I'd like to turn the conference back over to Greg Salchow for any closing remarks.

All right, and guys, this is John Sztykiel, but I wanted to ask Tom Gorman -- he is our Chief Operating Officer -- what excites him about 2013 because obviously it is about operations, the I in DRIVE, but I want you to hear Tom's color before we wrap it up.

We talk about the I in DRIVE every day and three things that absolutely keep me amped on a regular basis. First and foremost is Bristol. Having come from automotive, and I have never made a secret with our associates as much as I have always loved Utilimaster, I have struggled with our original campus in Wakarusa and to see the vision come to fruition of a single building and being able to build product under one roof is extremely exciting. And we really like to see people in the plant, not only customers, but anybody else because we're really doing something that is very, very special in this segment of the industry.

The second thing, and I don't know that you'll talk to anybody that will ever say they get excited about gross margin improvement, but I actually am and we have taken two of our best people and put them on this full time. 270 specific projects that we are working on, so it is more than looking at the line items on the P&L for driving gross margin, but really putting timing-specific project and resources around moving ourselves towards the 17, 11 and 6.

Third is both the changes and the new products that we are seeing in the ER. John hit on the MPA. We have a Series 75 aerial and the excitement that was there with customers at the show with the FDIC last week was pretty palpable. The leadership that we have had in terms of shoring up what we needed to fix with ERV I think is going to yield us some pretty great results. Got a couple of other things and we talked about the Reach as well, but those are the ones that are driving me pretty heavily right now.

To the group, I just want to say thanks so much. Very, very focused on the I in DRIVE, in driving improvement, dramatic as we move along from Q2 to Q3 and Q4 as well. We appreciate your patience and understanding and honestly your loyalty. This team, which we have endured, you have endured over the last two to three years, believe me, we understand that. I am a significant shareholder as well, but I am really glad to see a lot of moving parts come to a stop and it is all about turning backlog into profit. Thank you very much.

Thank you, everybody. Have a good day.

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