Shyft Group Inc (SHYF) 2013 Q2 法說會逐字稿

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

Thank you, Catherine. Good morning, everybody, and welcome to the Spartan Motors second-quarter 2013 earnings call. This is Greg Salchow and I'm joined today by John Sztykiel, our President and CEO; Lori Wade, our Interim Chief Financial Officer; and calling in today for the Q&A period is Tom Gorman, Chief Operating Officer.

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

I must caution you that, as with any prediction or projection, there are a number of factors that could cause Spartan's results to differ materially. All known risks our management believes could materially affect the results are identified in our forms 10-K and 10-Q filed with the SEC. However, there may be other risks we face that we cannot anticipate.

Also, please keep in mind that during the question-and-answer period we request that you submit only one question and one follow-up question per analyst, that will allow everyone the opportunity to ask a question. And after asking your question you are welcome to rejoin the queue for additional questions. Now I'm pleased to turn the call over to John Sztykiel for his opening remarks.

All right, thank you, Greg, and good morning, everyone. And thank you for joining us on Spartan Motors' second quarter 2013 conference call. First, I want to thank Lori and Greg for their efforts to add more information and clarity to our earnings release, something many of you have requested and honestly is something that we plan to continue. Another good point is clarity drives accountability and we are accountable to every shareholder out there.

We also have Tom Gorman with us today for the Q&A portion of the call, similar to last time. Tom will be able to provide additional details on the operational initiatives we have underway throughout the Company.

During today's call we will talk about our results compared not only to the second quarter of 2012 but on a sequential basis as well from the first quarter of 2013. We are doing this because we want to illustrate that our businesses continue to improve on the operation side and on the revenue side as well.

In the second quarter each of our business segments showed significant operational improvement; we expect this trend to continue throughout the second half of the year and into 2014. In addition, order backlog, an indicator of demand for Spartan products, grew substantially. We are making progress on all fronts and that is great to see.

This morning the three main points I want to make -- we did what we said we would do -- be profitable in the second quarter of 2013, deliver operational improvement in every one of our business segments compared to the first. Next, the strength of the order backlog for Spartan products. Number three, we expect to be profitable for the remaining quarters of this year and for 2013 as a whole with operational momentum going into 2014.

Now let's get into a little bit more detail. Some of our other accomplishments in the second quarter include sales and order growth in the specialty vehicle and Emergency Response segments. As our markets recover and we gain market share, revenue growth in these segments propelled Spartan as a whole to higher revenue for the quarter and growth in order backlog.

Let me just talk about the ER backlog for a second. In today's Wall Street Journal front page Section B Marketplace there's an article on Rural Metro Ambulance Provider Bankruptcy. Part of also what is taking place is fire departments are taking over more and more of patient transport emergency response service. We recognized this trend several years ago, started the development of more multi function big red fire trucks.

So when you look at our backlog growth, our revenue growth today it was because we recognized a strategic operational shift and the marketplace several years ago. And now we are benefiting from that, not a company struggling with it, but we are benefiting from it. There's another reason why we sold Road Rescue, because we knew the core ambulance manufacturing business model as it was today, or as it was several years ago, was going to be severely challenged as the future unfolded. And this is important because leadership is not just about impacting today but creating a better tomorrow as well.

As a whole the order backlog increased to $233 million at June 30, 2013 from $162 million December 31, 2012. And was at $173 million a year ago at June 30, 2012. This growth represents an increase in backlog of 34.5% from a year ago. We are doing a great job executing the D in DRIVE diversified growth.

As I mentioned earlier, all of our operating segments reported improved results compared to the first quarter of 2013. We are focused, executing with discipline as one team and the results are evident.

There is more work to be done. There are also challenges that lay ahead. As I use the term internally and externally, nothing is a walk in the park anymore. But substantial improvement and progress was made. And honestly that feels good.

Spartan met the goal we shared with you last quarter for modest profitability, posting a profit of $0.02 per diluted share for the second quarter of 2013. This was a substantial improvement from our first-quarter results and marks an important step toward sustained profitability.

While this process often takes longer than expected fixing a business, it is a task we have successfully completed recently. A perfect example is our RV chassis business, let's roll the clock back to 2012.

The RV chassis business lost nearly $5 million in 2012. We launched an intensive effort to fix that business. Today the business has turned into a strong performer making a sizable contribution to our overall revenue growth and profitability with significant room for upward potential. In reality, the RV business is our largest business segment to go after and we play in just a small market share today or market niche that will grow over time.

The reason I bring up the past is I'm sure you should be asking, as I am often asked, has this organization ever fixed a business before? Can I trust them when it comes to fixing current issues? The answer is, yes. It should not surprise anyone that we have made substantial progress in Q2 as we have done it before, most recently in the RV business.

Now I'll turn to some of the quarterly highlight segments of our business segments. Delivery & Service business reported improved results compared to the first quarter of 2013, but still reported an operating loss. It's a loss, the good news is we made substantial progress. Do we expect them to be profitable in the second half of the year? The answer is yes.

The two main reasons for the second quarter loss was a decline in revenue, especially in aftermarket parts and field service solution sales, and the Bristol launch to ramp up expenses. You will recall that in the second quarter of 2012 we were finishing a large field service program, keyless, for UPS that ended in the third quarter of last year. That was a huge driver to income and revenue. The absence of those two thus impacted our year-over-year comparisons.

Next you add in a large one time related expenses to the start-up/launch and now into the ramp-up phase of Bristol, we've had a significant financial effect in the first half of 2013. When viewing DSV's performance it's important to remember that the Bristol facility remains in ramp-up mode and has been producing walk-in vans for less than six months.

Compared to our original timetable for achieving certain ongoing labor efficiency and other operational improvement targets, we believe we are about 90 to 120 days from ending our ramp-up period. That will result in incurring more expenses during the third quarter than we projected and we will not anticipate to realize the cost savings on a fully annualized basis until the fourth quarter of 2013.

Do we expect Utilimaster to be profitable in Q2 -- or Q3, I should say? The answer is yes. So again, we expect continued operational improvement from Q2 two Q3. Do we expect them to improve that profitability in Q4? The answer is yes. And as we look forward to 2013 the second half we see substantial improvement in Utilimaster and we see substantial operational improvement going into 2014 on an annual basis.

To be very specific to give you some color, Utilimaster or Bristol produced 93 walk-in vans in the first quarter of this year. In Q2 we produced 914 walk-in vans in this year. So that is a huge, huge change from an operational production rate.

We are also very focused on meeting our customer delivery commitments, thus we are spending more over time than what we initially anticipated. So while we are behind 90 to 120 days from completing the ramp-up schedule, we are meeting our customer commitments.

And the reason I highlight that or accentuate that, our [honorable] competitors typically listen to the webcast of these calls and I simply do not want anybody going out there saying, Spartan is indicating that they are late on their customer commitments. We are not at Utilimaster. We are also moving forward on a variety of other areas to continue the improved profitability.

Now let's talk about Reach. During the second quarter we made a lot of progress on Reach as well. Our team continued their work to take out the material cost and make Reach an easier less expensive product to build. The good news is we are ahead of plan in this area.

Something else still very exciting is that we also began the production of the Reach for a 1,900 unit order for FedEx early in the third quarter. We will be starting at second shift later this month. Now remember that term, second shift. It is great to hear the term second shift. Why? Because it is a more effective use of your facilities, drives a better return on assets, uninvestigated over time will improve financial results.

Production of this order should continue into early 2014. As of last Thursday we were actually two units ahead of plan. We expect to meet or exceed FedEx's delivery requirement with a high quality product. The latest [US entering] production already incorporates the changes we have validated so far from a cost reduction perspective.

In addition to these positive developments we're also working on a pilot program for a version of the Reach for another large customer. The Reach is an exciting strategic transformational product for Spartan, we expect it to move over to the positive side of gross margin late Q3, somewhere in Q4.

Another Q2 positive that illustrates our operational capabilities is Frito-Lay PepsiCo named Utilimaster its supplier of the year for 2012. Now we did make a mistake there, we probably should've done a release on that a few months ago but we did not. But that is a very, very great day from one of the world's largest best brands, and they own a lot of vehicles, their fleet is huge.

Shortly after receiving this award we delivered 254 truck bodies to Frito-Lay that were built in Charlotte on the same line as the Reach product line. Our team was able to transition to building a different product with high quality ahead of schedule, demonstrating what we are able to do from a flexibility perspective. The good news is we expect more business from Frito-Lay PepsiCo in 2014.

This also illustrates -- and let me focus on this for a second -- an operational shift within Spartan which will drive improved financial results. Rather than new facilities we are increasing our line flexibility as we strive to build more products in fewer facilities moving to more and more second shifts within each facility. As this happens our financial results will improve.

During Q2 -- now we're going to switch gears to the Specialty Vehicles group -- was also a strong performer. Specialty Vehicle revenues increased 42.9% year over year in the second quarter, or by $9.9 million to $32.9 million. The revenue increase was driven by growth in motorhome, RV shipments, from a chassis perspective, and building 18 ILAV units during the second quarter of 2013.

Although we do not have a follow-up order for additional ILAVs, we do believe there is a future for this product as ILAVs are probably the most cost-effective mine resistant ambush protected vehicle out there. So again, we are committed to the defense business, again it is going to be very, very small as time goes on. However, we do have a role within that segment.

All of the business units within Specialty Vehicles posted revenue growth, but I wanted to mention specifically the RV chassis unit which represents our largest growth opportunity today. Through May Class A motorhome sales were up 28.1% compared to the same period of 2012. Rising consumer confidence, housing values support future sales growth of this industry.

Spartan is continuing to evolve its products and develop the right strategic plans to create new growth opportunities within the RV market. We plan to combine these growth initiatives with strong products, great marketing and improved operational execution to deliver solid financial results.

Now we're going to switch gears, last business segment, Emergency Response. They posted slight revenue growth in the second quarter compared to last year as sales of our custom chassis grew offsetting lower firetruck revenue at our ERV unit. Revenue in the second quarter of 2013 was $43.8 million, up slightly from $43.6 million a year ago.

You will also recall from the first quarter call of this year that we made a decision to reduce the production rate at the ERV unit for Q2 to concentrate on improving assembly processes and quality in removing production bottlenecks and to improve our operational efficiency. The good news was we delivered on all those fronts as the Emergency Response, the ERV unit, showed significant improvement in operational results compared to the first quarter.

Adding to that positive contribution of higher sales of custom chassis resulted in a profitable segment for the second quarter as a whole. We look to the ER segment to continue its path of better financial performance for the rest of the year.

When we look at Delivery & Service, while they reported significantly improved second-quarter results from the first quarter this year, it also faced a difficult comparison to the second quarter of last year. As mentioned earlier there was keyless both from a sales and an income perspective. So revenue declined to $44.2 million from $47.8 million in the second quarter of 2012 due to the drop of aftermarket parts, the keyless, etc.

The decline in aftermarket sales overshadowed the increase in vehicle sales to $38.6 million from $25 million a year ago. Vehicle sales increased in Q2 2013 from the prior year due to the sale of 140 Reach vans and a 60% increase in traditional walk-in van sales despite the Bristol start launch ramp up.

And honestly, that is quite amazing -- we are increasing vehicle sales, which is our core product, versus a year ago, okay. And we're starting up a new facility and then we're going through the ramp-up phase. I mean when you think about that, that is a rather astounding set of data points, which honestly it excites not just us but a variety of people for the future.

In addition to the higher vehicle sales in the second quarter, DSV's order backlog continued to increase reaching over $100 million at June 30, 2013 versus $75 million a year ago. This represents an increase of 33.7% year over year, and shows the long-term growth potential of the Delivery & Service business.

An interesting quick closing on why backlog growth, etc., in Delivery & Service -- we use the term internally and externally, the Utilimaster is the medium or the middleman between bricks and clicks. And so, as we look at Utilimaster Delivery & Service, truck bodies, walk-in vans, Reach, etc., it has an unbelievable future ahead of us.

In summary, we saw operational improvement across the board and strong growth in backlog. We expect to see more in the second half of the year marking further improvement in each quarter; it will be incremental but it will be positive. Now I will turn the call over to Lori Wade to provide more details of Spartan's second-quarter 2013 financial results. Lori?

Thank you, John. I want to thank everyone for joining us today and for all the support I've received during these last several months. I've met a lot of great people and I'm very excited for the future. I'm proud to say that Spartan met the commitment we made to you last quarter and posted a profit of $0.02 per diluted share for second quarter. This compares to net income of $0.07 per diluted share in second quarter of 2012.

We will discuss our most recent results in comparison to results for the second quarter of 2012, but we think it is also helpful to discuss sequential quarterly results, that is from the first quarter of 2013 to the second.

First looking at revenue -- sales grew to $120.9 million from $114.4 million in the second quarter of 2012. Revenue for SV and ER segments increased year over year while DSV declined due to a significant drop in aftermarket and field service revenue. The (inaudible) chassis sales increased in all three segments in the second quarter 2013 compared to last year, indicating our markets are improving and we are driving customer demand.

As you recall, DSV's first quarter performance was negatively impacted by the impact of moving walk-in van production to Bristol and its associated start-up cost. During the first quarter 2013 we were heavily involved in the Bristol relocation project and didn't begin walk-in van production until the middle of the first quarter.

While we have work remaining to do on the Bristol project, DSV's performance improved dramatically on a sequential basis with its operating loss declining from nearly $4 million in the first quarter 2013 to an operating loss of $1.6 million in the second quarter. Clearly we are not where we need to be yet, but we results are showing a definite improvement from first quarter to second quarter. Based upon our current outlook for the rest of the year, we expect that trend to continue and for DSV to be profitable during the second half of 2013.

Now turning to Emergency Response or ER. That segment posted much better performance on both a sequential and a year-over-year basis. An operating profit of $0.4 million in the second quarter of 2013 compared to a loss of $2.6 million in the first quarter 2013 and a loss of nearly $1 million in the second quarter of 2012.

Sales of custom fire truck chassis increased compared to both periods and more than offset a temporary reduction in the build rate of fire trucks at Spartan ERV. We expect ERV's performance to improve throughout the second half of the year making a positive contribution to the ER segment's overall profitability.

Now onto the specialty vehicle segment. This segment performed well during the second quarter of 2013 with both segment revenue and operating income higher than in the second quarter 2012. Revenue increased by $9.9 million from the second quarter of 2012 with $4.2 million of the increase coming from higher production and sales of RV chassis.

During the quarter we produced 18 ILAVs, (inaudible) and gas production increased and aftermarket parts increased compared to the year-ago second quarter. Revenue growth in each business unit combined with the success of operational improvement initiatives implemented over the past year that John talked about drove operating income to $3.9 million compared to income of $0.6 million in a year ago second quarter. RV chassis orders continue to increase as more buyers in the high-end diesel market demand of Spartan.

Moving on to Companywide performance, our performance for the second quarter -- gross margin came in at 12.9% versus 16.4% in second quarter 2012. The decline in gross margin was due primarily to expenses related to the Bristol launch including the cost of extra support personnel and inefficient production, plus the impact of lower aftermarket parts and field service as mentioned earlier. On the positive side the second quarter's gross margin of 12.9% was a substantial improvement from the first quarter 6.6%.

Operating expenses totaled $14.6 million in the second quarter 2013, down $0.3 million from the $14.9 million in the second quarter of 2012. The SV and DSV operating segments recorded lower operating expenses for Q2 of 2013 while ER incurred higher expenses due to higher marketing expenditures. But as a percentage of sales operating expenses totaled 12% in the second quarter of 2013 versus 13% in the year-ago second quarter.

Spartan posted an operating income of $1.1 million in the second quarter of 2013, down from operating income of $3.9 million in the second quarter of last year. On a per share basis Spartan earned $0.02 versus $0.07 in the second quarter of 2012.

Now turning for a moment to the balance sheet. We ended the second quarter of 2013 with a cash balance of $15.6 million, down $1 million from March 31 of 2013. The cash balance was adversely impacted by $1.7 million in sales made on extended terms that otherwise would have been collected prior to June 30, plus $3.5 million that was received on July 1.

Also during the second quarter Spartan paid a cash dividend of $0.05 per share totaling $1.7 million. Accounts Receivable rose by $10.3 million from March 31, 2013 to $50.6 million while inventories declined sequentially to $73.7 million from $77.7 million at March 31. We believe inventories can be reduced further but note that levels fell from the first quarter of this year despite a sales increase of nearly $24.8 million in Q2. And with further sales increase expected in Q3.

Capital investments totaled $1.1 million for Q2 of 2013 in addition to the $1.4 million invested in first quarter. We forecast capital investments of $4 million to $6 million for 2013 as a whole. This is down considerably from the $12.5 million we invested during 2012, the vast majority of which was the Bristol project.

Now looking to the second half of 2013, we continue to expect Spartan to be profitable in both the third and fourth quarters of this year as all of our operating segments continue to improve. For the second half of this year we currently expect both quarters to be profitable and for profitability to increase on a sequential basis. By that I mean we expect the third quarter to reflect earnings growth from the second quarter and for the fourth-quarter's earnings to grow compared to the third quarter of this year.

We continue to expect revenue growth in the mid single-digits for 2013 with all of our segments generating growth the rest of the year. We expect operating expenses as a percentage of sales to be within the 11.5% to 12% range for 2013 while our operating income of 0.5% to 1.5% for the year. Now that this range is for the entire year and includes the first quarter 2013 during which Spartan reported a loss of $0.13 per share. Our forecast for operating income as a percentage of sales for the second half of the year is higher than the projected range for the entire year.

So to summarize all that, we expect Spartan to be profitable for 2013 as a whole and for the third and fourth quarters to show sequential earnings growth over the second quarter of this year. Now I'll turn it over to John Sztykiel for his closing remarks.

All right, Lori, thank you very much. The reality is we hope we have shown you how Spartan's performance is improving and that we have improved significantly since the first quarter of this year. And understand this, while all of us seem enthusiastic on the call and we're excited about the progress, in no way are we satisfied. But there are also significant challenges.

As I indicate to others, it seems like it is a lot easier to sell today but it is a lot more difficult to make money than what it was five, 10, 15 years ago. But we are committed, we are focused, we've got a great strategy and drive and we're disciplined in executing to keep our commitments to be profitable as time moves on a consistent and a growing basis. And you saw that.

As mentioned, we will get there by executing our DRIVE strategy in a disciplined way. We have demonstrated revenue growth that exceeds the growth rate of our markets by executing the D in DRIVE -- diversified growth. Reality, this should surprise no one and it is a key foundation as to white Spartan is such a compelling story, whether we are public or private.

As the world changes its needs in vehicles change. Meeting those changing needs with Specialty Vehicles is where Spartan comes in. As I sit and look out our window today I see a number of Reach FedEx vehicles. And what's exciting is soon I and others are going to start to see those on the street delivering packages. And that product didn't even exist three years ago. That just shows you how fast we can not only develop, react but deliver life-changing market transforming products.

Our success in meeting those changing needs comes from really five areas -- one, product innovations introduced over the past 12 to 36 months. Innovation or the redefining technology innovation, that is the R in DRIVE, is a core foundation of our strategy. Creative, dynamic, go-to-market sales and marketing efforts. Number three, we are benefiting from economic cycle/recovery in Delivery & Service, Emergency Response and Specialty Vehicle markets. Four, enhanced distribution both in North America and abroad. And number five, growth in global infrastructure. In particular, Emergency Response.

Reality, Emergency Response is a basic need to be provided by governments. And we are benefiting in particular in South America, in China and look forward to continued growth not just in the second half of this year but potentially in a very large way in 2014. The end result, the outcome, order backlog up 2% from Q1 of 2013 and up 34.5% from the second quarter of a year ago.

Meeting changing needs is why we brought the Reach to market. Now I just want to talk specifically about that, because it is a core issue which we are fixing in a positive way, it is a key strategic product for us. The Reach is a high-end, high-performance commercial van that delivers great operational results to the fleet operator.

According to a recent R.L. Polk study, in 2009 the commercial van market was 155,000 units and is expected to grow to 301,000 units in 2013. In 2014 the commercial van market is expected to increase further to 365,000 units. With the Reach, and it is a high end, high-performance commercial van that delivers great operational performance, all we want -- our strategic plans are set around is just 2% to 3% of that market, just 2% 3%. Now when you start to do the math that 2% to 3% is 7,000 to 11,000 units a year, a micro niche within the commercial van marketplace.

Achieving this goal will not be easy, it will take time, but as you look at Emergency Response -- when you look at Specialty Vehicles, RV chassis, MRAP's, etc., we have already demonstrated that we can carve out micro niches within the markets we focus in on.

I also have two great articles covering the operational why of the FedEx Reach order, that is one article, and the other detailing the commercial van marketplace of which I pulled the data from -- just read to you a few moments ago. If any of you would like a copy of those articles please contact Greg Salchow.

You know what's closing in great is that Reach, as I mentioned earlier, is a key strategic product. I talked we're in a disciplined way going down a path to execute a plan to carve out a micro niche which is 2% to 3%. And you know what is nice is FedEx is a great place to start with a significant order. This is all wrapped up with an integrated operational improvement, or the I in DRIVE. And it is what brings it all together delivering the results which we expect.

Q2 was a positive step in the right direction as all segments improved. Are we satisfied? No. Are we pleased with the progress? Yes. Are we committed to the future and improving the results? Absolutely. In closing, backlog was up, operational improvement was up, we are disciplined, working together as a team, executing DRIVE and keeping commitments relative to increasing shareholder value. Thank you. Operator, we are now ready for questions.

(Operator Instructions). Joe Maxa, Dougherty & Co.

Looking at the second half, it appears to have some increasing production on Reach and Utilimaster picking up, the way it sounded. Also improvements in the cost. So what are we looking at sequentially Q3 to Q4? I'm just trying to get a sense on top-line, obviously Q4 looks stronger, and then bottom-line, if it is a pretty significant bump sequentially on the op margin side.

Again, as we talked about, we said that Utilimaster we expected to be profitable in both the Q3 and Q4 with each quarter sequentially getting better. We do expect volume to continue at a nice steady pace. Obviously Q2 was significantly increased over prior Q2, but we do expect a nice steady trend for the year.

So looking -- okay, so you don't want to give specifics on how they might be tracking at this point. Let me ask on the ERV in particular -- very strong backlog. How should we think of the timing of those sales?

Well, and Joe, this is John Sztykiel, and then I'll switch it over to Greg. But the timing of the backlog in the Emergency Response business is typically anywhere from six months to a year depending upon the complexity of the product. For example, when you get into very, very complex pumpers or aerials you're typically nine to 12 months out. Simple pumpers or firetrucks, patient transport, etc., you could be anywhere from four to five months out to nine months. So, but on average a good rule of thumb is six to nine months.

We have been seeing a consistent increase in backlog each quarter, so I was expecting at some point you would turn that into revenue if (inaudible) continue to grow that. So that is what I was looking for.

Right. Yes, Joe, you will see that backlog translating into revenue and that is occurring. The order patterns have been pretty strong so far this year. So we have been receiving more orders. And so while the revenues increase we're also seeing backlog come up somewhat.

And going back to your first question, Joe, I think what you are going to see the second half of the year is, as we make improvements at Bristol you will see production there increasing and you will see the profitability improving. A lot of that is going to be the same issue with ERV and we are making some good progress there.

Again, as we said, we think that -- it probably becomes profitable during the fourth quarter of this year. But results improve sequentially from second quarter to third quarter and then third to fourth quarter. So I think if you look at the cadence of earnings, look for a sequential improvement each quarter. So third quarter looks better than second and fourth looks better than third.

Joe, and this is John Sztykiel. One of the things -- you talked specifically about Emergency Response as well. And one of the things, as I noted when I was talking earlier on the call, is we made a disciplined decision to reduce the line rate in the fire truck body group ERV in the second quarter of this year in order to drive efficiency improvements and improve some of the processes in the office so we could have greater efficiency within the shop.

We are seeing that, which is one of the reasons why you saw the operational improvement in the body group, so that was nice. But in Q3, you are correct, you will see above growth from an Emergency Response perspective in Q3 versus Q2 which will also drive operational improvement, because we are very focused on turning backlog into income.

And the reality is -- while I didn't say, the reality is our backlog -- I should say our order cycle is probably a little bit too long right now, anywhere from maybe 30 to 45 days in our Emergency Response product and we are conscious of that. So we are very, very focused on reducing that order to build cycle.

Just one more for me, if I could. Can you just discuss -- you talked about the macro being favorable. What have you been seeing or how have order trends been since the end of the quarter and what does the pipeline look --? I am just trying to get a sense for where you may expect backlog to be at the end of the third quarter? Thanks

Interesting, from a macroeconomic perspective the RV business is doing really quite well versus where it was last year and the year before. And it is not just benefiting us but a number of other companies that are public in the RV market. And the interesting thing is part of it is pent-up demand, but the other part is when I look at the RVs today, whether they be towable or motorized, they are of much greater value, they absolutely are of much greater value.

We are also seeing the benefits of easier financing or financing flexibility. Plus the other thing which I think a lot of people underestimated is the market was so soft for two or three years in the RV business that people kept their motorhomes or towable's for another three or four years, so now when they go in to do a trade in they are not as upside down as what they were three or four years ago.

So you have in essence pent up demand with easier or more credible financing. When you look at the Emergency Response side of life, the bid activity is good not just for us but a variety of other companies. Those that have been innovative products I think that have been more multi function oriented. So as the economy continues its slow growth the nice thing is in Emergency Response the rate of calls continues to go up.

And people look at Emergency Response as just -- as a simple basic need, no different than they look at education [road]. So there is good recovery there from that perspective. When we look at Delivery & Service there is growth in truck bodies, walk-in vans, that is really dependent upon the recovery, per se.

The Reach is really what I would call a market transforming cannibalization kind of product where we are going in to a large market and we are literally carving out a unique micro niche where people say, you know what, this is worth the extra money to buy this Reach product. The value we get out of it, it is absolutely dynamic.

So from a macro perspective feel good what is going on with North America. All three markets are boding well for us. I would probably say RV is growing the fastest, Delivery & Service second, Emergency Response third. And the Reach is truly a market cannibalization transforming product. Did I answer your question, Joe?

Walter Liptak, Global Hunter.

Good morning, guys, and a good quarter. Okay I wanted to ask kind of along the lines of the last question. In the mix conversation that you were talking about with higher volume versus lower volume in the mix, when did we start to see that switch? And when you are talking about lower volume, higher-margin I presume you're talking about ERV?

And Walt this was -- this is John Sztykiel. The lower volume we went through in Q2 where we reduced the production rates in the emergency vehicle body group. Now we're actually increasing production rates in Q3 and into Q4.

So as we look to the second half of the year you are going to see increased production in the Specialty Vehicles side, which includes RV business, the Isuzu product lines, you'll see increased production rates in the Reach product line, you will see increased production rates in Emergency Response being chassis and bodies. You will see increased production rates on walk-in vans.

Then in Q4 you will start to see some reduction in the walk-in van side of life from a business perspective just because of the cyclicality where a lot of their fleets want their product typically by the end of September or October.

Okay, all right, got it. So it sounds like a pretty good second half. I wonder if we could talk about the Bristol inefficiencies a little bit and if you could quantify how much cost you absorb either in material or time and how much comes out or has already come out that you'll benefit from in the third quarter?

And what I do -- I will let Lori talk a little bit about the macro from a cost perspective and then, Tom Gorman, why don't you talk a little bit about some of the operational improvements we have done or accomplished in the Bristol ramp/launch phase, okay? Because we are past the significant cost portion, now everything is on declining costs relative to moving forward in the ramp up. Lori.

Yes, well, so we roughly I would say have in the range of a couple million dollars rough numbers of inefficiencies, some material cost, some things like that that happened in Q2 that we expect to be reduced in Q3 dramatically. We are -- as John mentioned, we believe though that we are going to meet our customer demands and to have for customer satisfaction, we're going to have to spend a little bit of money in Q3 for overtime to do that. So but for the most part we still expect it to be profitable -- that DSV will be profitable in Q3 as compared to both Q1 and Q2.

Okay, good, that is good color. The move -- I'm sorry --. Okay, I'm sorry, Tom go ahead.

No, this is Greg. I was just saying that this is probably a good time for Tom Gorman to talk about some of the initiatives we have underway at Bristol that might give you some more color on what is going on and some of the progress we expect to make in the third and fourth quarters.

Okay, good idea, that is perfect.

Tom.

Tom, are you there?

Yes, I am. Thanks, Greg. Hi, Walt. The -- let me talk about a couple areas. One is on the direct labor side, we are continuing to drive up the daily rate that we have in the plant. As John mentioned, we had 90 some in the first quarter and 900 vehicles came out in Q2. Currently we are running at above 20 inching into 25 to 35; our real pacing that we want to hit is 35 vehicles a day. And we are manning to be able to hit that particular number.

On the direct labor side we've had some pretty good control, while Lori mentioned we'll be looking at overtime to meet customer commitments. The area that is receiving a lot of concentration for us here really Q2 and Q3 has been in materials management inside the plant. As you know, we went from a fairly large campus to a small area with all the material inside the plant and being able to deliver that in a timely fashion to the production lines has been one of the challenges that we are meeting.

And to that end we have got not only a daily walk around but a daily measurement that we do, how many times did somebody from the line have to call into materials to be able to do that. And we have gone from well north of 10 calls a day on the 45 different stations we've got, Walt, down to fewer than five at this point. So we are seeing some pretty rapid improvements.

The third area I will do is that while we have got a fair amount of stability in the Charlotte campus we're continuing to take some of our better resources that we have in Charlotte and plug them into Bristol so that we can accelerate those improvements. And that is both in manufacturing, engineering, materials management and purchasing and supply side.

Okay, good. These sound like all are pretty normal production ramp issues that you have to work through. I wonder if you can give a timeframe on when do you think this operation will be operating at sort of the level that you would like to see in terms of capacity utilization and then efficiency.

I think we will -- we're certainly going to see it when we are getting into the third quarter. We have got a couple risks that may take a little longer, but nothing that I think is going to impact some fairly significantly improved performances.

We brought in some more automotive experienced people on the consultant side that are giving us a hand in terms of understanding the type of serial production that those of us that have been in automotive are used to and being able to drive that cultural change down there. But I think the strides we are seeing into August and September are going to make the third quarter a pretty strong improvement quarter for us.

Okay, good. And if I can ask another one on -- just generally on material cost. I guess it would include the Utilimaster businesses. What we are seeing from some of our companies is a material prices are coming down and they are able to maintain some pricing and getting their margin benefit from that. How would you characterize your material at this point?

Agreed. We are coming down, which had some -- the materials group our supply chain group will hit their cost reduction targets this year that we set for them which were clearly aggressive at the beginning of the year. It has not only been because of commodity shifts, but some real cost reductions that are both real and sustainable.

I think our next phase that we are looking forward to, and John has been -- has really led a lot of the strategy -- John Sztykiel has led the strategy, is that we do more things with common -- we do more common parts while maintaining the flexibility and taking down the number of final part numbers that we have so we can enjoy more.

And we -- and part of a consortium down in Bristol in particular that has really yielded us some good opportunities on the supply side as we are working with other companies in the area for some combined purchases that has helped us in aluminum and wheels and some other areas.

Okay, good. All right, thanks very much. And if I could switch back to the ERV for a second. And over the last couple of quarters and including this quarter it is very pronounced is the lower backlog and fire truck chassis versus fire truck bodies. I wondered if you could just address as you increase production rates just what that means in terms of profitability in the third and fourth quarter? And maybe why that shifts (multiple speakers) pronounced.

You know, Walt, this is John Sztykiel, actually that's a positive. What's interesting is in the fire truck chassis side of life our backlog -- I should say our order to production is probably three months to five months versus six months to nine months when I mentioned on the complete vehicle. So while the backlog is down or flat, what we have done is actually we reduced our cycle time in that area.

So the interesting thing is we are doing extremely well on the ERC side of life from a chassis backlog perspective and an order intake perspective. I'm not saying everything is easy from that perspective, okay. We have seen a mix shift to slightly lower price products on the Emergency Response chassis side of life. But what is nice is in Q2 we saw gross margin improvement on the fire truck chassis side of life which was a key contributor to the profitable view or I should say the overall profitability of the Emergency Response crew.

So we are very, very focused on reducing the cycle times or throughput of our vehicles. But on a chassis backlog side of life, right now really don't have any concerns and I was very, very pleased with our gross margin improvement.

Okay, all right, good. And why is it that the cycle times are so stretched on the fire truck body side?

One, we underestimated the growth, okay, we simply underestimated the growth from a backlog perspective. And in this business, because everything is specialty vehicle, more so than what it is in delivery and service or even RVs or even the ILAVs or Isuzu. We underestimated the growth, it takes a while to get the sales, the engineering and the purchasing, all of that to be done effectively and efficiently.

And to be quite blunt, we thought we could accelerate the front end of the business being those three disciplines I mentioned earlier much faster than what we were able to. So in late Q1, early Q2 we made a decision to reduce the line rate because while in Q1 we were producing product on the body side the emergency vehicle side, we were not doing it efficiently with high-quality. So that is why you saw the slowdown from a rate perspective in Q2 versus Q3.

Now we're actually increasing the rate of production again. We have done some very, very good work on the front end side in sales and engineering and purchasing and we expect to increase production in Q3 and Q4. Now the interesting thing is we know we can to grow our business at very, very good margins by reducing our cycle time from when we get an order to deliver the product. And you saw that in the chassis side.

Okay, but that doesn't mean that as you ship the product and increase production in the third and fourth quarter that there is some margin impact from this longer cycle time, does it? Or you can still get the margin out of it, right?

No, no. No, we will still get the expected high margins on those products.

Okay, good. Okay, thank you very much.

Robert Kosowsky, Sidoti.

Just to build on the ERV side of the business. So the improvement that we saw in segment earnings, was that largely on the fire truck chassis side gross margin increasing. And have you seen gross profit increasing on the fire truck body? And what are the new orders that you are putting in backlog look like from a margin standpoint?

I will take that one, Rob. Actually the improvement from first quarter to second quarter I would say is pretty close to being 50-50 between the chassis and the body side. Both sides did a nice improvement. Sales were up for both segments and so we have some fixed absorption. We had some nice margins on the ERC side that John told you about. And the margins for the ERV side are definitely trending upward and very positive for Q2. So I would say it is probably about a 50/50 split between the two for that growth.

And how do the new orders look from a margin standpoint? I'm sorry to interrupt.

No, they look -- they look very positive. Obviously we talked about last quarter that we had a few that were priced at a lower level. But we are being able to offset some of that with efficiencies and on the shop floor. So we do believe still the backlog is still a very profitable backlog and that it will only continue as more of the units flow through with the higher selling price.

We mentioned that we took some pricing actions earlier in the year and the closer we get to year end the more we start to see that. We started to see some of the very small positive impact from that in the quarter. But as we go through the year we expect to see more favorable impact.

Rob, this is John Sztykiel. One of the things -- I just want to jump in quickly, okay -- is Dennis Schneider who runs our emergency group, okay, came from Bobcat where he was the Chief Operating Officer and he came on board in January, I think it was, of last year. The gentleman comes on board, we eliminate a brand, Crimson Fire, we combine everything into Spartan under one brand. And so you've seen a lot of growth because of that.

The reality is from one individual for probably our own structure was too much, okay, for Dennis, so we have added some very, very key people in there. And what is that is what makes me feel good with some of those key people, but also Dennis' operational excellence, we did a great job on growing the sales. We were a little bit behind on improving the operational process and the gross margin. Now we are honestly starting to get some acceleration there.

In hindsight, when Dennis came in we probably should've had one or two other key operational people underneath him because we knew a lot of his time was going to be very focused on the combination of the brand, eliminating Crimson Fire and working through all of that and the consumer and the dealer part of the marketplace.

Okay, that is helpful. And then otherwise on the specialty vehicle side a similar question, kind of just bridge the sequential increase in operating profit. How much was due to just I guess the ILAV sale that you had? Because it looks like motorhome chassis were pretty steady. And how sustainable is this higher margin profile?

Lori.

Yes I will take that one. So I would say that of the growth in the whole SV from first quarter to second quarter I would say probably around -- oh, say between a quarter and a third of that came from the growth in the defense business. But we also grew, as we talked about, the Isuzu or the end gas business, that grew dramatically. The APA continues to be strong, we still have some nice defense part sales there, that grew nicely. And in the SV business, again remember in Q1 we took the $1 million reserve on the recall for the motorhome project. So obviously that wasn't in the Q2, so that showed some of that significant improvement as well.

Okay, so there was nothing majorly I guess lumpy in a positive light in this quarter. And if you had a similar revenue you should have margin from that same ballpark?

Rob, you are right. But also, Tom Gorman, I would like for you to just jump in quickly and give Rob and the group some quick color as to some of the operational improvements we've made like on the Specialty Vehicle side of our business.

Sure, John. We are continuing to drive the labor out of the product and taken away of a lot of waste elimination. And this thing at this point is -- has really had that big turnaround that John talked about earlier where we are hitting some -- the highest inventory turns that we have in the Company as well the some of the best quality metrics, which is allowing us to really take out any of the waste in there and hitting our customers on time.

So there are some new innovative products that we are bringing in pretty quickly that are enhancing our brand image out there and really listening to the customers with some new technologies that we are looking to plug in there as well. So it has been on the material side, it has been on the indirect labor side, it has certainly been on the direct labor side. And continuing to roll into the third quarter on the Specialty Vehicle side.

And, Rob, this is John Sztykiel, for all of you, if you look at the very last page of the release which gets into the backlog, you look at the delivery cycle time for motorhome chassis, two months. This is for a bill of material that is anywhere from $60,000 to $120,000 less than 60 days. I mean that is unbelievable.

So part of Tom's excellence and what the group is doing is we are improving the operational performance. We are reducing the cycle time which is enabling us to gain a little bit more market share at a better margin.

All right, thank you very much and good luck.

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

All right. I want to say thank you very, very much for being here today. In closing, I am often asked the question recently, how does one deliver or execute DRIVE the strategy. And to give you an idea how we have evolved over the last 12 to 18 months, while we have a very defined operational and strategic plan (inaudible), we've got the most important objectives now and just one sheet of paper each side and we manage a number of metrics on a daily basis.

What's interesting as I sit here today, each week we get a sheet, we get an update on 48 metrics, key performance indicators within our business. 16 of them are SMI, then they are broken down between Delivery & Service, the Reach, Emergency Response Vehicle, Emergency Response chassis and Specialty Vehicle. And how we deliver and execute DRIVE the strategy is we manage the state of the business in a timely manner against our objectives and our key performance indicators, we work as one team in a disciplined way committed to delivering growth in shareholder value.

We are satisfied -- I should say we are not satisfied, we are pleased with the improvement, we have challenges and we are committed to delivering an improved Q3, on top of that an improved Q4 and delivering a profitable 2013. Thank you very much.

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