Shyft Group Inc (SHYF) 2013 Q4 法說會逐字稿

Good morning and welcome to the Spartan Motors fourth quarter and full year 2013 conference call. (Operator Instructions). I would now like to introduce Greg Salchow, Director of Investor Relations and Treasury for Spartan Motors. Mr. Salchow, you may proceed

Thank you. Good morning, everybody. Welcome to Spartan Motors fourth quarter 2013 earnings call. I'm Greg Salchow, and joined on the call today by John Sztykiel, our President and CEO. Lori Wade, Interim Chief Financial Officer; and Tom Gorman, Chief Operating Officer.

Before we start today’'s call, please be 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 couldmaterially affect the results are identified in our Form’s 10-K and 10-Q filed with the SEC. However, there may be other risks that we face that we cannot anticipate.

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

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

First, Greg, thank you very much. Good morning to everyone and thank you for joining us on Spartan Motors fourth quarter 2013 conference call. As we move into the call, as you look at the release, first, in no way shape or form are we trying to gloss over the poor performance of our body building fire truck group, which in Q4 2013 as a whole was terrible. It can and will be fixed more on that later.

What we also want to make sure, as in every release, we strive for clarity, transparency and perspective as we want to make sure all of you see all the positives, the really good work, that was accomplished by so many. When you look at Q4 2013, Delivery and Service Utilimaster’, Speciality Vehicle, Spartan Chassis the Emergency Response Chassis portion of ER really a lot of very, very good was accomplished. Delivery and Service for example posted a profit in Q4 as it largely completed the launch process of its Bristol, Indiana facility. Specialty Vehicle's SV posted an even stronger performance for the quarter in the year, and I will get into a little more detail later on as will Lori.

In Q4 only our Emergency Response segment was not profitable. The loss in the ER segment was driven by poor performance in our Emergency Response Vehicle unit, ERV as we call it, the group that builds fire truck bodies in Brandon, South Dakota; Ephrata, Pennsylvania; and Ocala, Florida. Unfortunately the loss in ERV not only exceeded the profit generated by the Emergency Response Chassis segment it over shadowed the profitable of the Delivery and Service group and the Specialty Vehicle group as well. We have done a lot of right things at ERV, the Vehicle group, developing great products, outstanding sales and marketing. We have the capability to generate over $200 million a year in revenue, over 500 bodies vehicles in the marketplace. The opportunity for significant shareholder value is there, but, first, we need to prove the operating performance, and that is simple quality trucks built on time, built efficiently. Our plan to fix the ERV operations will be focused, it will be disciplined. We will fix the business, protect our brand and reduce the cost base.

What is even interesting as we look at SMI even with the losses incurred at ERV excluding the $4.9 million Goodwill impairment charge and the $0.3 million valuation adjustment at Deliver and Service, Spartan generated a non-GAAP profit from continuing operations of $9 million. When you do the math, that is the fourth quarter in a non-GAAP basis excluding charges and valuation considering all we have done, it is really quite an accomplishment. What is interesting is Spartan generated an operating profit for all but the first quarter of 2013. Again, there is a lot of good that has gone on. We have done a lot of the things right, but it also drives absolute clarity that ERV must and will be fixed.

Some of the main points I wanted to emphasize on today's call are, one, the strengths of our brands as demonstrated by the growth of the order intake and our backlog. Simply we are gaining market share in each one of our respective markets. Second, the losses on the Reach reduced further in Q4. This dynamic product is expected to become profitable in the second half of 2014 and we look forward to its growth and continued success. Third, positive cash generation. Even with inventory that is unacceptably too,and we will talk about that a little bit later on, we generated positive cash. Delivery and Service, Specialty Vehicles are performing well on the right track as we move into 2014 point number four. Point number five, Emergency Response Chassis really great financial results. Point number six gets back to ERV is now are only major problem.

Now let's spend a little bit a time in to ERV the body company. First, we need to align our leadership our operational structure to fit the realities of the industry i.e., we must reduce our cost base both build material and operating. Second, one of the issues was unrealistic production expectations for Brandon, South Dakota. Third, what impacted us was carry over pricing from 2012, 2013 that was discounted in a tough marketplace. Four, were excessive delivery times. Five, was high associate turnover in Brandon, South Dakota. All of this came to a head during Q4 as we were making progress in Q1, Q2 and Q3 in 2013.

In Q4 though Brandon was set up for a high production ramp-up. To a certain extent almost doubling their business. By mid quarter it became apparent, one, we were going to have severe issues, thus we started to make several changes to address these issues. One of the things which we did was earlier in the year in 2013 we brought back Kevin Crump, who is leading the Bristol relocation for Utilimaster’ back to Brandon, South Dakota. For a point of a reference, Kevin previously lead the Emergency Response Vehicle group in 2010 and 2011 when they were profitable. He brings a great deal of familiarity and operational skills back to the business. And in theend everything revolves around people. This also points out to note that to a certain extent we were a little bit too thin on the management depth side. When we took Kevin away, things did not go in the right direction at the vehicle group in South Dakota, that issue has now been rectified.

Second, as noted in the 8-K we filed yesterday the former President of Emergence Response at Spartan is no longer with the Company. Until a successor is named, the ER leadership group will report directly to me. Once ERV has been stabilized, positive operating trends established, I expect to name a new President. I know this business well. It can be fixed. It has been profitable before. It will be profitable again.

Now let's get to the plan to address the issues which I mentioned earlier. We started implementing the plan in Q4 and saw significant operational and financial improvement in the month of January. Some of the specific actions to improve the performance of the Emergency Response Vehicle group are, one, we have increased pricing not just in 2013 but also in 2014. Second, we are leveraging Spartan's manufacturing base. We will Brandon at a very narrow optimal rate, simply complex units. We are to supplement that with Charlotte, Michigan international units in Ocala, Florida simple custom and commercial units. And this is a big deal. This is where we made in an operational mistake from a planning perspective. South Dakota has a very low unemployment rate, so there we have in the plan a 50% ramp up. End result was high turn over, units not filled, high inventory, poor cash utilization,simply a mess which we saw in our financial results. Brandon, South Dakota is set at a rate where they have and can build trucks efficiently of high quality and profitability.

The third part of the plan is to enhance the operational and controls and processes to improve the cost base. Number four, is to stabilize the Brandon work base. What is nice is though actions taken in December the turn overrate over the last 60 days has been very, very low. That is extremely positive. You can not move a business in the right direction with a high turnover rate. Collectively as an organization we strive for a voluntary turnover rate of less than 10%. Our other locations are at or below that. We need to get Brandon, South Dakota at that point.

Number five is management changes. I talked about those a little bit earlier. And again I want to get back a little bit to leveraging the manufacturing base because that is very, very key. Again, we have a product sales marketing distribution machine that can bring over 500 orders a year, a $200 million business model. As mentioned earlier, we plan for Brandon, South Dakota to build very specialized products, in a very, very tight production range. Ocala, Florida we will leverage growth around simple custom and commercial fire trucks, capacity will expand. What is nice is the leadership of Ocala, Florida is now under [Dave Bailey] who previously led Charlotte, Michigan's fire truck chassis operation. So we have demonstrated wise leadership now in Ocala, Florida.

The third part of the plan is Charlotte, Michigan. As we look at this Charlotte, Michigan, what is interesting is a point of perspective as I talked about earlier, we are focused on clarity, transparency and perspective. Charlotte, Michigan in any market has been a high performing, excellent machine, whether it be the Isuzu trucks, whether it be RV chassis, whether it be the Reach vehicle, whether it be Frito Lay truck bodies, whether it be Emergency Response Chassis Charlotte, Michigan has demonstrating excellence. This location makes money. Now we are going to be leveraging that excellence in the fire truck bodies. The Lima, Peru order over $25 million will start to be shipped in Q3 of 2014. This process or our process to ensure we deliver high quality, effective and efficiently built trucks on time is really very, very impressive. We have people in South Dakota, people in Ocala, Florida learning, understanding the process, the engineering, the documentation is all moving in the right direction. Why do I have faith? I can look back at probably the most recent ramp-up which was dramatic was Isuzu. 2011, 2012 we went from a clean plant to doing 14 units a day in less than 11 months. As of a point of perspective today that plant is doing 29 vehicles a day with less than 55 people. Charlotte does a lot of things extremely well, and we are going to leverage this location to expand and grow our Emergency Response business model. And again we are going to keep it simple; Brandon very narrow, very tight; Ocala, Florida great operation leverage growth; Charlotte, Michigan the new add demonstrated excellence, leverage the growth in that location.

The reality is when you look at Q3, Q4, we were simply pushing a rope up hill as we were trying to double production with a low unemployment rate. That plan has now changed. And as Lori will talk and you wonder why she uses the term "Q3 the second half of the being a positive infection point" it really stems around the fact between improvements in the pricing and the export orders starting to ship. Those are both very, very positive for ERV and for Spartan Motors, Inc.

Now let's switch over to Delivery and Service. Report an operating profit of $4 million in the fourth quarter of 2013. This is really great from a perspective standpoint, because they had an operating $2.1 million in the fourth quarter of 2012. So when people wonder how far we have come from an efficiency and effectiveness of implementing Bristol in the right direction it is a long, long ways in the right direction. We have gone from a $2.1 million loss to a $4 million operating profit with less revenues. We have really moved the ball in a very positive direction with the Bristol implementation. Are we perfect yet, no. Do we still have significant room to improve, absolutely. And that will improve DSV or Utilimaster's results in 2014, but we have come a long way. Another point to note is we also did take a $0.3 million or $300,000 valuation reduction of one of our remaining facilities at the Wakarusa location.

Next earlier in the year and to give you a little bit of background on Bristol we did struggle with material flow, material handling and other challenges. As mentioned earlier, the launch process has now been substantially completed. We are seeing improved profitability, a lot less work stress and improvement in Delivery and Service Utilimaster's operating results. When you look at the first half of last year 2013 to the second half DSV reported an operating profit of $2 million before the $300,000 valuation charge or $1.7 million net versus an operating loss of $5.6 million. Now I could do the percentage or give it to you, but it is in the release, but this gives you an idea of the dramatic improvement from the first half to the second half. And there were a lot people that questioned us or wondered could we get the launch done, completed, the organization moving in the right, the answer is absolutely yes. The data speaks for itself as do the financial results.

In the fourth quarter we produced 508 Reach vehicles, bringing the total for the year to 1,216 units. We also today have a few hundred Reach vehicles and work in process inventory. That is one of the big reasons our inventory is too high right now, which effects our cash position. The delay in shipping some of these units is another factor fourth revenue decline compared to prior year. It is because of a cladding shortage. That has now been solved. We expect to complete and ship and the remainder of the 1,900 unit Reach order for FedEx early in the second quarter of 2014. At Spartan we have made significant progress in improving Reach's financial performance during the fourth quarter and throughout the year. Prior actions to reduce the bill of material while increasing the production rate, have resulted in significantly lower loss for the quarter and significant improvement year-over-year from an operating loss perspective. We anticipate another order at higher prices for several hundred more Reach which will be built during the second half of 2014.

As we look at the data as we look at the trend lines Reach will cross over into a profitable product at this point in time. It is a great product. The market likes it and I am excited about producing it profitably in the second half of the year. I really compliment everybody within Utilimaster both from a pricing and operations and execution perspective, a reduction in cost, the Charlotte campus we are building the Reach, a lot of people have put in a lot of sweat a lot of very good work and we are now crossing over and that is exciting.

As we told you during the last conference call truck body demand declined late in Q3 with lower production set for the fourth quarter of 2013 compared to 2012. To a lesser extent the same was true with Walk-In Vans. What is nice or interesting is orders pick up for both during the fourth quarter of 2013. That was a positive surprise for us. To be blunt Utilimaster's backlog is higher typically in the fourth quarter than where is right now. When I talk to people in sales in the marketplace it just gets back to the simple fact the consumers base the market base perceives the issues of Bristol behind us, that we are building higher quality trucks, our delivery times are now coming back to normal, so we are now getting some orders which were a positive surprise. This gives us confidence in our outlook for revenue and profit growth as we look at 2014. The opportunity for Utilimaster, Delivery and Service is a great one and the growth should surprise no one. Simply Utilimaster's is the medium, the transport link between bricks and clicks.

All right. Switching over to Specialty Vehicle, and this was our stand out segment for Q4 and all of 2013. The performance of the Speciality Vehicle group is dramatically improved not only from 2012 but from 2011 in particular. In 2011 to give you, again, a point of perspective clarity and transparency the Speciality Vehicle segment lost $2.3 million. In contrast this year Speciality Vehicle revenue grew 25%, operating income increased 363% to $10.2 million compared to 2012. Even greater if you compare it to the loss of 2011. This improved financial performance is concrete evidence that we know how to turn around a business, and it is simple how to turn around a business. First you have to focus on the attitudes, get people believing in themselves, the vision, the plan. Then you examine every aspect of the business, particularly the motorhome and the bus chassis. Looking for ways to improve the operating efficiency, eliminate waste, reducing the cost structure. In Speciality Vehicles we reduced the cost structure by nearly $4 million per year. Again, we didn't slash the business, de-content. We improved our efficiency. Andthen we invested in the business, because at the end of the day you have to have high performing products which the market is excited about to pay a higher price for. We invested in the business to drive the revenue growth. We are continuing that on to develop more chassis initiatives. I will be blunt when I look at Speciality Vehicles in the motorhome I think our product has some whiskers on it. It could be more exciting. Our marketing could be more effective, more dynamic. Those are things which we are expected to improve upon to develop in 2014 and 2015 and beyond.

As I bring this section to a close and turn it over to Lori DRIVE is working. Two out of three segments are making strong progress. Now the task is to fix the ERV, and that frustrates us like no tomorrow. We are focused on it. We will get it fixed, because ERV for us is a $200 million plus operating segment and we expect both portions of it to be dynamic with financially great results. The chassis side which is there today and the vehicle side which we are very, very focused on. Lori will talk a little bit about the data, but quickly as we look at ERV, as I said in the release, we have a long job ahead of us,a difficult task, a lot of ground to make up to bring it up to profitability. It will be a late Q4 could be a 2015 event in Q1. We expect substantial progress each and every quarter. We have a very good plan. W are generating good results. In order to get it where we want it to be without destroying the business we are going to do it a disciplined very, very wise way making substantial quarterly improvement.

We have challenges. We are excited. It is almost like situation normal each and every day. Lori.

Thank you, John, and good morning everyone on the call. I am going to shift gears here slightly. First look at the balance sheet. Spartan ended the year with cash of $30.7 million $9 million higher than at the end of 2012. Cash decreased despite an increase in nearly $14 million in inventory from December 31, 2012. Growth in in inventory was due to the higher Reach work in process inventory due to the body cladding issue mentioned in the press release and earlier by John. As well as inventory levels at ERV due to the line set and Brandon. We expect to reduce Reach inventory during the first quarter as we complete these units and ship them to the customer. We expect to reduce inventory we have on hand at ERV, but these efforts will be offset by inventory brought in as we begin production of the 70 unit Peru order. We expect the net result to be for total inventory levels to remain steady or increase somewhat by the end of the first quarter 2014.

Spartan's financial results for the fourth quarter and for the full year 2013 include several onetime expenses and noncash charges. Some of the onetime items include first quarter ERV dealer bankruptcy $0.6 million. First quarter and fourth quarter SV steering gear recall $1.4 million. First quarter Bristol startup cost $1 million plus another $1 million in labor and efficiency costs. Second quarter Bristol labor and efficiency which is additional labor during a launch phase of $1 million. Second half DSV incurred startup costs for (Inaudible) Mexico upfit center of $0.4 million and additional warranty accruals at ERV in the first and fourth quarters for $0.7 million. These and other expenses reduced operating income by $6.2 million or approximately $0.12 per share. In addition, we incurred noncash charges that included $4.9 million to write off ERV's Goodwill and $0.3 million to adjust the remaining building we own in Wakarusa, Indiana to its estimated fair value. As John mentioned, if you exclude these two charges from our fourth quarter 2013 results, Spartan generated a non-GAAP operating income of $0.9 million.

In total Spartan booked $11.4 million in one time or noncash items during 2013. Of this $8.2 million comprised of the Bristol startup cost and the noncash charges are truly nonrecurring in nature. Having these items behind us allows us to set a base line for ongoing operating performance and expectations for 2014. We believe we have fairly good visibility for 2014 in two of our operating segments; DSV and SV. Our outlook for 2014 is less certain for the ER due to the turn around underway in the ERV segment. Improving the performance of this business is a top priority for Spartan, but accurately forecasting the timing and impact of these efforts on quarterly financial statements is more of a challenge.

With that said, we expect 2014 revenue in the range of $500 million to $525 million. We base our expectations on order intake of 536 million in 2013 and year-end order backlog of 242.7 million. We expect to ship approximately 14 million in Reach vehicles during the first half of the year and 20 plus million in fire trucks to Peru most during the second half of 2014. On top of these large orders we are seeing a recovery demand at DSV for both truck bodies and traditional Walk-In Vans. We expect to see continuing growth in the SV segment especially in motorhome and bus chassis sales during 2014. Also contributing to revenue growth should be greater output from ERV production shifting to Ocala, Florida. Both SV and DSV are expected to be profitable during 2014, but SV operating income is expected to be lower than in 2013 due to planned investments and developing new motorhome chassis and expanding its distribution network as John mentioned earlier. SV's after market parts and accessory unit is expected to experience reduce demand for defense related parts which is expected to contribute to lower revenue and operating profit in that business line. This segment could also be impacted by the uncertainty of the defense vehicle demand for 2014.

As a result, we expect Spartan to report an operating loss in the first quarter of 2014 with a modest operating loss in the second quarter. Let me go back. I think I missed the ER segment here. The ER segment is projected to report an operating loss in the first half of 2014, returning to profitability in the second half of 2014 and full year. Back moving on to Spartan as a whole again I will repeat, we expect Spartan report an operating loss in the first quarter of 2014 with a modest operating loss in the second quarter. As mentioned by John, we expect Q3 to be an inflection point, expecting to report an operating profit of the third and fourth quarter of 2014 as well for the full year. Our projections for 2014 operating income is in a range of 1% to 1.5% of sales. Operating income for the year will be driven largely by the pace of improvement at ERV, so we expect to update financial expectations for the year as we make progress in Emergency Response turn around efforts.

I thank you for your interest, and now I would turn the call over to John Sztykiel for his closing remarks.

All right, Lori. Thank you very much. As I look at Q4 and 2013 because I am a large shareholder and all of us are in the same boat together, it really frustrated me, and I am sure it frustrates each and all of you because we had great performance in so many areas. Delivery and Service, Specialty Vehicles, Emergency Response Chassis all over shadowed by one. Notice within this release and this transcript you do not see the word "transformation, transition" because that is behind us.

Emergency Response Vehicles will be fixed. It is going to take time. We are in a great position when you look at our backlog, when you look at the strengths of our brands. So many things are moving in an upward trajectory. In Specialty Vehicles are motorhome chassis business we have turned around and we are now on offense. As I mentioned earlier, some of our products have whiskers. We are developing new chassis, new innovations to expand our presence in that marketplace.

In Delivery and Service Utilimaster’ our Bristol launch is behind us. Operating efficiency is greatly improved and the Reach had a positive gross margin in Q4, which is actually a tremendous compliment. I wish to thank everybody both at Utilimaster’s and Charlotte where it is built on all they have done to get the Reach to that point. And we will be profitable in the second half of 2014.

ERV is our remaining operational challenge. During the fourth quarter the pace of change accelerated to achieve profitability. The nice thing is when we look at January's results we hit the production targets in Brandon and Ocala. I think we have gone in to very fairly good detail on the outline of our plan. And I am confident in our ability to get it done because we have gotten it done before, whether it be at Utilimaster’s, Speciality Vehicle we do know how to turn around a business. But again it is not going to happen overnight. Because as we move forward we do not want to destroy all the good that is going on within Emergency Response. We have a great product line. We have strong distribution. We have very dynamic marketing. In Latin America we have secured 134 orders over the past 24 months, very profitable orders. We are very focused on a path to increase our presence within Latin America because the Spartan brand is sought after and it is a very profitable for us.

For SMI as Lori mentioned earlier, when we look at Q1 we expect it to be a loss primary due to Emergency Response the Vehicle group. We will make progress though when you look at Q4. When we look at the second quarter, there will be continued progress, but, again, we still expect a modest operating loss. We just have a lot of work to do, some hurdles to overcome. By third quarter and fourth quarter of 2014 to quote others should be an inflection point moving on the positive side.

I think we have clarity. We have tried to provide transparency. We have a plan. We are working to execute against the plan,and we look forward to delivering a significantly better 2014 then what we did in 2013. Time for questions.

Thank you. (Operator Instructions). Our first question comes from Joe Maxa of Dougherty & Company.

Good morning.

Morning, Joe.

Thanks for all the details on your plan and what you expect to do this year. I'm going to focus a little bit on the guidance more specifically on the margins. If we look at Q1, it sounds to me based on everything given and put all the pieces of the puzzle together that Q2 will have a little higher revenue because of the Reach shipments but maybe not gross margin because they have not quite broken that -- I guess they have broken above zero. But I'm wondering when do you expect that Reach to get to double digital? Do you think you can hit that in the back half?

If we look at Reach in the second half of the year, we are definitely are seeing an improvement in both pricing and form reduction costs and efficiencies. We believe it will get into that range of we expect our normal Delivery and Service margins to be, so we will be in that range, I would say, somewhere between the 7% to 9% range.

Okay. And then I wanted to mention too these fire trucks going to Peru 25 million in the back half of they year, what does the margin look like?Typical fire truck margin, are they better?Are they worse?

I would say we have priced to be profitable but there is a lot of unknowns in the country. We believe we have cut all the costs. It is currently priced at a nice margin and compared to some of the domestic product.

The other thing Joe is that these are 70 identical units, and it is a fairly basic specification. So these should be much easier for us to build and hold on to margin then with some of the more complex units that have presented difficulties for us in the past.

Joe, this is John Sztykiel in to the group, and I'm glad Greg Salchow jumped in there. To give people a point of perspective the average common build today from a fire truck perspective is about 1.2 to 1.4, which in essence everyone is unique. So as we look at this export order, the opportunity is significant improvement from an operating efficient perspective. We have a greater chance for that in Q4 versus Q3, because it is not like you become wiser overnight. Another point of perspective for the group, what excites us so much about the export business when it comes to Emergency Response North American Emergency Response business as I mentioned earlier almost every vehicle is different, 1.2 1.4. However, when you go globally and our core focus is Latin America and Central and South America and to a certain extent selected areas in China, but what is interesting is they buy a lot of trucks exactly the same. So it is a dramatically different business model which is a great complement. So as we look at Emergency Response and the Emergency Response Vehicle group, we are it very focused in selected areas on global or export because what we love about it is not like every truck is a different truck you build. You have no idea how nice it is to know you are going to be building a group of something the same thing, and that happens from engineering to purchasing to sales throughout the whole operations change within the Company. That was a really good question, Joe.

Thanks a lot guys.

Our next question comes from Robert Kosowsky from Sidoti.

Good morning, guys, and Lori,how are you doing?

Good. How are you doing today?

Doing pretty good. First off on the Specialty Vehicle side. Can you tell us how we should think about margins and revenue cadence for next year? Obviously the fourth quarter has really strong revenue and margin performance but we have some cost head winds coming in and also backlog is down, so I wanted to get a better sense of, A, quarterly revenue cadence or just directionally, and then, B, what kind of margins do we look at for the whole year because it has been going at a pretty high rate but I know you have higher investment coming as well?

Rob, I will attempt that one. That was a good question. If we look at the Specialty Vehicle we do believe our motorhome and our bus business to increase year-over-year. But again as we have talked before, that is our more lower margin product. If we look, we also mentioned that our APA business is going to go down especially in the defense business, which tends to be much higher profitable product. Isuzu we believe is a nice profit that, that is going to grow. But the thing to remember is also in 2013 we also built 24 ILAV vehicles, and we have no orders at the moment for any ILAV. It is a guessing game if we are going to get any orders or not. That is a nice, nice profitable business. So those things if you look, with the growth in the motorhome and bus business at a low margin, losing some products for the defense APA the high margin, I would expect the margins to go down slightly. And also remember that we had talked that we are going to reinvest in that product line as well. So I would expect their operating income to be down over where we were in 2013.

Down significantly or down modestly, because it seems to me the third and fourth quarters were relatively clean quarters from after market and ILAV stand point. You had 5.7% to 9.2% operating margin. I'm just wondering which is better?

I would say we are going to be on the lower side. We really truly have some reinvesting as John mentioned, we have some products with whiskers, some aged products. We really need to invest I would say in the million of dollars. To develop a chassis is really not cheap, so we really have some large investments to be made throughout the year in 2014.

Rob, this is John Sztykiel. When she quoted the term million of dollars it is not like it is $5 million or $10 million, okay. It is not like it is all around one product line. But we have a great brand name in the motorhome. We are now developing one in the bus marketplace. We are very focused on developing a chassis for the Delivery and Service marketplace to leverage off the strength of the Utilimaster’ brand there. Again, it is line with our strategy DRIVE, defining technology and innovation, but we have some very, very selective initiatives, which in turn we believe will both grow sales and operating income not so much in 2014 in 2015 which we simply need to do. So when you look at the Specialty Vehicle group one we don't have ILAV units, and I will be blunt. I do not think the Defense business is going to be real good for us,because when the military wants to give away 13,000 of the existing MRAPs it is not like there is a lot of demand for new ones, okay, which actually that is what the Wall Street Journal wrote on a few weeks ago. But second, we have to do some things to improve the product line in the motorhome and bus area to bring some innovation and attractiveness, but also we are focused on bringing into the market a delivery and service chassis in the 2015 time frame.

Okay, so Delivery and Service. So if you look at market share gain opportunity, you might see something in 2015 on Delivery and Service because you can integrated that into what you already do, but then --

From a chassis perspective yes. From a body perspective I believe we will do that in 2014, but from a chassis perspective you are absolutely right.

Okay. But as far as motorhome and bus maybe those are new products that could be on platforms a couple of years down the road because you have to develop it and then get the sale process done, right?

I would say 18 months not two years. Typically you are looking at something that would show up in the March to July time frame of 2015.

Okay. And then switching to the ERV side. I understand or appreciate all the issues you are having there, but I thought that at least regarding pricing that it was something that was an issue from almost a year ago and we had already addressed pricing and order complexity a few quarters ago, and I am wondering why those improvements haven't stuck or what the hindrance has been?It seems like a few quarters you were talking about raising pricing, higher margin backlog mix coming in and less complexity being offered by the sales people, and I am wondering the disconnect between what we heard three quarters ago, four quarters ago, and where we stand today?

The pricing has stuck. And one of the reasons we believe Q1 of this year will be better than last year is because of some of the pricing initiatives which took place in 2013. We are also going down a path of raising prices some more to give us someflexibility in the marketplace. I think if there is an area where underestimated -- and again that is a very good question. Where we underestimated was the increase complexity of the trucks. We have what we call a complexity fee for order that if it gets over X amount of hours, for lack of a better term you have a surge charge and simply that surcharge was not high enough in 2013. That was adjusted going into 2014. The negative is we are not going to see that in the first half of the year relative to improving our gross margins. We will see it in the second half of the year. So if there is an area we underestimated was the increased complexity of the truck and how much it drove not just the increase in hours onthe shop floor but you typical have more rework after the vehicle is inspected when the dealer and the customer comes in. That is an area which we mixed, and I apologize for it. We learned from it, feeling the pain from it. We have now adjusted for it.

Rob, this is Lori. I want to add one more piece of color to that. Let's remember that we have been talking for the last several quarters that we did increase our prices in the first quarter of 2013. And as you may recall, we also have a backlog that is upwards of a year. And so with that it take s a while for that lower price product to get flushed through our backlog, so we are starting to see the benefit of that now.

Okay, that is helpful. Finally, on the redesign of the Reach where does it sit right now versus where you want it ultimately to be?Because I know you are trying to swap out certain components to be a little bit lighter or easier to assemble. What is the update on how the truck looks now versus where you see it down the road?

I will attempt that one on the price side. I don't pretend to be an engineer nor do they want me to be an engineer. I would say as we talked about in our press release we are still shooting for another $1,000 per unit to come out of the cost and all those things the goal would be to make it so it is easier to manufacture along the way so you also get some reductions on the shop floor. Plus we are also doing some pricing action, so we definitely believe it to be going in the right direction. The unit in June we have it going through a durability test, and once those things are validated, we should be able to get those put in production.

Okay.

This is John Sztykiel to give you a little bit of color relative to Reach. And Lori is right with the number and we do have to go through durability testing, because one of the reasons people pay 20% to 30% more for our Reach product is because it has significant durability versus other commercial vans out there. The other thing too, and this is what frustrates us, we missed about 400 Reach orders simple because of this cladding issue, which would have been at a higher price and that would have been a Q4 order for us. Part of the reason I bring that up is the marketplace some of the larger fleets and now as we work with the smaller fleets some of the larger fleets now that they are having the Reach product out there delivering packages and services they like it. They absolutely like. Our challenge is to not de-content it, but to improve the operation efficiency and reduce the bill and material cost base and make sure it has the durability. Because it is clear even with the higher price that the market likes the vehicle. I thought Lori answer was absolutely spot on. It will take some time for dollars numbers to correct. But we do have to go through durability testing because that is a key product differentiates of the Reach versus other commercial, the Sprinter, the Ford Transit, et cetera commercial vans.

Okay. Thank you, that is helpful.

(Operator Instructions). Our next question comes from Shivangi Tipnis with Global Hunter Securities.

Hello, guys. Thanks for taking my call. I just wanted to know out of the 156 million backlog for the ERV how much was related to the new orders (Inaudible) production stream?

To clarify are you talking the Peru order?

The ERV backlog is 156 (Inaudible) partly because of the newer orders as well as part because of the production constraints, so can you tell us what was the new order in Q4 ?

It is about $22 million coming from the Peru order. I'm not sure that we follow what the second part of your question was.

Okay. Actually that was my first question. Can you provide some color on the new orders that you have been receiving for ERV since (Inaudible) in 2014?

One, it is still fairly early, and this is John Sztykiel, relative to 2014. I will say this the orders for North American the bid activity for us is not just good just for us. One of the things the data shows is a lot of States have surpluses today. Even California is talking about a $2 billion to $3 billion surplus. So what we are seeing is an increased order activity. I believe there will be increased buying for North American Emergency Response products for the industry. Are we going to be back to the 5,500 units a year levels of 2005, 2006, 2007, no. The answer is no. We could get up to 4,000 to 4,500, but I believe collectively as an industry for Emergency Response Vehicles I am very positive about the ability to increase or secure order in 2014.

Next as I mentioned earlier, we have a lot of momentum in Latin America. We have secured 134 orders over the past 24 months. Next what is nice is in house we have 14 what is called Tractor Drawn Aerials, and those are the ones where actually you have an individual in the back steering the ladder. Those are very high Aerials, very, very long. We have a very dynamic -- very expense range from range from $800,000 to $1.4 million very maneuverable for high cities. On the books we should ship 14 of those this year. There is a lot of activity in the marketplace for that. That is a good sweet spot for us. Actually what is interesting when we look at our operational plan to improve earnings for ERV, one of our core focused items is Tractor Drawn Aerials how do we improve the gross margins. But relative to your broad question I would expect the Emergency Response market to be good not just for us but for a variety of companies in 2014 in North America. I feel very positive about our opportunities in Latin America.

Okay, fair enough. Thanks for the color. One question on the ERV pricing in continuation to your comments on the 2013 price increase. How much of a price increase did you do in 2013 for the ERV?

I will take that. So the price increase in 2013, if I understand the question, we did on average about a 5.3% price increase across the board, difference for different product, but on average that is about where we were.

Okay. And just to know overall how the pricing would be in 2014. Is it going to be like a gradual over the course of 2014, or it could be just one time that you (Inaudible)?

John, would you take this question? So the strategy for price increase on ERV is that going to be a gradual every quarter or is that one-time event.

One you will see us follow similar to the automotives, the passenger car industry and what you have seen them do extremely well and I know I've got a number of my honorable competitors and dealers listening to this call as well, but you will see smaller price increases, each and every quarter, in that way we're able to transition it to the marketplace more effectively. So rather than one large price increase as Lori mentioned a few moments ago, you will start to see selected price increases on different models as we look into the marketplace. And one of the areas Lori's group is focusing on is margin analysis by product line and where those selected price increases should be. I think one of the things which you will see as well, is you will see reduced discounting on multiples, et cetera, because when you look at our backlog of 10 months to 12 months to 14 months depending upon product line. Now we've got the benefit of being more selective as to what we go after, the only negative is because, as I mentioned a few moments ago 10 month to 12 month to 14 months backlog again that's not going to drive back, so Q1 of 2015. So really our strategy is two-fold, one, selected price increases on gradual basis each and every quarter depending upon model, just like the automotive industry, which the consumer marketplace has accepted. And second, a reduced discounting on selected multiples, et cetera due to the strength of our backlog.

Okay. Thank you for the information. And my last question is on the Reach orders. So for FedEx its I'm doing the math correct it would be about 650 plus remaining order deliveries out of the 1900; is that correct what I'm calculating?

Shivangi, this is Tom Gorman, that's correct. We're fortunate with the cladding issue that we're picking up that they go on after the trucks finish. So at this point we've got several 100 units that we have work in process, so as the cladding is coming in we're finishing those out and releasing to FedEx and we're committed to finishing those up here in the first quarter in fact our last online start would be March 10.

Okay. So we should be expecting all the FedEx orders to be completed by the first half of 2014?

Yes, the current order that's left over from 2013 should be primarily Q1 and there maybe some in April that will be out there, but nothing later than that.

Okay. And the new orders that you're talking about, is that from an additional order FedEx or from a new customer that you are talking about, the several 100 in H2?

Right now we don't have a firm order, we have an indication from the customer, and so and until it is a firm order and we have the customer sign off, we won't mention who it is from.

Okay. Fair enough. Thank you for answering my questions. Thank you.

Operate, it looks like we have time for maybe one more question.

(Operator Instructions).

All right. This is John Sztykiel and I will work to bring it to a close. First, Greg Salchow, Lori Wade will be available obviously for calls and what have you. Actually I'm going to be getting in my car and travelling to an IR, Investor Relations conference, where I have to be presenting tomorrow morning with Greg. But one of the questions which shocked me or one of the questions which wasn't asked which shocked me was why did it take so long to get into ERV and make some of the changes, which you've just talked about or we've just talked about. And in a nutshell or simply, we were making progress throughout 2013, we had positive forecast and plan for Q4. The moment October results did not come in the way we expected, we started to take actions immediately, we reset the Brandon production rate. We said, okay, we're going to leverage the growth in Ocala, and we because we have a new wise leader down there Dave Bailey who has grown the business substantially here in Charlotte, Michigan in fire truck chassis. Third, we're going to build all the export 70, 22 plus million, $25 million worth of business in Charlotte.

Number four, we took very aggressive steps to reduce in a very wise way our cost base. Number five, we focused on reducing the associate turnover. Six, we started steps, took actions to reassure the dealer base, because when you are not delivering product and you've got delivery to 10 month to 12 month to 14 months and these individuals and companies are relying on your product for their revenue income cash stream. You do not want to lose them, because they are doing a dynamic job. Number seven, we introduced a larger complexity fee on the trucks. Number eight, we reduced our discounting on selected bids et cetera. Number nine, we made some leadership structure changes which were announced yesterday. So, one of the things I want to illustrate was one we were making progress, we had a good plan. The moment October hit and things were not inline where we expected, we implemented a number of steps to get this business moving in the right direction, because it is absolutely key we get this fixed. Again it's not going to happen overnight, but the nice thing is we are moving the ball in the direction and we've got two very, very good operating groups that did a lot of things extremely well.

So in closing, I want to thank you for your time, I look forward to a more positive call with better results in Q1, and just want to say thank you very, very much, and to all the Spartan associates that did a lot of very good things, thank you very much. And to the Emergency Response vehicle group, we are simply going to get it done. I look forward to being a part of that team. Thank you.

Thank you everyone. The conference is now concluded. Thank you for attending. You may now disconnect.