Shyft Group Inc (SHYF) 2014 Q1 法說會逐字稿

Good morning and welcome to Spartan Motors' first-quarter 2014 conference call. (Operator Instructions) This call is being recorded at the request of Spartan Motors. If anyone has any objections, you may disconnect at this time. I would now like to introduce Greg Salchow, Group Treasurer for Spartan Motors. Mr. Salchow, you may proceed.

Thank you, Kate, and good morning, everybody. Welcome to Spartan Motors' first-quarter 2014 conference call. I'm Greg Salchow and I'm joined this morning by John Sztykiel, President and CEO of Spartan Motors; and Lori Wade, Chief Financial 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 Private Securities Litigation Reform Act of 1995.

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.

And during the question and answer period, please ask one question and one follow-up. And that will give everybody the opportunity to ask a question. Now I am pleased to turn the call over to John Sztykiel for his opening remarks.

All right, thank you, Greg. Good morning, everyone, and thank you for joining us on Spartan Motors' first-quarter 2014 conference call.

In the first quarter of 2014 we continued to execute our DRIVE strategy in a disciplined fashion. Our delivery and service, especially chassis and vehicle business segments, were both profitable, while we made progress in the turnaround of our emergency response vehicle business specifically, the body of the vehicle group.

In the first quarter, Spartan posted a net loss of $2.1 million, or $0.06 per share, compared to a loss of $4.3 million, or $0.13 per share, in the first quarter of 2013. The main driver of the improved financial performance this year was our delivery and service business, which posted an operating profit of $2.6 million versus a loss of $4 million in the first quarter of 2013 a year ago.

We had a full quarter of walk-in van production at the Bristol, Indiana, facility this year. As you will recall, the Bristol plant began walk-in van production in mid-February 2013. DSV also shipped approximately $7 million in Reach orders that were delayed from the fourth quarter of 2013 due to a components shortage from a supplier.

The Reach program also achieved a milestone in Q1 of this year: being profitable for the first time. Due to the improvements we have made in simplifying the Reach's build profits, reducing bill of material costs, along with better pricing, we expect a 670-unit order now entering production to be more profitable than previous orders.

Switching to emergency response, as expected it remained a challenge in Q1 of this year. ER posted an operating loss of $3.7 million versus a loss of $2.6 million in the first quarter of 2013.

The operating loss was due to lower sales of emergency response chassis, which is by far the highest margin in the emergency response vehicle group; and operating losses in the fire truck body business.

In terms of operations, the ER body business, or emergency response vehicle group, as we call it, showed improvement compared to the first quarter of 2014 and the fourth quarter of 2014. I'm sorry, compared to the fourth quarter of 2013. This indicates our action plan is gaining traction.

The ER body business reported revenue growth compared to the first quarter of 2013 due to higher-priced and more complex product mix. We also completed more trucks during the quarter that were not invoiced to customers.

Four of these five trucks were displayed at FDIC show in April. These five trucks totaled approximately $2.9 million in revenue that will be invoiced in the second quarter of 2014 rather than the first quarter.

The challenges we face in the ER body business, the emergency response vehicle group, are concentrated in five major areas: pricing/healthy orders. As a point of reference, though, that we're making progress and there's light at the end of the tunnel, as we look at 2015 there are only 15 orders that are unhealthy.

So as we move through 2014 we expect not only operational improvement but financial improvement as well as we work through a backlog of unhealthy orders.

The second major area is direct labor efficiencies. The third area we're focusing on is SG&A spending and overhead. Fourth, bill of materials cost. Five, COPQ due or cost of poor quality, as we call it.

As a whole, we have an action register of over 50 items that are targeted against these five major areas. In each area we made progress in Q1 of this year versus Q4 of last year.

Another point of reference is the emergency response vehicle group hit its master production schedule, or MPS, as we call it, in the first quarter of this year and April as well. That is a very, very positive change since it is much easier to improve efficiency financial results when there is consistent production flow.

We continued efforts to expand production capacity in the ER body business by building more units in Ocala, Florida. And just started the Peru order in Charlotte. As we discussed on the Q4 call in February, expanding production at Ocala and Charlotte will relieve pressure on Brandon, allowing us to increase revenue while reducing the delivery time to our customers. Manufacturing flexibility is a strong trait of Spartan and we are leveraging that.

As I also stated on our last conference call, we will fix the business first and the financial results will follow. Spartan ER reported a loss for the first quarter as expected, but progress was made in all five key areas.

However, complicating our outlook for the second quarter is a computer, server and backup failure we experienced late April, early May at Brandon. There was minimal impact through April as we overcame the issues through data recovery, et cetera. But we expect to see some manufacturing impacted in mid-May.

This recovery process is in motion. We are working to minimize the impact, leverage all of our locations, and expect to have greater clarity by the end of May, at which time we plan to provide you with an update.

As we move beyond this challenge, we expect better pricing, higher volume from expanded manufacturing capacity, the Peru ramp up in Charlotte, and improved financial results as we move through each quarter of 2014. Our goal remains to return ER to profitability by year-end, no different than what we did last year in DSV, a goal we accomplished.

Now switching over to DSV. They had an excellent quarter, reporting an operating profit of $2.6 million, versus an operating loss of $4 million last year. This greatly improved financial performance is a result of all the operational improvements DSV has made at its Bristol facility, along with higher revenue and profitability of the Reach.

As mentioned, operational performance has improved over the past year when DSV moved walk-in van production to Bristol. To give you an example of the improvement, walk-in van production cycle time now stands at 3.8 days, versus 15.4 days a year ago at the Wakarusa complex. That's a pretty dramatic increase.

While we have made progress, though, we're not satisfied as we have not yet attained all of our operational planned targets associated with the move. We are very, very focused and in a disciplined way we're working to overcome each one of these issues to indicate or to get to where the plan was to ensure we get the right return on our investment to drive shareholder value in the right direction.

We will get there but I believe it will take two to three more quarters before we hit plan. But it is clear we are making progress.

Switching over to specialty chassis in vehicles, the defense, motorhome, and Isuzu segment; that segment was profitable for the first quarter of this year despite a $3.8 million decline in aftermarket parts and assemblies, demonstrating our disciplined ability to manage costs.

APA revenue declined due to a reduction in defense-related sales. To offset the impact of defense budget cuts, APA is adding more non-defense aftermarket parts and assemblies to its product line. We expect this to be an ongoing initiative that will pay dividends over time but will not immediately offset the loss of defense-related sales.

Switching over to motorhome and bus, revenue increased $1.4 million during the first quarter of 2014 despite production rates declining throughout the quarter. RV dealer inventories for our product niche, our market segment, increased somewhat during the first quarter, causing dealers to cut back on orders.

In addition, as we have talked with motorhome manufacturers and dealers, we believe higher dealer inventories are at least partially due to exceptionally severe winter weather experienced in most of the country.

As dealers work off the inventory, RV manufacturers may increase their production in chassis orders. But we are also being very conservative in our own planning. We have reduced production rates, adjusted cost, adjusted discretionary spending in the motorhome chassis RV arena to reflect the more conservative outlook.

In summary, relative to Q1 we made continued progress by being disciplined in executing our DRIVE strategy. Our backlog is in great shape. We look forward to Q2, the balance of 2014.

Now I will turn it over to Lori Wade, our CFO, and she will comment on the financial highlights relative to Spartan Motors, Inc. Lori?

Thank you, John. And good morning to everyone on the call.

Looking at the first-quarter 2014, while Spartan reported a net loss of $0.06 per share, a loss was as expected, as we discussed during the year-end 2013 call. Performance in the first-quarter 2014 was significantly better than a year ago when Spartan reported a net loss of $0.13 per share.

Revenue in the quarter was $128 million, up 33.2% from the same period last year. Gross margin improved to 10% from 6.6% in the first quarter of 2013. Gross margin increased due to higher revenue which provided greater overhead absorption, compared to the first quarter 2013 which also included startup costs and operational inefficiencies stemming from the launch of the Bristol facility.

Looking forward, we see opportunities to expand gross margin as efficiency improves and revenues increase throughout the Company, especially in the ER segment.

Selling, general and administrative expenses increased by $3 million in the first quarter of 2014. Approximately $1.6 million of the increase was due to higher marketing and selling expenses and commissions.

As we stated in our press release, we streamlined our corporate structure during the quarter which resulted in the elimination of several corporate positions and severance expense of $1 million. These changes are intended to push more decision-making and accountability to the segment level and should result in an annual cost reduction of $0.9 million.

The other major component of SG&A expense growth was the timing of restricted stock grants. This year, restricted stock grants were made in the first quarter, resulting in stock grant expense of $23 million (sic - see press release, "$0.3 million"). While in 2013 this stock grant expense was incurred in the second quarter.

Severance and stock grant expense in the first quarter of 2014 totaled approximately $1.3 million before taxes, or approximately $0.02 per share. Spartan ended the first quarter with cash of $27.2 million, compared to $16.6 million at March 31, 2013, and $30.7 million at year-end 2013.

Compared to the year-end 2013 cash figure, the decline in cash was predominantly due to the increase in receivables more than offsetting a decline in inventory due to the shipment of Reach vehicle inventory in the first quarter. Reach vehicle inventory will continue to decline but we expect to see some inventory buildup as we produce the Peru fire truck order.

Now taking a look at our outlook for 2014, we continue to project revenue in the $500 million to $525 million range. We are on track to ship approximately $14 million in Reach vehicle inventory in the first half of the year that have been delayed by a component shortage.

Spartan ER has started the production build of the 70-unit Peru order with the first installment scheduled to ship late in the second quarter. Backlog in both the ER and the DSV segments appear solid, if more heavily weighted toward the second half of the year.

We have less certainty about the motorhome chassis production, as John had mentioned. But that has been taken into count into our revenue forecast. We typically do not provide segment level guidance but in the case of DSV we are making an exception this quarter.

Keep in mind that the $7 million of delayed Reach vehicles in the first quarter inflate the revenue run rate. We project full-year revenue of approximately $200 million for DSV in Q4 -- 2014, including this delayed Reach vehicle shipment.

We expect both DSV and SCV to be profitable during 2014 with the exception -- with ER expected to be profitable in the second half of the year. The subsequent event involving the loss of some data and data for manufacturing has not yet significantly impacted production at the Brandon facility. Nor will it impact production of the Peru order.

However, lost data is expected to negatively impact operations at Brandon by mid-May. The potential impact on number of units produced or revenue for the second quarter of 2014, also the full year, cannot be estimated at this time. As John stated, we expect to have more clarity about the possible impact on Brandon's operations by the end of May and plan to provide an update at that time.

So excluding the potential impact of the Brandon data loss, management expects a modest operating loss in the second quarter, followed by profitable third and fourth quarter for 2014. Based on our current outlook, Spartan is expected to be profitable for the full year.

Our projection for 2014 operating income remains in the range of 1% to 1 1/2% of sales. As we stated in the year-end 2013 conference call, operating income for 2014 will be driven largely by the pace of improvement in the ER segment.

Now I'll turn this call back over to John Sztykiel for his closing remarks.

All right, Lori, thank you so much. To sum up the first quarter of 2014, our backlog, brands, and innovations have positioned us very well. We entered this year with the following tasks: to deliver improved financial results; grow shareholder value; fix the ER body business. We made progress in Q1 with further progress expected each quarter during 2014.

Accelerate the pace of operational improvement at DSV's Bristol facility. Again, progress was made. Number three, bring Reach to profitability. That was accomplished. Number four, expand SCV's motorhome chassis product line, yet still make money. Progress in that direction. Number five, generate cash and reduce inventory. Again, progress was made.

And as we look at 2014 and beyond, one of our key metrics is value-add per square foot, which we define as sales minus bill of material cost, divided by total square footage. We have an excellent opportunity to reduce our manufacturing footprint, thus improving our ability to deliver greater value.

This will not happen overnight but now that Bristol has completed the heavy lifting phase, we are looking at the next steps. In conclusion, progress was made in our five key areas and we are on track for more progress in Q2 of this year and the second half of 2014. We are focused, committed, one team, one plan centered around DRIVE. Thanks. Greg?

Okay. Kate, we'll now take questions.

Thank you. (Operator Instructions) Joe Maxa, Dougherty & Company. Please go ahead.

I wanted to ask on the profitability, the gross margin. If I look sequentially, revenue was just up a little bit but gross profit was down about $2.5 million. Clearly a mix shift. I just want to get a little more color on the main drivers of the difference in the margin.

So, if we look at Q1, there were several drivers. One of the biggest is we had an extraordinary amount of the Reach. And again, this is the 1,900 Reach order that does not have the price increase and does not have all of the bill of material reductions in it.

Again, it was profitable. But again, it is well below our normal profitability of our products. We also had lower APA revenue in the quarter. And that will continue through the year. So that was a large driver.

We also had, as talked about, higher motorhome sales, which tends to be a little bit of our lower margin product as well. We also continue to have the inefficiencies of what John refers to as the unhealthy orders at the ER body side of the business, which also impacted the gross margin for Q1.

Okay, that's helpful. And then along those lines, your operating margin outlook for the full year, 1% to 1 1/2%, that does not include the potential issues at Brandon, correct?

That is correct, Joe.

Okay. Okay, that's what I had assumed. And just one more from me. I just wanted to ask on the $200 million DSV expectation this year, that -- if you look at it year-over-year we do see maybe a different trend than last year where Q1 was the lowest. And then you had a little bit higher in Q3.

Just wonder what your outlook is for the rest of the year. How this new Reach order will flow through. And what type of seasonality we might see this year.

So, Joe, I'll take that one. So if we look at Q1 again, it was unseasonably high because of the large Reach order. We believe our Q2 will be softer than normal. Usually our Q2 starts to pick up but we're expecting to be unnaturally soft.

We do believe we will have, as seasonally predicted, a strong Q3. And then our fourth quarter to be more normal. So we will have all of the Reach -- the 670 Reach order. That should be completed, excuse me, by mid-Q3.

Yes. Joe, this is John Sztykiel. One of the things I think -- and this is a positive side of it -- part of, as we've evolved at Utilimaster and the delivery and service and vehicle growth, is you're seeing a more effective balancing of orders and line production rates.

One of our strategic targets in the delivery and service business, which is truck bodies, walk-in vans, commercial vans being the Reach, is to eliminate the lumpiness of the backlog, the orders, et cetera.

As you've heard management talk over the last two or three years relative to the delivery and service business, you've heard the term orders can be sort of lumpy. Big swings, et cetera. We're very, very focused on eliminating this.

So it was very positive to see not just the Reach but the increase relative to Q1. What's nice is I think over time you'll see less lumpiness in the delivery and service business. And as you eliminate that lumpiness, you'll also then be able to improve your operating margins. Because it's always easier to improve something when you have a more consistent flow.

Okay. That makes a lot of sense. Thank you.

Shivangi Tipnis, Global Hunter. Please go ahead.

What is the ballpark figure of the first installment of Peru orders from the total 70?

Okay. We need to ship those in groups of ten at a time. So we'll expect to make that first shipment of ten late in the second quarter. But I'm not sure if we'll recognize the revenue then or if that's going to be more of an early third-quarter event.

That one could go either way just depending on the timing of the shipment and when those trucks arrive at the destination.

One of the things just -- Shivangi, this is John Sztykiel. And it's good that Greg noted the recognition of the revenue because we don't recognize the revenue till they are on-port and relieved off the boat in Peru.

And there's about a 28-day cycle time from when they leave Charlotte to when they show up in Peru and they're no longer on our revenue sheet. So while the first ten units will definitely ship in Q2 and we're on track, the revenue in all likelihood probably will not be seen till Q3.

Just like we will ship the balance of the order in Q3 but the revenue will be seen in Q4. Does that provide the clarity you're looking for?

Yes, that is great color. So we are expecting about all 70 to be shipped in Q3, is that correct?

They should -- the final shipment should happen by the end of Q3. Again, the revenue -- some of the revenue may fall over to Q4, based on the timing of the actual acceptance of the units in Peru. So we will be done producing by Q3.

Yes.

Okay. The next question is on the SCV side. I think most of the SCV things were driven by pricing. So how comfortable are you with the contracting environment? And how do we see the SCV going forward, based on pricing?

Well, I think in SCV in pricing, which is the Isuzu, the defense parts, and the RV business, from a pricing perspective that's very solid right now on the RV side. So we felt comfortable there.

On the Isuzu side, very comfortable there. As a matter of fact, we're now working to accelerate to over 29 units per day. That product line's doing extremely well for Isuzu in the marketplace.

On the defense side, however, which is no surprise to anybody in that industry, wheeled vehicles, parts, et cetera, are very challenging for us. So I would say in the defense side it's not really pricing affected. It's just there's really not much market or consumer demand right now.

Okay. Thank you for the color. And there's a last question. I'll get back in queue after this. What level of total cost saving benefits in dollars are we looking at from the efficient initiatives? And what -- can you give us an idea on the expected timing of the benefits?

Yes. Are you talking about the changes that we've made at Bristol?

Exactly. Yes.

Yes. We have -- we're truly right on plan. And you could expect to see -- we believe -- we've been talking about that this $2 million improvement -- or excuse me, $4 million improvement. And we will be on track to get -- by the fourth quarter, we should be at that annualized pace of the $4 million is what our expectation is.

Shivangi, this is John Sztykiel. And as Lori said, the target for Bristol, the plans and stated objectives were $4 million from an operational savings. And so we're moving against that plan. We're making progress against that plan.

We should be there Q3 or Q4 at the latest. So you should expect to see that $4 million total savings on an annual basis in the 2015 calendar year.

Okay. And how do you see the -- this cost saving benefits -- benefitting the ERV segment, then?

That's a separate issue. At Bristol, we're only producing Utilimaster or DSV vehicles. So --

And from a -- and this is John Sztykiel. From an emergency response vehicle perspective I think Lori provided the right guidance there that we expect to be profitable by year-end. But we have not gone through any consolidations or anything like that yet relative to ER.

And we don't have any formal target numbers out there. But if you look at their loss and where they were in 2013, we're making operational improvement. We expect Q2 to be better with a positive inflection point in the second half of this year as we ramp up and ship the Peru orders and Ocala as well.

So when we look at ER in particular, we look at really the loss of last year. That's our target to overcome on an operational perspective.

Okay. Thank you for the color.

Okay. Thanks, Shivangi.

Robert Kosowsky, Sidoti. Please go ahead.

The computer issues, can you give us more color as to what actually happened and what the recovery actually is?

All right, Rob. This is John Sztykiel. And to give you a little bit of color or background, a very unique event, which according to IT and several people I verified with, this rarely, if ever, ever happens.

But in essence, we were going through a process. A disciplined process to upgrade every one of our backup systems at each one of our locations. And the new backup equipment was literally on-site in Brandon, South Dakota.

However, we had a main server failure. Then we had backup failures. Very late April. Worked with a high quality recovery firm. We were actually recovering the data in a very high percentage. So it was very good quality.

We worked through the issues in late April and early May. However, the recovery server this past weekend also had two significant issues. Thus, we have to regroup and analyze, determine exactly what data we are going to get.

And again, we're not pessimistic or anything like that. We're just trying to provide transparency and clarity to the marketplace. And then we'll make our plan accordingly. It's extremely, extremely rare to have these kind of events happen back-to-back.

And probably the most discouraging thing is, here I talked about earlier we made operational progress in the emergency response vehicle group. And as sometimes what happens as an individual shared with me last night, said: Sometimes, John, on the path of a turnaround you take two steps forward, one step backward.

Well, this data recovery issue was a step backward. Now we're working to go forward again. So extremely rare. Simple main server failure. The backups failed. And then we were really overcoming every challenge in front of us with a very good data recovery firm.

Then this past weekend on Friday and Sunday they had operational issues in their recovery process as well. So a very unique storm which we're working to overcome.

The rule of Murphy's Law?

You know, that -- yes.

You got it.

Yes. I'm thinking: Okay, we had the polar vortex for winter. And very high snow removal cost, et cetera. Is this what you would call the digital vortex relative to our emergency response vehicle?

I'm trying to keep a positive attitude but probably the most frustrating thing was we were doing everything right to replace the systems and the backups, working in a very disciplined way. And this was the last location. So where does the problem hit? The last location.

Okay. And so is the problem that you don't have the right data sets in order to fully design and ramp up the manufacturing of a truck? And that's what you need to sort of recreate?

Yes. Basically, it's the bill of materials, the engineering that's all been processed and everything like that. So it's actually the work that was done, not the work that we're doing today. But it's the work that was done which was driving May production.

So as it operates, and again I'm not trying to provide a positive light. But the reality is we get discs every other day from the data recovery firm. And then we go through those discs and analyze the data to determine the validity, the accuracy, et cetera. Then we work with them closely.

It's literally to a certain extent hand-to-hand combat. And honestly, we were doing a very good job with a great firm the last week and a half of April. But this has caused everybody to regroup slightly.

So we will regroup and work through each issue. But like Lori and Greg said, by the end of this month we will provide clarity to everybody in the financial markets. I will say this: the good news is, Rob, is we now have two other locations that we can leverage production to to catch up. Okay?

Not just from a financial perspective but also from a market perspective. So one of the things we're looking at as we recover the data and there'll be individuals from Charlotte and South Dakota next week.

Is, okay, how can we leverage the other locations to catch up from a delivery perspective? And not only ensure that we meet our financial targets, operational targets. But also that we meet our delivery requirements of the marketplace.

I'll just tell you the truth, the last four months we'd hit the master production schedule. People were gaining confidence there ex -- people in the marketplace were positive. The dealers were positive. The associates were positive. And this Murphy's Law hit this past weekend. So.

Okay. So is there a risk come May if you haven't got the full data recovery that you're not going to be able to build trucks at Brandon? So then you're going to have production down time for a week, four weeks, two months? Whatever it takes in order to get the data set back up? Is that the way to (multiple speakers) --

I don't think you'd have a risk of production down time. I think you'd have the risk of production slow down. And that's what we're working to mitigate right now.

Okay. So you would still be able to make trucks there but it would just be very inefficient while you're rebuilding your processes.

It could be inefficient and slower. Yes.

Okay. All right. And then I guess keeping on the emergency side, how has the Ocala ramp been and the Charlotte ramp been on Peru? And where do they stand versus the target production rates?

Actually, they're ahead of target. Ocala actually exceeded their MPS schedule. So that's positive. And Charlotte is slightly ahead of target. So both have gone extremely well.

Okay, that's good to hear. And then finally you mentioned unhealthy backlogs. And I'm wondering if you can let us know how big the unhealthy backlog is. Or what percent of the sales in the first quarter were that? And the cadence of how this gets burned off over the year.

So, as a percentage, I cannot provide clarity on that percentage. But I will say this, it gets less and less as we go through each quarter. As we mentioned on the previous call, Rob, we had three price increases in 2013 on a version of the quoting system. And those are healthy from a product perspective.

So we will build less unhealthy trucks in Q2, less in Q3, less in Q4. So each quarter gets less and less and less. But as Lori mentioned, we expect ER to be profitable in 2014. So as a percentage, the good news is we have a larger percentage of healthy orders versus unhealthy orders.

Okay. That's good. And then finally on Reach, you mentioned it's profitable. Is that profitable at the gross income level or the operating income level?

Operating income on a fully [burn in] basis.

Oh, that's good to hear. And then finally how many Reach did you sell in the quarter? [Maybe I've forgotten your number.] I want to know the actual units are.

About 670. Had to do the math.

Okay, 600 -- (multiple speakers)

Yes.

670? Okay, and then one last question on the computer issues. Is -- if you do a worst case scenario, recreate some of your data and processes, is this something that is like a one, two, three month, six that you do get to fourth quarter say it should be clean? So if we do have production weakness, it's going to be confined to kind of just this year, worst case scenario?

Typically, it's a four to six scenario if you have to go through everything. So it's not like -- by Q4 we should be back to a normal run rate. But that, I would think, is the worst case scenario. Okay? Believe me, we're not thinking those kind of terms internally right now.

Okay, that's good to hear. And good luck with everything.

All right. Thanks, Rob.

(Operator Instructions) Rhem Wood, BB&T Capital Markets. Please go ahead.

Just on the backlog it sounds like you guys have -- especially in ER maybe (inaudible) after share, the expensive price (inaudible). Do you feel like you've maybe fixed that in the market? And you're going after a little more price now? And how should we think about that impacting order levels and backlog going forward?

Rhem, this is John Sztykiel. Absolutely as we sit here today we're pricing to -- or I should say we're quoting trucks which are profitable in the marketplace. For example, the Peru order is profitable both on the body side and the chassis side. Okay?

So we're very focused and confident that what we quote in the marketplace today is a profitable product. I think our growth, though, in some respects obviously came some from for lack of a better term, we bought market share. Okay?

But I will say this. When we look at the emergency response market price, we've been very focused around two initiatives: Redefining innovation and technology; excited consumers brand fanatics.

And if we have executed against those two focus points, we have done extremely well from a growth perspective in gaining market share. I think if you look over the last three to four years within Spartan, we've had a large number of innovations out in the ER market price where other people are cutting back because the market was so challenged.

That is now serving us well. When I look at our marketing, our digital, our consumer-centric approach, really driving excited consumers brand fanatics, I believe we're doing a lot of things right there.

So while pricing definitely contributed some, I think the principal reason, though, we grew our backlog. Because again, we had three price increases in 2013 and we had positive backlog growth in emergency response. Is against two very, very clear focus points with the right initiatives behind them: Redefining innovation and technology; and excited consumers brand fanatics.

Okay. And then with this server issue that you're having, did -- is it possible that that impacts the profitability of these Peru orders? And as you get into this, how's it going? Can you talk about any more progress you're having in Latin America? And where you plan to go with all that. Thanks.

Hey, Rhem, this is Lori. The good part is, this issue that happened in Brandon, everything -- these units were engineered in Charlotte. So everything is safe. It will not impact any of our Peru order. And will not impact any of our advancement in the South America area.

Okay, good. Good to know. And then --

Rhem, this is John Sztykiel. And one of the things, just to provide to the group, as we leverage the manufacturing flexibility of Spartan, all those files were created here. Just like in Ocala.

All those files to build the trucks are created in Ocala. And the files for Africa, the aerial group, are created in Ocala. And while we're commonizing bill of material sets, et cetera, this then enables us to grow and leverage and increase our production capabilities in other locations and not be dependent upon just one location.

Okay. And then last one I'll turn. Is the SG&A is up $3 million or so in the first quarter. And I think part of that was due to the kind of export expenses, et cetera.

But how should we think about that going forward? And if nothing else, with the server issues and I have a lot of consulting fees and other things. I guess that will get lumped into there going forward?

Yes, you're right. The consulting for this, the server recovery was (inaudible). Again, I don't really believe this is going to be a large magnitude expense for this recovery.

Again, remember that we had some one-time events. We had $1 million of restructuring that hit in Q1. We also had the timing of the stock ramp which was $300,000. That also will not occur in the rest of the year.

So you get some one-timers. And I would say then that cadence probably will have a few blips. But I think it's probably a pretty fair synopsis of what the rest of the year will look like. Again, we are continuing to look and reduce our cost structure. That is one of our key initiatives is to reduce that cost structure. So I believe that we're in a good place for that.

Okay. Thanks. And then last one. There was -- I picked up that NHTSA had a recall on 3,200 Utilimaster vans. Can you give us a little bit of color on that and maybe the impact?

Well, yes, that was a small recall which we're working through. The financial impact is not large. Not anything to be noted in the 10-Q, the 10-K, et cetera.

Okay. Thanks for your time.

All right.

There are no further questions, so this concludes our question and answer session. I would now like to turn the conference back over to John Sztykiel for any closing remarks.

All right. Thank you very much. As we look at 2014, excluding the Brandon data event, Q1 should be the lowest point of the year. Q2 should be better. The second half a positive inflection.

Obviously, challenges remain. We're very focused as an organization to improve our gross margin; to manage our [ST] and overhead expenses; to address those in such a manner that they are reduced in 2014 versus 2013; and to take the backlog where it stands to light -- today and to drive it in such a manner to execute in such a manner that as one team, one plan centered around DRIVE, we deliver increased shareholder value.

As we sit here today, again, there's challenges that pop up all the time. But we will work through those challenges and we expect Q2 to be progress versus Q1 and look forward to a positive inflection in the second half of 2014. Thanks so much.

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