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Spartan Motors, Inc. (NASDAQ:SPAR)

Q3 2008 Earnings Call

October 23, 2008 10:00 am ET

Executives

Jeff Lambert - Investor Relations, Lambert, Edwards & Associates

John Sztykiel - Chief Executive Officer

Jim Knapp - Chief Financial Officer

Karen Morrow - Vice President of Finance

Dave Reid - Vice President of Public Affairs and Brand Management

Analysts

Frank Magdlen - The Robins Group

Ned Borland - Next Generation Equity Research

Jamie Wyland - Wyland Management

Andrew Holm - Dougherty & Company

Operator

Good day and welcome to the Spartan Motors third quarter 2008 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jeff Lambert. Please go ahead.

Jeff Lambert

Thank you and good morning, everyone, and welcome to Spartan Motors third quarter 2008 conference call. I'm Jeff Lambert with Lambert, Edwards & Associates, and I have with me today several members of the Spartan Motors management team: John Sztykiel, Chief Executive Officer, Jim Knapp, Chief Financial Officer, Karen Morrow, Vice President of Finance, and Dave Reid, Vice President of Public Affairs and Brand Management.

I assume all of you saw this morning's release on the news wire and Internet. We want to take a few minutes this morning to discuss the results for the quarter; however, before we do, it is my responsibility to inform you that certain predictions and projections made in today's conference call regarding Spartan Motors and its operations may be considered forward-looking statements by the securities laws. As a result, I must caution you that, as with any prediction or projection, there are a number of factors that could cause results to differ materially. These risk factors are identified in our Form 10-K filed with the SEC.

A quick word about today's call. John Sztykiel will begin the call with a brief overview of the quarter and then go over the operational results for each business segment and the outlook for the future. Jim Knapp will then discuss the financial results for the quarter. Karen and Dave are here to help answer questions. We will conclude with a Q&A session, at which time the operator will instruct you on how to enter the queue.

With that, I'll turn it over to John Sztykiel. John?

John Sztykiel

All right, Jeff. First, thanks for being here this morning to all of you. As you all know, in one respect we're living in both uncertain times, but really also times of significant opportunity. From a quarterly perspective and really from a 2008 perspective, we had an excellent quarter. It was the best third quarter in company history and, as we look at the results, we reported net sales of approximately $237 million, up almost 60%; net earnings of $0.45 per diluted share, more than five times greater than last year; return on invested capital of 35%, more than four times greater than last year; a gross margin of 18.1%, up 53.4%, consolidated backlog of $183 million.

I just want to put this in context. If you look over the past 18 months and you take into account the growth in sales and income, the cash that's been generated, the facility improvements that have taken place that will have been paid off by year end, an interesting note is we've increased our production capacity by 130% and we have totally re-done every facility at Spartan Chassis in Charlotte, Michigan.

What's this mean? One, CapEx will be significantly less in 2009 and the next couple of years thereafter. Second, from a financial perspective, we're extremely sound, we're extremely strong, and Jim Knapp will go into that. Third, we are positioned for growth. So as we move through the call, I think it's important that people not only understand as they look at the financial results, but at the same time, too, we've increased capacity, we've re-done or reset the buildings to position us for the next level of growth for Spartan and its group of companies.

Getting back to the quarter, we ramped up production rapidly and efficiently to hit run rates of a remainder of a sizeable Military order. Most of this order will be completed in October. This was another substantial acceleration in our Military operations and once again we met with great success. As with past ramp ups, the military was pleased with our efforts, and we have proved once again that we are in this and we have what it takes from a demonstrated execution perspective to be a long-term player in the Military business.

We also saw very good results in our Service and Parts business, good results from fire trucks in the Emergency Vehicle Group. On the other hand, the RV industry as a whole is in difficult shape, including Class A motor homes. We were ahead of this trend in the second quarter as we scaled down operations in advance of the industry slowdown.

Driving our success in the quarter was really the strength of our business model, which we feel not only positions us well for 2009 but for the years beyond. And the strength of our business model first is market diversification and flexible manufacturing that allows growth but also gives us the capability to appropriately scale the business based upon market conditions.

This quarter also demonstrated a significant improvement in our operating efficiency as represented by our gross margin. From a balance sheet perspective, we have significant availability under the credit line. We continue to pay down debt. We are very well positioned financially, and we are generating cash. Again, Jim Knapp will go into that in a few more minutes.

From a market diversification perspective, today we're really in four markets: We're in Emergency Rescue, Recreational Vehicle, Military and Service, Parts and Accessories. But the reality is societies change, vehicles change. I have no doubt we will be in one new market over the next 12 months.

And I think it's important just to reflect on change in opportunities. A couple of years ago we introduced a Furion chassis at the Emergency Rescue Show FDIC in Indianapolis. The Furion is a medium-duty customized commercial chassis that will first focus on emergency rescue, fire truck and ambulance. It will then move over into other markets

Well, from an opportunity perspective, what was announced over the past couple of weeks, Daimler will be discontinuing their Sterling brand of medium-duty trucks. Those trucks, or the average annual sales of the Sterling brand, is 12,000 units a year. Now that need's not going away. That need's there of 12,000 units a year. Will the Furion be there? Not from a 12,000 unit per year perspective, but do we perceive there are opportunities for the Furion product to compete within that scope of the marketplace over the next 24 to 36 months? Absolutely.

And I think what's demonstrated or what, you know, really signifies the skill set of Spartan over the past 33 years is here we brought this product out two years ago, first focused on emergency rescue and will move in other marketplaces, and now we hear of a significant change in society, in business models, and we have a tremendous opportunity in front of us. Thus I think there's a lesson to be learned: Times of uncertainty are times of change, but they are also significant times of opportunity.

As we look at the segments, let's look at the Military business. We have provided more than 20 threat specific variants of mine protected vehicles for the U.S. military in six different nations. Our military role is evolving from rapid production to long-term sustainment and a partnership model based on specialized variants or really a customer-centric business model. We see a very solid future for Spartan as a military supplier in the ever-changing global war on terror.

And let me just read you some data points from the global war on terror. Today there are 42 to 50 armed conflicts going on worldwide. On the average, there are 250 IED blasts per month. Since 1991 through 2006, there have been approximately 6 million people killed in relation to armed conflict. That's about 400,000 people a year or over 1,000 per day. There's over 100,000 kidnappings per year or 274 per day.

The survivability in a mine-resistant vehicle is 94%. The average cost of an IED is $25 to $30, then you have the exchange rate of the dollar versus the euro and the British pound. You know, the reality [break in audio].

John Sztykiel

Hello, this is John Sztykiel again. I just want to apologize, but obviously technology does not always work as its best, which isn't surprising in one respect here - we're having great results for 2008 and I'm absolutely shocked at where our stock price is. So, back to the call.

But relative to the data points - and it was interesting, as noted by Kim Yarbaro last week as the MRAP Joint Program Office was at Spartan Chassis to thank the 500-plus associates for their work to date - and I'd like to read a quote from Kim Yarbaro, Assistant Program Manager:

"We will never let the country forget the work that has come out of this plant that has touched so many lives. The reality - IEDs continue to be a popular weapon of choice, the data indicates growing use worldwide, ranging from Iraq to Afghanistan to Colombia to India to Pakistan to Russia to Somalia to Yemen to Sri Lanka to Britain, wherever."

What's interesting is to read a quote out of Defense News as you think about Spartan's role relative to the military business and the future. And this was out of, I believe, the October 6th issue: "How long did it take us to bring the Bradley to the field? Ten years. How long did it take to develop MRAP? Nine months." said U.S. Army Lieutenant General Stephen Speakes, Deputy Chief of Staff of Programs. "Now we're over 10,000 units. This is just a remarkable ability that we have had to transform the way we modernize the force and deliver capability."

And the interesting thing is mine resistant vehicles are going to change and the variants are going to move, and as the military business model shifts more to speed and more to variants, that is in line with Spartan's core competencies.

As we look to the future, we see tremendous opportunity. We went from concept to production in less than six months. Today we are working on a number of other opportunities as we continually work to increase the customer base of Spartan relative to the defense business model. As a result, we expect to see a continuous flow of small orders but at the same time we are working on some larger orders as well.

Next I just want to comment on the marketplace. JLTV is a 2013 program at the earliest, and while we definitely see a role for Spartan within JLTV, the reality is if you think back to the data points which I just read a few moments ago, the market will not wait for 2013. There are tremendous opportunities today and in the near-term future for survivable mine resistant vehicles and Spartan expects to be there.

Now let's shift gears over to Service, Parts and Accessories. We reported sales of approximately $62.9 million in Service, Parts and Accessories, with most of the revenue related to the Military as well. From a Military perspective, we are now supplying parts and component kits to our Military customers and for non-core Military customers on MRAP or Spartan-related vehicles, i.e., in other words, we are increasing our business or our customer base in the Service and Parts business because of Spartan Chassis' demonstrated excellence from a timely delivery execution perspective with the right part at the right place at the right time in the Military business model.

In the beginning of 2008 there were approximately 2,500 Spartan supply related MRAP units operating in Iraq and Afghanistan. By mid-2009 this number will double to more than 6,000 Spartan-related units in the theaters of operation. All of this should drive SP&A in a direction that is up.

We also are working on selling more specialized kits, i.e., not just parts but not a complete vehicle to military or other Defense-related customers. Keep in mind that our success in servicing the military with parts and kits is a reflection of their overall satisfaction with our work to date.

But also we are seeing growth in Service, Parts and Accessories in Emergency Rescue and RV as well. We have just recently opened or I should say within the past 12 months we've opened our first remote service parts location outside of Michigan in the Dallas/Fort Worth area to service the RV and Emergency Rescue business models. Since 1975, Spartan has now produced over 70,000 specialized vehicles and each one of those vehicles represents an opportunity to maximize value after it leaves the facility.

And this is a huge strategic shift for us. Five years ago Service, Parts and Accessories was not on our radar screen. We were very focused on making money on the vehicle as it left the facility and honestly, we left the Service, Parts and Accessories business to other people. However, now it is a key part of our strategic plan. It is one of our four markets.

As we look at our third market, the Recreational Vehicle market, i.e., the Class A motor home chassis market, sales were down in the quarter, reflecting the industry as a whole. There is no doubt that the RV times are tough and I expect them to be tough over the next six to nine months. Several months ago we moved to right-size the business from a staffing and a structure perspective relative to the industry and this is reflected in our third quarter results and really in our results of 2008. We are positioned for growth the right way, but we are also positioning ourself relative to adjustments in the business model as dictated by the markets.

But in some respects - not all respects - times are hard for everyone. Class A motor home sales were down 46.9% for the year. Several OEMs are seeing tough times; however, I must emphasize our customer relationships remain very, very secure. Credit availability is a significant factor.

An interesting point, though, relative to the RV industry is one, an RV vacation is still considered to be the least expensive vacation compared to other traditional vacations - going by plane, boat, etc. And so as cost or price has become more important, in talking to people with the industry, they view this as a positive.

Another positive is the price of fuel coming down. I mean, it will provide an incentive or a desire for people to get out and about in their RV a little bit more.

The other fact is from a retail perspective - and again, this is just over the past several months  but the retail of Class A motor homes versus wholesale is at a 3 to 1 ratio, which is quite shocking. But what it does show is that within North America there is still a fair amount of retail demand.

Now if this 3 to 1 ratio is extrapolated for the whole year, that would put a retail rate of about 48,000 units a year and while the industry is forecasting 16,000 units a year. I'm not saying that's going to happen, but what it does show is at some point in time the inventory within the industry on the dealers' lots will become very, very thin, very, very depleted, and you will see a significant wholesale jump.

Whether that happens in the next quarter or the quarter after that, honestly, my crystal ball is not that clear. I wish it was. But I am encouraged because if the consumer is saying I still want to buy the product, I still like the lifestyle, I view that as a positive because it is a positive even in a very, very uncertain time as it relates to the RV business.

Switching over to Emergency Rescue, that business is good. We expect it to continue to be very good for us. First looking at fire truck chassis, we had another good quarter compared to 2007. Sales increased 20.9%. The backlog increased 5.6%. We continue to see solid order intake for fire truck chassis and I think that will continue to move on even in light of softer state budgets for one simple reason - you have a 2010 emissions change and there will be a fair amount of prebuying of fire truck chassis, etc., over the next 12 to 18 months.

Plus there are some significant issues amongst the competitive base within the Emergency Rescue industry and, simply, when I look at both Spartan Road Rescue and Crimson, I think they're just doing a better job from some simple blocking and tackling relative to gaining competitive market share.

In the second quarter - or I should say in the most recent quarter as well - we saw continued shift towards custom fire trucks, customer fire truck chassis. It was up to as high as 59%. From an industry perspective, it shows as society changes, vehicles change.

The interesting thing is if you look at some data points relative to Emergency Rescue, first, 50,000 people a day turn 50. And while that bodes well for the RV business, it also bodes extremely well for the Emergency Rescue business.

First, more of us are going to take a ride in an ambulance - whether we want to or not - and what's interesting is the ambulance industry, as noted in the release, is expected to be up 17% this year. Every 1.4 seconds there is a call for help. Medical aid calls are now 86% of all emergency calls.

In 2008, 4.5 million acres have been burned from a wildfire perspective. And even though there's expected to be a significant drop in state budgets, from a federal perspective funding has been increased for 2009 budget year versus 2008 by approximately $5 million or $565 million, which means from a federal perspective there will be more money allocated for the purchase of fire apparatus and other Emergency Rescue-related equipment and services than what there was last year. This is very positive for the industry.

As we look at both fire truck chassis and the emergency vehicle team, not only is a profitable foundation but it's a sizeable opportunity for us. We see a clear window to take more market share through new product launches, emission changeover, continued disarray amongst our competitors, and increased federal funding.

From an emergency vehicle team perspective - which made up about 5.5 of our total sales, net of intercompany sales in the last quarter - it was another quarter of improvement. Sales were up 13.7%. While the group is still in the red, we saw a 60% increase in the bottom line.

A couple of new products. One, introduced by Crimson Fire, the First Response All Call vehicle or the FRAC as we call it, was released in Denver at a major show. It's been received extremely well. Why? It's basically a rear mount pumper fire truck and an ambulance, can carry six people, and it's priced for less than $185,000. That's a huge, huge drop in the price point.

Next, just last week Road Rescue introduced an ambulance chassis or I should say an ambulance product called the Transmatic and, again, it's a multifunction product based on a sprinter chassis, a lower price point. Not only is this product an ambulance but it also has bariatric and handicap access in that it has a rollout ramp installed below the floor.

So now, relative to the private or to the community, you have ambulance transport capability; you have bariatric capability; you have handicap access capability in that you can roll people up a ramp; and last, you've got significantly improved fuel economy because it's based upon the sprinter chassis at a super attractive price point. So as a company, again, we see tremendous opportunities in Emergency Rescue. We are focused on operational execution, but we're also focused on product innovation to drive our business model.

In closing, as we look forward to 2009 - 2011, we are focused on executing around our six strategic directives to drive growth - culture, innovation, brand leadership, value maximization, Lean and global. The next two to three quarters could be tough in some of our markets; however, the next two to three quarters, we expect, will also be very good for some of our markets.

However, these are uncertain and challenging times. But we have been through this before; in 1991, 2001 [inaudible] I can recollect the most. Each time we emerged even stronger from the business on the year before. Our business is challenging, but it's also a time of opportunity. And as we look to the future, we're excited, but at the same time we're also focused on being very, very wise.

And in closing before I turn over to Jim, we appreciate your interest, but I look at these times really from an uncertainty perspective - yes, that's part of our concern - but really, from a macro perspective and what's first and foremost on our minds is how do we make sure that we operate the business to maximize the opportunities for growth but make sure that we adjust our business model accordingly where some of our markets are struggling.

Jim?

Jim Knapp

Thank you, John, and good morning, everyone.

We had $6.9 million in cash and cash equivalents at the end of the quarter compared to $3.6 million at the end of 2007. We used $11.2 million of operating cash flow during the third quarter.

We ended the quarter with $74.3 million in long-term debt. A large portion of our debt and the use of operating cash flow in the quarter was due to increased working capital that supported reduction of a significant Military vehicle order mentioned in the press release. Since the end of the third quarter we have reduced our debt by about $47.5 million.

Our current line of credit was zero as of yesterday, leaving about $26.8 million of fixed rate long-term debt. As announced in the press release, we also took the opportunity to adjust our line of credit to lock in rates below current market through the term of the agreement. As part of this change, we right-sized our line of credit to $50 million and renegotiated the rates and fees.

We did not repurchase shares of stock during the third quarter due in part to our need for cash to support working capital.

As our working capital normalizes during the fourth quarter we will generate significant cash that will provide an opportunity to invest in the business, buy back stock or evaluate strategic acquisitions. With the increase of the strength of the corporate staff, we have the ability to evaluate and integrate potential acquisitions that can enhance the future of Spartan Motors. We have the means to take advantage of opportunities which sometimes accompany tough economic times.

Depreciation for the quarter was $1.6 million. We expect depreciation to be about $6.1 million for the year.

We're forecasting CapEx to be in the $17 to $20 million range for the year. We're expecting lower CapEx in both 2009 and 2010.

Our effective tax rate was 32.6% in the quarter and we're expecting the tax rate for the year to be in the range of 33.5% to 34.5%. The lower tax rate in the third quarter was due primarily to an R&D tax credit that we received.

Our consolidated return on invested capital for the quarter was over 35%, which exceeded our company ROIC target of 15% to 20% by a wide margin. For nine months ended, our ROIC is over 32%.

We're taking proactive steps to control our cost structure to put the company on a solid footing for the future. Overall, we're in a strong financial position going into 2009.

With that, I'd like to turn it over to the operator for Q&A. Operator?

Jeff Lambert

And just before we do a Q&A, I just wanted to apologize. We did have some technical difficulties for a couple of folks who were dropped from the call. The conference call service hopefully got you back on, but they were having some problems and lost a couple of you for a few minutes there, so I apologize to any of you that were disconnected unintentionally.

Operator, can we go ahead and do Q&A now?

Question-and-Answer Session

Operator

You certainly can. (Operator Instructions) Your first question comes from Frank Magdlen - The Robins Group.

Frank Magdlen - The Robins Group

Going forward, John, what can we look for from the EV team in the road to profitability?

John Sztykiel

Well, in regard to the road to profitability I expect to see quarterly improvement each successive quarter, but more importantly, Frank, look at the EV team not as a separate group but look at our business model from an Emergency Rescue perspective, which includes Spartan Chassis. We internally do not look at the emergency vehicle team as a separately group. We look at the Emergency Rescue team - or I should say the Emergency Rescue business as a business model which is a key part of our strategic foundation today and a key part of our strategic foundation tomorrow.

Fire truck chassis are extremely important. Bodies are extremely important. Have Road Rescue and Crimson Fire Aerials moved the ball in the right direction? Crimson Fire Heads, Road Rescue Heads, Crimson Fire Aerials have not. As we look to the future, I expect to see all business groups improve.

I'm pleased with the progress they've made over the last 12 months. Are they where we want them to be? No. However, I think it's important to note that when we look at the Emergency Rescue business, you must bring the chassis into play as well because Emergency Rescue is a key part of our foundation and we look at everything together as we develop our strategic plans.

Frank Magdlen - The Robins Group

But let's say go back to Road Rescue. How many quarters are we away from profitability there do you think?

John Sztykiel

It's impossible for me to speculate; however, from a trend perspective they're moving the ball in the right direction. As a group, their percent improvement over the last 12 months was 60%. And I don't think it's fair for me to comment specifics relative to Crimson Fire, Crimson Fire Aerials or Road Rescue, but as a group they've improved by 60% over the last 12 months. If they improve by another 60% over the next 12 months, will it be a very positive step in the right direction? Absolutely.

Frank Magdlen - The Robins Group

Have the production rates changed significantly in the last several quarters?

John Sztykiel

Well, I'm not sure if the production rates have changed that much, but the operational execution has changed significantly in the right direction.

Frank Magdlen - The Robins Group

And in relation to the Military business going forward, should we expect a reasonable component again of R&D expense?

John Sztykiel

Oh, I would think from an R&D expense perspective you are going to see similar run rates. You could see actually maybe a little bit more as we look at moving into possibly one or two new markets over the next 12 to 18 months. I mean, the interesting thing is as the cost of fuel went up and as the markets changed, where cost becomes more important and let's say, you know, the customers' demands become greater, the interesting thing is the vehicles have to change.

And that's something which we are seeing going on not just within the U.S., but typically if you go over to Europe today you will see more specialized vehicles in line with work or things that are being done in the competitive marketplace. And if you look at the European cost structure versus the North American cost structure, it's significantly higher all the way around, whether it be labor, benefits, fuel, etc.

So as we look to the future, I think you'd probably see our R&D grow a little bit just because we have a lot of opportunities in front of us.

Frank Magdlen - The Robins Group

On the Parts, Service, Accessory sales for the quarter, was there a particularly large order that went out or requirement that might not repeat itself in the next quarter or two?

John Sztykiel

No.

Operator

Your next question comes from Ned Borland - Next Generation Equity Research.

Ned Borland - Next Generation Equity Research

I'd like to get a sense for at least some of the volumes or timing of some of these 20 different variants that you're working on in the Military side. Can you give us some color on that?

John Sztykiel

You know, Ned, I don't think from a variant perspective - I mean, it could be a change in the wheelbase, in the [vocational] use of the product. But from a variant perspective, I think the numbers continue to grow.

And again, if you look at the Military business model - which it is, it's a business model; there are customers and there's a competitive marketplace - it becomes increasingly more customer centric.

And, you know, one of the things I love with that one quote out of Defense News where, you know, it was Lieutenant General Stephen Speakes, where he said it took the Bradley 10 years for us to bring it to the field or to the marketplace; MRAP was nine months.

And as the global war on terror shifts or as people combat it around the globe, you are going to see the variants increase. You're probably going to see production orders or I should say purchase orders probably decrease from a size perspective, but the variants should increase. I mean, if there's something I've seen in the 20-some years I've been in this business, whatever niche one starts with becomes - over time, more micro niches develop. And this is no different.

Ned Borland - Next Generation Equity Research

Going at it maybe a different way, I'm just trying to get a sense for what your run rate on your Military backlog is going to look like. I mean, it's going to down but I'm just wondering what a steady state would look like going forward here.

Karen Morrow

Well, looking at the backlog right now, about one-third of that backlog relates to variants. So if you look at Q3 to Q4, what we're projecting is a 25% increase in variants, the shift that John mentioned, at a lower volume run rate, of course, as reflected in the backlog.

John Sztykiel

But I think, Ned, for the next two or three quarters, you know, while we are quoting and working on what I think I would call some significant variant orders, we don't have enough clarity right now to say okay, they're going to be in. So we do see potentially - well, in the fourth quarter we will definitely see a drop in Defense sales. However, as we look at Q1 and Q2, there is some opportunity for potential orders out there for those quarters, being Q1 and Q2, to potentially be higher than Q4.

But I think from a clarity perspective, if there is a misperception in the marketplace, as people perceive it from a military or a defense perspective, that we're just going to disappear come 2009, 2010, etc., one, I don't believe that to be the case.

And second, I continuously get asked a lot, what about JLTV? And the reality is JLTV is 2013. I mean, do I see us having a role in JLTV? Absolutely. I mean, the base vehicle price today on a JLTV product is estimated to be $450,000. Well, one, that's pretty close to an MRAP product.

But the other reality is between 2013 and today, you're looking at anywhere from four to six years. Well, the market's not going to wait. People are going to die. There's going to be IEDs. There's going to be conflicts. There's going to be battles going on, and variant product configurations will be needed whether it be by the U.S. or other countries, and we expect to be there.

Ned Borland - Next Generation Equity Research

And then on the Parts business - I was one of those guys that got dropped from the call briefly  but what was the install base again?

John Sztykiel

I quoted sales of approximately $69 million for the year [inaudible] Q3 from a Service, Parts perspective.

Ned Borland - Next Generation Equity Research

And your installed base now versus earlier in the year or what it's expected to be next year versus where -

John Sztykiel

Oh, okay, the number of trucks. Like at the beginning of 2008 I used a number of approximately 2,500 vehicles and by mid-2009 it should be approximately 6,000 vehicles in the theater of operations.

Ned Borland - Next Generation Equity Research

And is there any kind of linear relationship there? I mean clearly, you know, spare parts revenue has to go up.

John Sztykiel

We believe it will go up. Again, our crystal ball on the direction of the linear, the ramp of the line, I don't think we've got clarity on that yet because honestly we're just still new to this business model.

Karen Morrow

Still building our model, yes.

John Sztykiel

You know, the other thing is, Ned, and to the group, these vehicles are used quite a bit and there still is a fair amount of conflict going on. So depending upon where the vehicles are located, depending upon the conflict, relates to obviously the parts request, etc. So it's not just a normal okay, they go out there and be used - every vehicle is used the same way. So I think we'd be premature to provide any kind of clarity on a linear rate because it'd be an uneducated guess.

Operator

Your next question comes from Jamie Wyland - Wyland Management.

Jamie Wyland - Wyland Management

Just to follow up on what Ned said, so you would expect the spare parts volume to be at least at this level. You're not going to project any higher, but it's certainly going to continue at this level at a minimum?

John Sztykiel

Oh, I think we've got a [inaudible] I think we've got a very good opportunity for it to, one, stay at this level and to grow just based upon the growth in the installed vehicle base.

Jamie Wyland - Wyland Management

I just wanted to ask you a question about the balance sheet. I mean, obviously things are, as MRAP slows down, the balance sheet transforms tremendously as it has in the first couple of weeks of the quarter. Could you possibly give us a ballpark handle on what it's going to look like at year end - what the accounts receivable level will be, inventory, cash, long-term debt? Can you give us somewhat of a ballpark for that? [break in audio]

Jeff Lambert

The conference service is having some issues and disconnecting people. Jamie, could you go ahead with your question? I apologize.

Jamie Wyland - Wyland Management

I don't know where I got cut off, but basically everything's -

Jeff Lambert

Balance sheet a year end.

Jamie Wyland - Wyland Management

At year end, good - accounts receivable, inventory, cash, long-term debt, just a ballpark for what they all may look like.

Jim Knapp

Let's see. At the end of the year?

Jamie Wyland - Wyland Management

Yes.

Jim Knapp

Well, we don't forecast, Jamie, but we can say that they're going to be down substantially from the end of the third quarter as we collect our receivables on the Military side and our inventory is normalized [inaudible] the rate that we operate at. But we do expect, because of that, to generate significant cash during the fourth quarter.

Jamie Wyland - Wyland Management

I would love a lot more clarity. Receivables now, at the end of September they were $150 million. Obviously, they're a lot less now near the end of October. You're finishing up some additional programs during October. Are receivables going to be $100 million or $80 million? I mean, that's a huge difference in where it is today.

Jim Knapp

Right. They're going to be down significantly from where they are, Jamie. We don't provide guidance along those lines.

Jamie Wyland - Wyland Management

Just an earnings guidance. Okay. It would seem like by the end of the year you're going to have substantial cash on your balance sheet.

Jim Knapp

Yes. That's one thing, Jamie, we will have significant cash on the balance sheet.

Jamie Wyland - Wyland Management

And I know you have authorized a buyback, but given that $20 million will buy a lot more stock at $3 than it would at $15, do you think you may indeed go back to the Board and seek an additional authorization beyond that $1 million to give yourself a lot more flexibility considering what your balance sheet will look like at the end of the year beyond what it looks like today?

Jim Knapp

Well, we're going to evaluate all our options on cash, for the use of cash, including investing in the business and helping grow the business, looking at and evaluating long-term strategic acquisitions as well as buy back stock.

Jamie Wyland - Wyland Management

Well I would hope, you know, given the fraction of book and what you guys look like you would invest in yourselves first before you would go elsewhere unless you could find an opportunity of similar magnitude someplace else. I think it'd be hard to find than finding yourselves and what you know about you.

Lastly, on the emergency vehicle side, you talk about don't look at it as one unit within the Chassis business. Obviously about a third of your revenues are somewhat internally generated from the Chassis side. When you include the profitability of the Chassis business to selling to yourself, does that make the overall emergency vehicle business profitable today?

John Sztykiel

You know, Jamie, it does. And it makes it attractive. You know, again, the business model of Spartan, I think if there's something where we've evolved over the last 12 to 18 months, more so over the last six months, is from a strategic perspective we were probably more geographically focused. And, you know, honestly, that hurt us some from an operations and execution perspective.

Over the last six to 12 months we've become more aligned as to how we can execute, both from a sales, a product innovation, and an operational execution perspective by market. And I think what you're seeing is improved operating results within all the SVUs. And it's really driven through more of a market centered customer centric approach. But when you back into the Chassis, it puts the Emergency Rescue business on a very positive footing.

Jamie Wyland - Wyland Management

And as the dynamics of this market is changing, with competitors in a state of flux, with going to market, whether it's through dealers or through the Internet and through various lighter, faster, multi-task vehicles, are you re-thinking how you exactly go to market with your product lines over time in emergency vehicles specifically.

John Sztykiel

Oh, absolutely. I think - well, people don't buy the vehicles over the Internet, but they definitely are doing more research of the vehicles over the Internet. And actually, you know, I think all of our business units are doing a much better job on either improving or updating their websites relative to that.

I will say this, though - it still seems to come back that when we talk to the distribution, when we talk to the end user, and we look at the data, typically, whether it's an ambulance or a fire truck, people do not make a decision to buy until they've seen a product. And a key part of what drives that is 80% of the business is still being driven by volunteer departments. If there's something which we see a tremendous opportunity as we look at the ambulance business versus other parts of the Emergency Rescue business, the fire trucks, aerials, etc., is the ambulance turns or the sales cycle is much shorter than what you'd see in a fire truck or an aerial.

So now actually what we're trying to do and what we're looking at is how can we adjust our business model to really not only take advantage of that but also demonstrate some of the core competencies within SMI because, as you look at the two micro markets within the Emergency Rescue market, ambulances are definitely growing at a faster rate than fire trucks and aerials.

Dave Reid

With respect to maybe adding on to John's comments, we're specifically looking at two things with respect to our product lines and that is both what is the breadth that we need to have to serve our customers, so what kinds of models of different vehicles do we need to better serve a broader range of customers? And then the second thing is what is the depth within each of those model lines that we believe is either emerging or provides competitive opportunity for us, that being a range of price points. So we're currently actively developing our plans around those two dynamics.

Operator

(Operator Instructions) Your next question comes from Andrew Holm - Dougherty & Company.

Andrew Holm - Dougherty & Company

I just wanted to clarify - I was dropped from the call a couple of times - did you say it's $69 million in Parts for the nine months?

Jim Knapp

$62 million in Parts for the nine months.

John Sztykiel

Oh, Jim is correct. Yes, it's $62.9 million. That's where I got the 9.

Andrew Holm - Dougherty & Company

And you think that that level can be held going forward?

John Sztykiel

Well, I mean - again, this is John Sztykiel - very good opportunity for it to be held, but also our initiatives are how do we expand upon that seeing we have such a large or we will have such a significant increase in the installed vehicle base by mid-2009.

One of the things that gives us confidence in this area is our ability to perform quickly. And I think that performance in this area in the past has rewarded us with increased orders based upon the military's confidence in our ability to deliver on our commitments on time.

Jim Knapp

I think on thing else we've talked about in this area, too, is the fact we're doing more than just selling parts. We're doing a lot of kitting, which requires us to add labor value when we combine parts into complete units and put them in crates and ship them to the military, so we provide a great deal of expertise there and there's been a growing interest on the part of the military in that particular expertise.

Andrew Holm - Dougherty & Company

And are you guys including any Parts and Service in your backlog?

Jim Knapp

No, there's none in the backlog.

Andrew Holm - Dougherty & Company

So those are all vehicles.

Jim Knapp

All vehicles, correct.

Andrew Holm - Dougherty & Company

And then on the SG&A front, how do you guys expect that to kind of trend going forward? Should we expect that to kind of come back down to 2007 levels or kind of earlier in 2008's?

Jim Knapp

Well, we're going to need to continue to work hard to have a cost structure in place that's going to support the business long term. But as John mentioned, we also will be spending some additional dollar next year in R&D for new opportunities and some dollars next year in R&D to work on the emission standards for 2010.

Andrew Holm - Dougherty & Company

And what is your current headcount right now?

Jim Knapp

We're around 1,400.

John Sztykiel

And that's from a consolidated business perspective.

Operator

And with no further questions in the queue at this time, I'd like to turn the conference over for any further closing or additional remarks to Jeff Lambert. Please go ahead.

Jeff Lambert

John, why don't you go ahead and close it up?

John Sztykiel

All right. You know, I think in closing, one, we appreciate people's time, but something which we didn't really talk about much today is there was also a release indicating moving forward on the regular dividend payment being paid on December 17th to shareholders of record on November 17th. And, you know, the comment in the release was, "We continue to believe a dividend is a great way to share profits with our investors. Our 2008 results have already exceeded all of 2007, and our dividends confirm our long-term confidence in Spartan as well as our financial strength."

And really, that's where we're at today. If you look at our results in 2008 and how much they've exceeded 2007, and next, if you look at what was indicated on the release from a financial strength perspective and then you look at some of the opportunities for change, for growth in our respective markets, that even in uncertain times, as demonstrated in 1991 and 2001, we have not only worked our way through uncertain times but we have always come out much stronger on the other end. And I see this being no different this time around.

Thank you very much.

Operator

Thank you and that does conclude today's conference call. Thank you all for your participation and have a great day.

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Source: Spartan Motors, Inc. Q3 2008 Earnings Call Transcript
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