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Executives

Ryan McGrath - Lambert, Edwards & Associates, Inc.

John E. Sztykiel - Chief Executive Officer

James W. Knapp - Chief Financial Officer and Secretary, Treasurer

Analysts

Frank Magdlen - The Robins Group

Joe Maxa - Dougherty & Company

Walter Liptak - Barrington Research

Ned Borland - Next Generation Equity Research

Jamie Wyland - Wyland Management

Spartan Motors, Inc. (SPAR) Q4 2008 Earnings Call February 19, 2009 10:00 AM ET

Operator

Good day, everyone, and welcome to the Spartan Motors Fourth Quarter 2008 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to your moderator, Mr. Ryan McGrath. Please go ahead sir.

Ryan McGrath

Thank you. Good morning everyone and welcome to Spartan Motors fourth quarter and year-end 2008 conference call. I'm Ryan McGrath with Lambert, Edwards & Associates, and I have with me today several members of the Spartan's management team, including John Sztykiel, President and CEO, and Jim Knapp, Chief Financial Officer.

I assume all of you saw our release on the Newswire and Internet this morning. We want to take a few minutes to discuss the results for the quarter. However, before we do so, it is my responsibility to inform you that certain predictions and projections made in today's conference call regarding Spartan Motors and its operations, maybe considered forward-looking statements under the Securities Laws.

As a result, I must caution you that with ... as with any projection or prediction, there are a number of factors that could cause Spartan's results to differ materially. These risk factors are identified in our Form 10-K filed with the SEC.

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

With that, I'd like to turn the call over to John Sztykiel. John?

John E. Sztykiel

Ryan, thank you very much. First, good morning to all of you. To start, this was the best year of performance in the company's history, which is something we're extremely proud of, particularly given the recession, as well as some of the legal issues we worked through in the second half of the year.

As we look at the fourth quarter, though the results we reported were net sales of 146 million, net earnings of $0.09 per share, gross margin of 21%, up 66% versus a year ago, consolidated backlog of approximately $169 million, and the announcement of a $0.03 special dividend in the continuation of our regular dividend.

And it's interesting to note in these uncertain times that issues relative to credit liquidity et cetera, I take great pride; we all take great pride in the fact that we're not just announcing the continuation of the regular dividend, but the special as well, which just many companies are not doing that.

To give you a sense though of our operational performance in Q4; EPS would have been $0.26 per share, excluding the one-time charges. That being said though, I want to go over the some of the highlights of the fourth quarter, and then Jim Knapp's going to get into the financials in a few moments.

The highlights are really grouped into five areas.

One, we had continued strength for all emergency-rescue products. We reported improved sales, improved operational performance, and we look forward to a strong 2009. We see emergency-rescue as one of our largest, most stable platform, and we expect continuous growth in 2009 and into 2010 as well, as we are not only just riding some, what I would recall industry regulation opportunities, which are moving the sales market in the right direction, but simply we are gaining market share, because we are out-executing our competition.

From a service parts and accessories perspective, it was another year of very, very good growth where sales increased a 173% versus a year ago in Q4. Service parts and accessories should continue to grow in 2009, and we look forward to continued growth in 2010 as well.

From a financial perspective, item number 3, we are extremely sound. Jim Knapp will talk in greater detail about this, but we have minimal debt and open line of credit. We had very strong cash generation in Q4, and operations have been scaled to meet the current demand.

Our current focus is on cash flow, cash conservation, but at the same time, we have numerous initiatives from an organic and investigating some potential M&A opportunities to drive the top-line in the second half of the year and into 2010.

From a leadership perspective, we have tremendous depth. As we look at the leadership teams and management teams, we have the right depth with the right people in place to execute a strong strategic plan. We are looking for some people from a leadership perspective, however we have a very, very strong group of people. And honestly, this was evidenced by the strong performance in Q4, and throughout the course of 2008, as well.

And last, there were significant operational improvements across the business units, whether it'd be the emergency vehicle team, service, parts and accessories, fire truck chassis, military. What you saw was a company represented by the gross margin of 21% that is as we not only get wiser, we are executing more effectively from a lean perspective.

Now, what I'd like to do is take a few minutes to review our results by each market.

As we look at the military business, we have supplied or are currently supplying, more than 20 different threat specific variants of mine protected vehicles for the U.S.

In addition, we now have products that have gone to six different nations, relative to the mine blast protected vehicle business.

As you saw in Q4, our roll is evolved from the phase of rapid production to long-term sustainment, and it's a business model based upon partnership of designing and building specialized variants. As we've mentioned in the past, as we look forward to the future, we expect the military business to be a key part of our strategic plan.

And the reality is, the world is the very dangerous place. What's interesting is if you look at today's headline, there is obviously non-alignment between congress and the military.

Quoting a Military General today, 'The amount of troops being deployed in Afghanistan will enable us to have a stalemate.' Now that represents, on one respect opportunity from a vehicle perspective, from a lives perspective obviously, there is some potential negatives there.

But, over a thousand people are killed each day as a result of military conflict and while in the U.S. and certain other parts to the world, we take for granted, the safety going from point A to point B. The reality is, the world as a whole is not a very safe place to live.

In addition, as mentioned earlier, we are continuing to work on smaller runs of mine blast protected vehicles. The important thing to remember is what makes its attractive is our speed to market, manufacturing flexibility, on-time delivery, product performance and service parts and support.

As mentioned earlier, service, parts and accessory sales, closed at $107 million for 2008. This relates to sales of $33 million in 2007, and $10 million in 2006. Obviously, the growth was substantial.

And there is no doubt that service, parts and accessories will be an additional source of profitable revenue growth in 2009 and beyond. But at the same time too, I do not want individuals to lose sight of the fact that it's not just military.

For example, we now have a service parts support warehouse just outside the Dallas, Texas area. That's not just to support emergency-rescue, but to support RV and other specialty markets as well. As a company, we are becoming very disciplined with the right people, and the right plans in place, to grow service, parts and accessory sales in emergency-rescue, RV, and other specialty markets.

I talked a few minutes ago about Afghanistan. But the reality was in 2008, there were approximately 2500 Spartan-related MRAP vehicles in service. By the middle of this year, there will be more than 6,000.

In addition, we're working very closely with key strategic partners relative to upcoming M-ATV opportunities in Afghanistan. Obviously, that's a very, very competitive process. It's a process which is extremely critical relative to our Nation's war on terror. However, I feel excited about our opportunities, and are excited about the relationships and the partnerships which we with have with our current customers.

Moving over to the RV market. Motorhome chassis sales were down in the quarter, reflecting the industry as a whole. And for the first half of this year, I would anticipate RV sales to be extremely difficult. Between the lack of consumer confidence and the tight credit, the reality is it's extremely difficult to sell a motorhome whether that motorhome is big, or whether that motorhome is small right now.

However, as liquidity and credit improve, I believe that over time, and not just by self, but as I look at other data and talk to other individuals, consumer confidence will start to improve as we move throughout 2009. And the reality is that the RV industry, typically leads us out of a recession, and is the first into recession. So, while I'm still cautiously optimistic, our anticipation is that second half of 2009 will be better than the first half of 2009 from an RV perspective.

In addition, long-term we see the RV industry as a tremendous market and a tremendous opportunity. Although 11,000 people a day turn 50, with the current exchange rates, when you look at the dollar versus the euro, the yen et cetera., more and more individuals are looking to travel within North America. There is a decrease in the price of fuel, whether it be diesel or gasoline, and that's expected to be in place for the next 12 to 24 months.

The reality is the RV business as a whole, represents tremendous opportunity. As a company, we will have four to seven major new product initiatives displayed into the RV marketplace in December of 2009, which we believe will position us in a great way to take advantage of a strong uptick in RV sales in 2010.

As we look at emergency-rescue, fire truck chassis had another very good quarter compared to 2007. Sales increased 12.9%. Backlog increased 21.7%. Obviously, we have momentum. The momentum was driven in two parts. One, there was an industry change in standards, which became effective January 1, 2009, and at NFPA (ph). And obviously, that helped to drive some of the order backlog.

But the reality is, the Spartan brand name is extremely strong in emergency-rescue. And so, from a competitive perspective, we continue to gain profitable market share. And that also holds true to the emergency vehicle team, which made 12% of our total sales in Q4. It was another quarter of very, very solid improvement.

And while the group is still in the red as a whole, they saw 78% improvement in the bottom-line in Q4 of '08 versus Q4 of '07 with a net loss of $390,000.

So obviously, we are getting extremely close to total profitability and we are excited about that happening in 2009.

In addition, the backlog for the emergency vehicle team grew substantially in 2008 versus 2007, which will drive us into 2009. And again, part of that was driven by NFPA, the industry change in standards from a Crimson Fire perspective.

However, whether the Crimson Fire or Road Rescue, both companies are gaining competitive market share.

One of the things which we are doing though, is we are becoming more and more aligned or we are becoming more effective at implementing best practices across multiple business units. And while Road Rescue has made tremendous progress in 2008, and I wish to complement their leadership team on the progress they made, we are now implementing a lot of what is going on at Spartan Chassis at Road Rescue.

We have people in place in South Carolina, Spartan Chassis employees working with the Road Rescue associates. Road Rescue is now under the jurisdiction of Spartan Chassis. And for two reasons; one, we see tremendous opportunity for growth in the ambulance side of the business.

11,000 people a day turn 50, while that is good for RVs, the reality is its also good for emergency-rescue. More of us are going to take a ride in the ambulance whether we wanted to or not.

The reality is every 1.4 seconds there is call for help. And as we work to leverage the strengths of the Spartan brand name in fire trucks over into ambulances, we believe that will accelerate the profitable growth of Road Rescue in a significant manner. As we wrap up from an emergency-rescue perspective, and we look ahead in 2009, we will launch ten new major product innovations into the emergency-rescue market through Spartan Chassis, Crimson Fire, Crimson Fire Aerials and Road Rescue in 2009.

And this is being driven by one simple fact. One; it's a large market, one of tremendous opportunity but at same time too, based upon our solid financial position over the last 12 to 18 months, we've been investing in R&D. Those R&D expenditures will be brought to market in 2009. And we look forward to above industry average growth in 2010 and beyond.

Simply, we are excited.

Something I do want to make a quick note though before I close is, if you look at emergency-rescue, I get asked a lot of questions, will the recession cause a significant drop in emergency-rescue?

I have been in this business over 20 years, have been through a couple of recessions in this business relative to emergency-rescue, and a simple fact a lot of people lose sight of is, 80% of the emergency-rescue business is driven by volunteers. And while those volunteers, their jobs are important to them, the reality is, the reason they're volunteering into emergency-rescue, is it's extremely important to them.

So, while state and local funding is key, it is not the biggest driver of the emergency-rescue business from a purchasing perspective. It is the volunteer. It is the raising of local funds. And one of the things which is critically important to remember, is a fire truck and the ambulance. They are one of the most sought after, one of the first statements relative to community and the pride which that community takes in itself both from an image and its desire to provide the best service possible from a life saving perspective.

As I wrap up, and as we look into the future as a company, we are very focused on a customer-centric lean methodology. From a strategic perspective there are six Directors in place which really encompass all of our objectives, initiatives, action plans, or charts et cetera, first-aid culture. In the end, it is the people that make things happen. And we take great pride in the turnover rate voluntarily of less than 2%.

Second is innovation. Innovation that compels the customer, to buy your product that provides various to entry from a competitive perspective that enhances gross margin.

Third is brand leadership. Leveraging the strengths of the brands, improving the opportunities to enhance the value of the product; value maximization. You've seen tremendous growth in service, parts and accessories and as a company over last 24 months, we've not just become very cognizant of the fact that we have tremendous opportunities throughout the lifecycle of the product, but we are executing against disciplined plans and we are delivering results.

I take great pride in that. We all take great pride in that.

Number five is lean. Whether it'd be in the office or the shop, there is tremendous ways to be gained, or I should say tremendous ways to be eliminated. And the reality is as you look at our results, you look at the improvement in the gross margins, do I perceive we are a lean company, across all of business units today, whether it'd be in the office or the shop? The answer is absolutely not.

It is amazing how much ways there is still within the systems of how we operate.

And last is global. Today, less than 3% of our sales are for export. As a company, we are now developing the plans. We are actually looking to hire the right individuals. We have one individual already in place. But as we look at the euro, the yen, the exchange rate opportunities which we have, some of the initiatives which we have in place; export represents a tremendous opportunity for us.

In the given example, Crimson Fire will be introducing a new body at FDIC, the Legend. It's really quite revolutionary. But what's nice is that body is designed around being ... designed to be exportable. For example, those of you that are familiar with IT imagine a fire truck body, showing up in a flat paneled that could be assembled in another country at a much lower labor rate.

As we look at our future product development plans, one of the things we are focusing on is the product development. How it can be designed and manufactured to be exportable. Not to be totally built in North America, but portions are kicked built within North America but to be assembled in other countries to not only take advantage of lower cost labor rates, but also to create customer pull through, because we are adding jobs in those respective countries.

Simply, while 2008 was great, I'll be the first one to admit that I do not expect 2009 to surpass the results of 2008. It is going to be a difficult year in some of our markets. However, as I look at the year, I am excited about the opportunity. As society changes vehicle, change and actually recessions are times of great growth.

Emergency-rescue will be a very good market for us. We have significant opportunity in the second half of the year, as we quote and work to develop the opportunities and the M-ATV, Afghanistan et cetera.

From a motorhome or an RV perspective, the first half will be difficult. But I'm fairly optimistic about the second half of '09 that there will be uptake ... uptick I should say.

And last, as a company, we have demonstrated over the past 15, 20, 25 years that recession have been times of opportunity for us. As I mentioned earlier, recessions cause society and business models to restructure. As that restructuring takes place, vehicles change. And we've been able to take advantage of that either by leading the change or reacting to the change very quickly.

And in closing; service, parts and accessories is the umbrella. In any market which we enter, and I expect us to be into at least one to three additional new markets between now and end of 2010, we will now continue to look at the total lifecycle of the vehicle and how we can take advantage of that to maximize the value from the both the stakeholder, a shareholder, associate, a market perspective.

Jim?

James W. Knapp

Thank you John and good morning everyone. I am going to focus primarily on the balance sheet and cash flow this morning. We had $13.7 million in cash and cash equivalents at the end of quarter, compared $13.5 million at the end of the 2007. We generated $59 million of operating cash flow during the last quarter of 2009. We are already generating significant cash flow in the first quarter of the New Year.

As of January 31, we had $32 million in cash on the balance sheet. We ended the year with $16.6 million in long-term debt. Our $50 million line of credit with JP Morgan Chase is totally available to fund any future needs.

As noted last quarter, this line is at a very favorable rate. Our cash position and available credit gives us a flexibility to pursue multiple avenues to create shareholder value, such as investing in the business or evaluating strategic acquisition.

Our Board and Management Team are carefully looking at opportunities and will make decisions based on what fits our strategic plan and the prevailing conditions in the economy. Some of these opportunities maybe potential acquisitions that can enhance the future of Spartan Motors.

Depreciation for the quarter was $1.8 million and $6.1 million for the year. Our effective tax rate was 58.8% in the quarter and 36.6% for the year. Both these tax rates were impacted by the previously noted penalties.

Our consolidated ROIC for the quarter was 7.2% below our company ROIC target of 15 to 20%.

Within Spartan Motors and each of our subsidiaries, we use ROIC as a key measure of our progress. It's also linked to our bonus program for Management and associates, which is based upon an economic value added financial model.

For the year ended 2008, ROIC was 25.8%. This compares to 19.8% in 2007.

CapEx for 2008 was $16.3 million. We are focusing ... I am sorry, we are forecasting CapEx of $7 million to $9 million in 2009. Our balance sheet is healthy, with cash and available credit at favorable rates to support the growth of the business.

We believe we are taking the correct steps to control our cost structure and put the company on a sound footing for the future despite the recession.

Overall, we are in a strong financial position going into 2009. We have the cash flows and bank line to strengthen our position in the market during this downturn. We are optimistic that 2009 will position Spartan well for future growth.

With that I'd like to turn the call over to the operator, who will begin Q&A.

Operator?

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). And we'll first hear from Frank Magdlen of The Robins Group.

Frank Magdlen - The Robins Group

Good morning.

John Sztykiel

Good morning, Frank.

Frank Magdlen - The Robins Group

Congratulations on good financial management with the strength in the balance sheet, Jim.

James Knapp

Thank you.

Frank Magdlen - The Robins Group

Can you help us out a little bit, or John and what's going with the EV team, and when do you break into profitability there? Is it now a volume issue or is it still not getting the efficiency you want with the volume you're putting through?

John Sztykiel

Jim, I'll let Jim answer first, Frank. And then I'll jump in. Because I won't say that the ... honestly we've got a little bit of a different perspective as to how we view their progress, based upon how you ask the question. So, Jim?

James Knapp

Frank, I think we've made a lot of progress this year. We have, as John mentioned, we had a very small loss in the fourth quarter of this year. Two of the units were profitable in the fourth quarter. One unit, which is Aerials, needs to have more volume truly be able to leverage the operating assets they have in the business and the operating expenses they have in the business.

So, I think they are making progress. I do believe they will be profitable in 2009. As John mentioned, Road Rescue has now come under the management of Spartan Chassis. Even though Road Rescue made significant progress during 2008, we think that there is an opportunity obliviously to make even more progress under Spartan Chassis in 2009, and I do believe they will be profitable in 2009.

John Sztykiel

And Frank, this is John Sztykiel. As Jim mentioned, the group that wasn't profitable in Q4 was Crimson Fire Aerials, both Road Rescue and Crimson Fire were profitable in Q4 of this year. And the other point which Jim mentioned which I think is important to note, is that the company and it's not just at Road Rescue but if one took a look at the, what I would call, inner discipline or inter-business unit best practices, we now have more multiple best practices working within all the business units to improve the operations than what we did at this point last year.

So from a company perspective, we honestly are excited about the progress they made in 2008. We are excited about the momentum carrying into 2009 and the primary reason which we made the change relative to Road Rescue which we did was to accelerate the progress, because there was such tremendous opportunity.

And second ... and that opportunity is around operations but also Spartan has a very, very good brand name in the fire truck industry and more and more fire departments are making the buying decision relative to the ambulances which they purchase. So, from an emergency vehicle team prospective, we are very, very close to crossing over. But as we look to 2009, 2010 we're extremely excited which is the one of the reasons we've been investing so much from an innovation technology perspective. And between all three companies, or all four companies I should say, will be really unveiling ten major new product innovations throughout of course this year.

Frank Magdlen - The Robins Group

And on the service, parts and accessories, will it be a significant amount of seasonality in that business?

James Knapp

I don't think it'll be a lot of seasonality in it. One thing we should mention about service parts too is there are no service parts are in our backlog. Because they churn over so relatively fast that they are not in the backlog. And we should probably mention too, if you go back to 2005 we had $6 million in part sales that year and service and accessories. In 2007 it was 33 million. In 2008 it was almost $108 million.

So it's really growing substantially, as John was saying, and we expect that to continue to grow in 2009.

John Sztykiel

Yeah, the thing that one of the biggest items that's driving the growth in service, parts and accessories, whether it's military, RV and emergency rescue, what's amazing is that rather a large percentage of our RV part sales goes for chassis that where actually competition. But it's the core focus on delivering what they want, do the right thing in easy to do business with that attracts people to watch from a perspective in service, parts and accessories.

There is a request. We provide the right part at an attractive cost, much faster than other people in the service parts business model and it's amazing how that excellence attracts. So I should say some people think it's amazing. I think it's not amazing, because if you can deliver the right part at the right place faster than other people in a service parts situation, in essence what you're doing is reducing the amount of time someone has ahead it. And that really is a very, very good day.

As I tell people, the reason our part sales are growing is we're just reducing the amount of time someone has ahead and that always is a great day. So, we think there is tremendous growth. We believe it's not just military base. We see tremendous opportunity. But it's simply about having the right part at the right place at the right time, faster than everybody else, and thus we reduce someone's ahead time.

Frank Magdlen - The Robins Group

All right. I'll jump back in the queue. Thank you.

Operator: (Operator Instructions) Next we'll here from Joe Maxa of Dougherty & Company.

Joe Maxa - Dougherty & Company

Thanks. Regarding the parts and service business, how of that, can you give us a percentage was military versus your others and what you've seen in the growth of this, let's call it RV line you talked a little about over time?

James Knapp

We don't disclose the breakdown Joe. I don't really have that available.

Joe Maxa - Dougherty & Company

We can assume majority of its military though, right?

James Knapp

Yes.

Joe Maxa - Dougherty & Company

It seems like it's going to be such a large line item. Are you going to break that out separately, at some point just in parts and service?

James Knapp

We're giving thought to that Joe. But one of our concerns obliviously is because of the competitive pasture, that's an area that we're very sensitive to.

Joe Maxa - Dougherty & Company

Okay. I wanted to ask you about what you are seeing this quarter in your emergency-rescue as far as order rates obviously very strong in Q4. It sounds like some of that was due to the pre-buys, are you still seeing Q1's strength continue or is it slowing down to may be a more typical quarter or how should we look at it at least so far this year?

John Sztykiel

Well, one; I mean we all expected to slowdown a little bit in January and February just because there was such a large number of orders to process in Q4 of last year. However, when we look at the bid activity log book of the business units, the bid activity is very, very strong. And so as I challenge people, we've also got another major driver for emergency-rescue in 2010 or 2009, and that is the 2010 emissions change.

We had an industry standard change 01/01/2009, well now we've got an industry or I should say, diesel emissions changed 01/01/2010. So as an industry, I would expect not just us but a variety of other firms still that have a very, very good 2010 from an order backlog perspective.

We're extremely focused on 2010 and '011 which is one of the reasons we're introducing so many new product innovations this year. Typically in emergency-rescue it takes 12 to 18 months to generate the sales momentum because 71% of all emergency rescue products are purchased after they exceed the product i.e. a demo.

So, rather than waiting to bring innovations out in 2010, when things would probably have a better opportunity to be softer, both from an industry perspective and a recession perspective, we're bringing out these product innovations this year to ensure we've got competitive, attractive market capture opportunities in 2010 and '011. And that's one of the reasons we're excited about not just '09 but we're excited about 2010 is because as we look at our strategic plan relative to emergency rescue, we think we're just in a much better position.

Most of our competitors we talked to, are not introducing much new in 2009 for two reasons. One, they don't have a financial strength which we do. But second, to be quite blunt, I believe they took their eye off the ball.

Joe Maxa - Dougherty & Company

Okay. What are you hearing about from municipalities regarding the spending and potential slowing due to the, obviously the environment?

John Sztykiel

Most municipalities are definitely spending less money. The good news is that typically emergency-rescue is one of the last items to be cut. And again in 2009, with the working in our favor is this emissions change.

54% of all fire trucks today are more than 15 years old. So a very, very large number are very old, very aged. And so as an industry, we've got a lot of momentum behind us. But it is a concern. State and local budgets definitely do have less money. But as evidenced, we saw a very good order intake in 2008. And let's face it the second half of the fourth quarter 2009 was not a good quarter for us. Or I should say 2008 was not a good quarter for us, from a macroeconomic perspective, yet it was very, very good from an order intake perspective.

So again, emergency-rescue and that's one of the reasons it's a key cornerstone to our business model. And we are focused on the growth, is typically, very, very recession resistant.

Joe Maxa - Dougherty & Company

Okay, very good. On the military side, what do you see as a kind of a base run rate for your vehicles that you are producing, given MRAP's over and excluding maybe this M-ATV opportunity that would be later in the year?

John Sztykiel

Joe, I mean honestly, that is hard for us extrapolate. One; we don't forecast earnings. The orders come in much smaller lots right now. The business model is becoming more customer-centric i.e. the vehicles are becoming more special. The production or the order lots are becoming smaller. The prices are becoming higher. So, there is some positive to where the process is going. But honestly, it's too early for us to say because we don't have the experience in this business model, like we do in emergency-rescue.

The interesting thing is, the military business is becoming more and more like the emergency-rescue business, where it's becoming very customer-centric, much smaller order lots, prices are going up. But because we are still very new to this, we don't have the kind of experience or wisdom. I'd like to say, we've got in the emergency-rescue business. So, I really can't answer that for you.

Joe Maxa - Dougherty & Company

Okay, fair enough. Gross margins Jim, were up very nicely in the quarter. What should we expect in '09?

James Knapp

See Joe, we were running, I think in the quarter, I think going to be ... I anticipate they're going to be down a little bit of what they were in the year, a little below the average for the year. But there is opportunity on the upside. If there is, continues to be a richer mix of the parts, which carries a higher margin, than we could get back to probably, closer to the average we had for 2008.

Joe Maxa - Dougherty & Company

I see. Just two real quick ones, headcount and well, I'll leave it at that. What was your headcount at the end of the year? And would you expect to reduce more in '09?

James Knapp

We are around 1200 at this point of time.

John Sztykiel

Now, that's a total Joe. And reduce is a ... maybe, maybe not. Because for example, Road Rescue, Crimson, and Spartan Chassis are growing on the emergency-rescue side of the business obviously, from an RV perspective, we've definitely gone through those exercises relative to right sizing in the appropriate places from a labor perspective.

On the military side of the business, the SPA continues to grow. The vehicles are becoming more customers concentric from a vehicle perspective. But right now, here as we sit, it's a little bit too early to say whether we would downsize, because we've also got some opportunities to upsize, if necessary, based upon we receive some expected orders.

James Knapp

The other thing we should mention too John is that the SG&A is going to be a little higher than we would normally had at this volume level, because of the fact that we have to maintain and actually develop the 2010 emission standards, to be able to be ... to have that in place on January 1. So, that's quite an undertaking for us across all the different models.

Joe Maxa - Dougherty & Company

Would that be your SG&A or your R&D line?

James Knapp

I am sorry, it will be well ... when I say SG&A, I mean the whole thing. I look at the operating expenses. But you're right. It'd be an R&D.

John Sztykiel

What actually Jim, I am glad that you brought that up because one of the reasons Spartan Chassis continues to gain profitable market share in the fire truck chassis side of life, is there was a major emissions change 01/01/2007. And we made a conscious decision to not reduce the number of engine offerings, and where other OEMs, who built fire truck chassis, made a conscious decision to reduce the number of engine offerings.

In engine, for lack of a better term, is like the heart of a fire truck. And that's where you have a lot of service and maintenance. That's where you have a parts bin established et cetera. So, as a company, we made a conscious decision to not reduce the number of offerings. We henceforth have gained profitable market share. And as a company, we are making very much the same decisions today as we look into 2010.

So Jim, I appreciate you bringing up that from an SG&A or an R&D perspective. Those costs will typically be higher than normal, as a percentage of sales. However, we believe we will benefit from that in 2010, '011, and beyond, just like we have benefited in 2007 and 2008, from the last emissions changeover.

Joe Maxa - Dougherty & Company

All right, thanks pretty much. I will hop off the line.

Operator

Next we'll hear from Walt Liptak from Barrington Research.

Walter Liptak - Barrington Research

Hi, thanks. Good morning, guys.

James Knapp

Good morning, Walt.

John Sztykiel

Good morning, Walt.

Walter Liptak - Barrington Research

I guess the backlog is dropped pretty substantially and I know you've been taking cost out but I guess, how would you like us think about revenue levels and like a breakeven profitability, can we get a little bit of guidance on that?

James Knapp

We don't forecast and provide guidance, Walt. I think as John said earlier, we don't expect 2009 to be as strong, obviously as 2008. The parts and accessory business, we believe that's going to be stronger this year. We believe emergency-rescue will be stronger this year, just by looking at the backlog. And if there's opportunity in the military area, if we, if our partners are successful in getting orders on M-ATV that could be a nice boon to the second half of the year for us.

Walter Liptak - Barrington Research

Okay. Maybe another way to talk about it is that some of the accounts receivable and other working capital items have been drawn down pretty nicely and as you mentioned cash generation is good. Can we expect that those ... that you're going to continue generate more cash and at what point so we start thinking about like a cash burn in 2009 or is that something that's other question you expect to continue to increase your cash balance during the year?

James Knapp

I didn't get the one part Walt, about cash burn you said?

Walter Liptak - Barrington Research

Yeah, would ... your cash balances as you draw down working capital items and get cash inflow from those, add to your cash balances this year or would you expect that you're going to have a cash burn, at some point you have losses that lead to cash outflow?

James Knapp

Alright. We don't anticipate having ... not anticipate our cash balance throughout the year declining. We expect it to continue to grow. We expect to have strong operating cash flow this year again.

Walter Liptak - Barrington Research

Okay, good.

John Sztykiel

Walter, that's a very good question. We've invested a lot from the CapEx perspective over the last couple of years, but that will be substantially lower in 2009. I think it's important to note that at Spartan Chassis, not only did we more than double the manufacturing capacity, but we have literally reset or redone every building on the whole complex here at Spartan. And what's interesting is, as we sit today we're probably at about 40% capacity on a single shift, at 800 plus million in sales.

So as we look over the next two or three years, I would probably foresee very, very low capital expenditures, which means we'll be driving the return on invested capital hopefully in the right direction, and making wise utilization of our cash elsewhere.

But, as a company we've really done a lot over the last couple of years to reset the business for our next stages of growth. And first couple of quarters are not going to be easy, but we are excited about where we are going. And we think the second half of the year represents really some very good opportunity.

Walter Liptak - Barrington Research

Okay. Is cash flow, or is the CapEx number going to match kind of a D&A expense, or do you think it will be lower than that?

James Knapp

I think it's going to be in, I think CapEx for 2009 will be in $7 million to $9 million dollar range, and I would say depreciation will be probably $7.5 million to $8 million.

Walter Liptak - Barrington Research

Okay, okay. And then I guess, just one last one. In your commentary, you mentioned that motorhomes typically lead out of a recession. But there seems to be kind of a like a there is a much more severe recession and consumer led, and with the banking system, the way that it is. I mean, some of the order numbers were really terrible during the fourth quarter for RV, just as an industry.

Is it possible that that product class just takes a lot longer this time for it to comeback, and if that's the case, when do you want to take more cost out of the business, and prepare for kind of a longer trough in RVs?

John Sztykiel

Well, I mean, one; the vehicles are definitely going to change. I think from a motorhome or a tow-able perspective, units are going to be smaller, more fuel efficient, lighter. From a cost perspective, because we're a company with, where we've got very good demonstrated, what I would call background and experience and market and operational and strategic agility, from an operational perspective, I think we've done a great job relative to rightsizing our business for the current point with the RV marketplace.

Do I believe the RV industry is going to comeback in the second half of this year to levels of '04, '05, '06? Absolutely not. But do I believe the second half of this year will be better than the first half of this year? The answer is, yes. Because as consumer confidence improves, more than 50% of the RV owners pay cash for their unit, whether it's a tow-able or a motorhome.

And typically, what I have seen in the past I have been in this business more than 20 years, the number one metric I follow is consumer confidence. And as people start to believe that the economy has bottomed out and is now moving in the right direction versus the wrong direction, people have been putting off their purchase. But they'll also realize okay, now could be a good time to buy, because if I wait six to nine months later, then prices will be higher.

The other thing though I think working in our direction is you've seen every RV OEM whether it'd be tow-able or motorized, reducing their inventory both either on their laps or at the dealer level. And so, the good news is that that inventory winds down in the first half of the year I believe we'll get closer to a true consumer pull-through kind of demand cycle.

So, whatever uptick there is in the second half of the year, will be much more dramatic from an OEM perspective, supply-based perspective, because we'll finally be back to a one-to-one ratio, which I think will be healthy for the industry.

Walter Liptak - Barrington Research

Okay, thanks guys.

Operator

Next we'll hear from Ned Borland of Next Generation.

Ned Borland - Next Generation Equity Research

Hi, good morning guys.

John Sztykiel

Good morning, Ned.

Ned Borland - Next Generation Equity Research

I just want to follow-up on Jim's comments on gross margin. As I look at it, you've got spare parts, which is the highest margin products, in your, if anything you do, growing aggressively, well, maybe not as aggressively as last year, but certainly you should show better growth than anything else, comes on the high margins so that should be up, that should hold margins.

The low contribution from RVs, which is well margin, you've got fire which is pretty healthy, which is up. Plus you've got lean manufacturing initiatives, you've got ... the only thing that goes against it really, or I could see it is maybe a lower utilization in military vehicles. So, can you help me out with what I ... why these margins shouldn't be at least at the average of 2008?

James Knapp

I would say Joe, the only thing that will bring it...

John Sztykiel

Ned.

James Knapp

I am sorry, Ned. The only thing that will bring it down would be the fact that we have more overhead and put a number of facilities in place. And so we're carrying a higher overhead rate in 2009. So that would be the only thing. But if we continue to grow parts at a higher rate than we're currently anticipating, that will obviously bring it in a, at a higher level for the year along with the other things we talked about, M-ATV and some of the other opportunities.

John Sztykiel

Yeah, the other point to, Ned, which and the reason it's wise for us to be cautious on that statement is as I mentioned earlier, recessions are times of opportunity. And so, basically because of that ... what that cautious statement is indicating, is we want to give ourselves the opportunity to look at certain strategic decisions, whether it'd be in the RV, emergency-rescue, military, or another market from what I would call a growth capture perspective, or maybe we would be a little bit more focused on volume, market penetration.

We may decide to go after that business at a lower margin and let's say what we've been in the past for the past two or three years. And so, we've got a lot of positives moving in the right direction for us. However at the same time too, if there is something which is very, very different about this recession and I think Walt indicated earlier, in this recession companies are eliminating not just market niches, from a product perspective but they are eliminating brands.

For example Daimler Benz has made the decision to close the Sterling Truck brand. While that's a 12,000 unit a year product line, that they've made a decision the volume is not high enough. What we take and make of that with our per in (ph) product we are now working through et cetera. But as a company there are tremendous opportunities, actually some very high volume opportunities in front of us today, in a number of markets outside of what we're currently in and we are looking at that from a strategic perspective.

James Knapp

Another element and that is the fact that the EV team and we do believe that we'll be profitable in 2009, but EV team, their margins are not as high because their margins are all based on the value add and were made by the Chassis using Road Rescue as an example. They buy the Chassis primarily from Ford, so that's probably about third of the cost. And so there is almost no margin on their past two products. So their gross margins are lower.

Ned Borland - Next Generation Equity Research

Okay. And just to clarify on the EV team profitability, you're talking about profitability for full year on '09 or hitting profitability at some point during 2009?

James Knapp

Well, we'll definitely hit profitability during 2009. I believe that we'll be profitable in the second half of 2009. And I think there's a good opportunity that we'll be profitable in the second quarter.

But, I feel more comfortable to be profitable in the second half of 2009. Now, we didn't loose much money in the fourth quarter as John pointed out. And I would expect that we should be able to make some improvements over that number in the first half of the year as well.

Ned Borland - Next Generation Equity Research

Okay. And then I guess, uses cash going forward. I mean, are you still going to continue pairing down debt or what's going to go on with that?

James Knapp

Well, we have ... there is $10 million of debt that's coming due in November with JPMorgan Chase. And we're going to pair that down. We'll be -- obviously that's going to be paid down. So, our long-term debt right now at the end the year was $16.6 million. And we have ... that is all fixed term. We're not using our line of credit at all right now. So, depending on whether we make acquisitions, depending on kind of the growth opportunities, we'll have to reassess whether we want to make any changes in that longer term.

Ned Borland - Next Generation Equity Research

Okay. Thanks.

Operator

Jamie Wyland of Wyland Management.

Jamie Wyland - Wyland Management

Hi, fellas. A couple of the scenarios to follow-up. In spare parts, you talk about your growth expectations in the future. Obviously, net of that can't be used large as the percentage increases we have had in the past. But what kind of growth could you expect in that area?

John Sztykiel

Well, I think as we look to the future Jamie obviously, over the past couple of years we have demonstrated very good double-digit growth. The opportunity is there for us, as we look in 2009 for double-digit growth. What I expect the opportunity in 2009 from a range to be equal of that of 2008. That's probably unlikely.

However, it's a little bit too early to forecast, because what's interesting is as this backed the statement I used earlier, excellence always attracts. Every time we think we plateau or we think we're going to plateau, we continue to gain some new business from an order intake perspective relative to parts, kits et cetera.

So, what's interesting is, we honestly continuously surprise ourselves internally and I think it's just driven by the fact that we deliver the right part at the right time at the right price, we reduce someone's headache. And they may tell someone else just how good of job we've done. Than that individual organization calls us.

But again I think we've got the opportunity for double-digit growth. However, right now, as I sit here today, do I think it would be as high or as good at was in 2008, versus 2007? I'd say that's probably unlikely.

Jamie Wyland - Wyland Management

Could we model a range of 115 to 150, is that ... would you be comfortable within those two frameworks?

James Knapp

Since our ... since we are not a guidance ... since we don't provide guidance and we don't forecast, I can't really give you, I think, any more clarity than what John has already provided Jamie.

Jamie Wyland - Wyland Management

Okay. What's the inventory required in services business? Service, spare parts part of the program?

James Knapp

It's a good...

John Sztykiel

Oh, it's a good question. We can't give you a specific number other than the fact that it turns unbelievably past. And I will say this, one of the key reasons I think we do so well at turning the inventory, by providing the right part at the right place at the right time, is from an electronic data perspective, we are very well linked with our supply base.

Second; we are financially sound. So we're obviously paying our bills on time. But third, because one of our core focus points within our culture is deliver what they want, do the right thing, easy to do business with. That's the basic mantra within service, parts and accessories.

And when we take that thought approach, that culture, over to RV, emergency-rescue, military or other markets, it's amazing how the business grows. So, I cannot give you a number. However, I will tell you the turns are very, very fast. I've given you some insights as to how we do it, part of its culture, part of its zone. From an electronic perspective if you took a look at how we operate, you'd be amazed at how efficient we are from an electronic data orientation perspective we are linked with our strategic supply base.

Jamie Wyland - Wyland Management

Okay. Your revenue in spare parts in the fourth quarter was how much?

James Knapp

We're going to switch back to our seats. It was almost $45 million Jamie.

Jamie Wyland - Wyland Management

Almost 25 million?

James Knapp

45 million.

Jamie Wyland - Wyland Management

Say that again.

James Knapp

It was almost $45 million in the fourth quarter.

Jamie Wyland - Wyland Management

Wow! And what was so unusual about the fourth quarter that might not be a number that could be somewhere in the ballpark moving forward?

James Knapp

These opportunities, it's hard to forecast these opportunities that come along. And we often will receive an order that could be for $10 million at one crack and it depends on the timing. So we had a lot of good opportunities that arose during the fourth quarter. And, the thing to remember is that none of those were in the backlog, because they churn very quickly.

Jamie Wyland - Wyland Management

Okay. Were they mostly military type of refurbishments, is that what happened?

James Knapp

They were mostly military opportunities in the fourth quarter, yes.

Jamie Wyland - Wyland Management

Okay. And because again as you said we had 2500 out there last year and now there are ... will be 6,000 in the field that are Spartan made. It would seem like the wear and tear, could create continual opportunities of this magnitude moving forward?

John Sztykiel

I mean that's a logical assumption.

James Knapp

It is. And one of the things that's been growing in the parts business too is the kitting that we've talked about before where we'll kit actual, we'll make actual kits. We'll do kits for different components in the vehicles, and that has not only parts' dollars, material dollars it'll also add labor dollars.

Jamie Wyland - Wyland Management

Okay. And Ned also mentioned, spare parts is probably your highest operating margin business, is that true?

James Knapp

It's true.

Jamie Wyland - Wyland Management

Okay.

John Sztykiel

I think it's important to note though, again there is growth again not just in military, we're seeing double digit growth in our service parts location outside of the Dallas, Texas area. That's been a great investment. It's been a great decision for us. So right now we're also looking at a few other locations to expand that business model.

Because what's interesting is just the vehicle business, the large vehicle business, for example there's been over 2500 trailer logistic companies that went out of business in 2008. One of the things that is happening within this recession is a lot of smaller companies are going out of business either due to poor financials or lack of credit availability.

Vehicles, trucks, trailers still have to run. So, as we see an opportunity to grow the service parts business not just within our core market but slowly moving to other markets just because the access to parts is becoming less and less in certain markets, just because companies are going out of business.

And so again, if positioned properly, with wisdom and financial strength, recessions can be times of great opportunity. And I use the analogy, in football a team is never going to score a touchdown on every time they get the ball so, some quarters or some series you play for field position. If you look at the first half of this year that we're really playing for field position, in fact to score from touchdown in the second half of '09, as move and we move into 2010.

Jamie Wyland - Wyland Management

Okay. Last question on spare parts, you talk about non-military spare parts, can you talk about the growth in the non-military spare parts?

James Knapp

We don't have it broken out separately.

John Sztykiel

In effect, it's been very good. And we've got plans against it.

James Knapp

Okay. We don't really track it separately Jamie. It's all in one category as far as we're concerned at all. We don't break it out between military and RV.

Jamie Wyland - Wyland Management

Okay. Just three questions on EV real quick. Can we hit a 100 million in revenues in 2009? Is that possible?

James Knapp

In, for the EV team?

Jamie Wyland - Wyland Management

Yes.

James Knapp

Yes, I think it's possible.

Jamie Wyland - Wyland Management

Okay. You mentioned your buy chassis from Ford, there was always a concept that would make around chassis in the Road Rescue, is that a thought?

John Sztykiel

Well actually Spartan Chassis, their ambulance chassis line up is starting to move into right direction. So, the plan was eventually Road Rescue will be building upon that product. But, I mean Spartan Chassis has a definitive plan, based around the theory on product line, to take the ambulance market from a chassis perspective and convert it from commercial to custom.

And what's nice is, when I look at the plan for the number of ambulance chassis built by Spartan this year, I am extremely excited about what's in the plan. We still have to execute against that plan.

But the very own product was originally designed to go after the commercial part of the emergency-rescue marketplace and move in to other markets we believe we've got good traction now in the fire tuck side of the market. Now, we are very focused on the emergency-rescue side of the market.

So, an answer, are we very focused not just on Ford, but the other people whether be a Evesta (ph) Freightliner or et cetera. I mean that very own product, it's core focus in ambulance is to take the market from commercial chassis primarily being Ford, GMC, and Navestar (ph) and Freightliner and turn those into Spartan Chassis.

Operator

And it appears there are no further questions at this time. I'll turn the conference over to Mr. McGrath for any additional or closing comments.

Ryan McGrath

John, do you have any closing comments?

John Sztykiel

Really just want to say thank you very much for your time and efforts. And at the same time too, we completely understand that while in one respect 2008 was a record year, the fourth quarter was very good from an operational perspective, the past is the past.

And we are very focused executing ... very focused on executing not just for today, but also to insure that 2010, '011 and '012, are not just good years from a top and bottom-line perspective, but it's inline with our culture and also that as a company we are very, very sound financially.

If I look back to where some people were trying to drive us 12 or 18 months ago relative to increasing our leverage et cetera, we choose not to move down that path and because of that we are in a very, very good position today.

So, we appreciate the past but we are focused on today and tomorrow as well.

Thank you very much.

Operator

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.

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