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Spartan Motors, Inc. (NASDAQ:SPAR)

Q1 2009 Earnings Call

April 28, 2009 10:00 AM ET

Executives

Jeff Lambert - Lambert, Edwards & Associates, Inc.

John E. Sztykiel - Chief Executive Officer

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

Dave Reid - Vice President of Public Affairs and Brand Management

Analysts

Ned Borland - Next Generation Equity Research

Jamie Wyland - Wyland Management

Joe Maxa - Dougherty & Company

Frank Magdlen - The Robins Group

Jack Hain - Barrington Research Associates, Inc.

Edward Lefferman - First Manhattan Company

Operator

Good day, 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 Mr. Jeff Lambert. Please go ahead, sir.

Jeff Lambert

Thank you and good morning, everyone, and welcome to Spartan Motors first quarter 2009 conference call. I am Jeff Lambert 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, and Dave Reid, Vice President of Public Affairs and Brand Management.

I assume all of you saw our release on the Newswire and Internet this morning. And I'll take a few minutes to discuss the results for the quarter. However, before we do it, 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 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 format of 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 conclude with an outlook for the future. Jim Knapp will then discuss the financial results for the quarter. And Dave Reid will be available to answer questions towards the end. We will conclude with the Q&A session, at which time the operator will instruct you on how to enter the queue.

And with that, I'll turn over to John Sztykiel. John?

John E. Sztykiel

All right. Jeff, thank you very much, and good morning to all of you listening today, and those of you on the Internet as well. Overall, this was really a good first quarter especially, given the uncertainty in the economic conditions.

We are obviously very pleased with our improved gross margin for Spartan as a whole, and the performance of our emergency-rescue group and service parts and assembly business.

Quickly, as we look at the results, we reported net sales of nearly 116 million, earnings of $0.19 per diluted share, gross margin of nearly 23%, up 47% versus a year ago, a consolidated backlog at quarter-end of about 218 million in return on invested capital of 14%. As I mentioned earlier, it was really a very good quarter in light of the current economic conditions.

Notably, our emergency vehicle team operating group as a whole, was profitable in Q1, the first time that it's happened in quite some time. And that honestly is very pleasing to us. And we look forward to the future as well.

We also saw a boost in emergency-rescue related sales and the backlog. Emergency-rescue remains Spartan's most stable platform with significant growth potential.

We are very pleased with our financial liquidity's stability. And really, our financial position which gives us great ability to take advantage of future opportunities tomorrow, which we're addressing today.

The quarter was an indication of Spartan's agility, market operational and strategic. But first, as you look at market agility, we are very focused on transforming products ahead of society's changes, as some of you saw with last week's new products announcement at FDIC, the emergency-rescue show in Indianapolis.

Relative to mine resistant vehicles, we're currently working with a number of customers, on M-ATV related products for Afghanistan in other survivable markets.

In total, we are introducing 10 new products over the course of 2008, 2009, to capture competitive market share, and that is in emergency-rescue alone.

As we take a look over the next six to nine months, when we look at defense when we look at RV, we take a look at our opportunities to expand into strategic markets, you will see Spartan introduce at least a minimum of 15 new products or major technology innovations to position us for growth in 2010 and beyond.

That honestly is what financial stability does for you. It gives you the ability to not just weather economic uncertainty or a recession as we call it, but to take advantage of the opportunities, as society and markets of all. From an operational perspective, we have successfully repositioned ourselves in the RV business for obviously, the downside from a sales and top-line perspective.

We've moved a significant amount of our capacity utilization over to emergency-rescue over to defense, over to service, parts and assemblies. And we are in the process of taking advantage of that.

And something I wish to bring out, something we are noted for is flexible automation. And that we can literally revamp or change any assembly facility to a different product/production process flow in less than 48 hours. Not many companies can do this.

From a strategic perspective, we are focused on new market niches, and are able to react with speed.

A demonstrated fact of that was in the past in 2005, in the defense business, we went from not being within the business to being within the defense business in less than nine months from idea to production with our partners in that industry. Not many companies can say that. And as we look to the future, there are significant strategic new market opportunities and strategic agility is absolutely critical to our future.

As we look to the future though, society is changing, vehicles are changing. You will see a greater desire for vehicles that have improved fuel economy, a greater desire and need for vehicles that are multipurpose, multifunction, a greater desire that enables whatever is to take place for it to happen faster, i.e. getting in and out of the vehicles faster.

Less time between operational stuffs. Or if you're in the RV business, or I should say, the RV lifestyle that you are able travel and to see North America in the lowest cost possible with the greatest flexibility.

Simply as you've taken a look, or if you do take a look at past recessions, the last couple, the most one -- recent one being in 2001, when the dotcom bubble burst. Spartan, in the last two, has had a significant above average industry growth, when the past two recessions have ended. We are very focused on ensuring that happens in late 2009, 2010.

Now, as we look at the markets. In the defense business, we are working very closely with our military customers in the R&D stage on developing new lines of mine-resistant survivable vehicle. Some of this R&D and prototyping has been for the M-ATV program, which will be a product for the next large-scale ramp up to support our forces in Afghanistan.

The U.S. military has recently indicated plans to order between 2 to 6,000. And that number could grow in 2009.

As we've mentioned earlier, we do not expect clarity on these specific orders until somewhere in the latter half of the second quarter of this year. So, if you're thinking of a question as to when those vehicles are going to be ordered, everything which we read, everything which we have been told is it will be somewhere in the latter half of the second quarter of this year.

We're also continuing to work on smaller runs of mine-protected survivable vehicle. Items such as the Iraqi Light Armored Vehicle, the medium mine-protected vehicle, and a variety of variants that go to unique market niches within the defense industry.

As you look at Spartan, one of our great strengths as we are able to address multiple market niches within any market, and we do it with speed and with high performance product.

In our other products market, i.e. service, parts and assemblies, sales were at a 108 million are high for the year ended in 2008, with most of this revenues related to support for military vehicles in the field.

In contrast, we reported service, parts and assembly sales of 33 million for all of 2007 and 10 million for all of 2006.

We expect to expand the SPA part of our business, not just for defense, but for emergency-rescue and RV as well.

SPA is a key part of our value maximization strategy. Because obviously, within the lifecycle of each vehicle, there are tremendous opportunities to provide great customer service, as vehicles do have problems, but also vehicles change or evolve as they are put or kept in use. And since 1989, Spartan has sold over 6,000 units, and each one of those represents an opportunity from a value maximization perspective.

As we looked to the motorhome market or the RV market, it is still in a very, very distressed state.

As mentioned earlier, we have proactively right-sized our RV business model to match demand. And we are currently working on a number of initiatives to take advantage of some of the changes in the marketplace. As we look at the industry from a recovery perspective, there are still opportunities for some recovery in the second half of 2009. However, we do not expect it to be gigantic.

As we look at 2010, obviously, we are more excited about 2010 than we are about 2009. But, for the first time, consumer confidence is starting to stabilize, pick up a little bit. Consumer spending as a whole is starting to stabilize. We've seen a large inventory adjustment in a variety of industries, which bodes well for a variety of industries in the second half of 2009. So, as a whole, from a North American perspective, a lot of positive things are happening within the current markets or economic conditions, to honestly provide some growth in the second half of 2009 into 2010. And we expect to take advantage of that.

On a very positive side, despite the bad economy, people still intend to drive or use RVs. What's interesting is a recent RVI survey in March of 2009, indicated that 55% of the respondents intend to use their RVs more this spring in summer than last year. And 45% are considering another RV purchase. Only 4% say they will use their RV less.

And after being in the business 23 to 24 years, this does not surprise me, really for two reasons. One, the biggest economic indicator I've seen that drives the RV business is consumer confidence. As consumer confidence stabilize and start to pick up, people will start to buy RV units. Most RVs are still bought for cash, not financed over 50%, which means as consumer confidence starts to move in the right direction, RV purchases will start to move up.

Another positive is there has been a significant inventory correction over the last basically nine to 12 months, which bodes well for a potential significant uptick just from a wholesale perspective.

The third, and this just gets back to the use and the confidence with fuel prices significantly lower this year than last year at this time, we are singing -- seeing increase attendance at shows. We're seeing increased number of units on the road. So, as people travel, as people move, and as their attitude move in the right direction, right now we're cautiously optimistic that the second half of 2009, will be positive from an RV perspective versus the first half. And last, and not least, there is 8.2 million RV owners in our nation, and the market is there.

As we look at emergency-rescue, and first looking at fire truck chassis, we had another good quarter compared to 2008. Sales increased 11.8%, and the backlog increased 38.6%. Part of what was driving our sales and the backlog was demand related to industry regulation changes from an industry standard, which is called the NFPA, 1901 that took effect on January 1, 2009. And typically, fire truck chassis lag the body side of the business by at least a quarter or two.

We also are still optimistic that in the second half of 2009, due to a 2010 emissions change that there will be continued buying from an emergency-rescue perspective, whether its fire truck chassis, fire truck bodies, ambulances et cetera.

As a whole, what we are saying is that 2009 should be a very good year from an emergency-rescue perspective.

As we look at 2010, let's just cover a couple of data points real quick, because in the end data is a significant part of what drives or evolves market.

Fire departments respond to a call for help every 1.4 second. Last year, property loss was $14.6 billion. It's just a lot of money. The number of Americans over the age of 65 will more than doubled over the next 30 years. And as more of us get older, more of us are going to ride in ambulance, whether we like it or not. And that call for help, will not be 1.4 seconds, but that number will become less and less.

Number four is, there is a 120,000 fewer volunteer fire fighters under the age of 40 today than what there was 20 years ago. And there also is a reduction in state and local budgets because the economic recession. What does this mean, what are the potential outcomes? Emergency-rescue equipment must become easier to operate more, more multifunctional, lower in cost, carrying more equipment, lighter in weight as budgets shrink and fire fighters themselves get older.

As the population ages, calls for help will increase, and the need to prevent property damage will grow. Thus products are evolving. And as I mentioned earlier, an emergency-rescue alone in 2008, 2009, we will be releasing at least 10 new products or we have released products over 2008, 2009 time period that drives market share growth, not in 2009, but in 2010.

And honestly, it just gets back to our business model. Society evolves, but when you have financial stability, you're able to position yourself to take advantage of restructuring in society, restructuring in changes within the market. So, as the market comes back, you're able to grow much faster.

However, emergency-rescue realistically has an opportunity to be less in 2010, versus 2009. Why? Because of lower budgets, from an economic perspective. And second, because of a pre-buy potentially because of emissions. And so, we are very focused on doing the right things today in 2009, to ensure that we can gain competitive market share in 2010.

So, while others are struggling, we are growing. And this is nothing new. This is very similar to what we've been doing for the past 10 to 15 to 20 years.

As a whole, as I mentioned earlier, emergency vehicle team made up about 19% of our total sales. They were profitable for the first quarter. And we look forward to Q2 and Q3. They have improved considerably over the past 6 to 12 to 18 months. We continue to move the ball in the right direction, and we're excited about the future.

As we look into 2009, 2010, it is first important to understand that financially Spartan has taken some very, very wise and effective steps, to weather the recession, and to handle the uncertainties today.

We have reduced our costs structure. We are introducing new products to address new markets or niches. We're developing new markets or niches both today and tomorrow.

Our diversified multiple market strategy, with operational market and strategic agility, reduces our downside risks, while increasing our upside potential.

We have demonstrated ability when it comes to transforming markets. And we honestly have a strong portfolio upbringing. We are very focused on our six strategic objectives, directed, customer-centric, innovation, lean, brand leadership, value maximization and global.

And as we focus on those six strategic directives, it doesn't mean business or life is going to be easy for us. There's a lot of work to do. But, it means that over time, we expect to transform and improve not just the shareholder value, but the stakeholder value of each one of the customer groups we interact with.

As we looked to the future, the first quarter was solid. But, the reality is 2009 is still fraught with numerous challenges. And those challenges are not going to be easy to overcome. As the release demonstrated or illustrated, the RV market is basically almost zero right now.

But yet, there are signs of life coming back. And that gives us opportunity, it gives us hope. But, there is still significant challenges. In each of one of our markets I should say, there are challenges. In defense, while we anticipate a year-over-year sales decline in the first half of 2009, there is significant opportunity in the second half of 2009, relative to M-ATV and other potential orders with our customer group.

As we look at the RV business, we are expecting flat to declining sales, with really the potential growth in late 2009, moving into 2010. Last, on the service, parts and assemblies side of the business, we expect to grow as a percentage of sales in 2009 and 2010.

Now and as a final note, we plan to re-launch, or I should say, update our road cass (ph) Virtual Management Presentation on our website within the next one to two weeks.

We've had a tremendous response to this over the last couple of years. But honestly, we've been a little negligent. We're severely negligent in updating it.

Honestly, we've had a lot of things on our plate trying to get a lot of things done. And this is one them that fell through the cracks and I apologize for that.

We are excited about the update, took a look at some of the drafts this morning. We've got a few bugs that work out. But, within the next one to two weeks, that will be out there.

The biggest difference is though is that the road cass will now be updated on a quarterly basis from a financial and a data perspective. In the past, it was kept the same or stayed the same for a 12 month time period. On the new road cass version, we will be updating it quarterly. And actually, it will be updated the day before, or I should say, the night of our earnings are released. So, that means you'll be able to listen to us in the conference call or the Internet. And then, you will able to dial into the road cass presentation, and take a look at the updated data on that part of the road cass for each quarter. And we're very excited about that.

When it is released and fully operational within the market, we will be running or presenting a press release just to inform everybody. We're excited about that initiative as well. And I'm going to turn over to Jim.

James W. Knapp

Thank you, John, and good morning, everyone. We reported 27.7 million in cash and cash equivalents at the end of the quarter, compared to 13.7 at December 31, 2008.

We ended the quarter with 16.6 million in long-term debt, virtually unchanged from where we were at the end of 2008. We continue our $50 million line of credit with JPMorgan Chase, which remains fully available at favorable rates to fund future strategic investments. We also have 30 million available on a $40 million shelf from potential capital.

Depreciation for the quarter was 1.8 million. Our effective tax rate in the quarter was 34.5%. And we expect it to be in the range of 34 to 35% for the year.

Our consolidated ROIC for the quarter was 14%, just below our company ROIC target of 15 to 20%.

SG&A decreased year-over-year. Although, R&D costs did not decline due to the support required for NFPA and 2010 emission changes.

With lower year-over-year sales, our ROIC was pressured despite our higher gross margin percent. Within Spartan Motors, and each of our specific areas, we use ROIC as a key measure of our progress.

CapEx for the quarter was $800,000. We continue to forecast CapEx spending in the range of 7 to 8 million in 2009. We have positive cash flow of 16.1 million in the current quarter. Our strong cash generation is giving us a flexibility to pursue multiple avenues to create shareholder value, such as investing in the business, funding the special dividend or evaluating strategic opportunities.

It also allows us to repurchase shares. We have repurchased nearly a 141,000 shares of common stock in the open market since January 2009, at an average price of $3.09 per share.

This repurchase was the first out of the 1 million share buyback program announced in July 2008. The management team and the board, believes our share price was and is, trading at a discount in relation to our long-term earnings potential, balance sheet strength and market opportunities, including the opportunities John mentioned.

We'll continue to evaluate future stock repurchases wisely in light of other opportunities, making decisions based on what fits with our strategic plan, the prevailing conditions in the economy, and contribution to shareholder value.

As we're moving into the second quarter, we remain on financially solid ground with minimal debt, available credit, strong cash generation, and operations scalable to meet current and growing demand.

In light of the economic recession, we are placing strong emphasis on improving cash flow, leaving out cost, looking for short payback periods for any new investment. This year remains challenging given the economy. But based on our positive result in the first quarter, we remain cautiously optimistic.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question comes from Ned Borland with Next Generation Equity Research.

Ned Borland - Next Generation Equity Research

Hi. Good morning, guys.

John Sztykiel

Good morning, Ned.

Ned Borland - Next Generation Equity Research

Can you give us the spare parts contribution to the other product sales for the first quarter?

James Knapp

It was -- we had a rich mix of spare parts, Ned. But, that's not something that would be disclosed publicly.

Ned Borland - Next Generation Equity Research

Okay, alright. I thought you guys disclosed it last quarter. But, okay. What about the EVTeam backlog? It looks like you saw some sequential decline there. I was just wondering, did you step up your production rates there, given that you achieved profitability this year, or were orders slowing? What -- can you help us out there?

John Sztykiel

Ned, this is John speaking. The biggest reason for the sequential decline in the backlog was just that there was a slowing of the order intake primarily, at the a Crimson Fire perspective.

The order intake in Q4 was substantially higher at Crimson, and I think for the industry as a whole than what's been on the past. And so in Q1, there orders were significant below the normal order intake rate, which isn't surprising. I would expect to see order intake increase in Q2 versus Q1. I'm not sure if it's going to be at Q4, 2008 level. But, that's the number one reason, because there was just less order intake in the Q1 of this year.

Ned Borland - Next Generation Equity Research

Okay. And then, the backlog in fire chassis grew substantially, probably due to the standard change. Given that you'd standard change at the beginning of the year, and then you've got potential pre-buy activity at the back half of the year, I am just trying to ballpark a kind of a run rate for sales per quarter here. Do you think that it stays consistent with where it was in the first quarter, throughout the year?

James Knapp

From a, you mean from an order intake perspective or a revenue perspective?

Ned Borland - Next Generation Equity Research

Revenue perspective.

James Knapp

Oh, I would think from a revenue perspective you could probably look at the Q1 run rate, and say that could be a good average for fourth quarter of this year. From a top-line, or from an order intake perspective, I think what you will see is Q2 will be a little bit better than Q1. You will probably see Q3 be a little bit better than Q2. And then you will probably see again a significant increase in Q4 versus Q3, as people start to realize they have to make a decision.

Now on the fire truck chassis side, like at Spartan Chassis, they typically lag the body size of the business by one to two quarters, just because those orders have to be processed.

For example, Spartan Chassis is still had a very good order intake in the month of April, as OEMs continue to work through the processing of orders and what have you.

Ned Borland - Next Generation Equity Research

Okay. And then, on M-ATV, I know you don't want get on the too much specifics here. But, can you just kind give us sense of what the playing field looks like, how many participants are involved, how many OEMs do you envision that they are going to select and that type of thing?

John Sztykiel

Well, there is currently five players involved or five companies. Our defense could choose anywhere from one to five. Past history has indicated that they've liked to keep more than one production line going. I think industry -- I don't want to say, consensus, but a variety of people within the industry who have better experience in this business model in defense than I do indicate that there will be two, potentially three companies chosen for this project. Or I should say for this product upset.

Ned Borland - Next Generation Equity Research

And you are working with the five participants, you're working with two of them or... ?

John Sztykiel

Well, we can't comment specifically on that. In the past, we've worked with three different companies, BAE, GDLS and Force Protection. And I think we've got very good relationships with all three.

Ned Borland - Next Generation Equity Research

Okay. And then finally on RVs, and I'll get back in queue. The amount of cost reduction you've done in that side of the business and given that volumes are at a sorry state right now, do you think that you've improved your cost structure in that business enough that when volume does come back, you are going to be making margins that are gross margins that are greater than, say, the low teens level that I think you guys were at before?

John Sztykiel

Oh I think we've definitely improved our cost structure, where we've got upside opportunity on the gross margins side, from a business perspective, I mean one of the things which we take great pride in this quarter is the size of our gross margin. I think one of the things which we are seeing in Q1 is the company as a whole is operating more effectively with the people and the processes we have in place.

However, in the RV business we also perceive that the product, the business structure will change, which really should give us the more opportunity, I believe, to increase the value or the dollar amount, which goes up off the door with each chassis we provide.

If you take a look at the industry today, and you took a look at the inventory turns of other public companies, and if you look back a couple of years at those that were in business, which you'll see as historically, Spartan Chassis' inventory turns have been at least double of those of the body manufacturers out there.

And so, one of our direct strategic focus points is to work with our partners, because we don't have a desire to get into the body business. And how can we work more effectively to improve or reduce the cost i.e. improve the effectiveness of the whole operational value chain.

And if our inventory turns are double of a body manufacturer, one of the first rules or schools of thought would be, how do you offload as much, either from a bill and material contents or a process perspective, to the higher performing more effective companies.

So, I see two upsides as the RV business moves forward. One, I believe, our gross margins will improve. But also two, I believe that our dollar value or bill and material content per chassis we ship, would grow, just because we're more effective. And these kind of economic difficulties or restructuring bring to light just the efficiency and effectiveness that needs to take place to be competitive in the marketplace

Ned Borland - Next Generation Equity Research

Okay.

John Sztykiel

So, the long winded answer. But, those are the two biggest things we expect to see as the industry comes back, which both bode well for us.

Ned Borland - Next Generation Equity Research

Okay. Thanks.

Operator

And our next question comes from Jamie Wyland with Wyland Management.

Jamie Wyland - Wyland Management

I thought you had higher quarters in the bottom-line. I don't think we had have a better quarter on the bottom-line than what you have done in this environment.

A question for you about service, parts and assemblies. When I looked at Navistar and their business, in that part of the business, they have operating margins of 19%. How does Spartan compare to Navistar there.

James Knapp

As I was saying with Ned Jamie, we don't comment publicly on the gross margin, by the different product categories. But, we can say that it's -- our parts business, carries a higher margins than the rest of our business, which is pretty traditional for most companies in this business.

Jamie Wyland - Wyland Management

Okay. As you put backlog figures now in there for service, parts and assemblies, it's a pretty decent number too. Would I assume that service, parts and assemblies in the second quarter may indeed have higher revenues than they did in the first quarter, whatever those revenues may have been?

James Knapp

It will be I would say as good, but potentially better.

Jamie Wyland - Wyland Management

Okay. And on the emergency vehicle side, you were profitable in the quarter for the first time in a along time. Were you profitable in each and every month, or was there a momentum that has built throughout the quarter, or how would that profitability have...

James Knapp

I would say Jamie that we don't want to -- we don't normally comment on the months within the quarter. And it's going to vary by company within the quarters. So -- and I think we have a very positive trend. It's up substantially from last year. It's up from the fourth quarter of last year. So, I think we have a good trend link.

Jamie Wyland - Wyland Management

And you'd expect to stay profitable assuming that business is...

James Knapp

Our goal is to be profitable in that business for 2009.

Jamie Wyland - Wyland Management

And lastly on the raw material cost front, obviously, it's been a rather volatile couple of years. But, where did your costs and pricing stand right now?

James Knapp

We are benefiting to some extent because of the reduction in some of material costs, especially in the area of aluminum and stainless steel.

Jamie Wyland - Wyland Management

Okay. When you bid on these things, the selling prices are pretty much fixed throughout, or how flexible are your selling prices? Are you...

James Knapp

Our selling prices on a emergency rescue on a military are pretty much fixed once the contract is in place.

Jamie Wyland - Wyland Management

Okay. So, can be a positive or negative. And it looks like it will positive moving forward.

John Sztykiel

Right. And Jamie this is John Sztykiel, and I appreciate your opening comment, which, where you said while we've had other quarters where the top-line has been much higher. But, I don't think we've had as good a quarter in light of these kind of economic conditions. And I would concur a 100%, after having being been with this company, now going on my 24th year, on a number of fronts from a margin improvement perspective, the effective and the efficiency is improving dramatically.

Now that we have Road Rescue, under the jurisdiction of Spartan Chassis, very excited about the lean and the efficiency initiatives moving within that area.

One of the reasons you've seen Crimson Fire improve dramatically is that under the guidance of Kevin Crump and a variety of individuals, Jim Salmi et cetera, they have not just embraced lean, but they have executed lean.

So, and the reality is that we have a long ways to go. We are not truly a lean company throughout the whole value chain. But, on the other hand also to -- and again, I spoke of it probably more than once in the opening comments. I absolutely believe that this is our best quarter. And I think 2009 will be our best year from a positioning perspective for new market niches, and also new strategic markets.

Our financial stability under the guidance of Jim Knapp and a great finance group has put us really in a very, very good position to not just weather the storm, but to really accelerate in such a manner so what, when the storm or the uncertainties subsides a little bit, that we have greater than industry average momentum, whether it be in a existing market or a new market.

Jamie Wyland - Wyland Management

Outstanding. Thanks so much. Nice job.

John Sztykiel

Thanks Jamie.

James Knapp

Thanks Jamie.

Operator

And moving on, we have a question from Joe Maxa with Dougherty and Company.

Joe Maxa - Dougherty & Company

Thank you. Nice quarter, guys.

John Sztykiel

Thanks Joe.

Joe Maxa - Dougherty & Company

A question on the strong backlog parts business, fire truck, highest margin businesses, I guess, that would indicate your margin should stay near your Q1 levels. Is that fair to assume, at least in Q2 from Q1?

James Knapp

I think there's an opportunity to continue for some period of time this year at a higher margin level. But, that's going to depend Joe really, on the mix of products that we're going to have in each of the quarters. So, if we have a richer mix of the parts business, we'll be at a higher level.

As the RV business beckons to come back, as you know, the vehicle business isn't quite as heavy margin as the parts business. So, that will eventually cause our gross margin percentages to decline.

Joe Maxa - Dougherty & Company

Right. John you mentioned on the order rates for the fire truck chassis, if I heard correctly, that you expect the order rates to improve basically, sequentially each quarter for '09. Is that correct?

John Sztykiel

Correct. The opportunity is there. From a fire truck chassis perspective, we are still processing orders from OEMs that took a large number of orders in Q4. And so April was really a very good month from an emergency fire truck chassis sales perspective.

Now, May and June could possibly be a little bit soft. So, let me retract that statement, Q2 could be a little bit less on a chassis side. But, then I see Q3 and Q4 potentially could be very positive, not just from a body perspective and a chassis perspective.

But if I conveyed sequentially the Q2 would be better than Q1 from a chassis perspective, I don't think I am ready to say that Joe, because I am not exactly sure what May is going to look like or June is going to look like.

Joe Maxa - Dougherty & Company

I am just -- because I am thinking, because you talked about revenues being a may be flattish with Q1. But, it looks like your backlogs and order rates are increasingly significantly from last year. I mean, even if that is somewhere near the Q1 level, which would suggest you need to increase production to get these fire trucks out of the door in your typical 10 month...

John Sztykiel

Well, we are absolutely attempting to increase production. The one area which we do not have control of, and that is the OEMs that we don't own. And again, Spartan Chassis supplies products to over 50 different fire trucks OEMs up there, for those of you that are new to our business model. And while we may own Crimson Fire and Crimson Fire Aerials, and obviously we can effect their production rates to some degree, it is hard to accelerate the industry's production rates as a whole. But, as a company you are very, very astute, and incorrect that from a chassis perspective, while we have a definitive plan in 2009 for fire truck chassis, we believe we can grow production, because we believe there is opportunity to gain more market share on the fire truck chassis side alike.

Joe Maxa - Dougherty & Company

Yeah, absolutely. So, when we look at the fire truck and the EVTeam as the year progresses, we should see orders and backlog, really kind of maintaining or possibly growing, is how we should think about those?

John Sztykiel

Well I hope orders grow. And I believe, orders will grow. I hope backlog does not grow, which means we will reduce our lead time, and accelerate the throughput of products. So, I would concur with order take increasing, I would expect our backlog to either stabilize or ideally come down a little bit, as we reduce the lead time and accelerate the throughput of our emergency-rescue products.

One of the things we believe is that as we reduce the lead time, whether it would be for a fire truck body, a fire truck aerial, and the ambulance body or a fire truck chassis, as we reduce the lead time, we can gain competitive market share in the emergency-rescue market.

One of the reasons we were able to grow in the RV markets, for those of you that are new to the Spartan business model, as we were able to reduce our lead times versus our competitors out there in the marketplace. So, we were able to gain competitive market share with a higher priced product, before the markets fell apart, really in the second half of 2008. So...

Dave Reid

Joe, this is Dave Reid. You might also want to take a look at what we did, introducing the Legend at FDIC. That Legend body at Crimson is a very high quality body. And it's built modularly. And so, it kind of goes together a bit like LEGOs (ph). So, there is a lot of different options you can have with that body. But, the way that it was engineered significantly reduces our labor hours in the construction of it. So, that increased, that improves our costs, and it increases our speed. And everybody on the dealer level thought that, it was very well received, because of those two elements.

Joe Maxa - Dougherty & Company

Okay, that would make a lot of sense. Because my next question was going to be your suppliers of the -- as they are, the primary for your custom chassis, the cabs, for the fire trucks. And if they had enough capacity to maybe meet your demand. But, sounds like you maybe shifting to a new product, which would help alleviate that potential issue.

Dave Reid

We're doing, I think as we have mentioned before, we're expanding both the breadth of our product line i.e. the different models and types of vehicles that we offer, and also the depth in paying attention to moving down in price point as well.

John Sztykiel

But, one of the things and we are doing in that is that we do have a strategic initiative in place, where we are establishing our strategic fabrication for small parts. And this gets back to how do we accelerate the speed or improve the response time i.e. reduce the lead time. And one of the areas we've identified in the value chain is that small parts whether it'd be defense, RV, emergency-rescue et cetera, was the consistent bottleneck.

So, as a company it will be operational in the second half of 2009, very, very small capital investment.

But you -- actually, for those of you that will come view and view the facility in Sherlock, Michigan, which you will see for the first time as a, what we would call a small part strategic fabrication initiative. And those parts will not just be for Spartan Chassis here, but will also go out the outlined locations of Crimson Fire, Crimson Fire Aerials and Road Rescue, or other strategic partners as we see fit.

So again, as you look at the Spartan business model you think back to agility, one of the definition points within the word agility, is nimble or quick. And as we improve response time or reduce lead time, we believe we can grow market share yet do it at a higher price.

Joe Maxa - Dougherty & Company

Jim, one last question on for you is the OpEx levels. Would we -- do they look like they'll be maintained around current Q1 numbers?

James Knapp

The operating income?

Joe Maxa - Dougherty & Company

No, just the expenses.

James Knapp

Expenses.

Joe Maxa - Dougherty & Company

Development and SG&A.

James Knapp

Well, R&D as I mentioned earlier, is at a higher level than we would normally be at in this situation due to the fact that we have two designs in for NFPA changes, and also to 2010 emissions. So, that will continue for some quarters. But, we are going to leverage and drive our the rest of SG&A down as the year progresses.

Hopefully, as the volume comes back and the RV industry will have more latitude with maintaining SG&A.

Joe Maxa - Dougherty & Company

Okay. Thank you very much guys.

John Sztykiel

Thanks, Joe.

Operator

And our next question is from Frank Magdlen with The Robins Group.

Frank Magdlen - The Robins Group

Good morning, and that was a good quarter. A part of the question was answered, but the SG&A expense given whatever your capacity utilization is, is this more of a baseline number going forward, just to maintain everybody?

James Knapp

No. I don't think it's a baseline number. I think that the SG&A we still have opportunities as John was saying to lean out those numbers going forward. The R&D side would be a little more difficult to lean out as we are preparing ourselves for all the NFPA changes and also the 2010 emission changes.

Frank Magdlen - The Robins Group

Okay. But, your 10.4% of revenue. But, I mean, what do you -- your ideal capacity is what or you operating at what percentage of capacity do you think?

James Knapp

Depends on different part of the business. We have lots of capacity in the RVs -- in the RV business. And we are operating at higher levels as John said in the fire truck chassis business. And we're ramping up the volume in the EVTeam.

John Sztykiel

But from a capacity utilization perspective, if you took a look at as a company today, Frank, we're probably may be at 30 to 40% capacity on a double ship. We have a significant amount of room where we could grow the business without adding much CapEx.

Frank Magdlen - The Robins Group

Okay. And that's and you've made those expenditures and you should have reasonable operating leverage going forward?

John Sztykiel

Exactly. And one of the things we talked about, and you see on the road cass this from a compensation perspective, a key part of our compensation, the largest part is based upon our form of return on invested capital/EVA which we called Spartan profit in return.

So, while 2009 realistically will not be as good relative to 2010, if we look at year-over-year compensation levels, if we do our job properly and execute the right way in 2009, we should be back on a very positive upward trend in 2010, '11 and beyond.

Sometimes, we're no different than a farmer. Sometimes you actually got a plant in the ground, and wait a little bit of time to really reap the fruit.

Frank Magdlen - The Robins Group

All right. On assemblies, will there ever be a time where you have a large backlog there that would not shipped in the following quarter, simply because it takes too long or the customers ask for future delivery?

John Sztykiel

It's possible, where for the military may request orders to be shipped over a longer stretch of time. And where the parts require a significant lead time of probably 8 to 12 weeks.

Dave Reid

Frank, it's possible. But, I won't say this that goes against one of our strategic directives which is lean. One of the reasons our SPA business has grown so dramatically is we get very, very good report from consumers, customers, dealers et cetera saying wow, I order the part, i.e. the parts, the assemblies, et cetera. They show up faster, and everything is correct.

So, as we improve our response time, reduce our lead time, ideally, you don't want orders that represent a longer time period than a quarter. It just gets back, how do you accelerate the turns, accelerate the turns, because as we accelerate the turns, the business grows. So, ideally it could be. But, that's against one of our strategic directives, which is lean i.e. improve the response time.

Frank Magdlen - The Robins Group

All right. And John, do you have any comment on what you're doing with aerials now, and where are they on the road to profitability?

John Sztykiel

Well, they continue to make improvements. I can't say I'm pleased with their success, because they're not profitable yet. However, they continue to improve in the right direction. They continue to pull through profitable Spartan Chassis and the other part is they continue to generate bodies that are profitable as well.

So again, when we look at the total consolidated picture, not just of the emergency vehicle team, but the pull through of Spartan Chassis as well, emergency-rescue is by far our most stable business unit, one that has been very profitable. But also, when it represents significant growth.

Frank Magdlen - The Robins Group

All right. And then, just one other comment about what do you think is going to happen to your export sales in the next 12 to 18 months?

John Sztykiel

Hopefully, up. I mean, the reality is our export sales are dismal at best. They are very, very low single-digits. And when you look at the value of the dollar versus the pound and the euro, we have tremendous opportunity.

I think one of the things Dave Reid spoke about a few moments earlier is the Legend body by done by Crimson Fire, is really the -- it's a second product that's been designed and built by Spartan, where exportability was a key component of the design and build process.

The other product is the Furion fire truck in a ambulance chassis that has a European look to it. So, for the long this time honestly, that's really a fault of my lack of leadership, export or global awareness was not high in my priority, ir (ph) the objectives to get down with, it is now I see tremendous opportunity. And I hope the answer is up, I expect it to be up.

Dave Reid

Joe, this is Dave Reed. Commenting on the global to build on a couple of things that John just mentioned is that, we're really looking at moving from an opportunistic to a developmental strategy with this business. And we're evaluating assembly and distribution capabilities in markets that have low barriers to enter -- entry, have financial stability and demand for U.S. type products.

So, we are looking at this in a pretty systematic, focus right now, and are evaluating how to best capture the opportunity that's out there. But, we're prioritizing our focus.

Frank Magdlen - The Robins Group

All right. Thank you, gentlemen.

John Sztykiel

Welcome.

Operator

(Operator Instructions). And our next question comes from Jack Hain with Barrington Research.

Jack Hain - Barrington Research Associates, Inc.

Good morning. And I'd just like echo everyone else's sentiments. Congratulations on the quarter. Real quick, I was wondering, if there were any specific drivers you could talk about. They've got EVTeam to profitability in this quarter. I mean, the second quarter of year-on-year revenue declines. But, the press release mentions efficiencies and that's what you're profitable. I was just wondering, if you could drill down into that any further?

John Sztykiel

Well, from a financial metrics perspective, I think the data is out there. But philosophically, I think it's just the structural shift we made probably, about I would say, 12 to 15 months ago, to not just discuss lean but to embrace in what lean becomes a part of the everyday thought process.

And while we talk about six strategic directives, probably, the two we talk about the most is customer centric and lean. And customer centric means, you deliver to the customer what they want, you're easy to do business with, and you do the right thing with each customer group.

And lean is just you eliminate the waste in all that you do, and as Crimson Fire Aerials and Road Rescue has hit, they have embraced that methodology. And it has started to become a part of their normal every day operational. Their financial results have improved dramatically. As Dave Rid spoke a few moments ago that Legend body, this new fire truck body, is 15% lighter from an aluminum weight perspective, which means as commodity prices, if or may they go up, we're at a very good position.

But, from an hour's assembly perspective, it's at least 30% less from an hours to assemble perspective than the previous body design. And so, I mean, we feel very, very, not just comfortable, but excited about what that opportunity brings to the marketplace. And that's a body that's been designed with a lean thought process in mind, not just to be attractive to the customer, but it's got to be lower in cost to produce purchase the parts and assemble.

James Knapp

We should also mention John that I think, we've also benefited from some reduction in the cost of aluminum and stainless steel.

Jack Hain - Barrington Research Associates, Inc.

Okay. So, I think that some of the answers to that first questions will translate over to the second one. I was wondering, if you could just give us any direction in terms of how we should think about modeling, consolidated gross margins going forward considering that there is just been pretty wide variance over the last couple of years. And given the fact that a lot of our industrial companies right now are reporting lower gross margins on fixed costs, under absorption, things like that.

John Sztykiel

Well first, and then I'll, this is John Sztykiel, I'll let Jim Knapp to jump in. It will be very difficult for us to continue the growth in gross margins. As Jamie Wyland spoke earlier, this was a very, very good quarter from a gross margin perspective.

Are there opportunities to improve? Absolutely. But there also are competitive pressures out there, because it is a very, very uncertain economy, and price is becoming more important in the marketplace. As Jim Knapp, spoke a few minutes earlier, as the economy recovers, commodity prices will probably go up, not go down. So, there is pressures there as well.

At the same time though, what we're also seeing is the benefits of a diversified multi-market business model. Five years ago at service, parts and assemblies were not even a key part of our strategic plan, our operational structure.

We've got some great leadership within that group. They've done a fantastic job. So, what you're now seeing is that on the value maximization side, of not just each vehicle we produced, we're looking at the opportunities relative to service, parts, accessories to maximize the value of the vehicle within its operational lifestyle.

So, as we look to the future, it will be very, very difficult to improve where we are at today, because there is a tremendous amount of pressure to bring the gross margins down some. However, at the same time too, we are challenging ourselves to improve where we're at from today, because obviously, we are pleased with the results. And as we improve our gross margin results, it gives us greater operational flexibility to execute certain strategic decisions.

Jack Hain - Barrington Research Associates, Inc.

Okay, that's all I have. Thank you very much.

John Sztykiel

Welcome.

Operator

And our next question comes from Ed Lefferman with First Manhattan Company.

Edward Lefferman - First Manhattan Company

Yeah. Hi, good morning.

John Sztykiel

Good morning.

Edward Lefferman - First Manhattan Company

A question on the RV industry. What's the implications of the Fleetwood bankruptcy, whether you have any receivables with them? And obviously, with only 3 million sales in the quarter, you only know the industry if that's a pretty de minimis level. What's the status of your other customers like Tiffin, and what's their financial condition these days?

James Knapp

As far as Fleetwood goes, we have a very small amount of receivables there. And it's been fully reserved already. And so, there is no future impact from that.

As far as the other customer goes, we really can't comment on the financial health of our other customers.

Edward Lefferman - First Manhattan Company

Well, it can't be very good. So, once the confidence that when the market turns that all the business doesn't just go win a beg out of it, which isn't one of your customers.

John Sztykiel

Ed, this is John Sztykiel. One, there is no guarantee for the future. I believe as Fleetwood, Newmar, Tiffin and Travel Supreme, which is now a part of Jayco, which is the Entegra Group.

As we looked to the future, we still see us being a very viable chassis partner with those four respective companies. As we move into the future though, there's a huge benefit to the situation in the RV business today. And that is the business model is basically broken about zero for lack of a better term, which means that you can't get much worse really what you've got is upside opportunity.

You have a chance not just to participate as the model rebounds, but also to help create a much more effective business model. And as we looked to the future, we believe that we will be a partner on an increasing number of platforms, and whatever we provide to the marketplace, in addition to have an increasing customer base i.e. size. We're selling to more customers. Whatever we sell, the dollar content will be higher.

So, from an attitude perspective, I will be the first one to admit, I would love it, if the RV business was similar to the numbers of 2006 or '05. But, the reality is, it's not. So, the beauty of it is it can't really get any worse when you are at zero. You can't go negative in this business.

So, how do you make the best? And the good news is, it will come up at something different, speed, agility, innovation will be all be tenants of that. And we're excited about the initiatives in which we have ongoing. Now, it doesn't guarantee we're going to have a great future. But, we were at zero at 1985. And it became a great business model for us. So, we've done it more than once. The challenge is now for us to do it again. And we have absolute confidence we can make that happen.

Edward Lefferman - First Manhattan Company

Well, my question again, is just with your level of confidence in the customer base. If they are going be around to participate. You only participate for the they are there or you sign up someone new?

John Sztykiel

Absolutely, and one we believe. We believe they will be there in some way, shape or form. But, we also believe that we will be participating with an ever increasing number of OEMs in the RV marketplace.

One of the things we are absolutely focused on is we cannot accept the position we're in today, and that is to be a partner with just four companies. We have to be a partner with more than four companies.

Edward Lefferman - First Manhattan Company

Okay, fair enough. My only other question is, it looks like with your cash flow in Q1 that you generated some good cash out of working capital. How do you see that for the balance of the year?

James Knapp

I think we'll continue to have a very positive cash flow for the year. And I would think that it'll -- our cash position will increase as the year goes on.

Edward Lefferman - First Manhattan Company

Thank you.

John Sztykiel

Thank you.

Dave Reid

Thank you, Ed.

Jeff Lambert

Operator, we'll only keep one more call, and one more question.

Operator

Okay. We have another question from Joe Maxa with Dougherty & Company.

Joe Maxa - Dougherty & Company

Hi John. I just want clarify on your comments regarding the M-ATV opportunity. I think you said 2 to 6,000 this year, is what you are either seeing or thinking would grow?

John Sztykiel

If you look at what is in the data points, whether it'd be the defense news or other publications out there, you see numbers ranging from 2 to 6,000.

Joe Maxa - Dougherty & Company

Okay. I just wanted to see what you guys are into, yeah.

John Sztykiel

Yeah.

Joe Maxa - Dougherty & Company

That's all I have. Thank you.

John Sztykiel

Thanks.

Jeff Lambert

John, you want to wrap it up?

John Sztykiel

All right. In closing, again, I want to say thank you very much for your time. We take great pride in what we do. We look forward to the road cass being out of the marketplace within the next two to three weeks. We're excited about that.

But, as a company, we are cautiously optimistic. There's a very uncertain economy. But, there is also a tremendous opportunity. So, while we're pleased with the quarter, being the first, it's obviously passed us. And now we're focused on Q2, and the rest of 2009 and 2010 and beyond. So, thank you very much.

Operator

That does conclude today's conference. Thank you for your participation.

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Source: Spartan Motors Q1 2009 Earnings Call Transcript
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