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Executives

Jeff Lambert – IR, Lambert, Edwards & Associates, Inc.

John Sztykiel – CEO

Joe Nowicki – CFO and Chief Compliance Officer

Tom Gorman – COO

Analysts

Walt Liptak – Barrington Research

Joe Maxa – Dougherty & Company

Frank Magdlen – The Robins Group

Ned Borland – Next Generation Equity Research

Spartan Motors, Inc. (SPAR) Q3 2009 Earnings Call Transcript October 22, 2009 10:00 AM ET

Operator

Good morning, and welcome to the Spartan Motors third quarter 2009 earnings conference call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. This call is being recorded at the request of Spartan Motors. If anyone has any objections, you may disconnect at this time. I would now like to introduce Mr. Jeff Lambert on behalf of Spartan Motors. Mr. Lambert, you may proceed.

Jeff Lambert

Good morning, everyone, and welcome to Spartan Motors third quarter 2009 conference call. I'm Jeff Lambert with Lambert, Edwards & Associates. And I have with me today several members of Spartan's management team, including John Sztykiel, President and CEO; Joe Nowicki, Chief Financial Officer; and Tom Gorman, Chief Operating Officer.

I assume all of you saw the company’s earnings release on the Newswire and Internet this morning. The management will take a few minutes to discuss the results of 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 may be 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.

Quick word about the format of today's call. John Sztykiel will begin the call with a brief overview of the quarter. Joe Nowicki will then discuss the financial results and go over the operational results for each business segment. John will then conclude with an outlook for the future. And Tom Gorman will be available for Q&A at the end. We'll conclude with the Q&A, and as I said, at which time the operator will instruct you on how to enter the queue.

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

John Sztykiel

All right, Jeff. First, good morning to those that are listening to today’s call and on the Internet as well. As you saw in our press release, our 2009 third quarter results were highlighted by continued profitability as a result of swift actions we took to realign our cost structure to the current demand levels. Also very pleased with our ability to maintain margins and continue the history of positive earnings in the face of significant revenue decline. Honestly, this is extremely pleasing. Very few firms can operate this fast and in this kind of manner.

On our second quarter call, we indicated the several quarters will be challenging from a demand perspective. We also talked about our optimism for the future based and our intent to quickly change our cost structure while staying focused on our long-term vision to transform markets from commercial to custom. Simply we did what we said we were going to do. And again, not many firms do this.

We swiftly and successfully contracted our cost structure to match the demand in the market. We had great results over the last three years in the first half of 2009. However, society changes or markets change and so must our business model. This realignment restructuring took place and began -- began and took place in the third quarter, the results which will continue to unfold in the fourth quarter and 2010, as we continue our efforts on all fronts.

Our leaner cost structure will allow us to continue to build our balance sheet so that we can further pursue our growth strategy. Ultimately our aim is to embark on another run of consistent quarters of double-digit sales and income growth.

I guess from a people perspective, we have both Tom Gorman and Joe Nowicki in here, but what’s nice about both of their backgrounds is they come from variable cost structures, they come from markets which were highly competitive, where from a lean perspective, I think both the companies they came from and the markets they were in were farther along than where we are at today.

In a few minutes, I will talk about our progress in the area of transforming markets from commercial to custom or specialty vehicles, but first a quick recap of the financial results for the quarter, and then Joe Nowicki, our CFO, will get into greater detail. As with nearly all companies, we are seeing challenge in the demand side.

Sales in the quarter decreased 62% from last year’s level, driven primarily by the conclusion of a large defense contract procured in 2008. In addition, we saw the impact of the weak macroeconomic environment on our Motorhome Chassis RV business. We did, however, see increases in fire truck sales, emergency rescue, as departments continue to show preference for our products. Despite this decline in sales in some one-time restructuring charges, we maintained a healthy gross margin of 17.6%.

And if you look over the past three, five, ten years, healthy is a very, very good appropriate term, only slightly lower than last year. We also reduced our operating expenses by 30% from the prior year, a 33% reduction if you exclude the one-time restructuring charges. Again, Joe will go into greater detail. This allowed us to remain profitable. Plus with a renewed focus on our balance sheet, we doubled our cash position. Again, not many companies can make this statement.

In the quarter, we had $0.9 million in restructuring charges related to our cost structure realignment. Excluding these restructuring charges, the operating income was 2.4% of sales and adjusted earnings per share were equal to $0.04 per share. I should say $0.04 a share. Some of this restructuring took place midway to the third quarter. We do expect some additional operational cost savings in the fourth quarter and into 2010.

As mentioned earlier, from a lean perspective, we still have a significant way to go. All of these one-time costs were necessary to position the business at the right size and scale to drive continued profitability and growth into the future. We are pleased with our results in the quarter, and again in a few moments, Joe will provide more detail from a financial perspective.

From an RV perspective, in regards to order volume, things are moving in the right direction. In fact, our total orders for the quarter were up 28% from the second quarter, which may be an early indication that demand is heading in the right direction.

Now let’s get into the markets. In the RV industry, we are seeing a continued increase in orders, obviously not at 2006, 2007 levels, but significantly better than Q1 of 2009. This is probably due in part to some increased credit availability, our increased partnership with Fleetwood, and simply some people just making a decision to go out and buy a Class A motorhome.

Are we past the bottom? That I believe is yes. Is the trend up? The answer is yes. Should 2010 be better than 2009? The answer is yes. Will the growth be slow? Again the answer is yes. I do not expect us to see large double-digit growth in 2010 sales versus 2009, as there are still some major macroeconomic issues to work through with probably the number one being consumer confidence. And that must move in the right direction in a significant way before the RV industry truly busts out in the large double-digit macroeconomic growth.

In closing, on a very positive note, at RVIA in December of this year, we will be unveiling a concept that should allow Spartan Chassis to compete in all three RV markets; motorhome Class A through C, towables, and specialized. Hopefully some of you will be there. But I’ve been in this business since 1985, and one of the problems with our business model in the RV industry is the fact we do not compete effectively in the towable and the specialized part of the RV marketplace.

We will be showing a concept in December of 2009. The initial discussions with several OEMs relative to the concept had been extremely positive. We are excited about the debut. I doubt it will be much from a sales perspective in 2010. But if the concept is right, it should now place Spartan Chassis in all three parts of the RV marketplace, which could bode well for late 2010, 2011 and beyond.

Let’s switch over to the defense specialty segment. And simply, what we are seeing there are small order, small quote opportunities. This state of affairs should continue for the next several months. We will continue to increase the number of projects we are quoting on, the number of OEMs we are quoting to, and that is a good sign.

The reality, the defense specialty market business model will be one of the small wins, but we are in the industry for the long haul, and Spartan definitely has a role. I suspect the number of small wins will increase as time goes on. I’m excited about the strategy, the structure of the team.

In addition, as macro or large opportunities present themselves, obviously we will pursue those to the nth degree. We have been successful in the past. We look forward to success in the future, but from a reality or vision perspective, I see it being one of small wins as we look over the next six to nine months and addressing the macro opportunities as they come up. And we will take it one step at a time.

Switching over to emergency rescue, another solid quarter for the most part. Demand for emergency rescue continues to move in the right direction. The one negative, road rescue. It was a disappointing third quarter. Orders were off, gross margin decreased, as several of their designs released in April this past year at the Fire District Instructors Conference have been difficult to build at a level of high quality. That was probably the biggest disappointment.

We had made significant progress at road rescue in 2008, the first quarter of 2009, and then things started to come up on track late second quarter, third quarter of this year. However, we have made some leadership changes. We have made some process changes. From a leadership perspective, Dave Reid, who was the lead at Crimson Fire, and they are having an excellent year in 2009, now also has the lead at Road Rescue.

As we look at the emergency rescue market, it is simply a market of great opportunity. One, 11,000 people a day turn 50. As I have said more than once, and which is why one of the reasons we see this business model continue to grow for us, more of us are going to take a ride in an emergency rescue product whether we want to or not. Hopefully, it’s on a Spartan -- or in a Spartan. Once every 22 seconds, there is a fire call for help. Once every 1.25 seconds, there is an emergency rescue call, i.e., for an ambulance, a medical transport, et cetera.

From a data perspective, a market perspective, this is a market of tremendous opportunity. We have executed extremely well in the past. We look forward to the future. I’m excited about the strategy and the structure where Tom Gorman is leading the team and the group. It’s a market of momentum for us, and we are excited about the future.

In closing, it was exciting to see the release in the order for custom specialty ambulance chassis for Metro Dade and De Kalb County. Over the past couple of years, you’ve heard me and some others talk about our vision to transform the ambulance chassis market from commercial to custom.

Today, in the fire truck marketplace, just over 60% of all the vehicles are purchased on a specialty or a custom chassis. Our vision is to have, hopefully, the same results, hopefully greater market share, and we have a strategy and the structure in place to make that happen. Our desire is not to take 30 years to get there, but it was great to see those initial set of orders from De Kalb and Metro Dade on the Furion chassis.

In summary, again, we are excited about emergency rescue relative to 2009 and as we look at 2010. In the service parts and accessories side of life, as noted in the release, the business was down, as a significant amount of product was delivered in previous quarters.

In addition, the operational use of our products in Iraq, MRAP-based product configuration continues to decline, as the situation improves. As we look to Afghanistan, relative to the flow of MRAPs in the theater, as their operational use increases, the opportunity for service parts and assemblies will continue to grow. And we have the right strategy, the right structure, i.e. the right team in place to pursue and take advantage of that.

It is important to note though that MRAPs, Mine Resistant Ambush Protected vehicles, are different than MATVs. We are focused and we participate on the MRAP side of life. As a whole, SPA has been a great market for Spartan. Since 1975, Spartan has placed into operation over 65,000 vehicles, and each one represents an opportunity to maximize value in its lifecycle. Whether it’s emergency rescue, RV, defense, specialty, future markets are developing the opportunity to develop the right strategy and structure. It is there, it’s in place, and it’s moving forward.

In summary, and then I’ll turn it over -- I'm sorry. In summary, before I turn it over to Joe, it was a positive quarter, one of the best we’ve ever had, even though earnings were down, but we did a lot of things right. I’ll Joe continue into the financials and then we will work to wrap it up from there and open it up to questions. Joe?

Joe Nowicki

Thank you, John. And good morning, everyone. As John described, although our numbers reflect significant declines in the prior year, our ability to remain profitable and significantly strengthen our balance sheet, while incurring almost $1 million to restructure the business is a testament to the agility and determination that exists in this company.

That said, we are encouraged by the results we saw in the quarter. As I noted in the press release, this quarter was a preview of where we are moving as a company, the business model where we can maintain solid gross margins and operating income despite volatile demand, while also strengthening our balance sheet along the way.

Third quarter net sales were $89.7 million, down 62% from the prior year. The majority of the decrease was in the Other Product sales category due to the conclusion of a large defense contract in 2008. In addition, our motorhome chassis sales declined 30%. Although on the positive side, sales of fire truck chassis increased 20% in the quarter and emergency vehicle team sales increased by 5%.

The really good news is that orders for the third quarter were up 28% from the prior year, driven by the strengthening demand from motorhomes and fire trucks. In fact, our motorhome order intakes in September was the highest since May of 2008 and our fire truck chassis order intake for the third quarter was the highest third quarter we’ve seen in the 10 years we have been tracking this detail.

Spartan Motors consolidated backlog was $157.5 million as of September 20, 2009. Within this number, fire truck chassis backlog increased 16%, motorhome chassis backlog increased almost 6%, which is an encouraging sign. Backlog for our other products, which includes chassis for the defense, such as the MRAP vehicles, was down 72%, again in line with the lack of large scale contracts year-over-year. The EVTeam backlog was mostly unchanged compared to the prior year.

Gross margin percentage in the quarter was 17.6%, a decline from last year of only 50 basis points on a $148 million decrease in volume. This is a significant highlight and gets to our renewed disciplined on cost controls and operational efficiency to flex the business to current demand. Driving our gross margin improvement was the better product mix from increased sales of fire trucks, especially higher end trucks as well as lower commodity costs. These factors helped to offset a large loss of leverage from the lower volume, though cost of sales also includes roughly $300,000 in restructuring costs.

Moving on to operating expenses, for the third quarter, they were $14.6 million compared to $20.9 million last year, an improvement of approximately 30%. This number also included about $700,000 of restructuring costs. Excluding those, it’s a 33% impact. The year-over-year reduction is a result of lower incentive compensation, lower legal costs, as well as the start of the improvements due to our cost realignment work.

Talking about that for a minute, over the quarter, we aggressively sized our business in line market demand. We have reduced our staffing level by 14%, eliminated one of our older facilities, and have eliminated several other program and external costs. During the quarter, we also incurred some one-time costs to increase our AR reserves for approximately $600,000 to reflect a specific dealer issue in our EVT business.

Total restructuring expenses related to our operational alignment in the third quarter were $900,000. Operating income in the quarter was $1.2 million, or 1.3% of sales. However, when you exclude the non-recurring expenses, our adjusted operating income was $2.1 million, or 2.4% of sales.

Our effective tax rate in the quarter was 34.1% and 34% for the nine-month period. Net income in the quarter was $749,000 or $0.02 per share. When you exclude the non-recurring expenses, our adjusted diluted earnings per share would be $0.04. We had positive operating cash flow of $20.6 million in the current quarter because it improves working capital, primarily due to our focus on AR collections and inventory reduction.

We ended the quarter with $36.3 million in cash and cash equivalents, as well as $15.2 million in long-term debt. While we made some great progress in strengthening our balance sheet again this quarter, we still believe we have more that we can make in further managing our working capital. In addition, we have a $50 million unused credit facility, which provides us significant financial flexibility.

Depreciation for the quarter was $1.8 million. Our year-to-date return on invested capital was around 9.1%. Spartan Motors in each of our subsidiaries uses ROIC as a key measure of our progress. It’s also related to our bonus program for management and associates, which is based on an economic value-added financial model.

As noted in the press release, we define ROIC as operating income less taxes on an annualized basis divided by shareholders’ equity. This quarter was below our company target. With lower year-over-year sales, our ROIC was pressured despite our strong gross margin. As previously discussed, we currently have focused efforts to improve our capital base as well as grow our earnings to drive the increased ROIC into 2010. We continue to forecast capital expense spending of around $5 million to $6 million in 2009.

And with that, I’ll turn the call back to John who will share some final thoughts on our outlook as we move into the final quarter of 2009 and into 2010.

John Sztykiel

All right, Joe, thank you very much. The reality is people, you, myself included, all of us desire to see the run of operational results we’ve had for the past three to five years to continue every quarter. But simply that is absolutely not reality. Society changes, thus business models must, which is why this quarter was probably one of the best quarters we have had from a strategic perspective, positioning the organization for future growth and from an operational perspective, focusing the organization on short-term results.

First, we realigned, restructured the business, yet made money. Very few firms do this. And for those of you new to the Spartan business model, we were born out of the bankruptcy of Diamond Reo Trucks in 1975. And there have been a few bankruptcies over the past four to six quarters. And as I continue to educate both people internally and externally, when you were born out of a bankruptcy, you never ever want to go back.

Number two, people, the additions of Tom Gorman and Joe Nowicki, very customer-centric, very focused on lean, with demonstrated past results, as they look to change, influence our culture, the strategy, the structure, how we operate, we will become a more effective, a leaner operation.

Third, financially, as Joe mentioned, the cash position, the credit line, where we are from a financial perspective is absolutely excellent. This excellence will allow us to strategically grow and diversify our business model, both organically and through the right M&A.

The next two to four quarters obviously will be challenging, but where we are at today, the trend, the opportunities are in our favor. And while we do have a lot of work in front of us, it is not going to be easy. The trend, the opportunities, as mentioned a few moments ago, are in our favor. And we look forward to executing tomorrow just as we have been over the past several years, no different, in a highly performance oriented manner and also one of integrity.

Jeff?

Jeff Lambert

Operator, if you can up to Q&A?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Walt Liptak at Barrington Research.

Walt Liptak – Barrington Research

Hey, good morning, guys. Walt Liptak with Barrington.

John Sztykiel

Good morning, Walt.

Walt Liptak – Barrington Research

Congratulations on a great quarter.

Joe Nowicki

Thank you.

Walt Liptak – Barrington Research

I’ve got a -- my first question is on your comments about MRAPs in Afghanistan. Do you know the number of MRAPs that are operating in that country?

John Sztykiel

Walt, this is John Sztykiel. We don’t know the number. We do know the number continues to grow. I think the last note we had seen published in the press that the IED rates were now at a rate of 800 per month and the trend was up. Obviously, that number will decrease as the snow continues to fall and winter starts to set in. But at least from an operational perspective, the number of MRAPs is up versus what they forecasted 18 months ago. So we see this as a positive trend.

Walt Liptak – Barrington Research

Okay. I’m sorry, the number you’re quoting is there is 800 IEDs exploding per month?

John Sztykiel

Yes. I think that was the last quote. No, I’m not sure if that was July or August. But that was the last stated quote from an IED perspective.

Walt Liptak – Barrington Research

Okay. But let me ask you this. What do you expect the run rate for MRAP parts might be over the next couple of quarters?

John Sztykiel

You know, honestly, that is hard for us to make an estimate. I mean, those discussions are going on right now. We’ve had people overseas to try to understand that exactly, because when you have a product that has a tremendous success rate from a survivability perspective, it is imperative that you have the right part at the right place at the right time. I will say this. I think one of the things, which is important to note in getting into the detail, that MRAP-related products where Spartan has participated in have a high level of operational performance and readiness in theater in Iraq and we are focused on the same business model in Afghanistan.

There also is the opportunity to upgrade the suspension systems into a bigger engine, et cetera. I mean, one of the things from just a pure geographic perspective in Afghanistan, and it relates to MRAPs, is Iraq was mostly flat. Only to the north that you only [ph] start to get into some mountainous areas where for the most part, Afghanistan is very, very mountainous all over. And it’s no different than the fire truck or the RV business. When you have mountains, you need more horsepower to get a heavy object up the hill.

Walt Liptak – Barrington Research

Okay. If I could switch to SG&A, Joe, you guys did a great job of bringing the SG&A down to that $9.7 million. Is that a good run rate, or is that trend lower because of some of the costs out this quarter?

Joe Nowicki

No, I think what you will see is we are continuing to push that one down a little bit further as well too, Walt. So -- we did a great job this quarter. What we want [ph] to do is the $14.6 million of spending. As we described, there is about $700,000 of restructuring costs in there as a one-time perspective. And I also talked about in the call, we also had some one-time increases for our reserves, specifically on the receivables. A little bit on inventory as well too that drove another $600,000 to $700,000. If you take both of those out from a pacing perspective, that gives you a good idea of where we are at. But we are also not done yet. The work that we are doing on realigning our cost structure, we’ve got a great team looking across the organization at what we can do differently. And there is a phase two of that work currently going on. So, we expect to continue our efforts to drive additional lean improvement through our cost structure.

Walt Liptak – Barrington Research

Okay. That sounds good. And then --

John Sztykiel

Walt, one second. You know, I’d also like to have Tom Gorman jump in, our Chief Operating Officer, on just some of his thoughts and initiatives relative to reducing our total cost structure, i.e. lean. Tom?

Tom Gorman

Two areas, Walt, that we are looking at from a macro perspective. And Joe and I particularly have spent a lot of time together really looking at any of the redundancies that we have across the business units to really say where can we -- where can we get ourselves to get -- getting something that make sense, especially on transactions that we can look to do a one-out rather than a three or four-out. The second thing that we are looking at is, we are taking a look at all stuff we’ve got in the footprint. Where can we consolidate some office space? Where can we pull some operations into other existing buildings? Where can we get -- lower utilities that we’ve got? Where can we take some things into a temporary shutdown? So, all of that is ongoing and there will be further alignments coming up.

Walt Liptak – Barrington Research

Okay, good. That sounds great. Let me ask just kind of generally, Joe, you talk about staying profitable as part of the new strategy. Is there an expectation that every quarter -- you know, fourth quarter, each quarter in 2010 that Spartan will be profitable, will have EPS positive?

Joe Nowicki

Walt, I think that’s probably good expectation, for every public company out there should have that goal in mind. Wouldn’t you?

Walt Liptak – Barrington Research

Okay. Yes, but it’s a bad recession. I mean, there are a lot of companies that are going negative EPS.

John Sztykiel

Just a second. Let me jump in here. Walt, the expectation is there. And that’s why my excitement relative to Tom and Joe and some of the adjustments, realignments, restructuring they are making put us in that position. But it gets back [ph], when you are born out of a bankruptcy, and as I educate people here internally, companies that make money every quarter really go out of business. And --

Walt Liptak – Barrington Research

Okay. I understand. Let me just ask one more on inventory. Inventories still look high. What’s a good level? Can you get $20 million or $30 million of cash out of inventories?

Joe Nowicki

Great observation, Walt. You’re right on track. While we made great improvements this quarter on the receivable side of business, I mean, we have a focus team going after, really looking at the collections part. Tom and I, one of the items that we’ve got (inaudible) to get after the inventory pieces, Walt, we do think there is some opportunity in there. Now, it’s going to be offset of it. We do know that we are increasing our inventory of some engines. With the 2010 engine change over transition taking place, we are increasing our engine inventory as a result of that. But we do think when we look at it [ph], there is clearly some opportunity to take the inventory level down. They are much higher than they need to be. Tom?

Tom Gorman

We’ve put together bogies that we’ve seen from past experience in larger industries from what we see both in terms of the spares in the after-market as well as our traditional assembly operations. And the turns are far from where they need to be, Walt. No question about it. But the bogies are there, and we are picking up the practices that will drive those down.

Walt Liptak – Barrington Research

Okay. Is there a dollar amount that you can give us on the engine inventory for the fourth quarter?

Joe Nowicki

Our intent is to contain that incremental inventory. There are other reductions that we are going to put in place to get us the inventory (inaudible). So Walt, you shouldn’t see an increase in inventory for the engines. Our intent is to work through other ways to take the inventory levels down as a result.

Walt Liptak – Barrington Research

Okay. So the inventories might be flat in the fourth quarter sequentially, but then go down in 2010?

Joe Nowicki

Our hope will be to take them even down in the fourth quarter as well too, but we’ve got to work it out for us.

Walt Liptak – Barrington Research

Okay. Good work. Thanks.

Operator

The next question comes from Joe Maxa at Dougherty & Company.

Joe Maxa – Dougherty & Company

Thank you. Regarding the fire truck, nice quarter in orders. How do you see Q4 shaping up ahead of the January 1st changeover?

John Sztykiel

From an order intake perspective, I think when we look at emergency rescue product, we would probably see the order rate continue to grow -- Joe? -- as people start to recognize just a significant increase from an emissions perspective. From a production perspective, I think where the production schedules are at today is where they are at. And I’ll let Tom talk a little bit about the focus on the operating and efficiencies. But I do expect to see the order rate continue to move up a little bit in Q4 versus Q3, as people try to take advantage of the emissions pre-buy [ph]. Tom?

Tom Gorman

In addition to that though, Joe, we are also tracking the degree, as John mentioned, over the custom versus the commercial chassis, and that’s increased. And we are seeing in that segment an increase in our share. So while it’s hard to separate out everything ahead of the 2010 (inaudible), we are tracking better in both the segment that we play in and in our own particular share. That being said, as we went through the restructuring, we did lean out our fire truck operations and re-balanced our alliance without any loss in the customer service. And we feel very confident going into the fourth quarter. I don’t -- we are not anticipating a huge spike, but we are watching very carefully what’s going on in the marketplace with that and keeping our customers informed.

Joe Maxa – Dougherty & Company

Okay. Given that we are having some strength now, how does fiscal year ’10 look, assuming there are some pre-buys here in Q3 and Q4?

John Sztykiel

As I mentioned earlier, when I covered the emergency rescue segment, as we look at ’09 versus -- I should say as we look at ’10 versus ’09, I mean, we see the trend up. Is it going to be a gigantic trend-up? Probably not. But we do see the trend-up as we sit here today. And in today’s economy, that’s a very, very good trend. Now, on the side which we don’t know, we’ve got some products, which we’ve introduced over the last 12 to 18 months, new products in emergency rescue, we’re going through the execution process of certain market development relative to the new products. And if those happen to gain traction faster than what we anticipate, then we could surprise not just others but ourselves as well, or right now I’d say the trend is up, but it’s not going to be up in what I would call a large double-digit kind of perspective.

Joe Maxa – Dougherty & Company

And when you say emergency rescue, you’re talking fire truck chassis plus your EVTeam segment, right?

John Sztykiel

Correct. Fire trucks, ambulances, bodies, et cetera. You know, everything in emergency rescue.

Tom Gorman

Right. Just to add some clarity to that, Joe, I think what John (inaudible) he didn’t talk about the defense business. Obviously, if you include the defense business in there, that obviously [ph] can put in a different perspective year-over-year. Right?

Joe Maxa – Dougherty & Company

Absolutely.

John Sztykiel

Right, but not -- I'm separating out the defense -- just emergency rescue, when you -- when you put in everything that we do in emergency rescue, we expect ’10 to be up versus ’09.

Joe Maxa – Dougherty & Company

And let me ask you about your gross margins. The trends that we should see, motorhome segment starting to increase and has a lower margin; military segment, higher margin, obviously dropping off; should we expect margins from these levels actually trend down a little bit going to Q4 and into fiscal year ’10?

Joe Nowicki

I think the things you mentioned, Joe, are clearly don’t have impacts on us on the downside. But there is a lot of stuff that Tom and the team are doing to drive some value on the upside to margins as well too. There are improvements that we are making to our manufacturing processes, which should help to drive some additional efficiencies as well too. So there is not all bad news. The things you mentioned from a mix perspective certainly will have a little impact to us.

John Sztykiel

I think what Joe is saying though in summary is that while there is the opportunity for maybe a slight degradation in gross margin, if there was going to be a degradation in gross margin, it should not be large, because we’ve got a lot of initiatives in place to improve all that we are doing.

Joe Maxa – Dougherty & Company

Right. And what was your headcount at the end of the quarter?

Joe Nowicki

Somewhere around 1,000 people approximately.

Joe Maxa – Dougherty & Company

Okay. Thanks, guys.

Joe Nowicki

Yes.

Operator

The next question comes from Frank Magdlen at The Robins Group.

Frank Magdlen – The Robins Group

Good morning.

John Sztykiel

Good morning, Frank.

Frank Magdlen – The Robins Group

On the EVTeam side of things, is this production issue -- is that last (inaudible) to go into the fourth to maybe the first quarter of next year?

Tom Gorman

(inaudible) Can you repeat that again?

Frank Magdlen – The Robins Group

You introduced -- if I understood it right, you introduced some new product and you just look back into -- and you weren’t profitable in that group in the quarter. You had been for a quarter or two. And I’m trying to find out if that’s a -- if you’re claiming out of it in the fourth quarter and the first quarter, this coming year, or whether we should expect another loss quarter, say, in the fourth quarter?

Tom Gorman

No, we are really working hard to claim out of that. We’ve given the resources down to Road Rescue and Dave Reid is marshalling everything down there that we need to do to get that product right and really put the Road Rescue image there. We are feeling confident on where we are going to go. And we’ve given the resources to Road Rescue to make that happen.

John Sztykiel

But Frank, getting back to your question, and you made a quick statement there, while we expect to see improvement in Q4 versus Q3 at Road Rescue, we are not in the position to say that as of this moment in time that we expect them to be profitable in Q4 versus Q3.

Frank Magdlen – The Robins Group

Okay. And what’s happening in the aerial side, John?

John Sztykiel

From an aerial side perspective, I mean, there is a lot of positives from an operational perspective and that the gross margins have moved in the right direction in 2009 versus 2010 and as a company as a whole, Crimson Fire continues to move in the right direction. I will say this that from an aerial perspective, the pricing pressure from an order -- I should say, from a bid to order perspective relative to aerial that there is a significant amount of pricing pressure at this time in 2009 versus this time in 2008. How that rolls out into the future? I think what we will probably see in aerials is we will probably see some improvements from an operational perspective. However, we could see some pressure from a gross margin perspective. I think we are moving forward in the right direction operationally. But the orders are hard to get and the orders are definitely being priced a little bit more aggressively at this point in time versus where they were a year ago.

Frank Magdlen – The Robins Group

Okay. Will there be any restructuring costs in the fourth quarter?

Joe Nowicki

We tried to get as much of our restructuring in place in the third quarter as we possibly could. There might be some incremental amounts that to this point there is nothing large anticipated.

Frank Magdlen – The Robins Group

All right. And then, Joe, will CapEx be about the same in 2010?

Joe Nowicki

Yes, there isn’t anything large anticipated going into 2010. This year, as I mentioned, we will end up somewhere between $5 million and $6 million. And there aren’t any other significant changes in next year.

Frank Magdlen – The Robins Group

Okay. And then, John, what are you going to do with your cash now? And you probably won’t have to rebuild or build the balance sheet as much as you did. Are you considering going back in the market and repurchasing shares?

John Sztykiel

First, you know, I just want to provide some clarity to a statement you made and others may have missed. But as we look at the CapEx over the next couple of years, we really have a significant amount of capacity available and we don’t see really any need from a brick-and-mortar perspective to invest the money within our group of companies. So that’s extremely positive. Relative to a stock buyback, to an M&A, or to opportunities from an organic perspective, what we are going to do is do I think what most great companies do is we are going to evaluate what are the benefits relative to maximizing shareholder, stakeholder value. We’ve got a variety of initiatives in front of us relative to stock buyback. We’ve got an allocation in place. We’ve got a methodology as to how we evaluated that in place. And we will make the right decisions accordingly. So that’s probably the best clarity I can give you at this point in time.

Frank Magdlen – The Robins Group

All right. Thank you.

Jeff Lambert

John, could you talk a little bit about the addition of M&A to the organic growth opportunity?

John Sztykiel

Well, that’s a strategic shift for us. And the primary reason of the strategy shift for us -- I should say, the primary reasons is, one, as a company, we’ve done very good on the organic or the opportunistic side over the last three to five years. We have not participated on the M&A side of life. And that’s for a number of reasons. One, we had so much going on internally from an organic and an opportunity perspective. We didn’t have the time. Just as important though, we didn’t have the talent or the people. We’ve got two people in the room today, plus a few others that are not in this room. But one of the things, which is nice, is what Tom Gorman and Joe Nowicki bring to the team, is they have got demonstrated excellence on the organic side of life. So, is that now part of our strategic growth plan? Absolutely.

What reassures me each and every day, and instead of moving forward on that strategy with the same team as what we had over the last three to five years, which was not strong on M&A, we now have several members as part of the team who do have demonstrated strength in M&A. We’ve got inappropriate, what I would call, cash position/credit position. We are evaluating companies on a consistent basis. We’ve got a variety of initiatives in place. But when we make the decision, it will be the right decision at the right time from both the strategic, operational and price perspective. Joe, Tom, I’m not sure if you guys have any comments.

Joe Nowicki

The only other piece that I would add, John, is that as we think about the answer to your question, Jeff, from an M&A perspective, what would be looking for, I mean, it’s really -- the ability to enter into new and complementary markets. So, as we’ve talked about diversification and diversifying some of the end markets that we look into, also our ability to increase share or complete our product offering in some of the core markets is another area, we’ve talked about our desire to increase our global presence as well too.

And obviously, any way that we can look for opportunity to leverage our custom manufacturing expertise, it’s another area that we would want to pursue as well too. So just to give you a little idea for that. And also, as you know, our track record is one of profitability. So we -- as we endeavor to look that avenue, we look for partners that would provide some immediately accretive to earnings and having a focus on ROIC similar to what we do today too.

Jeff Lambert

Operator, do we have any further questions?

Operator

(Operator instructions) We have a question from Ned Borland at Next Generation Equity Research.

Ned Borland – Next Generation Equity Research

Good morning, guys. I just had a question on the restructuring efforts here. You mentioned the plant consolidations. I’m assuming some of those facilities were the ones that you have bought in the run-up of the MRAP production. Are we to assume that you just don’t need these facilities anymore or -- the anticipated volume is for smaller programs, but can you just help us think through this?

Joe Nowicki

I’m going to hand it -- this is Joe. I’m going to hand it over to Tom because Tom has had his team do a pretty thorough look across our facility in total and what our kind of needs are going forward into 2010. And he can describe the one action that we’ve taken (inaudible) but let him walk through that. Maybe at the end of Tom’s comment though, I’ll come back to you on this whole restructuring savings as well too and what we anticipate out of that, I think, as part of where your question is going.

Tom Gorman

Ned, over the past couple of years, we’ve had people spread all over the campus here, especially during the high growth areas [ph]. And one of it -- one thing that we did was just, as we downsized the SG&A and did some of the restructuring, we (inaudible) everybody into one building. We do have plans for the other buildings in terms of the potential market on the organic growth side that we are looking at and working on here over the next couple of quarters. But a lot of them were some consolidation making sure that we don’t have redundant operations or redundant SG&A. We’re doing it [ph] one time here among the several buildings we have in Charlotte. We do have one building that we are taking down. But everything else is turning the heat down and let it run at about 45 or 50, working our spares through there on some of the bigger military things and just getting ourselves tighter around the buildings that we make the best use of.

Joe Nowicki

So the structure cost that we did take around the one building in the quarter wasn’t one of the newer facilities around that, but it was one of -- it's our kind of oldest in the complex, the buildings that we needed to do a lot of repair and maintenance, and other two if were going to keep it around. And obviously we did need it from a space perspective, so what we will be doing is really eliminating that building and get rid of all together.

Ned Borland – Next Generation Equity Research

Okay.

John Sztykiel

You know, one of the comments -- just a statement I’d like to make towards that, Ned, is as a company, one of the areas where we have invested some capital in 2008 and 2009 has been establishing a strategic fab presence within Spartan Motors, Inc. And in our business model, because it’s very customer-centric, over the past several years, historically we’ve outsourced almost everything. And what we are doing now is looking at the opportunities where we could actually fab -- cut and fab parts as it relates to short delivery, small volume where we have been paying very, very high prices. So, as a company, we are evolving a little bit and that we are probably going to be bringing a little bit more of our parts fabrication in-house to actually reduce our cost base. And this would not only support the needs of Spartan Chassis, but over time we will support the needs of Crimson Fire and Road Rescue as well.

Ned Borland – Next Generation Equity Research

Okay. And then sticking with SG&A-related costs, it looks like they came in at about 15% of sales if you include the SG&A and R&D piece. And maybe I missed it, but was there a sort of a goal that you guys expect to reach and bringing these for us down as a percentage of sales?

Joe Nowicki

Maybe I’ll elaborate a little bit more on what we’ve done through restructuring (inaudible) for the magnitude of our efforts. Even though we talked about -- in the quarter, we reduced our staffing level by about 14%. If you go back and you look at some of our peak staffing levels, like back in the 2007 timeframe, it’s really -- we are closer to over 40% reduction in October headcount since that point in time. So we made another effort this quarter to align us again to the current size of the business. If you look at all of the reductions that we’ve made and what we have -- the teams have been looking at, we are pacing for really anywhere between a $7 million to $8 million reduction in operating expenses from where we have been pacing as a result of the restructuring efforts that were announced and what we just put in place. So, a pretty big number.

So, as we look forward into 2010, if we go historically, our operating expenses have been more around a 10% to 12% of sales goal, which was where we have been historically. It would be a challenge to get down to that low end of it, at the 10% number, because of the fixed costs in buildings we’ve taken on since then. But should we able to close that gap and get down to the 13%, 12% of sales numbers? Yes, absolutely.

Ned Borland – Next Generation Equity Research

Okay. Thank you.

Operator

We show no further questions at this time. Would you like to make any closing remarks?

John Sztykiel

This is John Sztykiel. And first, again, thank you very much for your time. And while the next two to four quarters obviously will be challenging as we continue to realign and restructure the business or to execute certain operational and strategic initiatives to both grow and diversify the business, the trends and attitudes are up. And attitude reflects leadership. And we have definitely improved the leadership not just within Spartan, but within all of our business units.

Next, from an Investor Relations perspective, starting in the month of December, we are probably going to be a little bit more active visiting a variety of cities. Would it be Joe Nowicki, Tom Gorman, myself or a group of us, we will be working through Jeff Lambert in his firm at LE&A. And so therefore, if you have any interest, the desire to meet, et cetera, please take those through Jeff and/or Joe. And we’ll work to try to accommodate as many needs as possible.

We are excited about not just today, but we are excited about tomorrow as well. We finished up the quarter being positive, i.e. profitable. And that’s important. But the reality is that’s the past, and we are focused on not just today, but tomorrow as well. Thank you very much.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Source: Spartan Motors, Inc. Q3 2009 Earnings Call Transcript
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