Spartan Motors' (SPAR) CEO John Sztykiel on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: Spartan Motors, (SPAR)

Spartan Motors, Inc. (NASDAQ:SPAR)

Q1 2014 Earnings Conference Call

May 7, 2014 10:00 a.m. ET

Executives

John Sztykiel – President and Chief Executive Officer

Lori L. Wade – Chief Financial Officer

Analysts

Joe Maxa - Dougherty & Company

Shivangi Tipnis – Global Hunter Securities

Robert Kosowsky – Sidoti

Rhem Wood - BB&T Capital Markets

Operator

Good morning and welcome to Spartan Motors First Quarter 2014 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 objections you may disconnect at this time.

I would now like to introduce Greg Salchow, Group Treasurer for Spartan Motors. Mr. Salchow, you may proceed.

Greg Salchow

Thank you, Kate. Good morning everybody. Welcome to the Spartan Motors first quarter 2014 earnings call. I’m Greg Salchow and I’m joined on the call today by John Sztykiel, President and CEO of Spartan Motors; and Lori Wade, the Chief Financial Officer.

Before we start today’s call, please be aware that certain statements made during today’s conference call, which may include management’s current outlook, viewpoint, predictions and projections regarding Spartan Motors and its operations, may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. I must caution you that as with any prediction or projection, there are number of factors that could cause Spartan’s result to differ materially. All known risks, our management believes could materially affect the results are identified in our forms 10-K and 10-Q filed with the SEC. However, there may be other risks we face that we cannot anticipate. During the question-and-answer period, please ask one question and one follow-up and that will give everybody the opportunity to ask a question.

Now I’m pleased to turn the call over to John Sztykiel for his opening remarks.

John Sztykiel

Thank you, Greg. Good morning everyone and thank you for joining us on Spartan Motors first quarter 2014 conference call. In the first quarter of 2014 we continued to execute our drive strategy in a disciplined fashion.

Our Delivery And Service, and Specialty Chassis and Vehicle business segments were both profitable, while we made progress in the turnaround of our Emergency Response Vehicle business, specifically the body of the vehicle group.

In the first quarter, Spartan posted a net loss of $2.1 million or $0.06 per share compared to a loss of $4.3 million or $0.13 per share in the first quarter of 2013. The main driver of the improved financial performance this year was our Delivery and Service business which posted an operating profit of $2.6 million versus a loss of $4.0 million in the first quarter of 2013 a year ago. We had a full quarter of walk-in van production at the Bristol, Indiana Facility this year. As you will recall, the Bristol plant began walk-in van production in mid February 2013.

DSV also shift approximately $7 million in reach orders that were delayed from the fourth quarter of 2013 due to a component shortage from a supplier. The Reach program also achieved a milestone in Q1 of this year, being profitable for the first time. Due to the improvements we have made in simplifying the Reach’s build process, reducing build material costs, along with better pricing, we expect a 670 unit order now entering production to be more profitable than previous orders.

Switching to Emergency Response, as expected it remained a challenge in Q1 of this year. ER posted an operating loss of $3.7 million versus a loss of $2.6 million in the first quarter of 2013. The operating loss was due to lower sales of Emergency Response Chassis which is by far the highest margin in the Emergency Response Vehicle group and operating losses in the fire truck body business. In terms of operations, the ER body business or Emergency Response Vehicle group as we call it, showed improvement compared to the first quarter of 2014 and the fourth quarter of 2013. This indicates our action plan is gaining traction. The ER body business recorded revenue growth compared to the first quarter of 2013 due to higher price and more complex product mix.

We also completed more trucks during the quarter that were not invoiced to customers. Four of these five trucks were displayed at FDIC Show in April. These five trucks totaled approximately $2.9 million in revenue that will be invoiced in the second quarter of 2014 rather than the first quarter. The challenges we face in the ER body business, the Emergency Response Vehicle group, are concentrated in five major areas, pricing/healthy orders. There’s a point of reference though that we’re making progress and there’s light at the end of the tunnel. As we look at 2015, there are only 15 orders that are unhealthy. So as we move through 2014, we expect not only operational improvement, but financial improvement as well, as we work through a backlog of unhealthy orders.

The second major area is direct labor efficiency. The third area we’re focusing on is SG&A spending and overheads. Fourth, building material cost, five, [top queue or constant poor quality] as we call it. As a whole, we have an action register of over 50 items that are targeted against these five major areas and each area where we made progress in Q1 of this year versus Q4 of last year. Another point of reference is the Emergency Response Vehicle groups, its master production schedules or MPS as we call it, in the first quarter of this year and April as well added a very, very positive change since it is much easier to improve efficiency, financial results when there’s consistent production flow.

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

As I also stated on our last conference call, we will fix the business first and the financial results will follow.

Spartan ER reported a loss for the first quarter as expected. The progress was made in all five key areas. However complicating our outlook for the second quarter is a computer server and backup failure we experienced late April, early May at Brandon. There was minimal impact through April as we overcame the issues through data recovery et cetera, but we expect to see some manufacturing impact it in mid-May. This recovery process is in motion. We are working to minimize the impact, leverage all of our locations and expect to have greater clarity by the end of May, at which time we plan to provide you with an update. As we move beyond this challenge, we expect better pricing, higher volume from expanded manufacturing capacity, the Peru ramp up in Charlotte and improved financial results as we move through each quarter of 2014. Our goal remains to return ER to profitability by yearend, no different than what we did last year in DSV, a goal we accomplished.

Now switching over to DSV, they had an excellent quarter, reporting an operating profit of $2.6 million versus an operating loss of $4 million last year. This greatly improved financial performance is the result of all the operational improvements DSV has made at its Bristol facility, along with higher revenue and profitability of the Reach. As mentioned, operational performance has improved over the past year when DSV moved walk-in van production to Bristol. To give you an example of their improvement, walk-in van production cycle time now stands at 3.8 days versus 16.4 days a year ago at the Wakarusa complex. that’s a pretty dramatic increase. While we have made progress though, we are not satisfied as we have not yet attained all of our operational planned targets associated with the move. We are very, very focused and in a disciplined way we are working to overcome each one of the issues to indicate or to get to where the plan was, to ensure we get the right return on our investment to drive shareholder value in the right direction. We will get there, but I believe it will take two to three more quarters before we hit plan, but it is clear we are making progress.

Switching over to Specialty Chassis in vehicles, the defense, motor home and Isuzu segment. That segment was profitable for the first quarter of this year despite a $3.8 million decline in the after-market parts and assemblies, demonstrating our disciplined ability to manage cost. APA revenue declined due to a reduction in defense related sales. To offset the impact of defense budget cuts, APA is adding more nondefense after-market parts and assemblies to its product line. We expect this to be an ongoing initiative that will pay dividends over time, but will not immediately offset the loss of defense related sales.

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

In addition, as we have talked with motorhome manufacturers and dealers, we believe higher dealer inventories are at least partially due to exceptionally severe winter weather experienced in most of the country. As dealers work off the inventory, RV manufacturers may increase their production in Chassis orders, but we are also being very conservative in our own planning. We have reduced production rates, adjusted costs, adjusted discretionary spending in the motorhome chassis RV arena to reflect the more conservative outlook.

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

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

Lori Wade

Thank you, John. Good morning to everyone on the call. Looking at the first quarter 2014, while Spartan reported a net loss of $0.06 per share, a loss was as expected as we discussed during the yearend 2013 call. Performance in the first quarter 2014 was significantly better than a year ago, when Spartan reported a net loss of $0.13 per share. Revenue in the quarter was $128 million, up 33.2% from the same period last year.

Gross margin improved to 10% from 6.6% in the first quarter of 2013. Gross margin increased due to higher revenue, which provided greater overhead absorption compared to the first quarter of 2013 which also included startup costs and operational inefficiencies stemming from the launch of the Bristol facility. Looking forward, we see opportunities to expand gross margins as efficiency improves and revenues increase throughout the company, especially in the ER segment.

Selling, general administrative expenses increased by $3 million in the first quarter of 2014. Approximately $1.6 million of the increase was due to higher marketing and selling expenses and commission. As we stated in our press release, we streamlined our corporate structure during the quarter, which resulted in the elimination of several corporate positions and severance expense of $1 million. These changes are intended to push more decision making and accountability to the segment level and should result in an annual cost reduction of $0.9 million.

The other major component of SG&A expense growth was the timing of restricted stock grants. This year restricted stock grants were made in the first quarter, resulting in stock grant expense of $0.3 million. While in 2013, the stock grant expense was incurred in the second quarter. Severance of stock grant expense in the first quarter of 2014 totaled approximately $1.3 million before taxes or approximately $0.2 per share.

Spartan ended the first quarter with cash of $27.2 million compared to $16. 6 million at March 31, 2013 and $30.7 million at yearend 2013. Compared to the yearend 2013 cash figure, the declining cash was predominantly due to the increase in receivables more than offsetting a decline in inventory due to the shipment of the Reach vehicle inventory in the first quarter. Reach vehicle inventory will continue to decline, but we expect to see some inventory buildup as we produce the Peru fire truck order.

Now taking a look at our outlook for 2014, we continue to project revenue in the $500 million to $525 million range. We’re on track to ship approximately $14 million in Reach vehicle inventory in the first half of the year that had been delayed by a component shortage. _ ER has started the production build of the 70-unit Peru order with the first installment scheduled to ship late in the second quarter. Backlog in both the ER and the DSV segments appear solid, if more heavily weighted towards the second half of the year. We have less certainty about the motorhome chassis production as John had mentioned, but that has been taken into account into our revenue forecast. We typically don’t provide segment level guidance, but in the case of DSV, we’re making an exception this quarter. Keep in mind that the $7 million of delayed Reach vehicle in the first quarter, inflates the revenue run rate.

We project full year revenue of approximately $200 million for DSV in 2014, including this delayed Reach vehicle shipment. We expect both DSV and [SEV] to be profitable during 2014, with ER expected to be profitable in the second half of the year. The subsequent event involving the loss of some data and data from manufacturing has not yet significantly impacted production at the Brandon facility, nor will it impact production of the Peru order. However, lost data is expected to negatively impact operations at Brandon by mid-May. The potential impact on number of units produced of revenue for the second quarter of 2014 or for the full year can’t be estimated at this time. As John stated, we expect to have more clarity about the possible impact on Brandon’s operations by the end of May and plan to provide an update at that time.

So excluding the potential impact of the Brandon data loss, management expects a modest operating loss in the second quarter followed by profitable third and fourth quarters of 2014. Based on our current outlook, Spartan is expected to be profitable for the full year. Our projection for 2014 operating income remains in the range of 1% to 1.5% of sales. As we stated in the yearend 2013 conference call, operating income for 2014 will be driven largely by the pace of improvement in the ER segment.

Now we turn the call back over to John Sztykiel for his closing remarks.

John Sztykiel

All right Lori, thanks so much. To sum up the first quarter of 2014, our backlog, brands and innovations have positioned us very well. We entered this year with the following task to deliver improved financial results and grow shareholder value. Fix the ER Body business. We made progress in Q1 with further progress expected each quarter during 2014. Accelerate the pace of operational improvement at DSVs Bristol facility. Again progress was made. Number 3, bring Reach to profitability. That was accomplished. Number 4, expand SEV’s motorhome chassis product line yet still make money, progress in that direction. Number 5, generate cash and reduce inventory. Again progress was made.

And as we look at 2014 and beyond, one of our key metrics is value add per square foot, which we define as sales minus billing material costs, divided by total square footage. We have an excellent opportunity to reduce our manufacturing footprint thus improving our ability to deliver greater value. This will not happen overnight, but now that Bristol has completed the heavy lifting phase, we’re looking at the next steps. In conclusion, progress was made in our five key areas and we are on track for more progress in Q2 of this year and the second half of 2014. We are focused, committed, one team, one plan centered around drive. Thanks. Greg?

Greg Salchow

Okay. Kate, we’ll now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Joe Maxa from Dougherty & Company. Please go ahead.

Joe Maxa - Dougherty & Company

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

Lori Wade

If we look at Q1, there were several drivers. One of the biggest is, we had an extraordinary amount of the Reach. Again this is the 1900th Reach order that does not have the price increase and does not have all of the build material reductions in it. Again it was profitable, but again it is well below our normal profitability of our products. We also had lower APA revenue in the quarter and that will continue through the year. So that was a large driver. We also had as we talked about, higher motorhome sales, which tends to be a little bit of our lower margin product as well. We also continue to have the inefficiencies of what John refers to as the unhealthy orders at the ER body side of the business which also impacted the gross margin for Q1.

Joe Maxa - Dougherty & Company

Okay, that’s helpful. And then along those lines, your operating margin outlook for the full year, 1% to 1.5%, that does not include the potential issues at Brandon, correct?

Lori Wade

That is correct, Joe.

Joe Maxa - Dougherty & Company

Okay, that’s what I had assumed. And just one more from me, I just wanted to ask on the 200 million DSV expectation this year. If you look at it year-over-year, we do see maybe a different trend than last year where Q1 was the lowest and then you had a little bit higher in Q3. Just wondering what your outlook is for the rest of the year, how these new Reach orders will flow through and what type of seasonality we might see this year.

Lori Wade

So Joe, I’ll take that one. So if we look at Q1 again, it was unseasonably high because of the large Reach order. We believe our Q2 will be softer than normal. Usually our Q2 starts to pick up. We’re expecting it to be unnaturally soft. We do believe we will have as seasonally predicted a strong Q3 and then our fourth quarter to on more normal. So we will have all of the Reach, the 670 Reach order. That should be completed by mid Q3.

John Sztykiel

Joe, this is John Sztykiel. One of the things I think – and this is the positive side of it. Part of is we’ve evolved at Utilimaster, the delivery and service and vehicle group, is you’re seeing a more effective balancing of orders and line production rates. One of our strategic targets in the delivery and service business, which is truck bodies, walk-in vans, commercial vans being the Reach is to eliminate the lumpiness of the backlog, the orders etc. As you’ve heard management talk over the last two or three years relative to the delivery and service business, you’ve heard the term orders can be sort of lumpy, big swings, etc. We’re very focused on eliminating that. So it was very positive to see not just the Reach, but the increase relative to Q1. What’s nice is I think over time you’ll see less lumpiness in the delivery and service business. And as you eliminate that lumpiness, you’ll also then be able to improve your operating margins because it’s always easier to improve something when you have a more consistent flow.

Joe Maxa - Dougherty & Company

Okay, that makes a lot of sense. Thank you.

Operator

Our next question comes from Shivangi Tipnis from Global Hunter. Please go ahead.

Shivangi Tipnis – Global Hunter Securities

Thank you guys for taking my question. What is the ballpark figure of the first installment of Peru orders from the total of 70?

Greg Salchow

We need to ship those in groups of 10 at a time. So we’ll expect to make that first shipment of 10 late in the second quarter. But I’m not sure if we’ll recognize the revenue then or if that’s going to be more of a early third quarter event. That one could go either way just depending on the timing of the shipment and when those trucks arrive at the destination.

John Sztykiel

One of the things Shivangi -- this is John Sztykiel, and it’s good that Greg noted the recognition of the revenue, because we don’t recognize the revenue till they are on port and relieved off the boat in Peru. And there’s about a 28 day cycle time from when they leave Charlotte to when they show up in Peru and they’re no longer on our revenue sheet. So while the first 10 units will definitely ship in Q2, and we’re on track. The revenue in all likelihood probably will not be seen till Q3. Just like we will ship the balance of the order in Q3, but the revenue will be seen in Q4. Does that provide the clarity you’re looking for?

Shivangi Tipnis – Global Hunter Securities

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

Lori Wade

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

John Sztykiel

Yes.

Shivangi Tipnis – Global Hunter Securities

Okay. The next question is on the SEV side. I think most of the SEV sales were driven by pricing. So how comfortable are you with the current sizing environment and how do we see the SEV going forward based on pricing?

John Sztykiel

I think in SEV and pricing which is the Isuzu, the Defense parts and the RV business, from a pricing perspective, that’s very solid right now on the RV side. So we feel comfortable there. On Isuzu side, very comfortable there. As a matter of fact we’re now working to accelerate to over 29 units per day. That product line is doing extremely well for Isuzu in the marketplace. On the defense side however, which is no surprise to anybody in that industry, wheeled vehicles, parts etc. are very challenging for us. So I would say in the defense side, it’s not really pricing affected. It’s just there’s really not much market or consumer demand right now.

Shivangi Tipnis – Global Hunter Securities

Okay. Thank you for the color. Just a last question, I’ll get back in queue after this. What level of total cost saving benefits in dollars are we looking at from the operational initiatives and can you give us an idea on the expected timing of the benefits?

Greg Salchow

Are you talking about the changes that we’ve made at Bristol?

Shivangi Tipnis – Global Hunter Securities

Exactly, yeah.

Lori Wade

Yeah. We’re truly right on plan and you could expect to see -- we believe we’ve been talking about the $2 million improvement – excuse me, the $4 million improvement and we will be on track to get -- by the fourth quarter we should be at that angulate pace of the $4 million is what our expectation is.

John Sztykiel

Shivangi, this is John Sztykiel. And as Lori said, the targets for Bristol, the plan, the stated objectives were $4 million from an operational savings. And so we’re moving against that plan. We’re making progress against that plan. We should be there Q3 or Q4 at the latest. You should expect to see that $4 million in total savings on an annual basis in the 2015 calendar year.

Shivangi Tipnis – Global Hunter Securities

Okay. And how do we see this cost saving benefitting the ERV segment then?

Greg Salchow

That’s a separate issue. At Bristol we’re only producing Utilimaster or DSV vehicles.

John Sztykiel

This is John Sztykiel. From an Emergency Response Vehicle perspective, I think Lori provided the right guidance there, that we expect to be profitable by yearend, but we haven’t gone through any consolidations or anything like that yet relative to ER and we don’t have any formal target numbers out there. But if you look at their loss and where they were in 2013, we’re making operational improvement. We expect Q2 to be better with a positive inflection point in the second half of this year as we ramp up and ship the Peru orders and Ocala as well. So when we look at ER, in particular we look at really the loss of last year and that’s our target to overcome on an operational perspective.

Operator

Our next question is from Robert Kosowsky from Sidoti. Please go ahead.

Robert Kosowsky – Sidoti

Morning guys and Lori. How are you doing? The computer issues, can you give us a more compolarize to what actually happened and what the recovery actually is?

John Sztykiel

All right Rob, this is John Sztykiel. To give you a little bit of color or background, very unique events which according to IT and several people I verified with, that’s rarely if ever, ever happens. But in essence, we were going through a process, a discipline process to upgrade every one of our backup systems at each one of our locations. The new back up equipment was literary on sight in Brandon, South Dakota. However, we had a main server failure, then we had backup failures very late April, worked with a high quality recovery firm. We were actually recovering the data in a very high percentage. So it’s very good quality. We worked through the issues in late April and early May. However the recovery firm this past weekend also had two significant issues, thus we have to regroup and analyze to determine exactly what data we aren’t going to get.

And again, we aren’t pessimistic or anything like that. We are just trying to provide transparency and clarity to the marketplace and then we’ll make our plan accordingly. It’s extremely, extremely rare that these kinds of events happen back to back. Probably the most discouraging thing is, here I talked about earlier, we made operational progress in the Emergency Response Vehicle group. And sometimes what happens as an individual shared with me last night, he said sometimes, John in the path of a turn around, you take two steps forward, one step backward. Well this data recovery issue was a step backward. Now we’re working to go forward again. So, extremely rare, simple main server failure. The backups failed and then we were really overcoming every challenge in front of us with a very good data recovery firm, then this past weekend on Friday and Sunday, they had operational issues in their recovery process as well. So a very unique storm which we’re working to overcome.

Robert Kosowsky – Sidoti

A little Murphy’s Law.

Lori Wade

You’ve got it.

John Sztykiel

Yeah. I’m thinking okay, we had the polar vortex for winter and very high snow removal costs, et cetera. This is what you would call the digital vortex relative to our Emergency Response Vehicle group. We’re trying to keep a positive attitude, but probably the most frustrating thing was we were doing everything right to replace the systems and the backups, so working in a very disciplined way. This was the last location so where does the problem hit? The last location.

Robert Kosowsky – Sidoti

Is the problem that you don’t have the right data sets in order to fully design and and ramp up the manufacturing of a truck and that’s what you need to create?

John Sztykiel

Yeah, basically it’s the building materials, the engineering. It’s all been processed and everything like that. So it’s actually the work that was done. Not the work that we’re doing today but it’s the work was done which was driving day’s production. As it operates and again, I’m not trying to provide a pause to the light, but the reality is we get disks every other day from the data recovery firm and then we go through those disks and we analyze the data to determine the validity, the accuracy, extra then we work with them closely. It’s literary to a certain extent, hand to hand combat. In honesty, we were doing a very good job with a great firm. The last week and a half of April but that has caused everybody to regroup slightly. So we will regroup and work through each issue but like Lori and Greg said, by the end of this month we will provide clarity to everybody in the financial market.

I will say this, the good news is, Rob, is we now have two other locations that we can leverage production to, to catch up, okay? Not just from a financial perspective but also from a market perspective. One of the things we’re looking at as we recover the data, there will be individuals from Charlotte and South Dakota next week and okay, how can we leverage the other locations to catch-up from a delivery perspective and not only ensure that we meet our financial targets, operational targets, but also that we meet our deliver requirements at the market place. Rob, I’ll just tell you the truth. The last four months, we hit the master production schedule. People were gaining confidence there. People in the market place were positive. The dealers were positive, the associates were positive and this Murphy ’s Law had this past weekend.

Robert Kosowsky – Sidoti

Okay. Is there a risk that, come May if you haven’t got the full data recovery that you’re not going to be able to build trucks at Brandon so then you’re going to have production downtime for a week, four weeks, two months, whatever it takes in order to get the data set back up? Is that the way it’ll work there?

John Sztykiel

I don’t think you’d have the risk of production downtime, I think you’d have the risk of production slow down and that’s what we were working to mitigate right now.

Robert Kosowsky – Sidoti

Okay.so you would still be able to make trucks there but it would just be very inefficient while you’re rebuilding due processes?

John Sztykiel

Yeah. It could be inefficient and slower, yes.

Robert Kosowsky – Sidoti

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

Greg Salchow

Actually, they’re ahead of target. A lot, actually you’ve seen in the ramp EF schedule. So, that’s positive and Charlotte is slightly ahead of target. So both have gone extremely well.

Robert Kosowsky – Sidoti

Okay that’s good to hear. Finally you mentioned on healthy backlog and I’m wondering if you can let us know how big the unhealthy backlog is or what percent of the sales in the first quarter were there and a cadence of how this gets burned off over the year.

John Sztykiel

As a percentage, I can’t provide clarity on that percentage but I will say this, it gets less and less as we go through each quarter. As we mentioned on the previous call, Rob, we had three price increases in 2013 on a version of the quoting system and those are healthy from a product perspective. So we will build less unhealthy trucks in Q2, less in Q3, less in Q4. Each quarter gets less and less and less but as Lori mentioned, we expect ER to be profitable in 2014. So as a percentage, the good news is we have a larger percentage of healthy orders versus unhealthy orders.

Robert Kosowsky – Sidoti

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

Lori Wade

Operating income on a fully burdened basis.

Robert Kosowsky – Sidoti

That’s good hear. And then finally how many Reach did you sell in the quarter. I know you gave it the revenue number. I’m wondering what the actual units were.

Lori Wade

About 670; hard to do the math.

Robert Kosowsky – Sidoti

Okay. 670?

Lori Wade

About 670 is roughly, yeah.

Robert Kosowsky – Sidoti

Okay and then one last question on the computer issues. If you do the worst case scenario, you need to recreate some of your data in processing. Is this something that is like a one, two, three months to fix that you do get to the fourth quarter, say it should be cleaned so if we do have production weekends, it’s going to be confined to just this year worst case scenario?

John Sztykiel

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

Robert Kosowsky – Sidoti

Okay that’s good to hear and good luck with everything.

Operator

(Operator Instructions) Our next question comes from Rhem Wood from BB&T Capital Markets. Please go ahead.

Rhem Wood - BB&T Capital Markets

So first question, just on the backlog it sounds like you guys have especially ER maybe going after share, the expensive price. But do you feel like you’ve maybe fixed that in the market and you’re going after a little more price now? And how should we think about that impacting order levels and backlog going forward?

John Sztykiel

Rhem, this is John Sztykiel. Absolutely. As we sit here today, we’re pricing -- or I should say we’re quoting tracks which are profitable in the marketplace. For example the Peru order is profitable both on the body side and the chassis side. So we’re very focused and confident that what we quote in the marketplace today is a profitable product. I think our growth though in some respects obviously came, some from for lack of a better term, we bought market share. But I will say this, when we look at the emergency response marketplace, we’ve been very focused around two initiatives, redefining innovation in technology, excited consumers brand fanatics. We have executed against those two focus points. We have done extremely well from a growth perspective in gaining market share.

I think if you look over the last three to four years within Spartan, we’ve had a large number of innovations out in the ER marketplace where other people were cutting back because the market was so challenged. That is now serving us well. When I look at our marketing, our digital, our consumer centric approach, really driving excited consumers brand fanatics, I believe we’re doing a lot of things right there. So while pricing definitely contributed some, I think the principal reason though we grew our backlog because again we had three price increases in 2013 and we had positive backlog growth in emergency response is against two very, very clear focus points with the right initiatives behind them. Redefining innovation in technology and excited consumers brand fanatics.

Rhem Wood - BB&T Capital Markets

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

Lori Wade

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

John Sztykiel

Rhem, this is John Sztykiel. One of the things just to provide to the group is we leverage the manufacturing flexibility of Spartan. All those files were created here just like in Ocala. All those files to build the trucks are created in Ocala and the files for Ephrata in the area group are created in Ocala. And while we’re communizing building material sets et cetera, this then enables us to grow and leverage and increase our production capability in other locations and not be dependent upon just one location.

Rhem Wood - BB&T Capital Markets

And then last one and I’ll turn it over. The SG&A is up $3 million or seven in the first quarter and I think part of that was due to the export expansion et cetera. But how should we think about that going forward? And I guess if nothing else with the server issue and have a lot of consulting fees and other things, I guess that will get lumped into there going forward?

Lori Wade

Yeah, you’re right. The consulting for this, the servers however it will go in the begin, I don’t really believe this is going to be a large magnitude expense for this recovery. Again remember that we have some one-time events. We had $1 million of restructuring that hit in Q1. We also had the timing of the stock ramp which was $300,000. That also will not occur in the rest of the year. So you’ve got some one timers. And I would say then that cadence probably [while] a few blips, but I think it’s probably a pretty fair synopsis of what the rest of the year will look like. Again we are continuing to look and reduce our cost structure. That is one of our key initiatives is to reduce that cost structure. So I believe that we’re in a good place for that.

Rhem Wood - BB&T Capital Markets

And then last one. There was, I think that next had a recall in like 3200 Utilimaster vans. Can you give us a little bit of color on that and maybe the impact?

John Sztykiel

That was a small recall which we’re working through. The financial impact is not large. Not anything to be noted in the Q, the K, et cetera.

Operator

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

John Sztykiel

Thank you very much. As we look at 2014, excluding the Brandon data event, Q1 should be the lowest point of the year. Q2 should be better, the second half of positive inflection. Obviously challenges remain. We’re very focused as an organization to improve our gross margin to manage our SP and overhead expenses, to address those in such a manner that they’re reduced in 2014 versus 2013 and to take the backlog where it stands to date and to drive it in such a manner and to execute in such a manner that it’s one team, one plan centered around drive, we deliver increased shareholder value. As we sit here today, again there’s challenges that pop up all the time, but we will work through those challenges. We expect Q2 to be progress versus Q1 and look forward to a positive inflection in the second half of 2014. Thanks so much.

Operator

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

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Spartan Motors (SPAR): Q1 EPS of -$0.06 misses by $0.02. Revenue of $128M (+33.1% Y/Y) beats by $17.83M.