Good morning, and welcome to Spartan Motors first quarter 2011 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 now disconnect at this time.
At this time, I would now like to introduce Ms. Paula Droste, Director of Investor Relations and Treasury for Spartan Motors. Ms. Droste, you may proceed.
Good morning, everyone, and welcome to Spartan Motors first quarter 2011 earnings call. I'm Paula Droste, Director of Investor Relations and Treasury for Spartan Motors. And I’m joined in the call today by John Sztykiel, President and CEO, and Joe Nowicki, our Chief Financial Officer.
I assume all of you saw the company's earnings release on the news wire and Internet this morning. John and Joe would take a few minutes to discuss the results for the quarter. However, before we do, it is my responsibility to inform you that certain predictions and projections made on 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 prediction or projection, there are a number of factors that could cause Spartan's results to differ materially. All known risks or management beliefs could materially affect the results identified in our Form 10-K and 10-Q filed with the SEC. However, there may be other risks we face.
With that, I’d like to turn the call over to our CEO, John Sztykiel.
Thank you Paula. Good morning to all of you listening on today’s call and those on the internet. Today, I will review the financial results, followed by our strategic plan in growth agenda, as these lay the ground work for all that we do.
Next I will give you an overview of each of our market, then Joe Nowicki, our CFO will provide details of the quarterly financial results. In summary, we will wrap it up with the Q&A session.
First an overview of the first quarter financial results. First quarter sales were down 19% compared to the same quarter in 2010, a reflection of our depressed Q4 backlog. Revenues were largely down in the ER market as expected, given the continued tightening of the state municipal budgets in the pull-ahead orders received in the prior year, as a result of the EPA’s 2010 emission standards.
Consolidated gross margin dropped due to the shift in product mix, away from more profitable APA business. However, margins also dropped within our existing emergency response lines, as we are selling less complex and lower content products.
Operating expense improved by nearly 2 million compared to the prior year, truly reflecting the achievements we made in realigning our cost structure. As a percent of sales, operating expense increased to 15% from nearly 14% in the same quarter of 2010, driven by the revenue [inaudible].
In the quarter, we had a $900,000 loss or approximately $0.03 per diluted share, compared to breakeven results in the prior year. On a very positive note, order intake was up 43% year-over-year and also up sequentially from Q4 of 2010.
Despite the significant achievement in our strategic plan, we generated a loss in the first quarter of 2011, driven in part by the softening of three of our four markets, due to the tough economic climate, plus also the timing of investments in new product launched and one-time cost associated with trade shows, partnership meetings and items relative to marketing in the first quarter.
To be frank, although we expected a tough first half in 2011, a loss is a loss and it’s tough to handle. This does not happen very often for us a [month].
This next quarter will also prove to be challenging, but we do see improvements in the second half again, with continued recovery in our service and delivery market, launch of new products that we’ll talk about shortly that fit nicely in the lower price niches in the market place; the rebalancing of our operational expense base and continued pursuit of profitable growth initiatives.
Again, Joe will cover the financials in more detail, but next I’ll review our strategic plan and then I will go in to detail in to each of the markets.
From a strategic plan perspective and a growth agenda perspective; we are guided by our 10 strategic directives. Operationally, we have a four part plan and it is very, very simple and this simple plan has helped Spartan to weather the tough economic climate over the past two years and also enhance our strategic position, as we look to the future.
First, growth and profitable market share, as Spartan blended three-point plan; second, compelling products and services; third, cost structure that is in alignment with our top line while supporting our strategic plan. Four; managing our balance sheet with a strong focus on working capital in our liquidity.
Now I will get in to a little bit of detail of each one. Growth and profitable market share. SMIs blended three-point strategic plan is disciplined and has been in place for over the past two years. The tenants per growth are as follows: alliances, acquisition in organic development. This growth strategy is integral to our plan for long-term profitability, top line growth and shareholder value maximization.
We are part of the accomplishments in this area in the speed with which our team is able to cease opportunity and follow through on the plans.
The order of our recent successes that fall in to these growth strategies are, and we’ll start with organic products such as the Force, the Reach, the Transformer. Growth through alliances have been achieved with Isuzu, a leading world-wide diesel and commercial vehicle manufacturer.
This alliance has generated two major opportunities for us; the assembly of the N-series gasoline truck chassis in Isuzu product and the development of Utilimaster’s Reach vehicle. This alliance with Isuzu will also allow us to access 48 out of the 58 specialty vehicle markets identified in North America.
Again, we will not access all of them at once. Some have a greater priority than others. But what you see is a broadening of estimized opportunities to reach additional market niches, a global distribution network and access to a broad diesel engine line of our customers.
Lesser known alliances include our work with existing and new suppliers including the Navistar Engine Group to supply another clean diesel option for our customers with the EPA 2010-compliant MaxxForce Big Bore engine.
Now lets move over to acquisitions. Our acquisition of Utilimaster at the end of 2009, followed more recently by the acquisition of Classic Fire, demonstrates our commitment to the acquisition growth strategy and our ability to execute it.
While small in sale, the acquisition of Classic Fire is large from an ER, from an emergency response perspective, and I will cover more about that in a minute.
Our growth strategy not only allowed us to diversify our revenue stream that was once dominated by a single market, but also strengthen it with more stable income. Compared to contract-driven military programs with service and delivery in emergency response market, which we have expanded for our acquisitions provide additional levels consistency and balance.
To be clear, we will aggressively pursue orders in the defense area, but the revenue stream is much more volatile unless predictable. And while we are focused on growth, we are also focused on reducing risks.
A core component of our strategic plan is building a portfolio of compelling products and services. This will enable to gain market share, while counteracting the pressure of a poor economic climate and meet the needs of the increasingly cost conscious customer.
Compelling product and services, we made great strides in this area. We introduced several new products that are compelling, and I will cover those right now. At FDIC Spartan chassis introduced the Force; a purpose built custom cabin chassis for the emergency response market, with customized options at a very, very aggressive price.
Crimson Fire introduced the Classic Series at FDIC; a fire-truck product line geared for high performance, ease of operation, simplified maintenance, again targeting a more price-sensitive market.
At the National Truck and Equipment show in March, Utilimaster revealed the reach on organically developed new product in alliance with Isuzu, effectively addressing two market segments: the commercial van market and the step van market.
Other key products introduced in the first quarter include the secondary power system. An auxiliary system that reduces the drain on the main power supply i.e. the engine, while reducing exhaust emissions, noise pollution by an estimated 51%. This product not only saves hard dollars, but is also a compelling reason to go green.
As mentioned earlier, the expansion of the engine offering in Spartan Chassis line-up with the MaxxForce 13 diesel engine, and other item is Isuzu’s 4JJ-TC 3 liter diesel engine in the Reach product.
What’s interesting today is Spartan offers products that range from three liters upto 15 liters. We have the broadest product lineup of diesel engines in the specialty vehicle market place.
When we look at field solutions; upfit solutions on installed vehicles while in service that are also generating customer value and having both a positive top and bottom line impact. A couple that are destined for the service and delivery market, keyless entry pads and safe load systems. Both of these increase the value of an existing vehicle and again provides positive top and bottom line impact.
The positive result of all of what I just talked about; backlog at a 166 million as of the first quarter, up nearly 24% compared to the end of Q4.
What’s interesting in the fourth quarter release of 2010; one of the things I noted was one of our biggest challenges was to raise the backlog, and I am very pleased with the positive result we were able to generate in Q1.
As mentioned earlier, Joe will cover the last two parts of our operational plan, reducing our cost structure and managing our balance sheet. However, now lets move in to a little of the markets, because we are consistently, constantly, continuously seeking ways to optimize our operations, including the review of our operational footprint across all our campuses and we are not done with that work yet.
One of the items we announced in Q1 was the relocation of the production of the Reach product to Michigan, the Charlotte campus in early 2012. This relocation made a lot of sense from an expense perspective, but it also made sense from a customer-centric perspective, as the Isuzu N Series is also assembled on the Charlotte campus.
This relocation will improve efficiencies, reduce overhear and provide a customer and competitive advantage. This relocation will require some capital investment, however it also generates opportunity for future tax credits upto nearly $9 million over the course of the next several years.
Now, lets move in to some of the markets. In our recreation specialty chassis market, sales were relatively flat compared to Q4 of 2010, but down 31% compared to the same period in 2010. We did have some big success in our motorhome business being selected the sole supplier of chassis for Integra’s (inaudible)product line.
This award affectively makes Spartan the sole supplier of Integra diesel product line and chassis. Production will begin in the second quarter of 2011. This win is expected to offset some of the market decline and we are expecting annual sales to be slightly up year-over-year in this market. In reality, this is pretty good for the Class A market.
Long-term the RV market is one of growth according Dr. Curtin, the Director of Survey’s of Consumers at the University of Michigan and the RV market specialist for them. For RVI Inc. Class A motorhomes are expected to increase in 2011, although not at the same pace in 2010.
In 2010, shipments of Class A motorhomes were up year-over-year a 122%, while in 2011 they are expected to increase only 6%.
With cost increasing the inconvenience to fly, there’s a growing interest in affordable vacations. The low cost nature of an RV vacation will support long-term industry growth. The increase in the price of fuel will dampen the industry some, so we remain cautiously optimistic.
Long-term the industry is one of growth which is why we are committed to it, with the alliances with Isuzu and overtime we will bring more compelling products to the marketplace.
Now lets switch over to defense and government. First quarter sales were up over 3 million compared to the same period in 2010. This increase is the result of the armored utility vehicles contract with BAE and additional shipment of some [inaudible].
Our backlog of 7 million reflects the additional contract secured during the quarter to produce 26 additional SOCOM MRAPs. These vehicles are identical to those built in 2010, and production of those will begin in Q2 of this year.
The defense industry though is affected obviously by the Federal budget. Money tight, the need is not as great, and this market will remain very, very difficult over the next couple of years. However Spartan remains committed to pursuing opportunities in these markets and continues to work with partners to develop products and [bet] on new opportunities.
Lets switch over to emergency response, which is proving to be a challenge as well, simply reflecting tight state in municipal budgets.
We expect this market to be tough in the next couple of years. Long term though, it is one of very, very good growth; but first the challenges and the tough news. The 2011 ER market as a whole is expected to up 25% to 35%. Emergency Response Chassis i.e. Spartan Chassis sales were down nearly 19% for the first quarter of 2011, compared to the same quarter 2010.
Sequentially ER chassis sales were down only 2%, compared to the fourth quarter of 2010, indicating we are nearing a level of stability, though at a lower level. Also though on a positive note, as I mentioned earlier, the Spartan Force, a low cost custom chassis was launched, introduced in Q1; reception has been excellent; and we are receiving more than simple interest, but we are receiving actual orders, and we will ramp up for production in Q2.
We continue to innovate, offer compelling products and services to our customers. Spartan Chassis kicked up its exhibition at FDIC showcasing the Force, the integrated secondary power system and announced the expanded engine lineup to include MaxxForce 13 engine by Navistar; all of which I mentioned earlier. And again, compelling products is something that will continuously drive growth in profitable market share not just for Spartan Chassis, but for Crimson Fire as well.
Now lets switch over to emergency rescue bodies representing Crimson Fire and Crimson Fire Aerials. Revenues were down 49% for the quarter, compared to the same quarter 2010. Crimson Fire is also being impacted by the overall softening of emergency response industry. However, their product lines fell in to the medium and high-end niches, and in tomorrows market for the next couple of years, this was simply too narrow of a focus, thus the big impact on the backlog.
However, with the strategic acquisition of Classic Fire, Crimson’s product lineup has been broadened significantly with a complementary set of products, products that are known for high performance, durability, lower in price, focus more on the price sensitive parts of the market place.
To give you an idea from a perspective relative to bid activity, bid activity on the products of the Classic Series through the Crimson dealer network since April 1 has exceeded what Classic Fire historically saw in 90 days. The reception from a bid in cold perspective has been that large.
Two of the Classic Series products were shown at FDIC, less than 60 days after the letter of intent was signed. Again, this demonstrates our speed and agility, one of our 10 strategic directives, but also demonstrates how far we have come from an integration perspective.
On a positive note from an integration perspective as well and this focuses on cost, what is exciting is over the past 30 to 40 days, the Crimson pump panel for the Legend Series, the cost to bring that panel to the market place has been reduced by over 30%.
In closing, Classic was very profitable before the acquisition, and we expect it to continue to perform in the same manner throughout 2011. I’d also like to congratulate the Crimson team on their success in being awarded a multi-year international contract to build and deliver upto 30 vehicles for use in Chile.
This win involves a substantial time and effort. Five of these units are scheduled for delivery in Q4 of this year; and again Global is one of our 10 strategic directives. We are moving in a very, what I would call, cautious but wise approach, and it’s nice to see a win happen.
Something from the emergency response perspective; they have been in this business since 1985. There have been some down markets, typically ER is last in to recession last [down], however over those years we’ve had many more up markets. Why? Because the need is there and it is growing.
Fire Departments are often the first to response to any serious events. Today there is a call for help once every 0.73.72 seconds. And as the population ages, that call for help will only grow. In addition, the existing national fleet of fire trucks is also aging; as over 54% of them are more than 15 years old and then need for replacement will also grow.
So while the next couple of years will be very challenging, we’ve got a lot of operational plans in place to gain competitive market share. What is exciting is the order rate for both Crimson and Chassis has been on the positive trend up in the month of March and April, so that is exciting. But long term this will be a very, very good market as the need is there.
Over to sale and service and delivery; let’s switch gears. That segment was flat with sales of nearly 24 million compared to the same quarter 2010. However, the backlog for service and delivery improved 49 million compared to year-end 2010, driven new large customer orders.
We continue to anticipate this market benefiting from any improvement in the economic climate, customer spending, but also the price of gas and oil going up. I’ll talk about that in a few moments.
The quarter also highlighted the unveiling of the Reach at the NTEA show in Indianapolis. The Reach is a revolutionary new product developed under alliance Isuzu Commercial Truck of North America offering over a 35% improvement in fuel efficiency, cutting in half CO2 emissions, and other esthetic and functional improvements.
Just quickly on the price of oil. What’s interesting to note is as the price of oil rises, internet shopping increases, which benefits Utilimaster which benefits the Reach product line. What’s also interesting to know that in yesterday’s Wall Street Journal, there was a small article discussing how Wal-Mart was testing home delivery i.e. internet in the US.
The Reach is an ideal product for B2B or B2C business models and Utilimaster is positioned extremely well there. Production of the Reach will begin in late Q3, early Q4 at a lower level than initially planned, and it’s now estimated to be at 400 units for 2011; and this is primarily due to a slightly longer testing and validation stage.
Now it is simple, we’ve learned some very hard lessons over the years, and you only bring a product to market when it’s right. Because when a product stops running, it’s a very, very bad day for the consumer, a very, very bad day for the customer that’s delivering the product.
Utilimaster continues to offer other compelling products and services with ongoing field work to retrofit existing fleets, a likelier better term, field solutions for existing fleets is a tremendous opportunity.
Two such examples include installations of Aquila Sentry systems and [Tank] loading systems. Both of these save time and money for the customers, and the orders have been excellent and that will continue to drive the top and bottom line in 2011.
Let’s talk briefly about the N-Series; another part of our alliance with Isuzu. Spartan’s alliance with Isuzu resulted in the assembly agreement for the N Series cabin gas chassis and Plant 5 which used to build defense product is being capacitized at just over 4,000 units annually.
Spartan began assembling work during the month of March, and despite shortages that slowed down the initial product schedule, our projected run rate is expected to continue during 2011. However, we are cautiously optimistic as the impact of the earthquake in Japan is just now being felt. And while Utilimaster’s backlog is up substantially, the profitability is not where it should be.
Joe will spend more time on that, [but] simply our brand leadership position and our continued efforts to align cost, improve our billing material and labor efficiencies must improve and will improve as time marches on.
Let’s move over the last segment; aftermarket parts and assemblies. We experience a 21% decrease in quarterly sales year-over-year, largely affected by decreased defense sales, partly due to the completion of the MMPV or the Medium Mine Protected Vehicle kit order.
Although we continue to see strength in the parts business for motorhomes and fire trucks, the defense business is very challenging and again will be for the next 12 to 24 months, as even in parts and assemblies you deal with the federal budget but also a declining need overseas.
Now in closing, while we’ve got a lot of opportunities ahead of us, again the loss was not something which we take pride in. We take great pride in some of the strategic things which we’ve accomplished. We’ve got a lot of work to do in front of us.
Now I will turn it over to Joe to address how we are doing on the operational plan, our cost and balance sheet management. Joe.
Thank you John and good morning everyone. As I mentioned in the last earnings call, we expected a challenging first half at 2011 due to the economic climate, tightening government budgets and timing of our new growth initiatives.
That still doesn’t make it any easier to be here today, talking to you about a loss for the quarter.
While we continue to make progress, it’s clear to us we still more work to do in driving our revenue growth and further aligning our cost structure. This will remain a top initiative on my agenda.
I am going to start with a quick review of our income statement results. First quarter sales were 95 million, 19% compared to the first quarter of 2010. That’s over 22 million decline from year-to-year, which was our biggest challenge to overcome for the quarter. It was also one of the most profitable markets which made the gross margin impact even more challenging.
We did a good job enough to [solve] it, but we weren’t able to impact it completely. Fire truck chassis sales decreased 19% in the quarter, comparing to the same period in 2010. Fire truck bodies declined nearly 49% as John had mentioned.
Both of these markets were negatively impacted by the softening in the ER market as a whole, driven by continued tightening of municipal and state budgets. Also negatively impacting this market was the 2010 completion of a heightened order volume related to the 2010 emissions change.
Sales of fire truck bodies were also impacted by a tougher comp in the prior year due to higher volumes in 2010, as a result of the order received ahead of the NFPA safety changes.
Q1 of 2010 also had more Aerial unit sales completed, and they completed a large multi-unit order of hire and fire trucks that we didn’t have in 2011. Outdoor rec (recreation)vehicles sales fell nearly 31% in the same period in 2010, but were relatively flat to Q4, indicating some stability in the market.
We had a tough comp from the first quarter of 2010 as manufactures at that time were rebuilding their inventories.
Our service and delivery sales were flat over the same period, however, the addition of (inaudible)continues to represent a larger portion of our sales mix, increasing to 25% of our total sales.
While doing a great job at diversifying our revenue, adding the service and delivery market at the current profitability levels to our portfolio puts pressure on our consolidated margins. That part I’ll address in a minute.
Our defense and government vehicles experienced a nice increase of over $4 million in sales when compared to the first quarter of 2011. AUV military units as John noted earlier, drove the defense business.
As our defense business becomes driven by smaller products, you will more volatility in this market from quarter-to-quarter. Our strategy is to develop an increasingly flexible structure to handle all the business we can get, but without incurring high fixed cost. We intend to flex up and down with the volumes.
APA was down nearly 3 million or 21%, again all as a result of the soft defense business. Of course margin recorder was 13.6%. Two major causes for the decline were volumes and product mix.
As I mentioned earlier with a loss of 22 million in revenue, we had a significant negative impact on our fixed overhead absorption. In addition our sales volume shifted from ER vehicles to service and delivery vehicles.
The mix shift to lower overall gross margin product compared to the prior year was expected and (inaudible)as we strive to improve our margin. We have a focused effort on [lean] going on both Utilimaster and Crimson Fire. In addition we are vigorously reviewing or bill of materials for the cost reduction areas.
As you all know pricing and many raw materials components continue to rise in the market place. Till this point, we have not seen a significant impact on our financials. Spartan is purchasing contract in place with our core suppliers to minimize the volatility with price fluctuations and the leverage of buying power.
Also, we continue to improve our bill of materials and work with our suppliers to ensure the best component quality while managing cost.
We are also sourcing more fabricated parts internally; even with all that we are cautious on the impact that supplier market price increases may have on our product cost later in the year.
Operating expenses decreased nearly $2 million in the first quarter of 2011 compared to the same quarter of 2010; and over $500,000 compared to the fourth quarter. The declines were driven by lower R&D spending and continued cost management efforts.
The savings were offset somewhat by higher selling costs, primarily related to trade shows and partnership meetings as these events were put forward in the first quarter than has historically been in Q2.
However, operating expenses as a percentage of sales increased to 15%. This is directly attributable to lower revenue levels. Obviously our work here is not done, and we will continue to scrutinize our cost structure to ensure maximum leverage.
We need to again align our cost structure to the current revenue stream. We are in the process of analyzing our cost structure, we’ve done successfully in the past, but this time we will be more surgical in our approach.
We’ve already taken a significant amount of cost out of the business across the board; now we plan to look specifically at areas most impacted by the revenue declines and in areas of non-value add to the customers.
Interest expense is down to one-third of that reported in 2010, driven by our aggressive pay-down of the debt which is on alignment for our efforts to strengthen our balance sheet while minimizing cost.
Our effect tax [Reach] decreased to 33% compared to the same period in 2010, as we are able to take advantage of the recently extended R&D income tax credits. We expect to sustain this rate for the balance of the year. And at last for the quarter was $900,000 or $0.03 per diluted share compared with breakeven results than last year.
Moving on quickly to the balance sheet. We continue to make significant progress in improving our balance sheet position. Accounts receivable decreased to nearly $42 million compared to 53 million at the end of 2010.
Although our day sales outstanding in [AR] creped up a bit this quarter, and we have some work to do here as well. A good deal of change though is structural due to how municipalities are now paying with less prepayments and opting for longer terms.
Fortunately we have a strong balance sheet and trying to use that to our advantage to guard more top line growth.
Our inventory has successfully been maintained at the conservative year-end level of approximately $60 million. In total that down 33 million from the same period last year, with year-over-year improvements reflected in a 17-day reduction in inventory.
In our cash flow statement, depreciation and amortization for the quarter was just over $2 million, managing our resources more affectively help to drive nearly 12 million in operating cash flow during the quarter.
The strong cash flow from [that] enables us to fund our continuing operations; the Classic Fire acquisition and other capital investments, without (inaudible)outside funding from credit facilities.
Capital expenditures for the quarter were just over $1 million. At March 31 our debt balance remained at approximately $5 million. I also would like to remind everyone, we continue to have capital capacity of upto $70 million on our existing credit facility and another $40 million available through private [inaudible]. This credit availability and current financial strength, positions Spartan well to continue to fund our strategic initiatives and ensure a long term growth.
On the equity side I am proud to announce that the Board approved the first 2011 semi-annual dividend that will approximate $1.6 million. It’s approval reflects a positive long term outlook and a strong current financial position.
Although moving in the right direction, our backlog continues to challenge our subsequent quarter results.
At March 31, 2011 our consolidated backlog was approximately a $166 million. The sequential quarter improvement was entirely driven by new orders in our service and delivery market primary as a result of significant orders of some major fleet customers.
Now I would like to spend just a quick moment talking about financial implications of the Classic Fire acquisition. As you know, we completed the acquisition of Classic Fire effective April 1. The business will represent approximately $10 million in annual sales to us and is expected to be immediately accretive to our bottom line.
Purchase price comprised of four components; $4 million in cash, the issuance of a 187,500 shares of restricted stock that divest in two years and an earn out portion continued upon achieving set sales levels, and last, the true-up of network and capital.
No additional debt was incurred at the completion of the transaction, valuation work is not yet completed but we will be finalizing it during the second quarter of 2011, and at that time we can talk more specifically about the final numbers.
In addition to the great reception the Classic Fire prices have had with the Crimson dealers, we have also identified ways to reduce cost and add value to our products with the Classic Fire acquisition, because we are ready to under reach the synergies from purchasing power particularly with raw material sourcing, additional savings are also expected with availability of proprietary pump modules and aluminum [exrouted] tanks which can now be sourced continually.
In closing, while I am not pleased with the quarter’s results, we did continue to gain ground in managing our cost, improving our balance sheet and generating cash. In addition we have made large strides in our long term strategic planning with acquisitions, alliances and compelling product offerings.
We do expect challenging second quarter as well, but remain optimistic for an improved second half of 2011 based on our new growth opportunities that we have in place, and for the cost realignment work that we’ve begun.
Now I’ll turn the call back to John, who will share some closing thoughts.
2011 will prove to be a year of continued execution of our four-part operational plan; growth and profitable market share, compelling products, strengthening our balance sheet and affectively managing our cost structure. Our blended three-point strategic growth plan has been disciplined, based around acquisitions, alliances and organic, and it will drive our top line.
Not surprisingly to make a quick comment, and I emphasize surprisingly, we continued to improve our strong market position as the price per barrel of oil in the US and worldwide continues to go up. Now up over 380% since the beginning of 2000.
The green movement grows and price becomes more important.
Again some areas where we are addressing this, the one I talked about being well positioned. First, the Reach which utilizes recycled materials, a composite structure, a three leader Isuzu very efficient diesel that improves fuel economy by over 35%. Next the secondary power system at Spartan Chassis, and third and smaller ER vehicles in our new Classic Series product line.
Organizationally SMI has successfully incorporated a matrix organic to leverage facilities, people, processes across all of our markets.
Progress is being reflected in our improved efficiencies, reduced cost and the heightened teamwork. Our drive is to created a sustainable structure that maximizes value for all stakeholders, our associates, our customers, our suppliers, OEMs, dealers, shareholders and the communities which we live and operate in.
We will continue to implement processes that will enhance our manufacturing efficiencies and better flex our cost and operations with our expected level and mix of volume.
As I noted earlier, Plant 5 which is now assembling the Isuzu N Series three years ago was assembling MRAPs. That’s a defined part of our strategic directives, but it also shows how we can flex and adapt.
This quarter reflects many initiatives, more of which are strategic in nature. This quarter reflects a strong rise in backlog, all positive. The negative of $0.03 loss, in overtime that will change as well.
In closing, 2011 will be tough operationally. We know that last quarter and we mentioned then. The good news is that we are financially sound, we’ve got a great balance sheet and a diversified revenue stream. As a single market focus is never a good model for a specialty vehicle company.
Last, challenging markets create opportunities. Since 1975 we have weathered numerous tough markets. Yet overtime we have grown in sales and income, and have no doubt the future will be no different.
Now we’ll open it up for Q&A.
(Operator Instructions). Our first question comes from Joe Maxa from Dougherty & Company. Please go ahead with your question.
This is Ash for Joe. My first question is, when we look at the gross margins or given the change in product mix. What are we looking for the trends for the rest of the year? If you can comment on that.
Sure. If you can kind of think about going forward for the remaining portion of the year, specifically second quarter, it will look a lot more like the first quarter. The emergency response volume because of the lower entries that part of it our Emergency Response Chassis business will start to drop off a bit, and also the defense and the APA will continue to be light.
We’re going to see great improvement, as you saw from the backlog on the delivery and service part of the business. So that mix – even though we will probably see slightly more volumes in the second quarter because profit (inaudible)we’ll generate will about the same point.
Now the really good news is when you get to third and fourth quarter, we’ll see that volume pick up even more certainly from the delivery and service part of our business. Classic Fire business is going to start ramp up a bit more which will help our improvements and volumes, while the Isuzu business start to kick in as well too, which will also help to improve our volumes along with the new Reach product that are kicking towards the end of the year also.
And on top of that, the work that we’ve begun to really relook at, realign some of our cost structures specific out of margins should help to drive the improvement in the margins as you get to the third and fourth quarter of the year.
Does that give you a little bit better sense.
So would you say we’re still focusing more towards 15% gross margin for the full year? Are we still targeting that?
Yes. Our targets long term haven’t changed, as we’ve kind of described and talked about 17% growth margin target. I know we moved a bit in the wrong direction this quarter just as a result of the (inaudible)business. But we are still ahead operationally to drive towards those gross margin.
Long term we still have the right initiatives in place, through the new products we’ve launched, acquisitions that we’ve made through Classic Fire which drives to improve margin level, combined with some of the new products that we have as well too. The Reach products, the Spartan Force and others will help us get to that point.
Ash this is John Sztykiel. I think its important to note what Joe said a few moments ago when he talked about the delivery and service business, the Reach product etcetera. There’s something which we really take great pride in, and we did notice in that fourth quarter release of 2011 was that one of our biggest challenges was the backlog, and we made substantial improvement in that in Q1.
Now the challenge is you take that backlog and you improve both the gross margin and the operating margin. But as you look within the market today, again it’s very positive when you see the backlog move up, because when you have backlog you have opportunity. When the backlog is not going up then you don’t have quite as good opportunity.
We know we’ve got work to do, but as the year goes on, we honestly made a huge step in the right direction not in just delivery and service but also at the acquisition of Classic as well.
Can I talk to you more about the backlog; there appears to be unusually high order intake for Utilimaster business, and I was just wondering if you could comment on that and how much of that is pre-orders for the Reach.
First Ash I will just make a couple of quick comments: one, there have been no pre-orders for the Reach. Joe is going to get in to the definition of the term lumpy. But relative to delivery and service business, there’s a lot of data article talking about how the rail industry continues to move in the right direction.
One of the interesting things or exciting things about the Utilimaster product line is if freight or packages is moved to either rail or large truck, they don’t go door to door.
The Utilimaster’s product line is a business-to-business or business-to-consumer business model. So that business model or Utilimaster’s business not only benefits from an improvement in the economy, but as the price of oil goes up, internet shopping goes up, which in turn aligns itself very, very well with Utilimasters' core products. Joe
You are absolutely right. Great increase in the backlog on the service and delivery the Utilimaster’s side. Not surprising to use as John mentioned, one of the big goals with the acquisition was, we previously had all these late cycle businesses like the emergency response business that tend to fall in to a recession and out of recession right, late cycle.
The delivery and service business, the other side they are very much on the early cycle business. So this really is their time to shine, and we expect to see orders come in.
So what we are seeing is a lot of major fleet orders. It’s a combination of new vehicles that they keep in mind that delivery and service business has been pretty depressed, right. They were at one point, three or four years ago running $200 million in sales in 2008 and they have since lowered to where they were running closer to $100 million facing last year.
So you had a lot of vehicle purchases that were just put on hold for a couple years that now being in those cycle businesses they are ramping back up. The other part which is good to notice and we’ve heard from several of the fleet customers is with the most recent tax legislation that began and I think it was September allowed for an accelerated depreciation of many items. One of those items are these vehicles.
So you are seeing some of our buyers, the more stowed economic buyers taking advantage of that quick (inaudible)advantage of accelerating depreciation on these vehicles, therefore the decision to buy and becoming that much more pertinent.
The other element that I’ll just mention really quick is on the service and delivery side, we are seeing a great increase in our business, that uptick business.
So we’ve talked about their parts business being strong, but a lot of their parts business isn’t [stoic] parts, but it’s retrofitting and [upseeing] and vehicles they do.
This is kind of the solution side of the Utilimaster business, where they go beyond just providing a part and instead they look at what’s the customer needs to make them more efficient, and that’s some of the things that we’ve done around [inaudible], some things that we’ve done around some more efficient loading and unloading devices for some of our other vendors as well or customers that we supply product to. So great growth there. (inaudible)doing a great job.
Just one follow-up. Would you expect this backlog to ship in quarter three, quarter four, like the second half of the year.
That’s a good point. Their backlog’s quicker then the rest of our business, because if you think about the fire truck business, usually it’s a six month or longer timeframe for when you get an order or when it ships.
Here in this business it ships sometimes within the quarter, but usually the quarter is still out. Most of the demand and the orders we have so far, some ship within second quarter, so you will see them ramp up some in the second quarter, but even more goes in to the third quarter, and based on what we have in the bid basket, well in to the fourth quarter as well too.
(Operator Instructions). We do have a question from David Fondrie from Heartland Funds. Please go ahead with your question.
David Fondrie - Heartland Funds
The Classic acquisition was completed on April 1. So Joe does that mean that there were no Classic backlog included in the backlog numbers.
Yeah that’s correct. It will all be rolling in to the Q2 numbers. So there’s nothing at the end of Q1 there. The only thing you will notice is on our balance sheet there is $4 million cash that has been set aside for the acquisition that was taken out of cash and put in to some of where in other long term assets. That’s the only one element of the transaction that (inaudible)recorded.
David Fondrie - Heartland Funds
Can you describe a little more detail, may if I have missed it. In fire truck bodies, if I read these numbers correctly, in the fourth quarter you had $14 million and first quarter a pretty significant drop.
Is you question in regards to fire truck bodies or fire truck chassis.
David Fondrie - Heartland Funds
I am sorry fire truck bodies.
And it’s in regards to the revenue line.
David Fondrie - Heartland Funds
Right. Yeah. I think if I have those numbers right, a little bit over 14 million to just shy of $8 million plus $1 million decline when backlog stayed pretty constant, not a lot of change.
Lets talk about one of the 8 million, the first quarter sales we are – emergency response bodies are around $15 million; that was in 2010. 2011 that number was around $8 million, so a pretty significant drop there year-over-year. So the year-over-year drop you saw was a few things.
One of them, it’s a softening in the market place. They had a tough time, they did a great business in terms of volumes in 2010. They were ramping up, they had lot of orders, they made some safety requirement changes in place and also had a large order in place that they (inaudible)at that time as well.
So they ran a lot through in 2010 that we didn’t in the 2011. So then your second question is probably in to the fourth quarter. So in the fourth quarter of this past year we had roughly $14 million in sales compared to the $8 million right now.
David Fondrie - Heartland Funds
That was the question.
So now let’s get to that element of it. A lot of it is just demand for when those fire trucks fall in place. They had four fire trucks that actually, a lot of it comes to acceptance at the end of a quarter. We had four fire trucks, emergency response there, didn’t get the final signups from the Fire Department, so they are sitting in the inventory kind of ready to be invoiced, just waiting for the final sign off.
A lot of those are tough to gauge whether you can get calendars and folks in place to actually be there and accept them. So one of the things is just the timing of getting some of the trucks out, and a lot of it is just the timing of the orders coming in as well too.
We had a big push towards the end of the fourth quarter where we had several of the municipalities that wanted deliveries at the end of the year. So ramped up to get some out the door in the fourth quarter of this past fourth quarter as well too.
So most of it, more just timing than anything else. You are right, if you look at the backlog it’s been pretty good.
David Fondrie - Heartland Funds
So would you expect second quarter would be somewhat better in the [bodies] area then, I presume?
Yes, I would.
David Fondrie - Heartland Funds
Could you talk a little bit more about the impact in Japan particularly on Isuzu. There’s been a lot of talk in the press about how automobile companies have been adversely impacted shortage of parts. Even I know that you were a bit concerned about availability of chassis earlier on. So has that been exasperated by the issue in Japan.
Great question David, I am glad you asked, because it is a question mark I am hoping a lot of the investors are asking many companies today, because it can have a big impact. So for us there’s three different areas that I will talk about the impact of the Japan disasters on.
The first one is on the N Series vehicle. So those are the ones we are making here in Charlotte. We’ve started production of them, so there were some of them actually that began during the month of April.
Because of the disaster we actually went in to a three-week shutdown, because we didn’t have parts availability for a lot of the key of components that come over from Japan.
After the three-week shutdown, we’ve got a slower ramp up phase going on. But by Q3, we expect to be back to the initial plan, which is shipping somewhere around 85 a week.
So a three-week shutdown, slower ramp up, by Q3 we will be back on plan to where we had expected to be from a pacing perspective.
Second element the Reach product. So the Reach product is well out of those shaft just coming over. At this point we are being told that one’s not going to have an impact on our plan to get those chassis on the boat by July.
Keep in mind, those who weren’t expecting to start until third and fourth quarter, we did take our volume slightly. We were expecting about a 1000 of units this year. We took it down to about 400, but it really didn’t have to deal with the impact of the Japan crisis. It was more as we are going through the durability testing. It took a little bit longer than we anticipated and we lost about two or three weeks because of the durability testing.
We take a very rugged standard to our testing specially on the service and delivery vehicle, so they want to be sure they are absolutely correct.
We do have by the way in Reach after the durability test and we’ve got 10 of those products now that are out in customers. So they are in the field live testing done through UPS and FedEx today with 10 vehicles currently sold. That’s going on even as we speak.
The third element of the impact of Japan just looking across the rest of our market. So our supply team went to kind of went out to all of key suppliers and asked them to look at their supply sources as well to find out what we might have.
So we took a very proactive approach there to going out there and finding out what else might be the live situation from Japan, and the good news is nothing came back. So everyone’s saying, no, we are okay on all fronts.
So really the element price for seeing the impact is on the N Series ones as I described it.
David Fondrie - Heartland Funds
That’s a comprehensive answer. The last one is just a little book keeping question. The retrofit in the Aquila Sentry on the unloading piece of revenues. Is that included in the Utilimaster revenues or is that down in the service parts area.
Actually it’s in Utilimasters' and if you look on the press release the schedule that breaks down on the back by the segments. You will see that the table at the top and there’s a line that says services and delivery and it’s broken down between vehicles and also parts, I think it’s called [inaudible]. That shows you what the [inaudible].
(Operator Instructions). And our next question comes from Ned Borland from Hudson Securities.
Ned Borland - Hudson Securities
Just want to follow-up on this delivery and service segment and the expected time to fill backlog. You’ve got it out to about eight months, and in the fourth quarter release it was two months. I know you alluded to the fact that customers seem to be indicating they want to take delivery later in the year. Is there any thing else that’s going on that would sort of drag out the production process here.
There’s really nothing going on that would drag out the process. What you’ve got is orders, when you look at Utilimaster they are no different than anyone of our other product lines whether specialty and nature, okay.
And also to the customers which Utilimasters' delivers product for, they have also got certain times of the years where they except product. So there is really nothing there that is dragging out other than what Joe mentioned a few moments earlier, where on the Reach product you’ve got some delays going on or pushback relative to increase validation durability testing. So instead of a1000 units we are not down to a level of about 400 units.
But from a delivery order intake perspective to getting the product out the door; the reality is the orders come in, mean individuals at Utilimasters' within SMI are working at a very rapid pace to get the orders out not just quickly but also in the time frames which the customers are asking them for.
The good news and that is, we are really starting to utilize our asset base there much more effectively. So in addition to putting on a second shift because of the volumes, we may even trip in to bit of [field trip] activity as well too. So we are really going to start to utilize our assets out of the Utilimaster facility even much better as we’ve talked to you before it’s a direction we are trying to head doing all of our plans.
Now the other piece that is going on, which has a slight impact to it but doesn’t really delay the orders at all; it really impacts how quickly we bring up the [third shift] is we’ll also be utilizing one of the buildings out there Utilimaster to begin the initial production of the Reach vehicle.
So one of the buildings that today is doing the tradition of (inaudible)or actually going to move in half just be doing these [stepped] end products to the Reach ones. So that will cause a little bit of a shift in volume around and changes the capacity a bit, but still plenty of capacity there to it. It’s more driven as John had described by our customer request.
Ned Borland - Hudson Securities
Just one on the question here, you covered the gross margin and how that’s supposed to track, I was wondering if sequentially you could go in to some of these one-time cost, trade show cost any expenses that were booked in the quarter related to the acquisition of Classic or anything that you don’t see recurring in the second quarter on the operating expense line.
Sure. Very little cost from the acquisition, so I’ll take that one first, on the Classic Fire acquisition. We are getting pretty good at doing the work associated with it. We did a lot of that work internally. There’s some cost in the first quarter but pretty small under a $100,000 and I think some of the closing cost will be in the second quarter as well too. But even then it will be pretty minor, I bet that’s in that same $50,000 to $100,000 range as well. So pretty minor on the Classic Fire.
Second in regards to the tradeshows; we had approximately between $600,000 and $700,000 of incremental tradeshow event cost during the quarter. Now a good chuck of those cost, usually $200,000 to $300,000 of them occur in the second quarter and they got pulled forward to the first quarter instead.
Ladies and Gentlemen at this time I am showing no additional questions and would like to turn the conference back over to management for any closing remarks.
Ladies and Gentlemen, thank you very much for spending some time today with us and to those on the internet as well. In summary, Q1 can be consolidated this way, strategically, backlog, balance sheet, cash management really was a quarter of great progress. The challenge is obviously grow smart, in operating expense we were well below our targets, and we need to execute against those targets.
The net result was the loss of $0.03 per share. However, as time goes on, there are numerous initiatives in place to turn the loss in to a positive, and as we move forward we are committed to making that happen. Thank you very much and have a great day.
The conference is now concluded. We thank you for attending today’s presentation. You may now disconnect your telephone lines.
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