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Executives

John Sztykiel - President and CEO

Joe Nowicki - Chief Financial Officer

Jeff Lambert - Lambert, Edwards & Associates

Analysts

Joseph Maxa - Dougherty & Company LLC

Ren Wood - BB&T Capital Markets

Walter Liptak - Barrington Research

Spartan Motors Inc (SPAR) Q3 2011 Earnings Conference Call October 26, 2011 10:00 AM ET

Operator

Good morning and welcome to the Spartan Motors' third-quarter 2011 conference call. All participants will be in a listen-only mode until the question-and-answer session of the conference call begins. (Operator instructions).

I would like to introduce Jeff Lambert of Lambert, Edwards & Associates, Spartan’s Investor Relations Firm. Mr. Lambert, you may now proceed.

Jeff Lambert

Good morning everyone and welcome to this morning’s call. I am Jeff Lambert and I am joined on the call today by John Sztykiel - President and CEO, Spartan Motors and Joe Nowicki, Chief Financial Officer. I assume all of you saw the company’s earnings release on Newswire and Internet this morning.

John and Joe will 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 in today's conference call regarding Spartan Motors and its operations may be considered forward-looking statements under the securities laws. As a result, I must caution you, as with any prediction or projection, there are a number of factors that could cause Spartan's results 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.

With that, I would like to turn the call over to John Sztykiel, John.

John Sztykiel

Alright. Thank you Jeff. Good morning to those who are listening on today's call and those on the Internet.

First I will briefly review our Q3 financial highlights then covered by our operational plan, the growth agenda and market overview. Joe Nowicki, our CFO will then provide a detailed review of the quarterly financial results. We will conclude by sharing our strategic direction that will pave the way for future profitable growth followed by a Q&A section.

First, an overview of the third quarter results. On our second quarter call we indicated that the first half of 2011 would be challenging from a demand perspective, but that the second half would market turn for the better in terms of sales and profitability. Based on the results we delivered this morning, we started the second half even stronger than what we anticipated, with Utilimaster posting stellar results and proving the value of our diversified business model.

Our focus on our four-part operational plan resulted in sequential improvements in revenue and return to solid profitability in Q3. At this point before I go on, I wish to thank all the SMI associates for a strong step in the right direction which took place in the third quarter. It all happens by people working together focused on the right strategy working in alignment.

Our top line performance highlighted the strength of our diversified business lines as solid growth in Utilimaster drove outstanding results in delivery and service. The performance of Utilimaster helped to offset softness in the recreational vehicle, the emergency response and the defense markets. It also helped produce our exposure to government dependent revenue streams.

Our profits for the third quarter validate the restructuring actions we have taken over the last several months and demonstrate our ability to drive significant leverage to the bottom line. The third quarter also illustrates the power and the strength of our diversified growth strategy in action, as we saw vibrant growth offset softness in other markets.

As a data point, in the third quarter, 63% of our business was either B2B (business to business) or B2C (business to consumer) with the remaining third being business to government or B2G related. This is a major shift from just 3 years ago when only 12% of our business was B2B or B2C and sales were dominated by government vehicles, i.e. about 88%. It is amazing how we have changed in this area over the past two year. And honestly, that foresight has provided not just direction with opportunity but is evolving as to how we operate. Given the significant challenges in federal and defense spending, state municipal budgets, we had the foresight to change the way also how we approach our markets and we worked diligently over the past 2 to 3 years to broaden our revenue base.

The acquisition of Utilimaster, which serves the delivery and service market is benefitting from how society operates a shift, Internet shopping, increased home deliveries. Our market which is driven by fleet operators and business customers, which includes demand cycles, which typically improve before the ER and RV related markets and/or defense.

Our alliance with Isuzu as well is also a great example of our diversification strategy. As we leveraged our expertise in assembly to assist Isuzu in reintroducing the popular N-Series gas product line in an incredibly short time period, less than 12 months and I will talk a little bit more about that later on.

As we look at the fourth quarter in early 2012, we do expect short term challenges in a number of our markets given the current weakness among consumers, budgetary constraints at the federal state municipal levels and its seasonal softening in the demand for delivery and service products. However, we are focused on the fact is to drive profitable growth, specifically momentum in service and delivery vehicles, particularly the opportunities in other projects or field service solutions as we call them.

The recent stability in our emergency response chassis and body markets, the successful and full integration of Classic Fire, the launch of our new revolutionary commercial van product “The Reach” and the retooling of our operational structure, continued pursuit of additional profitable growth initiatives with Isuzu and diversification into one or two other markets through either acquisitions, alliances or organic. Really, those are seven major items which we are very very focused on which will not only direct us, but which will start to see dramatic change in the right direction as time moves on.

As I mentioned earlier, Joe will review the financials in detail shortly, but now I am going to get into a more of a strategic review.

On our four-part operational plan, it is simple and straight forward. Growth and profitable market share through a disciplined three-point approach. Compelling products and services through a broad and attractive line-ups of products and services. Cost structure management to effectively utilize resources to leverage and support profit generating products and services. Last managing our balance sheet to sustain financial strength and liquidity so we can (inaudible) on new opportunities.

As we look at growth and profitable market share and our three-point approach which we termed the blended strategy it revolves around three penance [ph] alliances, acquisitions and organic. This growth strategy is an integral part of our plan for sustainable long-term profitability, top line growth and shareholder maximization.

As mentioned earlier, today 63% of our business is dependent on B2B or B2C. The effective implementation of the growth strategy and the acquisition of Utilimaster over two years ago and it has been a successful integration in driving what we are seeing today. And really we take great pride in that because 5 to 10 years ago honestly we were not known for successful integration of acquisitions, but today over the past two years we value Utilimaster and just most recently Classic Fire. Another example as to how we have changed. But it is not going to stop there, we will continue to explore additional areas for growth and diversification just as we have done with Utilimaster, just as we have done with Classic Fire and we will not hesitate to jump on the right opportunities from the strategic perspective when they arrive.

Let’s get into the markets. In the first half of 2011, the RV market on the whole improved slightly, but those gains were primarily in smaller-sized motorhomes and towables where Spartan currently does not compete and I use the term “currently” as overtime we will.

Wholesale shipments of motorhomes fell 17.4% overall, in August Class A motorhomes fell 15.4% from August of 2010. In addition, as I mentioned earlier, motorhome sales mix has shifted from diesel to less expensive models in the Class A and Class C markets. As a result, our recreational and especially chassis market sale were down 34% in Q3 compared to the same period a year ago. Obviously that is not our positive data point, but there are several initiatives in place to address them.

In light of this recent softening in the RV market, the strategic relocations of motorhome chassis manufacturing operations to Wakarusa, which will take place in 2012 is an important strategic shift. This relocation is in line with one of our 10 strategic directives being customer centric, it provides us the opportunity to grow market share by being closer to our end customers and more responsive to their needs. This facility is located in the heart of the motorhome or the RV production industry as more than 70% of our recreational vehicles are produced in northern Indiana. We will be within minutes of our customers and this is significant benefit. We also believe that it will provide other opportunities for other areas of growth in the RV industry beyond the typical Class A diesel where we currently participate. As we look at these opportunities, the location is perfect and we will take advantage of it as time goes on. Again, that move will take place in mid 2012.

The outdoor recreation market because I get that a lot, is why we are still there because it is a great industry and the demographic trends point towards its long term growth. What’s interesting, a recent camp by a canvas [ph] survey of RV owners revealed that 53% intended to use their RV more this past year than what they did in previous years despite higher fuel prices. While 38% planned to use theirs the same amount and just 9% say they have used the RV lives. So, it’s interesting, people plan to use their RVs more often.

Another data point, 65%, one of the reasons is to take more mini vacations. I think if there is something which you are seeing in some of the long vacations three or four weeks, people are taking their RVs for a long three-day weekend. So, they using them more and that’s good for the industry. In addition, RV family vacations are an average 27% to 61% less expensive than the other types of vacations, according to a study by international travel and tourism expert carriers [ph].

We know the strengths of this industry. We have the chance to identify emerging trends, identify and develop the right products and services that will win customers. It is also an industry of tremendous solid potential. Today the RV industry is an $8 billion market. It’s been in its high as $14 billion. But as you look over the next three to five years and it will be a challenging economy, the RV vacation is a very attractive from a cost point, plus it is the only lifestyle that gives you the ability to go where you want, when you want, at your direction and that is another reason that makes it so attractive.

Let’s shift over to defense and government. Third quarter sales were down $5 million compared to the same period in 2010, down nearly $1 million compared to Q2 of 2011, again a very challenging industry. During the quarter we completed production of SOCOM MRAP units under a 26-unit contract with BAE. SOCOM vehicles that were built were identical to those built in 2010.

The defense market outlook remains cautious as reflected in our lower backlogs at the end of Q3. The reality is the defense department is aggressively cutting costs by limiting new vehicle purchases and curtailing new programs. As the funding is limited, we have seen a number of competitors pursue lower margin opportunities in this space, in some areas it is not profitable, but we will remain disciplined as we are focused on growth in profitable market share, not just growth in market share. Part of this disciplined approached involved the restructuring done in this area to create a more variable cost structure and I compliment Joe Nowicki, Tom Gorman our Chief Operating Officer and all the other individuals involved, and they have reduced our cost point, plus they have also increased our flexibility to ramp up when required.

We will continue to work to develop the right partners. The defense industry is not going to disappear, we are committed to it. And again, our strategy is no different than what it was in Q2, look for the small, the right, the opportunities where we fit in and we can develop growth in proper market share where all stakeholders are smiling at the end of the day.

Over to emergency response. It has been a challenging market as well, as we have noted in previous quarters. Longer term we see that as a market with great growth and there is call for help every 0.73 seconds. And this statistics will likely grow, either time period will get less, as our population ages, 11,000 people a day are turning 50, and as you have heard me say before, more of us are going to take a ride in an emergency response product whether we want to or not.

What’s interesting is it’s also a very dangerous profession. As in 2009 there were 78,150 fire-fighter injuries, or 214 per day. Innovation, technology when applied properly, can make any job safer. Spartan has been a leader in the safety arena in the emergency response industry in the past and we will continue to lead in the future, provide value and differentiate our products.

Let's get into the details. Emergency response chassis, our Spartan Chassis unit, sales were down nearly 30% for Q3 of 2011 compared to the same quarter of 2010. Future indicators were mixed during the quarter; order intake was up slightly, while the backlog was down sequentially year-over-year. Despite these factors, Spartan is continuing to develop the product and services demanded by the global marketplace, which will result in improved market share.

As part of Spartan’s commitment to leading the industry in safety related innovation, we will begin offering the next generation of airbag technology on our emergency response cabin chassis in 2012. These airbags will be unique to the industry, the Spartan safety system, and they will be incorporated in the Spartan Chassis’ product. The system is currently in development and testing and will be validated in early 2012 then brought into the marketplace. As I mentioned earlier, very very dangerous going to the scene, very dangerous coming from the scene. Spartan Chassis has been a leader in safety, we will continue to be a leader in safety.

The market share gains we have experienced in emergency response chassis have continued to gain momentum, not just in North America, but beyond. As came out earlier, this past year we shipped 23 Metro Star cabin chassis for the Chinese market bringing our total units exported to China to 94. I should say these units are slated for delivery in Q4 of this year and early 2012.

Another interesting data point, here we are North American country creating sales across the world in a market or a country known for tremendous revenue, GDP growth, et cetera, and we've got space there, we will continue to grow there.

Emergency response revenue might shift over to Crimson Fire. Crimson Fire Aerials and Plastic fire. Revenues were up 23% for the quarter with nearly $12 million in sales compared to $9.5 million in the same quarter of 2010. Excluding Plastic fire, revenues were relatively flat with the third quarter of 2010. And in reality fairly flat indicates a lower growth which is still a great number as a whole emergency response fire truck market is down 25 to 30%.

Why is Crimson gaining share? First, it's a great team. Less than 2009, 2010 they introduced over 10 major product innovations and they are now seeing the results in those innovations, gaining market share. In the emergency response industry it takes about 18 months to seek growth after an innovation is introduced. We are obviously working on shortening that cycle to realize the topline growth of a new product but the reality is they're capturing profit and market share. There is a concern though, sequentially sales, the revenue, were down more than $2 million from Q2, illustrating our concern about the future. And while they have brought our numerous initiatives over the past couple of years there are numerous initiatives in place as we move into 2012 and we have a significant daily focused to reverse that negative data point.

Talk a little bit about the strategic acquisition of Classic Fire that has broadened their pipeline. High-performing durable products, very very value-oriented, set up, geared towards the budget sensitive department which is critical in today's marketplace. Again here, SMI we used an acquisition strategy to complement the Crimson line of quickly and effectively and what you saw was the topline growth in sales in Q3 significantly different while others are in this marketplace.

Across the country from a macro perspective, it's not just the mark where there is a need but 54% of all fire trucks are more than 15 years old. And that means there is a growing pent up demand, i.e., need for replacement. And as time goes on as we deliver the right products to the marketplace we will drive profitable growth.

Now let's switch over to our last market, I should say, then we will get into Aftermarket Parts and Assemblies but let's switch over to delivery and service. Simply Utilimaster blew the doors of this quarter by almost every measure. Sales were up 122% to the same quarter in 2010, and up 58% from Q2, driven in part by compelling products, improved profitability per unit, Joe will get into some of the details plus additional opportunities in field service, solutions, aftermarket parts and assemblies.

As good as Utilimaster’s results were there is still significant room for improvement from an operations perspective. There are 16 buildings on the campus in Wakarusa today where Utilimaster is located and we have significant vehicle flow opportunity to reduce our overall cost in building the Utilimaster product. So what I'm saying is, don't perceive we have come to the mountain top as to how efficient we can be with Utilimaster, we have got opportunity, we're focused and we're working daily to ensure that strategy delivers the right results.

The interesting thing is as people say why is delivery and service growing so much, they ask me that question. And there is a number of evolving trends which support our strategic decisions made over two years ago into the delivery and service marketplace. First, Internet commerce has increased dramatically over the last decade. Increase in the demand for package and delivery services, as I tell people, class A trucks and trains don't go door to door, that's where Utilimaster comes in.

Internet commerce continues to grow with major players like Amazon, reporting 33.7% compound annual growth in revenues from ’06 to ’10. And with more Internet retailers offering free or discounted shipping that will move. One large provider of packaged delivery indicated yesterday that they expect this holiday season to be their best ever, a step in the right direction. The reality is, our society is becoming more customer centric, whether it be Internet shopping, groceries, dry cleaning, more and more is getting delivered to the home. And Utilimaster is benefiting not just because they are business to business or business to consumer, but the reality is they're benefiting because of a shift in society. It's really not housing dependent. It's been a great acquisition, I complement everybody on the integration of it, and what's interesting is it's not just about the product going out the door. Improved driver or vehicle efficiency was another key factor driving growth in Q3, which will drive growth in the future.

Keyless entry systems for a major package delivery customer that will take or cut the time it takes for drivers to access cargo, thus increase the number of packages or staff they can make on a day. As a point of reference, UPS recently disclosed that keyless entry, as they call it, will save them over $70 million annually. The simple technology which has – it’s been available in passenger car for decades marks an important shift in the delivery and service market, driving down costs, increasing capacities, while providing a return to fleet operators and Utilimaster as well. You know, really a great statement.

And as we talk a little bit about field service solutions’ keyless entry, another major initiative is what we call system to assist in safe loading and unloading of the vehicles, custom (inaudible). The reality is delivery and service vehicles are in operation for 10 to 15 years, 10 to 15 years. We recognize there is tremendous opportunity to update existing vehicles and provide value to the fleet operator and us as well. Utilimaster has over 125,000 vehicles in service today. That number is growing.

Field service solutions will be a key part of our strategic growth, not just today, as we look into the future, as we recognize that each vehicle can be a revenue stream, not just when they leave the facility but provide a revenue and income stream outside of the normal parts replacement business over a 10- to 15-year period. Another area of field service solutions where we have differentiated ourselves really starting to hit home in Q3 of this year.

There will be some seasonal factors which impacted Utilimaster in the third quarter as a large number of vehicles were delivered, obviously it takes to address the largest shipping season which takes place in Q4, as major package delivery fleet customers prepare for the peak holiday seasons they require new vehicles to be delivered well in advance resulting in a seasonal increase. As a result, the backlogs drops sequentially from the peak in the second quarter, however year-over-year basis Utilimaster’s backlog is up over 38% to 53.9 million.

We're also excited about the launch of the Reach product, a revolutionary new commercial van developed under alliance with the Isuzu truck that offers over 35% improvement in fuel efficiency, cutting CO2 emissions in half, with other driver efficiency improvements. The Reach utilizes technology that is available and widely used today, it is a very very compelling value proposition for fleet major customers. If you're curious just go to the UPS website where they have a variety of notes and comments, some are actually YouTube videos about the Reach product. It's amazing, go to the Spartan Motor’s website, there is update on what's going on relative to the Reach product. The Reach provides Utilimaster’s delivery and service customers the opportunity to optimize both their top and bottom lines while enhancing the sustainability performance image. And what's interesting is this will not drive revenue so much in 2011 but it's a significant part of 2012 as we move forward.

The Reach was officially launched in Q3 of this year, will be distributed directly through Isuzu’s nationwide distribution network of approximately 280 dealers, we are now receiving orders from fleets and Isuzu dealers, and we are continuously building the backlog and just starting production.

In 2012, I do want to note we will be transitioning Reach production from Utilimaster’s Wakarusa facility to our production campus in Charlotte, Michigan. This will allow the Reach to be very close in proximity to the engineering production resources of the Isuzu, also in line with our customer centric business model and over time we will reduce our cost base as well.

Another data point, strategic diversification, increased revenue and solid profitability in every front, the delivery and service market is a growing $7 billion industry and we're on a great profitable path.

Couple other quick data points. Let us talk about the Isuzu alliance. During the third quarter, we continue to ramp-up production of the N-Series vehicle, our low-cab-forward gas cabin chassis, with our partners Isuzu commercial truck of America. As we mentioned in the last quarter, we expect to achieve production of 20 units a day by Q4. Reality, vehicles are now rolling off the line at a rate of approximately 21 units a day and that's where the market is demanding it. Initially things were set up at 14, then we increased our production targets to 20 units per day in Q3 because the demand was stronger than initially anticipated. In the first quarter of this year the reality is we are now rolling them off at 21 units per day.

To give you an idea of our evolution, the improvement in lean efficiency, 21 units per day are being produced by 49 people in a 50,000 sq ft. facility that was once building defense products. Flexibility, efficiency, absolutely great metrics. 21 units per day, 49 people, and 50,000 sq ft., those are dynamic metrics, no matter what anybody says or what other data points you look at, and we take great pride in that, my compliments to the people at Utilimaster, the Spartan team, and the Isuzu team.

Aftermarket Parts and Assemblies, the business was positively affected by several orders at Utilimaster during the quarter, which offset some softening in APA for speciality vehicles, i.e. defense. Total APA sales of 25.7 million increased 2% in Q3 versus the same quarter in 2010. Now, Joe, I would like to turn it over to you to do a deep dive into the financials and our operational plans.

Joe Nowicki

Thank you John and good morning everyone. As we stated in our last earnings call, we experienced a tough first half of 2011 but we're driving for improved results and return to profitability in the second half. Our results in the third quarter represented an important first step in delivering on that commitment.

I'll start off with the review of our income statement. Third-quarter sales were $120 million, relatively flat compared to the third quarter of 2010, but up more than 21% from the last quarter. Sales were driven by the surge in delivery and services more than doubled, $61.2 million, offsetting decline in specialty vehicle revenues which fell by a similar dollar amount to $59.1 million. Delivery and service vehicle revenues were driven by flavors of new packaged delivery vehicles ahead of the peak holiday season, as well as significant orders for several aftermarket parts and assembly programs.

Gross margin in the quarter was 17% of sales compared to 16.4% of sales in the prior-year, and up from 12.8% last year. A product mix shifted to a more profitable products and services, in addition operating leverage drive from the incremental (inaudible) sales helped to lift overall margins for Utilimaster.

During the quarter, we also began to see the positive impact of the cost reduction activities we initiated last quarter, which will amount to more than $4 million in annualized reductions to our fixed costs base.

We have also continued working to improve our ability to leverage sales with savings in material costs, labor efficiencies, and reductions in overhead costs. Our lean initiatives have propelled our success and included a thorough review of our bill of materials. We continue to view our cost for further margin improvement as we recognize this is an ongoing process at Spartan Motors.

For some of our markets I would like to review financial results in some more detail. The emergency response chassis sales decreased 29.5% in the quarter compared to the same period in 2010, really as a result of the softening of the overall ER market in light of the tightening municipal and state budgets as John described.

In contrast, emergency response bodies showed an increase of 23.1% compared to the third quarter of 2010. Mainly due to the addition of Classic Fires’ operations. Excluding Classic Fire, we are still relatively flat versus the same quarter a year ago, despite a very challenging market.

Sales in deliveries and service rose substantially, up a 122% for the third quarter of 2010 reaching $61.2 million in the third quarter of 2011. Our delivery and service sales increased to 51% of this quarter’s sales, compared to 23% for the same quarter in 2010. As we have mentioned on previous calls, the margins in delivery and service reflect the competitive nature of this business, it can also have a dampening effect on our overall margins. However, in the third quarter, we received the benefit from two positive developments on the margin front in Utilimaster. First with a higher level of sales in the quarter, we are able to achieve operating leverage to those (inaudible) margins. Second with the benefit of the significant increased in APA business(inaudible) . Our defence and government motor markets continued to experience a large contraction. As John stated these shifts are reflections of the overall market condition.

Across the organization, we have thoroughly reviewed our cost structure and made adjustments to align with the expected near term revenue levels and make our cost structure more viable, so we can flex those operations with changing market conditions in the future.

Consolidated operating expenses increased by approximately $800,000 in the third quarter of 2011 compared to the same quarter of 2010. Operating expenses as a percentage of sales increased to 12.6% from 11.9% for the same periods. Increase in operating expenses was driven by three main factors. First, the inclusions of operating expenses from Classic Fire, which were not present in 2010, backens[ph] a higher variable costs those[ph] with the increased sales of Utilimaster. And also the $600,000 accrual for contingent earn-out payments for the Utilimaster acquisition, which really reflects the good news that the significant growth in Utilimaster has exceeded our acquisition performance targets.

On a positive note, fixed operating expenses were down as a result of the restructuring actions taken earlier in the year. We are to lower our cost structure by $4 million. Interest expenses down $150,000 from Q3 of 2010, driven by the $10 million decrease in outstanding debt.

Net income for the quarter was $3.2 million or $0.10 per diluted share compared with net income of $3.3 million or $0.10 per diluted share for the same period in 2010.

Now moving over to our balance sheet, quickly. We continue to make outstanding progress in improving our balance sheet position. Accounts receivable decreased to roughly $44 million compared to $53 million at the end of 2010. And our DSO’s[ph] are reduced from 35 days at December 31, 2010 to just 28 days at the end of the third quarter. Our inventory has risen slightly to $65 million, but it is decreased by $13.6 million since Q3 of 2010. This year-over-year improvement is reflected in a reduction of 18 days inventory, which fell[ph] the 57 days at the end of the quarter. Well, we are pleased with this improvement we see more opportunities to make progress as we continue to actively manage all aspects of our balance sheet.

In our cash flow statement, depreciation and amortization for the quarter was $2.3 million. Managing our resources more effectively, help to drive $1.5 million in operating cash flow during the quarter. With the improvements we have made in managing our balance sheet, our cash conversion cycle improved by 17 days from the third quarter of 2010 to just 61 days at the end of September.

Capital expenditures for the quarter were $1.1 million and support continuing operations in strategic investments. At September, 30th our debt balance remained at approximately $5 million and our net cash position was approximately $25 million up nearly $16 million from the end of 2010.

Our capital capacity includes of the $70 million on our existing credit facility, another $40 million available to private placement notes. With this credit availability, $30 million in cash and the extremely low debt level we have significant financial flexibility to fund our growth initiatives.

The sequential increase in sales along with moving past peak seasonal demand in delivery and service produced a contraction in our backlog which ended the quarter at a $143 million. This is lower than the second quarter in same period in 2010 for the market and economic reasons discussed a moment ago.

In note[ph] our delivery and service backlog is up 38% from the prior year. Sequentially it is down $31 million given the (inaudible) orders for those package delivery vehicles ahead of the this peak holiday seasons we described.

In closing, I am pleased with the numerous successes we have achieved in the quarter. We delivered on our commitment and improved profitable result in the second half with a strong earnings performance in the quarter. With our exceptional performance in Utilimaster, which proves the value of our revenue versus vacation strategy, and form the basis of our financial performance. We continue to work on controlling our operating expenses and effectively managing our balance sheet that resulted in reduced break-even and increased financial flexibility to pursue our growth initiatives.

We continue to expected profitable performance for the remainder of the year, while we are facing challenges from lower backlogs and adverse seasonal factors. Overall, we are excited about the long term prospects of our new products like Reach, as well as the continued development of our alliance with Isuzu, which we believe will drive profitability and shareholder value.

I'll now turn the call back to John, who will share some closing thoughts.

John Sztykiel

All right, Joseph. Thank you very much. In closing the third quarter market turning point for Spartan, as we saw the results of the many efforts we have put in over the past couple of years, form our restructuring, to launching new products, to support new business growth. The reality at Spartan Motors is a dramatically different company than what we were two years ago. We have diversified our business with the successful integration of two great acquisitions Utilimaster and Classic Fire.

We have the alliance with Isuzu. The strength of our balance sheet, which positions us to pursue the right acquisition alliance and growth, organic growth opportunities. We have seen many changes in our markets over the last few years. As I mentioned earlier, we had a dramatic turnaround in our B2B, B2C business, shifting away from government related businesses. We will continue to address more business to business, business to consumer markets to organic alliance and acquisition initiatives to achieve our revenue diversification goals. This shift really reflects changes in how society operates, resulting in a much bigger emphasis on delivery and service and other speciality vehicle type markets.

The reality when the federal government sees significant budget challenges and the defence department begin to cut back programs, as the war in Iraq and Afghanistan have come to a close, we didn’t sit back and take it. We did what we always do, we adapted, we evolved and are focused on leading.

Next, reality is we are particularly excited about what lies ahead from an organic perspective. As mentioned earlier, the Reach is a revolutionary new commercial van that is absolutely right for the delivery and service market place. We took our first orders in Q3 and expect to make our delivery, our first deliveries in Q4. As 2000 comes to an end, we will be showing several exciting new concepts at the largest RV show, RVIA, late November, early December.

In early 2012, several new innovations will be introduced to the emergency response industry through either Crimson and/or, I should say both Spartan Chassis. But also, that is also reality or reality is that over the next three to five years, it will be a very challenging North American economy. We talked earlier about SMI being a different organization and recognizing that North America will be a very challenging market over the next four to five years. The reality is one does not want to be a single market company without a global presence. These defined decisions made a few years ago, today SMI is a multi-market company, with a growing global presence. Plus, we are constantly looking at ways to reduce our cost base as evidenced by our third quarter results.

2011 as I close has not been easy. Quick summary strategically, areas that will drive sales and income in future years, we have done a great job, Utilimaster, Classic Fire, Isuzu, the Reach. Balance sheet management is providing opportunity and the cash to pursue tomorrow. The third tenant or the key part, every organization have to do great job (inaudible) do they want to be a high performing organization is operationally. We defined that as those areas that drive sales and income in the current year. The first half was not so good, we gave the (inaudible) on that, we also indicated that we expected the second half to be better and the third quarter was much better, but the reality is that the third quarter is over, we are in the fourth and we are focused on 2012 and beyond.

As we look at today, and (inaudible) tomorrow, we are focused, confident, looking forward to ensuring not just a good today, but a great tomorrow. And the reality is this was evidenced by also the dividend release that the board just declared. And there is one amazing data point outside of the dividend, which provides some clarity on Spartan as to how we are different. We have been paying dividends 24 years in a row. So in closing, third quarter was a step in the right direction, however we are focused, we are confident, and we are committed to ensuring not just a good today, but tomorrow as well. Thank you very much.

John Sztykiel

Operator if you can open up the questions please.

Question-and-Answer Session

Operator

Certainly, we will now begin the question and answer session. (Operator Instructions) Our first question comes from Joe Maxa of Dougherty & Company.

Joseph Maxa - Dougherty & Company LLC

Thank you, congratulations on a nice quarter.

John Sztykiel

Thanks Joe, good morning to you.

Joe Nowicki

Thanks Joseph.

Joseph Maxa - Dougherty & Company LLC

I was, wanted ask a little more, or talk a little more about you, the delivery and service. I understand the seasonality. Will the Reach vehicle help you smooth out that seasonality? Perhaps, maybe not initially, but would you expect to see that? And then also, what type of cannibalization would you expect?

John Sztykiel

Joe, John Sztykiel, I will talk about the seasonality and then Joe will talk a little about the cannibalization, but you know, very perceptive buying your part in that overtime the Reach will reduce the seasonality of the delivery and service market. And the point being, their product is not just geared for large commercial fleets, but also for smaller and mid-sized fleets. And what you find, and that’s where the Isuzu distribution network, the 280 cross dealers comes in. Is that those, the Reach can go to, a firm or a fleet that might have 1,2,3,5 commercial vans. We will make product dynamic as easy to get into, a six foot two person can stand up inside. It is got great fuel economy, delivering 35% better than what out here today. It is a 10 to 15 year vehicle. And as people look at Utilimaster and then they look into the future, Utilimaster has never sold the product to 280 dealers or through distribution network. So I expect that that happen in 2012? The answer is no. Where we will start to see that reduce the seasonality will probably be 2013 and beyond, because that will take a little bit of time for all the dealers to get their products, start to hit the tray from the sales and marketing perspective etc. So, it will reduce the seasonality, it will drive the top line and bottom line and Joe is going talk about cannibalization, but I would not expect in 2012, I would look to see it in 2013. Joe.

Joe Nowicki

I think, your comment is correct John and Joe in regards to cannibalization, as we have always described, yes there will be some from the Reach product on the traditional step van, but keep in mind, it is a different product and it is got a slightly different market as well to. Cargo space is probably the biggest differences we have described, it is a little bit smaller than the traditional step van, so what you will see, and we have already seen from some of our end customers, is that they are looking how they can use that product in specific routes, and markets, different than what they use in the other markets today. So there will be some cannibalization Joe. But, I can’t tell you an exact amount or how much? We think it is going to provide us also (inaudible) in the several parts of the market that we are not at today. So that is a great opportunity for us.

John Sztykiel

Joe let me make one other comment to the group that because all of you are probably used like a home, air conditioning and heating individual come into house, a plumber or a carpet cleaner etcetera, most of them show up today in like a cargo van or even in (inaudible) okay. The Reach product carries anywhere from 50% to 75% more stuff than a cargo van. It spread[ph] at a six foot two person can stand up inside. I should say the Reach, with the Reach product an individual can do work in the back of the unit. So talking to some of these people that do a lot of home delivery or home kind of work, one of their predicaments or issues today is they can’t take everything they want to go out in the truck and then not come back, so like UPS truck, okay. Because, of the size of the cargo van. The Reach will enable them to put everything they want to do for one complete day and not come back, that means they are more efficient from a fuel perspective, they can do more stops because they are wasting time coming back two or three times to the main store. So, and what is interesting there is over 225,000 cargo vans purchased a year for just the workplace part of the market place. So, well there will be some cannibalization. A huge focus point of the Reach is to go after that 225,000 units per year cargo van market place. Is the Reach product more expensive, absolutely, but you have product that is more fuel operating efficient, doesn’t have a life cycle of three of five years, it has a life cycle of 10 to 15 years, both on the body and the chassis, so we have got a very compelling value proposition.

So in closing, while we expect some cannibalization, it is not as much as what some people may perceive, because the Reach is also targeted at a very market place going after the cargo van market place.

Joseph Maxa - Dougherty & Company LLC

Nice, that is helpful, thank you. Regarding the seasonality and where the backlog is for your delivery and service here at the end of Q3, would we be looking for Q4 product sale of Utilimaster been similar to Q3 or should we see that back off?

John Sztykiel

What was the second part of the question, Joe, sorry I can’t –.

Joseph Maxa - Dougherty & Company LLC

I was just wondering if Q3, you would think would be normally or larger quarter of the year given the holiday season?

John Sztykiel

Good questions Joe and absolutely Q3 is our, from a delivery and service perspective, is the seasonal high point. So, yes in Q4 we will see those new vehicle sales, the vehicle sales part kind of come down in the fourth quarter from delivery and service and the second part as well to as we did pull some business into third quarter from fourth quarter based on customer demand. Customers really wanted some of the vehicles sooner, they also wanted some of that aftermarket parts, in service business that we are doing sooner as well to. So we pulled some that from fourth quarter into third. So yes, you will see the delivery and service segment come down in the fourth quarter.

Joseph Maxa - Dougherty & Company LLC

And lastly, I was, I wanted ask about that, you know, the APA segment for Utilimaster very stronger in the quarter, is this sustainable number? What would be a good number to be thinking about going forward?

Joe Nowicki

Yes, I am going to shy away from giving you a number Joe, but we will talk a little bit about, absolutely, do we intend to make this a sustainable product or business going forward? One of the big differences in the Utilimaster business model is, it is not just about selling the initial vehicle. It is about being a customer solution product all the way to the end, which means, all the enhancements that we do, some of the things that John described as he walked for APA’s job from keyless, to shelving, to some safe loading systems, all those things go beyond just selling a vehicle to customer. Naturally, what is unique about Utilimaster. So, yes you will see that continue in the future. Now was it probably at a heightened level during this quarter, probably was, because we pulled some of steps forward when we have some unusually large projects going through. But I intend just to growth that at Utilimaster, but also to grow that same concept in our traditional Spartan Chassis business as well.

John Sztykiel

You know, I think one of the things that Joe and group would (inaudible) it is interesting, there was a very article a couple of weeks ago on this keyless entry system, actually in the Wall Street journal. And, what we technically see is you have one or two or three customers work with Utilimaster at large fleet on the field service solutions, recognizing they keep vehicles 10 to 15 years, very, very good results. And you get those fleets updated etcetera and then you are going to see a bit of a dip and then you will see sustainable growth happen after that, the reason you have a bit of a dip is one, you start working with even greater number of customers. You solve the fleets, people see the results and it is like okay, the awareness is now there, okay vow, I have got this vehicle and you guys will work with me to adapt to revolve the vehicle knowing that I am going keep it 10 to 15 years. So, what we are seeing is Utilimaster today is a increased number customer increase, as to how they can update their vehicles versus what they have today, but we have seen good growth, there will probably be a bit of a dip, but then as I would say 2012 and 2013 moves on you should see good sustainable growth as we get past the awareness into the field service solutions, execution implementation.

Joseph Maxa - Dougherty & Company LLC

Yeah, makes sense, I will jump back in the queue.

John Sztykiel

Good thanks Joe

Operator

Our next question comes from Ren Wood of BB&T Capital Markets.

Ren Wood - BB&T Capital Markets

Good morning, John and Joe.

Joe Nowicki

Good Morning Ren

John Sztykiel

Good morning Ren.

Ren Wood - BB&T Capital Markets

First congratulations on a nice quarter.

Joe Nowicki

Thank you.

John Sztykiel

Thank you

Ren Wood - BB&T Capital Markets

I wanted to ask about your distribution network. Couple of things, one do you feel at this point that your, you know, fully covered there in where you want to be and, you know, your full access to Isuzu network, you have added some on the Crimsons side, you get those opportunities to add there. And then when I look at Utilimaster for the quarter, how much of this was growth versus you are adding distribution networks and access to markets you didn’t have before?

John Sztykiel

Okay Ren. This is John Sztykiel and I will cover the distribution and I will turn it over, you know to Joe on the growth. But, first from the Isuzu side, when delivery and service as we look Utilimaster and the 280 dealers, you know, we are working with a great distribution network. We believe we have got great coverage, absolutely, and it’s not just John Sztykiel, but for all of the listeners. Isuzu has been the market leader in the low-cab forward market for the last 24 years straight. Now, when you are the leader for 24 years straight, you are probably doing a lot right on a consistent basis. So, on the delivery and service, the Isuzu, is the distribution coverage great, absolutely.

As we look at Crimson Fire, do we have opportunities to improve their distribution network? Absolutely, and it is in certain parts of the country, there is a number of initiatives in place to enhance their distribution network. What’s interesting is the Classic Fire acquisition brought on a great dealer, but we would consider to be a Type A dealer in the Georgia, Florida region, which is where Crimson in the past. So, Crimson is going through a very disciplined market approach. They have identified their gaps from a distribution perspective, and they are now addressing that. So, it’s sort of a two-part answer, delivery and service, Utilimaster, Isuzu demonstrated greatness, very, very comfortable there. Crimson Fire, we have some very good dealers, we have got some gaps and they have filled some gaps, but they are also very disciplined in filling those future gaps as we move throughout the rest of ’11 and into ’12.

John Sztykiel

On the growth side, I will take that one real quick, and what drove the growth at Utilimaster, as you saw from the numbers, it was a good even growth in both the vehicle side and also the aftermarket parts side. I don’t think strengthening the distribution really was any of the factors on the Utilimaster part of the equation this quarter. It was really a lot, on the vehicle side it was kind of combination of pent-up demand and also some of the tax advantages that are out there today that we described before. And the pent-up demand, keep in mind, $60 million a quarter, so that’s a $240 million annual pacing, but that’s not uncommon. That’s where they were running in the 2007-2008 timeframe. Remember then that industry dropped off substantially and that’s when they were running closer to $100 million to $120 million range for the last couple of years.

So, it’s not that out of question, and it’s really getting that pent-up vehicle demand. Plus, there is also on the vehicle’s issue, the tax advantages in the current tax law that allowed for that – that will allow for in ’11 and a portion in ’12 for the immediate write-off, that’s also been a big push as well, too.

On the APA side, it’s really been the business model shift. I think the Utilimaster folks have always focused a lot on being this kind of full-service provider more than just selling the truck, and they have had that as part of their business strategy and they have really accelerated over the course of the last year. And I think what you are seeing is a lot of that APA stuff coming to fruition with them.

Joe Nowicki

You know, one of the things that I just wanted to talk about field service solutions where to give people, I think the proper perspective is when you look at the vehicle, the revenue and income stream over a 10 to 15 year period, it’s also a counter-cyclical move from a strategic perspective as well. Typically, when the economy is moving strong in the right direction, you see vehicle purchases go up etcetera, and you see that for example in the car industry, and then when the economy starts to struggle, purchases start to come down, when industry starts to go up parts sales. AutoZone, Action Auto [ph] all of those, and so, it’s interesting. Again, it has not been a part of Utilimaster’s strategic and operational business model in the past, but in late 2010, 2011, they really developed this field service solution, strategic and operational plan, now they are executing it. But the other benefit of it is it’s also a counter-cyclical play as well, because as the economy dips or may struggle some people will look to try to retain vehicles and our challenge or opportunity is how do we continue that revenue and income stream. So, it’s sort of like in, you know, in AutoZone, Action Auto [ph] parts etcetera, and what you are seeing is the benefits of that.

Ren Wood - BB&T Capital Markets

Great color, thanks for that. I want to ask you another question with emergency response division. You talked about the challenges there, and we talked about in the past kind of the industry numbers. Do you still think that we are kind of at a base level for the industry at this point and given your recent acquisitions and new products and your international opportunities with China and maybe other places, do you think we can kind of continue to see that kind of grow modestly from here?

Joe Nowicki

I think that’s a very reasonable statement. First, I think we had an industry low point from a vehicle perspective. We believe their looking at the data etcetera within the industry, Ren. Because the reality is two data points, one is the call for help every 0.73 seconds. Second, you have got an industry where 54% of the trucks are over 15 years old, which means they don’t even have the anti-lock breaks. Just imagine driving a 35,000 pound vehicle without anti-lock breaks. I think , the third area where you are going to see Spartan Chassis and Crimson continue to differentiate themselves is providing compelling products that have great value. And compelling could for example like Spartan Force Chassis, it is a big large cab, it is a custom in that, there is no front-end like on the commercials, so you have very good manoeuvrability, but recognizing that the large cab is both the transportation and the office to the scene, that’s why that large cab is so important. The value comes in as that there is less budget dollars today. So we are offering a compelling product at a lower price point. That’s part of what you have seen with integration of Classic Fire – the 28% increase in the revenues et cetera. Why the Classic Fire acquisition was so important is compelling product, but you got to provide value to society and how we define the value to the society, is it has to be at a lower price point because society less money today. And as we look to the future for Crimson, you know, we expect to see them and Spartan Chassis grow their market share and that will driven around compelling products with innovation, but providing value to society, well hopefully the people spending their money, so you know what, pretty cool product, it really does all that we want, but do you know what the price is great, all right. You know and I think we have had success with that in Q3 and that’s our plan pretty simple going forward.

Ren Wood - BB&T Capital Markets

Great, thanks for the color and the time, I appreciate it.

John Sztykiel

Thanks Ren.

Operator

(Operator Instructions) Our next question Walter Liptak from Barrington Research.

Walter Liptak - Barrington Research

Thanks guys, good morning.

John Sztykiel

Good Morning Walter.

Walter Liptak - Barrington Research

And I would congratulations too, it’s nice to see the diversity with 51% of the sales coming from Utilimaster. I wonder if you could talk about the profit, diversity? And, for example, how much of your gross profit, was it roughly half that came from Utilimaster or was it something higher than that?

Joe Nowicki

Well, I think if you look in the press release, we don’t really give up gross profit, but there is a – in the press release we get kind of give earnings number. That will give you a good reflection of it. The net earnings or loss from the specialty vehicle segment as compared to delivery service segment is shown, the segment tables at the back of the press release. As you can see, a good portion of it, really our profitability came from that delivery and service vehicle segment in this quarter.

Walter Liptak - Barrington Research

Okay, I hadn’t noticed that. So the 4.8 million net earnings was offset by some losses in –

Joe Nowicki

Right. It really drove our profitability. The speciality vehicle segment, the other segment of it, really pretty much – yes, some loss too, but really at all the profitability from the delivery and service vehicle side.

Walter Liptak - Barrington Research

Okay. And presumably the parts are more profitable than the trucks within delivery and service?

John Sztykiel

Traditionally that’s the case. But one of the comments as I mentioned earlier was when we get that big of an increase in the volume and we are running along at $60 million a quarter, that is just a great leverage of the overhead there which really helped to drive our profitability of the vehicles quite substantially. We have talked in the past about – it’s a tough market, competitive from a pricing perspective and that makes it a challenge for our profitability perspective with the margin on the vehicles. But what we demonstrated this quarter is, when you have the volume and you drive the volume to the plant, from the vehicle side it drives really good, kind of vehicle margins for us. So, it’s a combination of both. Yes, we did get good margins from the aftermarket business, but yes, we are really doing a good job of fixing, improving, leaning out the operations side of the business and with the additional volume that drove great margins on the vehicle side too.

Walter Liptak - Barrington Research

Okay. And I understand that the fourth quarter will be seasonally weaker than the third –

John Sztykiel

Right.

Walter Liptak - Barrington Research

Will you still get that production leverage, even though it’s at a lower level or would some of the profitability fall on the fourth quarter?

John Sztykiel

It will fall a bit in the fourth quarter because few things – mix a little bit away from that, the APA or the parts business, so that will take away from the profitability of that. And second, you won’t see as much new vehicle sales going through in the fourth quarter, so lest buying the leverage. So you will see the margin come down as well too.

Walter Liptak - Barrington Research

Okay. On the APA side, was it primarily the keyless entry that drove the incremental APA revenue in the quarter?

John Sztykiel

No, really it was several. The nice part about it is it wasn’t just one event. Keyless was great but we had a great shelving program that we had gone out with some of our major customers as well too. And then we also had some systems that helped for the safe loading of trucks that we had in place and a couple others. So it was spread out nicely.

Walter Liptak - Barrington Research

Okay. And are those going to continue into the fourth or those projects, you mentioned some trucks and parts got pulled forward? Are we looking at a lower level of part sales on the fourth?

John Sztykiel

Yes we are. We had customer request to pool some of the shelving and Keyless stuffed into the third quarter, so we pulled some of that stuff forward based on their kind of demand request.

Walter Liptak - Barrington Research

You beat my revenue number by I think 12 million out of the DNS segment. Is that about the amount of the pull forward?

Joe Nowicki

I don’t know that off the top of my head but it was a substantial amount that we pulled forward, yeah.

Walter Liptak - Barrington Research

Okay. And your backlog, just kind of talking about the whole business, the backlog is down about 20% sequentially. As we think about the seasonality for the fourth quarter, is that about the amount of the revenue, lower revenue for the fourth quarter because of the seasonality?

Joe Nowicki

Not that perfect of a science with it, so you can’t just assume that the revenue would be down by 20 million in the fourth quarter. A good portion in some of the aftermarket part of business doesn’t really show up as much in the backlog, so that kind of comes automatically. Keeping in mind the orders that were in the backlog beginning of the quarter, got built up over the prior couple of quarters when they came in, so it’s hard to see that backlog – picking up – the end of the first and the second quarter we started to see those orders for UTM come in.

Walter Liptak - Barrington Research

Okay. And if I can ask about the gross margin for the fourth quarter, seasonally we should have a weaker fourth quarter revenue. Does that flow through to a lower gross margin for the fourth quarter as well?

Joe Nowicki

Yes, as I mentioned earlier, when you have less volumes and also a shift in the mix of the business that will drive lower gross margins for us next quarter, absolutely.

Walter Liptak - Barrington Research

Can you give me an idea about the magnitude like you are running about 15%, maybe above that year-to-date, would you come down towards the kind of that three quarter run rate?

Joe Nowicki

We don’t really kind of get to disclosing a financial forecast at that level of detail.

Walter Liptak - Barrington Research

Okay. And one last one, I apologize for going this long, but...

Joe Nowicki

No problem.

Walter Liptak - Barrington Research

When you talked to UPS and FedEx, you know obviously, there is a lot of macro things and worries with the economy, what are they thinking about for their ageing fleet and the level of purchases that they might put in place for 2012?

John Sztykiel

Well, I mean when they continuously evolve the business model, but I think they are actively looking at upgrading their fleets because the price of fuel continues to move up. Second, the vehicles from Utilimaster are becoming more efficient. And again while you’ve got an existing vehicle and while a keyless entry system or a safe load system they make sense short term, long term you get benefits of improved fuel economy a variety of different areas, for safety, entrance and (inaudible) etc. So as we look into 2012, I mean honestly we get excited when we start to see people publicly indicating some of the larger fleets saying they are expecting their best holiday season ever and that they actually see an uptick in GDP growth in the economy in 2012 versus a variety of people that are forecasting potentially a double dip. So right now, I’d say we’re probably you know, consciously optimistic, fairly positive as we look at vehicle purchases in 2012.

Walter Liptak - Barrington Research

Okay, and they usually place orders in early part of the year, like January, February? Is that right?

John Sztykiel

No, it’s more – it goes throughout the year but the large fleets really they place orders throughout the year not all at the same time which is good because if they all came in at once, we couldn’t build them all at once. One thing which is fairly consistent with the large fleet is they really don’t want them, but they want them all delivered by the end of October. You know it’s interesting, there is a saying in the industry “nowhere to be seen after Halloween.”

Joe Nowicki

More towards the first quarter and the second.

Walter Liptak - Barrington Research

Thanks.

Operator

Thank you. At this time we have no further questions. I would now like to turn the call over to Mr. John Sztykiel for closing remarks.

John Sztykiel

Alright. First I want to thank all of you for your time. Really, some great questions, you know tremendous insight. In closing, the reality Q3 was a glimpse and while we appreciate the comments on a great quarter, okay, it was a glimpse as to what we can do and we understand that. The result is our passion to deliver and improve financial results to ensure that all of stakeholders smile, through differentiated profitable growth is greater today than what it was really three months ago because we are now seeing the potential of what we can do as a team was actually very reduced revenues versus two and three years ago.

On the other hand versus two to four years ago, when sales and income were really much higher, the reality was, it was short lived as most of that was specific event driven i.e., award. And as we sit here today, well we will always be opportunistic, speed and agility to take advantage of those items in front of us. As an organization, as a group of people we are very focused and diversified sustainable profitable growth and that’s our focus. And what’s nice, is Q3 demonstrated that, we continue to move the ball in the right direction in 2011 and enclosing we are a stronger company than where we were 3 to 5 years ago and especially vehicle business continues to evolve in moving in the direction as society becomes more customers centric. Thank you very very much. Have a great day.

Operator

The conference has now concluded (Operator instructions).

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