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Executives

Greg Salchow - Director of Investor Relations and Treasury

John Sztykiel - President and Chief Executive Officer

Joe Nowicki – Chief Financial Officer

Analysts

Walt Liptak - Barrington Research

Joe Maxa - Dougherty & Company

Rob Kosowsky – Sidoti & Company

Rhem Wood - BB&T Capital Markets

Spartan Motors, Inc. (SPAR) Q1 2012 Earnings Call May 1, 2012 10:00 AM ET

Operator

Good Morning and welcome to Spartan Motor's first quarter 2012 conference call. [Operator instructions] I would like to introduce Mr. Greg Salchow, Director of Investor Relations and Treasury for Spartan Motors. Mr Salchow, you may now proceed.

Greg Salchow

Thank you Amy. Good morning, everybody, and welcome to Spartan Motors first quarter 2012 earnings conference call. I'm Greg Salchow. and I'm joined today on the call by John Sztykiel, our President and CEO and Joe Nowicki, Chief Financial Officer of Spartan Motors.

I assume all of you saw the company's earnings release on the newswire and Internet this morning.

Before we start the call, I need to inform you that certain statements made today, during our conference call, which may include management's current outlook, viewpoint, predictions and projections, regarding Spartan motors and its operations, may be considered forward-looking statements under securities laws. 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, our management believes, that 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.

Please note that during the question and answer period, we will take one question and one follow-up, per analyst. That should allow everyone the opportunity to ask a question. After asking your question, you're welcome to rejoin the queue, for additional questions, as time permits.

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

John Sztykiel

All right. Thank you Greg. Good morning and thank you for joining us today. We have been busy at Spartan, working to diversify and grow our business and deliver consistent profitability.

We'll keep our prepared remarks fairly short today so we can discuss the quarter, our growth strategy, and how we are defining emergency response. Joe Nowicki will then provide a review of our first-quarter financial results. Following that, we will have time to answer your questions.

But, as we look at the first quarter, there were four major points to note in the first quarter. First, Spartan's operating income was $2 million, compared to an operating loss of $1.3 million, a year ago. Spartan earned an adjusted net income of $0.04 per share in the first quarter of '12, versus a loss of $0.03 per share in the first quarter of 2011.

Note that our first-quarter 2012 results excluded $5.4 million in restructuring charges

Second, the first quarter of 2012 marks the third quarter in a row that Spartan has posted an adjusted operating profit.

Third, we diversified our revenue base. In the first quarter of 2012, 65%, nearly two-thirds of our revenue, came from consumers or businesses rather than government buyers.

Fourth, we posted revenue growth of 25% in the first quarter of '12 versus first-quarter 2011. This rate of growth shows the strength of our brand and the benefits of our diversified globe strategy.

Now, I want to update you on some of the steps we took during the first quarter. First, we continue to move ahead with our plan to relocate Utilimaster operations to a more efficient plant in Bristol, Indiana, as we execute our strategy for Utilimaster. We expect to begin transferring production of the Bristol facility in the late Q3/Q4 time frame. As you will recall, we forecasted annual cost reductions of at least $4 million by moving our Utilimaster operations to Bristol, Indiana. This remains our target. We continue to make progress towards relocating our operations in realizing these savings.

Next, the outlook for delivery and service. That market is good [ph], and we're on track to post revenue growth in 2012 compared to 2011. We need to execute the move to Bristol, continue to bring the Reach to market, and to improve the Reaches' financial performance. As you know, the launch of the Reach occurred one quarter later than we planned. This delayed initial shipments, and it's pushed out most of our volume targets by about one quarter.

We're also working to reduce the materials and manufacturing costs of the Reach, as we work through the startup of this new and exciting product. Customer interest remains strong in the Reach, and we're confident in our volume targets. As the volume increases, and as we make some changes to the bill materials, we improve the bill processes, we should be on track to our profitability goals.

In closing, as we execute the plan of delivery and service, 2010 will build upon the progress we have made in 2012.

Now, let's talk about Emergency Response. By now you have probably heard or read about the actions we took to redefine "Global Emergency Response Leadership". Including the record number of new products we introduced at FDIC, the major trade show, a couple of weeks ago. Emergency response is our second largest market, and as such, is very important to our business.

FDIC, or the Fire Department Instructors Conference, is the largest conference in trade show in North America for emergency response. As such, it is an ideal venue to introduce new products and illustrate how Spartan is redefining emergency response.

Just prior to the conference, we announced we would consolidate Crimson Fire and Classic Fire businesses, as well as our chassis business into Spartan ER. We did this to take advantage of the global strength of the Spartan brand. We realize we needed to take advantage of that brand strength, as we intensified our focus on the ER sector, as both the growth opportunity; thus one brand, Spartan ER, made absolute sense.

We also appointed Dennis Schneider as president of Spartan ER. Dennis previously headed our Crimson Fire subsidiary, and he has years of relevant experience, including serving as Chief Operating Officer of Doosan Infracore International, formerly Ingersoll Rand Bobcat where he was responsible for global operations, including manufacturing, Lean, and Six Sigma among other functions. Anyone who has heard of the Bobcat brand knows how powerful of a brand it is; a brand that is an absolute leader in its market. That is the type of leadership we want in our emergency response business. With Dennis' background we believe he is the right leader to help Spartan ER reach its potential as the leader in emergency response.

I want to make clear that we view emergency response as a growth opportunity for Spartan. While the ER market has declined more than 30% over the past year, Spartan is gaining market share in North America as evidenced by our growing backlog.

Innovation is also a key component that will drive our global growth in Emergency Response. Over 13 new products and concepts were introduced at FDIC. One of our newer products recognizes the budget constraints many fire departments are operating under today. The 21 ST is a very capable all-calls truck that delivers the most truck for the price. The 21 ST offers more storage, compartments to maximize the amount of equipment that can be carried aboard. This is just one example of how our product development is becoming more consumer focused than ever before.

Another exciting product we introduced at FDIC is the Advanced Protection System; APS as we call it. This advanced airbag seat belt system, fitted to the cabs of Spartan ER vehicles, greatly improves crash protection against occupant ejection and other issues that go on in a crash. This is an important development for fire fighter safety since more fire fighters are injured in traffic collisions than really in fighting fires. With this advanced system, Spartan is leapfrogging, a Steve Jobs term, competition in terms of capabilities and we have plans to make this system standard on our cabs in the near future.

Also, through our new relationship with Gimaex we introduced two new product concepts; the Spartan 4x4 Wildland Crossover and the Spartan RXO cab and chassis. Both of these concepts offer enhanced off-road performance for fighting wildfires and will be built and sold as Spartan ER vehicles. The need for such vehicles is highlighted by a data point from 2009 that shows that there are nearly 79,000 wildfires each year in the U.S. or even more important, 215 per day affecting over 16,000 acres per day.

This is an area of emergency response that is a wide open market since the technology and use is over 20 years old and much of the equipment is in need of replacement. Simply, no one has focused on wildfires. We, being Spartan, are about to change that.

These are just a few examples of the exciting products, vehicles and features we introduced at FDIC. The customer response was outstanding. Our dealers are excited and were energized about the future. As I have stated before we believe that global emergency response is a growing market as well. We believe that the market continues to grow as countries grow and develop adding infrastructure and population.

As populations and economies grow, there is an increasing demand for infrastructure and basic services, such as fire protection emergency response. Through innovation, working with the right partners, Spartan plans to be a part of this global growth. Alliances with Gimaex, with Renault, place us in a great strategic position to take advantage of these growth opportunities.

I will be also happy to discuss this further during our Q&A session later in the call but before we get to that, Joe Nowicki, our CFO will talk in greater details about our first quarter operating results. Joe?

Joe Nowicki

Thanks John and good morning, everyone. I want to begin my remarks by reiterating what John said about our first quarter performance. A 25% increase in year-over-year sales, 100 basis point improvement in adjusted gross margin over the prior year, a 210 basis point decrease in adjusted operating expense over the prior year and excluding non-recurring items another profitable quarter.

Valid results, but we recognize that the level of profitability should have been even higher. We have more work to do to continue to improve our operating efficiencies and drive more profit to the bottom line. Our revenue increased 25% to $118.8 million in the quarter due to strong sales growth in our delivery and service segment. Utilimaster continued to perform well with revenue growth in both vehicle sales and aftermarket parts and service solutions.

Utilimaster's total sales for the quarter were up 148% compared to the first quarter 2011. Utilimaster's vehicle sales nearly doubled to $37.1 million from $19.4, while parts and accessory sales rose to $21.7 million from $4.3 million in the first quarter of 2011.

Revenue in our emergency response business was down approximately 16% year-over-year, but our order backlog grew 14% during the quarter to $82 million. Since there's a time lag of up to six months from order to delivery, a growing backlog provides some encouraging signs about AR revenue in coming quarters.

Our motor home and bus chassis business showed signs of stabilizing in the first quarter. Sales were down only 1.8% year-over-year and backlog increased 7% from the end of 2011 to $10.7 million.

Although motor home and bus chassis production volume remains low, order intake so far this year has been fairly steady. [??], one of our larger customers is moving to a low-priced chassis and we will see volumes declining in the second half of this year as a result.

During this quarter a dedicated team intensified their efforts to improve the performance of the motor home and bus chassis business. The team made considerable progress in a short period of time to improve operating performance and reduce costs throughout the business unit. Due to the loss of a major customer, our motor home business will post lower revenue in 2012 than 2011. However, due to the work we have done to reduce costs, we expect operating results for 2012 to be improved from 2011.

We recognize we have more work to do to return the motor home and bus chassis business to our profitability targets. We're working to increase our revenue base, as well as lowering the cost side of the business, and are committed to being in this business for the long run.

You will remember from the fourth quarter of 2011 conference call that we announced the Utilimaster relocation project. That project has three parts. The first is the asset impairment charges of $4.6 million. The second are the move-related expenses. The third is the additional capital needed at the new Bristol facility. During the quarter, we incurred a total of $5.4 million in restructuring charges. Of that total, approximately $4.7 million is associated with the Wakarusa breakdown. Another $700,000 is due to employee separation costs at our other campuses.

The second part of the move consists of move-related expenses. These will total about $4 million and include the cost of moving the Utilimaster to Bristol and the Reach to the Charlotte campuses. These costs will be incurred evenly over Q2 through Q4 and will be called out as restructuring charges.

Finally, the third component is some capital spending, which will total approximately $8 million. This includes the cost of improvements to the Bristol facility and new equipment to include a modern paint line to improve the quality of our finished vehicles.

In my discussion of our operating results, I present both adjusted results that exclude the impact of restructuring charges as well as our results reported under GAAP. A reconciliation of our adjusted results to GAAP can be found in our first quarter 2012 earnings press release.

In our first quarter results, the cost of goods sold includes the restructuring charge of $3.6 million, mainly resulting from the impaired asset value of the Wakarusa, Indiana complex. The resulting charge reduced our reported gross margin under GAAP by 300 basis points. Excluding the impact of this charge, our cost of goods sold was 14.6%, up from 13.6% in a year ago first quarter. Including the restructuring charge, our gross margin percentage was 11.6% of sales. This performance shows where we are headed in terms of our gross margin percentage and is approaching the 15 to 15.5% gross margin we targeted in the full-year guidance we shared last month.

We are making progress in margin improvement, but we have more work to do in leveraging incremental sales into higher margins. Part of the issue with Utilimaster stems from the late launch of the Reach product. Because the launch of Reach was delayed, sales have lagged our initial projections. That's likely to be the case at least in the 2013, since fleet customers typically evaluate new vehicles for several months before placing additional orders.

For 2012, we expect to ship about 750 to 1,000 Reach vans and approximately double that number in 2013. In conjunction with moving the Reach production to Charlotte, we're working to modify the design of the Reach to make it easier to assemble and are changing some parts specifications to reduce costs and improve manufacturability. We receiving positive feedback from customers indicating we got he basics right with the Reach, and we expect some follow-up orders for more vehicles.

We also posted a restructuring charge of $1.8 million in our SG&A line. This charge is primarily related to the write-off of equipment at Wakarusa, plus costs related to the move to Bristol. This charge raised our operating expense as a percentage of sale by about 150 basis points.

Excluding the $1.8 million charge yields operating expenses of 12.9% as a percentage of sales. This compares to the first quarter of 2011 operating expenses of 15%. Great improvement. Including the restructuring charge raises our operating expenses as a percentage of sales to 14.4% for the quarter.

On an operating basis, you can see we're getting closer to our targets for the year. With some additional volume, we believe we can reach our targets and make further improvements throughout the year and into 2013. This, in turn, gets us closer to our 17-11-6 Plan that we're targeting for 2014.

For the quarter adjusted net income was $2 million or $.04 per diluted share, versus a net loss of $900,000 or $.03 per diluted share. Including the $5.4 million in restructuring charges that we incurred during the quarter, we reported a net loss of $2 million or $.06 per diluted share for the quarter.

We ended the quarter with $39.4 million in cash, up from $31.7 million at the end of 2011. We made further progress in improving accounts receivable collections and reducing inventories during the quarter, allowing us to free up more cash.

Compared to the prior year period, our days-sales-outstanding receivables declined to 32.7 days from 37.9. So we had another quarter of excellent balance sheet management. We expect to enter the heavier portion of the Bristol project in the second quarter of this year as we described earlier.

In 2013 a new set of emissions standards goes into effect. To avoid production disruptions, a certain number of pre-2013 must be purchased and used in production until we re-engineer our chassis to accommodate the 2013 engines. This means we'll need to pre-purchase 2013 engines in larger numbers than we would normally would hold. We believe we'll invest approximately $12 million to $15 million in the fourth quarter of this year to purchase those engines.

As we produce and sell vehicles, we'll work off this inventory of engines and convert the inventory into cash once again. By mid-2013, we expect to have our engine inventory cleared out and most of those receivables returned to cash.

We'll keep you posted on our expectations for our cash balance, but emphasize that we project Spartan to remain in the net cash positive position throughout the year, and continue to maintain a strong balance sheet. We also expect to have sufficient cash and borrowing availability to fund future growth initiatives.

Finally, as most of you know, we provided some guidance for 2012 back in mid-March. We believe that guidance is still accurate. To refresh your memory, we project revenue growth in the mid-single-digits, gross margin in a range of 15 to 15 1/2% for the year, and operating expense in a range of 12 to 12 1/2% for year, excluding restructuring charges or other non-recurring items.

We expect each quarter in 2012 to have higher sales than its 2011 counterpart. As we progress through the rest of the year, we'll provide further updates. Now I'll turn the call back over to John for his closing remarks.

John Sztykiel

All right, Joe. Thank you very much. As I stated on our last earnings call, I expected Spartan to show improved operating results in the first half of 2012. We did exactly that with our first quarter results. I want to emphasize though, that although we are pleased that Spartan was profitable during the first quarter of 2012, we know we are not where we can be, and we must continue to execute our plan.

Our results show, though, we are making progress. We are confident, absolutely, we can improve our operating performance in margins in the future quarters as we execute the plan and deliver profitable growth.

Our plan to continue growth is centered on alliances, acquisitions, and organic growth, and we are making great progress in several areas. In terms of alliances, we first entered into a relationship with Isuzu to assemble the end series trucks. That relationship is going absolutely great. That relationship, while working very well, has also taught us a great deal about building more standardized vehicles in higher volumes at lower costs.

More recently, we announced new relationships with Rano [SP] Truck and Gymax [SP], two leading companies in their respective fields. We've also made several acquisitions in the past couple of years, including Utilimaster and Classic Fire, all of them which have been integrated into Spartan and are contributing significantly to our profitable growth.

We expect organic growth to make a great contribution this year, as evidence by the 13 market changing ER innovations at FDIC. At FDIC, there was not another company in the emergency response industry that demonstrated greater leadership than Spartan Motors. Been in the industry since 1985, by far the most outstanding show, and it is absolutely amazing the bounce we have gotten from them.

Our backlog in ER has increased and based on the reaction to our new product introductions at FDIC, we expect to see above market growth in 2012 versus 2011 from an industry perspective. We also need to execute in our markets from an organic perspective to drive growth, and we are in the process of doing and will be unveiling those plans and those innovations as 2012 moves on.

In summary, the first quarter was another quarter of operations moving in the right direction. I wish to give thanks to all the Spartan team members out there. We also made some strong strategic moves in terms of our new alliances with Rano Trucks and Gymax,

our Utilimaster relocation, and our initiatives at Spartan ER. Again, I wish to give thanks to all the Spartan associates and partners in moving forward with those initiatives. We look forward to the second quarter and accelerating profitable growth as 2012 moves on.

Now, we'll be happy to take your questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator instructions)

Our first question is from Walt Liptak with Barrington Research. Go ahead, please.

Walt Liptak - Barrington Research

All right. Thanks. Good morning guys.

Joe Nowicki

Good morning, Walt.

John Sztykiel

Good morning.

Walt Liptak - Barrington Research

Nice quarter, guys, especially on the cash flow. So, I wanted to ask about, because the sustainability of the cash flow, you talked about the $12 million to $15 million of inventory build later on in the year. With the reloads going on, the reductions to inventory, how are you thinking about working capital accounts, including inventory next quarter and into the rest of the year?

Joe Nowicki

Yeah. I think you caught on the right big items, Walt. This is Joe, by the way. I think you caught on the right big items when you think about cash, and you got my point for wanting to bring up those items as well, too. While we've seen great growth in cash, we'll continue to manage some of the working capital items. So, we'll continue to see the inventory come down a bit as we go through the year.

We've got a little bit more room, we have to take the inventory levels down, but we've made great progress. I think what you're going to start to see though, is our cash balance will come down as we go through the year, second, third, and fourth quarter. As a result, primarily of the Bristol costs, so you've got all the move related expenses and capital costs that I described.

Then, also the engines. The pre-buy engines as we've done in the past, will occur primarily in the fourth quarter. So what you'll see is our cash balance steadily start to work itself down a bit in the second, third, and fourth quarter.

Then, obviously, as we sell the transition engines through the first quarter, you'll see that bump back up again.

Walt Liptak - Barrington Research

OK. The engine inventory build, I'm not sure I understand why you're pre-buying them. Are you buying tier four engines, or are there tier four that you're going to buy?

John Sztykiel

Actually, Walt, what we do - and this is John speaking - very good question. It's not just us, but a lot of companies do it. Not everything works the way it's supposed to always work in a perfect world and we live in an imperfect world.

So, between all of the suppliers bringing on the new emissions platform, and then dealing with the OEM's that receive the chassis, the vehicles, the products, etc., we have to carry engines to ensure a good buffer over a period of three to six months.

The reality is, after going through this for the last 10 to 15 years, if you try to do everything where on this day you end and that day you start, and also align with the OEM's who you supply product to, you'd probably have a train wreck at the end of the day. So what we've just learned over the years is that we carry a buffer of engines, and it allows us to sequence the new products in line with when the OEMs are able to receive the products.

Walt Liptak - Barrington Research

So yeah, and we don't have to go into it right now, but what is the change to the 2013 engines because the 2010 emissions is, you know, we're well into that, right?

John Sztykiel

Right. You know, it's just another set of electronics and configurations which improve the quality of the air. The reality is in a lot of cities in North America, the engines will be producing cleaner air out of the exhaust than what's in the city in and of itself.

Walt Liptak - Barrington Research

Okay. And if I could just switch topics to the Emergency business. The change that you made where your Emergency Response group, the backlog grew there, and it was stable in chassis. As you become more of an OEM, as you are growing to be more of an OEM supplier, won't that compete with some of your fire truck chassis customers?

John Sztykiel

Well, the reality is we are very focused on the Spartan brand name as a complete vehicle, Spartan ERV. And in some respects one could foresee that we would be competing with our customers, but the reality is the Spartan chassis is so strong. And we're not leaving the OEM's we currently supply product to.

And because Spartan has one of the strongest brands out there actually, our plans today are more effective than what they were three years ago because we are working with our other Spartan chassis OEM customers out there, and they're leveraging around the strength of the Spartan brand to pursue the other leaders in the Emergency Response marketplace.

So what is interesting is that of the custom chassis at the show, Spartan was under 36% of all the vehicles out there. There was not another custom chassis lineup that was close that had that kind of market penetration from a custom chassis perspective. So in reality, and that's one of the reasons why we're seeing the chassis backlog grow because we are actually working smarter, more effectively to line their strengths around the strengths of the Spartan brand from a chassis perspective, and we're gaining market share from the larger companies in the marketplace.

Walt Liptak - Barrington Research

Okay. Okay. Good work on your transition. I'll get back in queue and let someone else do a few more questions.

John Sztykiel

All right. Thank you, Walt.

Operator

Our next question is from Joe Maxa with Dougherty and Company. Go ahead.

Joe Maxa - Dougherty & Company

Yeah, hi, guys. This is Ash for Joe.

John Sztykiel

Good morning, Ash.

Joe Maxa - Dougherty & Company

Yeah. I had a question regarding the Utilimaster orders and the timing of those. From what we expected, we expected a stronger first quarter, and it was sequentially strong, but what would you expect for second and third quarter for Utilitmaster? Would it be in that $15 million range because the backlog has come down sequentially and year-over-year.

Joe Nowicki

Ash, this is Joe Nowicki. The backlog being down year-over-year, we'll tackle that one first and we'll get in a little bit to our thoughts on Utilimaster going forward.

The backlog down year-over-year, if you recall last year in the first quarter, we had some really significantly orders that kind of came into play as a result of a couple of our key significant fleet customers on the package delivery side. That all happened in the first quarter, that drove the Utilimaster volume really high in the first quarter of last year.

So that's a piece that was unusual last year that wasn't here in the current year. As we've said in the past, a lot of the Utilimaster orders can come in kind of lumpy, in phases, right? You'll get these big project orders that come in at different times. So that wasn't here in the first quarter this year.

Let's talk about Utilimaster then, going forward full-year. We still anticipate seeing a great year for Utilimaster year-over-year 2011 versus 2012. And if you look at the growth there, we've had great growth in the first quarter year-over-year. For the full-year it won't be that same level, but we still anticipate growth being in the high single-digits in our Utilimaster entity year-over-year.

Joe Maxa - Dougherty & Company

And you're talking about revenue, high single-digit?

Joe Nowicki

Correct. Revenue growth, high single-digits on a year-over-year basis at Utilimaster.

Joe Maxa - Dougherty & Company

Sure. Hey Joe and John, can you talk about this aftermarket parts for Utilimaster? It was quite strong and, frankly, way above our estimate. What is in there in the aftermarket parts? And is there any one-time items, is it strong because of strong product sales? How do we model that going forward?

John Sztykiel

Well really, aftermarket parts, I'm not sure if you can model going forward, strictly because you work with a variety of different customers on vehicles that are already in the field. There were some very good drivers to the aftermarket parts at Utilimaster: one, the keyless projects by UPS; second, a variety of projects working with Syntax on their safety load; and third, shelving relative to FedEx vehicles and other vehicles as we move forward.

I think if there is something, Ash, which you bring up which is very positive about Utilimaster, and again, it's going to be hard to model. But what Utilimaster is demonstrating and illustrating is that there is revenue. There is value to be gained after the vehicle is shipped and after it has been serviced three to four to five years.

And so now that they are starting to have some success, they are now working with a variety of other customers. Remember, they have over a 125,000 vehicles in operation every day in North America. So they are working with a variety of other customers to develop the same kinds of initiatives.

It was very, very positive. Do we see other opportunities? Absolutely. I think it's difficult to model as we sit today because they are at the beginning stages. They have only been into it, really, for about the last 12 to 18 months.

What you are see from Utilimaster is, not only as Joe said is our top-line growth from just new vehicles going in the market, but there's also top-line increase profitability from a field service solutions model, as we call it, in Utilimaster on vehicles in the field today. Did I answer your question?

Joe Maxa - Dougherty & Company

Yeah. Yeah. Sure. It was good clarification. Thank you. I actually did have one quick clarification before I just back in the queue. For the Reach guidance, did you say 750 to 1,000? Did you increase the - because from the last conference hall in mid-March you had 500 to 1,500, so did you increase that to 750 to 1,000? Did you say double in 2013?

Joe Nowicki

I don't believe we increased. I think that was the same guidance we gave before, 750 to 1,000. Yes, you did hear correctly. Next year in 2013, the reach volume should double from the current year levels. That's correct.

John Sztykiel

One of the reasons, Ash, is it is an exciting product, a market transforming product. As I mentioned earlier, we're about a quarter behind, but there's so many great things around the product. Looks great, large cube capacity, an extremely durable chassis, improved fuel economy. So again, our excitement around the product is probably greater than what it was 12 to 18 months ago.

We're also very, very focused on delivering high quality products to market because we know in our industry word-of-mouth, especially just physically but also through social media, is probably one of the best marketers of your product. So, we're taking a very, very methodical and diligent approach to make sure we deliver high quality products to the marketplace.

Joe Nowicki

Hey, Ash. This is Joe. One other kind of clarity that I wanted to add to your earlier point around the APA business out at Utilimaster. Just to give you a little more depth. We did have a great first quarter on it. Those projects John mentioned came through stellar. Do we expect that to continue at that high level for the rest of this year, every quarter? No, absolutely not.

We did have some good one-time sales in a few of those programs, so you'll probably see it come down as you go through the remainder portion of the year, but as John described, will this continue to be a big part of our business at Utilimaster going forward? Absolutely.

So there's several new and other creative ideas on there, on APA, which will help us in the future. This quarter was unusually high and you won't see it recur in futures. Hope that helps.

Joe Maxa - Dougherty & Company

Yeah. Thank you. Thank you, Joe. I'll jump back in the queue.

John Sztykiel

Thank you.

Operator

Our next question is from Rob Kosowsky with Sidoti. Go ahead, please.

Rob Kosowsky - Sidoti & Company

Yeah. Hey, good morning, guys. How are you doing?

John Sztykiel

Good morning, Rob.

Rob Kosowsky - Sidoti & Company

Yeah. Just had a quick question on the Utilimaster revenue guidance. You said high single-digits, so it that for just the truck sales component, not the truck sales plus the parts?

Joe Nowicki

Full year, total revenues for the Utilimaster entity, which would include both truck sales as well as the parts sales. At a full year basis, 2012.

Rob Kosowsky - Sidoti & Company

Okay. So we're looking for a pretty big step down in one of the few quarters coming up, because if you just look at the last - this quarter, plus the last three quarters of last year, that gets you up 21%.

Joe Nowicki

Yeah, traditionally as you know, the fourth quarter is pretty low for us. So, our fourth quarter sales at Utilimaster usually come down quite a bit and that won't be any different this year. [But it's still early.]

Rob Kosowsky - Sidoti & Company

Yeah, but I'm saying if I just use one Q, like the revenue growth based on one Q, and I just assume no growth for the balance of the year, that still gets you at about 21% growth for the segment.

Joe Nowicki

Right. That's correct. So, what I'll draw attention to, remember last year during the third quarter we had a huge revenue period for Utilimaster based on a lot of the truck sales that went through? That was primarily that, remember the 2011 tax advantage that there was? So, we had a huge amount of orders that went through.

That was the back log that was up in the first quarter of last year, drove huge vehicle sales in the third quarter of last year at Utilimaster. That's a quarter which we won't see continue as high of a pace year-over-year.

Rob Kosowsky - Sidoti & Company

OK. That's helpful. Then, do you have the one-time itemis by segment?

Joe Nowicki

Yep. As a matter of fact, I do. So if we look at those restructuring charges by segment, from our two segments, but not that earlier, it's roughly - the restructuring costs on the specialty vehicle segment are around $700,000, and on the delivery and service vehicle segment is about $4.7 million. That gets you your 5.4 total.

Rob Kosowsky - Sidoti & Company

Right. $700,000 in the . . . there's $4.7 million in the service and delivery?

Joe Nowicki

Yeah. The bulk of service and delivery was all the building impairment related charges. Of the $700,000 in the specialty vehicles, that was primarily all reduction of force related costs.

Rob Kosowsky - Sidoti & Company

OK. Thank you very much, and good luck with the balance of the year.

Joe Nowicki

You bet. Thanks, Rob.

Operator

(Operator instructions) Our next question is from Walt Liptak with Barrington Research.

Walt Liptak - Barrington Research

Hi. Just a followup on that APA question. So if you've got fewer of these keyless things or shelving or whatever going in second quarter in the back half, does that mean that gross margin will be down sequentially in the next couple of quarters?

Joe Nowicki

Well, from Utilimaster's perspective, that's a correct assumption. The other thing to keep in mind as we get to later in the year, one of our gross margin drains this quarter was also at Utilimaster with the Reach start-up.

So as we get through the year, through the first quarter we should get better at the Reach project as well, too. So that should give us a little bit of opportunity, but overall your assumption is pretty fair.

Walt Liptak - Barrington Research

OK. Then, you brought that up in the press release too, about the profitability of Reach. What were the startup costs? Can you quantify it?

Joe Nowicki

Well, I can't quantify numbers. I can give you a general kind of sense though of the items. It's really what you might normally consider with a start-up. Right? So, it's inefficiencies in the build process from a labor perspective, as they don't have the processes quite perfected yet.

As you recall, at the end of fourth quarter we had 100, I can't remember the exact number, 120 units or there about which we didn't have shipped out because we needed to do some rework on quality. So all that quality work that was done in January that was a lot of rework labor that went into that product as well to.

In addition to it, even from a material perspective, were still buying and were still changing some of the material components as you would in some of these initial products and working with our suppliers to get some of those costs down as well to. So, were several items in there, Walt.

Walt Liptak - Barrington Research

Okay, but it sounds like at least an efficiency could be out of the way already. Does profability for reach come up to at least they can break even or something in the second quarter?

Joe Nowicki

Well, the second quarter, keep in mind our volumes, our volumes in the second quarter will still be low. We won't have as many going on. Towards the end of second quarter, we'll also be moving the Reach product to Charlotte.

Remember how we described taking the Reach product, we're going to move it from Wakarusa to Charlotte to tie-in with the rest of the work that we do for Isuzu. So it will all be part of our Isuzu kind of campus here and the reach is going to move.

So, the volumes will be pretty low in the second quarter and they'll be some of those costs to shift around then the third quarter will be the start-up here. So really, by the time we get to fourth quarter is where you'll start to see some more marked improvement in the reach.

John Sztykiel

I think one of the things Walt and this is John Sztykiel, just a couple of comments. One relative to consolidated gross margin, while you have a gross margin prior to restructuring charges in Q1, we're still on track for gross margin. If you looked at a range of 15 to 15 ½% for 2012 so as the year moves on, even though some of the aftermarket parts or field solutions the key lets will drop off the Utilimaster.

We will be building more emergency response products plus we will be executing a variety of other initiatives to improve the gross margin. Okay, so as you look at us as a year we still expect to see gross margin improvement versus 2011.

Second, relative to the Reach, I think as Joe said earlier, I would agree with his comments.

One of the reason we're moving the Reach up to here is it not only is it on a Isuzu chassis, but the N-Series which has been a great product for us. We're assembling basically 21 units a day with 49 people in 35,000 square feet. Not a lot of variations until we've got a demonstrated success with a very, very good return on both time and dollars in that project, and it's not going to happen overnight in the third quarter but it will be under the same operation team up here in Charlotte. And the Reach does not have as many options on it as some of the larger other delivery and service vehicles, which Utilimaster offers into the marketplace.

So one of the reasons we're moving, I mean really the two basic reasons we're moving the Reach is not only to align it the Isuzu, but also to align it with an operating group that have done an absolutely great job building a very highly profitable product with Isuzu and making sure we get the same results from that from Reach.

Walt Liptak - Barrington Research

Okay, yeah, thank for that color and that's a good point. And I'd like to switch gears back to just the Utilimaster backlog. I understood the reasons, Joe, that you talked about for it being down, but from a big picture . . . And ACT data, when it came out in March was weak and there's been some weakening in heavy truck and medium truck, industry wide. Did you see some of that, customers getting cautious and slowing some of their order activity?

Joe Nowicki

Walt, I'll give you two perspectives. One of them . . . I don't know if much weakness we saw on the customer's concern, lowering their order activity. More of the weakness we saw was somewhat expected because of that departure of the tax incentives. We saw a lot of folks last year really beef up their orders on the Utilimaster vehicles because of that 100% accelerated-depreciation tax advantage.

We knew we had several orders of large trucks go through last year that would hurt us in the current year on the truck sales, the UN, and that part we have seen and we have experienced, not as a surprise to us. I don't think, though, outside of that, are we seeing any more consumer demand on it.

John Sztykiel

And the other thing to note, Walt, is that relative to UN, they did not fill all the orders they could have in 2011, not just from a large-fleet perspective, but from a smaller-fleet perspective. One of the constraints we had, in Wakarusa was in the paint shop area.

So, while I'm really pleased, honestly, with high single-digit forecasted growth in 2012, verses 2011, we would expect stronger growth in 2013, one around the Reach, but also, too, we will be taking away one of the bottlenecks in Wakarusa, Indiana, and that is the paint shop, and if there's something that clearly separates UN, in the delivery and service marketplace, it's their ability to customize more of the vehicles. That is very attractive to the marketplace.

I think something we did not do a very good job of, in 2011, was indicating that we actually turned away orders at Utilimaster because we could not physically get them through the system. So, in 2012, remember, we are going to be moving it in Q3 and Q4, so high single-digit growth is very, very good when you're moving 40% of your business.

As we look at '13, will have Reach, but also we will have eliminated the biggest major bottleneck at Utilimaster and that is the paint shop. So, honestly, I felt very very good with the market and the high single-digit growth, which we're forecasting in delivery and service. Do we expect that to be greater in '13? Absolutely, because we'll have a great product plus we'll also be able to supply more of what the market demands.

Walt Liptak - Barrington Research

Okay. Thanks guys.

Joe Nowicki

Thank you, Walt.

Operator

(Operator instructions) Our next question is from Rhem Wood with BB&T Capital Markets.

Rhem Wood - BB&T Capital Markets

---- 15 of 17 ----

. . . market.

Rhem Wood - BB&T Capital Markets

Nice quarter, guys.

Joe Nowicki

Good morning, Rhem.

John Sztykiel

Good morning, Rhem.

Rhem Wood - BB&T Capital Markets

Good morning. So I just want to make sure I got this right. Is your guidance to the reach is it 700 to 1000 or 700 to 1500? What was that? I think I missed that.

Joe Nowicki

750 to 1000.

Rhem Wood - BB&T Capital Markets

Okay. And can you talk a little bit just about what you're seeing from the Isuzu dealerships in particular and maybe what kind of buyers you're seeing out of there? What their uses for . . .

John Sztykiel

Okay. Good question. This is John Sztykiel. What we're seeing from the Isuzu dealers is one, they really like the product. Second, they would probably like it faster. Okay. Third, the type of buyer is for example shipped about 16 units to a firm on the East Coast where they do automatic power washing of vehicles, buildings, etc.

And the reason they switched over from a more commercial van kind of product was because of the durability of the chassis and the body. They had 16 vehicles in their fleet. They carried heavy equipment in the vehicle and the equipment moves around and after two or three years, the body's shot, the chassis' shot, and they got to go out and buy another $35,000-40,000 vehicle.

For example one of the things UPS has talked a lot about on the reach is they love the durability of the chassis and the body, so our challenge with these Isuzu dealers is to find and develop more accounts like that and the training and the go to market process, very excited about how Utilimaster's working with Isuzu and vice versa. But what makes this product attractive to a commercial small fleet individual is the durability of chassis, the durability of the body, the ease of entrance and egress, and the improved fuel economy.

This is a vehicle again that has 350,000 life cycles miles for both engine and by much longer than that on the chassis, the body, much longer than that. So the kind of buyer will value durability, fuel economy, ease of entrance and egress, and honestly, it just looks great.

Rhem Wood - BB&T Capital Markets

Yeah, that's great color. And on fuel economy, are you getting what the initial test reported, the 35% fuel economy?

John Sztykiel

Well, right now, collectively as a whole, are we getting what the test reported? The answer is no. Part of it is dependent upon the drivers who operate the vehicle. Second, there is some work that needs to be done between Isuzu and Utilimaster to improve the fuel economy to improve the fuel economy of the vehicle even more. Are we within the range of where we'd like to be? We're very, very close to that. But we're not exactly where we want to be yet and that's something which we're working on.

Rhem Wood - BB&T Capital Markets

Okay. On average what kind of fuel economy are you getting and how long do you think it'll take to get to the 35% level?

John Sztykiel

Well, again, we're probably at the 35% level depending upon the chassis you're comparing it against. OK? So if I look at a typical delivery and service chassis today, Rhem, that uses a 5.9 liter engine, we are getting that 35% fuel economy. OK?

I guess my answer I gave you a few moments ago was against a smaller kind of product, where we want to improve the fuel economy even more, so we can be more competitive in the commercial van part of the market place. So, against the 5.9 typical delivery and service chassis, which Utilimaster uses today, yes we are getting that 35% plus improvement fuel economy against other products in the marketplace to increase the market attractiveness out there.

We're not satisfied with the fuel economy, so we're pushing even harder to improve it even more. Does that give you a little bit better understanding?

Rhem Wood - BB&T Capital Markets

Yeah. That's good. So I think what you're talking about is you're maybe against a Sprinter depending on how it's spec'ed, but yet you're going to beat that on durability and life cycle, and other things. Right?

John Sztykiel

Absolutely. I'm glad you asked that question because it gets back, again the Reach looks great. It is a very, very durable body. It's a very durable chassis. What we've been told by a variety of people, whether it be Sprinters and other commercial vans, you get the fuel economy up even more, and now you've fallen to our value proposition where it makes sense for us to buy it.

So it's like, OK. While this is good, if we do this, this, and this, we can get even more sales or touch other parts of the market we didn't think we could touch quite so easily. So, you hit the nail right on the head.

Rhem Wood - BB&T Capital Markets

That's great color. Then last, anything new on the military side. Is that going to kind of stay at this run rate, or anything that works there?

Joe Nowicki

Rhem, this is Joe. No real new news on the military side. We think it'll probably still continue at the run rate that we're seeing. As we described before, the market conditions have been pretty soft there. We at this point in this time, we've got a few opportunities that we're working through, but we don't see any significant changes in that business currently.

Rhem Wood - BB&T Capital Markets

Great. Thanks for the time. Keep up the good work.

John Sztykiel

Thank you, Rhem.

Operator

Our next question is from Rob Kosowsky with Sidoti. Please, go ahead.

Rob Kosowsky - Sidoti & Company

Yeah. Hi, Joe. Just one last question. Do you see the operating losses and the specialty vehicle segment narrowing, I guess, as we get through the year?

Joe Nowicki

Good question. In regards to the specialty vehicle segment, what really drove that operating loss was that emergency response side of the business, and it really was volume related. If you looked at the volume that went through there as we talked about it being down 16% kind of year-over-year on the ER side, and if you looked at the back log which is up as we described it, yes.

More volume goes through there. It'll offset more of the fixed overhead costs that we have associated with that business. Plus, the changes that we described on our ER business that John went through around really relooking at Spartan ER in total. All of that will help to change our cost structure. With the additional volumes, we'll drive a much increased level of profitability as we go through the year. Yes.

John Sztykiel

Rob, this is John Sztykiel, Spartan E. R. We use the term FDIC with a lot of off the brand, the sales, driving that part however, at the end of the day it's good defense that wins. As we move into the second half of the year we have a lot of momentum, very good initiatives in place in the top line side of life. We are going to become very focused on the good defense and that is reducing our breakeven point, reducing our operating costs as we look at the synergies, the process duplication, and how we can eliminate those within emergency response.

Rob Kosowsky - Sidoti & Company

All right, thank you very much and good luck. Thank you, though.

John Sztykiel

Thank you, Rob.

Operator

This concludes our questions and answer session. I would like to turn this conference back over to Mr. John Sztykiel for any closing remarks.

John Sztykiel

I just want to say, thank you very much for your time and say thank you to all of the Spartan associates. As I mentioned in the wrap up or summary, while we are pleased, we are not satisfied and as we move past transforming the organization we are now focused on accelerating profitable growth and we look forward to executing that in 2012. Thank you.

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