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Spartan Motors Inc. (NASDAQ:SPAR)

Q4 2007 Earnings Call

February 14, 2008 10:00 am ET

Executives

Jeff Lambert - Lambert, Edwards & Associates

John Sztykiel - CEO

Jim Knapp - CFO

Karen Morrow - VP, Finance

Analysts

Ned Borland - Next Generation

Frank Magdlen - The Robins Group

Joe Maxa - Dougherty & Company

Walter Liptak - Barrington

Brian Rosenhouse - Sidoti & Co

Kathryn Thompson - Avondale Partners

Steve Barger - Keybanc Capital

John Rogers - Ferris Baker Watts

Jamie Wilen - Wilen Management

Operator

Good day and welcome to the Spartan Motors fourth quarter 2007 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Lambert. Please go ahead, sir.

Jeff Lambert

Thank you and good morning everyone and welcome to Spartan Motors fourth quarter and year end 2007 conference call. I am Jeff Lambert with Lambert, Edwards & Associates and I have with me today several members of the Spartan Motors management team. John Sztykiel, Chief Executive Officer; and Jim Knapp, Chief Financial Officer, [Karen Morrow], Vice President of Finance; and Dave Reid Spartan's newly appointed Vice President of Public Affairs and Brand Management.

I assume all of you saw the earnings release on the wire or the internet. I want to 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 by the securities laws.

As a result, I must caution you that, as with any prediction or projection, there are a number of factors that could cause results to differ materially. These risk factors are identified in our Form 10-K filed with the SEC.

A quick word about today's call. John Sztykiel will begin the call with a brief overview of the quarter and then go over the operational results for each business segment and the outlook for 2008. Jim Knapp will then discuss the financial results for the quarter and then Karen, Dave and the rest of the crew will be here to answer your questions. We will conclude the Q&A session. And with that I would like to turn the call over to John Sztykiel. John?

John Sztykiel

All right, Jeff. Thanks so much. First all of you good morning and thank you for being here and listening on the internet. Some of you are on the West Coast so therefore you waken up very early. Today we are going to keep our comments a little bit shorter in the beginning to allow more time for Q&A. We've listen your comments from the past call and we are quick learners.

The fourth quarter of '07 was a great way to close a record year. It was a year of rapid sales growth however with this increase in sales in the backlog we needed to increase our production capacity and with this ramp up in capacity there was definitive pressure to our margins, something we are focused on reversing in 2008 but its not going to easy.

In 2007 we increased our capacity at Spartan Chassis by a 177% and we had combined the sales growth with the increase in capacity as an astounding achievement I wish to compliment Rich Schalter and all the people at Spartan Chassis on really an absolutely fantastic year.

Its also important to remember that we are a mass customization business model therefore its almost virtually impossible to have a clear linear succession of growth in earnings in this type of model. As we went through the growing pains of the third quarter, margins improved in Q4 versus Q3. The cash conversion cycle improved in the right direction as well as a double-digit increase on the positive side.

Looking a gross margin percentage of the fourth quarter while it was down year-over-year it was up nearly 8% over the third quarter of Q7 obviously not great but moving in the right direction.

We are very focused on gross margin improvement however, and Jim will comment a little bit more on this later on, the model mix competitive pricing will make it a challenge to continue this improvement in 2008.

During the fourth quarter, we realized some of our operations in Michigan South Dakota in terms of human resource and headcount to meet our anticipated needs in 2008 we are now a bit linear today than what we were three months ago.

We've also added some support though in our service, parts and accessories area as this business continues to grow in almost triple-digit kind of format from a percentage perspective.

Taking a quick look at our segment results for the fourth quarter and year end, Spartan Chassis represented 89% of Spartan Motors in consolidated sales in the fourth quarter while the EVTeam made up the other 11%.

The Chassis focus on 2008 is on improving margins, especially in light of some difficult margins or a shifting market conditions. We continue to have an excellent relationship with Force Protection, BAE Systems and General Dynamics Land Systems. We also expect additional orders in the near future from our military partners and are excited not only about the hardened military vehicle market today, but we are very excited about the opportunities in 2009-2010 and beyond. As mentioned on every call, we can’t talk about military orders until we receive the PO from the customer. When we have the PO we will issue a simple press release as soon as possible. And as we look forward, we see no reason to see any difference in the future relative to past performance and honestly as I said earlier we have very, very good relationships.

On our service parts and accessories side, sales increased almost 240% over the same quarter in 2006. Part of this is being driven by the growth in just number of Spartan user of products out of the market place, and us having what I would call, a more effective business model of operations in 2007 than what we did in ’06 or '05. The second fact is we are now starting to see a significant increase in the service parts accessories business from the military as the units which Spartan has been associated are start -- or are being put in service, whether it be in Iraq, Afghanistan or other parts of the world. We expect the results to continue in 2008 as well.

RV sales increased in the fourth quarter despite a flat industry of wholesale shipments. This is a reflection of our growth and market share within the luxury motor market but also a reflection of the strength of the Spartan brand. There is something and again 2008 is going to be a tough year for the RV industry. That I have no doubt. However 2007 was a tough year for the RV industry. And Spartan was able to buck the market trend to the strength of its brand by doing the right thing building a product that performs and having great customer for service.

And again while 2008 I believe will be tougher than 2007 on the positive side we have got the strength of the brand. On the other positive part of a sign we have also got the greatest number of models on Spartan Motors Chassis ever being 40, but it is going to be difficult in 2008. And I am not going argue that. From our fire trucks chassis perspective sales increased in Q4 though the backlog decreased. Part of the reason the backlog decreased was one due to a softness of the market, second due to some of the mission change over and third due to an improvement in efficiency of production. So those three items, one represented on efficiency improvements which obviously contributed part to the margin improvement. But the other two items the softness of the market due to municipal budgets under pressure and the market softness due to 27 pre buying there is still a lit bit of a hangover there.

From the emergency vehicle team perspective Crimson Fire and Road Rescue both made progress operationally, however I will say this we are extremely disappointed in their range of progress. We are excited about their potential for 2008. The backlogs are moving in the right direction as we look at order intake in the first quarter of this year. However, the focus on those three business units is increasing. However, the wisdom of the leadership teams has definitely improved versus where it was six months ago. On the other hand too and other very positive and I shouldn't use the term other hand Crimson Fire and Crimson Fire Aerials and Road Rescue have all instituted price increases for 2008 which help us in the second half for the year.

And actually the ambulance market is strong enough right now the Road Rescue is considering another price increase because while the demand for fire trucks is little bit more difficult than the demand for ambulances part of it is as more of us get older more of us are going to take a ride in an ambulance whether we want too or not. So our fire trucks maybe a soft pricing market the ambulances our hard pricing market.

As we look ahead the 2008 and the foundations for growth there is several challenges in front of us one of them is the economy that in the consumer confidence index that obviously is having an effect on the RV industry and the economy and the reduction in municipal budgets will effect the emergency rescue market.

However from an opportunity prospective in the emergency rescue part of the market there is a call for help every 20 seconds, demand for the product it's not like the motor home where you can decide whether you want to go out or not that call happens.

Second there is some large competitors in the emergency rescue industry that are definitely struggling right now. That's about 15% of the market and on the positive side Spartan Crimson Fire, Road Rescue, and Crimson Fire Aerials are still small enough where they can take advantage of those competitive opportunities.

Next we've said about the operational improvement potential of the emergency vehicle team we are also expect to see higher margins for fire truck chassis in 2008. I've talked a little bit about the RV side of the business and the difficulties there. As we look to 2009 and beyond Spartan today competes in three markets emergency rescue, RV, military/specialty. Within those three markets we're currently in seven different niches. As we looked at 2008 we will enter anywhere from seven to eight new what I would call market or micro niches within those three respective industries in 2008 starting in April at the FDIC show with new products.

We'll be ranging from multipurpose Furion based fire truck/ambulance chassis to the Boomer to vehicle outfit in our RV business to a multipurpose Ambulance Rescue unit between Road Rescue and Crimson Fire and a couple of others as the year goes on. So while we expect 2008 to be a year of sales and income growth we're not sitting back on our laurels. We are moving forward to continue the trend in the right direction so as we close out 2008 hopefully we are sitting on another record Q4 backlog which will drive us into the next year.

In closing was excited about the year, excited about a lot of the opportunity but we do have our work cut out for us. We're very focused on efficiency improvements to utilize our cash in an effective manner which drives the return on invested capital which drives both shareholder value and stakeholder value.

And in closing the past is the past and now we're focused on Q1 in 2008. Jim?

Jim Knapp

Thank you, John and good morning everyone. You should have each received the press release along with consolidated income statements, balance sheet and segment results this morning. I'll provide an overview of the financial statements and then we'll do Q&A.

Operating cash flow increased $9.1 million in the fourth quarter of 2007 compared to the same quarter of 2006 driven largely by increased earnings and improvement in the cash conversions cycle. The operating cash flow for the fourth quarter was $2.2 million and we ended of the year with $13.5 million in cash and cash equivalents. Depreciation for the fourth quarter was $1.3 million and $4.1 million in total for 2007.

Our effective tax rate was 34.4% for the quarter and 35.9% for the year. We ended the quarter with $62.7 million in long-term debt which includes financing for Spartan Chassis new facilities and growth in working capital to support its increase sale. We expect operating cash flow to increase significantly in the second half of the year, which should allow us to make substantial reductions to debt.

Our consolidated ROIC for the quarter was 27.4% which exceeded our company ROIC target of 15% to 20% and demonstrates what we can do, when we have normal productions flows. For the year ended 2007, ROIC was 19.8%. We are pleased with both of these numbers, which are linked to our bonus program for management and associates, which is based upon on economic value added financial model. Our goal in 2008 is to achieve ROIC within a range of 15% to 20%. We repurchase 250,000 shares of common stock in the open market during the fourth quarter 2007. In total we repurchased 300,000 shares for the year.

In December 2007, we paid a special dividend of $0.03 per share of common stock along with our regular cash dividend of $0.05 per share for total dividend payments of $0.13 per share in fiscal 2007.

We feel that dividends are important way to directly returns valued to shareholders. But we look at ourselves as a growth and value stock. We also try to differentiate ourselves from other public companies by paying dividend. Looking at CapEx; we spent $31.2 million in 2007. We are forecasting CapEx about $20 million in 2008 which includes some rollover from the expansion launched in 2007. We expect lower CapEx in 2009 and 2010 and do not foresee the need for additional capacity increases in next several years.

We are focused on improving margins in all our product lines in 2008. The consolidated margin may decline this year as the military business becomes a higher percent of total sales ahead of the lower margin. The increase in military business does provide us with a good opportunity to leverage SG&A and add to the bottom line. With that I like to turn over the operator for Q&A.

Question-and-Answer Session

Operator

(Operator instructions). We'll take our first question from Ned Borland of Next Generation

Ned Borland - Next Generation

Good morning guys. I just had a question about the gross margin. This margin drag is this more of a function of the capacity coming online or is it the fire chassis have the highest margin I mean is it, is it one mix? I guess that's what I'm getting at.

John Sztykiel

I would say its more mix Ned. I think we saw significant improvements in our military margins because of the improved component flow but the military margins do have a -- they are lower than the average margins and so as the mix of the business changes with more military it's going to have a impact on consolidated margins and it will decrease the consolidated margins. But on the other side because the military doesn't require a lot of SG&A we can leverage our SG&A and add more dollars to the bottom line.

Ned Borland - Next Generation

Okay. If you look at SG&A as a percentage of sales going forward I mean is it going to stand basically, as it going to trickle down by or is it going to kind of remain flat?

Jim Knapp

Well it should decline as the business grows in sales. As a percent of sales it should decline.

Ned Borland - Next Generation

Okay. And then in the fire market I mean -- you hit the market weakness but you had the potential for share gain I mean is it fair to assume that basically unit wise you guys will be down in '08 versus '07?

John Sztykiel

This is John Sztykiel right now I can't necessarily say that because Crimson Fire and Crimson Fire Aerials and Road Rescue in Spartan Chassis are all increasing their production rates in Q2 versus Q1 of this year.

And again part of the opportunity [allows] a group of companies is we are still relatively small versus, some of the other competitors in the marketplace and with those some of those competitors being about 15% of the market I think all four business units are doing a very good job more can we take advantage of those competitive opportunities. So there will definitely be less municipal funding. But in the fire truck area I think there is very good competitive opportunity it is not going to be easy. But the good news is they are forecasting increased production rates on the ambulances side of the business when I talk not just the Road Rescue but other competitors in the ambulance business model they all say John even though municipal budgets are going to be tighter there still need for more ambulances whether it be public or private. So I think that's why you just some of this aging population, you know the calls every 20 seconds people are going to get hurt or die or what ever I mean the Defense Secretary Gates the other day slipped on a side walk and fractured his arm and needed an ambulance. So I mean that's just reality.

Ned Borland - Next Generation

Okay. And the EVTeam businesses has a collectively -- are we finally looking at profitability as a whole in '08 for those guys?

John Sztykiel

This is John Sztykiel and I will be one, I have over promised to that question in '06 and '07 and it grinds me like no tomorrow. I think their potential to improve operationally is there in 2008. As I sit here today am I ready to state that as a group they will be a 100% profitable in 2008, I cannot state that. I believe the potential to improve it is there however and we're committed to all three business units but I can't make the same commitment I've done over the last two years because honestly we nor I have kept that commitment. So I am now more cautiously optimistic but very focused.

Ned Borland - Next Generation

Okay. And last question on some of these new products launched the Furion and the Boomer I mean I guess would these be in line with the some more of product launches that you guys have launched over the years or is the opportunity even bigger.

John Sztykiel

Well, the opportunity is bigger just one thing which to remember in the emergency rescue cycle or I should say business model, it takes about 18 months for a new product introduction to really gain traction. So the Boomer and Furion, honestly are not going to be a large part of the sales model in 2008 and really, that's okay, because we get the military business and some other things. However, the products which we are launching and even some of the stuff like Road Rescue et cetera, we don't expect to see much sales or income rolled in 2008 but if we do our job properly we should see that in the second half of 2009 and beyond.

Ned Borland - Next Generation

Okay, great. Good quarter.

John Sztykiel

Thank you.

Operator

We will take our next question from Frank Magdlen of the Robins Group

Frank Magdlen - The Robins Group

Good morning.

John Sztykiel

Good morning, Frank.

Frank Magdlen - The Robins Group

A couple of question on the gross margin, from what level are you measuring that when you say it is going to be more down a bit because of mix in '08, you are using the consolidated '07 average or you are using the fourth quarter as a base for that?

John Sztykiel

I would say that, it is mostly -- most of my comparisons be to the year in total.

Frank Magdlen - The Robins Group

Okay.

John Sztykiel

Because of the fact that we had a fairly rich mix in the fourth quarter of military business. And so that margin will depend on a consolidated basis, will depend on how rich the mix of military business is going forward.

Frank Magdlen - The Robins Group

All right. And were there much in the line revenue from kit sales in the fourth quarter?

John Sztykiel

Yes there were, and we expect that to continue to grow in 2008.

Frank Magdlen - The Robins Group

Are you willing to quantify that a little bit?

John Sztykiel

Frank it is John Sztykiel, I don’t think we can quantify that right now because we haven’t done in the past, it is something which we are investigating relative to the future, because it is becoming a greater significance within our business models, so actually that's something which we are looking to address as we look at the results and prepare for the Q1, 2008 call.

Frank Magdlen - The Robins Group

All right.

Jim Knapp

There is an opportunity Frank to have a substantial increase in 2008 who knows when that will.

Frank Magdlen - The Robins Group

Okay. When I look at your backlog and lead times we realize that the RV business has very short lead times. But what should we expect then in a way of normal backlog or lead times when you look at the Chassis, the Fire Truck Chassis and the EVTeam?

John Sztykiel

On an emergency rescue this is John Sztykiel, emergency rescue the normal backlog, the delivery time cycle is about six to nine months. One of the things which I think is exciting and I was excited to see the backlog go down because our cash conversion cycle improved by 28% in Q4 versus Q3.

So as a company the backlog was very large but we are also excited we wanted the improvement in the cash conversion cycle which then helped to generate positive cash but it means [OQ] were becoming more efficient and we know we can gain market share if we have shorter delivery times whether the RVs military specialty or emergency rescue for example Spartan Chassis as I talked about in the past with Fleetwood in particular, they are not doing more and more of the chassis up tick which is value add for the chassis. But it is also very positive for Fleetwood because it is a very effective utilization of cash and that’s helping to produce a higher quality product with a shorter lead time bringing into the market place. So I am not sure if could say what an ideal back log is personally I like to see the cash conversion cycle improvements go up and the back logs come down a little bit and as we do that we seem to be moving both the sales, the income and the cash utilization in the right direction.

Frank Magdlen - The Robins Group

What are the lead times in this with the fire truck chassis?

John Sztykiel

About six months.

Frank Magdlen - The Robins Group

Okay.

John Sztykiel

Oh, eight -- I am sorry. About 13 to 16 weeks they were recorded earlier the six to nine months is for completed fire truck aerial and about 13 to 16 weeks for our fire truck chassis that Spartan Chassis is unquestionably the fastest delivery time of our custom fire truck chassis in the business just like in the RV business. There are delivery times of custom chassis range anywhere from 30 to 45 days depending upon the model and again they are by far the fastest delivered of custom chassis or chassis period in the RV business.

Frank Magdlen - The Robins Group

All right. Just two other questions. The cost to debt might be for the next couple quarters?

John Sztykiel

The cost of debt it should be declining but it's going to be a little hard for me to estimate, Frank I can probably provide some more of a range.

Frank Magdlen - The Robins Group

Okay.

John Sztykiel

Let see I would --

Frank Magdlen - The Robins Group

While are you looking at that the tax rate and then which to we expect any more stock repurchase activity?

Jim Knapp

Let me answer the interest first. I would say interest expense will probably range $3 million to $3.5 million for the year. Obviously that depends on where the interest rates go because a lot of our data is based on LIBOR plus 40 basis points. From a -- just to answer your question about the stock buyback our first priority Frank is really to fund the growth of the business and as we increase our operating cash flow in the second half of the year as I mentioned earlier we expect to pay down debt and we will consider other uses of cash such as buying back stock.

Frank Magdlen - The Robins Group

Okay. And then tax rate?

Jim Knapp

The tax rate is for next year I would say would be around between 35% and 35.5%.

Frank Magdlen - The Robins Group

Okay. I'll get back in the queue. Thank you gentlemen.

Operator

(Operator Instructions). We'll take our next question from Joe Maxa of Dougherty & Company.

Joe Maxa - Dougherty & Company

Well, thanks. I just want to ask couple of questions on the military side to start with. The backlog look pretty good in the quarter given that you only announced one major deal, can you give us a little more color where the rest of revenue came from? Did you have another large deal or just several small deals regarding parts or maybe with other specialty vehicles?

Jim Knapp

You mean -- and Karen why don't you jump in. It's Karen Morrow

Joe Maxa - Dougherty & Company

Sure.

Karen Morrow

Hi. There were some shift from I think what the analysts expected in the third quarter for the orders that we took in some of the specialty sales actually hit in the fourth quarter that I think many people anticipated actually in the third, just for the regions getting our suppliers up to speed in terms of our run rate. So I think where you saw this proportion of the orders we have received specialty was a little bit heavy in the fourth quarter.

Joe Maxa - Dougherty & Company

Actually I am just talking about, if you at your backlog at the end of Q3 plus any orders you announce which was a one order in the quarter like $49 million less what you shift in Q4 would suggest your backlog would been quite a bit lower than it is coming out of Q4. So I am just wondering what did you receive for orders in Q4, was that more another large order that you just did announce or was that more parts related or just a kind of?

Jim Knapp

There was really more parts related.

John Sztykiel

Right. And we don't announce the other orders that we receive in other -- in fire trucks and RV and there is small military orders that we received two job for vehicles that we don't included, I will call the major orders.

Joe Maxa - Dougherty & Company

Right, okay. So…

John Sztykiel

And that's a positive because one of the things which it demonstrates is that when the growth and service parts of the accessories but also that in the hardened vehicle military market that there are other for lack of a better term micro niche products being purchased by the Armed Services and then those orders flow into the business model but they are so small that we really don't post them.

Joe Maxa - Dougherty & Company

Right. You do that indicate on your scene of the event back in December that your service person et cetera you're expecting about $28 million in shares for '07. Is that about work payment?

Jim Knapp

Actually, it came in at about 33.

Joe Maxa - Dougherty & Company

Okay. So you had a very nice quarter.

Jim Knapp

No, very nice year that was total for the year.

Joe Maxa - Dougherty & Company

Okay. And then going forward you are saying you still expect that was there certain growth rates you were kind of thinking or?

Jim Knapp

Well, it's too early to forecast the growth but we expect the number to go up substantially just because as we have more vehicles show up in the feeders of operations than the increase for service and parts and accessories is obviously growth. One of the other nice aspects is also now, I want to use the term the excellence of Spartan Chassis service parts and accessories group. We are know floating and actually receiving orders from a few other people in the military business that have nothing to do with the MRAP or the harder the MRAP type of products so, whether it be emergency rescue RV or military something we're very focused on is having the right part at the right place at the right time.

Joe Maxa - Dougherty & Company

When you talked about expected orders from your three main customers that means certainly it's the BAE who have 1,200 that they haven't let out our total competitor that you're going to get those orders as well as the ones the smaller orders left from Force and General Dynamics?

John Sztykiel

Well I think we're fairly confident enough to put the statement in the release which we did today.

Joe Maxa - Dougherty & Company

Okay, fair enough. Next I want to ask about the inter company sales it was 1.2 million in the quarter and so when you look back, it was very high in Q3 compared to historical numbers and then it dropped off drastically in Q4, should -- would that something to do of just timing of shipments. Do you shop a bunch of product into from Spartan Chassis to maybe Crimson Fire in Q3 and then it got shipped down Q4 from Crimson Fire that how we should look at it?

Jim Knapp

Sure. I think its very good Joe, if it's all impacted by the units that Spartan Chassis ships to Crimson Fire and the units that Crimson Fire Aerial ships to Crimson Fire. And the -- so there is a timing issue on that and it's also a mix issue in some quarters, Crimson Fire will produce a higher mix of commercial chassis products than they will do custom chassis products depending on customer demand.

Joe Maxa - Dougherty & Company

Would that affect your margins as well if there is, would there be more cost which would have hurt the margin in Q3 and then given that there weren't many shipments in Q4 that would have benefited your gross margin?

Jim Knapp

Not necessarily.

Joe Maxa - Dougherty & Company

Okay.

John Sztykiel

No actually that was one of the drivers though of the improvements in the cash conversion cycle and the return on invested capital that obviously Crimson Fire reduced their inventory substantially, therefore the effectiveness of their operations improved.

Joe Maxa - Dougherty & Company

So should we…

John Sztykiel

(inaudible).

Joe Maxa - Dougherty & Company

So are we looking for more of a historical 6 million per quarter going forward or are we going to see this bounce around maybe the last couple of quarters?

John Sztykiel

It that hard, it's hard for us to say it's based on customer demand. I think if you are trying to develop the model I would, I'll focus on historical numbers.

Joe Maxa - Dougherty & Company

And then Jim the SG&A was up significantly in the quarter. Is that, how much of that had to do with the bonus or versus typical increase should I guess?

Jim Knapp

Part of it had to do with the bonus, part of it had to do with the fact that we grant, its not depreciation rights in the last quarter of the year those are probably the two big factors.

Joe Maxa - Dougherty & Company

What would be a normalized number to look at in '08?

Jim Knapp

I would use more take a look at more like the third quarter will be more probably indicative.

Joe Maxa - Dougherty & Company

I see, Okay. And then just on the RV side what you are seeing now have you been seeing, may be your orders are pretty good in the quarter but what you have been seeing so far in Q1?

Jim Knapp

It's been I mean in Q1, it is definitely more difficult from an RV retail perspective then what it was in December or November. And I think it varies, by pockets or the different geographical areas of the country. I mean some geographical areas where the economy is still fairly resistant fairly strong you don't have like the better terms some of the mortgage or the financial crises impact. You talk to those dealers they say, like [chances] business this is actually pretty good because people are seeing a little bit lower cost of financing and a little bit better deals on the products.

But as a whole I won't say this, the RV market will definitely be more difficult at least for the first six months in 2008 than where it was in for the first then -- versus the first six months in 2007. If there is one silver lining to all that's going on within Congress and some of the other things is, the cost of the motorhomes is starting to come down a little bit from a finance perspective and so if there is an increase in the second half of '08 it could be better than the second half of '07 but right now honestly that's a little bit too far away. So from an RV perspective we are very focused on the right marketing, the right dealer relationships to fall through the product and very focused on improving the margins and efficiency in our RV products because then its going to be difficult market in '08 versus '07.

Joe Maxa - Dougherty & Company

No, its sounds like maybe best case scenario your revenues are roughly flat with the first half of '07, at least the way it looks now. Is it fair to assume?

Jim Knapp

They should be up Joe. We expect that they'll be higher in the first quarter.

Joe Maxa - Dougherty & Company

Okay. Great.

John Sztykiel

No, in the first half.

Joe Maxa - Dougherty & Company

The first half?

John Sztykiel

In the first half and part of that is Joe while the unit shipments could be down a little bit, our value add is improving. So again we're focused on not so much units as we are dollars per unit.

Joe Maxa - Dougherty & Company

Okay. Okay. That's great. And lastly I'll just ask you about your whole deliveries from your current customers, I know its sounds like Force and GD may have been going all right but has BAE picked up and worked through some of their issues to get you some more timely shipments?

John Sztykiel

Well. Everybody has improved because obviously we invoice substantially more in Q4 than what we did in Q3. However if I was asked the question is everybody within the business model operating like a fine Swiss watch right now, the answer is no. Everybody is still working through logistical issues to improve both the delivery, the production rates and the efficiency, so there are definitely challenges in Q1 which we are working through no difference in Q4.

Joe Maxa - Dougherty & Company

Okay. I'll add to that one more question when you look at the year how do you see these vehicles shipping out I mean the delivery dates for the first batch without any additional orders coming in March were mostly around July but it appears that that could be dragging out. What are you guys seeing or expecting?

John Sztykiel

Really throughout the course of the year vehicle shipments, parts will flow in, vehicle shipments will move out through Q2, Q3 and may be a into Q4 but right now it is basically a Q2, Q3 business model shipment format.

Joe Maxa - Dougherty & Company

Okay, great. Thanks a lot guys.

Jim Knapp

All right. Thanks Joe.

Operator

We will take a question now from Walter Liptak of Barrington.

Walter Liptak - Barrington

Hi. Thanks. Good morning guys and congratulations on an nice quarter.

Jim Knapp

Thanks Walt.

Walter Liptak - Barrington

Most of my questions have been asked but I wonder if I could drill into the gross margin a little bit more, and you gave us some color on how some of the product categories might have looked. I wonder if you could provide some more detail, for instance, in the EVTeam, John, you sound disappointed, does that mean that it's still operating at a loss on a gross income level?

John Sztykiel

Well on a gross margin level I don't think that there is a negative, no, there definitely is a positive, but and that is a step in the right direction. But the disappointment is absolutely, because I have been on this call more than once over the last couple of years and said, okay, the EVTeam is going to be profitable as a whole, and honestly we haven't kept that commitment, and so I am a share holder like a lot of other people and I am extremely disappointed. The good news is, I believe the management teams are much better than what they were 6 months ago; for example, Crimson Fire, their inventory reduction in 2007 versus ’06 was about 23%, that's very, very good. Road Rescue reduced their inventory, so they are moving the ball in the right direction, is it fast enough, absolutely not, have we increased our focus, absolutely, because we look at the emergency vehicle team as a $100 million in sale, waiting or an expectation to be profitable. So the focus, the intensity is it greater today than what it was 90 days ago or 30 days ago, absolutely. The ball is moving in the right direction but we have not gotten into the red zone or into the touch down, end of the line here.

Walter Liptak - Barrington

Okay. Got it. So there is slightly profitable low single digit gross margin and it should keep getting better in ’08. I wonder if we could do the same thing, on motorhome, you talked about new model wins and some of the value add that you are doing. Where was the gross margin during the quarter and where you think it could go?

Jim Knapp

You know, Walt we really can’t disclose that just because of competitive situations. We don’t get into specific gross margin into the fire trucks, the military chassis or the motorhomes other than the fact that we believe we got opportunities to improve and we are focused on that but I really can’t get into specific ranges because then to be quite frank our customers or our competitors will know exactly where our costs are.

Walter Liptak - Barrington

Okay Fair enough. But one of the things I think you really need to drill into is what the military gross margin looks like. I mean it was in the prior quarter , in the third quarter it was low and that’s because of the ramp. It sounds like you are in the double digits at least in this quarter, in the fourth quarter?

Jim Knapp

I think you could you can make that assumption Walt, there was substantial improvement in the margin on the military side because we had a pretty good flow of components in the fourth quarter And as you see we shift a lot of military units especially in the months of November and December and when we can have a consistent component flow. We can have a very high level of efficiency in production.

Walter Liptak - Barrington

Okay. Right and you talked to this quarter too about the richer mix, so the expectation is that we are not going, is this the peak margin that you are getting at military or are we going to be able to see military margin come up as the flow of components gets better.

John Sztykiel

I think as long as we have a good flow component and we are always at risk there to some extent because there might be interruptions with the component flow. As long as components continue to increase I think we can improve the efficiency and improve the margins on the military.

Walter Liptak - Barrington

Hey, fair enough. And then just to switch gears to -- your comments John about the second quarter production I believe in Crimson and in the fire chassis business. If the backlogs are down how are they going to be, where are you getting the visibility that production is going to be up in the first half of '08 especially in the second quarter or did I hear that wrong?

John Sztykiel

Well the backlogs were down again as of Q4 but, the order in take, was good in January and based upon expectations as we look at core activity and bid activity and honestly competitive capture opportunity, it is good we have one large competitor about 300 units a year declared Chapter 11 a couple of weeks ago. Now I feel sorry for those individuals but honestly the distribution groups of Spartan Chassis, Crimson and Road Rescue as our lot of other people are very focused on going to those cities in the current contracts and saying, okay, why do you want to keep an order with a company that is now in Chapter 11 recognizing your purchase is at 3 to 5 to 15 to 20 year purchase. So…

Walter Liptak - Barrington

Do you have dealers where American LaFrance was strong?

John Sztykiel

Absolutely.

Walter Liptak - Barrington

Okay.

John Sztykiel

But you know really, that's right, I wish to complement Spartan Chassis and the other [SPUs]. They recognize the competitive opportunity and everybody recognizes the emergency rescue market for fire trucks will be more difficult in '08 because of just the drop in municipal spending. If you think about 15% of the market in the state of flux that's a tremendous opportunity, so I really compliment those SPUs having a very, very, direct focused rather saying okay business is normal. Now, they're focused on trying to take advantage of these opportunities.

Walter Liptak - Barrington

Okay. Okay. Thanks guys.

Operator

We'll take a question now from Brian Rosenhouse with Sidoti & Co.

Brian Rosenhouse - Sidoti & Co

Hey, guys great quarter.

Jim Knapp

Good morning Brain and thanks.

Brian Rosenhouse - Sidoti & Co

Good morning. I guess my question is I know that you don't release all military sub contracts, just a $199 million figure from fourth quarter '07. Does that include the October and December MRAP orders from partners BAE and Force?

Jim Knapp

The MRAP orders for BAE the 1,200 they received are not orders that we have issued a press release on yet. We haven't received those orders.

John Sztykiel

And they would not be reflected in our backlog. The only thing that's reflected in our backlog numbers are those orders where we have actually received the contracts in home.

Jim Knapp

Exactly.

Brian Rosenhouse - Sidoti & Co

Okay. I guess given the fact that in the press release you mentioned military backlog being filled by October of '08. Do you see that there is a chance to that it could get pushed back with slight delays from your partners? And I guess my real question is like what do you expect in 2009 in terms of the sustainability of these military sub contracts?

John Sztykiel

Well, it could get moved back obviously if there is delays on the shipment of components et cetera, it can also move out into 2009, as Spartan Chassis continues to receive orders. So we are the group of companies, in Spartan Chassis in particular do not believe that the military market for hardened vehicles is going to disappear with a downside some of '09 versus '08 absolutely. Will service parts and accessories grow in '09 probably versus to '08, we believe it to be so, however we don't believe that the hardened vehicle market will disappear of 100% products and niches will probably shift or change some and Spartan looks forward to working with their partners in a long-term manner.

Brian Rosenhouse - Sidoti & Co

All right. And I guess my last question is do you see a chance that '09 could be as a richer as 2008 or do you definitely see decline occurring?

John Sztykiel

Well, I think again I believe the RV will be up versus RV in 2008. I believe emergency rescue will definitely [peak] up versus 2008, for one simple reason in 2009. You're going to start to get a lot of pre-buying of vehicles again. Because in 2010 there is a major mission change so you could see increase that 20% to 30% of emergency rescue in 2009 versus 2008, somewhat around what transpired in 2006 for emergency rescue. Again not just for Spartan but for other companies as well as emergency rescue. And, we expect to see decline in military vehicle shipments. We expect to see growth and services parts and accessories plus we've got the seven new products niches so as I said here today. Or do I believe we probably got the opportunity for top line growth in '09 versus '08 the answer is yes.

Brian Rosenhouse - Sidoti & Co

Excellent. Thanks a lot guys.

John Sztykiel

Thank you.

Operator

We'll take a question now from Kathryn Thompson at Avondale Partners

Kathryn Thompson - Avondale Partners

Hi, thanks. My questions are primarily focused on the RV segment. First are you seeing any pricing pressure from some of your RV partners like Fleetword and Newmar? And, any color on that will be helpful?

John Sztykiel

You know Kathryn we are not -- no we're not seeing pricing pressure, where we're seeing pressure is one to reduce the cycle time of the product. Okay, because everybody is trying to reduce their exposure from an inventory perspective. So we're seeing a lot of focus there. We're also seeing probably greater focus on some change or modifications about chassis and products platform plans as again well the RV market is going to be soft. People still expect about 30,000 flat base purchase this year.

They expect diesel to be a significant number and so I think we're, we're seeing is the pressure is okay, let's reduce the cycle time and how can you make some changes in the chassis to take advantage of this segment of the niche where there is excitement and definitely customer pull through whether its geographic or particular product segment. But I don't think we're not seeing push back thinking, guys you got to reduce your prices of some more products.

Kathryn Thompson - Avondale Partners

How does the reduction cycle time and capture margins or does that at all?

John Sztykiel

Well, it actually probably improves our margins because that means we're becoming more efficient. I mean if when we reduce our cash conversion cycle, or we reduce our lead times whether it be a fire truck, an ambulance, a motorhome, a military vehicle, when you almost see a direct correlation in improvement and gross margins.

Jim Knapp

We reduce our working capital that processes well which lowers our interest rate.

Kathryn Thompson - Avondale Partners

Sure, yeah, absolutely. And then on in terms of, are you seeing any changes then in market share particularly again from your top two customers in the motorhome segment and are you -- I was saying that you would benefit from that so in particular, any comments you have about Fleetwood and their rebound motorhome products?

John Sztykiel

Obviously we cannot comment, that would be inappropriate whether it be public or private to make a comment other than the fact they are great partners and they are very focused on gaining competitive market share, other than that we really can't say anything it would be inappropriate.

Kathryn Thompson - Avondale Partners

Okay, great. Thank you very much.

Operator

And we'll take our next question from Steve Barger of Keybanc Capital.

Steve Barger - Keybanc Capital

Hi, good morning.

John Sztykiel

Good morning, Steve.

Steve Barger - Keybanc Capital

I wanted to go back to the American LeFrance situation. Did that bankruptcy result in an increase in finished truck inquires and do you or the dealers have rolling stock inventory that you can be competitive within the short-term?

John Sztykiel

Well, this is John Sztykiel, and I will let Jim or others comment. We really can't comment on the cause of their bankruptcy I mean other than what they put out over the wires and what was in the Wall Street Journal. All of our business units, they are to increase the production of what I would call stocks/demo products, as they anticipated something like this happening and those stocks/demos will start to roll in to the marketplace late Q1 and Q2.

Now it's not a large number but the opportunity is that you have existing customers or past customers who are thinking about a product. Now, you're number one competitive advantage is to reduce your deliver time. So there is an opportunity with the stocks that companies did that or it's not a huge number. That's why you see the focus on reducing the lead times from lengthy orders placed to win the product shift that's your greatest competitive opportunity.

Steve Barger - Keybanc Capital

Okay. So you haven't seen conquest sales yet then its sounds like, are any of your dealers talking with overlap with the American LeFrance dealerships think that they can get permanent market share gains or is it too early to tell.

Jim Knapp

Absolutely no idea and again these are under orders but to give you an idea in one geographical area a dealer again for Crimson and I know this is representative of other dealers there are nine Crimson around the U.S. and 33 Aerial opportunities working in an area over last year at this time they had four. And again it's not just American LeFrance but there are some other companies that produce Aerial that are struggling in the marketplace.

So and when you buy a product whenever a company gets within a state of flux, what happens is customers start to look elsewhere because they buy the product not just for one year, they buy it for three, five for some of these or lot of these cities is the 15, 20 year purchase.

If there is one thing which we did right with Road Rescue and we're still working through it but no where did the market or the end user perceive that they've either going to be closed or we're going to sell them or whatever.

So therefore, their order rate went down a little bit but it hence forth rebounded. So I think it's not just out that's a great opportunity but there is others out there which not just Spartan or Crimson-related dealers are taking advantage of. There is a lot of people within the industry.

Steve Barger - Keybanc Capital

Okay. And that kind of leaves me my next questions which is a little bit conceptual but we know we have emission standards coming up but also an FPA standards in '09 I think that's going to drive Chassis cost and complexity. How much opportunity is there from changing standards with respect to further migration of the smaller Fire OEMs toward you or another custom Chassis competitor?

John Sztykiel

Well, I think one, your statement bodes extremely well for the Furion. I mean the Furion is the lowest priced custom product out there. And Spartan take it a very, very what I would call I don't want to used the term cautious but I would call a deliberant market introduction process to ensure the right product at the right price with the right quality in customer service. But typically the emission and an increase in complexity from a standard whether it be RV or emergency rescue or whatever, has been a market competitive opportunity for Spartan because 11% of our work force is in engineering. So where others cannot change their product to adapt to changes because of, say, government or industry regulations, we have been able to. For example, within Spartan Chassis, in the last emissions stream, they really did not drop one engine offering. Whereas other fire trucks OEMs who built their own chassis dropped several engine offering. And that allows Spartan Chassis to gain market shares. So honestly well FPA change in the emissions change will be definitely be a challenge, because it is not going to be easy, an engineer probably doesn't like it. The reality is that if we address it like we have did in the past, we should come out with greater competitive market share in 2011 than what we started in 2010.

Steve Barger - Keybanc Capital

Yeah, I would agree with that, but that implies to me that custom chassis in the market place becomes, lesser the competitors advantage to these other fire OEMs who migrate to your chassis or who evers, and that means non-chassis R&D becomes more the focus for fire equipment sales growth. So thinking about that, strategically, where is your real focus, on organic growth in Spartan Chassis or continuing to find a competitive edge in Crimson, are they mutually exclusive?

John Sztykiel

No, it is really everywhere. The interesting thing, [Brian], is the data would illustrate because we have been through several emission changes, and FPA changes whether it be RV, emergency rescue, the reality is 10 years ago we were probably building 500 units a year; this past year we were almost 10 times that. So, as the products have become more complex, and the business models become more customer centric what's interesting is great -- Steve I am sorry greater market niches or an increased number of micro niches develop which bodes well for Spartan whether it be emergency rescue RV or military. So actually complexity is a benefit because we have been able to address in the past.

I won’t say this is just one thing where we are definitely more focused on today than what we were two years ago, is reducing the weight of the product and reducing the cost to assemble which is just not build materials but all the processes internally because we know that if can reduce the cost and bring a product to market we can really gain substantial market share in 2010, 2011.

Steve Barger - Keybanc Capital

All right. Thank you

Operator

We have a question now from John Rogers of Ferris Baker Watts.

John Rogers - Ferris Baker Watts

Good morning.

Jim Knapp

Good morning J.T.

John Rogers - Ferris Baker Watts

Just a quick question on the fire truck chassis market, you saw a pretty strong growth sequentially, in what was normally a seasonally slow quarter and based on the backlog that was in the face of slow order growth, sooner what lead to that strong sequential growth?

John Sztykiel

Well as we look at it I mean really it was just an increase in throughput but I wouldn’t classify it as strong, I would say, it was an improvement in the right direction, I wouldn’t classify it as strong, now service parts and accessories were up over 200% and that I would classify as strong. I was saying it was moved in the right direction just like some people would say to new improve gross margin 8%, some people would perceive that to be strong. I would just say we move the bomb in the right direction.

Jim Knapp

And as John said early we do see some positive trends in the emergency rescue market and that's why we have a increased our capacity in the second quarter.

John Sztykiel

And again, while we are doing this, municipal budgets are coming down from a spending perspective. So I don't want anybody to perceive it all, Spartan believes that there is going to be more money in '08 versus '07, because no, the answer to that is definitely no. Our biggest opportunity is the strength of the brands but also there is competitive flux of about 15% and how do we make the right operational decisions to take advantage of this in 2008, rather than just assuming it's going to be a tough year.

John Rogers - Ferris Baker Watts

My question was generally in the fourth quarter you see a decline you closed down for the last two weeks of the year did you not close down this year or did you just have…

Jim Knapp

We usually close down for one week at the companies during between Christmas and New Year. Now this year because of the fact that the military business was -- the orders are very strong. We work lots of overtime on the military side of business during the fourth quarter and through the holidays we did not shutdown the military side.

John Rogers - Ferris Baker Watts

So you just increased your production of the fire truck chassis in the balance of the quarter?

Jim Knapp

Well, we…

Karen Morrow

I think it's probably you're seeing to is our average selling price in the fourth quarter. We don't mix things on the fire truck side where we are a little heavier towards our higher end fire trucks. So some of that average selling price is explained in the numbers you are seeing as well.

John Rogers - Ferris Baker Watts

Okay, thanks. Then also I was wondering what percentage of 4Q '07 especially vehicles sales were to the hardened vehicle market outside of the MRAP program?

Jim Knapp

That is something we don't disclose.

John Rogers - Ferris Baker Watts

Okay, and then finally I missed your CapEx and depreciation numbers for next year?

Jim Knapp

Sure. Let's see CapEx for next year or for 2008 rather we expect around $20 million and depreciation -- you ask depreciation for the current year or for next year.

John Rogers - Ferris Baker Watts

For next year?

Jim Knapp

And as for '08, I would say this is once again I am going to have to give you a range because I would say in the $5 million range for '08.

John Rogers - Ferris Baker Watts

Thank you.

Jeff Lambert

Okay. We can take one more question, operator.

Operator

We'll take our next question from Jamie Wilen of Wilen Management.

Jamie Wilen - Wilen Management

A couple quickies at the end. Parts business you said was $33 million in 2007 what was it in 2006?

John Sztykiel

It was about $10 million.

Jamie Wilen - Wilen Management

$10 million? Okay. Then RV on 40 models what was at it a year ago at this point in time?

John Sztykiel

36.

Jamie Wilen - Wilen Management

36, okay. And in emergency vehicle you said you had some price increases could you quantify what they were?

John Sztykiel

They would be in the ranges of about 2.5% to 4% Jamie.

Jamie Wilen - Wilen Management

Okay. A couple of other quickies. Working capital obviously from the growth of the business inventory accounts receivables was up $90 million 2007 versus 2006. Where would you expect that those numbers giving you are current levels of business to end 2008? Do we need any more -- do we need any additional working capital or will that you say pretty constant at these levels or can we actually reduce that?

Jim Knapp

I think it's going to go up to some extent in the second quarter Jamie as the military business grows. Later in the year as the business tends to flatten on the military side I think we're going to see decline in working capital and we'll be generating more operating cash flow we'll be paying down debt.

Jamie Wilen - Wilen Management

Okay. By the end of the year do you expect receivables and inventory to be less at the end of 2008 than was at 2007 or no comment at this time?

Jim Knapp

I would say it will be down, yes.

Jamie Wilen - Wilen Management

Okay. Lastly on emergency vehicle as well, with American LeFrance -- you didn't supply them with any Chassis or do you or did you?

John Sztykiel

No, we are direct competitors. Sorry, LeFrance is a direct competitor.

Jamie Wilen - Wilen Management

So. If you pick up the business or somebody else picks up the business and there is an opportunities Chassis wise in addition to vehicles lines?

John Sztykiel

Well, absolutely there is a huge job opportunity Chassis wise.

Jamie Wilen - Wilen Management

Okay. And then last question is what are, the opportunities overseas within all your businesses? You got a product you basically do domestically, but you have got a lot of expertise. Are there opportunities outside United States?

John Sztykiel

There is an opportunity whether it be in the military for example, the domestic product which has been -- where we have worked with Force Protection on. They are a great company that's kind of overseas. There is, opportunities from an RV prospective in certain parts of Europe with certain OEMs Spartan Chassis, is talking to. We probably sold again of the small number less than 10 but we sold the greatest number fire truck Chassis to China over the last couple of years. From our product perspective, the Furion is a tremendous product from an overseas perspective especially for emergency rescue and other specialty vehicles because if you look at the exchange rate of the dollar versus the euro and it also has a European design. It's a very, very appropriate product now I won't say this, the business units Spartan Chassis doing the right thing.

They are talking to people developing the relationships, haven't shipped anything yet because they want to make sure that the products right and they are able to judge that close to home. Crimson Fire actually about 15% of their bodies well 10% to 15% actually go overseas right now. As they actually produce just raw bodies and ship them to a couple of OEMs that actually turn those into complete fire trucks. So they got a small road going forward, they look to grow that. They have got a definitive arrangement on the Boomer that's very attractive overseas and they are actually working on developing somewhat I would call demo or prototype contracts to ship probably in Q3 of this year. There is some large emergency rescue shows in Europe and Southeast Asia in the third quarter of this year.

Road Rescue right now honestly they are not focusing on it at all. They have got enough opportunity to improve their performance within the core North American market that I don't want really them going overseas a bit to reduce the cost of the business improve their efficiency is great and they have had a couple of trips overseas but if it's to chassis sale wins overseas honestly they are staying very focused on improving their margins internally.

Jamie Wilen - Wilen Management

Okay. Great. And lastly America LeFrance was in trouble, any other you said 15% of the market is struggling. Were there others besides…

John Sztykiel

I mean there are definitely others out there that are struggling from a competitive perspective. I really can't comment on the names other than the one company. They have made their situation public but there are definitely companies struggling but it is the greatest amount of struggle I've seen in the emergency rescue market. Over the last 22 years I've been in this business however it does not surprise me. In the emergency rescue market there has to be some consolidation because the vehicles are becoming more complex, costs are going up and if you are not investing in the engineering to produce the right custom products and a reduced cost base that meets the new standards. You are either going to be in the street or market obsolete or non-price competitive.

Jeff Lambert

Jamie we are going to cut it off now.

Jamie Wilen - Wilen Management

Thanks. Appreciate it fellow.

Jeff Lambert

John now you can conclude.

John Sztykiel

In closing honestly I want to say thank you hopefully the increased question-and-answer time was more fruitful. You know that what past calls have been, while we're cautiously optimistic about 2008 and we've got a record Q4 backlog and many companies cannot say that we also know we have a lot of work ahead of us. Because as a company we really don't take the time to enjoy the past so, we're really focused on executing today and tomorrow. Thank you very much.

Operator

That does conclude today's conference. We thank you for your participation. Please have a good day.

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Source: Spartan Motors Q4 2007 Earnings Call Transcript
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