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Force Protection, Inc. (NASDAQ:FRPT)

Q1 2008 Update Call

May 29, 2008 4:30 pm ET

Executives

Tommy Pruitt – Senior Communications Director

Michael Moody – Chairman of the Board, President & Chief Executive Officer

Francis E. Scheuerell, Jr. – Interim Chief Financial Officer

Damon Walsh – Executive Vice President of Customer Operations

Analysts

Chris Donaghey – Suntrust Robinson Humphrey

James McIlree – Collins Stewart

Joe Maxa – Dougherty & Company LLC

Marc Robins – Robins Consulting Group

Kirk Ludtke – CRT Capital Group

Operator

Greetings, ladies and gentlemen, and welcome to the Force Protection Investor Conference Call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Tommy Pruitt, Force Protection’s Senior Communications Director.

Tommy Pruitt

Thank you. Certain statements in this presentation, including without limitation, statements relating to the company’s business expectations for the remainder of 2008, statements relating to the beliefs of management, expectations, or opinions, and all other statements in this presentation other than historical facts are forward-looking statements as such term is defined in the Securities and Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Forward-looking statements are subject to risks and uncertainties, are subject to change at any time, and may be affected by various factors that may cause actual results to differ materially from expected or planned results. In addition to the statements discussed above, certain other statements are forward-looking, including, without limitation, our expectations regarding profitability, the numbers presented for the year ended December 31, 2007, and the three months ended March 31, 2008, our ability to address or identify material weaknesses, and the progress made with respect to our internal controls, the number of vehicles the company expects to deliver in 2008, the value of the sustainment and remanufacture orders that the company may received during 2008, our ability to secure foreign military sales for our products, our relationships with the United States Department of Defense, Field Dynamics Land Systems, GRS sustainment systems, our ability to develop and diversify our new product offerings, the desirability of The Cheetah vehicle as an interim solution for our customers, and our expectations about levels of production for the Buffalo vehicle. These statements are subject to numerous risks and uncertainties, including but not limited to the risks detailed in our annual report on Form 10-K for the year ended December 31, 2006, and our Form 10-Q for the three months ended September 30, 2007, and other reports filed by the company with the Securities and Exchange Commission.

During this call we will be referring to certain non-GAAP figures which are non-GAAP financial measures as defined under SEC rules, such as adjusted net sales for the three months ended March 31, 2008. These amounts have been adjusted from GAAP measures to exclude amounts related to the Force-Dynamics joint venture agreement between General Dynamics Land Systems and Force Protection. A reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure is available and posted in the Investor Relation section of our website at www.forceprotection.net/investors/events_presentations.

I would now like to turn the conference call over to Michael Moody, our Chief Executive Officer.

Michael Moody

Thank you. Good afternoon, and thank you for joining us for our First Quarter Review Call. With me today is Frank Scheuerell, our Interim Chief Financial Officer, and Damon Walsh, our Executive Vice President for Customer Operations.

As we said on our last call, we are committed to giving you these regular updates on our business to help you understand our position in the marketplace and our opportunities. The amount of financial we can disclose continues to be limited, however I will comment later on the progress we are making to meet our filing requirements. I would like to start by sharing some of the numbers that we can report.

Our first quarter 2008 revenues were approximately $400 million. Bear in mind that the MRAP program is conducted in conjunction with General Dynamics. Because of the way the relationship is currently set up, all of the General Dynamics revenue for MRAP Cougars shows in our income statement but is essentially a pass-through. We recognize the revenue allocated to General Dynamics and record the same amount as a cost of goods sold.

The first quarter revenue for Force Protection, after adjustment to remove revenues associated with General Dynamics, was approximately $200 million.

Our backlog continues to be significant and at the first quarter’s end it stood at approximately $410 million for vehicles, service, and support. This backlog does not include any General Dynamics delivered vehicles, or service and support.

We are beginning to have visibility into 2009, particularly with the recent orders from the United Kingdom Ministry of Defense, which I will speak about in a moment.

During the first quarter we received approximately $195 million of new orders, including both new vehicles and service and support orders. These orders do not include any vehicles or service and support orders for General Dynamics.

Our balance sheet continues to be free of long-term debt and we currently have approximately $70 million in cash. Also with respect to our liquidity, we have extended the facility we have with the Wachovia Bank. The facility is now for $30 million as opposed to the previous $15 million. This amount better reflects any possible Force Protection requirement. We continue to be pleased with the good relationship we maintain with Wachovia.

Now that’s about the extent of the numbers we can talk about for right now. I would also like to make some broad comments about the first quarter and our expected financial performance.

Since I was confirmed as the Chief Executive Officer on March 1, 2008, our executive team has focused on a comprehensive review of the whole organization. We have looked to immediately streamline our processes and appropriately size our organization to improve our financial performance.

As an initial step, we reduced our headcount from approximately 2,000 at the year ended December 31, 2007, to approximately 1,650 at the end of the quarter ended March 31, 2008. Our current headcount is approximately 1,540. However, I should note, we do not see these headcount reductions and other expense reduction actions having a material impact on the first quarter’s results.

As anticipated during our last conference call in March, we are completing the analysis of our facility needs. We expect to make the following changes during the next six to nine months:

First, we are relocating our sustainment team, which includes our training center and spares management to Roxboro, North Carolina. We will continue to maintain sufficient square footage available to accommodate establishing production operations in Roxboro.

Second, we are expanding our Demingway facility in Summerville, South Carolina, and relocation our design engineering there to co-locate them with our research and development department. This change is intended to create a consolidated design and development center under one roof.

Third, we are establishing a separate spares warehouse to better provide the dedicated spares management and improve spares delivery and efficiency.

Fourth, we are re-orienting our manufacturing operations around production lines to provide dedicated facilities for Buffalo, Cougar, and The Cheetah and to better utilize our footprint here in Ladson.

And finally, we plan on relocating our corporate headquarters to a different facility in the Charleston, South Carolina, area to assist in our operating efficiency.

We are making progress with respect to the completion of the financial statements and audit ended for the year ended December 31, 2007. We are very pleased that, after undertaking the rigorous client-acceptance process, Grant Thornton agreed to accept the position as independent auditors of Force Protection. Our auditing committee completed the engagement process on April 10 and Grant Thornton immediately began their work. They have laid out a process and have a team of approximately ten people who have been here in Ladson for several weeks. The work is progressing in line with their process. We are not in a position at this time to say when this work will be completed. We just want it to be done both properly and promptly.

In addition to working on the restatement for the third quarter 2007 and the preparation of the December 31, 2007, numbers, we are addressing the material deficiencies in financial reporting and internal controls that created the need for the restatement. Frank Scheuerell has been leading the effort and coordinating with the folks at Grant Thornton. We continue to expect, as we previously disclosed, that our 2007 net income is likely to be approximately the same level as in 2006.

Turning to our various programs and vehicle platforms. I would like first to address our expectations for Cougar and its variance. This remains our largest vehicle program. We shipped approximately 340 Cougars during the first quarter of 2008. This number is only those vehicles delivered by Force Protection. There are currently, globally, approximately 3,100 of these Cougar vehicles in the fielded fleets, including those delivered by both General Dynamics and Force Protection. As of year end 2008 there will be approximately 4,100 total vehicles in the fielded Cougar fleets.

I would like to make a couple of important points about this. First, we do expect to see additional orders, especially from foreign military customers, for our Cougar vehicle variance. I would like to mention here that we are moving forward with the United Kingdom Ministry of Defense and a UK-based company to provide full forward integration, installation of operation and retrofits, training, maintenance, and future development of vehicles for the United Kingdom Ministry of Defense. We are excited about this opportunity as it represents the first step in expanding our presence internationally.

Second, with respect to Cougar, we believe there is a significant remanufacture opportunity for the fielded fleet. We expect that the customer will update fielded vehicles to the most current performance standards of operation and protection.

Third, the service and support opportunity is both alive and ongoing. In fiscal 2008 we expect to see approximately $150 million of service and spares support revenue for the fleet. This includes both spares, demand to repair our vehicles in the field, and our field service representatives in Iraq and Afghanistan.

Finally, it continues to be our belief that these vehicles fulfill an important and long-term requirement for tactical-wheeled vehicles.

We continue to be very pleased with our partnership with General Dynamics. The partnership enables us to serve our customers at a higher level than would otherwise be possible. We are working more closely with General Dynamics everyday and together are exploring opportunities to forge a stronger partnership and define ways to expand our joint venture.

With respect to Buffalo, this is the program we have the longest visibility. We expect to see approximately $100 million a year in production for this vehicle for the next several years. It is a unique platform with a highly specialized mission and it’s doing its job exceptionally well. We have a lot of confidence in this program and believe that this, too, is a category of vehicle for the significant potential international base.

During the first quarter of 2008 we delivered 24 Buffalos. Next week we plan to deliver about 200 Buffalo to the customer.

Finally there is The Cheetah. We believe that this remains a great opportunity for Force Protection. However, we still do not have an order to announce. I know that many of our investors are focused on this platform, and rightly so. We are very conscious of the opportunity that this vehicle represents. The current procurement landscape for vehicles such as this remains highly fluid and complicated. The simple fact is, however, that The Cheetah offers the improved tailored performance and protection that the customer is searching for in a tactical-wheeled vehicle. We think that this is compelling and that the need is urgent. We are working hard to secure orders from both the U.S. government and foreign military customers and we remain optimistic about The Cheetah’s potential.

I am pleased to announce that we have expanded our lobbying effort and hired an extremely capable organization to assist us in communicating with Congress and the military about our views and capabilities as a significant part of the industrial base for tactical-wheeled vehicles. This organization is & Ghazal Associates, which will work closely with Congressional strategies. Jay Ghazal began his business with a little client called Agara [inaudible] and subsequently oversaw the lobbying efforts to Abama, the Humvee program. Jay’s talented, knowledgeable, and has excellent relationships both with the Pentagon and on Capitol Hill. We are very fortunate to have retained his services and believe that he will be a valuable addition to the efforts of Congressional strategies.

As a last topic I would to mention the JLTV effort we are working on with DRS. I know that there is a lot of speculation about this, particularly given the recent proposed acquisition of DRS. I think what is relevant here is that we are very pleased to be partnered with DRS and if it comes to pass that DRS is acquired, we look forward to continuing with this relationship. We are very hopeful that our efforts will be validated in the down selection process. The JLTV program provides us with another part in the tactical-wheeled vehicle market. We believe it is important to position ourselves, our technology, and our capability to participate regardless of how the tactical-wheeled vehicles market evolves. In addition to JLTV, we are also interested in expanding our partnership with DRS.

I would like to comment on the vision for Force Protection. While our executive team is clearly engaged in the near-term challenges and efforts to improve organizational performance and to take advantage of near-term market opportunities, Force Protection continues to focus on driving a broader future for itself towards a new responsive business based on creating and delivery innovative survivability solutions.

To that end, as noted earlier, we are taking the first steps on this path with realignment of our research and development department and co-location of our design engineers with this group. Further, we have significantly added to the research budget to expand our work in both evolutionary improvement in our product lines, and in more revolutionary survivability solutions.

In closing, I would like to summarize. We are working to rectify our financial reporting and internal control issues, appropriately sizing our organization, and continue to have a strong order backlog, including some significant foreign military orders. At the same time we are meeting our customer delivery schedules. We are also doing a better job of leveraging our industry partnerships and upgrading our external communication efforts. We’ve come a long way in a short time. I think this organization is cohesive and energized and we are looking forward to translating that into orders and value for our shareholders.

Thank you, and I would like to now open the call for some questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris Donaghey with Suntrust Robinson Humphrey.

Chris Donaghey – Suntrust Robinson Humphrey

You have kind of given us some good data points on what to expect on the services side of the revenue, service and support for fiscal 2008. As we think about 2009 should we use a similar type of run rate for the services business in 2009? Obviously the fleet will be a little bit larger by then but [inaudible] to quantify what we should expect in 2009 for services revenue.

Michael Moody

Certainly taking the whole area of sustained revenue of service and spares such as ours has been a significant contributor in 2009, as it will be in 2008. Obviously some of that is going to depend on how actively used our vehicles are, but certainly we expect that it’s going to be a very significant revenue strength for us next year.

Chris Donaghey – Suntrust Robinson Humphrey

Okay. And as we think about that $250 million, in terms of visibility, that seems to be the highest visibility revenue right now. What should we be thinking about in terms of the margins on that $250 million in revenue?

Michael Moody

Where is the $250 million, Chris? I’m just not quite sure.

Chris Donaghey – Suntrust Robinson Humphrey

Oh, I’m just using the $150 million in services revenue and $100 million in Buffalo revenue. Just the highest visibility portion of the revenue right now.

Michael Moody

I’m sorry, I was focused on the number. What was the question again?

Chris Donaghey – Suntrust Robinson Humphrey

What kind of margin expectation should we have around that, just the Buffalo and the services part of the revenue?

Michael Moody

I’m not sure I can really quote on that at the moment. It’s pretty difficult for me to give forward-looking statements when we haven’t put our historical financials out. I think I’m going to be in a much better position once we’ve got our tag filed to start talking about those things.

Chris Donaghey – Suntrust Robinson Humphrey

That’s fine. But can you maybe bracket for us what your expectations are based on either the remanufacture of the existing fleet or other foreign military sales? Can you put a range around what the Cougar production numbers could look like in 2009 and/or the revenue associated with that? Now that you’re already kind of building the production book for Cougar in 2009 with the British order?

Michael Moody

Let’s talk about that a little bit. We are obviously actively looking towards putting in place foreign military sales for Cougar. We have the sale to the British where we are actively talking to a number of other foreign counties as well, and then, as you said, the remanufactures are likely to be a significant part.

I don’t know, in terms of the actual production of new Cougars at this stage, I can quote a number to you. But what I can say is that we see this facility as having a capability of 80-100 vehicles left. That’s what we see the capability of these Cougars. And we’re certainly going to seek to fill that.

Just in terms of the remanufacture, the customer has said to us that this is a program that they are very interested in, they see that there would be substantial remanufacture activities and if that does come to pass, that could represent a significant percentage of that 80-100 vehicles per month.

Chris Donaghey – Suntrust Robinson Humphrey

And do you believe that your aggregate demand picture supports that type of production rate for some time period? Again, not specific numbers, but as you look at the total market opportunity over the next few years, you know, win or lose, the number of vehicles over the next few years could support 80-100 Cougars per month.

Michael Moody

There are a couple of things I should say. One is that our facility here, in terms of manufacture of the Cougars, we’re spending a small amount of capital on that to ensure that it’s practical enough for us to manufacture Cougar or The Cheetah off the line, so there will be some degree of flexibility in terms of their production.

But secondly, our expectation, if you look at the very substantial number of Cougars that are already filled and will be filled by the end of this year and our activity related to foreign orders, that the 80-100 number doesn’t seem unreasonable to us.

Chris Donaghey – Suntrust Robinson Humphrey

And one last question. Just on the R&D effort. Are we thinking more armor research and development or, I know we’ve talked about blast-protected wheels in the past, or are we talking about new vehicles as well?

Michael Moody

We see ourselves as a company that’s in the business of survivability solutions. Vehicles are important to us, they are a central part of what we do now. That is where our revenue comes from. But certainly as far as our research and development is concerned, it will be somewhat more broadly based that that. We are going to work a lot in the invention and innovation area, around the chemistry and chemistry to prevent concepts. And then actively developing that into manufacture of marketable products. So I think that you will see that there will be some broader activities beyond what we’ve necessarily done today.

Operator

Your next question comes from Jim McIlree with Collins Steward.

James McIlree – Collins Stewart

The $410 million backlog that you referred to, how much of that is deliverable over the rest this year?

Michael Moody

Most of it.

James McIlree – Collins Stewart

And that is just your portion of the backlog? It doesn’t include the pass-through from GD, is that correct?

Michael Moody

That is correct.

James McIlree – Collins Stewart

And also, I just wanted to make sure. On this service business, you talked about $150 million. That’s just your share?

Michael Moody

Again, that’s correct.

James McIlree – Collins Stewart

I’m going to round off to 1,500 employees as of now. Is that what you think the number is going to be, more or less, through the rest of this year, or is there likely to be further downward movement on that?

Michael Moody

I think I would be better answering that question more broadly. Obviously, the new management team has been in place for a short period of time and we have seen where there are opportunities to have the operation generally more efficient and ways in which we can operate more effectively and save money. That’s an ongoing process. So I don’t want you to think that in the first 60-90 days that our work is done. So we will continue to work with like results in stock reductions or [inaudible] I wouldn’t directly say, but that work is not complete.

James McIlree – Collins Stewart

And back to the backlog. That $410 million is mostly for vehicles, I am assuming.

Michael Moody

Correct. The predominant part of that is vehicles.

James McIlree – Collins Stewart

In terms of the remanufacturing, is it likely that that would come out of the existing MRAP contract and program office or are you thinking that there would have to be a different bucket of money found to do that?

Damon Walsh

This is Damon. They already have funds allocated and in the amount of around $250 million in both FY2008 and FY2009 money for Cougar remanufacturing. They already have our proposals. It will be done against our MRAP contract.

James McIlree – Collins Stewart

And, Damon, when you said the $250 million for both fiscal 2008 and fiscal 2009, you were referring to the total Cougar remanufacturing, not just your share, is that correct?

Michael Moody

That is correct. You need to recognize that includes General Dynamic shares.

James McIlree – Collins Stewart

And I was thinking more broadly, to include the Navistar and the BAE shares.

Damon Walsh

Oh, no, that is just for Cougar.

James McIlree – Collins Stewart

Okay, just specifically Cougars, not MRAPs broadly speaking.

Michael Moody

Correct. Just Cougars. So you just need to look at that in terms of Force Protection and General Dynamics.

James McIlree – Collins Stewart

I know I’m being dim, but the $250 million does include GD in this case?

Michael Moody

Yes, it does.

Damon Walsh

It’s the remanufacture of Cougars under the MRAP program, which is part of our joint venture.

Michael Moody

It’s always worth asking the question because I think we need to be really clear on these numbers.

James McIlree – Collins Stewart

When was the last time that you had 1,500 employees? It must have been sometime in 2007.

Michael Moody

Correct.

James McIlree – Collins Stewart

Would that have been in the middle of 2007?

Michael Moody

It would have been in the second or third quarter, maybe in August or September. This company ramped up very quickly toward the end of last year.

James McIlree – Collins Stewart

The Roxboro facility is, I think Michael, you said it’s still going to be capable of production, correct?

Michael Moody

Correct.

James McIlree – Collins Stewart

But it won’t be producing until there’s something to produce?

Michael Moody

That’s true, but I also made the point that we are putting the work into some flexibility with our production capability there for both Cougar and The Cheetah down the same line.

James McIlree – Collins Stewart

Right, and that was my next question. It sounds like Ladson can be a tri-use facility, you could do the entire menagerie down there.

Michael Moody

That’s correct. The Buffalo is part of a separate line and operation but we see having a production line which is flexible to handle the variance of the Cougar and The Cheetah as well.

Operator

Your next question comes from Joe Maxa with Dougherty & Company.

Joe Maxa – Dougherty & Company LLC

I want to make sure I’m clear on the backlog and the service revenue. Is the $150 million service revenue included in the $410 million backlog? Or is that a separate line?

Francis E. Scheuerell, Jr.

No, it’s not a separate line.

Michael Moody

There’s a separate definition is the right way of putting it. What we talked about in terms of the $150 million, that is what our expectation is in terms of service and sustainment of the vehicles. What we talked about in terms of the backlog if specifically what we have on contract and on order.

So in terms of the spares and sustainment, some significant part of that we have not yet had orders placed. That’s not unusual because the orders tend to get placed during the year and in fact, we’ve found towards the federal government’s financial year, a lot of the orders get placed.

So they are actually different measures, if you understand the term.

Joe Maxa – Dougherty & Company LLC

I do understand. But a portion of that $410 million includes your services?

Michael Moody

Correct.

Joe Maxa – Dougherty & Company LLC

How does this compare with what you gave last quarter? Because when I look at this I see $410 million plus the $200 million that you did in Q1 gives you $610 million and if I recall right, last quarter you gave a backlog for the year of $580 million plus about $100 million in service. And so a portion of that was already in the $580 million so it looks like you’re just up maybe $30 million?

Michael Moody

The number is slightly less than what we reported before, because the number we quoted in the previous quarter was $450 million. And what we quoted that for was purely for vehicles. So I think the vehicle backlog now, if you wanted to have a like-for-like, the vehicle backlog now is more like $370 million.

Joe Maxa – Dougherty & Company LLC

Versus $450 million.

Michael Moody

Correct. That’s the like-for-like.

Joe Maxa – Dougherty & Company LLC

There’s been some talk of doing the complete production in-house, including the automotive integration. Is that something we should expect to start seeing from you guys, or will you still sub that part out?

Michael Moody

Including the auto integration?

Joe Maxa – Dougherty & Company LLC

Yes, for Cougar.

Michael Moody

We still have a good relationship with Spartan and Spartan does a significant amount of work for us. Although now we do have the capability to do auto integration here. What we see, as far as auto integration is concerned, but also generally, is that we have capacity here, in our facility for 80-100 Cougars, but we see working with partners like Spartan for surges in that or opportunities where there are particular requirements our for short term.

So, yes, we do have a large part of the capability of doing that production here. But it doesn’t mean that our relationship with Spartan is going away.

Joe Maxa – Dougherty & Company LLC

But do you expect to start, have you been doing a number of those vehicles in-house, and what are your expectations?

Michael Moody

Yes, we have been doing a number of vehicles in-house and we expect over the coming months for that number to increase significantly.

Joe Maxa – Dougherty & Company LLC

You gave us a ballpark net income for 2007 and you gave us some good revenue numbers, expectations, for us to think about for 2008. Can you give us a net income range of what we should look for in 2008 compared to 2007?

Michael Moody

No, I can’t do that. Once we get the financials filed I’ll be more prepared to talk about that.

Operator

Your next question comes from Marc Robins with Robins Consulting Group.

Marc Robins – Robins Consulting Group

When you went through the reorientation of the facilities, could you go through that again, because that kind of helps us get a better orientation of what’s really going on with manufacturing.

Michael Moody

I will go through it exactly as I did before. We are going to relocate our sustainment team, which includes the training center and the spares management, to Roxboro, North Carolina.

Marc Robins – Robins Consulting Group

So does that mean the new warehouse that went in, as I think of it, off to the left, does that go out to Roxboro?

Michael Moody

No, it doesn’t. What we’re talking about is, we do an enormous amount of work here in terms of training military personnel to go into theater, in terms of the whole lock stock around the management of our sustainment and spares. We still have a substantial warehouse here. That is becoming more for our manufacturing. We’re putting our spares into a different location.

But a lot of what’s going to Roxboro will be the training of the people to go into theater, both military personnel and our own personnel, and some other management functions, as well.

So that’s the first component. The second component is in regards to our design engineering folks. We are moving those from this location to a facility at Demingway and Summerville. Now, if you know the area at all, that is the next city to Ladson. But what we want to do is we want to put them with the R&D folks and have them really in one area as part of their whole development activities.

The third thing, which I mentioned briefly a minute ago, is that we are separating our parts for manufacturing from our spares warehouse. Now, at this stage, we are using the services of a third-party provider in the Charleston area to locate those spares, and we are looking at some other alternatives as to exactly how we can handle that. But the initial steps to place our spares for the service and sustainment activities are already underway to separate those from the manufacturing warehouse, which is the warehouse you referred to here.

And then the fourth point is that we’re focusing our Cougar and The Cheetah production, if you know the facility here, in Building 2. The Buffalo is in Building 3 at the back of our campus here. The Building 2 has been used for part of the Cougar activity, principally the integration. It’s also where our new auto integration line is. We have been successful in making our operations much more efficient and I mentioned some numbers in terms of employees before. We are now satisfied that we can house the Cougar and the flexible Cheetah operation, the fabrication, the integration, including auto integration, in Building 2.

And then the final part I mentioned is that we’ve got a substantial corporate headquarters presence here in the product Building 1 in Ladson. We are looking to a much more efficient operation, another taken pretty close by here, which will I think be better from an operational point of view and is also going to be good from an exchange point of view.

Marc Robins – Robins Consulting Group

Where was fabrication? Where was the mono-cog fabrication?

Michael Moody

That was in Building 1. That is in the back of Building 1 presently.

Marc Robins – Robins Consulting Group

And I remember correctly, in the front of Building 1, you were having automotive integration and that’s going to Building 2. So will you have more fabrication in Building 1 or will you have less space involved in Building 1?

Michael Moody

No, Marc. Where the auto integration is, is in Building 2.

Marc Robins – Robins Consulting Group

That’s where you’re moving it to. Yes.

Michael Moody

The Building 1 is the office facility in the Proctor building. The back of the building of the fabrication. What we’re looking at is moving that fabrication into Building 2 to be with the auto integration and the final integration. So all that is moving out of Building 1.

Marc Robins – Robins Consulting Group

We haven’t heard about ILAV in a long time and I was wondering if there’s any life to that program. I know it is a BAE program but you were involved in its initiation and the original design. Is there anything on the horizon there or is that just kind of ended?

Michael Moody

We believe there’s still life in it.

Marc Robins – Robins Consulting Group

So, that could raise its head and be an opportunity for the company in the not-to-distant future, and if I remember the way the contract was written, there could be some good volume there.

Michael Moody

Yes. The original requirement was in the couple of thousand vehicles and we’ve delivered less than 500 of those.

Actually, there are a significant number of vehicles to be delivered there so, yes, there certainly could be an additional opportunity on that. We certainly don’t think that’s dead.

Marc Robins – Robins Consulting Group

Someone asked the question about R&D and you did a fairly decent explanation of bringing us up to date. I guess I would like to ask, are we looking out six months or 18 months or something like that before we could see something significant announced? I remember August almost two years ago when the first patent announcement was released on the wheel technology. And I know Vernon can’t be just sitting on hands, he’s got to be going crazy creating stuff. Give us a little color on timing, if you would, please.

Michael Moody

I’m not really ready to give a six month or 18 month time frame. The only thing I can say to you is this. Last year, particularly, this company was focused on producing vehicles. The whole company was focused on producing vehicles. What we now see is that there is a real opportunity for us to get back to the core competency and core value of this business. Not only in terms of people like Dr. Joynt, as you mentioned, but with more scientists, with more research, and getting back to the fundamentals of survivability solutions.

So one would expect that we are going to start producing results there. We have some good results already discerned or we wouldn’t be putting all this effort into it. But I don’t know that I’m prepared to say that’s going to be six, nine, or 12 months. Because a lot of it is going into the market, it’s an important part of the fundamental value in this business and we really think that there are some substantial opportunities to do some really good work here.

Marc Robins – Robins Consulting Group

Nobody is giving you much credit for your technology. I have one more question. Partnership expansion, do you want to say a few more things about that and give us some color on what’s been happening, or what could happen?

Michael Moody

Well, I talked a little bit about General Dynamics and DRS. It has been a significant value to this company, to have partnerships with strong capable organizations that help us bring out forces as we have or to respond to JLTV. There have really been some outstanding relationships and, as you mentioned before, I wouldn’t want to forget BAE. I mean, that was one of the original partnerships.

But Force Protection sees that there is continued value in terms of partnerships. Whether we would continue to partner with different people in terms of industrial production, or there is more value or additional value in terms of working in partnerships, in terms of that whole R&D effort we just talked about, are all questions that we are considering at the moment. These partnerships bring a great value to Force Protection and we are very open to looking at additional partnerships.

Operator

Your next question comes from Kirk Ludtke with CRT Capital Group.

Kirk Ludtke – CRT Capital Group

I was wondering if we could talk about the year end markets a little bit. I am curious, is there a rule of thumb, with respects to your parts sales, for how much you generate in parts and service revenue for a vehicle in the field? I know you mentioned earlier on how much they are actually used, but is there a range there that you can give us?

Michael Moody

We believe that vehicles will have a very long life in service. One of the wonderful things about these vehicles is not only the survivability record, and we’re very proud of that and we’re delighted with the number of lives the things save, but we don’t talk often enough about the serviceability, about easy these vehicles are to repair and maintain, and the fact that we have an extraordinary limited number of losses from all of the activity that takes place around these vehicles. We expect that these vehicles will have a long service life in the U.S. military.

Now, the UK customer told us yesterday that the vehicles they purchased from us were initially for a one-year urgent operational requirement and the vehicles have been so successful operationally, but also in terms of service and sustainment and ability to repair, that the use [inaudible] is now 20/20 and likely to be beyond that.

So just putting that background here, the outview is that the dollars that are spent on the procurement of the vehicle is only 20% of the total life cost of the vehicle.

Kirk Ludtke – CRT Capital Group

So, let’s just put some numbers on it. Say an MRAP costs $500,000. You’re suggesting that there would be another $2 million spent on its life?

Michael Moody

That’s what I’m saying. Exactly.

Kirk Ludtke – CRT Capital Group

And it would last 20 years?

Michael Moody

It could last up to 20 years.

Kirk Ludtke – CRT Capital Group

So that $2 million would be spread over 20 years.

Michael Moody

Maybe 20 years. Our view is these are 12, 16, maybe up to 20 years. But I think it’s not unreasonable to look at that sort of life span and that sort of expenditure.

Kirk Ludtke – CRT Capital Group

I know there are at least a couple of different types of armoring systems in the field. I know one is a welded system and one is a bolt-on system. Do you have any feed back from the field as to how those two types of systems are performing, if one’s performing better than the other?

Michael Moody

The threat to our vehicles and to everyone’s vehicles is always evolving. We believe that, we have customers that have been extremely successful in responding to those threats. And I’m not in a position, or prepared to talk about the individual solutions. But the solutions that are being provided are extremely capable.

Kirk Ludtke – CRT Capital Group

And you’re using more of a welded configuration?

Damon Walsh

Normally we try not to talk any specifics about the construction packages on any of the vehicles. I think we can say that the vehicle is made of steel and armor. Predominantly the capital is welded together. The portion that goes into the armor recipe uses a variety of attachment and manufacturing methods to achieve what we believe are, and what’s proven in combat, is that that solution on the battlefield for the best way to arrange that armor recipe.

Kirk Ludtke – CRT Capital Group

Do you expect any more MRAP awards, industry wide, for this year?

Michael Moody

That’s quite possible.

Damon Walsh

The government still has funding available. There is still requirement that remains under the JROC approved amount. There is, however, a lot of question about what kind of vehicle they buy going forward into the future because the tactical-wheel vehicle market is pretty fluid and pretty dynamic and there’s still some question about whether they buy heavier vehicles or lighter vehicles.

Kirk Ludtke – CRT Capital Group

Do you have a sense of how many JLPVs would be needed. How many Humvees are in the fleet and how many would have to be replaced with JLPVs?

Damon Walsh

To answer your question backwards, the number of Humvees in the fleet is around, north of 150,000 in the Army. And I may be a little off on the Marine Corp, but it’s about 40,000 in the Marine Corp, and less than half of that in the Navy and the Air Force.

For planning purposes I would say a number of around, using an initial number of around 50,000-60,000 would be the Humvees they would replace with one of the JLPV variance.

Kirk Ludtke – CRT Capital Group

And timing-wise you think that is 2010 or 2011?

Damon Walsh

I don’t know. Currently the plan is that they will make a decision sometime in 2012, maybe 2013. If history holds true, the JLPV will likely flip a year or two to the right as a result of funding and testing. But, as early as 2012 or 2013 would probably be the earliest we would see any JLPV production of consequence.

Operator

Your have a follow-up question comes from Jim McIlree with Collins Stewart.

James McIlree – Collins Stewart

The $150 million of sustainment that you spoke of, can you split that out in broad terms between what is sustainment of work for the Buffalo versus the Cougar?

Francis E. Scheuerell, Jr.

In general terms I would say, of the $150 million, and I’m spit-balling the number a little bit here, maybe $20 million-$30 million for Buffalo, the rest for the Cougar fleet.

Damon Walsh

Bear in mind that we also have FSRs mixed in there and that complicates it a little bit, because many of our FSRs at wherever location they’re on will work on both Buffalos and Cougars. And hopefully Cheetahs at some point in the not too distant future.

James McIlree – Collins Stewart

And when I think of that sustainment business, I kind of think of it in terms of a base business and then a business that’s driven by the tempo or the amount of work that the vehicles and how much damage the vehicles have sustained. Is there any way to spit-ball that one?

Michael Moody

There’s a few things we can say to you. One is that, and we might have given you this indication before, the customers told us, if you look at it in terms of the automotive component as opposed to battle damage, these vehicles have been so actively and in such a hostile different environment, that they are receiving five-year automobile services every six months. So all of the components that go around normal automobile wear and tear are enormously accelerated in these vehicles.

As far as battle damage is concerned, I mean the costs there are the costs and the slides in that area, are reasonable extensive. Obviously we supply lots of axles, suspensions, those sorts of things. But the vehicles are rather actively used, they’re in a hostile environment.

James McIlree – Collins Stewart

I guess the unasked question that I’m dancing around is, if the activities in Iraq wind down or if the continued success that the forces are having there maintain themselves, would that five-year automotive service happen every 12 months instead of ever 6, or happen every 18 months? That’s still a high tempo, but in terms of what you guys are doing, a lesser tempo.

Michael Moody

We would expect that if the level of hostility reduces or our involvement significantly reduces, that the use of these vehicles will be significantly reduced. And that would impact not only the spares and field activity but also the field service representatives. We have lots of folks in the field in Afghanistan and Iraq and they’re enormously invaluable to the customer but it’s also an important part of the revenue stream for Force Protection.

Damon Walsh

And another thing to consider, Jim, and to be perfectly honest I think for all of us we hope it happens tomorrow, but if the war were to end tomorrow, what would happen then is there would be an opportunity for the fleet to be remanufactured, much like what happened with the Abram’s fleet after Desert Storm. There was a spike in Abram’s work to upgrade the Abram’s fleet.

James McIlree – Collins Stewart

Thanks for that reminder. And then, Damon, I you mentioned that there are budget dollars for MRAP still out there. Do you have a feel for whether or not that is going to the Army or to the Marines or both?

Damon Walsh

The best deal I could say, Jim, is that we know roughly what the split of the vehicle deliveries are between the services. That’s public information out of JROC. I would say that’s a good indicator for the split of the dollars going forward. If 80% of the fleet’s in the Army, 80% of dollars will go to the Army.

Operator

Our next follow-up question comes from the line of Chris Donaghey with Suntrust Robinson Humphrey.

Chris Donaghey – Suntrust Robinson Humphrey

On the remanufacture program, is that $250 million each year in fiscal 2008 and fiscal 2009?

Francis E. Scheuerell, Jr.

It’s $173 million in FY2008, $180 million in FY2009.

Operator

At this time there are no further questions. I would like to turn it back to management for any closing comments.

Michael Moody

I would just like to thank you all for participating in today’s call. We had indicated at the start of this call that we will have regular quarterly calls and we hope that you will join us again for our next conference call. Thank you very much.

Operator

This concludes today’s teleconference. Thank you for joining us. You may now disconnect.

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Source: Force Protection, Inc. Q1 2008 Update Call Transcript
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