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Spartan Motors, Inc. (NASDAQ:SPAR)

Q2 2008 Earnings Call

July 24, 2008 10:00 am ET

Executives

Jeff Lambert - Investor Relations, Lambert, Edwards & Associates

John Sztykiel - Chief Executive Officer

Jim Knapp - Chief Financial Officer

Karen Morrow - Vice President of Finance

Dave Reid - Vice President of Public Affairs and Brand Management

Analysts

Joe Maxa - Dougherty & Company

Frank Magdlen - The Robins Group

Jamie Wilen - Wilen Management

Jack Hanne - Barrington Research

Operator

Welcome to the Spartan Motors second quarter 2008 earnings conference call. (Operator Instructions) At this time I would now like to turn the conference over to Jeff Lambert.

Jeff Lambert

I’m Jeff Lambert of Lambert, Edwards & Associates. Welcome to this morning’s conference call. I have with me today several members of the Spartan Motors management team; John Sztykiel, Chief Executive Officer; Jim Knapp, Chief Financial Officer; Karen Morrow, Vice President of Finance; and Dave Reid, Vice President of Public Affairs and Brand Management.

I assume all of you saw this morning’s release in the newswire and the internet. I’m going to take a few minutes to discuss the results for the quarter, however before we do that, it’s 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 of 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.

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 the future. Jim Knapp will then discuss the financial results for the quarter and Karen and Dave will be available for the Q-and-A session. We’ll conclude with that Q-and-A at which time the operator will instruct you on how to enter the queue.

With that I’d like to turn the call over to John Sztykiel.

John Sztykiel

Before we get into the results, as an individual, as I stated on the release, as a company, as we look to the future we are optimistic, we are cautious, but what you saw in the second quarter as we looked into the future is our multiple market diversified business model with a flexible manufacturing structure. It provided very, very solid results and the interesting thing is while the rise in fuel prices will definitely cause some hardship, vehicles will change, there will be a restructuring in society and that will happen fast.

Over the past 33 years Spartan Motors has taken advantage of that restructuring. We’ve either led the evolutionary change, we’ve anticipated the evolutionary change, or we have reacted to the evolutionary change. So, what’s interesting as I sit here today after being 23 years within the company, probably going within the most difficult economic time period we’ve seen in the last 20 to 30 years, I’m more optimistic about our long term opportunity and our short term opportunity being three to five years and over the next 12 to 18 months than what I’ve been in the last 23 years.

So starting with the results; we reported net sales of $197 million, an increase of 29% compared to the second quarter of 2007; earnings of $0.32 per share increasing 60% versus last year; consolidated backlog of $320 million increasing 10% with turn on invested capital of 28% increasing 23%. Gross margin of 17% an approximate increase of 10%, our third quarter in a row of improvement in the gross margin area, obviously the focus on effectiveness, efficiency, a lien operating methodology throughout all of our business units is bearing fruit. Last we have an operating cash flow of $35.3 million.

As mentioned earlier in the release, our earnings of $.077 per share for the first six months of ‘08 surpassed our earnings of $0.75 per share for all of 2007 and honestly not many companies can say that and we take great pride in that. The second quarter was also another illustration again of our flexible manufacturing model.

From a negative perspective and again it’s really not much of a negative, it’s really just a shift because of some design modifications and improvements of the latest MRAP models and the related parts delay we had to ship most of the production scheduled for Q2 for a significant group of orders into the third quarter and fourth quarter of 2008. The order is still in the backlog, we expect to produce all of these units in the second half of 2008, and again this is not unusual.

As we have seen in the past quarters military vehicle production can be difficult to forecast month-to-month as the suppliers of these vehicles are involved in a new design; you have design, you have engineering, you have procurements and sometimes this ramp up takes a little bit more time than anticipated, however our focus on operational excellence and moving forward with our customers, this shift will go from Q2 over to Q3 and Q4 and so we expect actually military volume to flatten out into a more consistent pattern in the second half of ‘08 versus the last three to four quarters.

Let’s switch over for an RV prospective and the class-A motor home market is a challenge, as is the RV market is a challenge. As Dr. Kurton from RVIA in the University of Michigan recently indicated, the next twelve to eighteen months are going to be very difficult from a consumer spending perspective due to some issues with the economy.

Rising fuel costs reduced home values; it will take some time to work through this. However, the company we are very focused on innovation, we are very focused on working with our customers and we are very focused on bringing models and product to the market place that compel the customer to buy and to do it fast.

So is this a challenge? Absolutely; however despite all of these challenges and the focus on bringing new models to the market place we’ve maintained significant control over our cost structure. We have adjusted our operating structure accordingly and the second quarter is an example of how quickly we can ramp up or down based upon market conditions.

As mentioned earlier society in general is becoming more customer centric, demanding specific experiences that are tailored to individual wants and needs and how are we posted or how are we able to take advantage of the evolution to lead it or react to it, again it drives back to the fact that within our group of associates approximately 1500, 10% of the work force is in engineering.

Where other companies get bogged down moving through the engineering path to bring innovations or exciting products to the market place, Spartan is able to move through it much faster. From a core competency prospective our customer centric vehicles bring speed to the market place, the flexible design, the disciplined material logistics and all of this you saw come to fruition again in the second quarter as demonstrated by a third quarter in a row of gross margin improvement.

As mentioned earlier when you combine the two together, the diversified business model, the flexible manufacturing structure, we’re excited about the next two to five years, the next 12 to 18 months. There will be bumps along the way though and it’s not going to be easy to work through it especially in the RV arena; however another positive is the emergency rescue.

As I mentioned on the last call we expect the second half of 2008 to be better than the first half of 2008 from an emergency rescue prospective and as I sit here today, I expect that to hold true. The backlog is stronger i.e., larger; we saw improvement at Spartan chassis, the emergency vehicle team as a whole posted a 25.2% improvement in the segment bottom line versus Q2 ’07, so we are moving the ball in the right direction both from a sales prospective and a bottom line perspective as we look at the emergency rescue market.

Now let me just take a few minutes to talk about the segments in particular. Spartan Chassis represented 92% of the Spartan Motors sales in this quarter, while the EV team made up the other percent. I’ve already talked quite a bit in detail relative to military, so I’m not going to spend really much time there, other than the fact there’s been a lot of press lately talking about the need for vehicles now for Afghanistan and what’s interesting is that it appears some of this shift is going from Iraq over to Afghanistan and something else which I think is important to note is the terrains are different between both countries.

In Afghanistan you’ve got a very hard terrain, you’ve got a rocky terrain, you’ve got more mountains etc, which means the vehicles will probably have to have a lower centre of gravity. There may be the opportunity for less IEDs because there is more rock, less sand. How does that hold well for Spartan and other people who are participating in this market segment being embark or mine blast protected vehicles, the vehicles will probably have to change some, because the terrain is different. The competition or the enemy is different and that holds well for us.

As I mentioned earlier some people perceive that from a military perspective that while our business is expected to decrease some in 2009 which we concur, we see ourselves being a long term player in the defense market place. On another very positive side relative to military and service parts accessories as a whole the business increased to 160% year-over-year in Q2. I mentioned earlier from an RV perspective it is a difficult time.

Class A sales fell a remarkable 40% year-over-year in May and again the products will have to change. If the products don’t change you will see the same numbers or possibly worse as the future moves on to reality; however Spartan is committed and we’re focused on working with our customer base to change our products quickly to react to opportunities in the market place because the market hasn’t disappeared, it’s just much smaller right now.

On another very positive note RVIA recently posted the results of a study showing that typical family on an RV vacation will spend 27% to 61% less than what it spends on other types of vacations. The reality is when you take a vacation in a class A diesel or a tillable, it is a less expensive vacation than many other methods whether it being staying in a hotel, a time share, a cruise etc. North America is still one of the most beautiful places on the planet and the RV livestock gives people the opportunity to go wherever they want, whenever they want in a very, very affordable manner.

Let’s switch over to the emergency rescue market. While sales were down for fire truck chassis, at Spartan chassis our profitability was better year-over-year; again the focus on lien is producing results. As we look at the production rates in the second half of 2008 from a fire truck chassis prospective we will build more fire truck chassis in the second half of 2008 versus the first half of 2008.

In addition as we look at fire truck chassis I know I should say fire truck bodies, crimped and fire and road rescue will be building more products in the second half of 2008 than the first half of 2008. In addition we have some new products which will be coming to the market place actually being displayed this week at a show in Baltimore where literally this is Crimson Fires in Road Rescues first joint combination effort into the first response all caused part of the market place. It is a combination of a fire truck pumper, ambulance, less than $185,000.

Once every 20 second there is a call for help, budgets are getting tighter. As budgets get tighter in any market place people then look to increase the amount of which they can do with a particular tool whether it be a vehicle or whatever than what they had before. This product, the First Response All Calls product FRAC as we call it can carry six people, a patient, is a rear pumper and can facilitate a fire as well, so in essence a fire department no longer as to be one unit down. This product is truly revolutionary and I’ll be in Baltimore tomorrow excited to see the markets response.

As we look ahead to 2009, 2010 obviously we are watching fuel prices, the consumer confidence level, the tax base and materials pricing. I will say this from a material pricing prospective whether its Spartan Chassis, Road Rescue or Crimson Fire, all three business units or all four business units including Crimson Fire on the proactive side of the fence from a materials pricing prospective which is another reason why you saw gross margin improvement for the third quarter in a row.

We are not going to put ourselves in the same position we were in, in 2004 where earnings dropped off dramatically, gross margins dropped off dramatically and that we did not monitor, follow the price increases the way we should have from a materials prospective and pass those onto the market place. The other nice thing which you’re seeing is that sales have gone up and our prices have gone up but that demonstrates as we are bringing products to the market that compel the customer to buy and they’re actually paying more for our products under the Spartan Motor Group of companies.

As we looked at 2009, 2010 another big positive from an emergency rescue prospective is next year and late this year we should see pre buy from a 2010 emissions changeover. In 2006, late 2005 we saw a significant increase in emergency rescue orders approximately 50% over a 12 to 18 month time period prior to January 1, 2007 as municipalities purchased products to take advantage of a lower cost prior to the 2007 emission changeover. We expect to see that happen again in late 2008, 2009.

Do I think it will be at the same 50% increase? Honestly no; do I think it will be somewhere between 25% and 40%? That’s a range I feel very comfortable. So, from an emergency rescue prospective we expect the second half to be better in 2008, we expect 2009 to be even better than 2008 as a whole.

As we look to the military area we expect to see vehicles to change. As the products are shifted from Iraq to Afghanistan we expect Spartan’s core competency of speed, engineering excellence and a customer centric philosophy to board well for us. In addition we’ve had some much smaller orders, orders that are too small for one; however that’s one of the reasons why you’ve seen our backlog grow versus last year at this time.

My estimate from an RV prospective it will be challenging and that’s probably the most difficult market segment which we’re in today, but in closing I have no doubt that by the time another year rolls around, Spartan Motors will be into at least one other major market segment. So it will not just be RV, Emergency Rescue and Defense, there will be one other major market segment. Why? Vehicles will have to change as society changes. Our challenge right now is not creating opportunities to be in front of us, but determining which are the opportunities that represent the greatest opportunity to increase both share holder and stake holder value.

In closing we had a very solid quarter, we are excited as we look to the future. However, there are some definite economic issues which cause our optimism to be cautious as well. However, we will manage our business model the best way possible to ensure we get through this so that overtime we represent growth and opportunity from a stake holder perspective. Jim.

Jim Knapp

As John mentioned, operating cash flow increased by $35 million in the second quarter. This increase is driven primarily by reduction and indeed for working capital. We reported $3.2 million in cash and cash equivalents at the end of the quarter compared to 13.5 at the end of last year. We ended the quarter with $53.4 million in long-term debt of 14.8% reduction when compared to the end of last year.

Reduction was related to lower working capital due to lower production volumes in the second quarter. As we move through our solid consolidated backlog, we suspect we will generate significant cash flow in the fourth quarter of 2008. This allows us to make some substantial reductions in debts, grow the business and strengthen our balance sheet. Depreciation for the second quarter was $1.4 million. We expect depreciation for the year to be about $6.7 million.

Our effective tax rate was 34.4% in the second quarter and we are expecting the tax rate for the year to be in a range of 34.5% to 35.5%. Our consolidated return on invested capital for the quarter was 27.7% which exceeded our company ROIC target of 15% to 20% by a wide margin. Although we may not be able to maintain this level of ROIC we do expect to see the targets for the year. Within Spartan Motors and each of ours subsidiaries we use ROIC as the key measure of our progress. It’s also related to our bonus program for management and associates which is based upon an economic value added financial model.

We continue to forecast CapEx to be in the $15 million to $20 million range for the year which includes some role over from our facility expansion launch in 2007. We are expecting lower CapEx in 2009 and 2010.

Finally this morning we announced our board has authorized a repurchase of up to $1 million shares of the of 3% shares outstanding. This replaces the stock repurchase plan from June 2007 which has expired. Under last year’s buy back we repurchased 300,000 shares of common stock of the open market at an average price of $9.23 per share.

Given our long term potential of growth sales, profit and return on invested capital, the board of management believe that our current stock evaluations did not fully reflect this potential. As the year progresses we will focus on various options to increase shareholder value.

We also welcomed a new addition to our board of directors with the addition of Richard Curtain who is the current CFO of Neo Gen Corporation here at Lancing. With that I would like to turn over the call to the operator who will begin Q-and-A operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe Maxa - Dougherty & Company.

Joe Maxa - Dougherty & Company

A question on the military side, the push out into Q3 and Q4, are we now looking at revenue split roughly equally between those two quarters or should it still be Q3 loaded?

John Sztykiel

Joe as I sit here today and this is John Sztykiel I think we probably see probably at least half to may be five to eight in Q3. It’s really dependent upon the parts flow, but as I said here today I probably see at least 50% to may be 60% possibly 70% in Q3, the rest moving over into Q4.

Joe Maxa - Dougherty & Company

You’re talking about total backlog or just the stuff that was pushed out?

John Sztykiel

No it’s just the part that’s pushed out.

Joe Maxa - Dougherty & Company

Looking at next year with military being down, MRF winding down here are we thinking that Q4 levels of military are indicative of what next year would be?

John Sztykiel

I think it’s a little bit to early to tell and that’s probably not the answer you’re looking for, however we’ve got some other contracts or potential contracts or potential contracts which we’re working on, some which could represent a fairly significant potential into 2009. So, I think at this point in time honestly that’s a bit too early to tell.

Honestly we’ll have better clarity as we did closer to the October time frame, but it’s too early to provide the clarity you’d like to see on that answer and the reason simply is, as the papers indicate there is a greater military shift moving from Iraq over to Afghanistan. It’s different enemy, it’s a different geographical environment, but the vehicles have to change.

Joe Maxa - Dougherty & Company

The smaller orders you talked about for the military, your certainly, your order flow was larger than you reported by 40 some million dollars, where these like $5 million deals or were they $20 million; can you give us a little more color on size of some of the vehicles that you got.

Jim Knapp

I think there was a mix of product Joe. There was this new variations on some of the MRAC product. I don’t have specifics on the actual order sizes.

Joe Maxa - Dougherty & Company

Did you get additional orders from force protection during the quarter or was this all BA related?

Jim Knapp

I would say most of it was BA related.

Karen Morrow

And they both work on Iraq program. We continue to see smaller at this time Joe. We continue to see smaller orders on the Iraq variant which is a joint venture between the two, so we do get orders from both those entities.

John Sztykiel

What’s interesting and what we are seeing is once the product is brought into the market place then there may be different units or operational groups within the military that say “Okay, we like that particular product and it is relative to our current need” so they don’t order a super large quantity, but they order a few more. We have a very similar approach in the emergency rescue business where you’ll have a city that will for example order a certain number of fire trucks or ambulances, then you’ll have a neighboring city that’ll come along and say “do you mind if I tag on to that order. I’m not going to order as many, but I’d like the identical product for this location” and really that’s what we’re seeing in these smaller orders and Karen and I appreciate you bringing that up.

Joe Maxa - Dougherty & Company

Can I ask on the motor home market obviously it’s been a difficult environment and there’s been a lot of struggles all the way around. Have you gained any additional models, are you gaining, your thoughts in additional OEM customers, is this an attractive environment where you’d expect to add an OEM customer or do you think these customers are trying to keep their employees and may be potentially bring stuff to in-house for when the market does pick up if it’s a year from now?

John Sztykiel

Well first we definitely don’t believe people will bring stuff in-house from a chassis perspective. If anything what we are seeing is the value added portion where people are looking at the chassis and saying okay how can we at Spartan Chassis do more, we are seeing that increasing; Why? Because Spartan Chassis if you look at the financial, they have significantly better inventory turns, have significantly better material logistics management and from a cash, the balance sheet perspective, it makes sense for OEMs to actually have Spartan Chassis do more.

Second as we sit here today and as I look over the next twelve months, I have no doubt when I look at some of the prototypes, the R&D projects etc, that by the time we get to the first quarter of next year Spartan Chassis will be under more models in the market place with greater dealer space than what we sit today and the reason is again Spartan’s known for having speed relative to reaction from a product R&D to market place perspective.

OEMs are not stopping, they are taking a look at what’s selling in the market place. Obviously some smaller products, what can we do to improve their fuel efficiency, improve the living area etc., how can we increase the attractiveness of the unit to compel the consumer to buy? So, I think from an R&D and a prototype perspective the activity at Spartan Chassis is probably the greatest it’s been in the last twenty four months.

Joe Maxa - Dougherty & Company

Jim what was the parts in the quarter. I think you indicated $70 million last quarter?

Karen Morrow

They’re around $25 million this quarter.

Joe Maxa - Dougherty & Company

Are you expecting that level to continue?

Jim Knapp

I’m not sure we’re going to have the same level next quarter Joe but I think we’ve been saying overall that we would more than double what we experienced last year. So last year we had about 33 million and this year we’ll more than double that.

Joe Maxa - Dougherty & Company

Would that have led to some of the out performance in your gross margin line I would expect?

Jim Knapp

Absolutely.

Joe Maxa - Dougherty & Company

As well as what vehicles I suppose. So in Q3 we might see growth margins tick down a little bit if vehicles are similar and parts slow down?

Jim Knapp

Yes, that’s true. If we have a higher level of vehicle that carry a little less margin than the parts, yes it would do that.

Operator

Yours next question comes from Frank Magdlen - The Robins Group.

Frank Magdlen - The Robins Group

John you alluded to a new segment for 2009; can you tell us how significant that might be in its first year out there and will it have a separate line item under business segments?

John Sztykiel

I’m not going to qualify from a dollar potential other than the fact that I believe in 2009 it will probably be very, very small and what I mean by that, I wouldn’t be surprised if the sales are going to be less than $5 million to $10 million, so in 2009 I would not expect a significant increase in sales relative to this fourth market segment however I think the opportunity for growth past 2009 is very, very significant and it just goes back.

Two years or three years ago we were primarily an Emergency Rescue and RV company, today we are an RV, Emergency Rescue, Defense Company. I have no doubt by the time we get to the second half of 2009 we will be in another market snitch, but more importantly Frank or just as important is I’m very excited about the growth opportunity for service parts and accessories in that and second the value maximization.

Value maximization is one of our six strategic objectives and we look at making money on the vehicle at the point of delivery, we look at making money on the base vehicle plus the value add at the point of delivery, we look at making money improving our sales and income level on the service parts and accessory level. After delivery we looked at making money at component sequencing and assembly where we don’t do the whole vehicle but we sequence a group of components and ship it to a partner; for example we are doing this in the military business right now.

Last there is the opportunity for vehicle refurbishment, especially in the military business. So, as a company we’re not only focused on creating another market segment, but we’re also extremely focused on increasing the value which we can bring back to both the top and bottom line within each market segment and two years ago we did not have this strategic focus, today we do and you’re really seeing that in the growth and service parts and accessories, the growth in the liberty project especially with Fleet Wood and last component sequencing at assembly in the military business as well.

Frank Magdlen - The Robins Group

Then vehicle refurbishment is not currently in your backlog?

John Sztykiel

It’s not currently in the backlog; it’s something which we’re in the process of coding and going after. We may or may not be successful but the opportunity is absolutely there.

Frank Magdlen - The Robins Group

The EV team, do you have any estimate now or what’s your expectations for the second half or by the fourth quarter because we might be break even or where do you think you’re going to be?

John Sztykiel

Well they will continue their improvement. As a consolidated group I don’t believe they’re going to be at break even in the second half of this year. On a very positive side Road Rescue did have a profitable month of June which was nice. The first time in several years, part of that was due to a vehicle carry over, but road rescue in particular has seen the greatest gross margin increase of any business unit which we have from January to June of this year. I feel very confident that from a profitability prospective the EV Team will definitely be profitable in the first half of 2009, however when we look at the whole emergency rescue business today and you bring in the chassis, the bodies and the aerials, the emergency rescue group is a very, very positive event for Spartan Motors and the shareholder.

Frank Magdlen - The Robins Group

In Crimson and Fire can you give us an idea of how many units you’re building there?

John Sztykiel

I would prefer not to get into that. We really don’t break it down from a segmentation prospective.

Jim Kipps

We don’t get into the details. I think that’s down within the segments.

Dave Read

The one thing that you’re going to see released, that has been released this morning is an announcement that Crimson Fire did secure an order for 36 pumpers from Montgomery County, Maryland which I believe is the largest order they’ve ever received.

Frank Magdlen - The Robins Group

Over what period of time would you deliver them?

Karen Morrow

A handful in the fourth quarter and then the rest in Q1 and early Q2 is what we are forecasting at this time.

Operator

Your next question comes from Jamie Wilen - Wilen Management.

Jamie Wilen - Wilen Management

In the parts area; how does it work? You get an order for X amount of MRAP vehicles and how long is the tail on that business. You get $1 million dollars today and spare parts from that $1 million will be how much and over what period?

Jim Knapp

Actually it various quite a bit Jamie from order-to-order. I think the lead time could be -- in some situation we’ll be able to turn it around in a matter of weeks and sometimes it’ll be in a couple of months.

Karen Morrow

And what we are seeing right now is there are sets of kits that we sign right away to sell the depots and get them ready to go, to see the supply lines if you will, so that we have a good sense how they’re flowing right now and what we’re still developing is what those models are going to look like over the life of the vehicle. We just started shipping those less than a year ago, so that part of our model we are still developing a little bit.

Jamie Wilen - Wilen Management

Currently would you expect your volume of spare parts to increase in 2009 over 2008?

John Sztykiel

I think the opportunity is very strong for that. I think one of the things that Karen was alluding to or indicating it’s hard to forecast on services parts because different vehicles are used for different purposes and so you can’t say the replacement, the service cycle is the same across the board and so depending upon where the vehicles are used, the duty, etc.. that’s a big driver relative to this service parts business, but relative to 2009 versus 2008 the opportunity for increased service parts accessories sales especially in the military is very strong, but also we see tremendous upside opportunity in the RV and the Emergency Rescue because now we’re extremely focused on that and we’ve got a very good team in place working to address the two other market segments from a service parts accessories perspective.

Karen Morrow

Certainly we have more vehicles in the field, so that would lead you to believe there’s going to be a higher demand and we’re definitely gearing up to make sure we have a place to really service those vehicles quickly.

Jamie Wilen - Wilen Management

John you talked about potential market segments that you could be in and there are several, can you give us some idea what you’re talking about without giving away the company’s store?

John Sztykiel

Well, if you just take a look for example at the delivery business, okay were people deliver packages, services and I’m not talking about UPS, FedEx, etc, but when you take a look at the opportunity relative to deliveries and the focus on reducing cost whether the vehicle operating cost, the workmen’s comp cost etc, there’s a significant opportunity for vehicle improvement today.

For example Amazon.com just reported record earnings. Just came back from Europe last week. The internet service business is tremendous because the price of fuel is almost twice the price versus what’s here in the States, so people are using the internet more and more from a shopping procurement prospective so they don’t have to drive.

The interesting thing is if you look at the vehicles within the US today, most of the vehicles are designed around gas or diesel being $1.5, $2 to $3.00 a gallon, well that cost has gone up dramatically, so has workmen’s comp cost. How does that relate back to the vehicle? You look at a lower frame height, you look at a higher square cube area etc., you reduce the frame height, and you reduce the number of steps a person has to get in and out, that’s one particular area.

From a municipality prospective when we look at Emergency Rescue market we do not compete into it effectively as home land security. What’s interesting is there’s 571 bomb squads within the US. That money for vehicle procurement comes out of home land security dollars; however those decisions are made by fire departments; departments we have a great relationship. We are now developing a strategic focus to go after home land security products and take advantage of not just our product, but our distribution opportunities itself. That gives you a little bit of color of where we’re looking relative to a general or a specialty vehicle market perspective.

Jamie Wilen - Wilen Management

And lastly on this order you just got for Crimson Fire 36 multi function pumpers, what was previously your largest order you had ever received?

John Sztykiel

From Crimson Fire, honestly I can’t answer that because this is so much larger than what they previously received.

Jim Knapp

I don’t have a good feel of it John. As I’m aware its sounds like it’s been in the range of the ‘06 to ‘08.

Karen Morrow

We’ve done some for the city of Chicago that has been probably double digits but clearly not to this level, yes.

Jamie Wilen - Wilen Management

To put this in another way why are we finally able to compete and win in orders for 30 units where we’ve never been able to compete and win in that before?

John Sztykiel

Well I think for a number of reasons. First I want to compliment the people of Spartan Chassis. I think their excellence from a Chassis perspective just created a great aura when Montgomery took a look at Crimson Fire. From a Crimson fire perspective I believe what enabled them to be successful and they were not, I should say as they were competitive on the bid, but they were able to provide the customer with exactly what they want in a very timely perspective from a delivery point of view and one of the things which we’ve seen in Crimson Fire over the past twelve to eighteen months is reduced delivery time, improved quality, improved operational effectiveness and if you can deliver to a customer exactly what they want in a shorter time period you have got

the opportunity for more good days than bad and simply I think that’s why Montgomery County shows not only Crimson Fire, but also Spartan Chassis to provide the complete unit.

Jamie Wilen - Wilen Management

You’ve always mentioned that the age of the fleet of fire trucks is very old and therefore there’s opportunities there. Will there be other similar types of orders like this coming out forbid throughout the country and this is a replacement of these 15 year old pieces of equipment?

John Sztykiel

Jamie if we do our job properly and I think we are very good in clarity not just with Montgomery County because these are multifunction trucks, they have both EMS and pumper capability, but for example the product which Crimson Fire and Road Wrestler are show casing in Baltimore this week at the Emergency Rescue show as a combination pumper ambulance, close to 54% of the 125,000 fire trucks out there are more than 15 years old and as a group of companies we’re very focused on the delivering an increasing number of multi function products which can do more than one task to help fire departments just to find not only purchasing the product but purchasing a greater number or products to accelerate the fleet change. So in answer to your question I think we have clarity as to what needs to be done, now the question is can we execute? I felt confident we can execute but we have to demonstrate the results over the next two to three years.

Operator

Your next question comes from Jack Hanne - Barrington Research.

Jack Hanne - Barrington Research

I have couple of questions related to the sub contracts that were affected by the upgrade from MRAP to MRAP Plus. First of all can you tell us how big these loaders are in terms of the total military background either in absolute solar or percentage assurance?

Jim Knapp

That’s something we don’t normally disclose.

Jack Hanne - Barrington Research

These are larger Chassis and you are going to have to incur more cost as a result have you renegotiated the contracts on those?

Jim Knapp

Yes there’s additional content going into the units itself. We have increased price or quote, those are always negotiated.

Jack Hanne - Barrington Research

What do you foresee the impact being on overall military gross margins as a result.

Jim Knapp

I don’t see the military gross margin changing substantially. What we’ve been seeing is it will be, we are just adding additional components that we would mark up in the same manner.

Jack Hanne - Barrington Research

And also if you could, can you provide a break out of gross margin by the segment?

Jim Knapp

There is some details by segment that is attached to the press release this morning and there is a new bit more information provided in 10-Q, but that’s all the break down we provided on a margin basis.

Operator

There are no further questions at this time.

John Sztykiel

Well first I wanted to say thank you so very much both for your time and your support. As mentioned earlier we’re optimistic at the same time we’re bit conscious because the economy is about as uncertain as what we’ve ever seen, at least over the last 20, 25 years but as a company we’ve been in business for 33 years and our methodology is simple. As society changes and evolves, we expect to their react or lead relative to the market place from especially a vehicle perspective and therefore, over the next two to three to five years, the next twelve to eighteen months we’ve got optimism, it’s a bit cautious, but we’re as excited as we’ve been over the last twenty, twenty five. Thanks very much.

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