Greg Salchow - Group Treasurer John Sztykiel - CEO Daryl Adams - COO Lori Wade - CFO.
Robert Kosowsky - Sidoti Shefali Tipnis - Global Hunter Securities Rhem Wood - BB&T Capital Markets.
Welcome to the Spartan Motors Inc. Third Quarter 2014 Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.
As a request of Spartan Motors, if anyone has any objections, you may disconnect at this time. I would now like to introduce Mr. Greg Salchow, Group Treasurer for Spartan Motors. Mr. Salchow, you may proceed, sir..
Thank you and good morning, everyone. Welcome to the Spartan Motors third quarter 2014 earnings call. I’m Greg Salchow and I’m joined this morning by John Sztykiel, President and CEO of Spartan Motors, Daryl Adams, our Chief Operating Officer and Lori Wade, Chief Financial Officer.
Before we start today’s call, please be aware that certain statements made during today’s call, which may include management’s current outlook, viewpoint, predictions and projections regarding Spartan Motors and its operations may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995.
I caution you that as with any prediction or projection there are a number of factors that could cause Spartan’s results to differ materially from projections. All known risks or management beliefs could materially affect the results and are identified in our Forms 10-K and 10-Q filed with the SEC.
However, there may be other risks that we cannot anticipate. As always, we request that you ask only one question and one follow-up question during the Q&A portion of the call. So that everyone has an opportunity to ask a question. Now, I’m pleased to turn the call over to John Sztykiel for his opening remarks..
Alright, thank you Greg. Good morning everyone and thank you for joining us on Spartan Motors third quarter 2014 conference call. I am pleased to have Daryl Adams, our new Chief Operating Officer joining us this morning.
All three of our operating segments now report to him and he will have a few comments later in the call concerning his top priorities for the next few quarters and how he will execute the IOE DRIVE integrated operational excellence for the quarter. So the quarter, the third quarter 2014 was another quarter that marked a step in the right direction.
In each quarter of 2014 Spartan has moved in the right direction and demonstrated operational improvement.
Third quarter sales of 144.2 million EPS of $0.09 per share, operating income of 4.3 million, a cash balance of 28.5 million, order intake of 130.5 million and order backlog of 233.4 million, all are very solid numbers, thanks to all the Spartan team members for their alignment and their execution delivering results.
Also very positive all three operating groups, delivery and service, emergency response, specially chasse and vehicle posted positive operating income.
Another note of strength, the Spartan brand backlog of 233.4 million, and what is interesting is time always provides perspective and since the third quarter of 2011 the compounded annual growth rate of our backlog has been 17.9% per quarter. Today’s backlog is a long ways from 142.6 million at the end of the third quarter of 2011.
Before I turn the call over to Daryl couple other notes, as I mentioned in the release we are still working through the first and fourth quarter revenue seasonality issue. Lori Wade will cover the impact of seasonality in her remarks.
Next, while the third quarter was a solid step in the right direction operational execution is our number one focus today and into 2015, integrated operational excellence the IOE DRIVE. Now I will turn the call over to Daryl Adams, Spartan’s COO.
Daryl?.
Thank you, John. And good morning to everyone joining us on today’s call. I am Daryl Adams. I am excited to be on my first quarterly earnings call for Spartan Motors. As you know I joined Spartan in early August after spending nearly 30 years in the automotive industry, including two international assignments.
Upon joining Spartan I spent the first few weeks visiting our facilities and meeting front associates, as well as some of our customers. I am impressed with the dedication of the Spartan team and the capabilities we have throughout the company.
Our job now is to provide the leadership that will result in more consistent execution of our DRIVE strategy and improved operating results.
Two areas of focus for me over the coming months are, one, to align all areas of their own organization and accelerate the pace of our operational improvement, and two, to develop and produce innovative high-quality niche products that will redefine the marketplace.
To make both of these initiatives become reality you must nurture and reward and a proactive mindset, if you create a sense of urgency and ownership at all levels within Spartan. In 2014, Spartan’s primary has been on operational improvement, specifically in emergency response and realizing the full cost savings of DSVs Bristol project.
Operational improvement will again be our main focus for 2015 as we work to accelerate the pace of positive change, especially in emergency response. Earlier this week, we announced the latest steps in our strategic plan for the ER segment. After completing a review of our manufacturing footprint, we reached a decision to close our Ocala facility.
This was a very difficult decision to make. But one, that is in the best long-term interest of Spartan. We plan to close the facility by the end of 2014, and transfer fire truck production to our Brandon, South Dakota and Charlotte, Michigan locations.
The 70 units built for Peru in Charlotte, exceeded our operational targets and were completed ahead of schedule reinforcing our decision to build fire trucks in Charlotte on an ongoing basis.
Charlotte is where we make all the custom cabs and chassis to building some of our complete trucks here will allow us to reduce transportation cost, truck work and reduce the order to delivery cycle time. We're investing approximately 5 million in capital equipment and to implement robust scalable processes to improve our operating performance.
We will invest in new equipment at our Ephrata Pennsylvania facility to provide our associates with the tools to build the highest quality aerial apparatus possible. The most important aspect of our strategic plan is investing in our processes from ordering to production and delivery.
These processes need to be scalable and robust to support future growth. Bringing in scalable business processes will make it easier to do business with us and allow our associates to build a higher quality fire truck on-time and profitably.
These processes -- process enhancements will start at the dealer level allowing our dealers to configure and order fire truck more easily and more accurately, saving everyone's time and effort.
We will also improve the design engineering process so that our production associates can build the trucks to a higher level of quality while reducing labor, rework and waste. This will then allow us to meet production schedules and ensure we deliver the highest quality trucks to our dealers and end-users on-time.
Much of our efforts to create and implement scalable business processes will be geared toward Brandon. In the past, we've asked Brandon to increase output dramatically, but haven't given them the support and tools needed to accomplish the task. This project will correct that situation and provide them with the tools they need to succeed.
In our delivery and service business, our tasks are to realize the full savings of the Bristol project. To-date, we've realized about 50% to 60% of the project -- of the projected 4 million annual cost savings of relocating walk-in van production into Bristol.
As we saw in the financial results for the third quarter, DSV has made significant progress in its operational improvement efforts, an increase in operating income despite a slight revenue decline in its outstanding progress. We know there are more savings to be gained here, so this will be a priority in 2015.
Delivery and service announced a major new business award late in the third quarter for 665 walk-in vans worth $27.9 million. This award is from a very large fleet operator that has not been in the vehicle market for several years. We believe there is a strong possibility of future orders from this customer in 2016 and beyond.
And especially chasse and vehicle segment, one of our primary tasks is to expand our motor home chassis offerings and provide the marketing support needed to increase our market share. We're developing new chassis now and expect to have those chassis on four new RV models in 2015.
Our contract manufacturing business with Isuzu has continued to grow this year. As Isuzu increased the sales of its N-Series gasoline powered trucks. This has been a very successful relationship for Isuzu and Spartan and has the potential for expansion in the future.
Before I close, I want to say that everyone I've met in the organization is dedicated to the success of Spartan Motors. I believe they understand that we're not only taking action and implementing the plan, but also providing them with sufficient resources to succeed.
We've spent a great deal of time and energy developing our plan and we will devote the same energy and dedication to bind with resources and support to make a more profitable, more customer centric Spartan business a reality. I look forward to speaking with you in future quarters and reporting on our progress.
Now I'll turn the call over to Lori Wade to provide the financial details of the third quarter..
Thank you, Daryl, and good morning to everyone on the call. Spartan reported a solid third quarter with all segments reporting profit excluding the ER segment as they have returned to profitability for the first time since the third quarter of 2013.
Net income was $3.2 million or $0.09 per share that compared to net income of $0.6 million or $0.02 per share in the third quarter of 2013. Results for the third quarter of 2014 included the restructuring charge in our ER business of approximately $0.3 million.
Through the first nine months of 2014, Spartan reported net income of $1.3 million or $0.04 per share compared to a net loss of $3 million or $0.09 per share in the first nine months of 2013. Revenue grew to $144.2 million from $126.1 million in the third quarter of 2013, driven by emergency response and specialty chasse and vehicle segment.
For the company as a whole, higher revenue in the third quarter allowed us to leverage labor and overhead absorption, posting higher gross profit of $4 million over the same period last year. Spartan reported a gross margin of 14% in the third quarter 2014 up from 12.8% a year-ago.
The third quarter gross margin is the continuation of the sequential improvement from the 12.7% and 10% gross margins we have reported in the second and first quarter of this year respectively. Operating expenses totaled $15.9 million or 11% of sales this included the $0.3 million restructuring charge.
This compares to the third quarter 2013 operating expense of $14.3 million or 11.4% of sales. In the third quarter, we have repurchased $1 million of common stock, bringing the total for the year to $2 million or just over 382,000 shares.
We ended the quarter with cash of $28.5 million compared to 30.7 million at December 31, 2013 and $29.7 million at June 30, 2014. Inventory at September 30, 2014 stood at $73.7 million, a reduction of $10.7 million from June 30, 2014. As we produced and shipped 46 trucks from the Peru project, inventory transitioned to accounts receivable.
As a result, our accounts receivable balance rose to $59.4 million at September 30th, from the 49.2 million at June 30. We expect to collect the remaining accounts receivable for the Peru order during the fourth quarter. Now as we look ahead to the fourth quarter we maintained our 2014 revenue forecast of $500 million to $520 million.
We currently expect fourth quarter 2014 revenue to come in below last year’s fourth quarter revenue of $126.5 million which was elevated by higher Reach sales. Based on our current forecast, we expect our Q4 operating income to be approximately breakeven before the impact for the restructuring charges in the ER segment.
As mentioned in our press release from earlier this week, we expect to take a restructuring charge of $2.4 million in the fourth quarter of 2014. This charge will cover cost of closing the Ocala facility, transferring production to Brandon and Charlotte, as well as some of the cost of upgrading processes in the ER segment.
When the impact of this restructuring charge is included, we expect to report an operating loss of approximately $2.4 million in the fourth quarter. As we look ahead to next year, in 2015 we expect revenue growth in the mid single-digits and to make additional progress in our operational improvement initiative.
We also expect to make additional investments in our ER business. As Daryl mentioned, we expect to invest approximately $5 million in the ER segment with most of that spending occurring in 2015. For the year, we expect 2015 to be on higher revenue and operating income, including the impact of the incremental spending and investment in the ER segment.
We expect to provide more details when we report fourth quarter 2014 results. Now John Sztykiel will give his closing remarks..
Alright, thank you Daryl, thank you Lori. Again the third quarter of 2014 was a solid quarter demonstrating continued progress. As we close 2014 moving to 2015, DRIVE as our strategy in particular the IOE, Integrated Operational Excellence.
The fourth quarter will be challenging as we discussed as will be the first quarter of 2015 both due to the seasonality of order timing. The reality is though we are making progress.
As we look at each business unit from both a Q4 to 2015 perspective delivery and service our number one focus will be improving operational execution, delivering continued improvement and operational performance from our Bristol Indiana facility.
Moving over to the emergency response business unit, again improving operational execution as we build high-quality products, on-time efficiently, fixing the issues and transforming the ER business model, the Ocala announcement earlier this week is one major step in this transformation process.
Our third business unit especially chassis and vehicles grow the Isuzu relationship, now there we need some redefining innovations coupled with great marketing but again a very-very core focus on operational execution. Operational execution is the foundation of Spartan and our focus not just in 2014, but going forward into 2015 and beyond.
On a macroeconomic level, our consumer confidence index which came out earlier this week now stays at 94.5 a seven year high, this bodes well for all three of our markets as we move into 2015. To close, we had a solid third quarter and ended with a strong balance sheet.
For the first nine months of 2014, Spartan reported net income of $0.04 per share compared to a net loss of $0.09 per share in the first nine months of 2013. That’s a 13% share swing in the right direction.
In addition, we repurchased another $1 million of common stock in Q3 and just announced a $0.05 per share dividend to be paid in the fourth quarter of this year. Our direction going forward will be alignment of the organization around DRIVE, again in particular the IOE DRIVE, integrated operational excellence.
As I look at the quarter, we've demonstrated points of quality corporate execution. And I'm pleased and thankful for the team's execution from the Board of Spartan Motors, Inc. to all Spartan associates, thank you.
Greg?.
Okay, thank you John. Operator we're now ready to open the call to questions..
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Thank you. (Operator Instructions) The first question comes from Robert Kosowsky of Sidoti. Please go ahead..
I'm wondering on the 5 million investment looking into next year, is that all going to be CapEx?.
I'm wondering on the 5 million investment looking into next year, is that all going to be CapEx?.
No, it actually is a mixture of both CapEx and expenses of a -- let me just open the page here. If I look, I would say that, sorry -- about 2.6 million of the amount or it should be 1.6 is the CapEx. The majority of the rest of that is people and travel and training cost.
We've a lot of resources internally dedicated to this project and we're back filling those with outside consultants or temporary workforce and we also have our team traveling to Brandon several times throughout the month so it's really internal people cost with only about 1.6 million of that being CapEx..
That's internal, so 3.5 million of just higher expenditures going through the year?.
That's internal, so 3.5 million of just higher expenditures going through the year?.
Correct..
Okay and then how you think about I guess A, the risk of doing such a big kind of move given that you already have a very strong backlog and what is the ultimate savings potential from having one fewer location?.
Okay and then how you think about I guess A, the risk of doing such a big kind of move given that you already have a very strong backlog and what is the ultimate savings potential from having one fewer location?.
Okay Rob this is John Sztykiel. What has enabled us to look at the move first is when you analyze and look at the performance of the Charlotte campus which of all of our campuses the highest performing campus from an operational execution perspective.
They did a tremendous job from really the design to the purchase to the assembly to the build of the 70 truck order for Peru. So one of the things which is clear is from a people, process and facilities perspective the Charlotte campus now gives us that flexibility where we could leverage bringing fire trucks into this campus.
So as we took a look at the manufacturing footprint and the rationalization and Daryl I'd like you to jump in here, we now have greater flexibility relative to consolidation.
Daryl you want to add some color on the consolidation and the rationalization?.
Sure, hi Robert this is Daryl. As John said the Peru build here gave the team confidence and we have some additional space here that we wouldn’t have in Ocala in order to increase sales in the future once we get the scalable business processes in place so that was part of the thinking process behind it as well..
Hey Rob and now getting back to the question on the order and the backlog, one of the outcomes of the Peru build here is that the deliveries were done ahead of schedule. One of the core issues within our emergency response unit today is our order to shipment is too long for the marketplace.
So what this will enable us to do, is that we improve our operational execution in essence we should reduce our backlog or our order cycle time which in essence should make it easier for us to grow more orders in the marketplace I think if there's something that's very positive in the release.
If you take a look at emergency response and that's what excites me about Daryl his focus and his team on-board is while revenues grew 41%, our backlog was very-very strong and so what that indicates is really two things, one we've got a very good brand name, but also two, if we accelerate or reduce the order cycle time then we can still grow our business even more getting back to operational excellence should actually unleash a greater opportunity to grow the business..
Okay, that’s helpful. And then I guess any way to think about the savings potential or maybe just the improvements that you see Daryl coming into this plant. I mean you are talking about changes in business processes and I am wondering how radical the change you need to do.
How much was the improvement, there is in order to kind of raise the margin profile of the business and any kind of idea of what you think the longer-term margin potential is for the company or maybe just how far you can reduce cycle time.
Just any way to dimensionalize what the opportunity is there?.
Okay, that’s helpful. And then I guess any way to think about the savings potential or maybe just the improvements that you see Daryl coming into this plant. I mean you are talking about changes in business processes and I am wondering how radical the change you need to do.
How much was the improvement, there is in order to kind of raise the margin profile of the business and any kind of idea of what you think the longer-term margin potential is for the company or maybe just how far you can reduce cycle time.
Just any way to dimensionalize what the opportunity is there?.
So Rob I am going to take that for just a minute. If we look at this whole project with the $5 million and closing of Ocala, we believe it’s roughly between two year to three year payback based upon today’s turns, today’s dollars about a two year to three year payback to for the investment to return itself back to hit the P&L.
But again the P&L will see incremental improvement along the way as we do it, but it will take two years to three years to get that full mature savings..
Okay.
And I guess Daryl like how do you kind of view the opportunity there kind of new to the plant just working on the plan how do you view that area of opportunity to improve business processes and reduce lead times?.
Okay.
And I guess Daryl like how do you kind of view the opportunity there kind of new to the plant just working on the plan how do you view that area of opportunity to improve business processes and reduce lead times?.
Robert I am excited. I joined Spartan in an August a lot of this stuff was already in place for me it’s the right actions and the right movement so the direction is correct. My focus right now is that’s going to fix the front-end of the business if you will.
We are focusing on the shop floor and we have some people that will be starting next week at Brandon which are outside people so we are not going to task our resources there long-term people in the automotive industry that are operational experts they will be in there helping us get the shop floor ready.
So that when we do have the front-end fixed we can produce at a higher pace and meet our delivery schedules..
The next question comes from Shefali Tipnis with Global Hunter Securities. Please go ahead. .
My first question is actually on the shipping.
When do you expect to ship out the 665 fleet trucks in the DMS segment?.
My first question is actually on the shipping.
When do you expect to ship out the 665 fleet trucks in the DMS segment?.
Daryl?.
That’s a 665 walk-in vans Lori?.
Yes the walk-in vans..
So the schedule for that is 2015 event, I think that’s….
And it will be in late Q1 Q2 event. Shefali this is John Sztykiel. So that’s a very large order from a new fleet customer which is great. It will be a late Q1-Q2 event which is part of why I noted in both the opening and the closing we have got some order seasonality fluctuation issues we have to work through. .
Okay. And you did point out that right now the backlog is just includes the bodies and not the chasse.
So can you just walk us through exactly when would you low you would be recognizing the backlog for chasse as well?.
Okay. And you did point out that right now the backlog is just includes the bodies and not the chasse.
So can you just walk us through exactly when would you low you would be recognizing the backlog for chasse as well?.
Hi this is Lori. We are currently analyzing and working through our assumptions on that. So if you look at our delivery and service vehicle segment, traditionally the chasse is provided to us from our end customer and so chasse usually never flows through our P&L.
So this is a very unique situation for us and so we are not taking that lightly and making sure we go through all of our stuff and analyze whether or not it will be just the pass through on the balance sheet or if it will actually refer to the P&L, we should know by our next earnings release..
Okay..
Okay..
Shefali this is again John Sztykiel and a question you may be asking internally is why are we not building them earlier is simply the chasses we cannot get those as fast as what we would like, if we could get the chasse as earlier we would build those walk-in vans much earlier.
So right now we are very focused on trying to accelerate it as fast as possible that chasse delivery schedule..
And then on the backlog for the ER, you mentioned that the timing for the order is generally seven months or less.
So how do you see the shipments in there then like are they going to linear or more concentrated towards the first half or first quarter of 2015?.
And then on the backlog for the ER, you mentioned that the timing for the order is generally seven months or less.
So how do you see the shipments in there then like are they going to linear or more concentrated towards the first half or first quarter of 2015?.
Are you talking about the expected shipment times for the ER is that correct?.
ER yes that’s correct..
ER yes that’s correct..
That spreads pretty evenly throughout the year, when John was talking about the seasonality that really impacts the delivery and service business more than the others.
Does that answer your question?.
Thank you. (Operator Instructions) The next question comes from Rhem Wood with BB&T Capital Markets. Please go ahead..
Can you talk a little bit just about your international opportunities? I know you recently talked about an order going to Brazil and now as Peru order is kind of finished.
Like where does all that stand, what are the additional opportunities going forward?.
Can you talk a little bit just about your international opportunities? I know you recently talked about an order going to Brazil and now as Peru order is kind of finished.
Like where does all that stand, what are the additional opportunities going forward?.
Rhem this is John Sztykiel. As we look at our business from a global perspective, one Latin America represents a very good opportunity for us in 2015 from an emergency response perspective. We're obviously gaining traction, delivered a number of products into Chile, a very good order for Peru, now you see the order for 20 units for Sao Paulo, Brazil.
The people at Utilimaster are now slowly working into Latin America as well. When we look at other parts of the world, I'd really say it's in Asia in particular China from an emergency response perspective.
So, when we look at our global growth overseas, it's really very-very specific really laser focused on two areas, Latin America and China primarily around emergency response.
And the reality is when we've got very good opportunity, but we also have to be very disciplined in how we run the business, because our core focus is improving our operational execution and what we want to ensure is we don't get diluted in our focus and the reality is the world is a pretty big place.
The good news is in Latin America and China, North American emergency response product is considered for lack of a better term to be the gold standard.
We've got a very-very good brand name so we're excited, that's about as much as I can say from a global perspective we're excited, we've got good traction, probably what excites me the most is when I look at the financial margins on our global product, it's far better than North America but we're working in a very disciplined way. .
Okay thanks.
And then when you talk about the SCV business, I think you mentioned that you were making some changes in there and then kind of implied maybe that there will be some follow-on business with Isuzu, can you just talk a little bit about that working standard that relationships is going well but when could you possibly see from this additional business or volumes from them?.
Okay thanks.
And then when you talk about the SCV business, I think you mentioned that you were making some changes in there and then kind of implied maybe that there will be some follow-on business with Isuzu, can you just talk a little bit about that working standard that relationships is going well but when could you possibly see from this additional business or volumes from them?.
Okay Rhem really this is John Sztykiel and I used the term to grow the relationship with Isuzu and that is specifically around the N-Series gas product which we're building today. As all of you are aware of gas is much cheaper today than what it was three years to five years ago. And their N-Series gas chassis has hit a great sweet spot.
Two years ago, we were building 14 units a day. Now we're building 33 units a day. So, when I talk about growing the relationship with Isuzu it was not about future product platforms, it was just about working with them to meet their delivery requirements because obviously they've got a very good dynamic product.
Within the other parts of the SCV marketplace, as we mentioned in the release we expect to be on several new motor home models next year in the retail marketplace that will probably be somewhere in mid Q2 because new model introduction is late Q1 early Q2 so in essence we're going to have a little bit more retail shelf space in 2015 by the time we get to mid year than what we have today and that really is very exciting, the Spartan brand name has some very good cache but we are going to be expanding our retail shelf space by the time we get to mid 2015 from an RV chassis perspective..
Okay, thanks that's good color.
And then on the Isuzu a nice order for walk-in vans what about the Reach can you talk about that you mentioned in the revenue section a part of that will be down because of lack of production there but taking orders in the horizon where does all that stand and maybe you are kind of redesigning it can you talk to that?.
Okay, thanks that's good color.
And then on the Isuzu a nice order for walk-in vans what about the Reach can you talk about that you mentioned in the revenue section a part of that will be down because of lack of production there but taking orders in the horizon where does all that stand and maybe you are kind of redesigning it can you talk to that?.
Well first I want to compliment the team on improving the Reach from a financial performance perspective. Now it is a positive margin product for us, so I really want to compliment the team for their hard work and execution over the last 12 months to 24 months.
Second, the Reach while being a very dynamic product today has a more limited market opportunity than what it did three years ago.
And the reality is the Reach is a diesel-based product with high durability, great volume capacity and ease of entrance and exit in particularly for it sliding doors but I admit as I mentioned number one it's a diesel-based product and because gas and CNG compressed natural gas it's so much lower on cost than what it was three years to five years ago transportation markets have shifted.
So we're looking at models and variations of the Reach product but in essence when we look at the volume opportunities for Reach today versus two years ago, it is less and that's because the market has shifted, now we've to adjust to that but that will take time, it is a dynamic product FedEx really likes it, other niche people like it but the core customer for Reach values diesel-based and the improvement in fuel economy the high durability of both the body and the engine the great volume capacity and the ease of entrance and exit.
Did that provide enough color or answer to your question?.
Yes, that that's good thank you. And then just two more quick ones, I want to verify and then thanks for the time Lori did you say I think you said in your comments that you'll be breakeven in the fourth quarter excluding the charges. And then what were the extraordinary charges you took in this quarter? That’s it for me. Thanks guys..
Yes, that that's good thank you. And then just two more quick ones, I want to verify and then thanks for the time Lori did you say I think you said in your comments that you'll be breakeven in the fourth quarter excluding the charges. And then what were the extraordinary charges you took in this quarter? That’s it for me. Thanks guys..
So the first one is we truly believe with the seasonality of our business with the DSV segment being lower that we will be a breakeven operating income before restructuring charges in fourth quarter.
The next part of your question concerning the, I assume you are talking about the $0.3 million restructuring charge?.
As mentioned in my initial comments there is some extraordinary charges in the current quarter?.
As mentioned in my initial comments there is some extraordinary charges in the current quarter?.
That’s really is the first piece of the 16th of the $5 million that Daryl talked about of the fixing the front-end processes. We did incur we developed a team and put the team together and have them travel out to Brandon several times. So that’s really what that cost is that was the beginning of that project..
Thank you. The next question is a follow-up from Robert Kosowsky with Sidoti. Please go ahead..
Just one last question, on the, it looks like the specialty vehicles have had a very strong operating margin. And I am wondering what drove that and how much of that is sustainable and kind of how do you look at the margin profile of that business going into next year.
I know the past year we had some increased spending in that business but the margins have still been very strong nevertheless..
Just one last question, on the, it looks like the specialty vehicles have had a very strong operating margin. And I am wondering what drove that and how much of that is sustainable and kind of how do you look at the margin profile of that business going into next year.
I know the past year we had some increased spending in that business but the margins have still been very strong nevertheless..
So if you look at that segment and we break it down. As John talked about this the contract manufacturing went up pretty dramatically over where we were last year which is the specific driver of that profitability improvement. It really doesn’t help much overhead to it but really does drive that as well.
The other thing is we are seeing a very large demand for our high-end K3 product. And so that mix within the motor home side of that business, has really changed the profile of that profitability of that gross margin. So those are really the key drivers.
Our R&D spending was just over so slightly in the third quarter but we expect that to go back up again in fourth quarter..
Okay, that’s helpful. And then also on the motor home side, you mentioned in the press release that it seems like your customer has finished working down the inventory, I guess is that correct.
And do you see kind of a snap back in production may in some of the lower-end models?.
Okay, that’s helpful. And then also on the motor home side, you mentioned in the press release that it seems like your customer has finished working down the inventory, I guess is that correct.
And do you see kind of a snap back in production may in some of the lower-end models?.
If we look at that so yes we definitely have started to see we had a really large nice September order intake on the motor home side. They still seem to be a little choppy in their orders to us.
So again so then things are looking they are about normal but we are seeing more consistent quarters from them at a higher level than we have been seen in the first half of the year..
Okay, Rob this is John Sztykiel. I think what will be interesting is when you hear Lori talk in Q3 and Q4 of next year and Daryl as well, as you probably see a little bit less choppiness because we will add a few more models out in the marketplace so as you have greater retail space in the RV industry it reduces the choppiness of the order intake.
So that’s a very good question on your part. We do have choppiness right now but that will become less as we move into the second half of 2015..
At this time, I am showing no further questions. We will now conclude the question-and-answer session. I would like to turn the conference back over to management for any closing remarks, Ms.
Wade, gentlemen?.
Alright, this is John Sztykiel. I want to say special thanks to all the Spartan team members, honestly to all of our shareholders as well. You have supported us, you had faith. We continue to move the business in the right direction.
I am extremely excited about Daryl Adams, our new COO being on-board as he brings a very strong accountability against the plan and will move us forward in the right direction. In closing, Q3 of 2014 we improved our results another quarter in the right direction. We paid a dividend. We bought back stock and a solid order intake.
Mechanically alignment and execution around DRIVE is delivering results and moving us forward with confidence and as we approach 2015. Thanks and have a great day..