Greg Salchow - Group Treasurer Daryl Adams - President and CEO Lori Wade - Chief Financial Officer John Sztykiel - Retiring President and CEO.

Rhem Wood - BB&T Capital Markets Mike Shlisky - Global Hunter Securities Robert Kosowsky - Sidoti.

Good morning and welcome to Spartan Motors' Fourth Quarter 2014 Conference Call. [Operator Instructions] This call is being recorded at the request of Spartan Motors. If anyone has any objections, you may disconnect at this time. I would now like to introduce Greg Salchow, Group Treasurer and Director of Investor Relations for Spartan Motors. Mr.

Salchow, you may proceed..

Thank you and good morning, everyone. Welcome to Spartan Motors' fourth quarter 2014 earnings call. I am joined on the call this morning by Daryl Adams, President and Chief Executive Officer; John Sztykiel, Retiring President and CEO; and Lori Wade, our Chief Financial Officer.

Before we start today’s call, please be aware that certain statements made during today’s conference call which may include management’s current outlook, viewpoint, predictions and projections regarding Spartan Motors and its operations may be considered forward-looking statements under 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 actual results to differ materially from projections. All known risks or management beliefs that could materially affect the results are identified in our forms 10-K and 10-Q filed with the SEC.

However, there may be other risks that we cannot anticipate. As always, we ask that you ask one question and a follow-up during the Q&A portion of the call. That will allow everyone an opportunity to ask a question. And after the initial round you are welcome to rejoin the queue for additional questions as time permits.

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

Good morning everyone and thank you for joining us on Spartan Motors fourth quarter 2014 conference call. This will be my last conference call at Spartan as Daryl Adams became President and CEO this past Thursday, February 19. I will briefly cover the main points of the fourth quarter of 2014 while Daryl will address his outlook and plans for 2015.

Lori Wade, our CFO, will cover the financial details for the quarter for 2015 going forward as well. Quickly as we summarize 2014, we reversed the negative trends of 2012 and 2013 reporting a net profit of $0.03 per share for the calendar year. This represents the impact of DRIVE, our strategy, moving forward.

Spartan also ended 2014 with a backlog of $242.7 million and a cash balance of $28.6 million. Placing the company on sound footing as we move into 2015. During 2014 we also purchased 2 million shares on a $2 million worth of Spartan stock and paid dividends of approximately $3.4 million to our shareholders.

Both of these actions represent strong corporate shareholder responsibility. As we look to 2015 and continuing our focus on operational improvement, as Daryl will emphasize in his remarks, I am very very excited about the Spartan and its future for the following reasons. One, continuity of leadership. Second, we have markets with growth potential.

Third, strong brands in Spartan and Utilimaster, a solid order backlog. Number four, very solid financial position. And number five, operational focus emphasized by Daryl Adams and his team.

And what's interesting as I close this out, while Spartan has impacted so many and transformed the world through specialty vehicles over the past 30 years, I have no doubt the future will be even more dynamic than the past. And as I close my career at Spartan, I wish to say thank you to so many people.

From shareholders to those of you I have interacted with in the investment community, to associates, to dealers, to consumers, the communities that we have served. It's amazing, the number of people that have impacted my life in a positive way in so many ways. And so I wish to say thank you. All the best to each one of you.

Now I will turn the ball and the call over to Lori Wade, our CFO, to cover the financial details of the Q4 of 2014, the year and 2015.

Lori?.

Thank you, John and good morning. Spartan reported net income of $1.2 million or $0.03 per share for 2014, marking our first profitable year since 2011. That compared to a loss of $6 million or $0.18 per share in 2013.

We are pleased with the improvement and with reporting net income for the year but recognize we still have a lot of opportunity for improvement. Looking at the fourth quarter, revenue was down 6.7% to $118.9 million with the DSV and the SCV segments both reporting lower revenue versus last year.

The revenue decline in the DSV segment is explained by the absence of the Reach production in the fourth quarter of 2014. SCV sales declined due to lower motor home and bus chassis sales. In addition, [APA] sales were also lower in the fourth quarter as they were for most of the year due to declining sales in defense related parts.

Sales increased in the ER segment due to a slight increase in volume and more favorable product mix, partially offsetting the lower revenue in the other two segments. Margin performance improved with fourth-quarter gross margin at 13.1% versus 11.8% despite the inclusion of $0.8 million of restructuring charges in the fourth quarter 2014.

[Conforming] [ph] to the higher gross margin was better material utilization in the quarter compared to the prior year. Especially in the DSV and SCV segments contributable to a favorable product mix. The company posted an operating loss of $1.9 million compared to an operating loss of $4.2 million in the prior year.

In the fourth quarter of 2014, Spartan recorded restructuring charges of $1.9 million compared to an asset impairment charge of $4.9 million in the fourth quarter of 2013.

After tax credits of $1.6 million, Spartan reported a net loss of $0.1 million or $0.00 per share for the fourth quarter, compared to a net loss of $3 million or $0.09 per share in the fourth quarter of 2013. Turning now to the full year. Spartan posted a 2014 operating loss of $1.2 million, including $2.1 million of restructuring charges.

We also booked tax credit totaling $2.1 million. At December 31, 2014, we reorganized our corporate structure to allow us to recognize certain tax benefits totaling $0.5 million. We also booked $0.5 million in FIN 48 reversals in R&D tax credits in the amount of $0.3 million.

The resulting net income for 2014 was $1.2 million or $0.03 per share compared to the net loss of $6 million or $0.18 per share in 2013. Cash on hand at year-end was $28.6 million compared to $30.7 million a year ago. Inventories at year-end were $71.1 million, down from $81.4 million at the end of 2013.

Now as we look ahead to 2015, in our press release we shared management's expectations for 2014 with projected revenue growth in the mid-single digits and profitability to improve.

We expect an operating loss in the first quarter of 2015 due to seasonally slower production and cost of wrapping up fire truck production at Charlotte, as well as restructuring expenses and continuing investments in the ER segment.

We expect both the second and third quarters to be profitable and for [two] [ph] sales in '15 as a whole to improve year-over-year. As we execute against our operational plans during 2015, we will be better able to provide you with further guidance concerning our projected financial performance for the year.

Due to the timing of new business that includes 665 unit walk-in-van order with chassis, 21 fire pumpers for Brazil and 22 ILAVs, we expect to see cash levels decline in the first quarter. Also contributing to the anticipated use of cash, there is some inventory buildup related to the production ramp of fire trucks at the Charlotte campus.

We are currently in production of the walk-in-van and fire truck orders which will increase inventory and accounts receivable balances throughout the first quarter. We expect to convert these balances to cash during the second quarter, resulting in cash balances returning to more normal levels by the end of the second quarter.

At this time we expect cash at the end of the first quarter to be approximately $15 million. Now I would like to turn it over to Daryl Adams, the newly appointed President and CEO..

Thank you, Lori. Good morning everyone. First, I want to thank John, for all his assistance and support during my transition into the CEO role. John has been Spartan's greatest advocate and supporter during his 30 years at Spartan.

He was with the company's transformation from being dependent on government revenue to a stronger, more diversified company today. On behalf of all Spartan associates, I think him for his years of dedication, service and I am honored to have this task of prepared Spartan for success in these next 40 years.

We all wish him a very best in his retirement and know he will be missed. As Spartan's new CEO, my focus will be on operational improvement. We are in the process of implementing a multi-year operational improvement plan based on five focal points.

The plan is designed to produce profitable growth, increasing operating margins and will initially focus on ER segment, the Spartan's only unprofitable business. We are fortunate to have two of three business segments performing reasonably well, both DSV and SCV are profitable with good growth potential.

ER presents a number of challenges but also manufactures products that are in high demand. As we expand production and output, we will be able to capture more market share and grow revenue and profit. The five focal points I mentioned earlier are number one, fix the ER body business. Number two, improve operational discipline and performance.

Number three, apply lean principles and a continuous improvement mentality. Number four, reduce quality and warranty expenses. And number five, we will continue to strengthen the Spartan team. Our first priority is to fix the ER body business. We announced our ER restructuring plan in October 2014.

One of the first task would be to close the Ocala, Florida facility. We have since transferred production from Ocala to Brandon and Charlotte facilities and expect to vacate the Ocala location completely during the second quarter of this year.

One of the most important aspects of our ER business overhaul is to implement more robust procedures before the production process begins. There are several parts to this change. The basic goal is to reduce complexity of the order process as well as the production process.

You are all familiar with 80:20 rule, I believe the same rule applies to our business. In the case of fire truck production, about 80% of the truck is a standard. Meaning engines, axles, frames etc. are the same parts or are installed in the same location on most trucks. The remaining 20% are options that vary from truck to truck.

Our plan is to reduce complexity in several different ways. Spartan ER is much like the automotive industry of the past which offered hundreds of standalone options. If we combine these standalone options into option packages, we will offer the customer better value and reduce cost of assembly, engineering and design.

It also reduces complexity on the shop floor as well as inventory costs. We expect that combining options into option packages, we will meet the needs of 95% of our customers. For the remainder who need something special we can offer one off features but we will charge more for it to cover our cost.

We have already eliminated some of the lowest volume products from our offerings and we will continue to consolidate as we move forward.

We are working to design option packages for the future orders, implement a new order and configuration system, cross training our salespeople to use the tools and to work with our customers to manage the order process. We plan to have the first phase of these tools installed and in use during the third quarter of this year.

Since we currently have approximately a nine-month order backlog, the effect of these changes won't be felt until 2016.

In the interim, we are adding engineering and design resources which will allow us to provide our production associates with the ability to build the trucks more efficiently while better management of workflow should improve the throughput. We are working to take the burden off of Brandon facility and we are ramping up production at Charlotte.

We are starting with one production line and have the capacity to add more lines and shifts as needed. Spartan will be able to produce fire trucks of differing degrees of complexity on separate lines, accelerating and smoothing production flow.

This process will happen over time as we are able to improve the design and engineering processes and provide production associates with trucks designed to be built more efficiently. The second of the five priorities is to improve operational discipline and performance.

[Flat] performance is well in many areas but there are always opportunities to improve. One of the ways we need to improve is by sharing best practices and knowledge throughout the company. Our goal is to create a culture of one Spartan. Meaning a mindset of being one company with a single set of standards and procedures companywide.

One way we intend to accomplish this is by creating centers of excellence with Spartan's operations and support functions. This will allow us to leverage cost and capabilities throughout the company and spread the workload more efficiently. It will also breakdown the silos within our operating segments, improve communication and help share ideas.

We will use more data and metrics to run our business. We need to upgrade some of our systems over the next few years to support this effort. We can do a better job using the data we have today. This will allow us to adjust course in less time, provide more tools to associates on the shop floor who adjust course each day.

We need to be realistic about our expectations for pace of change. Our team can accomplish a lot in a given amount of time but we must set realistic achievable goals and work at a measured pace to achieve them.

We expect Spartan to prosper for many years, so we need to make continuous change and improvement but to manage the pace where associates can remain focused for the long term. Our third focal point is to foster a mindset of continuous improvement and lean operating principles.

Today we do a reasonably good job in certain areas but there is room for improvement everywhere. We need to do a better job of sharing those ideas and working cooperatively between operating segments.

Using a center of excellence model will allow us to drive continuous improvement and lean operating principles throughout Spartan and make this part of our everyday procedures and operating philosophy. This mindset will continue to become a higher priority going forward. The fourth focal point is to reduce quality and warranty expenses.

If we do the right things the right way, quality will improve and cost will decrease. The goal is to do things right the first time. Improved quality improves customer satisfaction and reduces their downtime or time out of service and reduces their total cost of ownership.

Increasing the time a customer's vehicle is working should also be good for business, generating more repeat business and helping us gain market share. The last focal point is to strengthen the Spartan team. We must have the management skills and depth to operate the business and drive improvement throughout the entire company.

One of my first tasks has been to strengthen our management team. In strengthening Spartan [indiscernible] we have brought in these critical new hires. A Corporate VP of Human Resources. This position is a new position at Spartan that we never had.

We have brought in Thomas Schultz to lead the initiatives to make Spartan the employer of choice in our area and to ensure we can attract and retain the best talent available. Tom is experienced in operations in addition to his HR skills. His knowledge and influence are already being felt throughout the company.

Dan Slater joined Spartan in January as President of our Emergency Response. Dan has a back on automotive and specialty vehicle manufacturing that includes working with Toyota, BMW and Volkswagen.

More importantly, he was most recently with a division of Terex and turned around a money-losing operation into a very profitable operation with great products. He has been with Spartan less than two months but is already have an impact on the ER segment.

In December and January, we hired John Mocny as our Corporate Director of Continuous Improvement and Lean Manufacturing; Steve Guillaume, as Vice President of Business Development and Joint Ventures; and Mike Paruszkiewicz as our Corporate Director of Quality. Each of these new executives adds depth to the organization where it is needed.

They will lead the creation of our centers of excellence and champion the spread of one Spartan culture, quality and continuous improvement. We have added management talent to improve operating performance in Brandon and to support the production ramp up in Charlotte.

They are already having a positive impact but we will not fix the business overnight. A full fix generating an acceptable profit margin will be a two to three year process. We are making progress but remember the actions we take today will not be reflected in our operating results for one to three quarters.

Also remember that the team and I have done this before. We have successfully transformed a business losing money into a significantly profitable growing business. One advantage we have with the ER body business is that it offers innovative products in high demand. That is an important distinction and advantage compared to many turnaround efforts.

Our operational performance plan and the five focal points are comprehensive but not complicated. Our first priority is to fix the ER business. That will receive the bulk of our investment in the short term. We will invest as needed in the short-term to maximize our return in the future.

We will take the right actions and invest to ensure Spartan's success for the long-term. As with all investments, we incur the cost upfront which will impact short-term profitability. This is a contributing factor to our expected first quarter loss.

But I want to emphasize, we are already seeing positive change in the business and I am confident we will see positive momentum throughout 2015 and beyond. Reaching Spartan's full potential for growth and operating performance will be a multiyear task but we will see incremental payoff throughout the process.

Again, the team and I have done this before and we have all the resources needed to execute successfully against our plan. I have confidence in our team, our plan and our future success.

I look forward to updating you on our progress as we move deliberately and decisively toward our shared goal of enhancing shareholder returns and sharing Spartan's long-term success. Operator, we are now ready to take questions..

(Operator Instructions) And our first question comes from Rhem Wood with BB&T Capital Markets. Please go ahead..

So first question, in your comments I think you have said that second and third quarters -- you are expecting a loss in the first quarter, you expect second and third quarters to be profitable but you didn’t say anything about the fourth quarter of the year.

Is it possible that you lose money there or do you expect that to be profitable?.

Hi, Rhem. This is Lori. As we look at the fourth quarter, as we look at our traditional -- our first quarter is seasonally our lowest quarter but our fourth quarter is always our second lowest.

So as we are looking to the fourth quarter, we are looking at as we believe it will be profitable but again, it could be closer to that breakeven as we continue on through the year. We will have further clarity as we implement all the actions that Daryl talked about..

Okay. Thanks.

And then can you give us, just for modeling purposes, a sense of the restructuring charges for the first quarter and for all of '15?.

As we had talked earlier and we talked last quarter, we believe that we will take restructuring charges of approximately $5 million with the majority of that being spent in 2015.

I believe that if we look at the four [indiscernible], that our restructuring charges will be pretty heavy in the first two quarters, first half of the year, and then trailing off slightly in the second half of the year. But we will have restructuring charges throughout the entire 2015..

Okay. Thanks. And the Daryl, you talked a lot about the ER business, fixing that. Obviously that’s the one losing money right now.

But do you need to do the same things in DSV at some point?.

Rhem, good question. The ER business is the losing division right now. The other two as we mentioned are profitable. So it's not going to be quite as detailed with them, it's going to be more of a continuous improvement, lean focus..

Okay. So maybe the first year or two you fix the ER and then get to the DSV at some point. You mentioned kind of a two to three-year process..

Yes. We are not going to wait for two to three years. I think we will probably be getting into it late second quarter, early third quarter, we will be touching SCV and DSV with our lean, continuous improvement efforts..

Okay. Thanks, that helps.

And then -- last one, I will turn it over -- at this point are you going to be focused on the operational improvements but can you still launch new products and where do you feel like you have holes in your product lineup at this point and what are your plans for launching some new products in '15?.

You are talking on the ER side, Rhem?.

Really throughout the business..

Yes. Well, I think, as we mentioned, an [ETA] [ph] is going to be an unveiling of a opportunity and the next product we believe that will serve the market well in DSV. On the specialty chassis side, we are focused on -- I think it’s getting a product out by the third quarter-fourth quarter that will also be a benefit for that division.

And also we have, John is on a consulting agreement with us and his focus is going to be on the SCV side of the business to see if there isn't some other opportunities out there we can pick up.

And then on the [anniversary] [ph] spot, as I mentioned we are consolidating the products that in our opinion is going to make it much easier for both our dealers and the end-user to order. And then here on the Charlotte campus we also have options to bring in additional lines as needed.

So we are starting slow here with the ramp up so we make sure we have good quality and that’s starting with our Classic series. So once we get comfortable with that we are going to ramp up as the year goes out to increase volume here in Charlotte..

The next question comes from Mike Shlisky with Global Hunter Securities. Please go ahead..

So what don’t you take a quick question here about how you [bid] [ph] at new work going forward. Daryl, with your new focus on lean or other ways to be more efficient for occasion.

Is there any way to make that process more cost effective and/or maybe design division for [indiscernible] more standardized or a little bit cheaper to actually get done?.

I am sorry, Mike. It was very difficult to hear.

I don’t know if you are on a cell phone or -- can you repeat that question?.

Sure, Daryl.

How is that, a little better?.

That’s better, thank you..

I was wondering if you could tell us, in the year you are focused on lean and high efficiency in the overall business. [indiscernible] that’s the way you have been in your work going forward.

Will there be ways to get [indiscernible] business, how you actually bid the new work contracts and how you can design the products in a cheaper way to address these cost [indiscernible].

Do you think you will need there to standardization or lower engineering cost?.

Yes. And that’s the 80:20 rule that we are talking about. And in the past we have talked about SBP, scalable business process, that’s still underway in Brandon. So that’s going to help with the ordering process. And the 80:20 rule that we talk about in option packages is definitely going to make it more efficient to build the products and design them..

Okay. And Lori, this is for you. With the cash getting us a little bit tighter here in the first quarter, [only] [ph] it was temporary.

Can you just tell us about, just so we know, where do you stand on some of your other areas of available liquidity throughout the quarter, if this [indiscernible] and certainly [indiscernible] a little bit higher than you expected?.

Mike, we are having a hard time with the connection but I think your question was regarding our use of cash and liquidity. So in the first quarter, as Lori mentioned, we have several programs hitting all at once. We have the 665 unit walk-in-van order. And this time we are actually purchasing the chassis as well as building the body on the chassis.

Typically, we just have the chassis on consignment, build a body on that. But this time we are using some more cash to purchase the chassis. We also have the Brazil order. We are ramping up for that. We have more inventory. Also building more fire trucks in Charlotte. We have some more inventory there.

When you combine all of these and the timing of delivering and such, we do think it will reduce our cash balance at the end of first quarter to about $15 million. And we will start converting that back into cash pretty early on in the second quarter.

So we think by the time we get to the end of the second quarter, we should be back to about where we are right now in terms of cash balance. So somewhere in the mid-20s, upper-$20 million range. So we have adequate resources. We are not going to have to access our revolver according to our projection.

This is just a short-term debt and it's one of the reasons we keep a fair amount of cash on balance sheet..

And all levered on that. As Greg said, everything he said was very true. We would like to have $20 million to flex our working capital because we have a very seasonal business. And so our working capital goes up and down. So we truly like to have this where actually [indiscernible], this is evidencing having that money there.

Again, when you say tight, $15 million, I don’t consider to be tight. We still have our revolver that we renewed at the end of last year.

We don’t believe that we would consider it tight but again we just want it to be open and honest with you, that we believe we have a lot of uses of cash happening, short term [gap] [ph] that will come right back in [future] [ph]..

[Operator Instructions] The next question is from Robert Kosowsky with Sidoti. Please go ahead..

First question is on service and delivery.

Were there any Reach vans sold in the quarter?.

There was under a hundred units sold in the quarter. And those were just more for dealer type activity. [Rework] [ph] had been completed with the FedEx order..

Okay. And then you isolated material utilization as a positive driver. Does that step up significantly from what it was in the third quarter because you did see some very nice margin expansion, third quarter to fourth quarter even with down volume..

I would say we had. The majority of the reasons for that favorable material utilization was product mix. We had a very favorable product mix in the products that we sold in both the DSV and the SCV segment, being that we sold the higher and high profit margin products. So this was how the quarter ended up and so that pretty much explains that..

Okay. And then, I guess finally a question for Daryl. If I evaluate the plan you are using right now, it seems like the two biggest risks that I see at least are that customers don’t want the option packages that you are using. And second, your employees don’t want to change, done want to adopt lean.

Do you agree that these are biggest risk factors? Which one is more legitimate and how do you minimize them?.

No. I would say, Robert, that neither one of them are a risk factor. So if we talk about the orders, we think the customers are getting confused with ordering the amount of options they have. So we are going to try to take, again the 80:20 rule and build them into some packages.

Now if they don’t like those packages, we can certainly build them the custom truck they are looking for. So we don’t think it's going to affect any of the ordering. We actually think it's going to be much easier and they are going to be happier with us.

The feedback we have is that it's too difficult to order our truck, so we need to make that much easier. So on the lean side, I think in my script we talked about -- we are doing a lot of good things. There is some lean bright spots. We are just having, as a company, had a real top down focus on lean.

And that’s where it's starting today and we have a lean expert who is going to be going across all the divisions. And each of the divisions will have their own lean expert in-house but we are going to have it as a corporate function across to all so we have oversight..

Rob, this is John Sztykiel. And Daryl hit the nail on the head, but when I talked about five reasons why I was excited about Spartan, the last one was the operational focus of Daryl and his team.

When I look at the team here, the focus on lean, the people, the processes they are starting to institute, this is something we have never ever seen in the 30 years I was at the organization. And to me that was so exciting.

Spartan has shown an ability to be creative, bring new products to market but we have not been known on a continuous basis to be a high performing lean organization. And this will be a dramatic change for Spartan, all in the right direction which over time will drive more orders.

So as you spend time with Daryl, members of this team, you are going to see something which you have never seen or experienced before and you are going to become as excited as I am..

And Robert just a follow up. I think it was in the last call we had, I mentioned how excited I am with the associates at Spartan, how they all want to help. They are all anxious to be part of the winning team. They are accepting this lean principle or lean focus very very well.

And actually we may need to speed up the implementation because they are so hungry and want to learn on how to move forward. So it's not that they are blocking us.

Since that we haven't taken this step, like John mentioned, in the past, this is a very strong step with a continuous improvement, center of excellence, a [new rule] [ph] if you will, working across each of the divisions. In the past, each group would be responsible for their own lean. So this is a corporate function working across the divisions..

Looking at the [indiscernible] have you seen any -- so you haven't seen any big increase in turnover over the past few months as you have brought in these separate business heads?.

No, not at all. Actually people are excited and they are excited about the new structure as well..

Okay.

Then what do you see as the biggest risk in this implementation process as opposed to [indiscernible]?.

It's the two -- I am sorry, I don’t understand you..

You had basically said that, reducing the customer and employee turnover weren't significant risk factors and I am wondering what you perceive as the biggest risk factors over the next year or so as you basically change the culture of the company..

Well I think it's going to be -- everybody, once they some success, they are going to be really anxious and we are just going to have to manage the pace and the amount of change that we bring in so that we do it right. We don’t want to stumble. We don’t want to have big issue.

So it's just going to be the pace and I think it's going to be the patience of people to let it, have it take its course and the time it's going to take to affect us. But as Greg talked about and I talked about, our order backlog, it's going to take a few months for these things to show up.

So financially it's going to be months, quarters out from when we implement the actions..

Okay.

And then in any way you can quantify what the potential upside is to profitability?.

At this Rob we are really -- we need to get the processes in place, get the people in place, get some traction we need. So we are really not in a position to be able to talk about that right now..

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Greg Salchow for any closing remarks..

All right. We appreciate everybody's time and attention. If you think of any additional questions after the call, please feel free to give me a call, get in touch with me and we will be happy to go over anything else that comes to mind. Thanks again and we look forward to speaking to you next quarter. Have a good day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..