REV Group, Inc.

Greetings. Welcome to the REV Group's first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Drew Conop, Vice President, Investor Relations. Drew, you may now begin.

All right. Good morning, and thanks for joining us. Earlier today we issued our first quarter fiscal 2024 results. A copy of the release is available on our website at investors.revgroup.com. Today's call is being webcast and a slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures is also available on our website. Please refer now to slide two of that presentation. Our remarks and answers will include forward-looking statements which are subject to risks that could cause actual results to differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we've described in our Form 8-K filed with the SEC earlier today and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on the call today to a quarter or a year are to our fiscal quarter or fiscal year, unless otherwise stated. Joining me on the call today is our President and CEO, Mark Skanechny. Please turn now to slide three, and I'll turn the call over to Mark.

Thank you, Drew, and good morning to everyone joining us on today's call. Shortly, I'll provide an overview of our consolidated first quarter performance, as well as detailed segment financials. Before I comment on the quarterly results, I would like to review the strategic initiatives, including capital allocation activities that have been recently executed. These actions were aimed at optimizing our portfolio products, creating a more focused operating structure, and unlocking shareholder value. As we have previously announced, REV Group will be exiting bus manufacturing through the recent sale of Collins Bus and the winding down of manufacturing operations at our El Dorado National California, or E&C, transit bus business. The sale of the Collins school bus business to Forest River closed on January 26th with an all-cash deal price of $308 million, inclusive of certain preliminary working capital adjustments. The wind-down of the operations of E&C is expected to be completed before the end of fiscal 2024. We expect to generate net cash proceeds of at least $250 million from the exit of the bus manufacturing businesses. Approximately $179 million of the immediate proceeds were used to return cash to shareholders through a $3 special cash dividend that was paid on Friday, February 16th. The remainder of the proceeds were used to participate in a secondary offering that closed on February 20th by purchasing $8 million of REV Group common shares at an average price of $15 and 76 cents for approximately $126 million, reducing the total amount of shares outstanding by 13% and our largest shareholders position from 46% ownership to approximately 18%. We believe these actions demonstrate our commitment to delivering shareholder value. Since 2020, we have returned over $400 million to shareholders in the form of dividends and share repurchases while paying down debt and strengthening the balance sheet. We remain focused on generating high levels of cash from operations and are committed to a strong balance sheet that allows flexibility to pursue new growth opportunities and optionality for future returns of cash to shareholders. Finally, beginning with today's earnings release, the fire and emergency businesses have been combined with the specialty group business that manufactures capacity terminal trucks and laymore street sweepers and a new segment named specialty vehicles. The segment's first quarter results also include Collins' operating performance through its investor date of January 26, and will include EMC financial results through the wind-down period. Specialty Vehicles is being led by Mike Vernig, the former REV Fire Group president. The recreation segment has been renamed Recreational Vehicles and remains under the leadership of Mike Lanciotti. Taken collectively, we believe these strategic actions create a more focused portfolio that provides opportunities for growth, consistent cash generation, and improved margin performance while maintaining a strong balance sheet. Turning to slide four, consolidated net sales of $586 million were approximately flat compared to the first quarter of the prior year. The year-over-year revenue result was primarily due to increased net sales, including price realization within the specialty vehicle segment, offset by lower net sales from the recreational vehicle segment. The increase in net sales in the specialty vehicle segment was related to increased unit shipments and price realization within the fire and ambulance businesses and increased bus manufacturing sales, partially offset by lower sales of terminal trucks. Lower net sales in the recreational vehicle segment were primarily a result of fewer shipments of Class A, Class B, and towable units, partially offset by higher shipments of Class B units. Consolidated adjusted EBITDA of $30.5 million increased $9.2 million, or 43%, from the prior year, with increased contribution from the specialty vehicle segment, partially offset by lower contribution from the recreational vehicle segment. The increased earnings in the specialty vehicle segment were primarily due to increased contributions from the fire and ambulance businesses. Lower earnings in the recreational vehicle segment were primarily related to lower contributions from the Class A, Class B, and total businesses, partially offset by increased contributions from the Class C business. Please turn to slide five. Specialty vehicles first quarter segment sales were $417 million, an increase of 17% compared to the prior year. The increase in net sales was primarily due to increased shipments of fire apparatus and ambulance units. higher sales from the bus manufacturing businesses, and price realization, partially offset by lower sales of terminal trucks. Unit shipments of fire apparatus increased 24%, and shipments of ambulance increased 23% versus the prior year period, reflecting continued momentum of the operational improvement initiatives put in place aimed at increasing throughput. Net sales of fire apparatus and ambulance increased 36 and 38% respectively in an improved product mix and the benefit of price realization as we deliver a greater number of newer units from our backlog with pricing put in place throughout 2022 and 2023. Within the quarter, certain fire businesses accelerated shipments of aged units that were trapped in backlog, improving the overall backlog mix and future price realization opportunities. Specialty vehicle segment adjusted EBITDA was $26.2 million in the first quarter of 2024, an increase of $21 million compared to the adjusted EBITDA of $5.3 million in the first quarter of 2023. The increase was primarily due to increased contributions from the fire, ambulance, and bus businesses, partially offset by lower earnings from the terminal trucks business. The increased fire group contribution was primarily related to higher unit volume improved efficiencies and price realization, resulting in increased profitability of 550 basis points for the first quarter of last year. This was aided by the strongest first quarter results of the Spartan businesses since its acquisition in 2020. In addition, the KME brand had its best quarterly performance in 2019. The increased ambulance groups contribution was primarily due to higher unit volume, improved efficiency, and price realization, resulting in 600 basis points of margin expansion versus the prior year. Ambulance delivered the highest first quarter profitability since 2017. Adjusted EVTA contributions from the legacy commercial segment businesses was a year-over-year net improvement of $3 million, which includes improved bus performance, partially offset by lower terminal truck volumes. Segment backlog of $3.9 billion increased $692 million or 22% versus prior year. The increase reflects strong orders for fire and ambulance units over the past year, as well as the benefits of pricing actions, partially offset by the removal of the Collins bus backlog, lower demand for terminal trucks, and a reduction in transit bus backlog. Excluding the impact of the sale of Collins, segment backlog increased $867 million for prior year. Within the first quarter, the combined emergency vehicle book-to-bill consisting of fire and ambulance orders was 1.3 times, and the book-to-book ratio, which compared first quarter 2024 orders to the same period last year was 1.5 times, demonstrating continued industry strength and demand for our products. We expect specialty vehicle segment revenue and earnings to benefit from the increased number of available working days in the second quarter compared to the first. For modeling purposes, note that future segment revenue and adjusted EBITDA do not include Collins Bus, which was previously disclosed at $150 million and $25 million respectively for the remainder of fiscal 2024. In the second quarter, we expect operating improvements from the remaining businesses to offset the loss of Collins revenue and earnings, resulting in the second quarter being approximately flat versus the first quarter. We expect continued momentum to build on the second quarter's performance With most single-digit revenue improvements sequentially in the third and fourth quarters, its higher contribution from the fire and emergency businesses offset declines from the wind-down of E&C. We expect sequential incremental margins in the range of 30-40% on increased revenues throughout the back half of the year. On slide six, recreational vehicle segment sales of $169 million decreased 56.6 million or 25% year-over-year as we navigate through a soft end market environment. Within the industry, dealer inventories remain high with limited floor planning availability and reduced lot traffic. Lower segment sales versus the prior year were primarily a result of fewer shipments of Class A, Class B, and total units, an unfavorable mix of motorized units and discounting, partially offset by increased shipments of Class C units and price realizations. The segment's unit shipments declined by 39% for the prior year, driven primarily by an 80% decline in total units. Within motorized categories, consumer preferences for lower-end gas units as compared to higher-end diesel products continued to weigh on segment revenue within the quarter. Recreation segment adjusted EBITDA of $11.6 million was a decrease of $12.7 million or 52% versus the prior year. The decrease in adjusted EBITDA was primarily a result of lower unit volume, unfavorable category mix, inflationary pressures, and discounting, partially offset by price realization and cost reduction actions in the Class A and total businesses. Segment backlog of $377 million at quarter end decreased $611 million or 62% versus the prior year. The decrease is primarily due to production against backlog, cancellations, and lower orders over the trailing 12 months. Within the quarter, the book-to-bill ratio for our most profitable Class B and Class C businesses was 1.2 times and 1.1 times respectively. However, this was offset by reduced demand for Class A and total units. With seven to eight months of unit backlog in the Class B and Class C category, we expect production increased from the seasonally low first quarter, resulting in increased revenues throughout the remainder of the year. The profitability of the combined Class B and C businesses is expected to remain in the low to mid double digits while we continue to flex costs on the Class A and total businesses, resulting in full year segment adjusted EBITDA margin in line with our original guidance of high single digits. Turning to slide seven. Trade working capital on July 31, 2024 was $363 million, an increase of $45 million compared to $318 million at the end of fiscal 2023. The increase was primarily a result of lower accounts payable and customer advances, partially offset by a decrease in accounts receivable and inventory. Cash used in operating activities was $69.7 million, which includes the payment of annual management incentive compensation within the quarter, Transaction expenses related to the Collins bus sale, as well as timing of certain tax payments. We spent $10.5 million on capital expenditures, including the purchase of a service center for our Class C RV business, which we expect will allow additional unit production and manufacturing facility that previously housed the service and aftermarket parts business. Next cash on the balance sheet as of January 31st was $87.9 million. prior to the special dividend payment on February 16th and repurchase of 8 million common shares at an average price of $15.76 on February 20th. We declared a regular quarterly cash dividend of $0.05 per share payable April 12th to shareholders of record on March 28th. At quarter's end, the company maintained ample liquidity for our strategic initiatives with approximately $534 million available under our ABL revolving credit facility. Turning to slide eight, we provide a 2024 fiscal full-year outlook, which builds upon the momentum experienced within the specialty vehicle segment. Today's update to top-line guidance is a range of $2.45 to $2.55 billion, which includes a $150 million adjustment for the column bus divestiture that I previously mentioned. We expect continued throughput gains and strong incremental performance within the fire and ambulance businesses to offset headwinds from cyclical end market softness within the recreational vehicle segment and terminal trucks business. At the midpoint of $2.5 billion revenue is expected to be approximately flat to last year after adjusting for the divested revenue from the college bus sale. Adjusted EBITDA guidance is $145 to $165 million, or $155 million at the midpoint, which includes a $25 million adjustment for the college bus divestiture. Given the solid performance of the first quarter, we now expect first half consolidated adjusted EBITDA to be approximately 40% of the full year guidance. Adjusted net income is expected to be in the range of $72 to $90 million, and net income in the range of $224 to $245 million. Adjusted free cash flow is expected to be in the range of $57 to $72 million, which excludes approximately $71 million of tax and transaction costs related to divestment activities that are within cash from operations and offset by gross cash proceeds included in the investing section of the statement of cash flow. Full year Capital expenditures remain in the range of $30 to $35 million, including growth investments in our businesses, as well as ERP upgrades in certain businesses. Expected interest expense of $26 to $28 million considers the typical seasonal use of cash in the first half of the year, as well as the impact of the Collins bus sale. EMC wind down in the previously announced returns of cash to shareholders in the form of special dividend and share repurchase. Thank you again for joining us on today's call. With that, operator, we'd now like to open the call up for questions.

Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Thank you, and our first question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Hey, good morning, guys. It's Joe Grabowski on for Mig this morning.

Hey, Joe. Hey, Joe.

Hey, good morning. So just wanted to clarify a few things that you went over in your prepared remarks but kind of went over them quickly. The backlog for Collins Bus that you backed out of your backlog in the first quarter, it sounded like it was around $175 million. Did I catch that correctly?

Yeah, on a year-over-year basis, Joe. So actually we have been talking about the backlog being over a year coming into the quarter, so it's a little bit higher than that if you were to remove it from October 31st.

Okay, so the specialty vehicle backlog dropped by a little over 200 million. Again, I'm trying to figure out, is that all Collins bus or maybe ex-Collins bus backlog in specialty vehicle was roughly flat? Is that the right way to think about it?

No, actually there was also a decline related to the wind down of the E&C operation of about 50 million.

Okay, so maybe apples to apples backlog was up modestly, sequentially?

Yes.

Okay, great. Thank you. Next question, and maybe there seems to be a little confusion about this, I'm not sure why, but you raised your EBITDA guidance by $5 million versus the recast guidance back in late January. You actually beat our estimate by about $7 million versus where we were back in December. So is it safe to say that the $5 million raise in guidance was basically just flowing through the first quarter upside?

That's right, yeah, that's right.

Okay, and you just, we're just one quarter in, and so you kept the rest of the year basically where you thought you were gonna be back in December.

Yeah, that's right, Joe, that's exactly right.

Okay, perfect, helpful. Maybe last question for me, and I can get back in the queue. Back in December, you mentioned that you thought recreation sales would be down roughly mid-single digits. Obviously, they were down 25% in the first quarter. I think you mentioned you thought they'd be up the rest of the quarters. But does down mid-single digits still sound right, or do we kind of need to tweak that a little bit?

Yeah, I think we've probably got to tweak that a little bit. It'll probably be more of the low single digits, low double digits sales. Down, obviously, we're off $57 million year-on-year in Q1, so a majority of that will be in Q1. But, you know, probably building in sequentially increases of 10% going forward, which would be more in that low double-digit reduction. But, obviously, we're happy with the conversion that we delivered on in Q1 from a margin. So we still feel that we're managing our costs down as the sales drop.

Got it. Okay, very helpful. I'll jump back into you. Thanks very much.

Thanks, Joe.

Thank you. As a reminder, to ask a question today, you may press star 1. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please receive your questions.

Yes, hi. Good morning, everyone, and nice quarter. Hi, I'm Mark Drew. I'm wondering if we could just talk about the fire and emergency business performance in the quarter. Can you just update us on where price realization was on units delivered in the first quarter compared to 2022 levels? And, you know, as we look out in the backlog, you know, out a year, year and a half plus, how much higher is that pricing point compared to what's flowing through the numbers now markets?

Yeah, I don't think, Jerry, we've obviously talked about that there's, you know, six to seven percent margin realization opportunity over the year progressively, right? So, and it performed well within the quarter as we've highlighted. So, we still believe that in the original guide that everything's performing well. I've also said my prepared remarks were, you know, we pulled forward some older units, so as we've accelerated throughput, we've been able to get through our older backlog quicker, so the price realization in the back half of the year will improve as we move through it, which is consistent with what we've talked about, that third and fourth is really what we're counting on there is just fire throughput improvement. As we've talked about, ambulance, if you think about a baseball game, ambulance is probably in the fifth or sixth inning of the price realization and fires in that third to fourth inning, so we expect them to catch up here in the third and fourth quarter. So, you know, nothing's really changed in Q1 from what we expected entering the year and executing on it.

And so just sticking with that analogy, Mark, the inning analogy, so six to seven points of margin improvement this year, somewhere between third and fifth inning, depending on the business, does that mean there's another six to seven points of margin improvement as we get through the backlog and we're building the units that you're booking today?

Yes, yes.

Very good. And can I ask in the RV business, you folks are still delivering good profitability at a challenging point in the cycle. Can you talk about how you expect the margin cadence to play out Over the rest of the year, typically, the first quarter, I think, is your seasonally lowest margin quarter in RV, but I don't know if that changes considering the production outlook. Can you just update us on how you expect the RV cadence for margin specifically to play out this year?

Yeah, I think the cadence, probably Q2, as we said, and the remarks probably similar to Q1 and Q3, a buildup there. with ultimately Q4, depending on, you know, we're obviously cautious heading into the back half, but Q4 would show expansion, which would still get us into that, you know, mid single digit for the full year, right? So progressively build from Q1 more or less flat in Q2 and then progressing in three and four to build from, you know, the 6.8 we were at in Q1 up to that full year, 8% or so, mid single digit sort of number by the end of the year.

And, you know, last question for me. In prior downturns, you know, the predecessor companies for the RV business were breakeven to slight losses, and you folks are delivering solid profitability here. How would you bridge the, call it, six to eight points of margin improvement this cycle versus last in terms of the major driving pieces and the confidence and the sustainability?

Yeah, I think like we've talked about previously, you know, we've managed the Tobles business as well as the Class A to more of a trough level. So we flexed out costs and we were successful in doing that and didn't get ahead of ourselves during the COVID period, right? So we've been able to manage those costs for margin profitability versus just a volume play, right? So that's really, we've been focused on that for the last two years to make sure that we have the right cost structures and have the ability to flex out as units come out as well as we manage build on different product types that may have less hours that we have the appropriate staffing. We don't have trapped labor sitting in those facilities. So it's really been all the way from an overhead down to the shop floor, managing those business to a trough level, which we're experiencing right now.

Well done. Thanks.

Thanks, Jared.

Thanks, Jared.

Thank you. Our next question is from the line of Mike Schliske with CA Davidson. Please proceed with your question.

Hi, good morning. Thanks for taking my question. You had mentioned in your comments, Mark, that you have an ERP project underway. Can you share with us a little bit about how far along you are with getting that changeover done and when we might start to see some of the margin implications of that changeover?

What was your last point? Margin implications?

Yeah, I was curious when you start to see the operational benefits of the inflation of the new ERP?

Yeah, that's really what we're doing there. It's not, you know, it's more just a replacement of a very dated system. And it's in our RV space, our Class A business, as well as our B business, we're implementing ERP. So it's replacing old, really old operation or ERP with a new Microsoft application. And we'll be going live this quarter, so it's gone very well and we're expecting to go live this quarter and kick off.

Got it. I also wanted to ask secondly about the changes you're making in your Ocala, Florida facility for fire emergencies. Can you tell us a little bit about some of your latest developments there, things you've done to make that even more efficient for the last couple of months and periods to see How far have you gone from kind of where you started to where you think you'll end up in that particular facility? Thank you.

Yeah, so like we talked about previously, we've really done a lot of work from a value stream perspective. We brought in, you know, people from an upfront process. So we've strengthened our purchasing and supply chain specific to that location to make sure that we're getting parts in when operations need it. We've also bolstered the operational leadership process. there as well, so we got a really nice cadence from a management perspective as far as, first off, Valley Stream managers in each of the facilities. Again, that location is made up of 10 building manufacturing sites that go across four miles. So we talk about the site is actually pretty expansive around a four mile radius. So we have value stream managers based on the product that they do, but we've also implemented some central people within that facility specifically around supply chain and engineering as well to make sure that our builds of material are being done accurately and on time. So it's really been a microscopic change or, you know, guess, of what you would expect a whole company to do. We're doing that on a site-by-site basis. So that's really been the improvement there.

Thanks so much.

Thank you. All right. Thanks, Mike. Thank you. At this time, we've reached the end of our question and answer session. And we'll also conclude today's conference. You may now disconnect your lines at this time. I thank you for your participation. Have a wonderful day.