REV Group, Inc.

Greetings and welcome to REV Group's third quarter 2024 earnings conference call. At this time, all participants are on the listen-only mode. A question and answer will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Drew Conop. Thank you. You may begin.

Good morning and thanks for joining us. Earlier today we issued our third quarter fiscal 2024 results. A copy of the release is available on our website at investors.revgroup.com. Today's call being webcast and the slide presentation which includes the reconciliation of non-GAAP to GAAP financial measures is 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 can cause the actual results to differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8K 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, our fiscal quarter or fiscal year, unless otherwise stated. Joining me on the call today is our president and CEO, Mark Skonechny, as well as our CFO, Amy Campbell. Please turn 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. Today I will provide an overview of the operating, commercial, and financial highlights achieved within the quarter, then moved to the quarters consolidated financial performance. We are pleased to have delivered another strong quarter of operating results that reflect continued success and execution of our strategies to improve the performance of our municipal backlog businesses while managing the impact of a challenging environment in our cyclical businesses. Double digit margin performance has been the target for each of our businesses since I arrived in 2020. and I applaud the various teams that contributed to the specialty vehicle segment, achieving an adjusted EBITDA margin of 10.3% in the third quarter. Within the quarter, our ambulance business continued to benefit from the momentum it has built over the past several quarters with programs designed to increase line rates and improve efficiencies. The fire group is on a similar journey to drive operational improvements, and their efforts led to the specialty vehicle sequential adjusted EBITDA increase for the quarter. FIRE continues to pursue a strategy of simplification along with the development of manufacturing centers of excellence designed to eliminate waste, increase throughput, and generate operating efficiencies. As we discussed last quarter, We have leveraged Spartan chassis production from our center of excellence in Michigan across our network of fire plants and brands to drive efficiency and cost effectiveness. In addition, we have dedicated line at our Spartan emergency response facility in South Dakota to produce the S-180 fire apparatus, which has enabled our brands to deliver semi-custom fire apparatus at accelerated lead times. Furthermore, the integration of sales, inventory, and operations planning, or SIOP, across the group has resulted in a dual benefit in contributing to improved throughput, as well as a year-over-year reduction of fire division's inventory balances. Ongoing efforts to create greater alignment between the fire group's resources and manufacturing footprint, in addition to these improvements to our upfront processes, have resulted in improved completions of trucks. As I've stated in the past, each unit we ship today is worth more than the unit shipped yesterday. Increased line rates have contributed to greater profitability throughout the year as we gain efficiencies and reduce the number of age units from backlog. We exited this quarter with a robust $4.4 billion consolidated backlog led by the strength of inbound orders for fire and emergency vehicles. Specialty vehicle segment backlog of $4.1 billion increased $386 million or 10% as compared to last year. The prior year's backlog of $3.7 billion included $421 million of backlog attributed to the bus businesses. Adjusting for the best year of Collins and winding down at E&C, which had largely exhausted its backlog actually in the third quarter, segment backlog increased $807 million or 27% versus the prior year quarters. Year-to-date, the combined book-to-bill of the F&E businesses was one times on a user basis, driven by both increased shipments and a normalization of demand. This is in line with the guidance we provided in December for fiscal 2024. The benefits of our pricing strategy delivered a book-to-bill ratio of 1.3 times on a revenue basis in the legacy fire and emergency businesses during the same period. The duration of backlog varies by business and the specific unit type, but generally remains in the range of two to three years. The backlog is elevated versus historical norms, but is in line with our industry peers given the current demand environment. Prior to 2020, the typical delivery time for a pumper unit was approximately nine to 12 months, while an aerial ladder truck would be approximately 12 to 15 months. The ambulance group had historically operated with less visibility and backlog of three to six months. It remains our expectation that industry demand will continue to normalize, which, combined with our successful increase in line rates, is expected to deliver a more balanced supply and demand dynamic as we focus to achieve best-in-class delivery times. The recreational vehicle end market remains challenged as discretionary purchases for such items as RVs have been delayed by consumers. According to SSI data, Industry-wide retail sales of Class A, Class B, and Class C units declined 15%, 20%, and 4% respectively over the trailing 12 months ended in June versus the prior year period. Despite these challenges, the data shows that retail sales of our motorized brands have outpaced the industry across these categories over the same period. We are looking forward to showcasing the quality innovation of our model year 2025 units at the Hershey RV Show and Elkhart Open House in September. The fall shows provide insight into customer and dealer sentiment, and the interactions and feedback are expected to provide an early read on calendar year 2025 demand. After September, the next big indication of activity will be in January at the Tampa RV Show, which historically sets the pace for the year's retail demand. Until we gain greater clarity on end market demand, we will continue to work closely with our dealers to focus on production of units that align with consumer preferences while we aggressively address our cost structure. I would like to acknowledge the hard work by the RV segment team, which has continued to work tirelessly to navigate the market challenges and manage costs, resulting in decremental margins of 14% year over year. The wind-down of production at our E&C municipal transit bus business in Riverside, California is progressing ahead of schedule, with the last units expected to be completed within the fourth quarter. I would like to thank all our dedicated employees, as well as our suppliers and channel partners that have made this difficult process an operational success by delivering quality buses to our customers while exceeding the expected timeline. With the completion of the final units, we expect to realize remaining network and capital benefits within the fourth quarter, and we will proceed with the sale of EMC or its assets when the wind down is complete. Our balance sheet and financial position continued to strengthen during the quarter. Actually, in the third quarter, net debt was $165 million, and our net debt to trailing 12-month adjusted EBITDA ratio was just below one times leverage. Actually, in the year, we expect to maintain leverage less than one times. Over the years, we have been disciplined and nimble in our capital allocation philosophy using our available capital to invest back in the business, pay down debt, buy back shares, and pay both regular and special dividends. We have regular and ongoing discussions regarding our go-forward capital allocation priorities and will communicate an updated capital allocation strategy when we share our intermediate financial targets later this year. Turning to slide four, consolidated net sales of $579 million decreased $101 million compared to the third quarter of last year. In the prior year, reported sales included $46 million attributable to Collins Bus, which was divested in the first quarter of this year. Adjusting for the sales impact of Collins, net sales decreased $55 million, or 8.6%, due to lower sales in the recreational vehicle segment and fewer sales of terminal trucks. partially offset by increased sales in the fire, emergency, and municipal transit bus businesses. Consolidated adjusted EBITDA of $45.2 million increased $5.8 million compared to the third quarter of last year. Included in the prior year reported adjusted EBITDA was $9.2 million attributable to Collins Bus, resulting in an increase of $15 million, or 49.7%, when adjusting for the divestiture. The increase was driven by the fire, emergency, and admissible transit bus businesses, partially offset by lower earnings in the terminal trucks business and recreational vehicle segment. Fire and emergency results benefit from higher volumes, the operational improvements mentioned earlier, and price realization. The fire and emergency results demonstrate the team's success in offsetting the increased cost of doing business through operational improvements allowing the businesses to maximize the pricing opportunity within backlog. Please turn to slide five, and I'll turn the call over to Amy for detailed segment financials.

Thank you, Mark. Specialty vehicles third quarter segment sales were $432 million, a decrease of $34 million compared to the prior year. As Mark mentioned, The prior year quarter included 46 million of net sales attributed to Collins Bus. Excluding the impact of the Collins Investiture, net sales increased 12 million, or 2.8%, compared to the prior year quarter. The increase in net sales was primarily due to price realization and increased shipments of fire apparatus, ambulance units, and municipal transit buses partially offset by lower shipments of terminal trucks. The legacy fire and emergency businesses delivered year-over-year increases in unit shipments and revenue from both the fire and ambulance groups. Unit starts, completions, and shipments remain at or near historic highs, which has reduced the number of aged units and improved the overall mix of the backlog. Terminal truck sales were lower than the previous year, which was consistent with the expectation provided and our update to full-year guidance shared during the second quarter call. The fourth quarter is expected to be the last quarter of difficult year-over-year comparisons for the terminal truck business. And accordingly, we don't anticipate singling out its performance after we exit this fiscal year. Specialty vehicle segment adjusted EBITDA 44.3 million in the third quarter of 2024, an increase of 14.6 million compared to 29.7 million in the third quarter of 2023. Adjusting for 9.2 million of adjusted EBITDA attributed to Collins Buff in the prior year, third quarter earnings increased $23.8 million year-over-year, or 116%. The increase in adjusted EBITDA was primarily due to increased performance in the fire, ambulance, and municipal transit bus businesses, partially offset by lower adjusted EBITDA from the terminal truck business. Higher fire and emergency contribution was driven by increased unit shipments versus the prior year and greater price realization. Improved municipal transit bus contribution versus the prior year primarily related to favorable mix, price realization, and lower labor and operating expenses as the wind down progressed ahead of schedule. Lower terminal truck contribution was related to soft industry demand. Today's update to the consolidated outlook anticipates continued fire and emergency sales and earnings momentum, partially offset by continued in-market softness in the terminal truck's business. and, as mentioned earlier, the shipment of the final E&T buses within the fourth quarter. We expect the momentum in F&E to result in modest sequential revenue growth and a slightly higher specialty vehicles margin as we exit the year. On slide six, recreational vehicle segment net sales of 147.4 million decreased 67.1 million, or 31% year-over-year. The sales decline is primarily the result of lower unit shipments in all categories versus the prior year, as well as increased discounting and an unfavorable mix of lower-priced units within certain businesses. Sales within the quarter are lower than our expectations if dealers remain hesitant to replenish inventory and have deferred the delivery of model year 2025 orders in certain categories. Recreation segment adjusted EBITDA was $9.4 million, decreased $9 million, or 49%, versus the prior year. The decrease in adjusted EBITDA was primarily the result of lower unit volume, inflationary pressures, and increased discounting, partially offset by cost reductions that were executed to align fixed and variable costs with the current level of demand. The decremental margin on lot sales of 14% year-over-year and 9% sequentially demonstrates the RV team's efforts to aggressively contain costs and manage through this difficult period of customer demand. Recreation segment backlog of $240 million at quarter end decreased $168 million, or 41% versus the prior year. The decrease is primarily due to reduction against backlog, lower order intake, and order cancellations over the trailing 12 months. Some dealers, as I mentioned earlier, opted to defer delivery of orders within the backlog. However, we are encouraged by the improved health of our dealer inventory, which has declined 20% since the beginning of the calendar year as retail sales outpaced our wholesale shipments. Given the current level of retail demand, dealer reluctance to restock channel inventory, and uncertainty surrounding interest rates, we expect fourth quarter sales, earnings, and margin to be sequentially about flat. Turning to slide seven, trade working capital on July 31st was $323 million, an increase of $4 million compared to $319 million at the end of fiscal 2023. The increase was primarily a result of lower customer advances and lower accounts payable, partially offset by a decrease in accounts receivable and inventory. As anticipated, customer advances have declined year-to-date as units are shipped from the backlog and consuming deposits previously received, while incoming deposits have slowed in today's higher interest rate environment. However, for the full year, we expect inventory reductions to offset customer deposit reductions, largely driven by shipments from finished goods in the fourth quarter. Year-to-date cash used by operating activities was $15.2 million. Adjusted free cash flow within the quarter was $29.5 million, including $5.9 million spent on capital expenditures. Year-to-date adjusted free cash flow was $16.5 million, which excludes approximately $54 million of tax and transaction costs related to divestiture activities that are presented within cash from operations but offset by gross cash proceeds included in the investing section of the statement of cash flows. Net debt as of July 31st was $164.5 million, including $50.5 million of cash on hand compared to net debt of $128.7 million as of October 31st, 2023. We declared a regular quarterly cash dividend of $0.05 per share, payable on October 11th to shareholders of record on September 27th. At quarter's end, the company maintained ample liquidity for strategic initiatives with approximately $262 million available under our ABL revolving credit facility. Turning to slide eight, we provide our updated 2024 fiscal full year outlook, which builds upon the momentum within the specialty vehicle segment, partially offset by continued end market weakness and the recreational vehicle segment. Today's update for top line guidance is a range of $2.35 billion to $2.45 billion. Adjusted EBITDA guidance is $155 million to $165 million, or $160 million at the midpoint, which reflects an improvement of $4 million at the low end of the range to account for the third quarter performance. The update to guidance today includes an approximate $50 million total revenue reduction related to softer-than-expected RV demand and its resulting earnings impact as we continue to manage to a 15% detrimental margin with aggressive cost actions. However, we expect that the lower RV performance will be more than offset by improvements in the fire and emergency businesses. Adjusted net income is expected to be in the range of 76 million to 89 million, and net income in the range of 226 million to 240 million. Expectations for adjusted free cash flow, full-year capital expenditures, and interest expense remain the same, with adjusted free cash flow in the range of $61 to $72 million, full-year capital expenditures in the range of $30 to $35 million, and interest expense expected to be $26 to $28 million. Finally, as you may recall, we provided intermediate financial targets at our investor day in April of 2021. We will be providing updated intermediate financial targets and a refreshed capital allocation philosophy along with our fiscal 2025 outlook during our regular fiscal fourth quarter earnings call in December. We plan to extend the length of that call while opening the line to analysts and investors. Consistent with our normal outreach, we will also be available for follow-up calls to address additional questions or clarifications. Thank you again for joining us on today's call. Operator, we would now like to open the call up for questions.