REVG - NYSE

Greetings. Welcome to REV Group's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to your host, Drew Konop. 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 is being webcast and a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures, is available on our website. Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward-looking statements, which are subject to risk that could cause the 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 made 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 are to a quarter or a year or our fiscal quarter or fiscal year unless otherwise stated. Joining me on the call today is our President and CEO, Mark Skonieczny as well as our CFO, Amy Campbell. Please turn to Slide 3 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'll provide an overview of the operating, commercial and financial highlights achieved within the quarter then move to the quarter's 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 Vehicles segment achieving an adjusted EBITDA margin of 10.3% in the third quarter. Within the quarter, our ambulance business continued to benefit from 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 our 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 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 aged units from backlog. We exited the quarter with a robust $4.4 billion consolidated backlog led by the strength of inbound orders for fire and emergency vehicles. Specialty Vehicles 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 divestiture of Collins and wind down of ENC, which had largely exhausted its backlog exiting the third quarter, segment backlog increased $807 million or 27% versus the prior year quarter. Year-to-date, the combined book-to-bill of the F&E businesses was 1x on a unit 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 1.3x 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 our pumper unit was approximately 9 months to 12 months, while an aerial ladder truck would be approximately 12 months to 15 months. The ambulance group had historically operated with less visibility and backlog of three months 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 both 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 aligned with consumer preferences, while we aggressively address our cost structure. I would like to acknowledge the hard work of 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 ENC 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 the difficult process and 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 the remaining net working capital benefit within the fourth quarter and we'll proceed with the sale of ENC assets when the wind down is complete. Our balance sheet and financial position continued to strengthen during the quarter. Exiting in the third quarter, net debt was $165 million and our net debt to trailing 12 month adjusted EBITDA ratio was just below 1x leverage. Exiting in the year we expect to maintain leverage less than 1x. 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 we'll communicate an updated capital allocation strategy, when we share our intermediate financial targets later this year. Turning to Slide 4, consolidated net sales of $579 million decreased $101 million compared to 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 municipal 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 5 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 divestiture, 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 vehicles segment adjusted EBITDA was $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 Bus 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 trucks 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 was 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 end market softness in the terminal trucks business and as mentioned earlier, the shipment of the final ENC 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 6, 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 were lower than our expectations, as 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 lots 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 7, trade working capital on July 31 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 31 was $164.5 million, including $50.5 million of cash on hand compared to net debt of $128.7 million as of October 31, 2023. We declared a regular quarterly cash dividend of $0.05 per share payable on October 11 to shareholders of record on September 27. 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 8, 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 in 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 resulting earnings impact as we continue to manage to 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 million to $72 million, full year capital expenditures in the range of $30 million to $35 million and interest expense expected to be $26 million 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.

[Operator Instructions] Our first question comes from Jerry Revich with Goldman Sachs.

Nice performance in specialty vehicles. Amy, I'm wondering if we could just unpack the fire and emergency portion of the performance. What was the bridge for the year-over-year margin improvement that you saw? How much was pricing? What did you see from inflation and productivity? Can you just unpack the margin bridge for F&E specifically, please?

If you look at legacy F&E specifically, we saw revenue grow mid-teens -- low to mid-teens and about 60% of that revenue growth was price mix, about 40% of it was driven by volumes. In the quarter, I would say that we largely offset inflationary cost and saw -- we didn't specifically give EBITDA margins in the quarter, but saw pretty significant year-over-year EBITDA margin growth in the legacy F&E business and also saw little over 100 basis points in EBITDA margin growth from the second to the third quarter.

And in terms of the comments that you folks provided on book-to-bill on units versus revenue, the 30% difference, can we feel back, how much of that 30% difference is content versus just pure price? In other words, what should we be thinking about as the potential higher cost of that content that you folks are seeing? Because I think there are two levers, right? One is absolute price and two I think you folks are driving a shift towards more custom, high-end of the range but please correct me, if I'm wrong on that.

Yes, Jerry, I don't know that I have the breakout. We talk about unit for legacy F&E, the unit book-to-bill at about 1x and the dollar book-to-bill at 1.3x, with fire a little ahead and ambulance kind of going through more of a normalization period. Breaking out that 1.3x in F&E between what's price and what's content, I'd say while we certainly do have a lot of custom units. We're also introducing we talked quite a bit about Mark did again this morning the S-180 which is more of a semi-custom unit. And so, I mean, I guess what I would say is I don't have that 1.3x book-to-bill in terms of revenue broken out between content and price.

And can I sneak in one last one on RV? Can you just give us an update in terms of absolute units of inventory versus prior peak and versus prior trough with the revenue reduction here? I guess what's our level of confidence that we've captured the move in inventories that we typically see?

Are you thinking specifically to dealer inventories, Jerry?

Yes. Thank you, Amy. RV dealer inventories.

Yes, as we said the dealer inventory is down 20% from the calendar year. I think we're getting more closer to the pre-COVID type of levels that our inventory levels are feeling good about the health of that inventory, Jerry, it's just they've been reluctant to replace orders. So we're seeing a nice like we talked about retails are definitely outpacing wholesales in the current market. And so it's a matter of just that's why we highlighted a couple of shows we're anxious to see what the consumer appetite is and then coming out of those what the dealer placements would be in the last couple of months dealers have been waiting. So the retailers are showing nicely, but wholesales have been down and we've been doing shutdowns as we talked about in the prepared calls to manage our costs there. So it's really a wait and see in September once it shows.

Our next question comes from Angel Castillo with Morgan Stanley.

I was hoping we could expand a little bit more on the margin conversation, particularly as we look forward. I think you noted, particularly within specialty vehicles, you expect slightly higher margins. Can you just put a finer point on kind of the cadence and maybe quantify how much of margin expansion you anticipate here in the next quarter? And as we think about maybe the early days of fiscal year '25, I understand you're not going to give an outlook at this point but just any kind of sense based on what you have in your backlog, what is kind of implied in terms of margin expansion for the next few quarters?

So, I think if you look at the third to fourth quarter sequentially and I referenced we expect to see moderate revenue and EBITDA growth in terms of EBITDA dollars. I think of that in terms of kind of low single-digit type of growth and with EBITDA margin percent up just slightly. And where we would expect so that's what's in the double-digit margins for specialty vehicles exiting 2024, our expectation is that we would continue that trend as we move into and hold those double-digit margins in 2025. And I guess maybe I would add as we look into 2025 what we've talked about in terms of pricing and we talked about the nine innings of the game, we're in kind of Tier 4 or 5 for fire and Tier 5 or 6 for ambulance and those are kind of mid-single-digit types of pricing increases as we move from tier to tier. And so that kind of 6% to 7% price increase on our value added content next year is what we would be thinking about and we're not giving 2025 guidance at this time, but certainly be looking to offset some of our inflationary headwinds as we move into 2025.

And then maybe just to expand on the RV side, can you talk about maybe the discounting? It sounds like the dealer inventories maybe are getting to a little bit of a better place and we'll get more clarity as we go into some of the shows. But as you think about the step change from maybe 2Q to 3Q and the level of confidence that won't continue, can you talk about maybe some of the discounting or competitive dynamics in the industry and your ability to kind of outperform that?

Yes. I think that's some of the things with the revenue drop. We are participating in the discounting, as others have and that was a driver when you look at our Q3 results. So I think we'll continue to see that in providing discounts as we move forward. But as the inventory gets healthier, those have definitely dropped sequentially when you talk about industry wide. So where they started in Q1, Q2 they've come down in Q3 and as the inventory has become less age sitting on deal lots and introduction of model year '25 units the discounting has been reduced on the new units. It's more the retail assistance that's provided on aged units within the inventory. But with the retails we're seeing the dealer inventory help us definitely from an industry perspective improving.

Our next question is from Mig Dobre with Baird.

So maybe going back to specialty vehicles, just for my own clarification, I guess. Can you remind us ENC, where we are in the process of winding down that business? Maybe how much revenue you recognize in the quarter from ENC? And my recollection is that, there is an EBITDA drag that's associated with ENC as well that at least in theory should be going away in fiscal '25?

That's right. It's around $40 million in the quarter. As we talked about it, we accelerated some of the shipments from Q4 that we expected. The great work that the team did. We're able to produce essentially five months' worth of production in three month period. So I'm very proud of the team. Even though, we've been out shutdown that we've had a very engaged workforce and suppliers and customers there. We are ahead of schedule from that perspective and expect to have a complete wind down here within early parts of the Q4.

I'll just add to what Mark said. I think when you look at EBITDA margins with that pull ahead of five month sales and some cost actions that we've been able to take in the quarter, as we wind that business down. It's not only had a schedule, but it was accretive to the overall EBITDA margins in the quarter.

So ENC was actually profitable?

Yes.

Yes.

In the terminal trucks, I do know that's been a drag and you highlighted that for several quarters. I'm trying to understand the magnitude of this drag in terms of what's embedded in your full year guidance for fiscal '24? What's the right way to think about this business beyond '24? Are we likely to see another step down in production next year? Are we at a trough? And what's going on margin wise at current production levels?

Yes. We're definitely at a trough and that's normal in our cycle as we talked about previously, Mig coming into an election year, as a normal trough in this business. So we've said that's a mid-single-digits margin business. Obviously, with COVID it was double-digits, but it's a mid-single-digits business going forward.

And we saw that there were some restructuring charges that impacted specialty vehicles. Can you talk at all about what some of the actions were that you took and any savings that would come into fiscal ‘25?

That was a continuation of the ENC closure, right? So, as we're booking restructuring as people exit the business.

Okay. So it's all ENC driven. And then lastly for me, in recreation, I guess, one of the things that we talked about in the past was this whole concept of backlog erosion and how eventually that's going to be reflected in production. Your backlog continued to step down sequentially. So I'm sort of curious, do you think that $150 million roughly of revenue can be sustained going forward? Or is it fair for us to expect yet another round of production cuts come the first half of fiscal '25 if demand simply stays where it currently is end user demand or sell through if you would?

Yes, I would say, Mig like I responded to Jerry it's a wait and see here but definitely we are flexing as much cost to enable us to hold that 6% margin that we delivered. We are within the month as we get orders or don't get orders we do flex our workforce. So I do like I said in my prepared remarks I'm very appreciative of the people that we don't have a fixed schedule, right? So people are on a very variable schedule in the business don't have any backlogs as far as what our work schedules and times that we're taking out. We will flex those, but again to say is that $150 million or whatever it's still too hard to call here, but I can assure you we are flexing the cost and our production schedule to align with our demand.

[Operator Instructions] Our next question comes from Mike Shlisky with D.A. Davidson.

I want to follow-up with you on the some of your F&E comments. Great to see that you've got really the whole margins at least into next year of some of this business. And I'm glad to see you also were able to improve the units coming out this past quarter and for much of the year. I'm curious if you could just give us an update as to what inning you think you're in as far as production rates and how much you would be able to improve the speed of production at this point versus where you would hope it would be in the over the long-term?

Yes, I think our goal here I think from an ambulance perspective as we've talked about before, they're pretty much at pre-COVID rates and a little bit higher. So we feel good about where we're at from a production perspective in ambulance. We are looking at incremental capacity where we can by adding lines and whatnot or partial second shifts. But in fire I would say, we're getting that more stabilized. We still have opportunity more from an efficiency perspective Mike than it is incremental throughput. So it's just getting more efficient on some more custom units as they're coming. So I would say it's less a capacity discussion than it is in a production discussion just becoming more efficient as we move more complex units through the plant. I feel very good that I demonstrated on Q3 where we are at, I think ambulance, like I said in our prepared remarks continue their momentum that we've seen, and then fire is catching up to ambulance from the throughput as we've expected. So they are on track with what we expected. As Amy just said, we will exit -- we actually exited Q3 at double-digits margins and we will exit Q4 at double-digit margins in specialty vehicle segment.

And then Amy, I think you mentioned in one of the earlier answers to one of the questions about a little bit fewer custom type trucks and more standardized versions of trucks coming off the line. Could you remind us whether there is a significant margin change or a difference, if the mix would have go a lot more towards standardized products? Whether you think you could make it up on the volume side, if there was a large change going over time, as folks want to get their trucks faster or in a more efficient manner?

Yes. There's not a significant margin difference between the trucks, Mike, and that answer was more as Jerry's point -- Jerry's question was that we're doing more and more custom trucks and I just wanted to clarify that, we're also -- we've built and designed and having good customer acceptance with this S180 and eighty which is a bit more of a semi-custom truck. But as far as margins go I think specifically to your question there's not really a material difference between the trucks.