Sandy Bugbee - Vice President, Treasurer and Investor Relations Tim Sullivan - Chief Executive Officer Dean Nolden - Chief Financial Officer.

Jamie Cooke - Credit Suisse Mircea Dobre - Robert W. Baird & Co. Charley Brady - SunTrust Robinson Humphrey Steve Volkmann - Jefferies Jerry Revich - Goldman Sachs Faheem Sabeiha - Longbow Research Andy Casey - Wells Fargo Securities Michael Baudendistel - Stifel Nicolaus Dillon Cumming - Morgan Stanley.

Greetings, and welcome to REV Group, Inc. Second Quarter 2018 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 would now like to turn the conference over to your host, Sandy Bugbee, VP, Treasurer and Investor Relations..

Thanks, Dana. Good morning, and thanks for joining us. Last night, we issued our second quarter 2018 results. A copy of the release is available on our website at investors.revgroup.com.

Today’s call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures that we will use during this call. It is also available on our website. Please refer now to Slide 2 of that presentation.

Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.

These risks include, among others, matters that we have described in our Form 8-K filed with the SEC last night 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 this call to a quarter or a year are to our fiscal quarter or fiscal year unless otherwise stated. Joining me on the call today are our President and CEO, Tim Sullivan; as well as our CFO, Dean Nolden. I will now turn the call over to Tim..

Thanks, Sandy. Good morning, everyone. Thanks for joining us today. For the past two years, we’ve enjoyed relative tranquility in our markets, where we were able to effect 15% top line and 30% bottom line growth.

Unfortunately, fiscal year 2018 has proved to be more difficult and our second quarter results fell below our expectations as a result of several near-term factors. We’re taking strong actions to address these factors.

And despite the disappointing second quarter results, we believe our business remains well-positioned over the mid and long-term as we continue to experience strong demand in our end markets. Before I detail the near-term challenges we’re facing, I’d like to highlight some positives.

One of the strongest characteristics of our business is the consistency and visibility of our sales. Approximately 60% of our sales come from end markets related to tax-based revenue from necessary government and city municipality customers. These sales include our fire apparatus, ambulance, transit buses, school buses and shuttle buses.

We have very good visibility within these markets, and with these customers, our demand remains strong.

Additionally, our specialty vehicles division, which includes yard truck, sweepers and mobility vans also continues to see significant growth opportunities and certain categories of our RV products, notably towables, Class Bs and Class Cs continue to grow.

Most of our product groups continue to show a high level of order activity and our backlog is growing up 15% to about $1.3 billion from $1.1 billion at the end of October 2017.

All of these positive factors result in us delivering revenue growth in line with our expectations and we continue to feel very good about the strength of our future organic growth opportunities. All of our businesses are seeing nice organic growth.

Organic growth appeared roughly flat year-over-year in the second quarter due to product mix in our Fire & Emergency and Commercial segments, but we expect to show stronger organic sales growth during the remainder of the year. From an inorganic standpoint, we’re maintaining a robust M&A pipeline with active opportunities in various stages.

Over the past few years, we’ve developed a compelling track record of acquiring and integrating high return complementary businesses, and we believe the performance of our acquisition underlines our strength as an acquirer of choice within the industry.

We have enabled many of our acquired product lines to grow their sales through our dealer networks and several of our acquisitions are doubling or tripling their pre-integration results last – notably Lance, Midwest, Renegade and Ferrara, which were acquired in 2017, as prime examples of that success, and we expect to remain bright spots for us moving forward.

Our healthy balance sheet and liquidity position will enable us to be opportunistic in the marketplace moving forward. And we remain committed to shareholder-friendly capital allocation policies, as evidenced by the repurchase of nearly $5 million of our shares during the second quarter.

We’ll continue making capital investments in the business to foster continued growth and improve efficiencies, along with our quarterly dividend policy, which currently reflects $0.20 per share annual rate. Finally, we’re pleased with the progress of our startup in Brazil, which is now 13 months old.

That business has already captured 27% market share for the products we sell in that market, compared to not being in the market at all prior to the startup of this business. Additionally, the pending backlog is very encouraging. Now for the challenges. Two of our higher-quality business units struggled in the first two quarters this year.

In our Commercial segment, our Collins school bus business declined to participate in a very large pre-bid requested by one of our school bus contractors. This adversely affected our first-half 2018 performance.

But we believe this was ultimately the right decision for the business and we believe we can recover and get close to plan by the end of fiscal 2018 with new traditional school bus and contractor sales opportunities.

Additionally, our transit bus business, which is also in our Commercial segment, is facing a short-term delay in activity between the end of our Chicago City contract in the beginning of our forthcoming Los Angeles County contract.

As a result, our transit bus business will be below our plan for the full-year, but we anticipate a return to higher production and profitability levels for this business in fiscal 2019. We remain encouraged by the good visibility we have for our financial performance in both of these commercial businesses between now and year-end.

Moving forward in addition to the Los Angeles contract serving us a good base for the business, we maintained very strong market share in school buses and expect to begin participating in other commercial activity this year. Our shuttle bus volumes are increasing and we see favorable trends in specialty vehicles, particular in mobility.

Before I turn to the near-term supply chain inefficiencies we’re facing, I’d like to spend a few moments providing an update on our Class A RV market. Over the course of the past few quarters, we’ve experienced flat to soft growth in this market, and we’ve identified opportunities to increase profitability by repositioning the product line.

We’ve had success with similar initiatives in the past with our Class B, Class C and towable products, so we’re taking a page out of our own playbook. We’ve launched a new Class A product line for 2019 that we believe will sell more profitable units than prior models. We’re in selling mode for this new product line right now and backlog is growing.

Now let’s talk about our supply chain. We’ve experienced significant and rapid cost inflation during the second quarter within both our material supply chain, but also in our service supply chains. Items like freight-in, freight-out, for example, which we are unable to offset in the quarter.

As a matter of practice, we purchased many elements of our cost base well in advance in order to match backlogs with necessary inputs. For example, we have approximately 60% of our aluminum spend purchased ahead through calendar year 2018 at historical prices.

Nevertheless, the combination of the announced tariffs and the resulting turmoil has created pricing opportunity for our suppliers.

In the past two months alone, we have seen almost $19 million in cost increases on an annualized basis, which brings – which breaks down to $6 million in the first-half of the year and $13 million in the back-half of the year.

Clearly, this is disturbing, particularly when a large portion of the price increases are not related to steel and aluminum, which are the current targets of the tariffs. The tariffs have also created unintended – unpredicted consequences. As soon as tariffs were suggested, there’s a run on many of the commercial chassis we purchase and convert.

We’re paying extra freight charges to get the chassis we need for the second-half shipments. Over the 60-day – over the last 60 days alone, this has resulted in approximately $1 million additional cost. We now need to get certain chassis shipped via truck due to railcar shortages based on what we believe to be abnormal and artificial demand.

In efforts to maximize our throughput time despite these inefficiencies, in some cases, we have decided to build some products on racks, while we wait for chassis deliveries.

This creates additional labor hours and expenses and labor availability and stability in some locations like high density, Elkhart, Indiana, which has resulted in some escalation of labor costs.

This is a 30,000-foot macro view of the near-term supply chain inefficiencies we’re facing, but there were two additional smaller events that exasperated these near-term challenges during the second quarter. First, the move of our Mercedes-Benz Sprinter van production from Germany to the United States market has made on-time deliveries challenging.

And a recent plant fire of a key supplier to most of our domestic chassis manufacturers caused productions shutdowns in some cases up to four weeks. Additionally, just when we thought it was safe to exit the bunker, new tariff threats were announced last week.

We think most of the damage of cost increases over although notwithstanding the recent trade moves, we did anticipate some additional increases and that has been included in our $19 million material cost projections. While cost and chassis were a big part of the story of the quarter, we experienced an unfavorable sales mix as well.

In particular, our mix of sales for the quarter had less of many of our higher content and gross margin products segments, including large commercial buses, custom fire apparatus and certain RV bus and ambulance products. Some of the mix – miss this quarter where we cover in the second-half of this year.

But for certain products such as transit buses and certain Class A RV models, we will not likely make up the lost sales mix in the second-half. Based on all the factors I just discussed, we are adjusting our guidance downward for the remainder of fiscal 2018. Dean will detail the specific changes to our outlook shortly.

But the midpoint of our revised guidance ranges translates to revenue growth of approximately 10% and adjusted EBITDA growth of approximately a 11% year-over-year.

We have worked diligently over the past several weeks to manage and contain as much of these issues as possible, including raising prices across all business units to help compensate for the cost increases. In some cases, we’ve also introduced surcharges where appropriate to ensure performance expectations.

We estimate the impact of these price actions will be approximately $7 million for fiscal year 2018.

But based on backlog and lead time differentials, we don’t believe we’ll be able to recover the full amount of actual cost increases, which negatively impacted our second quarter and the increases that we anticipate will impact the second-half of our year.

Furthermore, as you may have read in yesterday’s earnings release, we implemented restructuring activities during the second quarter in an effort to preserve margins, specifically moved quickly to reduce headcount, consolidate and simplify our facility and management infrastructure.

These actions result in a reduction of approximately $20 million in annual fixed expenses, all of which have been implemented. Keep in mind, this is an annualized number, which means that less than half of these cost savings will be realized in our fiscal year 2018 earnings.

Finally, we have continued to invest in our business and add key talent in areas, which we – which will drive our long-term growth and profitability. In particular, I’m pleased to welcome Ian Walsh to REV Group as our new COO.

We announced Ian’s hire in a separate press release yesterday in conjunction with the earnings release, and we’re very pleased to welcome him to REV. Ian had a long distinguished career at Textron in a number of their business units and look forward to working with him to further drive operational excellence.

I’ll now turn it over to Dean to go through some of the financial and segment details..

Thanks, Tim, and good morning. I will start on Slide 4. As Tim discussed, this quarter was one of our toughest yet as a public company, driven by some external macro factors and some temporary product mix impacts. Total net sales for the second quarter were $609 million, up 11.7% from the second quarter of last year.

Acquisitions were the primary driver of sales growth for the quarter. Excluding the impact of acquisitions, consolidated net sales were flat with the prior year period. Net income grew by 9.2% in the second quarter to $7.4 million, or $0.11 per diluted share.

Adjusted net income fell by 17.9% for the quarter to $15.6 million, or $0.24 per diluted share. The decline in second quarter 2018 adjusted net income was primarily the result of the near-term supply chain inefficiencies and a lower quarter-over-quarter sales of school buses and transit buses that Tim detailed in his prepared remarks.

In addition, we experienced higher interest costs in the quarter – second quarter of 2018 versus the second quarter of 2017, due to the timing of our IPO and use of proceeds last year, offset partially by lowering income tax expense due to benefit – due to the benefit of the new U.S. tax legislation.

Adjusted EBITDA for the second quarter decreased 9.2% to $34.1 million, compared to adjusted EBITDA of $37.6 million in the second quarter of 2017.

In addition to the increased cost in materials in the quarter on a consolidated basis, adjusted EBITDA was down due to sales mix in our F&E and Commercial segments that is not permanent and lower shipments of Class A RVs.

We are currently estimating that the impact of supply chain inefficiencies and increased raw material costs in fourth fiscal year 2018 will be approximately $19 million above our original plan.

The impact of these increases – these increased costs roughly nears the split of our EBITDA performance between the first-half and the second-half of the year.

However, we’re anticipating operational performance will improve in the second-half of the year as a benefit from increased volumes, price increases, implemented restructuring activities and other cost reduction initiatives.

The impact of the pricing and cost reduction initiatives is estimated to be approximately $7 million and $10 million, respectively, for the second-half of the current year. Let me now turn to Page 5 to discuss the performance of our segments. Fire & Emergency segment sales increased 15.1% to $252 million for the second quarter of 2018.

The primary drivers of this increase were the contribution of our April 2017 acquisition of Ferrara and an increase in ambulance unit volumes. On an organic basis, quarterly segment sales grew 6% compared to the second quarter of 2017. Starting in the third quarter, all of our prior acquisitions in this segment become organic.

F&E adjusted EBITDA for the quarter declined 10.7% to $21.8 million, driven by a less favorable ambulance and fire truck sales mix in the quarter and increased material and labor costs. On an organic basis, adjusted EBITDA for the quarter decreased 15.6% year-over-year.

The first reason for this organic decline was due to a shift in ambulance customers and products that is not permanent.

The ambulance market has proven to be more volatile than in previous years with major owners – with a major ownership change with one of our large contract customers in addition to the timing of regular business with larger municipalities and international customers.

These circumstances have contributed to this volatility and mix such as the sales profile for our ambulance division in the second quarter was skewed towards lower margin vehicles.

In addition, the mix of fire apparatus sales in the quarter were skewed toward lower content fire apparatus in the form of more retail custom trucks versus larger custom pumpers and aerials. Based on our backlog visibility for the remainder of the year, this negative mix in both fire and ambulance will improve in the second-half of the year.

Going forward over the long-term, we still see continued growth in our Fire & Emergency business from continued strong demand in both the fire and ambulance markets and positive macro trends.

We also expect our leadership positions in these markets to foster continued growth and market leverage in this business through the main – remainder of this year and beyond. Our backlog increased 7.4% during the quarter and remain strong with a healthy product mix.

As shown on Slide 6, in our Commercial segment, quarterly sales were down 1%, driven by a temporary decrease in transit bus and school bus units sold, partially offset by increased sales in shuttle bus, sweepers and mobility vans.

Much of the sales decline in this segment during the quarter was a result of a law between two large transit bus contract awards. Commercial backlog was up 8.4% during the quarter to $397.2 million, and we believe the fundamentals of this business remain strong.

Based on our visibility in the backlog for both transit and school buses, we are confident that the second-half of 2018 will be better, and then we will have very good momentum going into 2019, such that these businesses will again contribute meaningful EBITDA and margin enhancement to our Commercial segment.

Commercial adjusted EBITDA margin was down 320 basis points compared to the second quarter of last year. The decrease – this decrease is due to the lower school in transit bus sales, which both enjoyed profit margins in excess of the segment average, offset by higher sales of shuttle bus products, which have profit margins below the segment average.

In addition, the segment also experienced higher material and freight costs. The Commercial segment, specifically the bus division, has been meaningfully impacted by the chassis availability and logistic cost issues that Tim described earlier. Turning to Slide 7.

Quarterly sales in our Recreation segment grew 19.5% to $199 million, driven by strong performance from acquisitions and increase in Class C unit volumes, specifically Super Cs, and an increase in sales of the company’s molded fiber glass business.

Class A unit volume declined compared to the prior year, due to a strategic reduction in the number of different models produced and the timing of new model year introductions.

As Tim mentioned, we’ve reduced number of Class A models and floor plans we are selling as we believe there are opportunities to drive profitability improvements from a leaner portfolio of higher-quality products. We exited the quarter with segment backlog up 65.4% versus prior year-end to $144.8 million.

Recreation adjusted EBITDA increased 74% for the quarter to $12.7 million. The expansion in EBITDA and profit margin is attributable to the results from acquired companies. On an organic basis, recreation adjusted EBITDA for the first quarter – for the second quarter 2018 decreased 4% from the second quarter of fiscal 2017.

I’d also like to elaborate here on Tim’s comments regarding the success of our acquisitions that are not included in our organic revenues and earnings in the quarter, especially in the Recreation segment, where our purchasing leverage and distribution channels quickly benefit the acquired companies.

Each of the acquisitions made over the last 18 months in this segment, Renegade Midwest and Lance, are up in backlog and sales by double digits and adjusted EBITDA margin improvements have been even greater compared to the results prior to joining REV. Starting in the third quarter, all these RV businesses, except for Lance, will become organic.

On Slide 9, we provided a review of our balance sheet and working capital. Like prior years, we’ve experienced core seasonal working capital build in the first-half of the year. Like prior years also, we expect working capital to peak early in the third quarter and then decline through the end of the third quarter and bottoming by year-end.

You can see that core networking capital as a percentage of trailing 12 months revenues has approximated 20% over the last four quarters. The current quarter working capital metric of 23% was higher due to the build for the strength of our second-half and because some of our supply chain inefficiencies around chassis.

More importantly, we still believe and have not lost sight of the fact that, there is a very meaningful longer-term opportunity to permanently reduce our working capital requirements in our company over the next few years.

Total debt at April 30, 2018 was $369.7 million net of deferred financing costs, or 39% of total capital and our net leverage ratio was 2.1 times. As a result, we had $142 million of availability under our revolving credit facility, which was amended to increase its capacity to $450 million in December of 2017.

We are still forecasting meaningful debt reduction in the second-half of the year and expect to end fiscal year 2018 at leverage of 1.4 times to 1.6 times adjusted EBITDA.

Net cash provided for the year based on our guide – updated guidance, net cash from operations less CapEx for the year based on – upon our updated guidance should be approximately break-even before the impact of acquisitions. Capital expenditures were $10 million for the second quarter, compared to $19.1 million in the second quarter of 2017.

In addition, we are forecasting less CapEx requirements for the second-half of the year. And therefore, we are reducing our guidance for full-year CapEx to be in the range of $35 million to $40 million, down $5 million on both ends of the range from our prior guidance.

Now I’d like to also spend a few minutes discussing the restructuring activities Tim mentioned in more detail that resulted in $1.9 million charge in the quarter.

We implemented restructuring and cost reduction initiatives across each of our operating segments and our corporate office, and we expect these actions to result in approximately $20 million of annualized cost savings, with approximately $10 million to be realized in the second-half of this year.

These actions impacted headcount across the organization, including the closure of our Miami office, consolidation of Class B RV production into an existing REV facility and permanent reductions to other SG&A spending activities. Now please turn to Slide 10.

As Tim noted, we are revising our full-year outlook for revenue, adjusted EBITDA and net income. We now expect revenue to be in the range of $2.4 billion to $2.6 billion with the high-end impacted versus our prior guidance by concerns over timing of chassis availability.

Net income is expected to be in the range of $72 million to $87 million, up $31 million – from $31 million last year and adjusted net income is expected to be in the range of $94 million to $105 million, up from $76 million last year.

We anticipate adjusted EBITDA will be in the range of $175 million to $185 million, still up from $163 million last year. We expect approximately 70% of full-year adjusted EBITDA to be generated during the third and fourth quarter consistent with historic trends, and we expected our third and fourth quarters will also follow historic trends.

Net income and adjusted net income guidance reductions are less than the reductions in adjusted EBITDA guidance due to a lower effective tax rate and decreased depreciation from reduced CapEx. We now expect our full-year effective tax rate to range between 10% and 13%, down from 20% to 22% previously, due to the impact of new U.S.

tax legislation on revised earnings. On Slide 11, I’d like to walk you through a bridge to our updated adjusted EBITDA guidance. Our previous midpoint guidance for adjusted EBITDA was $210 million. We now expect a midpoint of adjusted EBITDA of $180 million.

This decline is driven by the previously mentioned $19 million full-year impact estimated from material costs, a $9 million reduction due to the first-half mix issue in ambulance that we won’t fully recover by the end of the year, a $20 million impact primarily from the temporary lower transit bus and school bus product sales volumes and $8 million from lower parts sales growth.

These challenges are expected to be partially offset by higher recreation sales and EBITDA resulting in an increase of $9 million, as well as the expected $10 million impact from implemented cost reductions and the previously mentioned $7 million in price increases.

On Slide 12, we have bridged our first-half EBITDA performance to the midpoint of our revised second-half EBITDA outlook. The green bars on this slide represent the incremental EBITDA in the second-half of the year from each of our segments over the first-half of the year.

First-half adjusted EBITDA was $55 million, and we expect to generate $125 million of adjusted EBITDA in the second-half to the midpoint of our guidance. At the bottom right side, you can see the percent of second-half adjusted EBITDA generated by each segment in 2017, compared to our revised outlook for the second-half of 2018.

F&E second-half of 2018 at 65% of the full-year approximates the second-half of 2017, but is slightly higher due to more favorable ambulance sales mix and sales of higher content fire apparatus and continued improvements in our Brazil profitability.

The second-half EBITDA for the Commercial segment forecasted for 2018 is at 69% of full-year is higher than the prior year due to a rebound in school bus sales, both traditional and contractor in the second-half, improving transit bus volume in later – in the later seasonal upturn for our terminal truck business.

The second-half of 2018 for the Recreation segment at 67% of the full-year is forecast to be a smaller percentage in the prior year giving us confidence over our ability to achieve the second-half result in recreation.

Lastly, we expect to see $1 million negative incremental impact from corporate and other costs in the second-half, but this increase is related to the seasonality of our business and is lower than the plan due to the restructuring and cost reduction initiatives that were implemented.

Altogether, this analysis illustrates our confidence in our revised guidance for the second-half of 2018 for the company. This all results in approximately $125 million, or 69% of adjusted EBITDA to be generated in the second-half of the year. On Slide 13, we show our capital allocation over the last four quarters.

Note that M&A activity in the slide includes the recent equity investment in our China JV of approximately $1 million. As always, our goal is to maximize growth and shareholder return, while being diligent with our capital allocation and maintaining adequate liquidity.

We believe we’ve delivered a good balance of return to shareholders through our capital allocation strategies over time, and our balance sheet will enable us to be opportunistic in the future with respect to M&A and other capital allocation decisions.

You can see that we were opportunistic in the second quarter about our share repurchase authorization buying back 253,000 shares. With that, I’ll turn the call back to Tim for some closing comments..

Thanks, Dean. In closing, while we’re facing some near-term challenges, we remain confident in the long-term health of our end markets and our ability to deliver compelling growth and financial returns. Our backlog is strong and growing with good order activity. We have very good visibility on future demand. With that, let’s turn it over to questions..

[Operator Instructions] Our first question comes from the line of Jamie Cooke from Credit Suisse. Please proceed with your question..

Hi, good morning. I guess a couple of questions. Tim, understanding you’re disappointed in the quarter and you want to restructure to take cost out.

But as I think about, if we dismiss the short-term issues, which just seem to be demand is good, et cetera, how concerned should we be the cost reductions that you’re taking sort of cut into the bone? You know, what I mean, because this really just seems like a short-term problems. I’m just trying to understand that.

And then how much is the $20 million going to cost you? And is the $20 million in savings over the long-term is that structural, or do we have to add back if the markets continue to grow.

And then my second question, if you can just sort of give more, I mean, the chassis availability issues – it’s been an issue just a little more color on your strategy to deal with that 2018 and does this extend to 2019? Thank you..

Yes. Well, as far as the restructuring, we thought it was time. I thought it was time to take a good look at the entire organization.

What had happened, I think, as we were building the portfolio, I think, the corporate side of our business got a little heavy as we were bringing on new assets and actually bringing these new assets under the fold and integrating them. It just seem like the right time to right size the corporate efforts in the company.

So the biggest reductions were really in Miami taking some of that corporate effort out, reducing expenses in other areas, it just seem like the right time to do it. We were post IPO. We had just done several acquisitions that we had brought and integrated nicely into the company.

And I think that even though M&A activity will continue at a good pace, it’s not going to be at the robust really high-level that we had last year. Four acquisitions, two JVs in 12 months required a tremendous corporate effort, and we’ve just really trimmed back that and trimmed back some other expenses that we thought were appropriate.

So it was, I think, the best answer I’ll give you, Jamie, as it was – timing was right and it seemed to tie in nicely to help us protect with some of the cost increases that we’ve had. The chassis situation is a little unusual. We always tend to have at least some noise in the chassis channel, which we can manage through pretty well.

This tariff thing has been relatively significant. As you can see, even the $19 million sounds like a big number. It’s just a little bit over 1% of our total material spend. So we don’t like it.

And quite frankly, we’re not happy with some of the suppliers that we deal with and will be looking for alternatives, because I think they took advantage of a situation that had nothing to do with steel and aluminum price increases. But it also causes a run on things like chassis.

So as soon as these things were announced that everyone thought they were going to get steel and potentially aluminum increases as they – as it relate to chassis, everyone started buying up every chassis that was available in the United States and it created a lot of noise in the channel.

We’re managing through it fairly well and we thought that we are pretty much on top of it. And then the fire that affected every chassis manufacturer with the exception of Mercedes-Benz in the United States hit and it was kind of fuel to the fire. The minimum plant shutdown was Ford for two weeks and GM has been shut – was shut down for four weeks.

So that in addition to the turmoil of people grabbing chassis as quickly as they could just exasperated the problem. And the whole situation with this kind of buying frenzy material has the biggest issue. I think, we’re managing through right now as the extension of lead times on almost everything. People have become hoarders.

And when they hoard, they create issues for normal operations in company. So we’re going to get through it. It’s a short-term situation, but it’s been painful..

And then sorry to the follow-up.

How much did it cost for the $20 million? How much should – does that cost to achieve the $20 million in savings?.

Jamie, that was the $1.9 million….

Oh, that did..

…in the quarter, that’s all the cost that’s going to be associated with that $20 million..

Okay. All right. Thank you for the clarification. I’ll get back in queue..

Our next question comes from the line of Mig Dobre from Baird. Please proceed with your question..

Good morning, everyone. I want to pick up from Jamie’s question here on the $20 million. So I’m a little bit surprised, because it seems like your cost to generate these savings is quite low.

So I’m trying to understand first and foremost how that’s working out? And then second, is there anyway to help us understand how much of this is coming from your supply chain initiatives versus facility versus maybe some other items like corporate.

I’m also wondering if this is an initiative that’s been generated by the challenges that you’ve experienced in the second quarter, or if this is still part of your bigger margin improvement plan actions that you would have taken anyway?.

I’ll let Dean answer the number question on the expense that’s been charged for the restructuring. But it’s more of a big picture Mig. I think, I – that’s how I operate. I mean, I look at expenses on a regular basis and we got a little bloated with all the activity that we have in the last 18 months on M&A and the integration process.

I think, we execute exceptionally well. But the pace of acquisitions is not going to be at that type of level of activity. And plus I think, it was just time to push the reset button on some of these expenses, a simple one. Our marketing expenses were quite high, quite frankly, to get the REV name known, the names only 2.5 years old.

And we spent a lot of money getting the REV name out into the marketplace. So, there has been a pretty healthy amount of that $20 million that’s just curtailing marketing expense, which is an easy one to do, right? I mean, it’s not headcount, it’s just basically stop spending money on promoting the corporate name.

So it was things like that, but it was also, I’m consolidating and shrinking and consolidating our entire corporate efforts to Milwaukee. It was – with the change from Orlando to Milwaukee, we had some carryover that end up in Miami, and I didn’t feel that that was efficient. So that that’s the story.

I mean, this is – we see this is more of a permanent long-term savings that was – it was time to do it.

And as far as the expense, Dean?.

Yes, Mig, about two-thirds of the $10 million or two-thirds of the $20 million on an annual basis is headcount-related, and the vast majority of the $1.9 million charge related to severance for those people.

The other third is overhead reductions – fixed overhead reductions in our factories to – that were actually kind of bloated, as Tim had said, and we needed to take some costs out of these factories, as well as the SG&A activities like marketing that Tim alluded to.

So it’s a pretty simple list of actions and the cost was relatively low compared to total, because of that fact..

Okay. That’s really helpful. And then maybe lastly, talking a little bit about this pricing action that you’re taking, some color as to how you’re going about it surcharges versus outright pricing actions. And I’m presuming that this is not impacting what’s already in your backlog.

So is it sort of fair to assume that we’re going to be seeing more of a fourth quarter effect here? And what does that mean for pricing into 2019?.

Yes, the mix is interesting. The mix – quite frankly, the mix of price increase versus surcharge mirrored a lot of what we got from our material suppliers. So if we thought it was a fairly temporary thing, we want the surcharges. If we thought it was going to be permanent, price increases are permanent.

Everyone says, no, no, it’s just a short-term pricing. It’s not. And when prices are increased, they never go back down. So we tried to mirror and be responsible to our customers by doing a mix of price increases to surcharges map into what we were seeing from our material suppliers. Secondarily, the industry is a little bit different.

Some will not accept price increases, but they will accept short-term surcharges. So, for instance, ambulance accepts surcharges, but not price increases and vice versa. So that’s how we map that in. As far as when it’s going to hit, it’s hitting actually now for the things that are being priced out today that are not in backlog.

So we will actually see some relief here in the third and fourth quarter. Our most complicated thing that we did and we probably might get – we might get a little heavy on estimating what those cost increases are with our pricing, but we wanted to make sure that we had it covered and we did an analysis.

We modeled it to make sure that all the cost increases that we got are absolutely covered going forward. That does not – that do not help us in the second quarter, it’s going to be a little bit of an issue for us in the third quarter. But with the exception of fire, it will be flushed out completely in the fourth quarter..

Thank you..

Our next question comes from the line of Charlie Brady from SunTrust. Please proceed with your question..

All right. Thanks. Good morning, guys.

Hey, Tim, could you just talk a little bit about the visibility you’ve got in the backlog right now as you look into the second-half of the year, in particular on fire and emergency? How much of this current backlog sitting here today just delivered in the second-half versus maybe carries over beyond that?.

Yes, we’ve got complete visibility on fire. Fire is actually sold out through the end of the calendar year into literally we’re starting to sell into the first part of the second quarter of fiscal 2019, so fire set. We know very well what we have in fire for the rest of the year, it’s locked and loaded.

As crazy as it sounds, because the transit buses have been a challenge for us this year. We already know what our backlog in transit buses looks like for 2019 and latter part of this year.

So, where we’ve got the longer lead times, we’ve got great visibility, where we’ve got the shorter lead times of 90 days or less in some instances, the good news is, we can affect price increases on that, where we can’t necessarily on the longer-term backlog. But we will gain visibility as we move through the third quarter..

In the transit buses that you’ve got the long visibility on, is that going to be impacted positively by pricing actions you’re taking, or is that – it’s already kind of a done deal and it’s going to be what’s going to be?.

No, that – I was speaking mostly of the LA contract, and that contract allows for adjustments. So we feel good about their contract..

All right. Just follow-up from me on parts. Parts, I can see – sorry, it’s a little bit slower than expected.

Just maybe expand on that and what’s driving that?.

Yes, it’s off to a slow start. We talked about in the last quarterly call, we are still 1000% committed to parts. What we’re doing and we’re getting actually very positive responses from the major national accounts.

And these are major contractors and ambulance and then bus, major accounts in terminal truck yard trucks like Walmart, FedEx, UPS, we’re negotiating long-term contracts for the supply of spare parts, and those take time. These are big companies. I think the positive news is that, they’re very receptive to having a global parts arrangement with us.

We have one in place and we have a couple that are close to being in place in the next 60 days. They take times to – they take time to negotiate. We have to demonstrate to these large national players that if they buy spare parts from us, they can get them at a better preferential price and we will have those parts at their fingertips.

It’s just taking longer to get these contracts in place. But I feel really good about the future of parts, it’s just off to a slower start..

Thanks..

Our next question comes from the line of Steve Volkmann from Jefferies. Please proceed with your question..

Hi, good morning, guys. I was just wondering, Dean, I’m sorry if I missed this.

But is there any wisdom you’d like to give us as we think about the third quarter versus the fourth quarter? I’m wondering the cost savings are kind of more fourth quarter loaded, or the mix issues, or just any of that that you guys can see relative to the next two quarters?.

Yes, I think, as it relates to the cost reduction items, as we just – as we explained about regarding headcount and other SG&A or overhead savings, those have been implemented. So those aren’t back-end loaded at all. Those will start taking place immediately in the third quarter.

I think, as we said in the prepared remarks, the quarterly cadence third and fourth quarter will roughly approximate prior seasonality.

But I think, what you will see is that, some of the improvements, as Tim said, related to price for those longer items in the backlog, or the rebound of transit bus and school bus, will start to take place closer in the fourth quarter. So I think in commercial in particular, you’ll start to see the meaningful improvement in margin in Q4 versus Q3.

Otherwise, I think, everything is pretty evenly split between the quarters other than volume increases as normally would be expected on a seasonal basis..

Okay, great. That’s helpful.

And then just looking ahead, if everything sort of were to be as it is today relative to everything you’ve done, do you think price cost is positive in 2019, or is that still sort of the challenge?.

No, we’re ahead of it. As I’ve mentioned, I think with the previous caller, we did the analysis. I wanted to make sure that we were completely covered across all of our segments with all of the cost increases that we’ve got. And I alluded to this and I think I mentioned this, we’ve actually estimated nothing static.

We’ve estimated that there could be even though we hope not, we think there could be even a few more cost increases as we roll towards the end of October. We bake those into our model to make sure we’re definitely absolutely ahead of our cost increases as we complete the year and go on to 2019..

Okay, great. And then just a quick final one, Tim. I’m curious about your view of the RV space, I guess, just because it’s the only one with public data, it’s the one everybody seems to pick on.

But are you seeing anything in the channels relative to inventory build or concern amongst dealers relative to the cycle, or just kind of your thoughts there?.

Yes, if we had as an industry, I think, if you looked at the data, we had a record wholesale delivery month in the month of April, which is the last data that’s available. That’s just obviously positive. That means that people are still loading their lots and the retail is doing okay.

We were off to a slow start in the summer buying season, so some of the retail lots are a little fuller than they were last year. But the dealers are optimistic and they feel that things are going well. I think, what you’re seeing is that, I think, some of the low-end towables in particular, kind of the real entry level, has softened up a little bit.

The very high-end on the As, has been fairly flat, but everything in-between has been really strong. So the very, very high and the very, very low have been a little softer and flat. Everything else seems to be doing very well and the dealers that I’ve talked to and I do talk to them on a regular basis are very optimistic..

And in the flat market, for say, you would still expect a grow I’m guessing because of the new product launches and so forth?.

Yes, that’s exactly why we – we were a little bit late getting about 2019s to the market. Usually, we get our 2019s to the market in April. We brought them out in May, because we revamped the lime. We want to reposition ourselves and the repositioning is really to help us quite frankly be more profitable.

We see what we’re doing in the B, C’s and towables, like it a lot. We’re very profitable in those three product lines. We were not as profitable as I want to be in the A’s. Awe were a a little bit late to the market.

It hasn’t hurt us, but we are late to the market, that’s going to effect, as Dean, I think, said in his comments, we’re going to be a little bit less in the back-half of the year than we normally are, because we were – we did miss about five weeks come into the market.

But having said that, we’re – our dealers are enthusiastic by the new product line and I’m enthusiastic about the potential of additional profitability in the As..

Thank you..

Our next question comes from the line of Jerry Revich from Goldman Sachs. Please proceed with your question..

Hi, good morning, everyone..

Good morning..

Good morning..

Tim, I’m wondering if you could talk about how much you have to book in your commercial business to hit the EBITDA ramp that you’re guiding for in the back- half of the year, how much is in backlog already? What has to be booked and specifically can you talk about on the shuttle bus side you had mentioned that there were some spec differences between you – your product in the industry and can you just talk about how the order cadence is looking on your product line up?.

Yes, Dean is working on the booking number. We’re some calculations here. But as far as the differentiation in our shuttle bus line, we have a fully crash tested product. As you know, we talked about in the past.

What our efforts have been in the last 12 months is to really do we can on a plan efficiency basis to be able to compete more effectively even in the markets that we’ve got to go toe-to-toe with our competitor that we believe has a little lesser product, if you will. As far as the booking number for the second-half of the year…..

Yes, in the commercial backlog, there is some of the LA County activity that we’ll start it in 2019. So we have about $200 million, $220 million, $250 million of the commercial backlog is deliverable within the second-half of the year. So it’s about half of our visibility to the second-half the year for commercial..

Okay, thank you.

And then can you talk about within the ambulance business, can you just build our comfort level around post acquisition among your customer base that you folks are maintaining your historical level of share on the higher-end ambulances? And can you talk about what gives you confidence that this is in the new normal level of mix between the low spec versus high spec ambulances that we’ve seen in the first-half?.

Yes, we’re very confident. We’ve got strong market share. We don’t – we haven’t talked much about ambulance mix, but let me give you an idea of why that is important. The lowest cost ambulance we sell is $80,000. The highest cost ambulance we sell is about $225,000. That’s a big difference.

So if you’re starting to load in some of the lower-end ambulances and they take precedence in a particular quarter, that can skew the numbers. We haven’t had that yet. This is – that’s a perfect storm. Q2 was on all fronts. I mean, we had an ambulance mix that we hadn’t seen before. It’s temporary.

The backlogs are actually building nicely for the back-half of the year on the more expensive ambulances. So and again, it’s horses for courses. Some of the contractors like to buy the lower-cost ambulances mid and lower, some of the municipalities, fire departments like to buy the mid and higher-end ambulances.

So it’s just how the orders came in the first-half of the year. But we feel very confident in ambulance. We love the business. This is kind of the first time though that we saw an unusual mix come through in a particular quarter..

Okay. Thank you..

Our next question comes from the line of Faheem Sabeiha from Longbow Research. Please proceed with your question..

Hi, good morning.

With the restructuring actions that were already implemented in the second quarter, just wondering if you can talk about what additional levers that REV can pull if cost continue to rise, or can be mitigated?.

Well, price increases. We got to stay ahead with the price increases. I think we’ve done everything we possibly can on the cost basis as stay diligent. The other thing and I alluded to this in our previous comment, we’re not happy. To say that we’re not happy is understatement.

We think some of our suppliers have taken advantage of a situation that was inappropriate. We are getting cost increases for products that have nothing to do with steel and aluminum. I can assure you that we are diligently seeking out of alternative suppliers for those components.

That is a egregious behavior and that’s another, I think, lever we can pull as we go forward. So we’re going to broaden out our supplier base, stay diligent, make sure we keep our pricing head of any cost increases we have. And the third thing, in all honesty, I think, we are rethinking. We like backlog, we love backlog.

We like long backlogs that are out for months. But if we don’t have the ability in some of our contracts to adjust pricing puts us in a bind. So the third leg that still, I think, is all new contracts that we’re contemplating right now. We are putting adjustment provisions in those contracts, so we can react to material cost increases.

We have it in some. But quite frankly, the percentage isn’t good enough, and it really depends on the industry. So we will be – continue to work to make sure that that base has covered as we go forward..

Can you provide us with your current thoughts on the capital allocation just given where the shares are trading today? I mean, they’re about 30% below the average price you did in the second quarter.

So just wondering the focus is going to be more on accelerating your buyback program at this time?.

Well, I think we all agree that anyone that’s on this call that this is probably one of the most inexpensive stocks in the market right now. So I guess, our Board will decide on that. We’ve got a program in place. And that program has been announced. That will be a Board action when our window does open, which will be very soon.

I think, our window opens on Monday and stay tuned for news..

Okay. Thank you..

Our next question comes from the line of Andy Casey from Wells Fargo. Please proceed with your question..

Thanks a lot. Good morning. First, a couple of questions. First, your new adjusted EBITDA margin guide of 7.2 at the midpoint. In the past and you kind of alluded to it earlier, you’ve outlined fiscal 2019 adjusted margin target of about 10% without a lot of market growth.

The internal initiatives that you’ve announced you took in the second quarter seem to be likely to add about 100 basis points on a carryover basis. So it leaves about 200 to get to the 10%.

Are there in place initiatives still supportive to boost EBITDA margins to that 10% next year?.

We’re not going to get the 10% next year. I think two things, obviously, you’re experiencing a pretty healthy speed bump that slowed us down on that path to 10% here in the second quarter. But the other part – the other element to get into the 10% is a meaningful contribution from spare parts and we’re lagging in spare parts.

We plan to continue to move in the right direction. Our goal has not changed. But I can guarantee that we will not get to 10% in 2019, which was our initial goal two years ago – 2.5 years ago, but we will get there. And we’ll have more visibility, I guess, on that come fiscal 2019, but it’s a goal we think we can get there.

We need some things to happen in a positive way..

I’d like to also add to that to that analysis, which is correct about the impact of our initiatives. But as we see a more healthy deliveries in volumes from transit bus and school bus and a better mix that we expect in ambulance, that will also had to improve margins in 2019.

And like Tim said, we see visibility and we see that opportunity, especially in transit bus with the backlog from that large contract. So in addition to the 100 basis points, there should be a tailwind from some of the mix that will rebound in 2019..

Okay, thank you. And then I just wanted to ask a near-term question. The revenue guidance for this year implies about and roughly 7.5% growth in – at the midpoint in the second-half. How ex-price moves to about 7%.

How much of the 7% is organic? And is any of that related to the Setra distribution agreement?.

No, none of it’s really related to the Setra distribution agreement. That agreement takes effect July 1. We actually do plan to gain some earnings off of that business between July and October, but effectively those gains will be washed out with infrastructure costs that were put in place to handle that product line. So nothing on the Setra side.

Everything is really on our current product group. And as I mentioned, we may have been a little aggressive on our estimates on what cost increases may go up between now and October. There could be a little bit of a tailwind there if we’re able to control that, but it’s going to be all organic..

The 7% is organic, so there’s no carryover benefit from Lance?.

Yes, the only one that will be inorganic is Lance, but all the other acquisitions that we have made over the last 18 months will become organic in the next quarter. So Lance is a smaller piece compared to what we’ve had to report over the last few quarters regarding inorganic versus organic..

Okay, thanks. And then if I could ask one on the RV market. You had a few comments about the Class A business and about a new product introduction delay causing some share. Well, what I perceived to be a share loss. What’s going on there? Because in the past, we talked about improved quality was likely going to be a gateway to regaining some share.

Has the competition changed, or is there something going on that we should consider?.

No, pricing is a complicated thing in our view. It’s kind of set at certain levels based on the size of the coach that you’re making. And quite frankly, I saw more running in place with the product offerings we were having. We’re growing some share, but we weren’t making any more money. And in business, it’s all about making money.

So we shook it up a little bit and decided to revamp the product line to provide us with quite frankly, more profitability with some of the designs repositioning the product line into segments that do provide the opportunity for more price, more profit with a different – a slightly different product. So it was a revamping and retweaking of the As.

We were fine, but I don’t think we were fine enough. I wanted to be in a position where we could make meaningful earnings like we are the – on the Bs, the Cs and the towables. Those business are making great returns in the RV industry and our As just we’re not making those types of returns. So, we made the changes..

Okay. Thank you very much..

Our next question comes from the line of Mike Baudendistel from Stifel. Please proceed with your question..

Thank you.

Just wanted to ask you, if you could break down that $19 million headwinds from the input costs down by segment? And I just want to make sure I heard you right, you think that those won’t be a headwind at all in 2019 that by the beginning of next year, you will hit those mitigation processes in place?.

I don’t have it broken down by segment, Dean might. But on a macro basis, I just get it across the Board as far as where it’s at, but it includes everything on the material side.

Dean, for the numbers?.

There’s a little bit more in some of the commercial businesses because of the fact that the shorter production times and lead times for buying materials, but it’s not. It kind of mirrors in total that over 1% across the Board for all of our segments..

Yes, the other one and just I’ll mention this, because this was one of those egregious ones. I think, in our RV area, one of the largest suppliers was coming out with price increases on certain commodities of 10% and 20%. And so that, that segment, in particular, really bothers me a lot, and we will be looking for alternatives there.

But it’s kind of across the Board RV kind of the one that bothered me the most, I guess..

Okay.

And all the mitigation processes are going to be in place by beginning of 2019, is what you said earlier? So you don’t think that’s going to be – continue to be a headwind next year?.

Yes. No, I think, here is the disappointment for me. Our sourcing team now is going to be tied on getting alternative suppliers versus working with our typically good suppliers to figure out how we can get their costs down.

So we’ll lose, I think, a little bit momentum – a little bit of momentum over the next three to five months as we seek out alternative suppliers, where we felt that the cost increases were unjustified. But that will set us up nicely for 2019.

The goal is to get our cost back down as we get into the first quarter of 2019 in the best way possible, and that unfortunately is going to be some hard work to find some alternative suppliers..

Got it. That makes sense.

And then just wanted to ask you, the niche that you’re trying to fill on the class A RV segment, is that the gasoline segment of the Class A or what segment is that?.

It’s both gas and diesel. The team did a great job. I think, I’m really pleased by the new products. The feedback I’m getting from the dealers is an enthusiastic two thumbs up. But it’s both gas and diesel. We did, I think, really in some instances, less is more. We did a little bit less as far as the number of models that we have out there.

But the models that we do have are really rocking it right now. We’re getting some really good orders in for the new stuff..

Sounds good. That’s all I have. Thank you..

Our next question comes from the line of Courtney Yakavonis from Morgan Stanley. Please proceed with your question..

Hi. Yes, good morning, guys. This is Dillon Cumming on for Courtney. Just a point of quick – of clarification first on the chassis availability.

Was there any one segment where that issue is more pronounced, or did you feel that was kind of spread out more evenly across the segments?.

Ambulance. Ambulance is our highest volume and that’s the one that’s hurting the most right now. It’s – those are the ones that we’re building on carts basically at all of our plants. We’re – it’s starting to loosen up a little bit. Trust me, we’ve had very high level discussions within our chassis supplier network.

But it’s ambulance, that’s the one that’s hurting the most right now..

Okay, that’s helpful. And then just the last one here. I wanted to come back to the result in Fire & Emergency. I think taking back the last quarter you mentioned about $1 million to $1.5 million EBITDA that got pushed out into 2Q from last quarters in the shipments.

And so, if you back that out of the 2Q number, it still kind of implies a more aggressive ramp in margin in the back-half of the year. So when we think about we’ll get to that $36 million and incremental second-half EBITDA embedded in your guide.

Can you just parse out how much of that’s through mix improvement, supply chain normalization, pricing tailwind? Any more detail that would be helpful?.

Yes, on the fire side, it would be less surprising because of the backlog characteristic that we referred to and not repricing the backlog. It’s much more the volume increase, but it’s also visibility on the mix.

What we have to do is some in the first – in the first-half as we had a little bit more mix of that kind of retail custom truck, we see a lot more and we have delivery schedules for a lot more higher custom pumpers and aerials in the second-half.

So in addition to the volume and the benefit to the volume, some of the cost reductions that we’ve initiated from headcount or overhead perspective and then the mix, which is probably the strongest benefit in the last-half for fire, that that’s where it’s coming from, but not in price.

We’ll see price in the fire side of the division of the F&E business towards the end of the fourth quarter into 2019..

Okay, great. I appreciate the color..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Tim Sullivan for closing remarks..

Well, thanks, everyone, for joining us. Sorry, we ran over. Obviously, we tried to be as descriptive as we could and as transparent as we could with the information to let you all fully understand what we’ve been through here in the second quarter. Tough quarter, a quarter that should not have been as difficult as it was.

And we – what they say doesn’t kill you, makes you stronger. This was a good learning lesson for us in many respects that we will take to heart and make sure that we will use our best efforts in the future. But I think, again, looking at the business from a macro level, nothing has changed.

This is a great group of company, it’s a great group of products with good visibility to the end markets and backlogs that are solid to – for us to execute on. We’ll continue to tweak our products and make them better, continue to concentrate on quality, and finish the year strong and look towards 2019.

Looking forward to talking to you all again at the end of Q3, and looking forward to hopefully a lot less consternation as we complete our year. Thanks, again, for joining us..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..